Directory UMM :Data Elmu:jurnal:J-a:Journal of Energy Finance & Development:Vol4.Issue2.Jan1999:

Journal of Energy Finance and Development
4 (1999) 185 ± 218

Oil-exporting countries of the Persian Gulf: What happened
to all that money?
Hossein Askari*, Mohamed Jaber
Department of International Business, George Washington University, Suite 230, 2023 G Street, N.W.,
Washington, DC 20052, USA

Abstract
Our objective is to assess the economic performance of Middle Eastern oil-exporting countries over
the past 25 years based on their general economic characteristics (economic dependence on a depletable
resource) and attendant policy requirements (transforming to a non-depletable resource-based
economy). As oil-exporting countries, we assess the macroeconomic and development policies that
they should have implemented and have actually implemented over time. We find that their policies
have rarely been consistent with the requirements of exhaustible resource-based economies. This has
resulted in a widespread misallocation of resources and a divergence from their essential goal of
economic transformation. D 2000 Elsevier Science Inc. All rights reserved.

1. Introduction
In 1975, when the price of oil had more than quadrupled from its level of 2 years earlier, it

was widely believed that the oil-exporting countries of the Middle East were on their way to
riches that would make them the envy of the developing world. By laying claim to over half
of the world's proven oil reserves, Middle Eastern countries were thought to be on their way
to reaping the rewards of petroleum. Now, after 25 years, history is the judge of whether these
countries have efficiently utilized their enormous wealth transfer to put them on a path of
sustainable economic growth.
Our objective is to assess the economic performance of Middle Eastern oil-exporting
countries. We start with an overview of their general economic characteristicsÐand attendant
policy implicationsÐthat set them apart from other developing nations, we then attempt to
assess their overall economic performance over the past 25 years. Finally, their macro* Corresponding author. Tel.: +1-202-994-6880; fax: +1-202-994-7422.
1085-7443/00/$ ± see front matter D 2000 Elsevier Science Inc. All rights reserved.
PII: S 1 0 8 5 - 7 4 4 3( 9 9 ) 0 0 0 0 9 - 5

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economic and developmental policies, based on their success in instituting the necessary
elements of future economic growth, are assessed.

2. The fundamental differences between oil-exporting and non-oil-exporting
developing countries
When comparing oil-exporting developing countries to those that are non-oil-exporting,
it is easy to overlook their common attributes and objectives. For the most part, their
national objectives aim for a sustainable rise in income per capita and in overall living
standards, a greater level of equity among citizens, sustained growth in output, an
expansion in the share of high-value added industries and services, an improvement in
general educational and skill levels, stable macroeconomic conditions, and other goals that
would allow them to reach the ranks of developed countries. Nevertheless, the abundance
of a valuable natural resource and the substantial inflow of capital from oil exports give a
distinctive character to oil-exporting countries.
2.1. Distinctive characteristics of oil-exporting developing countries
The differentiating characteristics that set oil-exporting countries apart from other developing nations stem mainly from (i) their dependence on an exhaustible natural resource and
(ii) the public ownership of that resource.1
In-of-itself, dependence on oil does not clearly set petroleum-exporting developing
countries apart from the rest of their non-oil-exporting counterparts. A large number of
developing countries are also heavily dependent on one or two (mainly agricultural)
commodities that constitute the lion's share of their exports. What distinguishes the
dependence on oil, however, is the exhaustible nature of the resource. Unlike agricultural
products, for example, which are reproducible year after year, the production and export of a

barrel of oil is a one-time transaction that cannot be regenerated from the same resources.
That is, unless new reserves are continuously found, oil wealth will necessarily be depleted at
some point in the future. As will be discussed below, this distinguishing feature of oil has a
direct effect on the governments' developmental strategies.
The other distinguishing feature of oil-exporting countries stems from the accrual of oil
revenues to the government. Although subject to some (mostly private) debate, the ownership
and exploitation rights to petroleum deposits in these countries belong to the state (as opposed
to private entities). Consequently, this affords the government a dominant role in the
economy. A role that becomes even more pronounced when one takes into consideration
the large economic rentsÐdefined as the difference between the market price of a good and
its opportunity costÐthat accrue from oil.
Despite their idiosyncratic traits, oil-exporting developing countries do not form a
homogeneous group. Economic differences between them are mainly due to their overall

1

The discussion in this section is based on Amuzegar's (1983) analysis of the issue.

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187

national factor endowments and domestic absorptive capacities.2 Among other things,
oil-exporting countries differ greatly in terms of the size of their oil reserves, their gross
domestic product (GDP) and development levels, the size of their populations, as well
as their factor and resource endowments beyond petroleum. A common distinction
between oil-exporting countries is that of the low- versus high-absorbing countries.
``Low-absorbing'' oil-exporting countriesÐsuch as Kuwait, Saudi Arabia, and the United
Arab Emirates (UAE)Ðare characterized by relatively small populations, large per capita
GDPs, large per capita oil reserves, little arable land, relatively few complementary
resources (especially water), small markets, and an acute shortage of skilled manpower.
``High-absorbing'' countriesÐsuch as the Islamic Republic of Iran (henceforth, Iran)Ðon
the other hand, have large populations, lower per capita oil reserves, a large skilled
labor force, other minerals, substantial arable land, relatively good water resources, and
a generally more diversifiable economy.3 Although in-depth discussion about the
differences between oil-exporting countries is not the object of this article, clearly, such
differences make it difficult to prescribe a single developmental strategy for all.
Nevertheless, certain macroeconomic policies are beneficial to all countries due to their
unique characteristics.
2.2. The interpretation of national output and its economic implications

