The "Dutch Disease" Hits Gulf Oildoms

If you follow such sites as http://www.middle-east-online.com/english/, a pattern of developing economic crisis is seen in the oil producing states of the Persian Gulf. All these resource rich semi-feudal spots from Saudi Arabia to Iran are experiencing what economists have called for some years, "the Dutch Disease." The symptoms of the disease are simple and obvious: accelerating inflation, low real growth and the absence of an economic base other than the exploited natural resource.

Actually the name should be the "Spanish Disease" as the symptoms were first experienced by the Spanish Empire during the Fifteenth Century as Spain was flooded by increasing torrents of gold plundered from its colonies in South and Central America as well as the Philippines. Inflation not only undercut whatever may have existed in the way of an underlying Spanish economic infrastructure but eventually assured the financial collapse of the Empire and its citizens.

More recently the Dutch experienced the same disease with the discovery and exploitation of oil from its continental shelf. It took the Dutch years, much effort, some pain and the understanding support of other countries to overcome the illness which now bears its name.

For a long, long time the oil producing shiekdoms, kingdoms and mullahocracies have or should have been aware that each and every one of them was a prime candidate for the next round of Dutch Disease. With the exception of Iran (which has poured money into economically non-beneficial uses such as missiles and uranium enrichment plants) none have used the oil based income to provide a sound economic infrastructure that could absorb and mitigate the negative effects of more money pouring in as the oil flowed out.

Sure, the Saudis Royal Family--all seven thousand or so members--have invested its plunder in any number of offshore projects. The same may be said of the elites in other countries such as Kuwait and at least some of the UAE.

Of course, the Saudis have poured a great deal of money into the building and provisioning of Wahhabist mosques and madrassas around the world. The same source has also been a generous contributor to various Islamist "charities" including such noted humanitarian organisations as the Taliban and al-Qaeda.

Spain did much the same as Saudi Arabia and the rest of the Gulf Oil Crew. It funded wars. It funded the Inquisition. It funded religious extremism and proselytising. It's aristocracy and elite built big homes, drove fancy carriages and wore expensive clothing.

Whether in the case of the Spanish or that of today's oil based autocracies, the spending of money on foreign investments, religious expansion or the stuff of war and repression helped develop the basic economic structure about as well as a 9 mm in the prefrontal lobes helps thinking.

From Iran on south and east to the tip of the Arabian Peninsula, the symptoms of the Dutch Disease are too visible to be hidden behind cooked books, fabricated statistics or a burqa of denial. Inflation is at or above ten percent throughout the region--and that is a conservative estimate. In Iran it is above twenty-five percent. Unemployment and underemployment are a majority experience for all those natives too proud to hew wood, draw water or do any of the other necessary, mundane and not necessarily inspiring jobs left to foreign helots (or expat Western technicians.)

As was the case with Spain and (to a lesser extent) Holland four hundred years later, the disease has profound effect upon neighbors. Neither Egypt nor Jordan, for example, are noted producers and exporters of petroleum, but both are experiencing very high inflation (in Egypt's case the highest in nineteen years) coupled with low rates of real growth and high unemployment.

Not surprisingly the countries with the worst cases of the disease are taking wrong actions. Iran has turned on the printing presses 24/7. The UAE and others are controlling prices and providing subsidies for such essentials as diesel fuel. Egypt continues to go the subsidy route for food.

The Geek admits economic history is a fascinating subject--if you are Allan Greenspan. For the rest of us, it usually is a very dull trudge through the Valley of Grim Numbers.

If, however, the trudge is taken and the Grim Numbers overcome, the result is an appreciation of what is needed to defeat the Dutch Disease. It's a simple, painful and not particularly short course of treatment involving the abandoning of controls and subsidies, the forced direction of resource derived wealth into economic infrastructure development and even, horrors! limiting the ability of the elite to buy private jets, luxury yachts the size of aircraft carriers or disporting in the usual lifestyle of the ultra-rich and self-involved.

Not a pretty political picture for any of these regimes. All the way along the wide arc from Tehran to Cairo, the governments are precarious in their grip on power.

Better not to take the risk of doing the right thing and losing hold of the levers of power.

Right?

Perhaps its only appropriate that the latest sufferers of the disease first experienced by the Spanish respond in the same way to their condition. Recall that the Spanish Empire was run by a dark and grim combination of autocrats and clerics. The Spanish Empire was hag ridden by a backward looking religious dogma and quivered in fear of the future. The Spanish Empire sought to hold its place in the world with a combination of blood-happy killers, repressive torturers and pure bluster of following "God's Will."

Sound familiar?

We know how it all ended for the Spanish. How different will it be for the Kings, Sheiks and Mullahs of oil?

It took Spain a long time to fade to the obscure margins of the world. Things happen much, much faster today.