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Institutions and Macroeconomic Policies in Resource-Rich Arab Economies$
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Kamiar Mohaddes, Jeffrey B. Nugent, and Hoda Selim

Print publication date: 2019

Print ISBN-13: 9780198822226

Published to Oxford Scholarship Online: July 2019

DOI: 10.1093/oso/9780198822226.001.0001

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Fiscal Institutions and Macroeconomic Management in the United Arab Emirates

Fiscal Institutions and Macroeconomic Management in the United Arab Emirates

Chapter:
(p.356) 12 Fiscal Institutions and Macroeconomic Management in the United Arab Emirates
Source:
Institutions and Macroeconomic Policies in Resource-Rich Arab Economies
Author(s):

Raimundo Soto

Publisher:
Oxford University Press
DOI:10.1093/oso/9780198822226.003.0012

The UAE has seemingly escaped “the natural resource curse”: it is one of the richest countries in the world and ranks comparatively highly on business environment, infrastructure, and institutional development. Symptoms of the curse can nevertheless be found in the very low growth in labor productivity, massive public sector overemployment, and the inability to counteract instability induced by oil price cycles. This chapter shows that fiscal policy is highly ineffective as a countercyclical tool due to the absence of income and ad-valorem taxes. Stabilizing instruments—such as open-budgeting procedures or fiscal rules—are notoriously absent. Why would a country design its fiscal, monetary, and exchange rate policies so that they allow for high levels of pro-cyclicality, thereby hampering efficiency and long-run growth? A political economy explanation is developed whereby weak fiscal institutions are an agreed-upon mechanism to secure political stability and transfer oil wealth among emiratis and to future generations.

Keywords:   fiscal policy, oil price cycles, pro-cyclicality, political economy, natural resource curse, weak fiscal institutions

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