Economic Diversification, Oil Revenue Management, and Industrial Policy in the Middle East and North Africa

This paper investigates the political economy of resource revenue management in the context of an extremely high need for economic diversification across several countries in the Middle East and North Africa. This paper find that across the board, resource-rich MENA countries have tended to spend their resource revenues generated by the last commodity boom by fueling domestic consumption, both at the public sector and private level, rather than for investment to increase the productivity of non-resource tradable sectors. This paper further argues that that the standard policy advice on managing resource revenues, which has been dominated by a short-term emphasis on consumption, fiscal stabilization and market equilibrium at the expense of long term structural change, is unsuitable in the context of an urgent need for diversification in MENA oil exporters. This paper also highlights important differences in the political economy of resource rents management according to the level of resource rent per capita: ‘Medium resource rich countries’, such as Algeria, Iran or Iraq, cannot afford to achieve growth and employment by pursuing the resource revenue management model currently followed by countries such as Kuwait, Qatar, Saudi Arabia and the UAE, which is more based on financial diversification, rents distribution through public sector employment and consumption subsidies, rather than the transformation of the domestic productive structure. Although all MENA exports need to diversify their economies, the opportunity costs of investments in financial assets overseas rather than real assets domestically varies across countries. This study concludes by outlining a resource revenue management model that is more adapted to the context of the various oil-dependent economies of the MENA region.