fiscal institutions fiscal institutions and macroeconomic management in arab oil exporters - jeffrey...

Economic Research ForumArab Fund for Economic and Social Development Fiscal Institutions

Fiscal Institutions and Macroeconomic Management in Arab Oil Exporters

November 4, 2015

Amany El Anshasy – UAE University Kamiar Mohaddes, Cambridge University

Jeffrey B. Nugent – University of Southern California

Fiscal Institutions and Macroeconomic Management in Arab Oil Exporters November 4, 2015 | 2ERF AFESD

Natural Resources (Oil): Curse or Blessing?

Evidence Mixed: • Sachs and Warner (1995), in a cross country econometric

study, show countries with higher resource exports (as a proportion of GDP), experience lower growth rates, i.e., a curse

• More Recent Results (Corden (1984), Ilzetski (2011), van der Ploeg (2011), Elbadawi and Soto (2012), and Cavalcanti et al. (2014), and our own Ch 3 that Kamiar will talk about) suggesting: that blessing or curse outcome depends on various institutional conditions, volatility, rent-seeking, rule of law, quality of bureaucracy, some of which are themselves factors that may be affected by Oil


Numerous Studies Identify Fiscal Institutions as Primary Ones for Distinguishing between Blessing and Curse Outcomes • Van der Ploeg

• Frankel


1. Existing Analyses have focussed on a. DCs like the US, Canada where property rights

and oil were developed without much involvement from government,

b. Norway and Chile, where innovative institutions have been introduced

c. More recently other LAC and SSA where problems often especially great but recent2. Objective of this study: Take Better Advantage of the Fiscal Institutions and Management of Oil in RRAEs


Challenge: Reason for Comparative Neglect of RRAEs: Lack of Disclosure, Information

But Advantages in Studying Them

• Different lengths of experience across RRAEs

• Different Sizes of country, population

• Different Governance Structures

• Different Levels of GDP per capita

• Different Degrees of Centralization: UAE federal, Libya, Syria, Iraq, Yemen, decentralized: chaotic


Our Analysis Divided into 3 ChaptersCh. 2 Taking Advantage of Existing data, Literature– (1) to identify what has and has not been learned about

existing fiscal institutions in RRAEs– (2) to compare these and their policy outcomes with

both each other and other countries, as well as over time. Consider different fiscal management objectives: economic volatility, efficiency of spending, physical and human capital development, economic diversification, technology, environment and distributional equity

Ch 3 Analysis of Oil, Management of Volatility and Growth Ch 4 Policy Recommendations


Overall Picture from Data Assembled• RRAEs started from a very deficient position in terms of Budgetary

and other Fiscal Institutions in some cases before independence– Missing Funds, Resource Governance – Low Scores on Open Budget Survey, Dabla-Norris others

• Some RRAEs have made considerable progress over time: SWFsand use of conservative oil prices in budgeting, rising OBS scores

• But much is left to do and reform needed, as (1) actual oil prices now sometimes below those used, (2) OBS scores low relative to other MENA countries, regions, (3) Even many of the SWFs ranked low; (4) Still no budgetary rules, (5) Alarmingly little progress in raising non-oil revenues even for countries running out of oil


Before Budgets: Missing Funds, RGI Where do


Counterfactual Hartwick –Actual K, Y (Majbouri 2015)Country Initial Year Inv. in Domestic Physical Cap

OnlyAlso SWF Inv.

Also Pub Educ

KH/KA YH/YA YH/YA YH/YA

Algeria 1979 2.0 1.11 1.09

Bahrain 1989 2.1 1.12 1.07

Egypt 1970 2.0 1.11 1.05 1.02

Iran 1974 2.4 1.12 1.12 1.09

Iraq 1989 4.6 1.25 1.10

Kuwait 1989 3.7 1.2 1.10 1.08

Libya 1989 8.4 1.16 1.15

Oman 1989 3.0 1.17 1.10 1.09

Qatar 1989 1.4 1.06 1.02 1.01

Saudi Arabia 1989 3.8 1.39 1.15 1.12

Syria 1979 3.7 1.21 1.09 1.06

UAE 1989 1.4 1.05 1.02


Challenges Reflected in Falling Short of Hartwick Rule • Too Little transformation of Natural Capital into

physical capital, human capital and financial capital– Even these shortfalls may be underestimated due

to excessively optimistic assumptions about returns on SWFs, efficiency of human capital,

