Oil is no blessing in disguise

Be careful what you wish for, they say. It might just happen, and when it does, it could bring its own regrettable difficulties, the very opposite of a blessing in disguise. Even in these days of prospecting for and promoting alternative energies, striking oil on any significant scale or in its associated or derivative forms retains the money-spinning sense that its iconic image has suggested through the ages. Any country would want that. As to the past, the Gulf might not have craved the mineral endowment which has defined its economic and geopolitical profile, but it naturally has benefited stupendously. At the same time, the so-called resource curse, whereby the sourcing of a single deep well of recurrent wealth creation inhibits other avenues to prosperity, is an established issue considered continually in academic circles in the ministries of the real world (see box). Recent reports by Capital Economics have refreshed that discussion in light of the intervention of the Arab Spring. Their key observation has been that whereas the ongoing financial imbalance in favour of Mena’s resource-rich, oil-exporting countries has been further enhanced in the short term by the spur to oil prices owing to the region’s uncertainties, this historic era might well, in fact, lead to a slowing of economic growth in the longer term. Market-oriented reform Meanwhile, the relatively resource-poor, oil-importing countries, the likes of Egypt and Morocco, while currently less stable and undergoing political transition, could be heading for faster rates of growth on the basis of being driven to embrace, sooner or later, more market-oriented reform (see chart). A key subtext is that any degree of restructuring of that nature will be beneficial, especially in societies that have previously been subject to statistic overload. While it is natural that governments will tend to dominate in situations and developing countries where new-found oil has a game-changing impact, as a matter of national security and strategic planning, once that becomes an old story, there is a premium on encouraging different business sectors to secure the country’s regenerative momentum. In the case of the Gulf, there have been dual ironies amid the oil bounty’s boon. Firstly, turbulent circumstances in some parts of the Middle East have indirectly imparted the ability to preserve stability in other parts by fiscal means, the largesse from inflated oil revenues being used to absorb any shock to the socio-political system. Secondly, this episode’s reaffirmation of the state as key provider is liable to curb the entrepreneurial forces that are hoped to take the baton onward in future. Business sectors are still excessively reliant on government’s lead. No incentives for private sector As Syed Hirsh, Middle East analyst at Capital Economics, put it by telephone this week: “The concern we have is that the Arab Spring and the reaction to it have distorted the incentives for the private sector, and the recent changes [in terms of the public sector’s hiring of nationals] do not bode well from a labour perspective.” It’s worth recounting some of the numbers on the purely financial front. Since higher oil prices in 2011 were accompanied by higher production as well, oil receipts to the region jumped to $700 billion (Dh2.57 trillion) last year, the highest on record, according to the consultancy’s research. Government spending in Saudi Arabia, which saw the largest stimulus, increased by a very substantial 7 per cent of GDP. Meanwhile, budget surpluses in Qatar, the UAE and Oman still increased despite their additional spending commitments. Indeed, overall, the collective surplus across the GCC jumped from 5 per cent of GDP in 2010 to 13 per cent last year. By contrast, both fiscal and current account deficits widened significantly among Arab countries without the same energy lifeline. While “enormous foreign currency reserves and low public debt levels mean that funding government expenditure in the near term should not be a problem,” Hirsh concedes, last year’s reflationary packages in the Gulf “have increased the risk of a spending squeeze in the next 10 to 20 years”. That’s far enough away not to create immediate concern, but not far enough to be forgotten about. Time has the habit of passing. From gulfnews