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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Economic Modelling, Volume 35, September 2013, Pages 118–125
The aim of this paper is to empirically examine the dynamic relationships between oil revenues, government spending and economic growth in the Kingdom of Bahrain. Oil revenues are the main source of financing government expenditures and imports of good and services. Increasing oil prices in the recent years have boosted public expenditures on social and economic infrastructure. In this paper, we investigate whether the huge government spending has enhanced the pace of economic growth or not. To this end, we use a multivariate cointegration analysis and error-correction model and data for 1960–2010. Overall results suggest that oil revenues remain the principal source for growth and the main channel which finance the government spending.
Is natural resource-rich a blessing or a curse for a country? This question has generated considerable academic work. Even though, with an extensive literature, a convincing answer is not provided. Furthermore, the relationship between natural resource abundance and economic growth is controversial among scholars. It could not be settled among economists that natural resource abundance is either a curse or a blessing for natural resource-rich countries. The first body of the literature establishes a negative relationship between resource abundance and poor economic performance (Auty, 1986, Auty, 1990, Auty, 1993, Auty, 1998 and Auty, 2001, Bulmer-Thomas (1994), Gelb (1988), Lal and Myint (1996), Ranis (1991), Sachs and Warner, 1995, Sachs and Warner, 1997 and Sachs and Warner, 1999). The results appear to support the “resource curse” hypothesis. Sachs and Warner (1997) find a clear negative relationship between natural resource based exports (agriculture, minerals and fuels) and growth in the period 1970–90 from a sample of 95 developing countries. Two exceptions were Malaysia and Mauritius that sustained 2% per year growth during 1970–80. In the same way, Auty (2001) found that per capita income of resource poor countries grew between two to three times faster than that of the resource-abundant countries for the period 1960–1990. He admits that crop-led resource abundance would be expected to have lower growth compared to its manufacturing equivalent. Furthermore, mineral driven countries have been among the weakest performers. This so-called “resource curse” has inspired many economists to explain its origins. Nevertheless, such conclusions exposed above are not without criticism. The results are very sensitive to the period chosen, to the definition of “natural resources” and to the methodology used. Some scholars put forward some doubts about the robustness of these findings due to differences in the measurements of natural resources abundance (Stijns, 2005). Schrank (2004) explains that this evidence does not prove that natural resources abundance of any kind causes poor economic growth even if they are correlated. Correlation does not mean causation. This is what we read in every econometrics manual. Ross (2003) goes further and put forward that the relationship between natural resources abundance and poor economies may be completely spurious by omitting a third variable. As in most natural resource-rich countries, Bahrain's economic growth has been strongly influenced by the volatility of oil, gas and mineral prices in international markets. This reveals Bahrain's economic dependence on its oil sector even though it is considered as the least oil dependent compared to its regional peers. Bahraini growth rates have generally followed a similar path to Saudi growth rates but have been less volatile because of huge gaps in oil and gas production and reserve between the two countries. Bahrain became one of the first Gulf countries to start diversifying its economy. In the late 70s, the government went one step further in its diversification policy by attracting financial and service institutions to set up regional offices in the country. Moreover, Bahrain was among the first countries in the Middle East and North Africa region to build an industrial base and it has been the most attractive for foreign investors, including regional ones in its industrial development (Looney, 1989). During the past decades, the government has intensified the structural reforms to improve the infrastructure of the kingdom as well as the well being of Bahraini citizens. Bahrain has become an open-ended economy with liberalized trade and capital account. It has also become the hub of international affairs and the preferred destination for investors.1 Quickly, Bahrain emerged as a key player for banking, Islamic finance, Islamic insurance industry, transportation and communication in the Gulf region and has become home to many multinational firms. Nowadays, the economy has known an unprecedented dynamism, population has been growing drastically and projects have been multiplying. The goal of the Bahraini government in development plans was to reduce the dependence of current expenditures to oil revenues, financing these costs through non-oil sources. Nevertheless, the slow-down in economic activity between the 1990s and 2000s has caused severe fiscal unbalances for Bahrain and oil revenues decreased drastically.2 During the last decade, the situation has worsened as the world economy has known a period of severe volatility in oil prices.3 As a result, Bahrain's fiscal position moved from a minor deficit in 2002 (− 0.1% of GDP) to a greater deficit of about 10% of GDP in 2009 due to the drop in oil revenues. Total revenue increased from BD 1.04 billion in 2000 to BD 2.8 billion in 2008 before decreasing to BD 1.7 billion in 2009 (Central Informatics Organisation, 2011). Oil and gas revenues registered a growth from BD 765 million in 2000 to BD 2.3 billion in 2008 before decreasing to BD 1.4 billion in 2009, while non-oil revenues rose from BD 264 million in 2000 to BD 367 million in 2008 before going back BD 262 million in 2009 (Central Informatics Organisation, 2011). This means that the government revenues and the overall fiscal policy in the Kingdom remain hugely based on oil revenues. Oil revenues are the life blood of the Bahraini economy ( Hamdi