In standard national income accounting, the way to account for a country's oil
production is to simply add to national product the market value of crude oil extracted at
the earliest stage of production.4 This method, however, leaves the estimate of national
product vulnerable to fluctuations in oil prices (especially sharp price movements) and to
changes in the rate of oil extractionÐwith these effects becoming greater the larger the
share of oil in the country's economy. Consequently, it is much more informative, in the
case of countries that are reliant on an exhaustible resource, to reconsider the calculation
of the net national product (NNP). For a country ``with reproducible capital, but no
depletable resources, the most reasonable interpretation of NNP is the largest permanently maintainable amount of consumption'' (Askari, 1990, p. 14). Thus, for an oilexporting country, NNP would reflect the maximum consumption level that is indefinitely sustainableÐi.e., even after the natural resource has been depleted. In his analysis
of this subject, Weitzman (1990) shows that the ratio of the conventionally measured
NNP to the theoretically correct one is inversely related to the real rate of return on
investment and to the life of oil reserves. In other words, the lower the return on an oilexporting country's investments and the shorter the expected life of its reserves, the
greater the difference between the conventional measure of its NNP and the
theoretically correct one. Moreover, he conjectures that achieving a favorable post-

2

In the context of this article, absorptive capacity refers of the ability of a country to absorb oil revenues
productivelyÐby efficiently investing in physical and human capital. Please refer to Amuzegar (1983, p. 21) for
more details.

3
For a more elaborate discussion on the nature of differences between these countries, please refer to
Amuzegar (1983).
4
For an elaboration on this topic, please refer to Askari (1990).

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depletion savings rate is highly dependent on the current savings rate, the life of oil
reserves, and the real rate of return on investments.5 The causal linkage between these
variables is quite intuitive: In order to attain a high, post-resource consumption level,
an oil-exporting country needs to (i) maintain a high level of savings during the predepletion period and (ii) invest these savings in high-yielding, diversified assets.
Consequently, for a country to enjoy a high post-resource savings rate, it must attempt
to increase both its current savings rate and the return on its invested capital.
Moreover, the savings rate would vary with the expected life of oil reserves. As
the life of oil reserves decreases over time, the savings rate has to increase in order to
maintain the desired post-resource savings rate.

3. The implications for developmental and macroeconomic policy
In general, when contemplating the economic structure of developing countries, one
cannot help but underline the pervasive role of the state in their economic activities.
Whether based on theoretical economic notionsÐsuch as an aggregate ``Big Push''
developmental strategy complemented by the need to develop the countries' comparative
advantagesÐor on pure political interests, governments of developing countries have, by
and large, taken it upon themselves to elevate their economies to the ranks of developed
countries. Oil-exporting developing countries are no exception. In fact, the accrual of
substantial oil revenues to the state has had the effect of further accentuating its role in the
economic arena. The presence of oil not only enlarges the role of government, but also
presents it with a new set of alternative policies. In this section, a number of policy
decisions facing oil-exporting developing countries are reviewed. The discussion will focus
on economic policy choices that are idiosyncratic to these countries in view of their
resource endowments.
3.1. Exchange rate policy
Traditionally, many oil-exporting countries have held the view that exchange rate policy
is of little relevance to their economic well being. The justification for this argument has
been based on the fact that oil is sold at an internationally determined dollar price. In other
words, fluctuations in a country's exchange rate have no effect on the competitiveness of
oil exports. Although this argument does hold some truth in regards to the countries'

energy sector, it is weak when applied to the non-oil sector. The crucial need to develop a
non-oil sector, as pointed out in the discussion of NNP, necessitates an appropriate
exchange rate policy by the government. Moreover, it is important to point out that the
pursuit of a particular nominal exchange level constitutes only part of a more compre5
These hypothesized conclusions (in Weitzman, 1990) are greatly influenced by the share of the oil sector in
the economy. In other words, the larger the share of the oil sector, the larger is the difference between
conventionally measured and theoretically correct NNP. Moreover, the larger the oil sector, the greater is the
relevance of real return on investment and life of oil reserves to the attainment of a high sustainable level
of consumption.

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189

hensive policy. What is truly important to international competitiveness is the real
exchange rate. The success of exchange rate policy is therefore highly contingent on the
adoption of consistent monetary and fiscal policies. Moreover, the effectiveness of such a
policy is limited by the share of economic activity that is not influenced by changes in
relative price levelsÐsuch as the pervasive role of government in most oil-exporting
economies. In an economy where government spending constitutes a substantial percentage

