With higher oil prices on world markets, wealth and opulence invariably come to
mind at the mention of any Persian Gulf country - Bahrain, Kuwait, Oman, Qatar,
Saudi Arabia, the United Arab Emirates (UAE), and even Iran. These countries,
and Iraq, have enormous wealth that is locked up in oil and natural gas
underground - about 65% and 40% of known global oil and gas reserves
respectively. But the distribution of oil and gas reserves among the countries
is not even, and is especially uneven given the vast differences in population
size, namely, oil and gas reserves on per capita terms.
Kuwait, Qatar and the United Arab Emirates (more accurately the emirate of Abu
Dhabi) are just super rich; Saudi Arabia is in the middle, followed by Iraq and
Iran. It is not just the wealth
underground that makes Kuwait, Qatar the UAE and, to a lesser degree, Saudi
Arabia, so rich; it is also their invested assets abroad in their sovereign
wealth funds.
So with all this wealth, you would expect citizens of all of these countries to
be in an enviable economic position and with a bright future. Not true. While
this may be the case for some of the countries, one thing is for certain in all
of them, including Iraq: the citizenry have been, and are being, fleeced to a
degree unrivalled in human history. The world only watches and does not notice
or care. How are they fleeced? What does this mean for the future? What is the
solution?
At the outset, let's accept three truths that are evident. The wealth in these
countries has come from oil and natural gas depletion. Oil and gas will not
last forever. Oil and gas belong to the citizens (today's and tomorrow's) of
these countries, not to the rulers, not to government officials, not to a
select group of citizens, but to all citizens. The simple corollary of these
three truths is that all citizens, now and in the future, should receive
similar, if not the same, economic benefits from oil and gas depletion. But
they don't and are not likely to do so the future if things go as they have;
it's not even close.
The evidence is clear-cut. The family rulers in the Gulf Cooperation Council
countries (GCC) - Kuwait, Qatar, Saudi Arabia, the UAE, and to a lesser extent
in Bahrain and Oman - are rich beyond belief. Have they achieved such status
from hard work or unusual abilities? No. A small cadre of fortunate citizens,
sycophants of the regimes in power, is also super rich in these same six
countries, as well as in Iran and even in Iraq. Income distribution, which
should be pretty even given that wealth comes from oil and gas and belongs to
all citizens, is highly skewed in all of these eight countries.
The fleecing of the citizenry takes a number of forms depending on the country.
In the GCC, the rulers have direct access to the national treasury and oil and
gas revenues. They take what they want. Any way you look at it, this can only
be called daylight robbery. In all the countries - the GCC as well as Iran and
Iraq - corruption is rampant. While in some GCC countries payments to a local
agent are mandatory, such payments are in most cases just camouflaged bribes.
Additionally, most princes in the GCC and most government officials in all of
the countries expect bribes on government contracts, not in the 1 to 2% range,
but sometimes exceeding 10%.
These are not the only ways in which citizens are robbed. Family rulers in most
of these countries waste oil and gas revenues to buy the support of foreign
powers to maintain their absolute rule, be it by awarding large military
contracts or even direct business contracts to Western leaders once they are
out of office and to their families, cronies and companies closely associated
with them.
But the most widespread, universal and costly fleecing of the general citizenry
is through ill-conceived economic and social policies that hide and mask the
robbery that prevails. Rulers in most GCC countries and in Iran and Iraq waste
their citizens' birthright through what can only be described as unconscionable
economic policies that effectively translate to robbery by a few. Let me
explain.
The task of all these countries is to transform oil and natural gas in the
ground into non-oil sources of income for current and future generations. There
are two broad options for implementing this fundamental economic transformation
- the development of a non-oil economy fueled by government expenditures or a
comprehensive development of sovereign wealth funds with clearly targeted
distributions of fund resources to the general citizenry.
The first and the conventional approach would be to rely on the government to
adopt comprehensive development policies that promote the establishment of
non-oil sources of production, non-oil goods and services where the countries
enjoy a comparative advantage. This must be implemented in a way that upholds
economic justice, as oil and gas depletion, the source of financing, is the
birthright of all citizens, current as well as all future citizens.
To achieve the transformation to non-oil sources of production while
maintaining economic equity is not easy. Countries need (i) a well-conceived
and comprehensive economic plan and (ii) a sophisticated income tax system to
address equity issues, because the major beneficiaries are the recipients of
large government contracts, the friends of rulers and governments. No country
in the region has even one of these necessary ingredients. Let's look at each
deficiency.
Governments do not have the entrepreneurial prowess to pick areas of
comparative advantage and to run business enterprises. Instead they have the
tendency to throw money into subsidies and wasteful projects that buy
allegiance, projects that may be high profile white elephants or that satisfy
the needs of a particular constituency. These oil revenue-driven government
expenditures invariably fuel inflation, lead to an overvalued currency and
impede the development of non-oil sources of national output and exports.
Economists label this unfortunate outcome "Dutch Disease", after a similar
phenomenon that occurred years earlier in the Netherlands: a sharp rise in
government expenditures, fueled by income from natural resource depletion,
impeding the development of non-oil exports. In today's Persian Gulf, Iran is a
good example of a country with Dutch Disease.
