The Institutional Curse of Natural Resources in the Arab World

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 these interact 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 utilized to increase government legitimacy and foster regime stability. Indeed, the curse is expressed subtly through a clear segmentation of the labor markets, which acts as an efficient mechanism of rent distribution in the form of well-remunerated public sector jobs and other generous social welfare schemes to national citizens. In contrast, the populous group comprised of poorer rentier states, have experienced conflict, violence and social unrest. Moreover, the limited resources seem to have led to more dire economic consequences; resource busts tend to drive the poor rentier states to engage in excessive borrowing while booms seem to have almost eliminated their manufacturing sectors. Moreover, in a context of low rent per capita, excessive consumption resulted in massive deficiencies in infrastructure investments and an underdeveloped financial sector.