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.

 

 

 

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