of GDP, the guidance offered by the signal from relative prices is largely neglected in
favor of political agendas and social pressures.
The substantial rents from oil exports, their accrual to the state and the importance of
the real exchange rate to the development of a non-oil sector interact in a unique way
within oil-exporting countries, producing an economic phenomenon that has come to be
known as the ``Dutch disease.''6 Assuming that the economy is divided into three
distinct sectorsÐnamely, the oil sector, the tradables sector, and the non-tradables
sectorÐthe dynamics of the disease predict that the increase in government spending
(stemming from the influx of oil revenues) will lead to a shift in labor and capital from
the non-oil tradables sector into the non-tradables sector. This is mainly due to two
interrelated effectsÐnamely, spending effects and resource movement effects. The
economic impact of spending effects can be analyzed from two different perspectives.
The monetary perspective stipulates that the increase in government spending will lead
to a higher rate of domestic inflation. Since in most developing countries exchange
rates are fixed, this would lead to an appreciation of the real exchange rate. Inasmuch
as prices for tradable goods are set on international markets, this should lead to an
increase in the relative price of non-tradable goods compared to that of tradables. An
alternative perspective (based on real-economy dynamics) also arrives at the same
conclusion. The latter view emphasizes the differences in supply elasticities between
tradable and non-tradable goods. Since one could safely assume that the supply of

tradables is relatively elastic (in comparison to non-tradable goods), then an increase in
government spending on both goods will have a differential impact on their price
levels. More precisely, the increase in spending will have the effect of increasing the
price of non-tradable goods relative to tradable goods. This effect is accentuated when
the majority of government spending is concentrated on non-tradablesÐsuch as services
and construction.
The change in relative prices leads to a consequent resource movement effect.
Attracted by high prices and greater profitability in the non-tradables sector, capital
and labor move out of the tradables sector. The highly lucrative oil sector, with its high
marginal product of labor, intensifies the resource movement out of the tradables sector.
Tradable goods producers thus find themselves constrained by internationally set prices,
fixed exchange rates, and rising labor costs. Briefly stated, a clear outcome of the Dutch
disease is that an overvalued exchange rate and a rise in the general wage level
combine to erode the competitiveness of an oil-exporting country's (non-oil) tradables

6

So called due to the experience of the Dutch economy, following the large inflow of gas revenues in the
1970s. The presentation of this issue is based mainly on Gelb et al. (1988) and Richards and Waterbury's (1996)
analysis of the Dutch disease.

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sector. Not only so, but it severely hinders its attempts to diversify the economy away
from oil.7
In view of the detrimental effects of real exchange rate appreciation on the non-oil export
sector, an active government policy is needed to contain the effects of the Dutch disease. One
proposal has been to establish a regime where the exchange rate would be periodically
devalued in response to real appreciation (i.e., a managed float). The rigidity of such a
system, it was believed, would shield petroleum-exporting countries from volatile capital
movements (largely induced by the oil-sector), while at the same time allowing for the
necessary adjustments in response to real exchange rate appreciation. On the down side,
however, periodic devaluations would also lead to an increase in the domestic price level; so
that the net effects of such an exchange rate policy are not entirely clear.8 A more direct and
workable policy to combat the effects of the Dutch disease is to: (i) reduce government
expenditures (especially in the non-tradables sector); (ii) promote non-oil exports (through
subsidies); and (iii) reduce the growth of the non-tradables sector (through taxation). By
following such a strategy, the government could effectively tackle both the spending and
resource movement effects of the Dutch disease, while avoiding the possible inflationary
results of periodic exchange rate devaluations.
If the achievement of an equilibrium exchange rate is the ultimate objective of an exchange
rate policy, then oil-exporting countries seem to be facing an additional complication. This is
because traditional equilibrium exchange ratesÐwhether based on purchasing power parity
or balance of payment equilibriumÐseem to be of little applicability to oil-exporting
economies. In his discussion of the subject, Amuzegar (1983, p. 31) writes:
An attempt to define some form of equilibrium exchange rate is complicated by
the nature of the oil-exporting countries' external transactions . . .. [If] a key
development objective is export diversification and if the present exchange rate
frustrated that objective, then the present rate would not be an equilibrium one in
the eyes of the developing country itself, even if the rate meets one or the other of
the usual definitions. What this analysis suggests is that a broader definition of
equilibrium rates that includes the competitiveness of selected non-traditional
exports must be formulated for oil-exporting developing countries.

7
The causal sequence described here is contingent on a number of factors that have been considered
exogenous in the above analysis. Among these factors is the elasticity of labor supply in the oil-exporting country.
If the labor supply is quite elastic, then one would expect the resource movement effect to be of little significance;
thus attenuating the negative effects on the tradables sector. Conversely, the tighter labor markets are, the more one
would expect the country to suffer from the symptoms of the Dutch disease. Another factor affecting this analysis
is the degree of openness of the economy. This is because the greater the level of protection, the less
distinguishable becomes the line dividing tradables and non-tradables. Other factors that could affect the
conjectured results are the degree of capital intensity in the oil sector and the variation in this intensity between
economic sectors.
8
The strategy of a managed float, with periodic devaluations, is further weakened by the introduction of
expectations into the analysis. In other words, if the devaluation is anticipated, the relative price differential will
not be sustained at the desired level for long. Inflationary pressures, channeled through expectations, will promptly
raise the real exchange rate to its original (non-competitive) level.

