How Allah's blessing has become the curse of wealth
by Daniel Pipes
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While a quick glance reveals glossy achievement and progress, closer scrutiny shows that Saudi Arabia, Kuwait, the United Arab Emirates, Qatar and Libya are in great danger — danger all the more insidious because it is hidden under an avalanche of wealth.
Let us call these desert countries which have oil and few people, "sheikhdoms" for lack of a more precise word.
Until a generation or so ago, the sheikhdoms existed in a small world circumscribed by the desert and by Islam. They were backwaters—poor, simple places with nothing to offer the industrialized countries, and little influenced by the modern Western world.
The oil riches abruptly thrust them into the centre of the world economy, handcuffing them to it, deluging them with Western culture and giving them startling economic and political power.
Although the sheikhdoms clung to tradition, everything has changed. New wealth has compromised the old social institutions and prompted a dangerous reliance on foreign money, labor and knowledge.
These negative effects are not without precedent. Other windfalls in the past have harmed their beneficiaries.
Gold and silver from the New World made Spain rich in the 16th century but distorted its economy and weakened it in the long run. Peru had a boom in guano (used for fertilizer) in the mid-19th century. Brazil had a rubber boom. These made a few people rich but left no useful legacies.
The trouble with booms is that they typically bring neither sustained economic growth nor cultural improvements. The riches they create are spent with abandon, disrupting normal behavior, fomenting unrealistic expectations and inspiring envy. And all booms come to an end.
In fact, given the oil market's downturn in the past year, permanently static or declining revenues in the Middle East may already be at hand. Market forces have operated very efficiently for the consumers of Middle East oil.
Conservation (in cars, heating, factories) and substitution (domestic oil, natural gas, coal, nuclear fission) have cut deeply into exports from the member nations of the Organization of Petroleum Exporting Countries.
Production, which peaked in 1977 at 31.8 million barrels a day is down to about 15 million barrels a day.
If OPEC nations should raise prices to make up for the smaller volume they would lose still more of the market through conservation and substitution even though they might earn more in the short run. Should OPEC lower prices to increase volume, its members can expect importing countries to sett quotas or import fees to keep consumption down.
Besides the inexorable force of supply and demand, OPEC members face other obstacles to increasing profits: the formation of a counter-cartel by consumers, war in the Persian Gulf and breakthroughs in the efficiency of alternative energy sources.
Profits from the export of petroleum have made many countries dependent on continued oil boom. But no other countries depend as much on oil as the sheikhdoms.
Oil lifted them from penury and it can return them to it unless other sources of income are developed while the opportunity lasts. Unfortunately alternative sources do not look promising.
The sheikhdoms have put aside far less money than they need to live off. Net foreign assets of all Middle East OPEC members come to about $380,000 million, but almost half of this is in private hands.
Sheikh, emir, king and colonel spare no expense to build up their countries' resources in the hope of lessening dependence on petroleum sales. Out of the $88,000 million Saudi budget for 1981-82, $7000 million is used for education. $10,000 million for transportation and telecommunications. $7000 million for development and economic resources, $7000 million for public works and nearly $8000 million for municipalities.
More than a third of State spending is devoted to developing the country's non-oil sectors. But these expenditures are all futile. Oil billions have created a never-never land in which everything is subsidized with unearned money, rendering long-range planning nonsensical.
Human resources are hard to develop in these circumstances. Persian Gulf students overwhelmingly prefer the liberal arts to technical studies and they can expect high paying jobs regardless of their skills and dedication. Within the sheikhdoms, academic standards tend to be low, because an aura of genteel good discourages real competition and achievement.
Large government subsidies shield industry from the hazards of competition and contribute to business mismanagement and labor inefficiency. Great industrial projects symbolize the sheikhdoms' concern for the future: modern and expensive factories now rise out of the sands at unlikely spots.
But the construction and operating expenses in the sheikhdoms exceed comparable costs in the developed countries by about a factor of three.
The sheikhdoms hope that cheap natural gas and oil—which are used both for energy and as feed stock (the raw material for which products as plastic and nylon) will nevertheless make it possible to manufacture products at competitive prices. But haze of plentitude permits inefficiencies that more than make up for the cost advantages of cheap raw materials.
