Oil shocks and oil producers' growth: where did all the spending go?

• DOI: http://doi.org/10.1111/opec.12022
• Date: 01 September 2014
• Published date: 01 September 2014
• Author: Amany A. El Anshasy

Oil shocks and oil producers’ growth: where

did all the spending go?

Amany A. El Anshasy*,**

*Assistant Professor of Economics, Department of Economics and Finance, College of Business and

Economics, United Arab Emirates University, UAEU Maqam campus, P.O.Box 15551, Bldg. H3, Room

1044, Al-Ain, UAE

**Assistant Professor of Public Finance, Department of Public Finance, Faculty of Commerce, Alexandria

University, Alexandria, Egypt. Email: aelanshasy@uaeu.ac.ae

Abstract

I use panel unit root tests and panel error correction models to examine the effects of oil windfall

shocks and types of public spending on economic performance in 16 oil-producing countries over

the period 1972–2008. Higher oil prices seem to reduce non-oil growthin the long r un, but stimulate

it in the short run. However,oil abundance may or may not become a ‘curse’ conditional on howthe

windfalls are managed. I find that the large windfalls of the 1970s and the 2000s have contributed to

the slow long-run growth performance, after controlling for the composition of public spending.

Public sector wages stimulated long-run non-oil growth in more oil-abundant economies; but had a

negative effect in less oil-endowed countries. The large publicinvestment programs were not effec-

tive in stimulating non-oil long-run growth; and the higher the dependencyon oil, the lesser the con-

tribution of new infrastructure investments to the non-oil sector’s growth.

1. Introduction

Since the seminal contribution of Max Cordon and Peter Neary (1982) and the empiri-

cal study of Sachs and Warner (1995), the paradox of how natural resource abundance

could be associated with slow or negative growth performance has drawn a lot of

research efforts. However, the debate over whether resources are a ‘curse’ or ‘blessing’

is still inconclusive. When oil recourses are particularly considered, the majority of

studies tend to find evidence of a negative effect on economic growth.1Thisresult seems

to be robust to using various measures of oil dependence. One exception is the study of

Alexeev and Conrad (2009) that find a positive effect of oil and mineral rents on income

per capita.

Some studies argue that fiscal policy mediates the effect of oil prices on the non-oil

sector, suggesting that fiscal policy is a key transmission mechanism of oil shocks to the

economy (Husain et al., 2008; Pieschacon, 2009). Despite the growing number of studies,

fiscal policy remains one of the empirically under-investigated resource curse economic

channels.

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Rodrik (1999) is among the first studies to argue that the quality of conflict manage-

ment institutions determines the quality of policy responses to external shocks. Coun-

tries with well-established institutions can make better policy choices in response to

windfall shocks; these countries are expected to grow faster. Fiscal policy and budget

institutions are in the heart of these resource distributional conflicts, especially in the

wake of oil windfalls. Lane and Tornell (1998) and Tornell and Lane (1999) argue that

terms-of-trade windfalls are a curse because they induce the so-called ‘voracity effect’.

Following windfalls, in the presence of weak legal and political constraints, powerful

interest groups compete through the fiscal process to appropriate national resources for

their own constituencies. So windfalls lead to more than proportionate increase in gov-

ernment spending and the redistributive struggles divert resources to unproductive rent-

seeking activities.

Indeed, Manzano and Rigobon (2001) show that resource booms and the seemingly

unsustainable increases in international debt are the sources of the negative effect of

natural resources on growth that Sachs and Warner (1995) had found in their original

empirical analysis of the resource curse. Similarly, Arezki and Brückner (2010) find

that commodity revenue windfalls in highly polarised countries induce voracity,

namely an increase in government spending, suppressing net foreign assets and private

investment.

El Anshasy and Bradley (2012) investigate the role that oil prices play in determin-

ing fiscal policy in oil-exporting countries and find that higher oil prices lead to larger

governments in the long run. In the short run, however, government spending rises less

than proportionately to the increase in oil revenues, signalling growing prudence fiscal

policy. El Anshasy (2012), using the generalised method of moments and pooled mean-

group panel techniques, finds that government spending financed by oil windfalls and

types of spending adjustments amid negative oil shocks explain some of the variations

in long-run growth performance across oil exporters. El Anshasy and Katsaiti (2013)

find that bad fiscal performance, measured by the degree of spending procyclicality,

hurts long-run growth in the group of resource-abundant economies. In addition, gov-

ernment consumption seems unproductive in this group of countries. However, the

study did not consider the composition of government spending.

Some studies find a negative impact of hydrocarbon revenues on the domestic tax

effort (Bornhorst et al., 2008). Other studies provide evidence that causality runs from oil

revenues to government spending, suggesting a procyclical expenditure policy with

respect to the oil cycle (Fasinoand Wang, 2002; Ossowski et al., 2008; Abdih et al., 2010;

El Anshasy and Bradley,2012).

This paper empirically examines the effect of oil revenue windfalls on growth in

oil-producing countries during the period 1972–2008, using a panel cointegration-error

correction model. In particular, it poses the question of whether fiscal policy, namely

Amany A. El Anshasy244

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