Colonization’s Influence on Economic Growth Essay.
While studies of the impacts of natural resource export revenues in developing
economies have traditionally laken the Dutch disease thesis approach, more
recent studies have emphasised the role of export revenues on institutions. Colonization’s Influence on Economic Growth Essay.
However, colonial heritage may have had a long-lasting infiuence on ex- colonies’ economic performance, and this alternative hypothesis has not been adequately tested. This study emphasises the long-lasting effects of colonisation on contemporary economic performance among Middle Eastern and North African (MENA) countries, exploring through a cross-country growth
model whether colonial imprints have had lingering negative effects on the region. Results show that contemporary growth patterns tend to be infiuenced by variations in historical government expenditures, trade openness and populalion changes. However, historical investment expenditures and oil
Ali Abderrezak is Associate Professor of Economics, Cumberland University, TN, USA. The author is grateful to Dr. F.K. Vinlove for many valuable suggestions.
The Journal of North African Studies, Vol.9, No.3 (Autumn 2004) pp.lO3-l 12
ISSN 1362-9387 print/1743-9345 online
DOI: 10.1080/1362938042000325831 © 2004 Taylor & Francis Ltd.endowment do not exhibit a positive influence on contemporary growth levels.
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Furthermore, the long-lasting influence of colonisation has weakened over
more recent years, perhaps because various reform initiatives produced
some structural changes in MENA economies.
The MENA region offers an interesting case study given its long colonial
heritage, its significant natural resource endowment and its relatively poor
economic performance. Despite a remarkable wealth transfer that has benefited hydrocarbon-rich MENA countries over the last three decades, low
growth rates remain a major obstacle to the region’s long-awaited development aspirations. Judging from Table I below, it is difficult to dispute the
notion that hydrocarbon riches have not enhanced economic growth for contemporary MENA countries. For instance, since the mid-1980s, growth performance in the region has been deteriorating and consistently below
expectations; growth rates have averaged below even those of natural
resource-poor developing countries. Furthermore, these performance levels
have been further exacerbated since the downturn in the international oil
market. Lagging structural economic and political reforms and high population
growth combined with a failure to join up effectively with the global economy
are often cited as reasons for the sagging state of economic affairs in the region.
The remainder of the article is organised as follows. First, it provides a brief overview of growth-related literature. The article then suggests a theoretical framework for a historically rooted thesis hypothesising that colonial
heritage has had a long-lasting influence on the economic performance of
the MENA region. Next, it introduces the data and statistical model. After
this, it discusses the main empirical findings regarding the relation linking. Colonization’s Influence on Economic Growth Essay.
Developing Countries
MENA
(20 countries)
MENA Oil-producers
(9 countries)
MENA Non oil-producers
(11 countries)
Average Crude Oil Price
(1995= IOO)
Ten-Year Averages
(1983-92)
4.70
3.46
(2.46)*
2.67
(2.56)
4.10
(2.30)
123.2
(32.7)
Eight-Year Averages
(1993-2000)
5.56
3.90
(2.11)
4.30
(2.28)
3.58
(2.00)
105.0
(30.3)
(*) Standard deviations are in parentheses.v Colonization’s Influence on Economic Growth Essay.
Source: Computed from IMF figures.contemporary economic growth to historical indicators. Finally, it concludes
and summarises.
The Literature
Following decades of wide-ranging but mostly unsuccessful economic devel-
opment strategies, the hydrocarbon-rich MENA region remains a puzzling
case for economic growth theorists. Early analyses, including Roemer,
Neary and Van Wijnbergen, and Gelb, documenting and assessing the conse-
quences of hydrocarbon revenues on development policy and macroeconomic
performance, were principally inspired by the Dutch disease hypothesis.’ The
latter refers to Holland’s experience with the economic distortions and deindustrialisation believed to be the outcome of the country’s substantial gas
export revenues of the 1960s. According to this hypothesis, times of boom would tend to diminish the value of tradable goods, leading to a greater dependence on natural resource export revenues and a lessened potential to export other goods. Such structural adjustments would raise the value of the country’s
currency, resulting in a loss of competitiveness for manufactured goods, a strengthening of its import sector and a weakening of its export sector, and
subsequent deindustrialisation of the economy. Although often cited as the
cause for failure of development strategies in the MENA economies, the
Dutch disease thesis may not explain the region’s severe economic imbalances
given the lack of industrialisation and competitiveness of its member states.
