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:
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.
NEXT: Military spending, conflicts and wars
Previous articles in this series are:
Part 1: Riddle of the sands
Part 2: The sweet and sour of oil
Part 3: The driver of oil prices
Part 4: OPEC in the driving seat
Part 5: The OPEC bogeyman
Part 6: OPEC and the sanctions highway
Part 7: Oil-price shocks lie in wait
Part 8: Whose oil is it anyway?
Part 9: The dark side of oil
Part 10: Institutions matter
Part 11: Oil-rich rulers blind to the future
Part 12: 'Arab Spring' without a bloom
Hossein Askari is Professor of Business and International Affairs at the George Washington University.
This was undoubtedly BIG. Everyone and his neighbor were there. The Emir of Qatar, President Morsi from Egypt, President Gul from Turkey, Palestinian Authority's Mahmud Abbas, Hamid Karzai The Afghan, Prime Minister Zardari from Pakistan, Marzouki the new Tunisian leader, King Abdullah from Jordan, Iranian President Mahmud Ahmadinejad himself. All 57 member-states of the Organization of Islamic Cooperation (OIC) - representing no fewer than 1.5 billion Muslims worldwide.
Arab News couldn't resist waxing poetically. What about ...
"In Makkah, last night the Holy Kaaba and the Grand Mosque was bathed in bright lights. The giant Clock Tower glowed in green lights on a clear, moonless night. As the muezzin's heart-warming voice reverberated in the mountainous city at Isha, the world's leaders, sitting in the Al-Safa Palace next to the Grand Mosque, repeated Allah-o-Akbar after him."Allah Akbar indeed - and then straight to the business in which these "leaders" excel; squabbling among themselves - and suspending Syria from the OIC. So much for the idea sponsored by "the Islamic world's respected leader, Custodian of the Two Holy Mosques King Abdullah" of how to "unify and strengthen the crisis-riven Muslim world".
The real nitty-gritty - off limits to everyone - was what the Saudis, the Iranians and the Turks actually discussed behind those Mecca doors after the heart-warming-voiced muezzin went to bed.
For show, the Mecca notables passed three resolutions. They suspended Syria; recognized Palestine as a sovereign state (once again, note that Palestine was treated as just a side issue); and defended the cause of the Rohingya Muslims in Myanmar (the military in Naypyidaw are not exactly quaking in their boots).
The Custodian's show
What the "Custodian of the Two Holy Mosques" seems to have perpetrated is a savvy, Washington-style PR coup. He was evidently advised to seat Ahmadinejad to his left and the Emir of Qatar to his right. The graphic message; this triumvirate - two Sunni Wahhabi powers, one Khomeinist Shi'ite - is deciding the future of the Middle East. We - Wahhabis - are not bent on destroying those infidel Shi'ites.
Not so fast. My colleague Kaveh Afrasiabi has argued Tehran may have fallen into a trap; they were expecting a real effort of mediation and political dialogue instead of the meeting's priority - to suspend and eventually expel their ally Syria (See Saudis use summit to isolate Syria, Iran , Asia Times Online, August 15, 2012).
Behind all the syrupy shenanigans, the fact is the House of Saud and Tehran didn't - and couldn't - possibly agree on anything; this was more like a "let's keep talking" - the Mecca version of the good ol' US-USSR red telephone. The "Custodian" called for "solidarity, tolerance and moderation"; hard to see any of this as the House of Saud - and Qatar - weaponize runaway gangs and an array of beheading-happy Salafi-jihadis in Syria.
The OIC as a whole defended Syria's "unity, sovereignty, independence and territorial integrity", exactly as the House of Saud and Qatar are doing all they can to undermine all of the above. Here's the OIC as an extension of the Saudi-led Gulf Cooperation Council (other GCC members being Bahrain, Kuwait, Oman, Qatar and United Arab Emirates). Quite a few countries - from Southeast Asia to Africa - are very uncomfortable with the whole thing, but in the end deferred to the "Custodian".
The "Custodian" also wants to set up a "center for dialogue" in Riyadh. The verdict is open whether this center will examine who's really responsible for what is now practically all-out war between Sunnis and Shi'ites all across the Ummah. Imagine a center like this coming to the conclusion that the protests in Bahrain were legitimate; as legitimate as the protests in the Eastern province of Saudi Arabia. And as legitimate as what happened last year in Cairo's Tahrir Square (everyone remembers the House of Saud's sheer horror at its ally Hosni Mubarak being defied by scores of young urbanites).
The "Custodian" also said, "The Islamic nation is living in a state of sedition and disunity that led to bloodshed of its people in this holy month in many parts of our Islamic world."
On sedition - fitna, in Arabic - it's unthinkable the "Custodian" and his pampered House of Saud princes are not familiar with the Yinon plan  and countless others, whose divide-and-rule basis is exactly to incite a never-ending Sunni-Shi'ite war, with a cast of subdivisions including Muslims against Christians, Arabs against Persians, Turks against Persians, Arabs against Turks and, why not, Kurds against Turks.
That's exactly what is happening as the major - intended or unintended - blowback of Syria's proxy war.
Why not have it both ways?
So the "Custodian" seems to have sold the notion that Iran and the GCC are talking - even if practically at each other's throats. But the House of Saud agenda remains extremely tricky; it may not dream of a smashed Iran, but certainly a very weakened Iran, either by years of Western sanctions or by a potential Israeli attack. It's no secret the GCC badly wants Israel to attack Iran; it then could reap the benefits of inwardly delighting over a weakened regional Shi'ite power while publicly condemning Israel's unilateral aggression.
This farce, anyway, is far from over. Up next; Tehran has invited the "Custodian" for the Non-Aligned Movement (NAM) summit later this month. Let's see whether the House of Saud, the GCC and Iran are really interested in ending fitna way beyond a photo-op. There's still no evidence the "leaders" of 1.5 billion Muslims will EVER get their act together. Not even Allah himself would make them see the light.
1. A Strategy for Israel in the Nineteen Eighties, Oded Yinon, 1982.