– Lack of Agglomeration economies

• But Even this Investment Expenditure Inefficiently Allocated, White Elephants


SWFs Major Innovation by RRAEs

• Kuwait 1963, did much to save the country and government in Gulf War

• SWFs have spread rapidly within and beyond RRAEs

• But in terms of Budget Smoothing, Volatility –reduction, their role has been very small

• Comparative Evaluations show them to be inferior on most criteria to Norway’s . Insufficient independence


YH/YA

SWF Evaluations by Sovereign Wealth Fund Institute 2013

Country Name Transparency Clarity of

ObjectivesGovern-

anceInvest-ment

Risk Manage Total

Norway Govt. Pension F 10 8 7 14 3.5 32.5

Algeria Rev. Reg. Fund 1 5.5 2 2 0 9.5

Bahrain Mumtalakat H. 9 3 1.75 8 0 12.75

Iran Nat’l. Dev. F 5 6 2.5 5 0 13.5

Iraq Dev. Fund n.a.

Kuwait K. Inv. Auth. 6 7 6.5 8.5 2 24

Libya L. Inv. Auth. 1 1.5 0 0.5 0 2

Oman State Gen. Res.Fund 4 6 0.5 2.5 0 9Oman O. Inv. Fund 4Qatar Q. Inv. Auth. 5 3.75 1.25 0.25 0.3 5.5

S.A. SAMA For.Hold. 4S.A. Pub. Inv.F. 4Sudan .S. Dev. Stab.F. 4 0 2 0 6

UAE AD AD Inv. Auth 5 6 6 6.25 1 19.25

UAE AD AD Inv.Coun n.a.

UAE AD Int. Pet. Inv. Co. 9 3.5 3 7.5 1.3 15.25

UAE AD Mabadala 10 5 5 10.5 1 21.5

UAE Dubai

Inv.Corp. D. 5 3.5 0.5 3 0 7


Major Fiscal Failures of Most RRAEs 1. Absence of fiscal rules: long after the successes of Norway, Chile (Closest were Algeria and Yemen 1990s)

2. Excessive and sudden commitments by leaders to increase wages and/or employment levels of nationals in the public sector, regardless of budgetary conditions.

3. Failure to develop non-oil revenues

4. Increased vulnerability to future financial crises due to non-sustainability of social security, pension systems with rapid increases in uncovered future liabilities

5. Failure to substantially reduce energy subsidies


Table 5: Fuel Subsidies in Arab Oil Exporting Countries, 1995-2012

Country Pre Tax Energy Subsidies as % of GDP

Government Spending on Education as % of GDP

2011 2011Algeria 10.4 6.7Bahrain 8.2 2.2Egypt 10.3 3.1Iran 12.3 4.6Iraq 11.5 2.8Kuwait 7.6 5.4Libya 9.1 4.5Oman 6 4.6Qatar 4.2 1.6Saudi Arabia 10.1 8Sudan 1.7 3.2UAE 5.9 1.3Yemen 6.1 5

Sources: Columns 2 from World Bank World Development Indicators; Column 3 from Cl l 2013 d 2013 E S b id R f L d I li i


Effects of Shortcomings on Outcomes • Shortcomings in Complementary Institutions

• Capital Formation: Well short of K Hartwick Rule, Government Investment in decline, trend to hiring, salaries instead of Inv.

• Efficiency in Capital Allocation, Bankruptcies, White Elephants

• Human Capital Formation: Evidence of Ineffectiveness Large investments per capita but low test scores

• Economic Diversification very limited, few linkages

• Weakness of private sector investment, clientelism

• TFP Growth Negative or Low

• Low R&D, Technology Development, Patent Applications, Environmental Pollution,


Specific Expenditures to be Reduced• Subsidies for fuels, food: huge costs, smuggling, corruption,

harmful externalities, and limited equity benefits

• Military: more might be done instead to encourage private sector development and maintaining personal security by absorbing refugees rather than repression military interference in business

• Excessive government salaries and pensions to maintain sutainability and reduce discouragement of private sector participation by nationals

• Duplicative Expenditures and Functions across rival ministries and agencies


Broader Fiscal Policy Reforms 1. Must reduce pro-cyclicality of government expend.

