The impact of oil revenues on the Iranian economy and the Gulf states

Abstract

AbstractPersistent streams of oil revenues can have a long‐lasting impact on GDP per capita in oil‐exporting countries. Higher revenues might finance government activities and GDP. Besides the direct impact, an indirect effect may occur, as revenues may lead to higher investment that could raise capital accumulation and the production frontier. In this paper, the relationship between poli revenues, GDP and investment is explored for Iran and the countries of the Gulf Cooperation Council (GCC). To account for nonstationarities of the variables involved, (panel) cointegration techniques are applied. Several results are drawn from the analysis. Cointegration between oil revenues, GDP and investment can be established for all countries. While the cointegration vector is found to be unique for Iran, long‐run equations for GDP and investment per capita are distinguished for the Gulf countries. While GDP and investment both respond to deviations from the steady state, oil income can be treated as weakly exogenous. The long‐run oil elasticities in tGCC states exceed their Iranian counterparts. While oil revenues are closely related to investment activities in the GCC states, investment in Iran does not react to oil revenues in the long run.