Natural Resources and Economic Development Nexus

The debate on whether natural resources contribute positively or negatively to an economy is complex. On the one hand, countries that have natural resources are perceived to also have better bargaining power on the global platform. However, there are countries that have fallen to war and poverty because of the natural resources they export. There are several things that might cause differences in development between countries that have natural resources. Some of these influencing factors include political goodwill and global political influence, local interests and national values, and country bargaining power in the worldwide arena. This essay will focus on the Middle East and North Africa region (MENA) in regards to whether natural resources have contributed to or hindered economic development. The report will analyze the different influential factors that affect the economic development of the MENA region. This essay will prove that natural resources have hindered economic growth in MENA because of political interference and poor leadership structures.

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History of the Middle East and North Africa Regional Block

The term MENA is used to refer to countries that were in the Arabic Mashriq and Maghreb areas (Altomonte & Ferrara 2014). The region hosts approximately 6% of the world’s population and is commonly known for its oil and gas industry. It is important to note that Oil and gas are some of the most valuable natural resources in the world. However, before the region started to export oil and gas, it was already prominent in batter trade with other Persian countries. Yousef (2004) argues that the realization of Oil and gas, and their importance in the world, led to an overdependence on the natural resources that has been described as an economic curse on development in the region.

This economic curse has been enhanced by the long-term conflict that the region has faced as well. Due to the enormous wealth, the area has, there has been conflicting revolving around the collection and distribution of the wealth. Apart from international pressure, the region has also had internal conflicts due to the quality and quantity of its oil and gas production. All these factors have influenced the block’s bargaining power in the global market.

It is also important to note that there has been instability due to religion, and this has affected international relations between the MENA region and other countries. The larger block is made up of Islamic faithful, while the countries that purchase the Oil are Christian faithful. Due to the fact that the Christian nations have a higher bargaining power compared to the Islamic Oil-producing nations, the issue of profit has been exploited by the former. Hanifa and Azmi (2015) explain that Sharia law stipulates the extent to which one (these countries) can seek profit on natural resources. This same philosophy is not shared by the Christian faithful, and products that are developed from crude oil by-products are imported at a higher price compared to the crude oil that was exported. Such dynamics affect the overall state of the region’s economy.

Global Politics, Natural Resources, and Economic Development in MENA

The Middle East and North Africa region is known for one of the most valuable natural resources in the world, Oil. The area is made up of more than 20 countries on three continents. Krane (2018) explains that many people perceive the MENA to be a developed (first world) region because of its oil exports when in fact, all the countries that make up the region are considered third world states. This pushes the debate of how natural resources aid an economy to grow. Saudi Arabia is regarded as the largest exporter of Oil within the Middle East and North Africa region.

As Ross (2012) notes, Saudi Arabia is indeed one of the wealthiest countries in the region despite the fact that other areas such as Iraq, Algeria, Libya, and Kuwait also export Oil. There are two questions that arise from this premise. The first is why one country is ahead of others in regards to development if they all produce the same natural resources? The second question is why Saudi Arabia is still considered the third world if it is the largest transporter of the world’s most valuable natural resource?

Mikdashi (2019) explains that the best answer to both questions is global politics. Looking at the individual countries that make up the Middle East, one can quickly identify other first-world countries that are pushing their agenda. For example, Algeria and Libya are the most significant sources of Oil for Europe, while countries in MENA within the Asian continent serve the Americas. One can argue that a country such as Saudi Arabia is far more developed than Libya. This can be tied to the management style of the oil industries in the countries. Whereas Europe handles the oil industries in Africa in the same manner as the colonization era, the US does not. This does not, however, suggest that countries that export mainly to the US are better off. For example, Iraq is one of the countries that have allowed the US to mine for Oil. It was also one of the most war-tone countries in the world.

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Global politics also determine the price of oil exports. As Mikdashi (2019) explains, whereas the countries that produce the natural resources get money from their exports, they have to import expensive products that were made by their buyers. An example can be used to explain further. In the last decade, the US was one of the lowest producers of Oil in the world. The consumption of Oil in the country was higher than the production rate, so through global politics, the government invested in oil mining in the Middle East (Mikdashi 2019). Today, the US is the largest exporter of Crude Oil in the world after years of searching for natural reserves both on land and in water. There are arguments that the US intentionally depleted the oil reserves of other countries to give it an upper hand in the economy (Mikdashi 2019).

