This research work was supported by the German Agency for International Cooperation GIZ (Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH) and implemented in cooperation with the Iraqi Economists Network. The activity is part of the GIZ project Private Sector Development (PSD) which is being implanted in Iraq since 2018. The objective of this particular activity is to upgrade research and publication capabilities of junior Iraqi economists and scholar and to enabling them participating on the scientific economic discourse in their home country. Ultimately, the activity aims at building new capacity for the preparation of the policy decision making process leading to improved formulation of economic policy measures, which contribute to reduce unemployment and to enhance the role of the Iraqi private sector in achieving sustainable development. The author of this paper was coached and supervised by Dr Barik Schuber.**
This research paper aims at explore the strategies and plans which natural resources-rich countries, such as Norway and Botswana have followed in order to avoid the oil curse and to what extent these strategies and plans can be applied in Iraq. Furthermore, the paper aims to show to what extent oil, quality of institutions (QI), and diversification in Iraq can be linked to economic growth.
Panel data analysis over the period 1995-2018 for (17) oil-rich countries as proxy for data of Iraq has been used to test the linear and non-linear impact of oil rents on economic growth, to examine the main symptoms of the resource curse phenomenon by using two systems: Generalized Method of Moments (GMM) estimator and Fixed Effects (FE) models. The findings of both systems indicate that the economic growth in Iraq is greatly and positively influenced by oil rents. Thus, our results confirm the classical theory that abundant natural resources could promote growth, since resource richness can give a “big push” to the economy through more investment in economic infrastructure. By these results, any resource-rich country must attain higher growth rates. Therefore, we reject the resource curse hypothesis introduced by Sachs and Warner (1995, 1997a, 1997b, 1999, 2001) and Murphy (2000). On the other side, we see that the phenomenon of resource curse in Iraq is a consequence of poor quality of institutions and bad strategies, as our results showed. In fact, the financial resources that come from the sale of oil in Iraq are not directed to investment in infrastructure, like Norway and Botswana, but they are directed to salaries, wages, with this attitude, Iraq cannot avoid oil curse like Norway and Botswana. Moreover, our data has been diagnosed with resource curse when we take into account the interaction terms between oil and each of the (QI) indices. We found out that if the (QI) indices reach certain limits, oil rents will start to create negative impact on growth. This result seems to confirm the theory of the natural resource curse, and to confirm that Iraq is associated with poor (QI). The results, correspondingly, show that diversification (DIV) has been frustrated by oil rents because economy of Iraq depends on oil rents, which encourage rent-seeking activities, but the multiplicative interaction terms between (QI) and oil rents indicate that the combined effect of these two variables is an effective factor to promote economic growth.
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