The oil curse theory

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The oil curse theory

The oil curse theory, which also forms part of the more general concept of resource curse, emerged as the negation of the assumption that revenue generation dependent on natural resources would create wealth (Stevens, 2003). The oil curse theory posits that the countries strongly dependent on the export of natural resources that are non-renewable, particularly crude oil, are likely to experience a slower pace of economic development (Katz, 2004). The oil curse theory applied to countries or economies largely dependent on the export of oil such as the Middle East and MENA.

A number of reasons account for this theory. Historical Development of the Oil Curse Theory The oil curse theory emerged during the 1970s when the oil shocks highlighted the impact of oil dependence on exporting countries. During this time, the major oil producing countries in the Middle East implemented an embargo of oil exports to the United States for political and economic reasons. The political reason is to rally the United States not to support Israel in its military campaigns. The economic reason is for the oil exporting countries to stabilize income generation.

Decreasing the supply of oil in the global market at an increasing level of demand would raise oil prices. (Rosser, 2006) However, the embargo gave the opportunity for the oil and energy sector in other countries to develop in order to meet the demand. The impact is the growth of competitors increasing the competitive pressure. Oil Curse in Developing Countries In developing countries with a substantial oil export sector, there is various evidence of the oil curse. First is the limited development in other industries because of the focus on the harnessing and export of crude oil (Auty, 1993).

This creates an imbalance in the development of different industries that support employment and income generation for households. This hampers the development of other promising economic sectors and resource potential of economies. Second is the volatility of revenue generation from oil exports on a number of factors such as public sector governance, stability of institutions, sufficiency of infrastructures, and global market conditions (Sachs, Warner & Andrew, 1995). The volatility of income generation makes aggregate output volatile as well so does the key areas of government spending such as infrastructure and welfare services.

Third is the range of economic and non-economic downsides of dependence on oil such as poverty, underemployment, political turmoil, and civil strife. Conflict is also evidence of the oil curse (Collier, 2003) at various levels. Conflicts can arise between factions for control of oil-rich sites. Often paramilitary groups emerge seeking control of communities located in oil rich locations. Conflicts could also arise among government departments or parties for a bigger control or share of income from oil. Conflict erodes peace in communities and effective functioning of government departments.

Fourth evidence of the oil curse is poor human development index in developing countries with significant oil export sector. Skills development tends to rotate around the oil sector to the detriment of the other sectors. Crowding out of skilled workers in this sector intensifies competition and eventually brings down the cost of labor and income of skilled workers. With sufficient skilled workers in the oil sector, there is also the tendency to neglect education since there is lack of immediate need for other skills.

(Katz, 2004) This hampers human development of the wider sector of society and the optimization of the capabilities of human capital. Fifth evidence is the instability of democracy and freedom in developing countries significantly dependent on the oil sector. This has relations to the emergence of conflicts to decide control for oil. (Ross, 2001) Nevertheless, less democratic forms of government could be successful tools for controlling the oil industry in developing countries with unstable governments and weak infrastructures. Oil Curse in Middle East and North African Countries

In Middle East and North Africa countries with significant oil sectors, these generally fall under the category of oil rich but labor importing countries or the category of oil rich and labor rich countries. This distinction is important because these have an impact on the manifestation of the oil curse. The oil rich countries that import labor have higher per capita income when compared to the oil rich countries with abundant domestic labor (Dahi & Demir, 2006). The impact of the oil curse on the economy and political infrastructures then differs.

In the case of oil rich countries that import labor such as Bahrain, Kuwait, Oman, Saudi Arabia, and United Arab Emirates, the oil curse emerges in the form of rentier state practice because of the lack of taxation on citizens. Authoritarianism emerges when the profit gained from oil exports has totally displaces taxation because there is no need for representation when citizens do not pay taxes (Ross, 2001). Without representation, a rift between government and its constituency occurs that could result to unmet needs or even corruption.

Another evidence of the oil curse in this group of countries is the implication of state ownership of oil companies on the efficiency of operations and investments. State ownership of companies gives rise to inefficient management and top-down decision-making linked to the authoritarian mode of governance. With regard to the oil rich and labor abundant countries including Algeria, Libya and Syria, the oil curse emerges in the form of excessive borrowing and other mismanagement of revenue because of the operation of the Dutch disease, which increases the real exchange rate making it cheaper for these countries to take out state loans.

In effect, these countries also accumulated large debts. Corruption is another manifestation of the oil curse in this group of countries. With revenue flows from oil exports, there is limited incentive for the government to establish the infrastructures for taxation and manage the productivity of society. (Institute for the Analysis of Global Security, 2005; Dahi & Demir, 2006) This leads to underdevelopment or slow development in the long-term. Oil Curse in the United Arab Emirates As a major oil exporting country, United Arab Emirates also experienced the manifestations of the oil curse.

However, this has distinguishable manifestations in the UAE than in other Middle East countries. The standard of living in the UAE, together with Kuwait, is relatively higher when compared to the other oil rich Arab countries such as Saudi Arabia covered by the oil curse (Fasano & Iqbal, 2003). This could because it was only fifty years ago that the UAE commenced the development of the oil sector. Prior to that its economy depended on fishing, trade in goods, pearl harvesting, and other economic sectors.

