Oil States, the Private Sector, and the Political Economy of Policy Reform

This dissertation examines the effect of oil wealth on a country's business environment and government policymaking towards firms and entrepreneurs. It begins with a game theoretic approach that derives hypotheses about business environment reforms given the interests of the government, elite entrepreneurs, and non-elite entrepreneurs. The first hypothesis holds that as oil income increases, the level of business environment reforms should decrease. Quantitative tests then conclude that higher oil income does lead to higher regulatory and financial barriers to non-elite entrepreneurs. A historical narrative of Iran further helps to illustrate this effect and also verifies the underlying logic of the game. A second hypothesis predicts that, given a situation of high oil income, the level of business environment reforms should be highest when elite entrepreneurs perceive low political uncertainty. A narrative of Saudi Arabia is used to test this hypothesis. I argue that Saudi Arabia's business environment reforms since the 1990s were possible due to enduring political stability and a dynastic system of rule which provided a credible commitment to elite entrepreneurs. Next, I examine the broader implications of this effect of oil on the business environment. I hypothesize that higher regulatory and financial barriers in the business environment should result in fewer new firms entering the market and less competition, which should have a corresponding downward effect on innovative activities overall. Quantitative tests confirm this hypothesis using a range of indicators of national innovation rates, such as data on patents and high-technology exports. Overall, this dissertation adopts a different approach to studying the economic effects of oil wealth than those typically found in the "resource curse" literature. For one, unlike existing work on the private sector in oil dependent countries I unpack the private sector into its elite and non-elite components. Additionally, I focus on variables that are critical for long-term economic development but have not been extensively examined by scholars of resource wealth, such as government regulation, entrepreneurship, and a country's business environment.