2. Budgets need to be more inclusive: military, rulers, no off-budget items, capital as well as current expend., oil

3. More open disclosure within govt., across ministries, to legislature, public, strengthen checks and balances, may allow better evaluation of alternative procedures

4. Not necessarily better to include more parties in the budgetary process: Can raise rent-seeking (and Voracity)

5. More rigorous program evaluation to limit wastage

6. Enourage regional collaboration in public goods (agglom.)


Assistance in improving institutional rules • Join EITI and IFSWF and follow their guidelines

• Don’t antagonize financial regulators in other countries, since SWFs want to be able to have maximum diversification, returns/risks and strategic benefits

• Strengthen rule of law, checks and balances, higher quality bureaucracy, fiscal responsibility laws that facilitate adoption and enforcement of fiscal rules

• More competive bidding, to reduce costs of infrastructural projects and increase competitiveness of economy, decrease clientelism


Urgency to Reform During This (perhaps lengthy) Period of Low Oil Prices• Enhance Non Oil Tax Capabilities, tending to

emphasize the need for efficiency and to replace diminishing oil revenues when prices low, and for after oil is depleted

• Improve Efficiency of Investment, Competitiveness

• Reduce Waste


Going Beyond Fiscal Policy• Exchange Rate Policy: Deliberate depreciation as

Indonesia had done and Aizerbaijan has done recently

• Again especially urgent with the current high value of the $US to which most RRAEs are tied. To encourage greater linkages to traded goods, agglomeration

• More flexible exchange rates might allow monetary policy to be used to help reduce volatility, especially in countries where fiscal reforms seem most problematic. Monetary agencies might help broaden and improve the institutional framework . Bank privatization and competition. (Algeria)


Political Economy• Given that looking around the region: it is not

obvious that overthrowing monarchies has been beneficial: Iraq, Libya, Syria vs GCC.

• Policy reforms in monarchies imply need for rulers to relax their monopolistic control of information

• For this to be politically feasible reforms must be demonstrated to be not only in interest of general populace but also in that of the rulers and their families themselves

• Rising Corruption around the region increases suspicions when disclosure is incomplete


Factors Favorable to Openness Reform in Monarchies

• Variants on the Strategic Leader Model of Caselli and Cunningham (2009) and Caselli and Tesai (2011) who maximizes own utility which may be based on tax (τ) on non-oil sector and probability of staying in power π:A. Repress population and opposition with policeB. Buy off Opposition with patrimonyC. Produce public goods (i) and stable investment environment for non-oil sector, labor regs to support hiring of educated nationals in non-oil sectorD. Putting his own time and effort and sharing information into institutional improvements


Leaders in Monarchies

• May have longer time horizons than leaders in democracies and have greater interest in bequethals to their heirs

• They seem to have ways of weeding out less competent successors

• Robinson et al. (2015) Expected future volatility lowers leader’s interest in remaining in power but if these expectations were internalized by a far-sighted leader, such a leader would be more likely to adopt policies to reduce volatility


Need for Urgent Action in Period with Low Oil Prices

• Monarchy or Not:– Need for action now on – Reducing the various unnecessary expenditures– Increasing Government Investment relative to

consumption– Increasing Non-oil Revenues through taxation– Improving Efficiency of Investment and Raising

Positive Externalities


Thanks to You (Distinguished Audience)RIAD for Financial Support for this project (Ibrahim Elbadawi encouragement to undertake it)

Fellow Cordinators: Amany El-Anshasy, Kamiar Mohaddes

Case Studies:

Algeria: Mohamed Benbouziane and Farah Elias El Hannani

Bahrain: Hoda El Enbaby and Hoda Selim

Kuwait: Abbas Al-Mejren

Oman: Adham Al Said and Alya Al Foori

Saudi Arabia: Ashraf Galal Eid

Sudan: Kabbashi M. Suliman

United Arab Emirates : Raimundo Soto

Yemen: Mahmoud Al-Iriani and Yahsob Al Eriani

fiscal institutions fiscal institutions and macroeconomic management in arab oil exporters - jeffrey...

Government & Nonprofit