Oil Discovery, Political Institutions and Economic Diversification
| Author | Nouf Alsharif,Sambit Bhattacharyya |
| Date | 01 July 2019 |
| Published date | 01 July 2019 |
| DOI | http://doi.org/10.1111/sjpe.12202 |
OIL DISCOVERY, POLITICAL
INSTITUTIONS AND ECONOMIC
DIVERSIFICATION
Nouf Alsharif and Sambit Bhattacharyya*
ABSTRACT
Diversification is touted as a desirable policy objective for oil-rich nations
because it reduces exposure to volatility. However, the empirical relationship
between petroleum and diversification is not well understood. Here, we test the
effect of giant oil discoveries on diversification using a panel dataset of 136
countries observed over the period from 1962 to 2012. We notice non-oil sector
export concentration 8 years after a discovery. However, we do not observe any
effect on the structure of employment in non-resource and manufacturing sectors.
Democratic political institutions moderate the export and employment concentra-
tion effects of petroleum discovery.
II
NTRODUCTION
Export diversification and structural change is often touted as a desirable policy
objective for petroleum-rich nations. This is based on two related theoretical
predictions. First, petroleum produces a highly concentrated structure of export
revenue which is then exposed to volatility in petroleum prices. Such volatility
in the long term is harmful for sustainable development and economic growth.
Second, petroleum riches engender an economic structure that is highly concen-
trated and reliant on imported consumer goods and non-tradable services. Such
structurally skewed economies are unable to deliver long-term prosperity as the
latter depends on rapid structural change away from non-tradables in the direc-
tion of tradables such as manufacturing and modern services.
In contrast, the classical trade theories of David Ricardo, Eli Heckscher
and Bertil Ohlin predict that countries specialize and not diversify their
exports and such a pattern is largely dependent on the factor endowments
rather than anything else. If a country is abundant in petroleum then it is per-
fectly predictable that it will have a petroleum-dominated structure of exports.
Given such ambiguity between theoretical predictions and policy prefer-
ences, it is of enormous importance that policy advice be grounded in hard
empirical facts. Yet, the empirical relationship between petroleum wealth,
*University of Sussex
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12202, Vol. 66, No. 3, July 2019
©2018 Scottish Economic Society.
459
structural change and export diversification is imperfectly understood. Is the
relationship fundamentally driven by factor endowments? Do other factors
such as politics and policy play a role? Given the common co-movement
problem in observational data, to what extent we can attribute a causal rela-
tionship between petroleum wealth, structural change and export diversifica-
tion? What role political institutions and hence policy play in influencing the
relationship between petroleum wealth and structural change?
A quick glance at the data in Figures 1 and 2 suggest that petroleum wealth
could indeed be an important variable in understanding diversification pat-
terns across countries and over time. Figure 1 presents scatter plots of the
ratio of employment in the tradable and non-tradable sectors of an economy
against oil dependence measured as a share of oil rent to GDP over the sam-
ple period from 1962 to 2012. We can observe a clear positive pattern in panel
A indicating non-tradable sector employment dominates over tradable sector
Figure 1. Oil, the Dutch Disease and institutions: (a) all oil countries, (b) with good
institutions and (c) with bad institutions.
Notes: Resource movement effect; as labour moves from tradable to non-tradable sectors
with higher oil abundance. X-axis is oil dependency measures by oil rent share in GDP, data
from the World Bank. Y-axis is the relative employment share in non-tradable to tradable
sectors within the ILO data. Panel (a) includes all countries in our dataset. Countries in
panel (b) are: Australia, Austria, Canada, Columbia, Czech Republic, Denmark, France,
Georgia, Germany, Greece, Israel, Italy, Japan, Lithuania, Malaysia, Netherlands, Norway,
Serbia, Slovak Republic, Slovenia, Trinidad and Tobago, Turkey, Ukraine, United
Kingdom, United States of America, Venezuela. Countries in panel (c) are: Algeria, Angola,
Azerbaijan, Bahrain, Belarus, Cameroon, China, Cuba, Egypt, Gabon, Iran, Kazakhstan,
Kuwait, Morocco, Oman, Poland, Qatar, Saudi Arabia, Syria, Tunisia, United Arab
Emirates, Uzbekistan, Vietnam. [Colour figure can be viewed at wileyonlinelibrary.com]
460 NOUF ALSHARIF AND SAMBIT BHATTACHARYYA
Scottish Journal of Political Economy
©2018 Scottish Economic Society
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