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191

3.2. Resource allocation and investment policy
The responsibility of allocating the benefits of oil revenues is of great significance. This is
because the entity entrusted with that task has to carefully balance the needs of the present
generationÐincluding powerful political and interest groupsÐwith those of future generations. Failure to take into account inter-generational equity would lead to little or no savings
and to a drastic deterioration in sustainable national income.
This leads us to the first of two main decisions facing the government of an oil-exporting
countryÐnamely, which entity should be responsible for investing oil revenues, the state or
the private sector? If the latter is to be responsible for properly dividing oil revenues between
consumption and savings, and for investing these savings wisely, then the bulk of oil
revenues should be directly transferred by the government to its constituencies. In that case,
the private sector would have to take it upon itself to make the necessary investments that
would allow future generations to sustain an acceptable standard of living, especially as oil
revenues decline. Concurrently, this would allow the non-oil sector to prosper; thereby
strengthening the level of NNP and reducing the share of the public sector in the economy.
Although intuitively appealing, this strategy is not without its pitfalls. For one, many
developing countries do not have accurate and sufficient information about their citizens.
Second, by placing the responsibility of inter-generational equity in the hands of individual
consumers (and investors), the government is likely to run into a dangerous ``collective
action'' problem. In other words, a number of citizens might forgo the painful, long-term
investments that are needed during the early stages of development, in the hopes that their
future offsprings would be able to enjoy ``free-ride'' from the investments of others. Third,
private investors, especially at the beginning stages of oil enrichment, might not possess the
financial sophistication needed to handle such a large inflow of funds. Fourth, regardless of
the intentions and financial savvy of investors, there remains an important role for the
government to play in the provision of public goods and in the mitigation of market
imperfections. This roleÐwhich is likely to gain importance as oil-exporting countries reach
greater levels of developmentÐwill require a substantial share of oil revenues. Although the
above arguments are by no means intended to validate the pervasive role of the state in most
oil-exporting developing countries, they certainly present a possible explanation for why so
many governments have chosen to hold-on to their economic dominance.
The second critical decision facing the government of an oil-exporting country is whether
to invest the revenues from oil domestically or abroad. From a purely financial perspective,
one would advise a government to invest wherever the real rate of return on investment is
greater. However, from a broader perspective, foreign investments have numerous other
advantages (and disadvantages). Among their advantages are the following:





Diversification: By placing capital abroad, the government is able to diversify away a
substantial portion of the financial risks associated with its investments.
Flexibility in economic policy: During periods of low, domestic absorptive capacity, and
of limited domestic investment opportunities, foreign markets enable the government to
bypass such constraints; while maintaining a respectable return on its investments.
Attenuating the effects of the Dutch disease: As explained earlier, the negative
impact of real exchange rate appreciation (and of wage increases) on the tradables

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sector can have detrimental effects on the future of oil-exporting economies.
Therefore, by diverting some of its investments to foreign markets, the government
can reduce the effects of the Dutch diseaseÐmainly, the spending effectsÐon the
non-oil tradables sector.
Foreign investments encompass some indirect disadvantages. Among which are (i) the
political risks associated with investing in another sovereign nation and (ii) the reduced
stimulation to the domestic economyÐin the case where the economy is not feeling the
pressure of its absorptive limits.
3.3. Diversification from oil and industrial policy
In their efforts to achieve a sustainable future level of consumption, oil-exporting
developing countries have a very strong incentive to diversify their economies away from
oil. It is perhaps this incentive, more than any other, that provides these countries with the
motivation to develop a healthy non-oil sector. However, a number of other important
justifications do exist for the adoption of this objective. The dependence on oil exposes these
countries to the risk of volatile energy prices. It is commonly held that fluctuations in oil
prices lead to considerable variations in the terms of trade of oil-exporting countries. As a
representative scenario, let us consider the case where the price of oil doubles. Even if a
country continues to produce the same volume of oil as it did before the price hike, assuming
that the oil sector is its only significant sector, its nominal GDP would increase by twofold. It
is true that once the necessary price adjustments are made (i.e., after deflating by the increase
in the price of oil) real GDP would maintain its pre-shock level. Nevertheless, the
enhancement to terms of trade, resulting from the oil price increase, is likely to augment
the welfare of citizens in the oil-exporting country (due to the relative decrease in the
prices of imports).9 It is also highly probable that the wealth effects resulting from the
price increase will bring the economy closer to its capacity constraints; thereby, leading to
inflationary pressures and to an appreciation of the real exchange rate. Conversely, the
effects of a decrease in the price of oil on the terms of trade could be detrimental. Not
only are imports likely to become relatively more expensive, but wage rigidity and price
stickiness are also likely to lead to substantial unemployment. The distortionary impact of
this downward shock is accentuated by the ``ratchet effects'' caused by the inability of the
state to sustain (nor reverse) the financing of programs that were initiated during the
boom years.
Besides reducing the economy's vulnerability to oil price changes, diversification allows
the country to mitigate the effects of a capital intensive oil sector on employment. A number
of oil-exporting developing countriesÐespecially high-absorbing onesÐpossess a large,
relatively low-skilled labor force. Therefore, an industry that is capital intensive and that
9
In this discussion of oil-exporting countries' terms of trade, the price of imports has been considered to be
exogenous. However, it is easy to show that the price of imports is affected by changes in the price of oilÐ
especially imports that use oil as input. In such a case, the net effect of an upward shock to the price of oil on the
terms of trade is ambiguous. Consequently, any welfare gains from such a price increase are also uncertain. For
further elaboration on this subject, please refer to Chap. 7 of Heal and Chichilnisky (1991).