With rising oil revenues, the Iranian government has increased government
expenditures. Prices for imported goods have increased somewhat along with
global inflation but the much larger price increase has been on what economists
refer to as non-tradable goods, things that cannot be readily imported. The
prices of non-tradables have increased at a much faster rate than those of
imported goods because their more limited domestic supply cannot keep up with
demand.
In effect, this leads to a currency that is overvalued, namely, an increase in
the real price of domestic goods relative to imported goods. In turn, domestic
businesses are given the incentive to supply more non-tradable goods to the
detriment of developing non-oil exports. The most high-profile item among
non-tradable goods is real estate, land and housing. This is Dutch Disease as
it has unfolded in Iran and elsewhere in the Persian Gulf.
In Iran, as a result, inflation has been running at 20-30% per year over the
past five to seven years. But real estate has gone through the roof. The price
of residential land in Tehran's best neighborhood that was about $50 per square
foot 10 years ago is roughly $1,000 today, or about $40 million per acre! An
old 1,200 square foot apartment that could be bought for about $50,000 10 years
ago is around $800,000 today. Such a bubble makes all Iranians real estate
speculators and impedes the development of non-oil industries and services that
could compete in the global marketplace.
Let us look at the end result of all this on economic equity. Oil depletion has
not resulted in viable non-oil sources of national output to provide income for
the general citizenry today and in the future. The very small minorities of
Iranians who own choice real estate have been made very rich, while the average
Iranian pays higher prices! But the story does not end here. The governments in
the region have also effectively maintained a currency peg. In the case of
Iran, over the same last five to seven years the Iranian rial has moved in a
narrow range with the US dollar, while Iran's inflation rate has exceeded US
and global inflation by 15 to 20% per year.
The Iranian rial should have depreciated dramatically and real estate
speculators should have not reaped such excessive dollar-denominated (as
compared with rial-denominated) gains, but alas the government has supported
their greed by maintaining the peg using scarce foreign exchange earned from
the exports of oil and gas. This has meant that real-estate owners could
convert rials into dollars, with little or no exchange risk, and take their
financial gains out of Iran. And this they have done with a vengeance.
By my estimates, capital flight from Iran has been roughly $250 billion to $300
billion over the past seven years. In short, a big chunk of Iran's oil revenues
has gone out of the country in the pockets of a few. This phenomenon, though
most evident in the case of Iran, is evident in all Persian Gulf countries.
While economists have long pointed out the deleterious effect of Dutch Disease
on developing non-oil export industries, they have totally missed the fleecing
effect. They don't see this real-estate bubble as robbery. But robbery is the
only word that can describe it. This robbery is made all the worse as the
average citizen faces higher prices and no capital gains to even offset the
negative effects of inflation. The average citizen's standard of living has
declined while a few have become rich beyond belief.
It is all the more robbery because no one in Iran or elsewhere in the Persian
Gulf pays a capital gains tax on their ill-gotten gains. There is no income or
capital gains tax in the GCC; and in Iran, government employees are the only
segment of society that effectively pay the income tax that is due. The private
sector, that is wealthy owners of real estate, evades taxes on a massive scale.
These are the ways that fleecing occurs. How can it be stopped? What is an
alternative policy to alleviate the deleterious effects of Dutch Disease and
the resulting fleecing that has gone unnoticed and unreported? We turn to the
second approach to managing oil and gas depletion.
The alternative approach has been discussed on these pages before. Briefly and
essentially, governments should adopt the following steps:
Over a period of 10 or so years, governments should wean themselves from oil
and gas revenues and support their general expenditures from income taxes;
In the same period, they should develop a comprehensive, effective and
equitable income tax system.
They should embrace a comprehensive sovereign wealth fund, eventually placing
all government revenues in the fund within the prescribed 10-year period.
These sovereign wealth funds should issue an annual check of the same real
value to every citizen (possibly over a certain age and contingent on certain
criteria) now and for all future time.
The sovereign funds, the transformed birthright of all current and future
citizens (not the private bank account of family rulers), should be managed by
professional managers in a transparent and professional manner and answerable
to the citizenry.
If such an approach were adopted, government economic policies would be
"forced" toward improvement, equity would be enhanced and fleecing dramatically
reduced. If deplorable economic policies and the tolerance of economic
injustice continue unabated, the region will continue to be unstable with yet
another disruption always on the horizon.
To stop the fleecing and reverse course, international economic institutions
(the International Monetary Fund, World Bank, Organization for Economic
Cooperation and Development), Western leaders and non-governmental
organizations must publicize the egregious acts of pillaging state treasuries
and policies that rob the citizenry of their birthright. They must shame family
rulers and governments into changing their practices and economic policies. At
the same time these countries must be persuaded to adopt a different approach -
comprehensive and transparent sovereign wealth funds - for managing their oil
and natural gas wealth.
Hossein Askari is professor of international business and international
affairs at George Washington University.
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