Perhaps more relevant to natural resource-rich developing economies are approaches such as Mahdavi’s original formulation of the rentier state thesis.^ The latter argues that rentier governments endowed with hydrocarbon
resources and substantial revenues from their exports need not rely on traditional tax revenue sources such as income or property taxes and thus
feel less accountable to their citizenry. Colonization’s Influence on Economic Growth Essay.Rather than promoting sustainable
economies, these governments become singularly preoccupied with self-preservation. Steady inflows of oil rent permit these governments to offer
generous social benefits, opportunities of employment in artificially inflated
public sectors, reduced individual tax burdens, heavy subsidies on consumer
goods, and regular payments to citizens based upon annual oil revenues.
Intended to perpetuate rentier governments, these policies lead to major
macroeconomic distortions and a failure to industrialise, a similar outcome
to that of the Dutch disease.
Recent contributions to the literature include Karl, who promotes a ‘structural contingency’ thesis that oil-generated capital flows lead governments to
enact popular policies detrimental to long-term economic development prospects.” Furthermore, the institutionalisation of such policies during times
of prosperity would make it difficult for governments to take on the necessary Structural adjustments in times of recession. Invoking the historical aspect of
colonialism and its influence on the African continent, Barro shows that a
dummy variable for sub-Saharan Africa exerts a significant and negative
effect on the average growth of per-capita GDP for the 1960-85 period.’*
Growth literature supporting Barro’s findings includes Collier and Gunning,
and Elbadawi and Ndulu, among others.^ Grier examines the effect of religion
on growth and development using a cross-national study of 63 former colo-
nies.^ He concludes that former French and Spanish (Catholic tradition) colo-
nies performed significantly worse than British (Protestant) former colonies,
and that Protestantism was positively correlated to real GDP growth and
real per capita GDP levels.
A recent institutional thesis is proposed by Chaudhry, who contends that
exogenous shocks provide opportunities for institutional reconfiguration in
underlying business-government pacts.^ Chaudhry offers the rise in the inter-
national oil market in the 1970s and its subsequent decline in the 1980s as a
case in point. The exogenous shock, she argues, helped reshape the economic
institutions and economies of oil-dependent countries in two extremely diver-
gent cases: the oil revenue-dependent Saudi Arabia and the labour remittance-
dependent Yemen. During times of boom, when Saudi oil rent financed its
government budget, thus contributing to an overgrown centralised bureaucracy, Yemeni labour remittance financed the country’s private sector. Later,
when oil prices plummeted, Saudi revenues dropped and so did Yemeni
workers’ remittance. However, subsequent reform efforts proved more successful in Yemen than in Saudi Arabia. Chaudhry believes that the relative
lack of support from the heavily state-supported Saudi business community
was responsible for the contrasting results of the two countries.
Colonial Heritage and Contemporary Economic Growth
tn the historically centred assessment of the economic impact of colonial rule,
two major views stand out. The dominant view, embodied in the ‘drain of
wealth’ thesis, regards colonisation as a phenomenon that was particularly
detrimental to the colonies. This thesis stresses the systematic extraction of
economic surplus to the benefit of metropolitan centres, which led to impoverishment, distortion and ultimately to chronic economic underperformance.
The alternative view, advocated by the ‘modernisation’ thesis, emphasises
the role of integration of the colonies into the world economy, and thus rela-
tive improvement in their economic conditions. In particular, this thesis
suggests that colonisation was decisive in attracting foreign capital and conse-
quently economic growth and development in these otherwise unattractive
economies. For instance, the development gap between Japan and its colonies,
Taiwan and Korea, was believed to be small.Expanding on the ‘drain of wealth’ view, the historically centred thesis in
this study suggests that colonialism not only distorted MENA’s economies, it
imprinted institutions into their economies as well. Furthermore, these colonial
imprints are believed to have a long-lived infiuence on economic performance
extending beyond the formal end of colonial rule. Over the course of colonisa-
tion, the systematic surplus repatriation from the colonies to the metropolitan
centres – including natural resources, profits, interest payments on loans, sal-
aries and pensions – is believed to have had a significant, unfavourable impact
because it reduced the colonies’ capital formation and accumulation, thus
adversely affecting their economic growth potential. Embodied in key histori-
cal indicators, the infiuence from the colonial years is expected to extend to and
consequently correlate with measures of contemporary economic performance
long after formal colonial ties were severed. Furthermore, with weak capital
formation likely to persist beyond the formal end of colonial rule, economic
growth and development potentials would suffer.
With respect to economic distortions and their implications on MENA’s
growth prospects, it is suggested that the direct exploitation of colonies in
the form of heavy taxation, tariffs and restrictions on international trade and
foreign direct investments severely distorted colonial MENA’s economies.
