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Despite being blessed with immense oil resources, Arab countries have neither achieved economic prosperity nor became developed countries. This chapter provides a brief overview of issues related to understanding the origins and symptoms of the resource curse and the challenges triggered by oil dependency in the Arab World including the traditional issues related to economic diversification, Dutch Disease etc. Among the novel issues explored are the interactions between oil windfalls and weak institutions (including fiscal institutions and optimal exchange rate regimes) as well as the role of political economy factors of the impact of resource rents on the strategies of the ruling elites to fend-off potential revolts that might remove them from power.
This paper argues that the resource curse in the Arab world is primarily an “institutional curse,” even though it has several macroeconomic manifestations. An empirical investigation, using an augmented growth model, confirms the conditional resource curse hypothesis. The results suggest that on their own, political institutions do not always have an effect on growth but, when interacted with natural resources, they reduce the negative effect of natural resources on growth but do not offset it. The analysis also shows that the curse has operated in different ways within the Arab World. In the GCC, large rents per capita have been channeled to national citizens in the form of well-remunerated public sector jobs and other generous social welfare schemes which have served to increase government legitimacy and foster regime stability. In contrast, the populous group comprising poorer rentier states have experienced conflict, violence and social unrest. Moreover, in a context of low rent per capita, excessive consumption resulted in massive deficiencies in infrastructure investments and an underdeveloped financial sector. Finally, the volatility of their limited resources has been accompanied by more dire economic consequences: excessive borrowing and Dutch Disease.
For over eighty years the Arab region has derived massive wealth from its natural resources, yet the region's economies remain little diversified, while the oil market is experiencing major structural shifts with the advent of shale gas. Moreover, the resource itself is eventually exhaustible. Under these conditions economic prosperity cannot be sustainable. The critical question is how can the countries of this region escape the 'oil curse'? In this volume, leading economists argue that the curse is not a predestined outcome but a result of weak institutions and bad governance. A variety of analytical perspectives and examination of various international case studies leads to the conclusion that natural resources can only spur economic development when combined with sound political institutions and effective economic governance. This volume, with its unique focus on the Arab region, will be an important reference for researchers and policymakers alike.
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