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Review of Middle East Economics and Finance

Ed. by Dibeh, Ghassan / Assaf, Ata / Cobham, David / Hakimian, Hassan / Henry, Clement M.

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Resource Curse and Power Balance: Evidence from Iran

Kjetil Bjorvatn
  • NHH Norwegian School of Economics, Bergen, Norway
  • Email:
/ Mohammad Reza Farzanegan
  • Corresponding author
  • Department of the Middle East Economics, Philipps-University of Marburg, Center for Near and Middle Eastern Studies (CNMS), MACIE & CESifo, Marburg, Germany
  • Email:
/ Friedrich Schneider
  • Department of Economics, University of Linz, Linz, Austria
  • Email:
Published Online: 2013-08-30 | DOI: https://doi.org/10.1515/rmeef-2012-0029

Abstract

Empirical research shows that natural resources have a detrimental effect on economic growth, a phenomenon known as the “resource curse”. Competition between influence groups for access to the resource rents, that is, rent-seeking, is often blamed for this curse. In this article, we dig deeper into the link between political competition and the resource curse by studying the case of Iran from 1960 to 2007. We present a theoretical model demonstrating how the effect of rents on the economy depends on the balance of political power. The model shows that an increase in rents may lead to a sharp reduction in income when the distribution of power between influence groups is relatively balanced. The empirical evidence confirms the predictions of the model.

Keywords: natural resource curse; political power; economic growth; Iran

JEL Classification: Q32; D72

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About the article

Published Online: 2013-08-30


See Frankel (2010) for an overview of this literature.

In a companion article, we use panel data for 30 oil-rich countries to investigate the interaction between the distribution of power, resource rents, and economic outcomes, see Bjorvatn, Farzanegan, and Schneider (2012). This case study of Iran allows us to dig deeper into the mechanisms of rent-seeking and the resource curse in a particular institutional setting. Other studies such as Karshenas and Hakimian (2005; 2007) have examined the interaction of oil, democratization, and the process of economic diversification in Iran.

Within the modernization paradigm, factionalism precedes the formation of modern parties which develop as channels of mass participation and thus act as important agencies of eventual democratization” (Lewis, 1995, 105). Indeed, factionalism may refer to a primitive and immature form of democracy which is a property of political systems in transition to democracy.

See also Amuzegar (2009) and Bjorvatn and Selvik (2008) for an analysis of factionalism in Iran.

Noland (2008) investigates the paradox of high stability of undemocratic regimes in Arab region.

Andersen and Aslaksen (2008) highlight the role of constitutional arrangements when explaining the resource curse. Shahnawaz and Nugent (2004) use a dynamic game-theoretic model to explain different political outcomes in resource-rich countries. Another group of researchers refers to the role of ethnical fractionalization as a possible explanation for the resource curse hypothesis (Hodler, 2006 and Montalvo, Reynal-Querol, 2005). Mavrotas, Murshed, and Torres (2011) show how an increase in resource rents can have large, negative impacts on growth when there are increasing returns to scale in rent-seeking.

Oil dependency captures materialized rents in the government budget. Political factions are more interested in these more tangible rents rather than oil reserves or production. In other words, what matters for economic growth and rent-seekers is ultimately the value of produced oil barrels and not necessarily the number of barrels (see Hodler, 2006 for similar view). However, we have also carried out the estimations using the per capita daily oil production. The results (not shown) remain robust by using the oil abundance indicator as well.

In 2SLS and GMM estimations, we treat all explanatory variables as endogenous except for the OECD growth rate and different dummy variables.

See Karim Sadjadpour’s note on the role of supreme leader in Iran: http://iranprimer.usip.org/resource/supreme-leader

Furthermore, there can be another concern about the effect of the “oil rent” specific variables on power distribution indicators which in turn influence economic growth. In this case, we still have a correct model, but it may not be an efficient specification. We show that this issue is a not a source of concern for our case. The correlation of the “oil rent” dependency variable with the power distribution variables is not statistically different from zero.

http://www.fsd.uta.fi/aineistot/taustatietoa/FSD1289/Iran.pdf

See http://www.fsd.uta.fi/aineistot/taustatietoa/FSD1289/Introduction_2009.pdf (page 10).

Moreover, there were two periods with a high power index: the four years after the Revolution and the period 1996–1999. In these periods, the vote shares of the largest group were 53 and 44%. We also controlled for these two periods of time in some of our regressions to see whether they drive our main findings. However, we do not find the evidence for sensitivity of our main results to developments under these two distinct periods.

Using 2SLS or GMM estimations does not change the marginal impacts qualitatively.


Citation Information: Review of Middle East Economics and Finance, ISSN (Online) 1475-3685, ISSN (Print) 1475-3685, DOI: https://doi.org/10.1515/rmeef-2012-0029.

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