To understand why states rich in natural resources have such poor economic growth records, economists invoke two complementary theories. The “Dutch disease” is the macroeconomic factor: Resource earnings that accompany the sale of a natural resource cause a country’s currency to appreciate, making its other products less price competitive on the global market. “Rent seeking” is the microeconomic factor: Rather than engage in productive economic activity by creating new wealth, economic players pursue benefits from the government.
Mazaheri, a political science professor at Tufts, provides an important supplement to these standard views. He demonstrates that resource windfalls—especially through oil production—not only enrich business elites but amplify their determination to block entrepreneurs and new businesses from enriching themselves. Simultaneously, they dampen policy makers’ interest in reforms that might create a better business environment for small and medium enterprises. He offers a good theoretical argument for why this can be expected, grounded in solid empirical evidence.
The heart of Mazaheri’s account is provided in separate chapters presenting three intriguing cases. In Iran, the Islamic Revolution brought in a new elite but maintained the shah’s policy of enriching the well-connected few at the expense of the many unprivileged businessmen. Similarly, in India’s western coal-mining belt, which produces the energy-equivalent of five million barrels of oil a day, the elected local government of Jharkand province maintains the same kind of elite-privileging policies found in autocratic, oil-producing countries with comparable harmful results for smaller businessmen. Surprisingly, Saudi Arabia has a business environment that is quite friendly to the average businessman. Mazaheri argues that the stable Saudi monarchy reassures business elites their profits will be protected. As a result, those elites do not feel threatened by the reforms that have opened opportunities for small and medium-size enterprises.
The author’s policy conclusion is that a stable political system, such as that in the Persian Gulf monarchies, is better for economic reform that benefits ordinary businesspeople.
