Sample - Literature Review for the Resources Curse for Gulf Arab States - Qatar, Oman, UAE, Kuwait, Bahrain & Saudi Arabia

Although classical economists voiced concern in the early-nineteenth century that natural resources, notably land, might constitute a limit to per capita GDP growth, the profession has tended to regard natural resources as generally less important to economic growth than capital and labor. By the close of that century most believed that society could overcome the Malthusian population trap and the law of diminishing returns, so that sustained economic growth seemed likely, if not assured. Mainstream economists came to believe that increased capital and technological progress would prevent natural resources from ever constraining global economic growth.

[some content hidden....] within a decade or less. There is also a virtuous social cycle because the early rapid expansion of manufacturing quickly eliminates surplus rural labor to promote a relatively egalitarian income distribution; while rapid PCGDP growth strengthens three key sanctions against anti-social governance to foster democratization that is incremental and endogenous (Auty, 2006). Moreover, the competitive industrialization trajectory associated with low-rent countries yields high net saving rates, indicating strong sustainability (Hamilton, 2001).

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GDP and Political Economy in Qatar

The corollary is that high natural resource rent relative to GDP can have two adverse effects on the political economy in Qatar. First, high rent deflects the incentives of governments away from the efficient creation of wealth and into rent re-distribution, which confers greater and more immediate political rewards. Second, the development trajectory of resource-rich countries prolongs reliance on commodity exports and fails to absorb surplus labor so that income inequality widens. Rent-rich governments frequently respond by using rent to provide jobs by over-expanding the civil service and protecting ‘infant’ industry that rarely matures. The resulting development trajectory tends to accumulate all forms of capital, whether produced (Auty and Kiiski, 2001), human (Birdsall et al., 2001) or social (Woolcock et al., 2001), more slowly than that of the resource-poor countries. This is especially so for the small... [some content hidden....]

The achievement of these positive features (prudent macro-economic policy, constraining wealth-damaging rent-seeking and channeling resources to enable less prosperous citizens to participate in competitive activity) is facilitated by adopting three institutions.

Net saving provides an index to inform such policy. It measures gross saving plus the net increase in human capital, minus the depreciation of produced and natural capital. Positive net saving connotes net wealth creation and implies that the development trajectory is sustainable. Many oil economies exhibit negative indices, often substantial, indicating that their growth is depleting the aggregate capital stock and is therefore not sustainable. [some content hidden....]

Over-rapid domestic absorption is inflationary and risks triggering Dutch disease effects that weaken the future growth potential of the Qatar economy. By sterilizing the rent, the capital fund helps to competitively diversify the economy so that the staple trap is avoided.[some content hidden....]

Without such information governments have shown themselves to favor large public sector investments that enhance scope for servicing patronage networks by padding construction contracts and providing employment to favored groups. Striking features of efforts to ‘sow the oil’ during the 1974–1978 and 1979–1981 oil booms were the high frequency of cost overruns and low investment efficiency that transformed many such investments into public sector revenue sinks instead of vehicles to competitively diversify the economy (Auty, 1990). These investments also tended to be capital-intensive, creating relatively little employment per unit of investment after the construction stage. Rather, the successful strategies of UAE, KUWAIT AND SAUDI ARAB. [some content hidden....]

Conclusion

It should first, use SEEA to explicitly identify the oil rent within the sector revenue stream and sterilize it in an overseas capital fund. Second, the government should restrict increases in its already high current public expenditure to ensure that the non-oil budget deficit can be funded from the NPV of the oil assets. This will automatically shrink the deficit to maintain a sustainable level as the oil is depleted. Moreover, any extra current expenditure should be pro-poor, principally on health and education, which build human capital. Third, non-inflationary increases in public investment should, subject to confirmation by the investment evaluation unit, rehabilitate the neglected rural sector.

This will promote not only poverty-alleviating labor-intensive growth that can quintuple the commercial value of rural output, but also further boost non-oil GDP by expanding scope for agro-processing and generating multipliers to domestically-supplied rural manufactures and services. Finally, all three policy initiatives will be undermined without effective constraints on rent-seeking, as provided by increased domestic competition and the adoption of the EITI. Internationally accepted standards for oil accounting will make it easier and more acceptable for countries to implement, and make the monitoring of oil revenues more transparent in Qatar.

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