On the same note, it is essential to note that there are countries in Europe that have gained immensely from their natural resources. For example, Russia and Azerbaijan have seen economic growth sprouts that have been directly linked to the production of Oil. This, and the fact that countries in the MENA also have different growth rates despite exporting the same natural resources, leads the discussion to the relevance of regional and local politics in economic development.

Regional and Local Politics and Their Influence on Economic Development of MENA

Whereas global politics is influenced by third-world countries, regional politics is influenced by local governments. Yergin (2008) explains that this is the reason why Kuwait is more advanced than Libya despite both offering the same export products to the world. Arguably, a competent leadership within the individual countries in the MENA region can ensure economic growth, albeit with challenges from the global platform. For example, King Abdallah modernized the Saudi Arabian economy between 2005 and 2015 (Altomonte & Ferrara 2014). Due to this and other political changes, the country did not record as many losses during the Arab Spring as other countries in the region (Altomonte & Ferrara 2014). The same applies to the use of natural resources to advance an economy.

Mikdashi (2019) goes further to argue that countries in MENA are also characterized by authoritarianism theory. This theory defines a political system that has highly centralized power (Mikdashi 2019). In MENA, particularly the Middle East, this power is bestowed on families, and they have unlimited decision-making power in regards to politics and economic development. It is common to find that these families are very wealthy, whereas the general population is not, as wealth gained from the natural resources are first distributed to the leading families before they are invested for economic growth. Again, this is a regional and local political influence. Thus, it is assumed that a change in political theories can help ensure that gains received from natural resources boost economic growth.

The theory of dependence also comes out clearly in this discussion. Boschma et al. (2016) explain that this theory explains the underdevelopment of an economy based on politics and economic biases. The economy of MENA is entirely dependent on its oil production. There are two main things that arise from a dependent economy. The first is the fact that depletion of the natural resource renders the economy dead. Ross (2012) notes that this is one of the critical discussions countries in MENA are currently having. In the last decade, little thought was put on the depletion rate of oil reserves in the region. Pressure from the already discussed global politics and the need for further economic development within the countries blocked away any reasons for caution. Today, the countries have not gained much compared to first-world countries, yet their reserves are depleted.

Secondly, dependence and overdependence on one commodity can create instability in regional politics. This is particularly the case when quality is involved. The different oil reserves in MENA produce different quality levels fill. Thus, individually, these will would be sold at different prices in the global economy. However, due to regional politics, the cost of Oil has to be negotiated with the entire block and not just the country involved. One disadvantage of this is that the price might be lowered due to other regional concerns. Border issues of oil reserves have also brought out regional wars within MENA. For example, Turkey lies on the border of Asia and Europe. Whereas both continents have different regional politics and interests, there is a lot of pressure on Turkey to align with one side as well. Such conflicts can affect a country’s ability to not only produce Oil but also negotiate its price with the highest bidder.

Global Trade, Natural Resources and Economic Development in MENA

According to the World Bank, the economic growth of MENA has gone down by 0.6% due to the voluntary decision to cut down on oil production (World Bank 2019, para. 1). Iran has been specifically highlighted as the most affected economy due to its overdependence on oil production (Diop, Marotta & de Melo, 2012). There are two main things one has to consider when discussing global trade, natural resources, and economic development in MENA. The first is the different products that MENA offers on international trade, and the second is the competition the region has towards the delivery of the said products.

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Indeed, Oil has been MENA’s largest export, and since the product was valuable for decades, many countries within MENA did not expand their interests to other effects (Sachs & Warner 2001). Karshenas (1990) explains that Iran and Iraq were among the first countries to overfill as a product on the global trade platform. This put pressure on the leadership of these countries to bring in investors to mine as much as possible in order to grow the economy of the country. Additionally, Alissa (2007) explains that Saudi Arabia started looking for other possible trading products in 2005 through the leadership of King Abdallah. For example, more investments were sought in real estate in the region. The United Arab Emirates also began to seek other valuable products for trade as soon as oil reserves began to be depleted. For instance, Dubai was positioned as a global tourist city with significant real estate value. Therefore, one can argue that the economic underdevelopment of MENA can be attributed to the larger region’s inability to diversify its economy. This relates to the theory of diversification, which encourages the allocation of capital in different areas to lower the risk value of one asset (Boschma et al., 2016).

