Kicking a crude habit: diversifying away from oil and gas in the twenty-first century

Abstract

This article investigates the correlates of diversification away from oil and natural gas dependence in the context of the twenty-first century resource boom (and bust). In a sample of 40 oil- and gas-dependent economies, the majority showed significant sectoral diversification of GDP, but exports remained highly concentrated in fuel exports. Regression analysis indicates that countries that began the boom with higher levels of oil and gas dependence, poorer countries, and those with significantly larger- or smaller-than-average populations were more successful in diversifying their GDP during the commodities boom. Governance matters – more effective, capable bureaucratic structures are associated with greater GDP diversification away from oil and gas – though the effects are not uniformly positive. For any given level of government effectiveness, stronger rule of law is associated with less GDP diversification. Education appears to affect GDP and export diversification differentially. Consistent with endogenous growth theory, countries with more educated populations saw greater growth in their nonresource sectors than countries with less educated populations, though education is associated with greater export concentration. Internal economic diversification in the twenty-first century has been less a matter of policy formation and implementation, and more a matter of factors that shape the policy-making environment.

Keywords:

• Petroleum
• diversification
• education
• rule of law
• institutions

JEL Codes:

• E02
• O10
• O13
• Q02
• Q40

Notes

1. Countries for which oil and gas rents were at least 5% of GDP in either 2002–2004, or 2012–2014, per World Bank (2016). 2002–2004 corresponds to the early years of the commodity boom. This measure excludes large oil producers like Canada and the United States from the sample because their absolute production volumes are only a comparatively small share of GDP.

2. Saudi Arabia Government Budget, Trading Economics, www.tradingeconomics.com/saudi-arabia/government-budget (accessed on November 16, 2016).

3. OPEC Confounds Skeptics, Agrees to First Cuts in 8 Years, Bloomberg Markets November 30, 2016, https://www.bloomberg.com/news/articles/2016-11-30/opec-said-to-agree-oil-production-cuts-as-saudis-soften-on-iran (accessed on January 30, 2017).

4. Development Plan, 1390 A.H. (Riyadh: Central Planning Organization, 1970).

5. Nasser Saidi, Saudi Arabia’s Shock Therapy, Project Syndicate, September 27, 2016, www.project-syndicate.org/commentary/saudi-economic-diversification-plan-by-nasser-saidi-2016-09 (accessed on October 17, 2016).

6. Quoting the World Bank study from which the data were derived (2011, 24): ‘Throughout the book [The Changing Wealth of Nations], all wealth figures are reported in constant 2005 US dollar prices. It is important to keep in mind that when we compare wealth across countries, we are using nominal market exchange rates. Because of this, wealth does not reflect the purchasing power of the income generated by wealth in a given country. To get an idea of the purchasing power of wealth, we would have to use purchasing power parity (PPP) exchange rates, which are often used to compare GDP across countries. Consequently, the wealth accounts are most appropriate for making comparisons across broad income groups and for looking at a country’s wealth over time – its volume and composition – but are less useful for making comparisons between individual countries’ (emphasis added).

7. In either 2002–2004 or 2012–2014. The countries included in the analysis are Algeria, Angola, Argentina, Azerbaijan, Bahrain, Bolivia, Brunei Darussalam, Cameroon, Chad, Colombia, Republic of Congo, Ecuador, Egypt, Equatorial Guinea, Gabon, Ghana, Indonesia, Iran, Iraq, Kazakhstan, Kuwait, Libya, Malaysia, Mexico, Niger, Nigeria, Norway, Oman, Papua New Guinea, Qatar, Russia, Saudi Arabia, Sudan, Suriname, Trinidad and Tobago, United Arab Emirates, Uzbekistan, Venezuela, Vietnam, and Yemen. These 40 countries account for 83.4% of global oil reserves and 77.0% of natural gas reserves (CIA 2016).

8. There is some evidence that resource-dependent economies spend less on education and human capital formation (Gylfason 2001).

9. Accessed using the wbopendata user-created module in Stata (Azevedo 2014).

10. (Oil and Gas Rents as % of GDP 2012–2014) − (Oil and Gas Rents as % of GDP 2002–2004).

11. Data for Angola, Azerbaijan, Chad, Equatorial Guinea, Nigeria, Oman, Suriname, and Uzbekistan are missing. For each, the country was imputed its UN subregional average for 2000–2005. In the absence of observations for Central Africa, those countries were imputed the average of Western and Eastern Africa (4.2).

12. World Bank, Worldwide Governance Indicators, http://info.worldbank.org/governance/wgi/index.aspx#home (accessed on September 29, 2016).

13. The violence variable is calculated as the mean for the period 2002–2014.

14. Angola, Chad, Republic of Congo, Equatorial Guinea, Gabon, Iran, Libya, Sudan, Trinidad and Tobago, United Arab Emirates, Uzbekistan.

15. Model 3 in Table 2 is the baseline specification for the discussion of marginal effects and predicted values for changes in oil and gas dependence. Model 6 is referenced for changes in fuel exports as a share of total merchandise exports.

16. The retained factor, governance capacity, is highly correlated with the component measures: government effectiveness (r = 0.97), rule of law (r = 0.99), and political stability and the absence of violence (r = 0.78).

17. For example, the Global Insight Business Conditions and Risk Indicators’ ‘risk of expropriation, state contract alteration, and contract enforcement’; the Institutional Profiles Database’s ‘withdrawal from contracts’ variables.

18. Algeria, Angola, Bahrain, Equatorial Guinea, Iraq, Kuwait, Libya, Papua New Guinea, Sudan, and the United Arab Emirates did not report data for manufacturing value-added.

19. Manufacturing Still Nigeria’s Fastest Growing Sector, CNBC Africa, September 8, 2014, www.cnbcafrica.com/news/financial/2014/09/08/nigeria-gdp-q2-growth/ (accessed on January 10, 2017).

20. Simeon Kerr, Saudi Arabia, Cutting Its Budget, Turns to Private Schools, Financial Times, November 21. 2016, www.ft.com/content/ab450160-9c1f-11e6-8324-be63473ce146 (accessed on November 22, 2016).