Also, slow, progressive restructuring and re-adaptation of these economies
and their institutions is necessary, because in the nineteenth century they
were patterned from the vantage point of the metropolitan centres. To sum-
marise, colonial legacy is believed to have had a long-lasting, adverse influ-
ence on growth and development potential of the region, and such effects
will persist until comprehensive structural reforms are enacted.
Data and Model
To test the historically based thesis, data from the MENA economies capture
ample heterogeneity in terms of economic performance levels and varying
degrees of natural resource endowment and colonial incursion. However, to
conduct such an analysis, data limitations are particularly acute given that
cross-country contemporary economic growth variations are analysed
against variations in historical economic indicators that are decades old.
The Data
To assess the historical effects of colonisation on economic growth, data on
indicators must be obtained from the 1950s and 1960s, an era marking the
formal end to colonial rule for most of the 20 MENA countries in the
sample.** The relevant economic indicators are defined by Heston and
Summers and may be found in the Penn World Tables 5.6.^ Contemporary
economic growth data for all 20 MENA countries in the study are found in diverse IMF sources, including various issues of the IMF’s International
Einctticictl Statistics Yearbooks.’°
When historical indicators do not correspond exactly to the independence
date for a given MENA country, that is, the political independence date pre-
cedes the earliest available data point, the earliest available indicator is used
as a proxy. For instance, the end of British colonial rule in Egypt is 1922,
but the earliest available historical indicators found in Heston and Summers
begin in 1950, and so data beginning in 1950 are used to estimate the
model. However, Algerian indicators from 1962, the formal end of the
French colonial rule, are employed even though earlier data are available.
Also, countries from the MENA region such as Iraq, Lebanon and Libya
have not been incorporated in the study because of inadequate data.
The selected historical indicators are: (I) real GDP per capita in constant
dollars (chain index) using 1985 international prices; (2) investment share (per
cent) of GDP, using 1985 international prices; (3) government share (per cent)
of GDP, using 1985 international prices; (4) openness, defined as exports plus
imports over real per capita GDP, using current international prices; (5) population in thousands; and (6) a dummy variable D to capture the influence of
hydrocarbon endowment among MENA members. The model attributes to
D a score of one if the country is a major oil producer and zero otherwise. Colonization’s Influence on Economic Growth Essay.
Finally, to determine contemporary growth rates (the dependent variable),
average annual real GDP growth rates are computed over three time
periods: 1983-2000, 1983-92 and 1993-2000.
The Statistical Model
To formalise the historically based thesis of the study, consider the following
cross-country regression model assessing the infiuence of key historical indi-
cators on the contemporary economic growth performance of 20 MENA
region economies:
‘og(yi,/yi,_i) = ao + ai log(yiJ -t-SA log(Xi,_j) -t- yD + ej (I)
where log (yit/yn-i) is the average annual growth rate in real GDP of country i
in the sample, yi, is contemporary real GDP, yi,, is historical real per capita
GDP level for the ith country at ‘rebirth’, Xi,_j is a set of relevant historical
indicators capturing the colonial heritage of each country at its ‘rebirth’
date, D is a qualitative or dummy variable, and e^ represents the error term.
With the historical indicators identified above, the suggested growth model
may be represented by the following linear regression model:
i,_j)-I-;
log (Ti,_j) + /34 log (Pi,_j) + yD + Si (2)
where I, G, and T, respectively, represent historical investment, government,
and trade expenditures as ratios of real GDP, and P represents historical
population levels in the MENA region. Colonization’s Influence on Economic Growth Essay.
The model’s hypothesised relations are as follows: (1) negative and significant «! coefficient estimates will show statistical evidence indicating
growth convergence to the steady state level;” (2) positive and significant
/3i coefficient estimates will reveal evidence that historical investment expenditures (strategies) have resulted into higher contemporary growth performance, and vice versa; (3) positive and significant ^2 coefficient estimates
will provide evidence that historical government expenditures (policies)
have promoted higher contemporary growth rates, and vice versa; (4) positive
and significant /33 coefficient estimates indicate that historical trade policies
have led to higher growth rates, and vice versa; (5) positive and significant
IB4 coefficient estimates reveal evidence that a beneficial growth effect has
been realised as a result of historical demographic policies, and vice versa;
and finally (6) significant and positive y coefficient estimates will support
the argument that MENA oil producers have enjoyed an economic growth
advantage due to hydrocarbon endowments. Colonization’s Influence on Economic Growth Essay.
