Paper short abstract:

Evidence from oil producing countries supports the idea that there is a natural ‘resource curse’ that associates oil resources with slow economic growth. This paper argues that this literature does not take account of other factors that generate challenges for the economy, such as volatility in oil prices.

Paper long abstract:

There is an understanding that natural resource abundance served as an engine of economic growth for some states such as Canada, Australia and the United States during the nineteenth century. However, the existing literature from different locales provides considerable evidence that shows that natural resource abundance leads to slow economic growth in developing countries. Within this context, this paper considers a very pertinent question - what economic and political factors enable some resource abundant countries to utilise their natural resources to promote economic development and prevent resource curse?

Conceptually existing explanations in the literature, from a fairly wide range of different perspectives, do not adequately account for the role that volatility and economic environment play in shaping the development outcomes of natural resource-abundant countries. They tend to focus on variables that are determined by a country's natural resource base and to exclude consideration of other variables. This paper offers an alternative explanation that emphasizes the detrimental effect of volatility as one of the main potential perils that contributes to poor economic performance. In fact, oil endowment is not a 'curse' as such, the curse is considered to be high volatility, weak exchange rates and high interest rates. This paper draws on PhD research on 'the impact of oil revenue on Iran's economic growth', and provides an estimate volatility model using the Markov Chain Monte Carlo method. The discussion also focuses on the role that institutions and fiscal policies can play as shock absorbers to manage volatility in the economy.