Abstract
Natural resource wealth such as oil is thought to be a curse rather than a blessing. The main reason is that the flow of oil revenues goes to the government and leads to rent seeking and corruption. It also helps autocratic governments to remain in power with no incentive to alter the status quo. To make matters worse, economies that are heavily dependent on oil revenues tend to have overvalued exchange rates which hurt the non-oil sector and further deepen these countries’ dependence on oil.
However, empirical evidence is mixed on the effect and the direction of causation between oil, institutions, and the economy. The evidence does show that countries such as Norway that discovered oil after having developed good institutions have done well despite the presence of oil riches. Yet, oil MENA, which discovered oil first, has tried to build viable institutions after discovering oil but is still struggling to do so. We also note that Singapore without any resource wealth but with solid institutions has done well. The presence or absence of oil does not explain the failure or success of a country. Institutions do. MENA rates poorly compared to the rest of the world on many institutional indices and economic indicators as shown in this chapter.
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Notes
- 1.
Many of the concepts below are explained in van der Ploeg (2011).
- 2.
While we are referring to oil here, we include gas wealth as well since some Arab oil economies such as Qatar and to some extend Algeria have substantial gas reserves.
- 3.
For more information see Akacem and Miller (2015).
- 4.
See Sect. 2.1 for an explanation of rent seeking and the Dutch disease.
- 5.
The Dutch disease, “The term was coined by the Economist in 1977” (The Economist 2014), refers to the appreciation of a currency when faced with large inflows of capital as was the case in Holland due to the large gas exports.
- 6.
This explanation can also be found and summarized in Tierney (2008).
- 7.
By liberal institutions, we do not necessarily mean left or progressive institutions, but free markets, the protection of human and property rights, freedom of the press and speech, and the rule of law.
- 8.
The announcement was made in January 2016 by the then Deputy Crown Prince Muhammad bin Salman. He is now the Crown Prince.
- 9.
The excessive spending on defense and the resulting illicit payments that are made were featured in an article by Leigh and Evans (2004). It noted the payments as a result of defense arms deal. “Most explosively, the documents detail £17 m in benefits and cash allegedly paid by BAE, which is chaired by Sir Dick Evans, to the key Saudi politician in charge of British arms purchases.”
- 10.
Meaning that oil economies that do not have inclusive economic and political institutions such as Norway tend to spend more on defense.
- 11.
Several authors addressed this issue but a summary of the impact of natural resources on governance can be found in Busse and Steffen (2011)
- 12.
Libya had a vast security apparatus but despite the spending to keep the lid on revolts, Qaddafi was toppled. While the literature covers mostly the period pre-Arab Spring, nevertheless, the consensus is that oil wealth can buy the peace by both spending on security and defense to maintain public order. We maintain that this paradigm does not hold and assumes a passive population that is willing to endure authoritarian governments. The Arab Spring showed that this is not the case.
- 13.
The actual Fragile States Index rank starts with the most fragile state as the lowest numerical ranking. For purposes of comparison to the other indices, this index was reversed with the highest numerical ranking being the most fragile.
- 14.
Not including the West Bank and Gaza, which were not ranked.
- 15.
Of the 17 countries in MENA ranked not including the West Bank and Gaza.
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Akacem, M., Miller, D.D., Faulkner, J.L. (2020). Resource Curse and Institutions. In: Oil, Institutions and Sustainability in MENA. Springer, Cham. https://doi.org/10.1007/978-3-030-25933-4_3
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