Resource curse and economic diversification in resource rich countriesthe case of infrastructure policy in Oman

Abstract

Logically, countries with abundance resources are blessed as the possession of the resources can help in economic growth as well as in the development. It also can increase the economy's investment and growth rates. However, this was not the case according to much of the subject literature (see for instance, Auty, 1990, 1993 and 2001; Ranis, 1991; Sachs and Warner, 1995 and 1999a; Gylfason et al., 1999; and Mehlum et al., 2006a.), which has presented evidence and shown that resource rich countries (particularly countries rich with point resources such as petroleum and minerals) are affected with the “resource curse” or “paradox of plenty”. Specifically, they found evidence that resource rich countries tend to grow more slowly than resource poor countries, as well as experiencing negative repercussions in economic, political and social outcomes. There have been many prominent hypotheses and studies to explain the correlation between resource dependence and poor economic growth, such as Sachs and Warner (1995); Leite and Weidmann (1999); Gylfason (2001b); Auty and Gelb (2001); Atkinson and Hamilton (2003); Papyrakis and Gerlagh (2004); Boschini et al. (2007) and Crain (2010). According to Crain (2010), the results of these studies indicate that the causes for the correlation between resource dependence and poor economic growth fall into two categories: economic factors and political factors. The former includes: (1) declining terms of trade, (2) commodity price volatility, (3) low external linkages of the mineral industry, and (4) the Dutch disease. The latter comprise: (1) mismanagement of resource rents, (2) weak institutions, (3) rent-seeking and corruption, (4) regime type, and (5) social conflict. As a response to the existence of the symptoms (all or partial) that cause the resource curse in an economy, the government intervene through setting up proactive and reactive policies. The failure of allocated the resources efficiently justify the government intervention through economic diversification policies. Which has been pointed as an effective means of counteracting the resource curse (Wiig and Kolstad, 2012) and as one of the most frequently long-term strategies for economic growth (Collier and Venables, 2008; and Gelb, 2010). Therefore, resource rich countries were routinely advised to diversify their economies (Alsharif et al., 2016) and consequently they tended to adopt and implement proactive economic diversification policies to mitigate, as much as possible, the harmful consequences of the resource curse. Even though many resource rich countries realize the importance of economic diversification for their economies, their authorities (political regimes) neglected or delayed the economic diversification process during the temporary high-profitability periods (Abubakar, 2015). Immediately after any global decline in commodity prices (especially for oil and mineral resources) the importance of economic diversification is brought again to the fore. Therefore, most resource rich countries have faced fundamental challenges in translating resource revenues into sustainable economic growth, and have not succeeded in diversifying their economies over recent decades. Economic diversification processes have two main forms (streams): production diversification and export diversification. Production diversification is the diversification of the productive base of the economy through the development of non-oil activities. Whereas, export diversification is the change in the composition of a country’s existing export product mix or export destination (Ali et al., 1991). Institution, infrastructure, macroeconomic stability and health and primary education are among different significant determinants of export diversification that have been identified in the literature. These factors have been also identified the main factor for factor-driven countries, to globally compete during the first stage of development. For example, transport infrastructure and ports facilities that ensure that goods arrive on time, in good condition and with the least delivery time are a crucial element in any successful export diversification policy. Also, it can play a critical role in development of new areas of export activity in the private sector (Nurse and Greene, 2014). Therefore, the development in logistics and supply chain technology has created significant opportunities for economic diversification in general and export diversification at specific, as well as for job creation over the last 20 years. Therefore, this thesis aims to assess the impact of infrastructures policy in export diversification of resource rich countries. Specifically, the case of infrastructure and logistics policy in Oman (development of roads, ports, FTZ and Industrial Estates) to make Oman a global logistics hub was used to accomplish the thesis objectives and to answer the research question “How can the development of roads, ports, FTZ and Industrial Estates impact the economic diversification in a resource rich countries”. The justification behind the use of Oman case is that Oman is an oil rich country that started efforts to diversify its economy four decades ago, and economic diversification was acknowledged as one of the most salient policies as early as the first five-year development plan in 