OPINION> Commentary
Drowning in riches made from black gold
By Kenneth M. Pollack (China Daily)
Updated: 2008-07-16 07:38

You might think that $140 per barrel oil would be good for at least one part of the world, the Middle East. It's too soon to tell for certain, but the region may well turn out to be the part of the world that suffers the most.

Right now, the region is experiencing an economic boom. That's certainly what the people of the region hope.

The danger is that the way the rising revenues are being spent will more likely worsen the region's instability over time.

In the 1970s and 80s, during the first great oil boom, the Middle Eastern producers largely squandered their wealth. Some did set up vast social-welfare networks that improved health care. But by and large they sent the money overseas, putting it in foreign real estate and Swiss bank accounts. This did little to develop their economies, and so when the boom turned to bust in the 1990s, economic problems mushroomed.

This time around, some Middle Eastern oil producers are trying to be smarter. They are investing billions of dollars at home, building industries, repairing roads and factories, and expanding social services. This has led regional elites and many in the international financial community to proclaim a new era in the Middle East - one in which the new oil revenues will diversify the region's economies, create jobs for everyone, and make the Arab states the world's economic superpower.

If this sounds unlikely, it's because it almost certainly is. More oil money is being re-invested in the region, but it is not being spent where it is most needed. As a result, it is having little impact on what really matters, and is even creating problems.

Much of the money is being re-invested in projects intended to produce quick profits for investors rather than long-term gains. A great deal of it is going into nonproductive sectors like real estate and oil refining. Many of the factories being built with the new oil revenues will be heavily automated plants that will employ few people.

The industries that create lots of new jobs, like tourism, agriculture and construction, import workers from southern and southeastern Asia rather than hire locals. Due to lack of reform of education, more students are being educated only to find out that they lack the skills to get the jobs they believe their schooling entitles them to. Across the region, youth unemployment averages at least 25 percent, close to double the global average.

Both the rise in energy prices and the flood of oil revenues have stoked inflation. Qatar's current rate is 14 percent, up from 2.6 percent in the 2002-04 period. As always, inflation hits the middle and lower classes hardest, and in many Arab states it is destroying the middle class, driving its members to the levels of the poor. That is pushing many into the arms of Islamist extremists seeking to overthrow the governments.

The rise in global food prices has also hit the Middle East hard.

To combat the effects of inflation, Saudi Arabia, Qatar, Oman and the United Arab Emirates have raised government salaries by 15 percent to 70 percent. In the short run this could help civil servants, but it also further increases inflation and does nothing to deal with the structural economic problems.

The foreign workers whom Arab states increasingly rely on because they tend to be cheaper and more productive than their own citizens are also beginning to show signs of unhappiness with their shoddy treatment. Foreign workers, who make up 80 percent to 95 percent of the private-sector work forces in the small Persian Gulf states, have gone on strike in recent months to protest inflation, which is eroding their earnings.

Meanwhile, the region's rich have grown obscenely more wealthy through their ability to tap into the windfall oil profits, both legally and illegally. The wealthiest measure their wealth in the billions, while the poorest are so poor that growing numbers cannot even afford to marry.

Money pouring in but not trickling down tends to create a dangerous social imbalance. People hope their country's oil windfall will alleviate their own economic problems only to find that vast sums are being siphoned off into graft; redirected out of the country to private accounts; spent on luxury items, military hardware or "white elephant" projects; or simply wasted.

How can the region turn things around? For starters, those charged with managing its sovereign wealth funds and private investments need to shift from bankrolling capital-intensive industries that guarantee a high return for the investor to financing labor-intensive industries that could increase employment and develop a more capable work force.

At some level, this means thinking of regional investment as a form of deliberate wealth redistribution, social engineering and charity.

Avoiding those kinds of internal upheavals and eliminating much of the anger and despair upon which the terrorists and extremists prey would be a major boon to a world that is likely to remain addicted to Middle Eastern oil, and therefore vulnerable to its vicissitudes, for decades to come.

The author is a senior fellow at the Brookings Institution

The New York Times Syndicate

(China Daily 07/16/2008 page9)