The impact of negative oil shocks on military spending and democracy in the oil states of the greater Middle East: Implications for the oil sanctions

Abstract

This study examines how negative oil shocks affect military expenditures and the quality of democracy in the oil rentier states of the greater Middle East using annual data from 1990 to 2018, inclusive. The theoretical analysis suggests that a reduction in oil revenues decreases the government spending on patronages and public goods and may challenge the political power of the incumbent leader. The results of the impulse response functions based on the estimated panel vector autoregressive models indicate that the responses of the military burden and non-military expenditures (as a percentage of GDP) to negative oil shocks become negative and statistically significant after three to four years. Reductions in the financial capability of a rentier government and spending on patronages improve the political environment and quality of democracy. However, this political improvement takes some time to develop as the government may resist the reduction in its expenditures during the initial phase of oil shocks. The policy implication of these results is informative for organizations and policymakers interested in the security and political impact of oil sanctions. Restrictions on oil exports decrease the military spending of the oil rentier states and improve their democracy indices in the long run, although the short-run impacts can be negative. These results are not sensitive to different proxies for oil abundance, alternative data on military expenditures, different indicators of democracy, and different groups of oil-dependent countries.