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193

requires a small number of highly skilled workers will not create the necessary employment
opportunities that are required by nationals. Another characteristic of the oil sector is that it
possesses very few linkages to the rest of the economy.10 Its ``enclave'' nature reduces
positive externalitiesÐwhether in terms of trained labor or technological flowsÐthat would
impact other industries and increase overall productivity. Perhaps the most powerful internal
linkage created by the oil industry is fiscal in nature (due to the accrual of oil revenues to the
state). This, however, enlarges the role of the state and further diminishes the role of the
private sector in the process of economic development.
Accepting the need for diversification, nevertheless, an essential question still remains:
What type of industries should be promoted in order to achieve a successful diversification?
From an economic perspective, one could argue that oil-exporting countries should invest in
industries that are compatible with their respective factor endowments and comparative
advantages. Moreover, by investing in education and encouraging the inflow of technology,
these countries can create a dynamic comparative advantage that would allow them to
break away from their natural constraints. Viewed this way, the challenge facing oilexporting developing countries is no different than the one facing their non-oilexporting counterparts. Nevertheless, two factors that are intrinsic to oil-exporting
developing countries need to be pointed out. First, as discussed earlier, these countries
differ markedly in terms of their factor endowments. It is nearly impossible to
prescribe a fit-for-all industrial policy for both the high- and the low-absorbing oilexporting countries.
Second, a common reaction by the governments of these countries to the inflow of oil
revenues has been to focus on infrastructural development and on resource-based industrialization. The development of infrastructure, especially from its dismal state in certain
countries, could certainly be beneficial to the rest of the economy; especially in terms of
increasing the efficiency of private investments and creating a strong base for the inflow of
technology. In many ways, infrastructure is a public good that an oil-rich state is expected, by
its citizens, to provide abundantly. However, infrastructural development can also have some
serious repercussions, some of which are: (i) the need to maintain the infrastructure using
non-oil funds once the resource has been depleted and (ii) the difficulty of predicting future
infrastructural requirementsÐwhich has led a number of states to enter large, long-term and
high-budget projects that increase their vulnerability to oil price changes.11 Resource-based
industrializationÐsuch as in the case of petrochemical plants and refineriesÐhas also been
the goal of many oil-exporting developing countries. No doubt, an industrialization policy
focused on petrochemicals does have several benefits, including: the production of
high-value added exports, the transfer and dissemination of modern technology and
managerial skills into the rest of the economy, and the expansion of high productivity
employment. However, the reliance on energy sector-based industrialization as a
primary path towards modernization can also be perilous. For one, oil-exporting
countries are not guaranteed to have a long-term competitive advantage in this area.
Among other factors, such an advantage depends on the ``relative transport costs of

10
11

With the exception of some forward linkages, such as in the case of petrochemicals.
For further elaboration on the impact of infrastructural development, please refer to Bowen-Jones (1984).

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H. Askari, M. Jaber / Journal of Energy Finance and Development 4 (1999) 185±218

finished and unfinished products, capital construction costs in processing industries,
relative costs of financial capital, relative labor costs, and external economies'' (Askari,
1990, p. 24). Second, such a strategy still subjects the economy to fluctuations in the
oil market with all their attendant costs. Finally, resource-based industrialization has to
be addressed within the more general framework of comparative advantage. In other
words, each oil-exporting country has to carefully analyze its resource and factor
endowments before embarking on such a costly industrial program.12
In the process of implementing industrial policy, many oil-exporting developing countries
have relied on subsidies to achieve their goal. These subsidies have varied in type from the
more generalÐsuch as the subsidization of imports through an overvalued exchange rateÐto
the more industry-specificÐincluding output and input subsidies. The rational for using
subsidies as an industrial policy tool is essentially the same for all developing countries.
Simply stated, subsidies can be economically efficient in situations where the social value of
an activity is greater than its private value; such as in the case of (i) the existence of
externalities associated with the industry, or activity, of interest that are not reflected in market
prices (such as learning-by-doing benefits) or (ii) the presence of distortions in market prices
that prevent the efficient allocation of resources in the economy (an example of which is the
effect of the Dutch disease on wages). It should be noted that both of these rationales are in
conformity with a sector-specific industrial policy. A general subsidization scheme has the
potential of creating severe misallocations in the use of resources and, thus, promoting
inefficiencies. In the aggregate, it is important that subsidies be targeted towards the source of
the desired benefits (whether they are in the form of technological gains or adjustments to
distortionary relative price differentials). Sector-specific subsidies should form an integrated
part of a more comprehensive industrial policyÐwith the ultimate goal of successful
diversificationÐrather than being an end in themselves.
3.4. Fiscal policy
Fiscal policy consists of changes in the government's revenue and expenditure levels
(and allocations), that in turn affect overall economic efficiency and income equality. In the
case of oil-exporting developing countries, the accrual of oil revenues to the government
highlights the importance of this economic tool in the distribution of wealth and the
insurance of inter-generational equity. In his analysis of the objectives of fiscal policy for
an oil-exporting country, Amuzegar (1983, p. 34) writes:
The critical tasks are to use oil revenues to achieve optimum growth and
diversification without undue inflationary pressures, to spread the benefits of oil
income over the largest segment of population without reducing incentives, and to
correct existing distortions in the economy without creating new ones.
Achieving these goals simultaneously is certainly an arduous task. However, in order
for petroleum-exporting developing countries to grow at a sustainable pace, their
governments have to successfully balance the allocation of oil revenues in a manner that
12

For further elaboration on the advantages and disadvantages of resource-based industrialization, please refer
to Auty (1990).

