The Middle East Uprisings, their Economies, and the World Economy-Becker

 

The revolutions and protests in Tunisia, Egypt, Libya, Bahrain, and other parts of the MENA region (Middle East and North Africa) are the most important world development in the past 20 years, even though it is still highly uncertain about the types of governments that will emerge, the effects on their economic and political freedoms, and their production of oil. I expect, however, that these economies will become more competitive and less government-controlled, and that world oil prices would tend to be higher in both the short and long runs.

The larger MENA countries are mainly autocratic, and their governments tend to dominate their economies. Corruption is common, and political connections are usually needed to start and grow businesses, to gain access to raw materials and other inputs, to obtain protected positions in telecommunications and other sectors, and to get credit from government banks.  The Heritage Foundation and The Wall Street Journal prepare annual indexes of overall economic freedom for many countries, including those from the MENA region, that can be roughly compared across countries. Studies have shown that the degree of economic freedom in different countries in any year is positively related to their subsequent economic growth.

Saudi Arabia and Turkey have the highest index of overall economic freedom of any of the larger MENA countries. Their levels of economic freedom place them in the “moderately free” category. Then come Morocco, Egypt, and Tunisia, with indexes in the “mostly unfree” category.  Syria and Yemen have even less freedom, while Iran and Libya are close to the bottom of all 179 countries considered, with indexes of economic freedom in the “economically repressed” category.

None of the major oil producers of the MENA region are democratic, with the exception of Iraq that has a fledgling democracy. They have a mixed record on economic freedom. Qatar, The United Arab Emirates, Kuwait, and Saudi Arabia are in the moderately free category, while the others have much less economic freedom.

Countries that become much more democratic as a result of the upheaval rocking the MENA region are likely to become far more transparent about how they spend their oil and other public revenues since information flow is much greater in democratic than autocratic countries. They would also become less corrupt since the greatest amounts of corruption are generally found in more authoritarian countries. Information flows about all aspects of life would increase, so that citizens would become much better informed about what is happening in their own countries and in the world.

If, as I expect, the shift away from autocratic regimes in the MENA region would increase the role of competition, and increase the private sector, that should speed up the rate of economic growth in these countries. However, the evidence is very mixed on whether democracies in general spur economic growth. Probably the most significant difference is that the variation in growth rates among democratic governments tends to be less than that among autocratic governments. Enlightened dictators can accomplish a lot for their economies, but misguided ones can cause disasters-as in China’s “Great Leap Forward” under Mao. The much greater information flow in democracies and the relatively free elections tend to prevent democracies from engaging in terrible and unpopular policies for prolonged periods.

The world is especially interested in what will happen to world oil production if many of the major oil producers from the MENA region become much more democratic. I say “if” because large oil reserves tend to discourage the growth of democracy (see, for example, Michael L. Ross, “Does Oil Hinder Democracy?” World Politics, 2001). One reason for this is that sizable oil production gives military leaders and autocrats a strong incentive to gain control of these governments and their large revenue base because that does not require trying to collect high taxes on earnings and profits.

However, if large oil producers did become much more democratic, the effects on their oil production is unclear. Would they encourage production and refinery of oil by international companies with much expertise at these activities, or would they, as in democratic Mexico and Brazil, reserve oil production and refinery for less efficient government-owned companies? Their oil production might well decline if government enterprises ran the oil industry. Democratic regimes might have a longer time horizon than the replaced autocratic regimes, especially if the latter governments feared being overthrown. Such governments tend to pump out oil (and other natural resources) at a faster pace since they would not expect to collect the oil revenues in the more distant future.

MENA country regimes that become much more democratic as a result of the current unrest would tend to produce less oil than the autocratic regimes they replaced if they use government-run oil companies, and have a long horizon. This would mean higher oil prices in the near and long term. On the other hand, if these democratic governments used efficient international companies to produce and refine their oil, and if they did not have a particularly long time horizon because they needed larger revenues, they might increase their oil production compared to the autocratic regimes they replace. Although it is uncertain which scenario will prevail, I lean toward expecting reductions in oil production from the MENA region, and higher world oil prices.

 

 

 

Comments

[NEH]

Jack, As for NG, I would rather it be completely removed as an Energy source for electrical generation and used exclusively as a Petrochem feedstock and perhaps home heating. Energy security is the most important issue confronting the Nation and has been for at least the last half century, but still we dither. As for those "trillion buck optional wars", we could now well use that money at home for helping too balance the Budget and implement an advanced Energy Program for the country.

If we did that, I could probably get my nephews back from Afghanistan. As one said on his last rotation out, "I thought we were over there to protect our interests and help a weak and downtrodden people. Not guarding and protecting the poppy(opium)crop for the International Drug Dealers". ;)

[Jack]

NEH -- similar thoughts. HAD we not been flown so helplessly far up the blind canyon, I too would favor using such a fine energy as NG for cooking and home heating. But! here we are and IF shale fracking is a viable means of production we're awash in NG at a price something like one third that of oil, AND the $$$$ for everything to do with NG (except (silly) LNG importation) goes into the pockets and treasuries of America.

I suppose the risk of Boone (and ha! my own!) use of NG as "transitional fuel" is that of getting as high centered on it as we know are on oil.......... but! we've well over half a century (and more) to deal with yet more rational means of conserving and fueling our needs.

Not sure HOW to educate the woman you saw tossing $150 into the tank of a 6000GVW (tax break) rig who is accelerating from stoplight to stoplight with the most common payload a single driver and perhaps a kid or two. I know a number of those and the rig and its costs of operation are often tax deductible and there is simply not the incentives regular folk would have to buy at least the 30 mpg rigs available that offer just as much "safety".

