Abstract
This chapter addresses the dilemma facing a number of oil exporting countries that despite the vast oil riches, their economies perform worse than countries with no resource wealth.
This chapter draws and relies on an earlier version which appeared in the Middle East Paper Series of the National University of Singapore under the title “The Myth of the oil curse in Arab oil exporting economies: Evidence from Norway & Singapore” (Akacem 2015) and other research by the author and others such as Akacem and Cachanosky (2017), Akacem and Miller (2015) and Akacem and Geng (2015).
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- 1.
The resource curse theory posits that resource rich countries do worse than resource poor countries. This is true for the MENA region. Moreover, it has been shown that non-oil economies within MENA do better than oil economies. See Abed (2003).
- 2.
In Sachs (2003) he makes the case that while institutions matter, they are not the only thing and somewhat dilutes their importance.
- 3.
Acemoglu and Robinson (2012) define the term “inclusive economic institutions.” They argue that: “Inclusive economic institutions require secure property rights and economic opportunities not just for the elite but for a broad cross-section of society (p. 69).” Also, “inclusive economic institutions foster economic activity, productivity growth, and economic prosperity (p. 69).” “Inclusive economic institutions create inclusive markets, which not only give people freedom to pursue the vocations in life that best suit their talents but also provide a level playing field that gives them the opportunity to do so (p. 70).”
- 4.
Not all Arab oil economies operate this way. Algeria, for example, has an extensive tax structure despite being dependent on oil for its foreign currency earnings. This mostly applies to the members of the GCC in the Gulf.
- 5.
The Global Competitiveness Report and The Global Human Capital Report among others.
- 6.
We added Venezuela in this figure even though it is not part of the oil MENA region to highlight the extreme case of that country having the largest oil reserves and yet having the second lowest per capita GDP in the group.
- 7.
1968 is the first year with data on GDP per capita for Saudi Arabia.
- 8.
Gulf states refer to the following countries, Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Bahrain and Oman. These are member of the Gulf Cooperation Council, or the GCC. They are endowed with larger resource wealth and relatively smaller populations.
- 9.
We argue that the oil majors had a high discount rate which translated in a faster depletion rate, knowing full well that the oil producers’ government will someday nationalize oil. Once the property rights changed hands, the new owners were not in a rush to deplete their oil wealth at the same rate.
- 10.
Granted that only Libya is an oil economy out of the three countries listed, the point here is that the status quo became untenable and three presidents were toppled.
- 11.
The term extractive is used as defined in Acemoglu and Robinson (2012, p. 372).
- 12.
The plan calls for direct payments to the citizens. One channel could be a new board that replaces the existing one but with direct input and involvement of the citizen owners. The payments will be net of what is needed for the oil company to cover its expenses. This is the same as with a private oil company. The only difference in this case is that the citizens are the shareholders.
- 13.
This of course is not limited to Arab oil countries. Venezuela is another example. Despite having the largest oil reserves, its economy is in shambles and the institutions have been decimated by the current government.
- 14.
It is not clear that the recent rounding up of members of the Saudi royal family and businessmen in the guise of fighting corruption is what is needed here. The consensus about this drastic move by the Saudi authorities is that it is perhaps more about consolidating power than fighting corruption. The fundamental problem remains the flow of oil revenues to the central government that elicits rent seeking and the siphoning of public funds made worse by the lack of transparency.
- 15.
For example, the United States. Despite the call for fiscal restraints, the government resorts to borrowing to cover its deficits year in and year out.
- 16.
Now that it cannot simply be covered by oil and gas revenues.
- 17.
The proposed sale of 5% of the Saudi oil state owned company ARAMCO through an IPO is not what we have mind here. The proceeds from the sale will be collected by the government and it will dispose of it as it sees fit with no feedback from the stakeholders further reinforcing the status quo. More importantly, there was no consultation or an attempt to assess the mood or the opinion of the general public—theoretically the owners of the company—regarding the proposed sale of a share of one of the biggest oil company in the world.
- 18.
In a free society, citizens should be able to dispose of their wealth the way they see fit. Putting limits on what the citizen can do with his/her shares is somewhat elitist but one needs to put this in the context of the region and the ultimate goal of the oil privatization plan. In order to empower the citizens to benefit fully from their oil wealth under this new plan, they must be able to own the shares and have a say. Allowing the shares to be sold immediately would render our privatization plan obsolete.
- 19.
Early on in 2003, when these ideas were developed for this privatization plan, and to give more choices to the citizens, we looked at competing oil companies owned by the citizens instead of only one. The existing national oil company (depending on size and how many oil wells it owns) would be split into two or three companies with control of approximately the same amount of oil reserves and production capacity. To enhance the choice for the citizens, they can now opt to select shares of company A vs company B depending on how fast or slow these wish to deplete their reserves thus answering the different revenue needs of the different segments of the population. A single oil company run by a citizen board is the most practical in the short run until the institutional environment catches up.
- 20.
Oil dividends distributed to the citizens will be taxed like any capital gains in other countries.
- 21.
Figure 5.4 is evidence of the misuse of funds. Singapore, a non-oil economy and Norway outperform the oil economies of the Middle East. The corruption perception index clearly shows the difference between countries that have solid institutions and those that do not. The literature on the subject notes the corruption that is made possible by the presence of oil and in the absence of adequate institutions. PBS (2009) covers the Saudi Arabian case. Another instance is related in El Watan (2015), where the then prince Mohammed bin Salman bought the Serene, a 440-foot yacht for 550 million dollars (Mazzetti and Hubbard 2016).
- 22.
Financial markets are at different levels of maturity in the region with Gulf countries being ahead of the rest of oil MENA.
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Acknowledgements
The author wishes to thank Professor Ahmed A. Ahmed, Gulf University of Science & Technology, Kuwait for his input and feedback and Dr. John L. Faulkner, formerly with the Environmental Protection Agency, Washington, DC, USA for reviewing the draft chapter and for his comments and feedback.
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Akacem, M. (2019). Oil and Economic Development in the MENA Region: Why Institutions Matter. In: Hall, J., Harper, S. (eds) Economic and Political Institutions and Development. Springer, Cham. https://doi.org/10.1007/978-3-030-06049-7_5
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