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195

reduces market distortions (such as in the case of the Dutch disease) and promotes the
growth of the non-oil sector. Moreover, and in preparation for the post-resource phase,
governments need to reduce the share of oil in their total revenues (i.e., increase tax
revenues). Very few, if any, oil-exporting developing countries have a well-established,
broad-based, progressive tax system in place. This not only increases the vulnerability of
long-term government programs to fluctuations in the oil market, but it also limits the
degree of income equity within the same generation and endangers the effectiveness of
the government's role once oil has been exhausted.

4. Economic and social development over the last 25 years: An overview
Over the past quarter-century, oil-exporting Middle Eastern countries have certainly made
great strides in terms of improving the quality of life of their citizens.13 As shown in Table 1,
most social indicators have improved markedly over time. Infant mortality has registered a
substantial decline in these countries. This has been accompanied by an increase in the life
expectancy of nationals and a general improvement in their quality of life. Yet it is quite
notable that large disparities exist among countries. Whereas Kuwait has attained an infant
mortality rate of no more than 11 deaths per 1,000 live births, Iran, with 36 deaths per 1,000,
still has not reached the level of upper±middle-income countries. Similar disparities exist in
terms of life expectancy at birth; with Kuwait at the higher end of the scale and Iran at the
lower end.
In school enrollment, however, the same positive trend is not persistent across all countries.
Whereas Bahrain, Iran, Oman, and Saudi Arabia show a positive trend in terms of primary
school enrollment, Kuwait, Qatar, and the UAE have witnessed a decline in this regard.
Moreover, in all countries (except for Bahrain), the percentage of primary school enrollment
remains lower than that of upper±middle-income countries. In terms of secondary school
enrollment, there is a strong positive trend in all countries (except for Kuwait). The percentage
of secondary school enrollment is generally higher than that of upper ±middle-income
countries (except for Saudi Arabia) and lower than that of high-income countries.
Over the past 25 years, population growth in oil-exporting Middle Eastern countries has
been substantial (Fig. 1). In all the selected countries, average annual population growth has
exceeded even that of low-income countries and, in some cases (such as the UAE), by a
considerable margin.
This result is further confirmed by other indicators of populations growth (Table 2).
Although, for the most part, these indicators show a declining trend over time, their levels as
13
The choice of which countries to include in this study has been constrained by data availability. For
example, the imposition of multilateral sanctions against Iraq has not only limited the amount of data available on
its economy, but it has also rendered any analysis of developmental policies futile in light of the country's isolation
from the rest of the world. Furthermore, although the focus of this article is on the petroleum exporting countries
of the Middle East, the existence of oil in the region has also indirectly affected Middle Eastern countries that are
not endowed with the natural resource (such as Jordan and Lebanon). These indirect effects have taken several
forms, including: (i) the recycling of petro-dollars during the 1970s; (ii) transfer payments from oil-exporting
countries in the form of worker remittances or direct government transfers; and (iii) an increase in the volume of
trade in goods and services resulting from the greater spending power of the citizens of oil-exporting countries.

196

Table 1
Selected social indicators

Iran

UAE

Upper ± middle
income
countries

Low-income
countries

Kuwait

Oman

Infant mortality rate (per 1,000 live births)
1970
64.20
131.20
47.80
1980
42.40
91.60
26.58
1990
22.80
53.60
13.60
1996
18.40
35.60
10.90

118.80
41.40
22.00
18.30

68.20
41.20
21.20
17.60

119.00
64.80
32.00
22.10

86.80
55.00
20.16
14.80

22.34
12.88
8.31
6.36

75.91
52.96
37.61
29.84

112.61
98.24
75.68
68.04

47.37
59.81
69.00
70.78

61.11
66.73
70.95
72.39

52.31
61.12
68.62
70.12

61.11
68.22
73.53
74.95

70.85
73.75
75.95
77.32

61.80
65.50
68.28
69.71

53.87
58.47
61.66
63.10

Life expectancy at birth (years)
1970
62.10
54.80
1980
67.84
60.13
1990
71.42
66.59
1996
72.90
69.84
Primary school enrollment
1975
96
1985
112
1994
110

66.11
70.78
75.30
76.56

(percent gross)
93
92
96
103
99
65

Qatar

High-income
countries

44
76
82

111
109
86

58
65
77

101
98
94

102.37
101.62
103.30

96.89
103.43
107.45

95.36
100.17
102.74

Secondary school enrollment (percent gross)
1975
52
45
66
1985
97
44
91
1994
99
69
62

1
27
65

52
82
82

22
40
55

33
55
80

80.29
92.05
104.19

39.98
51.87
61.59

32.91
34.62
50.09

Telephone mainlines (per 1,000 people)
1975
51.47
20.54
88.38
1985
167.38
26.96
129.00
1996
241.05
95.29
232.27

4.37
29.58
85.88

254.34
391.21
540.27

33.10
64.17
130.07

2.44
3.88
25.68

71.93
194.14
239.27

Source: World Development Indicators 1998 (World Bank, 1998).

