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.

This paper contributes to the empirical literature on oil and other point-source resource curse. We find that the curse does exist but conditional on bad political governance. Unlike previous studies, we estimate a flexible econometric growth model that accounts for long-term country heterogeneity and cross-dependency and retains the virtues of the recent literature, including short-run flexibility, cointegration and error-correction mechanisms. We unpack political institutions into those reflecting the degree of inclusiveness (Polity) and credibility of intertemporal commitments (political check and balances) and find that resource-rich countries with low levels on both scores are likely to experience the curse, while those with high enough levels may turn resource rents into a driver of growth. Countries with high scores on only one dimension may avoid the curse but are not likely to effectively use resource rents to promote growth. This suggests that for the oil-rich Arab World to achieve sustained growth, not only democracy is a necessary condition but also the creation of a strong system of political checks and balances.

This chapter attempts to incorporate the role of labor market flexibility in a unified theoretical framework of optimal exchange rate policies for resource-rich economies. For that purpose, the chapter extends the standard rules-versus-discretion model of monetary policy to allow for different assumptions about wage rigidities. The analysis suggests that when all prices are exogenous and wages are all optimally indexed to inflation (i.e., labor market flexibility case), fixed exchange rate regimes deliver more desirable outcomes in terms of real output, inflation and insulation against external shocks compared to flexible exchange rate regimes. Meanwhile, the fixity of exchange rates combined with rigid goods and labor markets can add to real appreciations.

This chapter shows that as per capita incomes increase, services sectors in resource-rich countries of the Arab World have declined as a share of gross domestic product (GDP) and of non-mining GDP. This negative relationship between the share of services in GDP and income per capita is opposite to global patterns and is linked to the large rents generated by natural resources in these countries. A large number of services sectors can now be contracted offshore or can be produced by temporary movement of service providers, implying that countries need to be competitive to maintain domestic production. Since rents from natural resources inflate wages and non-tradable prices, they tend to discourage domestic production of tradables, both goods and services. As the chapter highlights, the negative effect of rents are compounded by the negative impact of policy and regulatory restrictions on entry, and of business conduct on the development of services sectors. These restrictions create rents captured by “protected incumbents” or increase the real cost of producing services – in both cases inflating the price of services.

Resource-rich economies in general, and Arab oil exporters in particular, are at a critical juncture, facing the challenge of revamping their fiscal policy institutions and conduct to strengthen macroeconomic and financial stability, raise growth, and improve intra/inter-generational equity. This paper starts by reviewing the international evidence on fiscal policies and outcomes in resource-rich economies at large and Arab oil-exporting countries in particular, which suggests that strong fiscal (and political) institutions can turn the resource curse into a blessing. Then the paper provides comparative reviews of Chile’s and Norway’s decade-long experience in setting up new fiscal institutions and rules to manage their resource rents, aiming at and, in fact, attaining more macroeconomic and financial stability, higher growth and improved equity. Specific reform lessons to strengthen fiscal institutions and policies are drawn for resource-rich economies and Arab oil exporters.

This chapter examines the impact of the oil boom, blessing or curse, on Sudan’s economy, analyzes the key features of the country’s growth experience before and after the commercial production of oil and articulates their underlying political economy issues. The results show that the contribution of oil to real growth has been strong; however, Sudan is confronted with the Dutch Disease and grave fiscal management challenges. Moreover, the political economy regime engendered by the elites’ distributive politics tends to magnify the impact of shocks and it worsened the procyclicality of fiscal policy and contributed to the excessive currency appreciation. Overall these factors have contributed to premature de-industrialization, diluted the economic and social impact of the largely oil-driven growth and further weakened the state institutions. The policy implications of these findings are indicated.

Oil revenues enable the government to afford generous wages and expansive employment policies in Saudi Arabia. The availability of low-cost foreign labor combined with a rapidly growing working age population result in a large disparity between public and private sector salaries. This segmentation skews Saudi worker preferences for public sector employment and increases their reservation wages for private sector employment, resulting in high unemployment. Government initiatives such as those entailed by the 2011 royal decrees aiming at increasing public sector employment and compensations would further exacerbate unemployment in the long run. The main manifestation of the oil curse in Saudi Arabia is thus through labor market segmentation and the persistently high unemployment rate.

This chapter analyzes spillovers from macroeconomic shocks in systemic economies (China, the Euro Area and the United States) to the Middle East and North Africa (MENA) region as well as outward spillovers from a GDP shock in the Gulf Cooperation Council (GCC) countries and MENA oil exporters to the rest of the world. This analysis is based on a global vector autoregression (GVAR) model, estimated for thirty-eight countries/regions over the period 1979Q2 to 2011Q2. Spillovers are transmitted across economies via trade, financial and commodity price linkages. The results show that the MENA countries are becoming more sensitive to developments in China than to shocks in the Euro Area or the United States, in line with the direction of evolving trade patterns and the emergence of China as a key driver of the global economy. Outward spillovers from the GCC region and MENA oil exporters are likely to be stronger in their immediate geographical proximity, but also have global implications.