from the price and production volatility or ―rentier‖ revenues. The revenue volatility associated with resource revenue dependence has seen significant emphasis placed on smoothing revenues through stabilization mechanisms, as well as savings mechanisms.<sup>24</sup> Fiscal institutions can help discipline both aggregate public expenditure management choices, but more generally set the framework for medium term prioritization and enhancing the quality of rent dissipation in resource rich settings. A ―voracity effect‖ has been associated with the significant revenue volatility and a periodic ratcheting up of various distributional demands in resource dependent settings (Tornell and Lane 1999).

64. But the particular forms of rent dissipation in MENA to-date could perhaps be better described as low level equilibria, where rent distribution has been a central element of the state-society compact coupled with a notably degree of stability. Admittedly the level of resource rent flows, and existing proven endowments and associated financial savings, varies significantly across the region. Hence it is difficult to generalize the relationship between fiscal challenges, prevailing political economies, and conflict risk. Given prevailing resource endowments, a key strategic question for MENA countries entering potential phases of transition is whether fiscal institutional arrangements that align to both increased inclusiveness and inter-temporal credibility dimensions are in place, and whether emerging reform initiatives are actually aligned with more fundamental shifts in the nature of the statesociety compact.

65. The World Bank's Wealth of Nations "balance sheet" approach provides a useful framework for assessing the sustainability of development policies for countries relying on natural resources (Hamilton and Ley 2010; World Bank 2006, 2011a). The approach emphasizes debiting the depletion of non-renewable resources from traditional savings measures, while "crediting" government expenditures on education. Table 7 and Table 8 present these indicators from a cross-regional and MENA specific perspective. The data are subject to a number of missing observations, but highlight the prominence of resource depletion (at 20% of GPD, compared to 4.4 percent of global averages). The region exceeds only Sub-Saharan Africa, although levels are significantly lower there. Where available, the data show significant diversity across countries, but suggest high levels of financial savings and gross public and private fixed capital formation across the region, notably in the petrostates. Education spending is high in the region, although a number of non-resource settings (Tunisia, Israel, Jordan) do better by these measures. A key question of course pertains to the quality and inclusiveness of spending, and its ultimate impact on economic diversification impacts. Various forms of subsidies – from energy, public employment, housing – appear to be important elements of distribution in MENA, for example as denoted by relatively low fuel prices (Table 7 and Table 8, Colum (v)).<sup>25</sup> In Algeria and Iran, for example, housing subsidies amount to the equivalent of 4–6 percent of the GDP, making the

> 24 There is much to be said about mitigating the macroeconomic shocks that periodically afflict oil producers. Also see the discussion in Frankel (2010); the Natural Resources Charter at www.naturalresourcecharter.org; and the concluding chapter of Ross (2012).  For decades, well-meaning economic advisors have urged low-income commodity exporters to adopt some package of ―optimal‖ policies – for example, a combination of fiscal rules and stabilization funds – that seem to have worked in Norway.  Unfortunately, these first-best policies have often failed in countries with weaker governance (Davis et al. 2003; Ossowski et al. 2008).

> 25 Other datasets present this data on the basis of subsidies relative to GDP

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