Natural Resources and Development in the Middle East

Before delving into the analysis of various rent streams it is useful to briefly review the relationship between natural resources and development. Ever since the discovery of oil, hydrocarbons have defined the Middle East’s development experience. A quick review of the existing evidence suggests that the mena region shares with other developing countries the basic pathologies associated with a resource curse. Arab economies have experienced a middling growth performance with substantial volatility of macroeconomic outcomes. The symptoms appear all too familiar: weak private sector, unproductive investment in white-elephant projects, pervasive rent seeking and a large and oversized public sector. Government spending (especially on subsidies and public employment) has remained surprisingly resilient in the face of fluctuating oil prices. The relationship between oil and development in mena is well documented (Yousef, 2004; Elbadawi, 2005; Nugent and Pesaran, 2007). Rather than offering a comprehensive summary, I will highlight only the salient aspects of this literature.

Behind these generic patterns lies considerable diversity in individual development experiences. It is customary to classify the mena region along two dimensions: labour and resources. The political economy dynamics of the resource-rich, labour-scarce countries of the Gulf are distinct from more labour-abundant economies in the region (some of which are oil-rich, such as Algeria, while others are oil-scarce, such as Egypt and Syria). Classifying the region by rent endowments, it is initially useful to divide these economies into capital-surplus oil exporters; capital-scarce oil exporters; and resource-poor, labour-surplus economies. During the first oil boom (1973-80) all three types of economy favoured the public sector for allocating rents and developed patronage systems that undermined markets and competitive structural change. However, the development strategies and the nature of underlying rent streams differed across countries.

  • • The capital-surplus oil exporters of the Gulf deployed their sizeable oil rents to co-opt political support by providing generous welfare. This has led to the rapid absorption of resource rents through high government consumption. It has also been accompanied by perverse outcomes: stable autocracies, pro-cyclical fiscal policy, labour market distortions, patronage-driven private sectors, and a high dependence on resource rents.
  • • The capital-deficient economies are labour-abundant with relatively modest resource rents per capita in comparison to Gulf countries. Some of these (e.g. Algeria and Iran) deployed rent to initiate state-led industrialisation behind high, protective tariffs, but largely failed to create competitive industrial strength. Like other oil exporters these economies also created systematic welfare entitlements. Importantly, oil rents are combined here with regulatory rents through the manipulation of the economy. This has led to rent seeking, unproductive investment, weak private sectors and greater resistance to reform.
  • • The resource-poor economies might be expected to achieve more rapid political and economic development due to their lower resource rents, but this ignores sizeable rents derived from foreign aid, worker remittances and regulation. In fact, in the first two to three decades following independence, Yemen and Syria both derived one-fifth of their respective GDPs from hydrocarbon exports, while Egypt generated aggregate rents in excess of 20-30 per cent of GDP. Morocco, Tunisia, and Jordan sustained sizeable rent streams until oil prices collapsed in the mid-1980s, after which they accelerated economic diversification but resisted opening up politically.

The labour surplus economies witnessed declining rents in the 1980s—resulting from falling oil prices and dwindling inflows from foreign aid and remittances. With growing debt-to-gross domestic product (gdp) ratios, economic reform became a policy imperative. Several mena countries introduced privatisation and economic liberalisation on a limited scale. This was done in such a way as not to disrupt the status quo. Neo-liberal reform generated opportunities to exploit new rent streams through lucrative contracts and licenses in banking and telecommunications. These rents were allocated to consolidate elite coalitions and to reorganise political power. Overall, economic reforms failed to dismantle pervasive entry barriers and anti-competitive practices.

The second oil boom, which began with the oil price surge in the 1990s, led to a sizable windfall (mena oil revenues grew fourfold during the period 2000-07). Most oil exporting governments initially responded prudently to the windfall revenue, through higher savings levels, slower domestic absorption, and a greater reliance on markets. During the aforementioned period, total mena debt fell from 55 to 17 per cent of gdp. Oil exporting nations began to set aside a larger proportion of their current account surpluses in sovereign wealth funds (swfs). Arguably, in several mena countries, especially in the Gulf, the private sector has shown greater agency and independence. Despite this evidence of a steeper learning curve, however, the second oil boom did not redefine the rent-dependent model of development.

Public expenditure has accelerated since 2005 due to a growing commitment to salaries, subsidies, and infrastructure projects. Typically, roughly half of the extra hydrocarbon revenues have been deployed in resource-rich mena states, with public spending noticeably higher in capital deficient economies, such as Iran. Public spending continues to be the primary driver of private investment in oil-rich mena states, but returns on these investments (especially those on infrastructure) are typically low (Noumba Um et al., 2009). It is therefore unsurprising that the income per capita gains of regional oil exporters were mainly attributable to gains in the terms of trade, with limited contribution from non-oil gdp (Arezki and Nabli, 2012). It is pertinent to explore if social learning has any role to play in explaining differential policy responses to the two oil booms that the Arab resource-rich economies (rres) witnessed, in the early 1970s and the first decade of the new millennium.

A key difference, relative to the 1970s, is that spending on infrastructure was relatively more restrained during the second oil boom. There was also a more robust saving response. Learning from the fiscal challenges of the 1980s, most Arab rres have devised explicit strategies to set aside a growing proportion of their resource windfalls for the future. swfs emerged as important saving and investment vehicles during the second oil boom. Apart from facilitating overseas investments, these savings are coming to the rescue of Arab rres in the present climate of low oil prices. The question, however, remains: is the recycling of petrodollars fundamentally different across the two oil booms? Apart from the differential savings response, the nature and direction of investment also displays interesting differences. At home, Gulf Cooperation Council (gcc) countries have invested more in rail infrastructure,[1] and in educational and financial institutions.

The destinations of overseas investments are also more diversified, with greater cross-border investment in Asian and mena countries. But, at least in Qatar and Abu Dhabi, the pattern of prestige acquisitions abroad has continued and, in some cases, even intensified. In some sense, swfs and their associated investments represent merely a change of form rather than one of substance. As investment vehicles, swfs continue to be directed towards prestige projects at home and brand acquisitions abroad. Although investments have gradually become more diversified in terms of their destinations, few are oriented towards promoting development in the region. There are also lingering questions about the transparency of swfs. Their operations are unusually opaque, with little public knowledge of their investment strategies. Many swfs lack clear withdrawal rules. Even when specified, these rules are not consistently implemented. As a result, despite being a promising instrument, swfs have not been entirely successful in imposing fiscal constraints on the sovereign. As the brief review in this section has suggested, despite small changes on the margin, the old development model is alive and well. Oil rents continue to drive the region’s core trajectory of political and economic development. However, as the following section will argue, oil rents are only one large component of the region’s complex structure of rentierism.

  • [1] Gulf Business, 11 January 2015, (accessed on 17 March 2016).
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