Impact of Oil Revenues on Economic Growth in Iran with Emphasis on Variations in Institutional Quality

Oil-rich countries, including Iran, have acquired enormous windfalls from oil exports during last decades. These earnings have affected economic growth of the oil-endowed countries both directly and indirectly through changing governments’ intervention/influence in social and political fields and reducing institutional quality and increasing political risks. In this paper, using a simultaneous equations model for Iran’s economy, we study the impact of oil revenue on institutional quality, on the one hand, and the impact of institutional indexes on economic growth, on the other hand. The results indicate that oil has been used as a tool for political governance in Iran over the period 1984-2012. In other words, the increase in oil revenues through reducing institutional quality and increasing political risks has lowered the economic growth.