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.
For lack of a more precise word, let us call these desert countries, which have so much oil and so few people, "sheikhdoms." 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 West. Their way of life had scarcely changed over a millennium. Then oil riches abruptly thrust them into the center of the world economy, tying them totally to it, deluging them with Western culture, and giving them startling economic and political power. The effects of this transformation have been overwhelming; although the sheikhdoms cling to tradition, everything in them has changed. New wealth has compromised the old social institutions and prompted a dangerous reliance on foreign money, labor, and know-how.
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 sixteenth century but distorted its economy and weakened it in the long run. Peru had a boom in guano (used for fertilizer) in the mid-nineteenth century, and later Brazil had a rubber boom; these made a few people rich but left no useful legacy - only some gaudy buildings, including an opera house in the Amazon jungle. Gold-rush sites in California and Alaska turned into ghost towns when the mining stopped. 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 booms always come to an end.
In fact, given the oil market's downturn starting in 1981, permanently static or declining revenues in the Middle East may already be at hand. Market forces have operated very efficiently for the countries that consume Middle East oil: conservation (in cars, heating, factories) and substitution (domestic oil, natural gas, coal, nuclear fission) have cut deeply into exports from the Organization of Petroleum Exporting Countries (OPEC). Production, which peaked in 1977 at 31.8 million barrels a day, went down to about 16 million barrels a day in 1982. 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 set quotas or import fees to keep consumption down, and revenues still would fall. A major expansion in the industrial economies could reverse this trend, but only temporarily, because no one wants ever again to depend on OPEC.
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. Any one of these initiatives would upset the world oil market and drastically reduce OPEC's income.
Profits from the export of petroleum have made many countries dependent on a continued oil boom. Countries with large populations - Indonesia, Nigeria, and Mexico, for example - look to oil revenues for development funds and are already facing the unpleasant consequences of having relied too much on this easy money to see them through. This is true also of Great Britain, which needs the North Sea revenues to stave off the worst effects of its long-term economic spin. Several minor producers - Cameroon, the Ivory Coast, Peru - have borrowed against future oil revenues; if these do not materialize, the governments may not be able to pay their bills.
No other countries, however, depend as much on the oil market as do 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. Political leaders of the sheikhdoms fully understand this vulnerability and make strenuous efforts to diversify their income through investments at home and abroad. Should these substantially replace revenues from petroleum sales, the sheikhdoms can face the future with some equanimity; otherwise, they face impoverishment. Unfortunately, alternate sources of revenue do not look promising.
The sheikhdoms put aside far less money than they need to live off investments. Net foreign assets of all Middle East OPEC members in 1982 came to about $380 billion, but this figure is deceptively high because it lumps together state reserves and private funds. Private money is not available for state purposes, and has to be excluded from calculations about future government revenues. Almost half of this $380 billion is in private hands; Saudi, Kuwaiti, and UAE government holdings, which far surpass those of other OPEC members, total about $120 billion, $70 billion, and $30 billion, respectively. Enormous as these sums are, it must be remembered that the sheikhdoms produce little besides oil and cannot significantly increase their assets once oil sales decline. For the most part, their reserves amount to less than one year's budget; only Kuwait has two or three years' worth. Dividends from these assets are far too meager to compensate for declining oil revenues; in the Saudi case, annual dividends from $120 billion total about $13 billion - or about two months' spending at 1982 rates. State expenditures so far exceed dividends that no sheikhdom could possibly retire on its foreign investments alone, now or in the foreseeable future.
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 billion Saudi budget for 1981 to 1982, $7 billion went for education, $10 billion for transportation and telecommunications, $7 billion for development and economic resources, $4 billion for public works, and nearly $8 billion for municipalities. More than a third of state spending was 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 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 will discourages real competition and achievement. Students are not pushed to acquire the skills most needed to make the sheikhdoms independent of their oil incomes. Abroad, students from the sheikhdoms have earned a reputation of high living and casual efforts.
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 stands at such unlikely spots as Misurata, Abu Khammash, and Ra's Lanouf in Libya, Jebel Ali in Dubai, and Umm Sa'id in Qatar. Largest of all are the industrial complexes at Yanbu' and Jubail in Saudi Arabia, which will cost $30 billion and $50 billion, respectively. These plants will produce a wide range primary products (petrochemicals, ammonia, steel, concrete) and many finished goods, mostly for export. But the construction and operating expenses in the sheikhdoms exceed comparable costs in the developed countries by about a factor of three. (In one case, British contractors planned a hospital for Iran that averaged $320,00 per bed, nearly twelve times the cost of comparable facilities in Great Britain.)
