The Institutional Curse of Natural Resources in the Arab World1

Abstract

This paper argues that the resource curse in the Arab world is primarily an “institutional curse,” even though it has several macroeconomic manifestations. An empirical investigation, using an augmented growth model, confirms the conditional resource curse hypothesis. The results suggest that on their own, political institutions do not always have an effect on growth but, when interacted with natural resources, they reduce the negative effect of natural resources on growth but do not offset it. The analysis also shows that the curse has operated in different ways within the Arab World. In the GCC, large rents per capita have been channeled to national citizens in the form of well-remunerated public sector jobs and other generous social welfare schemes which have served to increase government legitimacy and foster regime stability. In contrast, the populous group comprising poorer rentier states have experienced conflict, violence and social unrest. Moreover, in a context of low rent per capita, excessive consumption resulted in massive deficiencies in infrastructure investments and an underdeveloped financial sector. Finally, the volatility of their limited resources has been accompanied by more dire economic consequences: excessive borrowing and Dutch Disease.

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