The Political Economy of Macroeconomic Policy in Resource-Rich Arab Economies

Revisiting the macroeconomic policies and outcomes of Arab resource-rich economies (RREs), this chapter synthesizes the political economy considerations that underpin policy choices. It argues that, in the context of Arab RREs, fiscal policies play a particularly important role in absorbing natural resource rents. Even where monetary policy has greater room to operate, existing policy frameworks are not geared toward domestic targets, such as inflation and unemployment. I argue that the political objective function is essential for understanding these macroeconomic arrangements. With weak productive constituencies and few institutional constraints, macroeconomic policy involves limited feedback from the private sector and upholds the interest of the sovereign. In this milieu, institutional constraints on fiscal policy are more important than central bank independence (CBI). The chapter also discusses the stability implications of current macroeconomic arrangements, arguing that such stability is almost entirely predicated on the uninterrupted flow of oil rents rather than resilient institutional structures.