Empirical Results
The empirical results of the cross-country regression model are summarised in
Table 2 below. The three model estimations are based on the duration used to
determine the dependent variable, growth rates. When selecting annual growth
rate averages over the 1983-92 time period, the generalised least squares estimates indicate that overall historical indicators have had a significant influence on contemporary economic growth. First, the significance of the
coefficient estimate for ai shows a tendency of slow growth convergence to’
a steady state (less than one per cent per year) in the region. Second, the statistical insignificance of/3| estimates indicates that colonial investment expenditures have not had an expanding influence on growth in post-colonial
MENA economies. Third, the marginal statistical significance of ^2 estimates
suggests that historical government expenditures have had only a minor positive influence on contemporary growth in these countries. Fourth, colonial
trade policies in MENA have had a detrimental impact on contemporary economic growth as indicated by the negative and statistically significant coefficient estimates of ^2- Fifth, the negative and statistically significant
coefficient estimates for /34 suggest that variations in historical population
levels also have had a negative influence on contemporary economic
growth in the region. Finally, the statistical insignificance of the y estimate
suggests that hydrocarbon-endowment has not had a noticeable influence on
contemporary growth performance among MENA members. Colonization’s Influence on Economic Growth Essay.
PERCENT CHANGE)
Constant
Log(y())
log(Inv)
log(Gov)
Uog(Open)
Log(Pop)
D(Oil)
Adj. R^
Obs.
la
(1983-2000)
19.60
(2.58)’
-0.46*
(-1.63)
0.09
(0.12)
0.97
(1.52)
-2.55*
(-3.02)
-0.83*
(-2.46)
.21
20
Ib
(1983-2000)
22.34
(2.98)
-0.95*
(-2.21)
-0.07
(-0.10)
1.32*
(2.05)
-2.49*
(-3.09)
-0.89*
(-2.79)
1.01
(1.45)
.22
20
Ila
(1983-92)
23.03
(2.06)
-1.21*
(-2.73)
0.18
(0.16)
1.06
(1.13)
-2.29*
(-1.78)
-0.81
(-1.59)
.29
20
lib
(1983-92)
28.24
(2.64)
-2.11*
(-3.33)
-0.08
(-0.08)
1.66*
(1.78)
-2.17*
(-1.82)
-0.94*
(-1.99)
1.91′
(1.85)
.34
20
Ilia
(1993-2000)
15.71
(1.45)
0.41
(0.99)
-0.06
(-0.05)
0.75
(0.82)
-2.74*
(-2.25)
-0.84*
(-1.75)
.26
20
Illb
(1993-2000)
14.98
(1.29)
0.52
(0.77)
-0.02
(-0.02)
0.66
(0.66)
-2.74*
(-2.16)
-0.82*
(-1.62)
-0.23
(-0.21)
.29
20
(1) t-statistics are in parentbeses.
(*) indicates statistical significance at, at least, ten percent.
When the same cross-sectional growth model is rerun with growth rates
averaged over the 1983-92 time period, the main statistical findings generally
are the same. The latter capture a relatively larger and stronger growth conver-
gence (over one per cent per year) toward a steady state in the MENA region.
The results also substantiate the earlier conclusion that variations in colonial
investment expenditures have not had an expansionary role on contemporary
growth. A weakening of the influence of government expenditures on growth
performance is also detected in the statistical findings. Moreover, trade pol-
icies and population variations have had negative, though minimal, influence
on contemporary growth performance in the region. Finally, oil-rich MENA
countries have had only a marginal growth advantage as a result of their
riches over the 1983-92 time period. These statistical conclusions are sum-
marised in regression formulations Ila and lib in Table 2 below.
When the cross-country growth regression model is estimated using con-
temporary but relatively more distant (from ‘rebirth’ years) growth rates aver-
aged over the 1993-2000 time period. The statistical results, reported in
Table 2 using formulations Ilia and Illb, show a tendency to change substantially. Colonization’s Influence on Economic Growth Essay.First, the insignificance of ai estimates indicates that the model loses its
growth convergence toward a steady state. Second, while colonial investment
strategies continue to have a non-expansionary influence on contemporary growth, colonial trade policy variations have a persistently detrimental effect
on contemporary growth in the MENA region. Third, the regression results
also reveal that variations in historical government expenditures and oil
riches have had no significant influence on growth variations in these more
recent years.
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Finally, it is important to note that while colonial investment expenditures
have had no expansionary influence on contemporary growth, colonial trade
strategies emerge as a historical indicator that has had a persistently contractionary effect on growth performance in MENA countries. Moreover, a comparison of regression specifications II and III in Table 2 shows that the analysed growth relationship may have experienced a structural change,
namely a weakening over more recent years. This would indicate that colonial influence, imprinted in historical indicators, may have progressively lessened as a result of various attempts by MENA governments structurally to
change their economies, especially that duration since independence, as indicators did not seem significantly to impact growth performance (results not
shown in Table 2). Colonization’s Influence on Economic Growth Essay. Also it is important to note the relatively neutral influence
hydrocarbon riches have had on contemporary economic growth in the
MENA region.
