Abstract
This study examines how negative oil shocks (due to the oil boycotts) could affect the military expenditure and the quality of democracy in the oil rentier states of Middle East by applying the annual date from 1990 to 2017. I use both economic and political variables in a panel vector autoregressive (PVAR) model of oil boycotts. The estimated PVAR models show significant impacts of oil boycotts both on key economic factors (government revenues, defence and non-defence expenditures) and on the different indicators of the political system.
Using panel impulse response functions (PIRFs) and a panel variance decomposition analysis (PVDC) based on the estimated PVAR model, the findings indicate that the responses of political institutions and different indexes of democracy such as electoral, liberal, participatory, deliberative, and egalitarian democracy to decreases in oil rents are positive and statistically significant, whereas the response of military spending is negative and significant. Moreover according to the results of the variance decomposition analysis the variations in oil rents and political situation explain considerable parts of the variation of defence expenditures in the Middle Eastern countries implying that defence expenditures are considerably influenced by oil rents fluctuations and the quality of political system in the Middle East. These results are not sensitive to different proxies for oil abundance (such as fuel exports and amount of oil production) and different indicators of political institutions (V-DEM democracy indexes and polity2), as well as different orderings of variables in the panel VAR system.
Keywords
Middle East, oil rents, democracy, sanctions, military expenditures, Panel-Vector Autoregressive model
JEL: F51, F13, F14
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Sajjad Faraji Dizaji is an Assistant Professor of Economics at Tarbiat Modares University of Iran and Post-Doctoral Fellow of Gerda Henkel Foundation in Germany. His research interests focus on economic sanctions and conflicts, international economics, political economy of oil exporting countries and energy economics. He holds a PhD in Economics from Tarbiat Modares University and has the experience of being a visiting researcher in other international institutions, such as the Institute of Social Studies (ISS) at the Erasmus University of Rotterdam and the Center for Near and Middle Eastern Studies at Philipps University of Marburg. He has authored and co-authored several books and book chapters and published in more than 20 refereed national and international journals, including Journal of Peace Research, Economic Modelling, International Tax and Public Finance, and Empirical Economics, among others. His most recent research project has been awarded the Gerda Henkel Foundation fellowship and is dealing with the impact of sanctions on conflict and defense expenditures.