Natural resource curse, economic sanctions and constructive engagement : evidence from petrostate

Abstract

The channel of transmission that causes the resource curse phenomenon is the subject of a continuous debate in academic research. For petroleum-producing countries (petrostates), identifying the transmission channel of the natural resource curse certainly plays an important role in determining the driving factors of economic growth. Thus, this thesis re-visit the debate on resource curse by propagating a new channel that seems to have not been explored sufficiently. Different channels by which oil dependence can interact with a country’s characteristics to influence economic growth reflect a lack of understanding of the inner mechanism that generates these adverse effects and the relative importance of each channel. The econometric analysis of this study involves twenty-one countries from 1995 to 2018. The first objective aims to uncover the oil curse in petrostates and determine the mechanisms of oil resources by the importance of each transmission channel. Fixed and random effect models are performed, coupled with quantile regression. The results show that oil dependency indirectly hinders growth through transmission mechanisms in petrostates. The effect of indirect channels is the greatest by inhibiting human capital, the Dutch disease, and government intervention. The implications of the findings suggest that policymakers can profit from the review of possible transmission channels to identify suitable policies to reduce the downsides of oil-based economies and promote sustainable potential growth. The economic sanction is considered an essential source of variations in oil revenues, and the resource curse is much attributed to the volatility in oil responses to these volatilities. The second objective estimates the impact of economic sanctions on oil exports and economic growth in the case studies of Iraq, Libya, Iran, and Venezuela. Using a synthetic control group method. The study finds that both oil exports and the economic growth of each case study would have been lower had it not been exposed to economic sanctions. The implications of the findings suggest that the sanctioned countries can deteriorate the effectiveness of sanctions by developing mutually win-win cooperation with other countries. Despite the importance of transmitting channels of the resource curse hypothesis, the scopes of most of the existing studies are limited to either political channels or economic channels. Economic sanctions can be considered another resource curse channel is operating exclusively at the international or global scale. The third objective seeks to expand the concept of a contractual natural resource curse. It suggests another channel that may not be addressed as one of the resource curse channels in petrostate countries. Using the system GMM estimator, the empirical results show a negative sign of the interaction term between economic sanctions and oil dependence. Therefore, the study has found a symptom of the oil curse from a new transmission channel under the international relations arena. The implications of the findings suggest that governments approach the design of foreign policy initiatives in the form of constructive engagement to mitigate the negative effect of economic sanctions. Very little attention has been paid to the role of constructive engagement in mitigating the negative effect of economic sanctions. Using the system GMM estimator, the result has shown a positive role of constructive engagement in mitigating the negative effect of economic sanctions on economic growth. The implications of the findings provide policymakers the opportunity to explore and use a broader range of foreign policy instruments and strategies and provide guiding importance in the fields of international economic relations in the context of the resource curse.