(HSBC Middle East, 2003) These economic sectors remained even with the export of oil. This means that while the UAE depends on oil, it still has other functioning economic sectors alleviating in part, the dependence on oil. Another reason could be the political structure of the UAE as composed of autonomous emirates. This takes governance closer to the constituents and public service more focused on the needs of each emirate. (DeNicola, 2005) This system of governance counteracts, to a certain extent, the oil curse. Nevertheless, its dependence still reflects the oil curse.

Many of its other industries have not achieved optimum performance because for decades after the discovery of oil, the UAE heavily invested in making the harnessing and processing of oil more efficient. The population of the UAE comprise of young people that the oil industry cannot accommodate so that its large-scale investment in the oil industry came at the price of human development. Education levels in the UAE still have room to grow. Although, the UAE has significant oil reserves, this would eventually decline in next years. This poses a threat to the future economic stability of the UAE.

There are promising opportunities for revenue generation in the development of emerging sectors such as finance, IT, and tourism. These may not be able to replace the extent of revenue generation from oil but with the development of competencies in these areas, the UAE expects to optimize revenue generation from these sectors while at the same time addressing the other negative impact of oil dependence. (HSBC Middle East 2003; DeNicola 2005) Oil Curse Debate Since the emergence of the oil curse theory, a debate emerged over whether oil dependence constituted a curse or a blessing (Stevens, 2003).

Initial perspectives leaned towards oil dependence as a curse. Now, there are indications that this is not necessarily so, since oil dependent countries would not have achieved their current positions without reliance on the oil industry (Mabro, 2006) and there are preventive measures or solutions to the effects of the oil curse. As a curse, the manifestations of oil dependence include the failure to use the wealth for economic development (Auty, 1993) or slow economic growth (Sachs & Warner, 1995).

A comparison of the GNP per capita of oil dependent countries and other economies shows decreases in the former and increases in the latter (Gylfason, 2000). Many if not all countries, with the oil industry as the economic base, experienced these effects, albeit in varying degrees. This implies that while oil dependence could lead to adverse effects, economic context determines the extent of impact and the solutions available to economies. From a different perspective, the adverse effects of oil dependence are more attributable to ineffective policies rather than the scale of oil exports (Brunnschweiler & Bulte, 2008).

Major oil exporting countries could implement policies that encourage the development of other economic sectors while achieving efficiency in its oil sector. The strategy of diversification captures this solution. Other views showed a lack of a causal or determining link between oil dependence and civil conflict or democracy. Oil economy becomes a context for civil disturbance but not likely the direct cause of civil conflicts (Menaldo & Seljan, 2008) Countries with democratic or authoritarian governments did not change their form of governance after discovering oil resources (Haber & Menaldo, 2007).

Oil dependence has benefits and downsides but there are solutions to the adverse effects. It is up to the governments to develop policies that address the negative impacts of oil dependence to prevent or resolve the oil curse.

References Auty, R. M. , 1993. Sustaining development in mineral economies: the resource curse thesis. London: Routledge. Brunnschweiler, C. N. & Bulte, E. H. , 2008. Linking natural resources to slow growth and more conflict. Science, 320(5876), pp. 616-617. Collier, P. , 2003.

Natural resources, development and conflict: channels of causation and policy interventions. Washington, DC: World Bank. Dahi, O. S. & Demir, F. , 2006. The Middle East and North Africa. [Online] Available at: http://faculty-staff. ou. edu/D/Firat. Demir-1/Demir_Development_in_MENA. pdf [Accessed 5 February 2009] DeNicola, C. , 2005. Dubai’s political and economic development: an oasis in the desert?. Williamstown, MA: Williams College. Fasano, U. & Iqbal, Z. , 2003. GCC countries: from oil dependence to diversification. International Monetary Fund. [Online] Available at: http://www.

imf. org/external/pubs/ft/med/2003/eng/fasano/index. htm [Accessed 5 February 2009] Gylfason, T. , 2004. Natural resources and economic growth: from dependence to diversification. CEPR Discussion Paper No. 4804. [Online] Available at: SSRN: http://ssrn. com/abstract=697881 [Accessed 5 February 2009] Haber, S. & Menaldo, V. , 2008. Do natural resources fuel authoritarianism? A reappraisal of the resource curse. Working Paper. [Online] Available at: http://www. stanford. edu/%7Evmenaldo/Papers/DoNaturalResourcesFuelAuthoritarianism [Accessed 5 February 2009]

HSBC Middle East, 2003. The oil and non-oil economy of UAE, 2003. HSBC Economic Bulletin. [Online] Available at: http://www. econresearch. net/admin/articles/7(1). pdf [Accessed 5 February 2009] Institute for the Analysis of Global Security, 2005. Will North Africa learn from the oil curse?. [Online] Available at: http://www. iags. org/n0124053. htm [Accessed 5 February 2009] Katz, M. , 2004. Lifting the oil curse. Washington, DC: International Monetary Fund. Mabro, R. , 2006. Oil in the 21st century. Oxford: Oxford University Press.

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