The second-factor one has to consider is the competition the products have in the global trade arena. Currently, tourism and real estate are additional products that are traded in the Middle East (Ram & Hall 2018). One can argue that the Middle East has joined the rest of the world in selling real estate at a later stage. However, countries such as UAE have been able to develop their economies further and move away from overdependence on Oil through real estate. For example, Dubai is one of the cities in the UAE that attracts Formula 1 racing. This event has led to the development of infrastructure suited for the millions of people attracted to the event and so forth.

It is crucial to point out that countries that have not diversified their global trade have had negative impacts on their economies. As mentioned previously, Iran is one such country. Additionally, Libya’s economy has been dropping due to the same reason. Before 2011, Libya had one of the highest growth per capita in the world at $12,000 (Shaban & Devarajan 2016). However, the civil war that lasted five years pushed this down, and as of 2016, a majority of the Libyan population earned less than $5,000 per year. Indeed, there are various reasons why the country went into civil war. For example, the global political forum felt it necessary that the government changed leadership in order to liberate the citizen. Apart from this, however, one of the critical factors was the depleting natural oil reserves in the country.

Economic Bargaining Power of Countries with Natural Resources

According to Devlin (2010), although ill is valuable, the fact that many third world countries are producing it gives the first world countries more bargaining power for costs and other benefits. It is essential to point out that the development of MENA as a region was to enhance the individual country’s bargaining powers. It was expected that the area would have more bargaining power compared to individual states. Whereas this is true, Mikdashi (2019) explains that the bargaining power was significantly lowered due to the fact that the region was affected by internal political disputes. This, combined with the fact that individual countries had alliances with different world superpowers since the beginning of the 19th century, made bargaining as a block difficult. For example, whereas Iran believed that the US was a better ally than Europe (as they had been fighting with Europe since World War I), they often disagreed with agreements with Libya and Algeria that preferred the Europeans over the Americans. These disputes gave the first world more bargaining power compared to the oil-producing companies.

Also important to note is the fact that the individual countries in MENA are also in competition with each other. This arises from their different local governments. For example, Saudi Arabia was a significant threat to other countries in the region as it had more oil reserves. This gave the country a higher bargaining power compared to other countries that produced less Oil. One can argue that since the whole region was using authoritarian political leadership theory, the same was applied within the MENA leadership. Cammet, Diwan, and Waterbury (2015) explain that this argument has been used to describe why Saudi Arabia’s economy is better than many of the countries in the region, albeit not as strong as expected.

Additionally, the bargaining power of countries that bought their was enhanced by their industrial strength. Once the Oil is mined, these countries produce other different products that are then sold on the global platform. For instance, the by-products of crude oil are used in the manufacture of petroleum jelly, gasoline, and waxes, among other products. These same products are then sold back at a higher rate to people in the MENA region. It is arguable that countries in the MENA region have little influence due to their lower economic status on the global platform. However, it is crucial to remember that access to the national oil reserves is allowed by the government of these third-world countries. Therefore, better negotiations are needed to ensure that the oil-producing countries also benefit through an enhanced economy.

Conclusion

In conclusion, ideally, the oil and gas industry should allow economic growth wherever they are produced. However, the financial curse that is associated with the production of oil and gas is enhanced by other factors such as global, regional, and local politics and country bargaining powers. The economic development of individual countries within the MENA block is different due to the respective country’s reaction to these mentioned factors. For instance, whereas the use of modern approaches in economics helped UAE diverse it’s business and transition from the oil and gas industry, countries like Iran and Libya are suffering due to economic failure based on overdependence on the falling gas and oil industries. It is prudent to note that the political leadership of these countries is also responsible for their failing economies despite having the world’s most valuable natural resource. These countries have to embrace the theory of diversification in order to save their economies.

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Reference List

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