1976. However, it has still not succeeded in reducing its dependence on oil, just as many other resource rich countries have not. The oil sector still dominates the rest of the other productive activities, and during the period (1970-2014) it accounted for 47.2 percent of the GDP, about 70 percent of the foreign exchange earnings, an average of 85.8 percent of the total exports, and an average of 85.2 percent of the government revenues. Export-led diversification was part of a larger diversification policy that had been adopted and implemented through the "Vision for Oman's Economy: Oman 2020" since 1996. To accomplish the goals of export-led diversification, plans were made to utilize the country’s excellent location through the development of its transport infrastructure (e.g. roads and ports), Free Trade Zones (FTZ) and Industrial Estates to make Oman a global logistics hub. The first part of the analysis in this thesis is dictated to examine whether the resource curse symptoms exist in the Oman economy or not. This is important because Oman and other GCC countries were not included in the empirical research on the resource-curse datasets study done by Sachs and Warner (1997a) and Gylfason (2006a), due to unavailability of data (Titulaer, 2010). Furthermore, Logical Framework (LF) and Theory of Chang (TOC), have been used as analytical techniques to assess the impact of the infrastructure and logistics policy in Oman, because they facilities the building of the component of the analytical framework. The LF identified the different components of the policy (inputs, outputs and impacts) and TOC identified the path for achieving the policy goals and through those indicators, the impacts haves been measured. Both time-series and panel data were used in the second and third parts of the analysis respectively. The time-series data cover the data of different LF and TOC indicators during the period 1996-2015, and the panel data covers the data of the values of the pillars of the factor-driven of the Global Competitiveness Index (GCI) and the values of the diversification index for twelve resource rich countries (Bahrain, Botswana, Chile, Indonesia, Kuwait, Malaysia, Norway, Oman, Qatar, Saudi Arabia, South Africa and UAE) over the period 2007 to 2015. The results of the first empirical part in this thesis that examine the existence of the resource curse symptoms (economic and political categories) in Oman, showed the presence of three factors out of the four of the economic category (commodity price volatility, low external linkages of the petroleum industry and Dutch disease), whereas in the political category, it found that only two out of five factors existed (weak institutions and the presence of corruption). On the other hand, the analysis of the LF and TOC (second empirical analysis) showed a good progress in many TOC indicators of the policy. For example, there was an improvement in the rank of the quality of infrastructure in the Logistics Performance Index (LPI), Global Competitiveness Index (GCI) and Global Enabling Trade Index (GEI). There was an increase in the value of investment of the FDI in general (as it increased from 1,588 million OMR in 2005 to 7,638 million OMR in 2014) and at different FTZ and Industrial Estates specifically. There was an increase of the percentage share of non-oil exports on total exports (increased from 6.1 in 1996 to 22.4 in 2015) and the non-oil exports revenues (increased from 173.3 million OMR in 1996 to 3,003.9 in 2015). Moreover, the results also showed that the impact of the development of roads, ports, and FTZ was not enough to generate a significant change in the diversification index during the period 1996-2015, as the diversification index (that ranks values between 0 for fully diversified countries and 1 for countries that export only one commodity) is still high (0.72) and only a slight change had been happening during the past nineteen years (1996-2015). The diversification index decreased from 0.76 in 1995 to only 0.72 in 2015 with an annual decrease rate of (-0.23) percent. Furthermore, the results of the panel regression analysis (third empirical analysis) showed that among the different pillars of the GCI, institutions were the only independent variable that was significantly correlated with the change of the diversification index for the twelve resource rich countries during the period 2007-2015. That result emphasized that, at the first stage of development of the resource rich countries, possession of good institutions is the most important factor in the diversification process, rather than the development of infrastructure, macroeconomic stability and health and primary education. This study is among the first of its kind as it assesses the impact of a policy over a long-term period, as policy evaluation and impact assessment are usually carried out over short- or medium-term periods. The results of this thesis contribute to explain why many resource rich countries have not succeeded in diversifying their economies over the past decades. Also, it will be a point of reference for scholars interested in economic diversification policies and policy makers in many resource rich countries, particularly among the GCC, which share many common economic features with Oman. Such similarities are their high reliance on oil and gas as the main source of government revenues, their welfare systems, and their reliance on low-skilled imported labor.