and Sbia, 2013a and Hamdi and Sbia, 2013b). Regardless of oil revenue volatility, the government has always kept a high level of current expenditures. By contrast, capital or development expenditures are sensitive to fluctuation in oil revenues. These simple and general observations show the vulnerability of the government fiscal situation to unexpected oil revenue shocks. Government cannot adjust its current spending easily in the case of a negative oil market. In this condition, when oil prices go down, the government is not able to reduce the size of its activities immediately, leading to a significant budget deficit (Farzanegan, 2011). This makes budget deficits a critical issue for the government. It is then important to consider a reform of the tax system more seriously. Given the weight of oil in the small kingdom, this paper sheds light on the importance of oil revenues in financing the government needs and improving the well-being of Bahraini households. Precisely, it aims at investigating the dynamic relationships between oil revenues, total government expenditures and economic growth in the Kingdom of Bahrain. To the best of our knowledge, this type of question has never been analyzed in modern literature despite the importance of oil in financing the economies of oil-dependent countries.4 Therefore, this paper is the first attempt in literature to analyze the short-run and long-run relationships between oil revenues, government expenditures and economic growth in the case of an oil-dependent economy. To reach this goal, we use an econometric model based on cointegration and error correction model techniques for a long time series data which covers the period from 1960 to 2010. Overall results suggest that despite the efforts of the Bahraini government to diversify its economy, oil revenues remain the principal source for growth and the main channel that finance government spending as they represent 87.85% of total government revenues in 2011 (Central Informatics Organisation, 2011). Therefore, we encourage the government of Bahraini to continue working on effective growth-oriented strategies and to undertake more structural reforms to promote non-oil sector. The remainder of the paper is organized as follows: Section 2 provides a theoretical background on the macroeconomic consequences of oil price volatility. Section 3 presents the econometric methodology; Section 4 provides the results while Section 5 concludes.
نتیجه گیری انگلیسی
The 2008 financial turmoil and the ongoing sovereign debt crisis have renewed the debate on the role of fiscal policy in stimulating economic growth and have also raised serious concerns among the policy makers around the world because of its adverse impacts. This is because the effectiveness of fiscal policy is very sensitive to a large set of factors. Further, its role in absorbing shocks relies on the size of fiscal multiplier (Espinoza and Senhadji, 2011). This fact is pertinent for the case of Bahrain as a small state with monetary policy based on the fixed exchange rate. Therefore, this was the motivation of this study. Precisely, we set out to investigate the dynamic relationships between oil revenues, total government expenditures and economic growth in the Kingdom of Bahrain. We used annual time series data from 1960 to 2010 and we performed an econometric model based on the cointegration analysis and error-correction model. The estimations were made to obtain both short and long-run results. The time series diagnostics were investigated before the estimation and the stability tests were conducted to confirm the robustness of results. The Johansen method of cointegration confirmed the existence of a unique long-run relationship among the variables. The long-run results indicate that coefficients of total government expenditures and oil revenues' variables are statistically significant. The results for short-run, however, show that oil revenue is the only significant variable. The value of the coefficient of the ECT is − 0.276 of the GDP which is statistically significant at 5%. This suggests that the convergence is moving fast enough towards the long-run equilibrium. The study also finds uni-directional causalities running from oil revenues to GDP. The results appear robust and might be useful to policy makers for different reasons. Firstly, Bahrain as a small open economy and an oil-dependent country, is facing a number of specific challenges, stemming mainly from the fact that oil revenues, which constitute the bulk of government revenues, are exhaustible, volatile, uncertain and largely originate from external demand (Sturm et al., 2009). Therefore, Bahrain is highly exposed to external shocks such as oil shocks. Literature on small states,9 suggests that those countries are very vulnerable to external events and face major challenges. They are heavily exposed to the global market behavior and have limited diversification opportunities because of their small domestic markets (World Bank, 2000). Secondly, Bahrain has a limited monetary policy because of the dollar-pegging regime and thus the fiscal multipliers could be weak due to substantial leakages through remittances and imports (Espinoza and Senhadji, 2011). Consequently, to overcome these drawbacks the government of Bahrain should adopt further structural reforms that promote non-oil sector development independently from government spending.10 The government would need to continue its structural adjustment efforts to encourage diversification of the economy,11 to broaden and deepen the financial market and to improve the effectiveness of the public sector. It is well-known that Bahrain is the most diversified economy in the GCC region. However, as oil is an exhaustible natural resource, further diversification of the economy appears to be a must. This would reduce the sudden shock in oil prices and would make the economy less reliant on energy resources. Here, the government has to strengthen its efforts in encouraging the development of the private sector by ensuring proper environment and adequate strategies. The Gulf Cooperation Countries' common plan to implement a large tax system could be a good instrument to reduce the effect of oil price volatility. Further work is needed in terms of automatic stabilizers.