THE GULF'S BLACK
TREASURE Reform - or be kicked
out By Hossein Askari
This is the 13th article in a special
series on oil and the Persian Gulf. For previous
articles, please see the foot of the page.
Although political and institutional
reforms are at the foundation of meaningful change
in the oil-exporting countries of the Middle East,
a number of complementary policies are also
imperative.
Let us start out by briefly
describing the policies of the past and putting
them in context. The mid-1970s, after the major
oil price increases, was a time of great hope for
the region. Oil prices had increased significantly
after the Teheran Agreement of 1971 and had
started to shoot through the roof after the Arab
oil embargo in 1973-1974.
This was also a
time when economists generally believed that
economic development and
growth could be readily achieved by government
investment in infrastructure and in key industries
that embodied and supported areas of long-term
comparative advantage. Financing had been seen as
the constraint, especially the availability of
foreign exchange. With dramatically higher oil
revenues, it looked as if the Middle East and much
of North Africa had overcome any and all financing
problems and that, as far as economic development
was concerned, the sky was the limit.
Oil
exporters with their surplus capital were expected
to invest in infrastructure, education,
manufacturing and more; economies would grow
rapidly, and their growth and surplus capital
would in turn fuel growth in the rest of the
region. It was a plausible story then. Sadly, that
was naive and wishful thinking.
It was not
long after 1976 that it became obvious that the
optimistic expectations were way off the mark and
were nothing more than a simple fairytale. Those
in power in the oil-exporting countries became
drunk on the vast transfer of wealth. Some
embarked on showcase projects and extravagant
celebrations to impress the world. Most increased
military expenditures dramatically and imported
the most sophisticated arms that money could buy
but that nobody knew how to maintain.
Some
sent the brightest and best to get a Western
education even before they had finished high
school in their own country. In many countries the
rush was to modernize, which became translated
into emulating everything Western and adopting the
Western mantle lock stock and barrel.
In
most cases, subsidies for food, fuel and
electricity became the overnight birthright of
citizens. Subsidies were the easy way to satisfy
the masses and, yes, to buy them off. Oil was
gushing from the ground and everyone wanted a
share, with the powerful taking more than their
share. Economic disparity among the citizenry
grew.
It was a period that be readily
compared to the gold rush era in the United
States, but it was not clear whether its aftermath
would turn out to be more like California or the
Yukon? In the Middle East, it was oil that made
all of this possible, but Middle Eastern
governments seemed to forget that oil was a
depleting resource, and a resource whose price
could fluctuate wildly.
In the late 1970s,
the International Monetary Fund was preaching
responsible fiscal and monetary practices,
open-trade policies, market reforms and the like
to resource-constrained developing countries, but
it offered much less advice (or criticism) to the
big oil exporters. It was evident that delay in
economic policy reforms (a reduction in subsidies
and the need for a policy environment to encourage
private sector growth) would only make matters
more difficult, both politically and practically,
especially in the face of explosive population
growth.
As vast revenues were flowing into
government coffers, the relative share of the
public sector grew. In most cases, the bloated
government sector was seen as the best source of
employment opportunities, but jobs that were in
most cases unproductive.Though economically
inefficient, subsidies and public sector jobs
became an important instrument of political
control and leadership survival in most of these
countries.
Generally speaking, the
governments in the region were reluctant to make
the difficult policy choices that would have put
them on the path of sustained economic growth but
that might have endangered their short-run
survival. But the longer they waited, the more
difficult their policy dilemma. In the late 1980s,
their existential problem emerged in the form of
fiscal squeeze (with declining oil revenues) and
today it is in the form of massive unemployment,
especially among the young, in the more populous
countries (Iran, Iraq and Saudi Arabia) and
possibly in the form of vast income and wealth
inequalities.
So what policies should they
turn to now? A number of policies have to go
together, almost simultaneously.
First, as
we have said in earlier articles in this series,
they should establish and nurture independent and
efficient institutions, such as an independent
judicial system, a transparent regulatory regime
with business-friendly rules and regulations and
effective enforcement, an independent central
bank, and so forth.
Governments should
adopt long-term and consistent economic programs
and policies to lay the foundation for encouraging
private sector activity as the basis for
sustainable economic growth. They should avoid
uncertainties and instabilities. The private
sectors in these countries need a heavy dose of
confidence. This should be accompanied by a
gradual reduction in the economic role of the
public sector and an increase in private sector
activity to create productive private sector jobs.
Setting aside the sequencing of policies,
the three larger oil exporters need to relax
economic controls, reduce the role of government
and create an environment where the private sector
can thrive. This would entail:
Elimination (or at least dramatic reduction)
of explicit and implicit subsidies,
Effective privatization (avoiding corruption)
of state enterprises (including commercial banks
and foundations in the case of Iran),
Elimination of remaining price and financial
controls,
Creation of an effective and equitable tax
system,
Reduction in tariffs and non-tariff barriers
to promote domestic competition,
Liberalization of labor laws and markets,
Improved education policies to promote quality
education and technical and managerial skills,
A real crackdown on corruption,
A more favorable attitude toward foreign
direct investment I (including more personal
freedoms for foreigners as well as citizens), A
managed flexible exchange rate (avoiding any
impression of a fixed system) and A total
commitment to upholding the rule of law and
developing the supporting institutional structure.
An enhanced modern education system is
critical for increased entrepreneurial activity
and private sector growth. These policies in
combination should create a favorable business
climate where investment (financed domestically
and from abroad) will increase significantly and
help pay for the needed growth - and, in the case
of some of these countries, motivate citizens
living abroad to return home, bringing their
needed skills and capital.
All of these
economies must create more rewarding jobs than the
number of new entrants into the labor market if
they are to reduce unemployment over the next five
to seven years, a period when the labor force is
expected to grow rapidly in most of these
countries. While again it must be acknowledged
that there has been recent progress with regard to
job creation in some of these countries, it will
not be sustained unless the governments adopt
bolder policies and stick with them.
It is
painless to sit in North America and in Europe and
expound what seems standard wisdom to the people
running countries like Iran. But from their
perspective it is anything but painless to
implement policies that might appear downright
suicidal.
In the case of Iran, the
government has built up a welfare state (albeit an
inequitable one) to garner domestic support and
allegiance and its abolition would be an anathema
to the politicians in Iran. The poor rely on food
subsidies. Those loyal to the regime (including
the families of martyrs) benefit from employment
in foundations and in the public sector generally,
have enhanced access to university education and
have access to better healthcare services.
The foundations also buy political support
for the government in more direct ways. The lax
tax system and the absence of a competitive
environment enable merchants, other businessmen
and land speculators to accumulate wealth rapidly.
The policies needed to truly turn conditions
around would upset this applecart.
The
governments of these larger (more populous)
countries have little choice. If they do not
institute reform more rapidly, they will be swept
aside as in Egypt by growing discontent among the
needy and the unemployed, especially by the young.
To have a reasonable chance of success,
governments must adopt policy reforms and ensure
that during the transition phase the majority of
their citizens (the less well-off economically)
see and believe themselves to be better off than
before the reforms.
This will require a
well-designed social safety net based on Islamic
principles (affording everyone the necessities in
food, shelter, healthcare, and education) to
compensate for the loss of subsidies for the
majority of citizens, a level playing field to
give everyone a reasonable opportunity for
success, and a political campaign to convince the
rich and those closely connected to the regime
that in the absence of reform they are also
doomed.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