There's another thing we could do. Financial writer Andrew Tobias put on quite a push for a true no fault insurance plan (some years back) in which the cost of insurance would be "paid at the pump". Changing the fixed cost of insurance to a variable cost would be more incentives for all to conserve. And for those who require a plumbing van or other heavy rig for work, they could have a more efficient 2nd car for pleasure driving, or if two rigs are in the driveway, a stronger incentive to take the more efficient one on errands. And! more incentive to walk, bike or combine trips. It would be a win-win-win for all by insurance companies getting full premiums on 2nd and third cars that spend most of their time in the garage.

Aaah! WOULD that we HAD a democracy functioning in favor of the people and our nation that would welcome and honestly vet the many ideas we have!

[Christopher Graves]

NEH makes a critical point when he said, "[i]n the long run, I have absolutely no faith in any of these Revolutions ending in any type of Democratic view, Democratic Institutions, or a Democratic way of life."

The key is the way of life that gives rise to political, legal, and economic institutions in everyday practices and attitudes. Democratic procedures cannot be set down in a vacuum producing a free society.

[Jack]

Chris, yup! We're having a fairly hard time trying to maintain anything resembling rule by and FOR the people here.

The explanations for these graphs along with awarding those who've already taken most of the productivity gains for the last four decades, UNAFFORDABLE tax breaks lead all too often to lobbyists carving off bennies for their well-heeled, but often unethical, employers.

http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/

BTW the giveaways reported by the bipartisan deficit commission thru the tax code are huge, including, as we try to save pennies attacking PBS and other programs favoring working folk, allowing hedgefund managers to pay only 15% rather than the 35% income tax of the post-Bush deal, or the 38% before the unaffordable tax cuts were implemented.

http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/

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[M.A.]

"...Saudi Arabia and Turkey have the highest index of overall economic freedom of any of the larger MENA countries. Their levels of economic freedom place them in the “moderately free” category."

Saudi Arabia "might" have a "degree" of economic freedom, but it is because of its vast oil reserves, however this economic freedom has brought no political or even social freedom to this country. It is in total contrast to what Friedman was saying, the very first step to have political (or even social) freedom would be to have economic freedom. "Governments never learn. Only people learn." Milton Friedman

[Jack]

M.A. Indeed. You have me reflecting on the "role" economic freedom in women's sufferage (connection to robber barons of the era?) or in the civil rights era of the 60's?

Perhaps a case for the opposite? The wealth ginned up by Saudi oil allows the inefficient ban on women driving themselves and having to have a driver to extend long past its time.

""Governments never learn. Only people learn." Milton Friedman"

......... Aah the old cliche smith! Another for whom the connection between the people and their representative government was lost in favor of our all being minions of "the market" and other scams resulting in the rising tide of productivity lifting primarily the gilded yachts as the dinghies and launches sink.

[Ringobiz]

i think first thing to do is to take down OPEC cartel.

[Jason M.]

Reading the comments I get a sense that oil production is one of the biggest issues the West is concerned about. The glorious ideas of spreading democracy, freedom for the people and a better world order seem as usual just a bunch of nothing promoted to cover up the real motives. At least we have the internet to express our dissapointment.

[Jack]

Jason: Perhaps not. As predictions about "spreading democracy" to those not having such a tradition in an area with a LONG history of religious crusades, theocratic or militaristic dictatorships are beyond our reach, perhaps we then attempt to deal with symptoms.

It's obvious that we are reaching some limits in both the supply of fossil fuels and the "wisdom?" of burning yet higher amounts in an endangered atmosphere.

Despite ideals as great as those of today, world-wide unemployment, oil, and starvation all played a role in WWII. Few today recall our own GI's being much smaller than those of today with the most frequent reason for failing the physical ailments related to food and vitamin deficiencies in their developmental years.

Food for thought? As you endure the minor annoyance to most of us of tossing increased numbers of hard-earneds into the old gashog, just imagine what $4 gas and $100 bbl oil does to those whose monthly incomes would be less than the price of 42 gallons of oil......... and the related costs of food, both due to their oil based production costs and the silliness of trying to maintain our fleet of gashogs on corn based ethanol.

[Joe Smith]

In today's Wall Street Journal (3/12-13, 2011) there is a chart of US Petroleum consumption, production and imports from the 1950's thru the 2000's that accompanies an article entitled "Obama Confronts Oil-Policy Critics" by Stephen Power. In my edition it appears on page A4.

Joe Smith

[oil mill]

In surgent human society, can let oneself have a light interaction,

[Gaston Cantens]

The Heritage Foundation and The Wall Street Journal prepare annual indexes of overall economic freedom for many countries, including those from the MENA region, that can be roughly compared across countries.

[Gaston Cantens]

The Heritage Foundation and The Wall Street Journal prepare annual indexes of overall economic freedom for many countries, including those from the MENA region, that can be roughly compared across countries.

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[Pepe Fenjul Jr.]

Studies have shown that the degree of economic freedom in different countries in any year is positively related to their subsequent economic growth.

[plumbing]

I think the conflict in middle east countries affect the economic crisis in their fields. Middle east countries are the main contributors of gas and they are the one who can initiate their products whatever will happen in their country.

[Pepe Fenjul Jr.]

The large volumes of foreign capital that became available during the 2000s would have been a perfect source but few investors were willing to take on the massive regulation and powerful interest groups. Long time energy investor.

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