The sheikhdoms hope that cheap natural gas and oil - which are used both for energy and as feed stock (the raw material for such products as plastic and nylon) - will nevertheless make possible to manufacture products at competitive prices. For example, the gigantic petrochemical plant at Yanbu', which cost $2.4 billion, will receive natural gas at about one eighth of prevailing prices. But a haze of plenitude permits inefficiencies that more than make up for the cost advantages of cheap raw materials. Market research and cost accounting are neglected; for lack of regional coordination, factories are duplicated. The deserts supply only petroleum; foreigners must design, staff, manage, and maintain plants, and most of the consumers live thousands of miles away. Assigning contracts on a cost-plus basis (the contractor spends whatever is necessary and adds a percentage for himself) invites spending without restraint. Efforts to compensate for manpower shortages with intricate automated systems mean that the sheikhdoms often receive state-of-the-art machinery that is especially likely to break down and requires expensive foreign technicians. Maintenance costs in the dry, dusty deserts far exceed those in more temperate climes. Repairs are almost unknown; broken parts are thrown away and replaced with spares, a ruinously expensive way to run a factory.
Inexpensive or even free petroleum will not offset all these costs, as foreign corporations seem to have concluded, judging by their reluctance to invest in the factories. Saudi Arabia only lured Shell and Mobil into Yanbu' by offering access to 500 barrels of oil per day for each million dollars invested. An Arab-owned magazine published in London notes that "some Western oilmen see petrochemical joint ventures in the Gulf as nothing more than the price that has to be paid for secure supplies of crude [oil]." Far from producing income to replace falling oil revenues, these industrial white elephants will do well to break even: more likely they will drain the treasury until they are abandoned.
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. The Saudi government even pays air freight charges to import cows from abroad. This help notwithstanding, food from the desert still costs about three times more than do imports; without lavish subventions, these sophisticated enterprises would revert to sand.
Many great fortunes are based on land speculation; real estate values have increased as much as 500 times between 1974 and 1982. Andrew Duncan, in his book Money Rush, quotes a senior official of British Petroleum, who explained it this way: "The government is willing to pay so that the lads develop as entrepreneurs. In Kuwait, they did it by giving away bits of the desert and buying it back at exorbitant prices." One prince is reported to have made a $2 billion profit when he bought and sold open desert land in Jubail, the site of an industrial city; the profit on land bought and sold for the Riyadh airport is rumored to be $8 billion. (The true figures, even if only a fraction of these, would still mean extraordinary profits.) But because the land itself is not good for anything but resale, land values will shrivel to nothing when oil revenues decline.
A Talent for Spending Money
What do static or declining revenues mean for the sheikhdoms? 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 a fraction of the money they were about to receive. For example, in September of 1973, just before the Yom Kippur war, George W. Ball, former undersecretary of state, expressed concern about the ability of the Arab oil states to spend the revenues collected at $6 a barrel, calling these "very far in excess of their absorptive capacities." Yet today, oil sells at nearly six times this price, and the sheikhdoms' spending has increased proportionately. Indeed, the oil states have shown an unexpected talent for spending money. Every time revenues increased, state expenditures soon caught up. And this pattern has held true not only in the minor emirates but even in Saudi Arabia, the country most often thought to have "too much" money or "more money than it can absorb." Except after the great price rises in 1973 and 1974, spending increases by the Saudi government have lagged just slightly behind increases in oil revenues.
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 ibn 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. But still he refused to spend it, saying, "I am a Bedou. All my people are Bedou. We are accustomed to living with a camel or a goat in the desert. If we spend the money, it is going to ruin my people, and they are not going to like it." By 1966, Shakhbut's penny-pinching provoked his overthrow; understandably, no other oil-rich ruler has sought to emulate him.
Must state spending inexorably rise with revenues? Are the sheikhdoms locked into every-higher spending, or do they have room in which to maneuver? If state spending is flexible, declines in revenue can be endured; if not, they may undermine social and political stability, and possibly lead to the collapse of the present regimes and to the disruption of oil supplies.
