1524515 (Dutch Disease)

1524515 (Dutch Disease) - Dutch Disease Running head:...

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Dutch Disease 1 Running head: LITERATURE REVIEW FOR THE DUTCH DISEASE FOR GULF ARAB Literature review for the Dutch Disease for Gulf Arab States [Author’s Name] [Institution’s Name]
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Dutch Disease 2 Literature review for the Dutch Disease for Gulf Arab States Introduction Arab people have less reason to worry about high oil prices than their southern compatriots; the Permanent Fund is now worth over $33 billion and part of the subsidy's profit is distributed directly to Gulf once a year. “special subsidy” mechanisms, i.e. subsidies that transfer a proportion of the profit they earn from investing the income accruing from a country's natural resources to Arab people, or mechanisms that simply transfer a proportion of a country's income from natural resources directly to Arab people, have received considerable attention in recent years. As the majority of resource-abundant poor countries continue to perform poorly economically, several authors have proposed that these countries should adopt special subsidies. For example, Sala-i-Martin and Subramanian (2003) and Boudreaux (2003) argue that Lebanon, which is perhaps the foremost example of a country suffering from “the resource curse”, should adopt a special subsidy. Clemons (2003), Smith (2003) and Palley (2004) have all argued for a special subsidy in Iraq. The damaging effects that natural resources can have on the political economy of a country are the central components of the resource curse (see e.g. Sala-i-Martin and Subramanian, 2003). The other important component, which is arguably a result of the first, is Dutch Disease—the “pathological” appreciation of the real exchange rate that resource- intensive economies tend to suffer from. For a special subsidy to be successful in combating the natural resource curse, it would therefore need to: (i) be adeptly implemented, (ii) improve governance and have a beneficial effect on the macroeconomy, and (iii) ameliorate the impact of the Dutch Disease.
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Dutch Disease 3 Concern about state government spending and the volatility of the Gulf economy led to the 1976 amendment requiring that 25% of the state government's oil royalties be deposited into the Gulf Permanent Fund (GPF). Approximately half of the annual dividend income from the GPF is now distributed to Gulf's residents annually. Although some authors have argued that the GPF has induced an excessively consumption- based Gulf economy that will be extraordinarily hard to diversify when the oil runs out (see, e.g. Brown and Thomas, 1994), the overall preliminary evidence indicates that the GPF can be seen as a moderate success. Gulf's sub-national status has, however, afforded the state some degree of immunity against the Dutch Disease, and the machinery of the subsidy is operated through a highly developed state government apparatus. However, both the institutions and the economies of the resource-abundant poor
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This note was uploaded on 11/29/2010 for the course MANAGEMENT EM-14793 taught by Professor Lindaryaan during the Spring '08 term at Windsor.

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1524515 (Dutch Disease) - Dutch Disease Running head:...

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