Summary and Concluding Remarks
Mostly known as oil-wealthy economies, MENA countries have consistently
shown classical symptoms attributed to oil rentier states: heavily distorted
economies, chronic political unrest and undemocratic governments. The
Dutch disease thesis is often used to explain the observed inverse relation
linking economic performance to natural resource endowment in these
countries. Using a historically rooted approach, this study examines an
alternative thesis suggesting that economic institutions in these countries
were imprinted at the time of their ‘rebirth’ or decolonisation by conditions
with long-lasting influence on economic performance.
The study’s statistical evidence offers substantive support for the above
thesis, namely that cross-country variations in contemporary economic
growth have been influenced by MENA’s ‘rebirth’ conditions through variations in historical indicators such as government, investment, population
and trade strategies. In particular, the model identifies colonial investment
expenditures as having had no expansionary influence on contemporary
growth, while colonial trade strategies have had a persistently contractionary effect on contemporary growth. The statistical evidence also reveals a weakening of this relationship over more recent years, an outcome that may be
attributed to economic reform initiatives undertaken since the major oil
market downturn of the late 1980s. These structural reforms include varying degrees of phasing out of price controls, liberalisation of trade and introduction of some flexibility in foreign exchange rates. Perhaps because the relative
success of these monetary and fiscal adjustments did not measure up to high
expectations, the political commitment to these reforms may have waned in
the region, thus further complicating the participation and integration of the
MENA region in the larger global economy. Colonization’s Influence on Economic Growth Essay.
NOTES
1. M. Roemer, Dutch Disease in Developing Economies, paper no. 156 (Cambridge, MA:
Harvard Institute for International Development 1983); P. Neary and Van S.V. Wijnbergcn
(eds.), Naturai Resources ami the Macroeconomy (Cambridge, MA: MIT Pre.ss 1986);
A. Gelb, Oil Windfalls: Blessing or Curse? (New York: Oxford University Press for Ihe
World Bank 1988).
2. H. Mahdavi, ‘The Patterns and Problems of Eeonomic Development in Rentier States: The
Case of Iran’, in M. Cook (ed.). Studies in Economic History of the Middie East (Oxford:
Oxford University Press 1970).
3. T. Karl, The Parado.x of Plenty (Berkeley: University of California Press 1997). Colonization’s Influence on Economic Growth Essay.
4. R.J. Barro. ‘Economic Growth in a Crcs.s-Section of Countries’, Quarterly Journal of Econ-
omics \06 (m\) pp.401-44.
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5. P. Collier and J.W. Gunning, ‘Explaining African Eeonotnie Performanee’, Journai of Econ-
omic Literature 37 (1999) pp.64-111; P. Collier and J.W. Gunning, ‘Why Has Africa Grown
Slowly’, Journal of Economic Perspectives 13 (1999) pp.3-22; I. Elbadawi and B.J. Ndulu.
‘Long-Term Development and Sustainable Growth in Sub-Saharan Africa’, in M. Lundahl
and B.J. Ndulu (eds.). New Directions in Economic Deveiopment (London: Allen and
Unwin 1996).
6. R.M. Grier, ‘The Effeet of Religion on Economic Development: A Cross National Study of 63
Former Colonies’, Kykios 50 (1997) pp.47-62.
7. K.A. Chaudhry, The Price of Wealth: Economies and Institutions in the twiddle East (Ithaca,
NY: Cornell University Press 1998).
8. The 20 MENA countries, grouped together for analytical reasons only, included in the study
consist of Algeria, Bahrain, Djibouti, Egypt, Iran, Jordan, Kuwait, Malta, Mauritania.
Moroeco, Oman, Pakistan, Qatar, Saudi Arabia, Sudan, Syria, Tunisia, Turkey, United
Arab Emirate and Yemen.
9. A. Heston and R. Summers, Penn World Tables 5.6 @ CHASS, 1998. CHASS Data Center,
University of Toronto.
10. International Monetary Fund, International Financial Statistics (IES) Yearijooics. various
issues. (IFS), Washington DC.
11. Underthe assumption of diminishing marginal returns to capital, the lower the initial level of
income the greater the opportunity of catching up through higher rates of capital accumulation
and diffusion of technology. Colonization’s Influence on Economic Growth Essay.