Abstract:
The purpose of this paper is to investigate the system of oil revenues effects on the
production performance of oil-rich countries in both short and long-run. To reveal new
insight, a macroeconomic model is designed to hypothesize long-run structural relations
in the economies of the oil-rich countries including three long-run relationships of real
output, real money balance, and the adjusted purchasing power parity and short-run
dynamics of variables within the framework of a Vector Error Correction Model. The
model is estimated based on the annual data of 33 oil-rich countries during the period of
1992 to 2016. The existence of three long-run relationships in the economies of oil-rich
countries is confirmed. Based on the estimated model, the net effect of oil revenues
changes on production is directly related to the institutional quality index. In countries
with the institutional quality lower than the threshold, the net effect of increasing oil
revenues on production in the long-run is negative, and in contrast, in countries with
higher institutional quality, this effect is positive and will be strengthened by increasing
institutional quality. The institutional quality threshold is estimated to be 0.23.
Machine summary:
In contrast, these revenues can negatively affect economic performance through other channels such as long-run depreciation of exchange relations, fluctuations in natural resource revenues, Dutch disease, rent seeking, and increasing the role of government and the sovereignty of rentier state.
In this paper, a macroeconomic model is designed to study the role of institutions in transferring the effect of oil revenues on the economic performance of oil-rich countries.
The results confirm the existence of three long-term relationships in the oil-rich countries, also reveals the specific role of the institutional quality in the manner and magnitude of oil revenues effects on economic performance, especially on production.
This includes the long-run weakening of the terms of trade (Prebisch, 1964), the income fluctuations of natural resources (Auty, 1998), Dutch disease (Fardmanesh, 1991; Corden & Neary, 1982), rent seeking (Mehlum, Moene & Torvik, 2006; Abrishami & Hadian, 2004; Khezri, 2008) and the increasing role of the government and the sovereignty of rentier state (Auty, 1998; Mahdavi, 1970; Beblawi & Luciani, 1978; Haj Yousefi, 1999).
Mehlum, Moene and Torvik (2006), based on a rent seeking pattern, emphasize the role of institutions in determining the impact of natural resources on the performance of the economy, and conclude that countries with rich natural resources have both positive and negative effects on economic performance.
The results confirm the existence of three long-run relationships in the economies of oil-rich countries, and reveals that the net effect of oil revenues changes on production is directly related to the institutional quality index.