19.03
71.62
106.37

51.10
150.15
302.12

H. Askari, M. Jaber / Journal of Energy Finance and Development 4 (1999) 185±218

Bahrain

Saudi
Arabia

H. Askari, M. Jaber / Journal of Energy Finance and Development 4 (1999) 185±218

197

Fig. 1. Population growth over the period 1970 ± 1996 (average annual growth rate).

of 1996 are still high in comparison to other regions of the world. In Oman, for example, the
age dependency ratio reached a staggering 98 percent in 1996, while the fertility rate was
close to 7 births per woman (in comparison to about 3.2 births for low-income countries).
Numbers for other, more populated, countries of the Middle East are also high. In 1996, Iran
had a fertility rate of 3.8 births per woman and an age dependency ratio of 81 percent (vs. 66
percent for low-income countries). Moreover, Saudi Arabia's fertility rate, at 6.2 births per
woman, is close to twice that of low-income countries. The reasons underlying this
considerable population growth differ depending on the characteristics of the country in
question. Generally speaking, in the high-absorbing oil-exporting countries of the Middle
East (such as Iran), population growth during the 1970s and early 1980s has been greatly
affected by lower literacy rates and the absence of active government policies to educate
citizens about the means and benefits of birth control. However, higher literacy rates among
current young adults (more than 90 percent in Iran), along with the active implementation of
family planning programs, have had a positive role in reducing population growth and should
continue to do so in the years to come. In low-absorbing oil-exporting countries, the
governments' approach to the issue of excessive population growth is quite different. In
these countries, the rapid growth of the indigenous population is viewed as an issue of
national security. With the ratio of nationals to total population not exceeding 35 percent in
certain countries (such as Kuwait), population growth is often regarded as a means of
maintaining long-run political stability. Such a policy, however, could have detrimental
effects on the well being of future generations. For not only does a rapidly increasing
population reduce the level of income available per person, but it could also lead to a
crippling unemployment problem as young adults enter the labor force at a much faster rate
than the economy is able to absorb them. This problem is accentuated by the fact that oil still
plays a major role in these economies (as discussed below) and employment possibilities in
the non-oil sector remain limited.
In view of the considerable wealth that has been transferred to Middle Eastern
petroleum-exporting countries over the past quarter-century, it would have been logical

198

Bahrain

Iran

Kuwait

Oman

Qatar

Age dependency ratio (dependents to working-age population)
1970
0.94
0.97
0.82
0.89
0.59
1980
0.58
0.93
0.72
0.90
0.48
1990
0.52
0.95
0.61
0.95
0.42
1996
0.51
0.81
0.64
0.98
0.40
Crude birth
1970
1980
1990
1996

rate (per 1,000 people)
38.96
44.58
46.52
34.08
43.64
37.20
27.46
37.60
24.80
22.06
26.24
21.60

Fertility rate (births per woman)
1970
6.51
6.71
1980
5.19
6.14
1990
3.76
5.50
1996
3.06
3.80

7.10
5.28
3.44
2.94

Saudi
Arabia

UAE

High-income
countries

Upper ± middleincome
countries

Low-income
countries

World

0.91
0.89
0.80
0.79

0.60
0.43
0.48
0.43

0.59
0.53
0.49
0.49

0.78
0.73
0.66
0.60

0.82
0.76
0.68
0.66

0.77
0.71
0.64
0.62

49.76
45.24
43.72
42.36

33.58
29.18
24.66
20.18

47.80
42.72
36.28
35.44

35.24
29.90
23.76
18.76

18.18
14.82
13.73
12.35

31.33
28.50
24.29
21.50

39.01
30.87
29.13
25.90

31.92
27.24
25.22
22.39

8.45
9.93
7.68
6.96

6.84
5.61
4.34
3.84

7.28
7.28
6.56
6.16

6.52
5.40
4.12
3.53

2.47
1.85
1.76
1.69

4.46
3.75
2.99
2.59

5.98
4.32
3.53
3.19

4.80
3.69
3.11
2.78

Source: World Development Indicators 1998 (World Bank, 1998).

H. Askari, M. Jaber / Journal of Energy Finance and Development 4 (1999) 185±218

Table 2
Indicators of population growth

Iran

Kuwait

Oman

Qatar

Saudi
Arabia

UAE

Chile

Korea

355.14
2,389.93
9,873.50
2,174.67

3,882.16
20,940.20
8,629.88
16,778.05b

394.31
6,048.30
5,267.49
6,403.57

2,506.64
34,077.59
15,021.31
14,971.55

623.66
16,701.00
7,039.02
7,247.17

4,425.85a
29,323.21
17,521.91
19,743.36

931.18
2,474.34
2,314.86
5,272.45b

272.06
1,642.87
5,917.24
9,622.60b

GDP per capita (US dollar) (average annual growth rates; in %)
1975 ± 1980
17.36
10.12
13.31
1980 ± 1985
ÿ0.03
8.96
ÿ9.60
1985 ± 1990
ÿ1.42
22.57
ÿ5.33
1990 ± 1996
2.13
3.55
29.51

