THE IMPACT OF OIL RENT, CURRENCY OVERVALUATION, AND INSTITUTION QUALITY, ON ECONOMIC GROWTH OF OIL-RICH COUNTRIES: A HETEROGENEOUS PANEL DATA STUDY

Alireza Motameni

doi:10.32479/ijeep.10971

Abstract

This paper investigates several key challenges faced by oil-rich countries regarding their economic growth and development. First, it discusses how to determine currency overvaluation for these countries (if any). To determine the overvaluation, the real exchange rate (RER) is calculated and the Balassa–Samuelson effect is estimated via a regression model. Next, the study presents an empirical model for assessing the impact of oil rent on economic growth in the context of currency overvaluation and the institutional quality in every country. As a dynamic model, both endogeneity and heterogeneity are expected across cross-sections because countries are different in culture, customs, and political institutions. Consequently, heterogeneous panel data analysis is undertaken using the error correction model cointegration technique and the mean group estimation method in an autoregressive distributed lag model. Finally, the study concludes the findings and provides policy recommendations by offering a new perspective on an ongoing dilemma, discussing the challenges and limitations facing developing oil-rich countries and how their path to success may differ from other countries. Keywords : Natural resources; Rent-Seeking; Institutions; Economic Growth; Energy Economic JEL Classifications : D72; E02; F43; O47; Q43 DOI: https://doi.org/10.32479/ijeep.10971

Highlights

This study aims to investigate the role of currency overvaluation, oil rent, and institutional quality on the economic growth of oil-rich countries
While some scholars argue that investigations into resource abundance or resource dependence should be considered, this study argues that resource dependence is a better explanatory variable for such research
If the purpose of the study is to determine the influence of resource rent, in this case, oil, on economic growth, it is not clear how resource reserves, which are underground, and yet unused, can be an effective explanatory variable

Summary

Introduction

This study aims to investigate the role of currency overvaluation, oil rent, and institutional quality on the economic growth of oil-rich countries. Because the driving force of growth changes during different stages in economic development, economists analyze the composition of various factors in different countries and regions. Such models look closely at the impact of structural change as well as political and financial institutions on economic growth and the effect of a variety of subfactors including distribution conflicts, market failures, credit constraints, migration, urbanization, changes in mortality and fertility rates through health improvement, inequality, and trade. One key to evaluating modern economic growth is to examine the causes underlying cross-country differences in income per capita (Acemoglu, 2009). Since there are more detailed data available for many countries, by combining the crosssectional data of different countries to time series data, modern

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