Already, profligacy in the sheikhdoms has - unlikely as this sounds - occasionally generated budget deficits. For example, when Saudi income remained constant during 1977-1979, government spending exceeded oil sales. Knowing that revenues subsequently rose much higher, one is inclined to dismiss these deficits as curious aberrations, but in 1977 and 1978, nobody knew that the Shah would fall and that revenues would soon increase by so much. Despite all efforts to reduce outlays (including a draconian order to government agencies to spend no more than 70 percent of their original allocations), the Saudi government could not cut back enough, and it ran a deficit. It seems likely that the same problem will arise any time that revenues stop growing.
Most observers are optimistic, however, arguing that state spending in the sheikhdoms can level off or decline without causing irreparable damage. Noting the waste that characterizes OPEC spending, they claim that many expenses - foreign aid, military procurements, industrialization, agriculture, building projects, subsidies, corruption - can be eliminated without creating undue hardships. These optimists sometimes point to the 1981 spending cuts in the United States and ask why the sheikhdoms can't do as well when their turn comes.
Predictions of the sheikhdoms' economies cannot be based on the behavior of the American economy, because the sources of wealth are fundamentally different: America produces its own wealth, whereas the sheikhdoms consume the wealth of others. President Reagan's goals are modest compared with expected reductions in the sheikhdoms. To being with, there are fewer beneficiaries of U.S. government aid and they get less support. Taxpayers outnumber welfare recipients in the United States, so spending cuts win widespread approval. In the sheikhdoms, where no one pays more than nominal taxes, everybody would lose if the government cut back. In the U.S., Republicans argue that tax relief will create a larger pie, eventually benefiting everyone, even those thrown off government support; the Arab states, however, would have to divide a smaller pie. Also, the American debate concerns a deceleration of growth, not absolute reductions, as in the Middle East. Thus, while cuts in federal spending have many political attractions in the U.S., they have none at all in the sheikhdoms.
The sheikhdoms have made some efforts to reduce 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 the postponement of public projects; in April 1982, the finance minister of the United Arab Emirates announced a 57.8 percent reduction in his country's foreign-aid program. But these gestures do not much disturb the people's expectations of riches and well-being.
Vested Interests
Those who suppose 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; this holds true even for commitments that appear superfluous. 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 programs.
Rulers buy themselves a significant place in world politics by lending money, giving aid, sponsoring political movements, and building military forces. Saudi and Libyan leaders have shown special skill at making their views known around the world; visitors to Riyadh in 1976 included twenty-three heads of state, nineteen prime ministers, thirty foreign ministers, and seventy-eight other ministers. The populace gains little from this power, however, and will press for money to pay for housing and rice. But will the Saudi king, who travels inside the country with a retinue numbering 1,800 persons, cut back for them?
Possessing sophisticated tanks and aircraft brings psychological rewards that defy rational calculation; besides this, the armed forces protect the ruler. So, too, industrialization has prestige value; aluminum 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 likewise 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 lies largely in their ability to pay out. Easy money reduces tensions and keeps the opposition fragmented. The Saudis increased funds to rural areas by 20 percent after the siege in Mecca, expecting this to quiet discontent. Colonel Mu'ammar al-Qadhdhafi ensures his power by lavishing payments on the army. The shah tried this too, but when oil revenues were stagnant for too long, previously papered-over problems abruptly emerged. As spending decreases in the sheikhdoms, tribes, minorities, leftists, soldiers, religious activists, Westernized city dwellers, regional separatists, displaced farmers, and migrant workers will all challenge the governments.
Professionals and businessmen also live in an unreal world. Most sheikhdoms require local sponsorship of foreign enterprises, and in return for signing his name, the local agent extracts a large percentage of profits. Agents' fees have created extraordinary opportunities for the well-connected; Muhammad ibn Fahd, son of Saudi Arabia's effective ruler, has been associated with many multinational concerns (Bechtel, Mobil Oil, Philips', the Dutch electronics firm, and ENI, the state-owned Italian energy company) and is reputed to have amassed a personal fortune of more than a billion dollars by representing these firms in his country.
Corruption of this sort flourishes in all the sheikhdoms; its elimination would appear to be an easy way to reclaim funds for productive use. But corruption on a grand scale serves an important function: it funnels funds from the state to the elite. According to a senior official of British Petroleum interviewed by Andrew Duncan, "The authorities have taken the view that commission is a way of spending oil revenue.... You have to have some mechanism, other than the dole, for pushing money round." When the state permits inflated agents' fees or buys land at exorbitant rates, it transfers wealth: does it matter that this is done surreptitiously and not through more formal channels? If graft were to be eliminated, the government would have a disgruntled elite to contend with.