18.94
ÿ2.29
1.20
3.20

18.72
ÿ11.97
ÿ1.80
ÿ1.52

21.96
ÿ16.07
1.48
0.37

9.48
ÿ7.61
ÿ0.79
2.16

28.72
ÿ10.09
11.28
10.58

23.31
7.11
20.89
8.76

4,334.05
6,738.66
7,357.22
7,569.57

43,622.02
16,868.40
16,285.42
13,364.87

15,755.04
8,143.29
8,280.61
7,648.81

30,867.47
18,649.11
16,607.39
12,144.68

5,521.45
4,870.98
6,403.24
8,611.56

3,428.12
4,254.70
6,918.24
9,529.56

ÿ12.08
0.47
ÿ1.54

ÿ9.34
ÿ1.96
ÿ5.90

ÿ2.06
5.72
6.16

4.48
10.40
6.62

Bahrain
GDP per capita (US dollars)
1970
±
1980
9,034.88
1990
8,012.31
1996
9,833.66b

GDP per capita, PPP (constant 1987
1980
16,366.72
1985
10,522.27
1990
10,315.34
1995
11,929.72

international US dollars)
4,148.52
23,091.54
4,178.65
13,049.21
3,736.94
10,072.49
4,129.25
20,704.07

GDP per capita, PPP (constant 1987 international US dollars) (average annual growth rates; in %)
1980 ± 1985
ÿ8.21
0.32
ÿ10.00
9.34
ÿ16.76
1985 ± 1990
ÿ0.14
ÿ2.09
ÿ3.79
1.89
0.86
1990 ± 1995
3.06
2.08
27.45
0.60
ÿ3.70

Sources: The figures in US dollars are from International Financial Statistics (IMF, various issues) and the PPP figures are from World Development Indicators
1998 (World Bank, 1998). The figure in italics is from Country Profiles (EIU, various issues).
a
Data for 1972.
b
Data for 1997.

H. Askari, M. Jaber / Journal of Energy Finance and Development 4 (1999) 185±218

Table 3
GDP by country

199

200

H. Askari, M. Jaber / Journal of Energy Finance and Development 4 (1999) 185±218

Fig. 2. GDP per capita, PPP (constant 1987 international dollar) (average annual growth rates during 1980 ± 1995).

to assume that their GDP per capita would have been consistently increasing over time.
One would have also predicted that by the 1990s, GDP per capita for these countries
would have at least equaled, if not exceeded, that of non-oil-exporting developing
countries. This, unfortunately, does not prove to be the case (Table 3). After an initial
jump in nominal GDP per capita during the 1970sÐmainly due to the two oil shocksÐ
its level has receded, sometimes substantially, in all selected countries (except Oman and
Bahrain). In 1980, for example, GDP per capita in Saudi Arabia was estimated at
US$16,701, while that of Korea (a non-oil-exporting developing country) was marked at
US$1,643. By 1996, the estimates for GDP per capita were US$7,248 and US$10,641,
respectively. This relatively weak economic performance is also reflected in the average
annual growth of GDP per capita: With mostly negative figures during the period of
1980±1985 (and exceeding negative 16 percent for Saudi Arabia) and fairly weak
growth figures during 1990±1996 in comparison to those of Chile and Korea (which
have averaged an annual growth of 10.6 percent and 8.8 percent, respectively).14
Perhaps more relevant than ``nominal'' estimates of GDP per capita are those that have
been adjusted for differences in relative purchasing power across countriesÐnamely, PPP
estimates (in 1987 US dollars). Here again, figures for Middle Eastern oil-exporting
countries are not stellar. Although, for nations such as Kuwait and the UAE, the level
of PPP GDP per capita, as of 1995, is higher than that of non-oil-exporting developing

14

Growth figures for Kuwait during 1990 ± 1996 should be viewed with a degree of caution. For
although averaging out annual GDP per capita growth rates over the period yields a highly respectable figure
of 29.51 percent, this number overestimates the actual improvement in the level of GDP per capita that has
occurred over the period. Due to the inherent vulnerability of averaging yearly growth rates given substantial
variations in a particular year, the considerable increase in nominal GDP per capita from 1991 to 1992 (in
the aftermath of the Gulf war) has biased the figure upward. In fact, Kuwait's GDP per capita rose from a
pre-war figure of US$11,864 in 1989 to US$17,705 in 1996, thus yielding a non-compounded annual growth
of about 7 percent.

H. Askari, M. Jaber / Journal of Energy Finance and Development 4 (1999) 185±218

201

countries such as Chile and Korea, the same does not hold true for the more populated
countries (e.g., Iran and Saudi Arabia). Moreover, and with the exception of Oman, all of
the selected countries have registered a drop in their PPP GDP per capita from 1980 to
1995. In the case of Saudi Arabia and the UAE, PPP GDP per capita in 1995 stood at less
than half its level in 1980. While the estimate for Qatar in 1995 was less than a third of
that of 1980. Average annual growth rates of PPP GDP per capita (in 1987 US dollars)
over 1980±1995 are also anemic (Fig. 2). At the lower end, Qatar and the UAE have had
average annual growth rates of negative 6.53 and 5.73 percent, respectively. Whereas at the
upper end of the spectrum, only Kuwait and Oman stand out with average annual growth
rates of 4.56 and 3.95 percent, respectively.15
The generally poor economic performance of Middle Eastern oil-exporting countries is
somewhat puzzling. After all, these nations have benefited from massive inflows of funds
generated by their petroleum exports over the past 25 years. This was a luxury that other
developing countries, such as Korea and Chile, have not had; although they were able to
perform considerably better. This puts into question the economic and development
policies th