Do natural resources spoil economies?
The discovery of natural resources is considered a positive event for the states where it occurs. It has however become evident that economic growth solely driven by such resources, without investment in indigenous productivity, creativity, or innovation, can have negative impacts on society and future development. This article focuses not only on obvious consequences like environmental degradation but also on economic impacts that may not be immediately recognizable.
In the six Gulf Cooperation Council (GCC) economies (Bahrain, Kuwait, Oman, Qatar, UAE, and Saudi Arabia), the discovery of oil and natural gas occurred gradually from the 1930s onwards. Oil wealth helped these states to achieve independence and develop into advanced economies in a relatively unstable region. In the 1990s, the region was affected by the Gulf War and the resource wealth served as a good motor in the period of recovery. The IMF however became aware that such overreliance on natural resources is not sustainable in the long term and for the past 20 years kept reminding the concerned states to diversify their economic portfolios. What exactly are the negative effects of oil dependency?
In economic theory, the negative impacts of overreliance on the resource-oriented industry were first described in the 1980s when economists W. Max Corden and J. Peter Neary (1982) introduced the theory of Dutch disease, based on the discovery of natural gas in the Netherlands. The expansion of industries related to this resource led to the appreciation of the domestic currency and the gradual displacement of other sectors. Since then, the Netherlands had to implement initiatives to actively support industrial diversification, transforming the country into an innovative economy.
As with every theory, The Dutch disease theory has faced criticism, leading to the emergence of a new theory in 1993 for the problems of resource-rich states — the resource curse theory (Auty, 1993). The premise of the resource curse (also known as the paradox of plenty) is that economies rich in natural resources gradually lose their economic potential, with a decline in GDP growth, education levels, and investment rates. Such “cursed economies” also suffer from various social issues, including concentrated power, high unemployment among women and minorities, and a higher level of corruption (Ross, 2011).
For illustration, Resource-rich states can be compared to a child from a wealthy family who, knowing he will be fine without making too much effort, may become idle. He might be later overrun by others who invested more effort and energy into themselves. Resource wealth can serve as a foundation for further development or lead to a sense of comfort and encourage laziness.
Among the GCC states, each has adopted a different strategy not to become the idle child. Kuwait is currently the least diversified economy in the region, with oil revenues constituting around 30% of GDP (WB, 2021). It is noteworthy that Kuwait is the only established parliamentary democracy in the Gulf region, however, it seems that the democratic system is not advancing the economy, but supports the status quo. Citizens do not seem to bother, why would they? In the previous year, Kuwait faced unprecedented inflation, but the majority of the population did not adjust its shopping behavior. They just started shopping for luxury brands abroad ( Kuwait Times, 2023).
On the other end of the spectrum is the United Arab Emirates, obtaining about 12% of its GDP from the oil industry (WB, 2021). The economy is more focused on the tourism and retail market, especially in the emirate of Dubai, which is now considered the Business Hub of the Middle East.
Saudi Arabia advanced its diversification efforts since 2015. This can be attributed to the initiatives of Prince Mohammed bin Fahd Al Saud, aimed to make the economy more attractive to investors through various strategies, such as Public-Private Partnership projects or granting greater access to the labor market for women (Global Economic Diversification Index, 2022). It was about time as the Saudi economy faced many challenges including high unemployment rates for women, overreliance on foreign labor, traditional tribal bonds (Tupek, 2023), and last but not least climate change.
While the oil industry undoubtedly played a crucial role in building strong economies in desert nations, the question now arises whether it will continue to serve them well in the future. The resource curse phenomenon is not unequivocal, but these states are grappling with high state administration costs, and some barely produce enough oil for domestic use (Bahrain). These states are also experiencing a shortage of skilled workers in sectors such as healthcare. The ruling elites must accelerate development plans if they want to maintain prosperity in the future.