Far from producing income to replace falling oil revenues, these industrial white elephants will do well to break even. Subsidies distort the economics of agriculture and animal husbandry even more drastically. Water and irrigation facilities are supplied by the State with scant regard for commercial feasibility.
What do static or declining revenues mean for the sheikhdom? How will they adjust?
A look at past spending habits may provide a clue to future actions. It was widely expected at the time of each price hike that the sheikhdoms would be unable to spend more than fraction of the money they were about to receive. Indeed, the oil States have shown an unexpected talent in spending money.
In theory, oil States could have spent less than they did, but pressures to use the money to increase welfare have been irresistible, as the fate of Abu Dhabi's sheikh, Shakhbut bin Sultan shows.
Hoping to prevent oil revenues from reaching his subjects and upsetting their way of life, Shakhbut hid the cash received from oil companies under his bed. When mice ate some of it, he put the rest in the bank.
By 1966, Shakhbut's penny-pinching provoked his overthrow. Understandably, no other oil rich rules has sought to emulate him.
The sheikhdoms have made some efforts to reduce the State expenses through retrenchment. Saudi authorities have reached the point of discussing the unheard of idea of making customers pay for services such as water, electricity, garbage removal, and telephones. The Finance Minister of Kuwait has suggested the need for fine tuning in national priorities and postponement of public projects.
But these gestures do not much disturb the people's expectations of riches and well being, and therein lies the tragedy of the oil boom. Not only has it harmed the industrial nations and brought suffering to poor countries, but its most devastating impact which has not yet been felt is reserved for the apparent beneficiaries.
Those who suppose that the sheikhdoms can reduce State spending without dangerous consequences ignore the intricacies of distribution and the power of vested interests. Abandoning programs developed during the past decade would precipitate general discontent.
Rulers have their own priorities, the wealthy elite have others and the citizenry and foreign labor still others. Their interests clash, and each group will resist attempts to cut its favored program.
Rulers buy themselves a significant place in world politics by lending money, giving aid, sponsoring political movements and building military forces. The people gain little from this power, however, and will press for money to pay for housing and rice.
Industrialization retains prestige value. Aluminium and petrochemical plants allow the leaders to claim that they are members of the club of industrialized nations. The belief that the desert factories can turn a profit if properly managed will probably persist, causing the sheikhdoms to spend still more money on them.
As for the agricultural projects, they bestow less prestige than industry but provide some security against food boycotts, and so these also will not be readily abandoned.
Internally, the rulers use their money as a means of maintaining political power. In the topsy-turvy world of the sheikhdoms, governments tax few but distribute money to all. Therefore, the rulers' hold on their States lie largely in their ability to pay out.
Government spending sustains local commerce. According to one estimate, 60 per cent of private business in Saudi Arabia is funded directly by the State. In addition, the government frequently rescues failed businesses. Public construction projects keep many concerns going.
Citizens who involve themselves in business profit from a wide array of advantages underwritten by the State: cheap land, interest-free loans, customs and duty exemptions, tax holidays and freedom from personal income taxes. In a post-boom environment, businessmen accustomed to such pampering are not likely to survive on equal terms with their non-subsidized competitors.
Most people in Saudi Arabia live with their animals and in-laws in drab, pre-fabricated apartments buildings on treeless streets. They are not rich by Western standards. With the exceptions of Kuwait and the United Arab Emirates, the standard of living throughout the sheikhdoms remains low.
Half the Saudi population eats little meat and lives in unsanitary housing. More than three quarters are illiterate, disease is rampant, infant mortality is high and life expectancy is low.
Saudi oil revenues are about $15,000 to $20,000 per capita but personal income is only a fraction of this. Most of the revenues go on foreign labor, foreign goods and foreign investments. Prices far exceed those in the West, further diminishing real income.
To mitigate the high cost of living, the Government provides a wide range of subsidies not only to the elite, but also to ordinary citizens.
Foreign workers are perhaps the greatest potential source of danger for the sheikhdoms. Aliens make up about 60 per cent of the population in Kuwait, 40 per cent in Saudi Arabia and 85 per cent in the United Arab Emirates. They constitute 75 per cent of the labor forces in Kuwait, 60 per cent in Saudi Arabia and 96 per cent in the United Arab Emirates.
When the boom ends and foreign workers return home, remittances will drop, unemployment will soar, and serious financial hardships will result. In this way, poor neighbors too will experience the curse of oil wealth.
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