The Oil Curse, also called the Paradox of Plenty, is the paradox that countries with plentiful oil reserves tend to have less economic growth and worse development achievements than countries with fewer oil resources. In an article published by European Economic Review, Gylfason (2001) find that economic growth per capita in the developing world without the OPEC countries increased by 2.2% during the period 1965-1998, while in the OPEC countries it decreased by 1.2%.
Researchers who study the Oil Curse put forth at least three hypotheses to explain this paradox:
Hypothesis 1 is the Dutch Disease. Oil booms lead to appreciation of the country’s real exchange rate which leads to misallocation of resources among sector, with the resource-losing sectors ending up losing their competitiveness and exporting power. The Dutch disease is used to explain de-agriculturization and de-industrialization in the oil-producing-countries such as Nigeria, Venezuela and Angola;
Hypothesis 2 is Oil Revenue Volatility. Oil markets are characterized by wild swings because they are highly sensitive to business cycles. The oil price reached a bottom of $10 a barrel in 1999 and a top of $147 in 2008. Volatility may be synonymous with risk and uncertainty under which planning on the part of businesses and governments would be difficult. In such an environment, projects and decisions will be postponed because of the fear of shortages in funds, resources and demand; and
Hypothesis 3 is Government Mismanagement. Oil booms suddenly bring huge amount of wealth that may overwhelm governments’ institution to absorb the oil revenues effectively and efficiently. It brings a wide asymmetry in power and information between the government agencies. Putting graft and corruption aside, this sudden huge wealth will be mismanaged and spent in the short-run on white elephants without long -term planning. This wealth will lead to unbalanced growth and bottlenecks in certain sectors and in the infrastructure. This outcome will also contribute to disruptive behaviors such as rent-seeking and asset speculation. The collapse of the Kuwait stock market in 1981 and the 2008 real sector crashes in Dubai are by-products of this facet of the Oil Curse. Our research on the GCC stock markets demonstrates that the GCC markets have three volatility regimes low, high and extreme or crash regime which most other markets have two regimes. This finding show that the GCC stock markets are prone to crashes.
Having said all that, a visit to Saudi Arabia, Dubai, Abu Dhabi and Qatar and another to Yemen, Jordan, Syria, Egypt and Morocco will make a person wonder about the truthfulness of the Oil Curse. I have only been to Kuwait among all the GCC countries but visited Jordan, Egypt and Tunisia several times. From what I heard, saw and researched there is a huge difference between the two groups in terms infrastructure, technology, organization and quality of services, pointing overwhelming to the pre-eminence of the first group over the second group (Avalcanti et al., 2001). But why did the GCC countries lack in economic growth over the last decade or so?
There are several reasons that help explain the Oil Curse or Paradox of Plenty; most of them have something to do with the oil bounty.
i. Heightened political risk, internal conflicts, political instability and wars. Huge oil endowments bring huge oil revenues, which help create a sense of overconfidence and influence to the oil producers. They also bring conflicts between provinces or regions within the same country. Examples of internal conflict include the political instability in Venezuela, the separation conflict in Angola’s oil rich Cabinda province, the civil war in Nigeria, and the 2011 civil war in Libya. These conflicts are known as the resource curse argument”. The oil endowments also attract the greediness of superpowers to their regions. Examples of superpowers’ greediness include the1980 Iran-Iraq war, the 1991 Gulf War and the 2003 Iraq war. This oil-motivated war phenomenon is known as the “resource war argument” (Le Billon, 2006). The Middle Eastern wars have contributed to political instability in the whole MENA region.
ii. Unbalanced development without long-term planning. This brings waste, bottlenecks and White Elephants that need long-term horizons to hold traction and usher in above average economic growth. It takes a very long time to smooth the misallocation of resources and substantiate the White Elephants and replace them by factories and farms. Moreover, putting time aside, the failure to produce outcomes that are conducive to high economic growth is the failure of policy makers who have not planned correctly, have not execute efficiently, have parked the huge wealth in very low yielding U.S. Treasury securities, and have smuggled a good part of the oil wealth to their own accounts instead of spending it generously on education, research and development (Palley, 2003).
iii. The failure of policy makers to go beyond what is stated earlier. In the name of protecting their countries’ oil wealth, policy makers segmented their economies from the rest of the world. They have stringently restricted foreign ownership of their assets, have not allowed immigrants to become productive citizens and replaced them by temporary workers, and have not truly diversified their economies .Immigrants will be a scarce resource in the future as countries like France, Russia, U.S. and Japan will compete to attract them and hold them to keep their economies young and productive.
The policy implications to deal with the oil curse must be the opposite of what I wrote earlier. The high volatility and uncertainty of the oil revenues underline the importance of establishing Oil Stabilization and Saving Funds (OSSFs) by governments with strong governance to shield their budgets from the wild swings in oil revenues. These saved funds could also shield these countries from appreciation of their real real exchange rates (the Dutch Disease) that makes them lose their international competitiveness. Planned immigration should be expanded, foreign ownership should be made more flexible, stock markets should adopt new technologies including hedging tools to hedge against crashes, more funds should be spent on education, research and development, and economic diversification through wise privatization combined with strong governance (e.g., 49% for the governments to prevent oligarchy and kleptocracy of happening), less on wars and the political enterprise, and more investor-friendly legislation should be legislated including protection of intellectual property. Moreover, the GCC countries should strengthen the GCC monetary union to make it a monetary, fiscal and institutional union in order to pool resources, capital, markets and households to be able to stand the test of time (Hammoudeh, 2011).
Looking far in the future, the Oil Curse may become a full fledged curse if oil is depleted or replaced by alternative sources before a true diversification of the economy occurs. Under such a strong oil curse, the oil-producing countries will be like a retired person who has to live on his life savings during retirement years. The Paradox of Plenty would be become the Syndrome of Depletion and Poverty. Hopefully, we will avoid this hidden end-of-oil curse.
Gylfason, T . (2001). "Natural Resources, Education, and Economic Development", European Economic Review 45 (4-6), 847–859.
Hammoudeh, S. (2011). “GCC can Draw Lessons from European Sovereign Debt Problems”, http://www.zawya.com/blogs/shawkat.hammoudeh/100209030609/.
Palley, T.(December 2003). “Lifting the Natural Resource Curse”, Foreign Service Journal.
Avalcanti, T., Mohaddes, K. and Raissi, M., (2011). "Does Oil Abundance Harm Growth?". Applied Economics Letters. doi:10.1080/13504851.2010.528356 for a another point of view that contradicts the oil curse.
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Community Comments (1)
Dear Dr. Hammodeh,
I'm Dr. Mahmoud Abdelbaky, Universtiy of Dubai
I've met you few times in conferences. You were my disscusant of one of my paper.
I have some time series works about Oil Curse in GCC which I want to share with you.
Please if you are interested in working togethe in this area let me know and I will send you my work. My email is email@example.com
I'm Dr. Mahmoud Abdelbaky, Universtiy of Dubai
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