Government spending sustains local commerce; according to one estimate, 60 percent of private business in Saudi Arabia funded directly by the state. In addition, the government frequently rescues failed businesses. Public construction projects keep many concerns going - cement factories, labor contractors, import firms, wholesalers, lawyers, agents, and others. 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. They are sure to resist any attempts to trim state projects.
With the exceptions of Kuwait and the United Arab Emirates, the standard of living throughout the sheikhdoms remains surprisingly low. Most citizens in Saudi Arabia are not rich by Western standards. They live with their animals and in-laws in drab, pre-fabricated apartment buildings on treeless streets. 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 for foreign labor, foreign food, and foreign investments. Prices far exceed those in the West, further diminishing real income; a United Nations report recently found living expenses in Saudi Arabian cities to be among the highest in the world.
To mitigate the high cost of living, the government provides a wide range of subsidies not only to members of the elite but also to ordinary citizens. The state pays premium wages and collects minimal rents on its properties. It sells goods, especially food, at below cost, and charges only a fraction of the market price for energy. Bus and plane fares are subsidized. The state covers medical expenses and student fees, and assists almost every commercial or agricultural venture with inexpensive land and interest-free loans. The Saudi government even helps young couples to marry, by paying $7,000 toward a woman's bride-price. (To qualify for this, a man must prove Saudi citizenship, an inability to pay on his own, and a good record of attendance at the mosque.) In just a few years, citizens have come to depend on subsidies to smooth the way for virtually every endeavor. They too may turn against the government if the supports are withdrawn.
(This is what happened in Iran. Although Iran is not one of the sheikhdoms - its population and cultural resources far exceed theirs, and its per capita oil income hardly compared - still, the country was transformed by wealth much as the sheikhdoms have been. The oil bonanza brought inappropriate industries, bloated armed forces, food imports, and consumeritis. It bestowed unprecedented power on the central government and upset traditional life. Oil revenues jumped from $5.6 billion in 1973 to $22 billion the next year, but then stagnated, and in real terms declined, for five years until the 1978 revolution. Predictably, tensions grew as oil income contracted; when prospects for self-improvement faded, merchants, students, day laborers, oil workers, and even religious officials felt the pinch and took part in anti-Shah activities.)
Some foreigners - Westerners and East Asians, especially - take jobs in the sheikhdoms just to make quick money, and stay for only short periods. Disdainful of their hosts' culture, irritated by civic and religious restrictions, and unused to the blistering heat, about a third of them leave before their contracts expire. Other foreign workers, usually Muslims, accommodate better; they view the sheikhdoms as the promised land, and many try to settle in them permanently. Their religious and cultural ties lead them to believe that they should have rights equal to those of native citizens. Arabs feel this most strongly, but so do Pakistanis, Turks, and other Muslims.
With rare exceptions, however, foreign workers cannot become citizens (in Saudi Arabia that requires a special royal decree) and do not enjoy the easy life of the native-born. They earn lower wages, lack full legal rights, and are excluded from the political process. On one occasion, the Saudi government gave its Saudi employees a 50 percent raise but left the non-Saudis' salaries unchanged. Citizens alone enjoy most of the subsidies noted above, and they alone may practice law, own land, or open a business. A Saudi citizen has free access to some of the most advanced medical facilities in the world; a foreign worker pays for his health care and is not allowed to be treated in the better hospitals. In Kuwait, a foreign worker who retires must leave the country. According to traffic regulations broadcast on Kuwaiti television, when two cars meet at an intersection, a Kuwaiti citizen has right-of-way over a foreigner. Citizenship is a closed caste. Muslim expatriates in particular resent the native-born, who do so little work themselves yet resist pressures to share the bounty more equally.
Lacking political representation, foreign workers will probably be the first to suffer as oil sales decline, and they may not do so passively. In early 1981, groups of foreign workers professing radical leftist ideology surfaced almost simultaneously in most of the sheikhdoms.
Enough Yemenis, Egyptians, Jordanians, and other workers have moved to the Persian Gulf and Libya that their homelands suffer manpower shortages. North Yemen, for example, has so few farmers left that the country has begun to import much of its food. In Pakistan, the privilege of sending workers abroad has become a source of dispute between regions. On paper, remittances sent home look good for the economy, but two thirds of the money goes to buy land nd consumer goods; rarely is it invested productively. When the boom ends and foreign workers return home, remittances will drop. Unemployment will soar, and serious financial hardship will result. In this way, poor neighbors, too, will experience the curse of oil wealth.
Herein 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.
