March 25, 2012

From this week in 2002. Thoughts on Arab regimes from ten years ago and why they might eventually collapse

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Think about the guy who has just won a rake on the horses or the lotto. The becomes everyone’s mate, doling out sweeties in a new pub, which he has now decided to frequent. There he meets new mates and when not buying rounds, he’s down the bookies. His life quickly loses its ballast.

Within months he has lost all his real friends and has acquired a crowd of hangers-on. Over time he becomes unemployable. A court case over an alleged assault is settled expensively on the steps of the court and his legal bills are twice what he expected. Soon he’s on the skids, money is being spent hand over fist and, most importantly, he forgets how to earn.

This slippery slope, which has been one of the main plots of human drama since the Bible, centres on the premise that it is easy to spend money that was unexpected or unearned.

Countries can do the same. Countries blessed by unexpected windfalls are equally condemned to throw it away. This type of country makes an unreliable friend but an easily conquered enemy.

In 1500, when the Spaniards plundered the gold, spices and raw materials of Latin America, money flowing into Cadiz made Spain by far the richest country in the world. Spain wasted much of its cash in the battlefields of Flanders and Lombardy. It spent millions of ducats buying steel muskets from the Dutch and English. Because the Spaniards ceased making money and started spending their Latin American windfall, most of the Spanish money simply passed through Spain and lined the pockets of other countries.

Spain even stopped growing crops, agriculture fell into decline and the empire quickly became reliant on imported food. Spain gradually began to run out of money. In others words, Spain (which in 1500 was the wealthiest country in the world) was in crisis by 1600 and a European backwater by 1700.

Spain became poor by being too rich. It squandered its wealth because it never had to work for the cash in the first place. This proves the point that wealth is not as good as work, nor riches as good as earnings.

Ironically, the country that most benefited from the Spanish love of luxury was Holland. Yet four centuries later the Dutch themselves fell foul to the same carry-on. The discovery of gas in the North Sea in the late 1960s generated a huge windfall for the Dutch government. This was spent in the mid-1970s on great social welfare projects, which had the same effect as giving people free money. The subsequent waste of the cash, manifested in the chronic trade deficit, became known in the economics profession as ‘Dutch disease’.

Today, the mistakes of the Spaniards are being repeated on a monumental scale in the Middle East, particularly the Gulf states. These countries have become fabulously wealthy over the past five decades – so much so that a recent Economist article referred to them as ‘time travellers’, because up until the 1960s, many of the Gulf states were still made up of tribes of illiterate nomads moving about in the desert. Some of today’s glittering cities were no more than small trading outposts.

It is as if these societies have travelled through three centuries in three decades. Like the Spaniards, they have learned how to spend without figuring out how to save. They have depended hugely on foreign labour, as their strict Islamic law prevents half the population, women, from participating in the economy. For example, almost 30 per cent of the Saudi population are immigrants.

Most of the Gulf states are running huge current account deficits, and capital flight out of the countries is significant. Desert-rich Saudi Arabia tops the bill for preposterous spending. Believe it or not, the Saudis paid handsomely for the importation of Australian fine beach sand.

Despite their adolescence, it is on these countries that the United States depends as a cornerstone of its energy policy. Ironically, America’s enemy in the region displays remarkably similar attributes to its friends. Oil-rich but secular, Iraq has been similarly profligate. If Saddam had learned that hard work rather than theft was the key to lasting wealth, he wouldn’t have tried to plunder Kuwait in 1990 and led his people into a decade of misery.

With the prospect of a war in the Middle East now quite real, it is worth looking at the other Arab states to see how they are managing their economies. Unfortunately, the picture is bleak. If such short-sightedness and profligacy were limited to the Arab countries that had oil, there might not be so much to worry about, but mismanagement seems to be a pattern in Arab economies. Arab countries have the highest levels of illiteracy in the world after sub-Saharan Africa. They have fallen down the world income league every year since 1988.

More worryingly, what cash they do have appears to be wasted on arms. Taken together, Arab countries spend on average 11 per cent of GDP on arms. This is an extraordinary figure.

Depressingly, Arab economic delinquency seems to be cultural. The Arabs statess are like medieval states in need of a Reformation. Any culture that does not generate an educated and capable workforce, that eschews modern western techniques (the internet is banned in Syria) or that elevates the military in society over other professions, will fail in the 21st century.

The economic implications of gender discrimination are plain for all to see. If a society prevents women from being economically active, it strangles itself and condemns itself to relative poverty. Brains rather than brawn are the routes to wealth, and either Arab men are twice as bright as their European equivalent or Arab societies will remain poor.

What are the implications of Arab underachievement for the region? The idea that Israel is the root of all the Arab problems and that an Arab flag in Jerusalem could be a universal panacea is nonsense. Arab impotence in the face of Israeli technological superiority is a reflection rather than a cause of the Arab dilemma.

The reliance by the West on Arab oil is a serious problem. The more we rely on them, the more we finance their profligacy. Over the coming years, as the region becomes more unstable, the oil supplies will become increasingly erratic.

The nature of the US alliance with the Gulf states can be best summed up by the original American name for the first war on Saddam. They termed it Desert Shield, not Desert Storm. The overriding aim was to shield the oil, and looking forward, where possible it is likely that the Americans will try to diversify their sources.

If the US can’t depend on these regimes it is likely to seek much closer ties with Russia and its allies in the Caspian region as a secure source of oil. Odd as it may seem now, a US-Russian alliance may emerge as one of the strongest on the planet by 2020.

Whatever happens, the combination of bad economics, too many guns and religious fundamentalism makes the Arab states, at best, undependable friends. This implies in the short term that the oil price will remain unstable and high for some time to come.

But in the longer term the Arab failure to have a Reformation, to divorce church from state and get on with the business of joining the modern world, implies that they are condemned to follow 16th-century Spain into economic oblivion.