The Fallacy of the Resource Curse in Arab Oil Economies: Why Institutions Matter

Abstract

Journal of South Asian and Middle Eastern Studies Vol. XXXVIII, No.2 Winter 2015 The Fallacy of the Resource Curse in Arab Oil Economies: Why Institutions Matter Mohamed Akacem* Xin Geng** Introduction The subject of the resource curse has been studied extensively and the standard conclusion is that countries rich in natural resources are doomed to perform poorly. However, the empirical evidence is not so clear-cut as to agree with this conclusion. Norway is an oil economy, yet its economy has performed admirably. Other countries such as the Netherlands and the United States have done the same. The nature of ownership of the resources differs of course. Some countries allow for private ownership such as the United States while others such as Norway do not. The interesting aspect is that despite the fact Norway’s oil resources are controlled by the government like the members of the Oil Petroleum Exporting Countries (OPEC), the results have been significantly different. The set of countries we chose to study present a number of differences in terms of their economic approach to development and their political systems. Algeria and Libya1 have both been run as command economies 27 *Mohamed Akacem earned his Ph.D. in Economics from the University of Colorado, Boulder in 1981. Dr. Akacem worked as an economist on world oil market issues at the International Center for Energy and Economic Development in Boulder, Colorado. He worked as an economist in Saudi Arabia. In addition to teaching, Dr. Akacem has published several articles in The Wall Street Journal, The Christian Science Monitor among others as well as in refereed journals such as the Review of Islamic Economics, The Journal of North African Studies, the Journal of Energy and Development and the Middle East Policy. **Xin Geng, is a Ph.D. candidate at the University of Colorado, Boulder in the Department of Economics. He received M.A. degree in Economics at the University of Colorado at Boulder. His research interests are econometrics, specifically nonparametric estimation. He is currently the instructor of Math tools for the Economists. 1 For Libya, until the Arab Spring toppled Qaddafi in 2011. 28 with strong governments with not much dissent until the Arab spring.2 On the other hand, Kuwait, Saudi Arabia and the United Arab Emirates are conservative monarchies and part of the Gulf Cooperation Council (GCC). They are pro-western and relatively more market oriented unlike Algeria and Libya.3 Algeria and Libya are relatively “poor” compared with this small set.4 They have a smaller reserve base and larger populations.5 The remaining three are the “rich”, larger oil reserves and smaller populations. More importantly, economic principles dictate a different optimum price and production path for resource rich versus resource poor countries. The resource rich countries in general opt for a lower oil price preferring to lengthen the life of their resource and prohibit the entry of alternatives into the market. This has been the objective of a number of OPEC meetings. Unlike Sachs and Warner6 , this paper will focus on a small set of oil exporting countries with different characteristics, but where oil constitutes a very large part of their export and government revenue. Despite their differences, the countries we examine have more in common than the larger set of countries that Sachs and Warner chose to study. In fact, it is not really the resource wealth that is the problem, but rather the institutional7 setup in the oil producing countries that determines if resources are used to benefit the country as a whole or squandered away. It took a geologist from Iraq, Farouk Alkasim, who happened to immigrate to Norway at the time when Norway was beginning its quest to become an oil power to “save Norway from oil”8 and avoid the mistakes that Iraq and the rest of the Middle East committed. 2 Algeria had its own version of the Arab spring in the autumn of 1988 (October). 3 Although 9/11 changed the political map of North Africa and both Algeria and Libya (even prior to the toppling of Qaddafi) changed their foreign policy towards the west and particularly towards the U.S. 4 Algeria and Libya have less...