The Middle East’s paradox of plenty
by İhsan Işık*

What prevented Egypt from joining the global winds of democratization in the 1980s was “the oil of diplomacy.” First, there was the competition between Moscow and Washington to win Egypt over through foreign assistance during the Cold War era, then the investments of oil-rich Gulf countries and Egyptians living abroad and finally Egypt’s discovery of its own natural gas and oil in the 1980s and 1990s put off the public’s resistance. When Egypt found oil and natural gas, the people thought it was a blessing gushing out from underground. But this wealth never turned into a blessing showering over them. To the contrary, the dark fossil fuel bursting from the ground became a calamity for the Egyptian people.

According to several scholarly studies, the richer countries get, the more democratic the administrations become. But there is one exception to this process. If national wealth relies primarily on natural resources such as oil, natural gas, diamonds, gold or copper, then democratization in that country either slows down or completely stops. Recent studies have found that resource-rich countries (compared to resource-poor countries) are not only more anti-democratic, but they are also backward in economic development and more prone to civil clashes. In political economy, the rich country-poor, suppressed people contradiction is called the “paradox of plenty,” “the resource curse” or “the Dutch disease.” The paradox of plenty is seen in countries that found oil before installing laws and democracy more so than in countries that found oil after establishing laws and democracy, such as Norway, Denmark, England and the US.

Inverse correlation between oil prices and democratization

The income per capita in oil-rich Organization of the Petroleum Exporting Countries (OPEC) members declined by 1.3 percent between 1965 and 1998, while the income per capita increased by 2.2 percent in poor countries, a scientific puzzle. Some recent studies found an inverse correlation between oil prices and democratization. According to Stanford University’s Larry Diamond, none of the 23 countries that derive most of their export earnings from oil and natural gas is a democracy. According to Freedom House, the worst year for freedom in the world since the end of the Cold War was 2007, the year when oil prices peaked. Freedom of speech, freedom of the press, free and fair elections, freedom to organize, the transparency of the government, the impartiality of the judiciary, the maintenance of laws and the establishment of independent political parties and nongovernmental organizations are hurt in oil-rich countries when oil prices rise. In contrast, when oil prices decline, signs of freedom substantially improve.

The country that comes closest to a democracy in the Middle East today is Lebanon, which doesn’t have a drop of oil. Again, among Gulf countries, the country that held the first free and fair elections and grants women the right to vote and be elected is Bahrain, whose oil reserves will be the first to run out. To minimize the economy’s reliance on oil and raise the public’s labor productivity, Bahrain hired foreign experts, renewed its education system, opened vocational schools, repositioned its teachers, closed down sluggish state economic enterprises and promoted technology and production investments. But in 1998, when Bahrain began debating corruption and started making legal reforms, the price of a barrel of oil was only $15. When oil prices reached $150 in 2007, reforms slowed down as the administration switched its focus from necessities to desires.

Nigeria has collected more than a quarter trillion dollars from oil in the last 30 years. Despite this wealth, the per capita income in Nigeria declined 15 percent in that period and the number of people living in extreme poverty rose from 19 million to 84 million.

Similarly, two-thirds of the people in Venezuela, the most oil-rich country in Latin America, live in poverty. Saudi Arabia has the biggest oil reserves and exports in the world. Oil accounts for more than 90 percent of the government’s revenue and close to 75 percent of export revenues, but wealth is not distributed evenly in this country. Income distribution declined in Saudi Arabia between 1980 and 2000 and the average income of the population dropped by nearly half. Russia, which was formerly one of the two super powers, lost sight of its scientific and technical achievements, and became a big spender that makes more than 70 percent of its national income with the minerals removed from wells.

Clashes over resources

Of course, wealth in resources brings with it clashes over sharing. During the clashes that broke out in Sierra Leone in the 1990s over “blood diamonds” 75,000 were killed, 20,000 were injured, 2 million were displaced and thousands of children suffered psychological trauma.

So, why is economic development slow in resource-rich countries? To start with, it is easy to waste wealth that bursts from the ground and is easily obtained. The complete reliance on oil for revenue makes the economies of OPEC members weak and subject to price fluctuations and complicates financial management. Additionally, the distribution of natural resources in countries like this where the rule of law is not fully in place and regional and ethnic differences are deep seated naturally produces a tug-of-war and results in the powerful side seizing resources. Harsh tug-of-war fights harm the social and economic fabric of the nation over time and cause the national wealth to evaporate in the midst of brawls.

According to the Financial Times, ousted Hosni Mubarak has a fortune of $70 billion in banks in the West. He recently gave a bribe of exactly $2 million Saudi officials when ordering an $80 million fighter aircraft from the British arms company BAE. Additionally, natural resources deepen internal conflicts by increasing foreign interventions.

Resource-rich countries also suffer from an illness called the “Dutch disease.” When the Netherlands found vast deposits of oil and natural gas in the North Sea in the 1960s, it caused an increase in natural gas exports, which led to a large increase in foreign currency. As a result of this, the value of the Dutch currency became extremely high.

An over-valued currency made Dutch industrial goods expensive for other countries and the industrial goods of other countries cheap for the Dutch. Exports hit rock bottom while imports hit the ceiling. There was also a major shift of talent and capital from the industrial sector to the oil industry. Soon Dutch industry started to collapse and the economy started to contract. Oil became a disease for the Netherlands.

Another problem for resource-rich countries is they undertake excessive borrowing because they count on high prices but then encounter challenges in the future. A precautionary measure that these countries can take against the Dutch disease and price fluctuations is to create “stability funds” and to save during good times and spend during bad times. Another solution is to meet government expenses with domestic revenues and to use natural resource revenues to make foreign investments.

Oil really does prevent democracy

So why are resource-rich countries anti-democratic? When Professor Michael Ross researched this matter, he found that oil really does prevent democracy, a problem not unique to Middle East countries, as other resource-rich countries face the same situation. According to Ross, one of the reasons for the oil-democracy conflict is the tendency of oil-rich countries to collect very limited or no taxes from citizens and companies. Considering how in the past Americans said “no taxation without representation” to refuse paying taxes unless they were represented in the British parliament, oil-rich countries that don’t collect taxes from the people are in a sense saying, “No taxation, no representation.” Since the public pays no taxes to the government, it cannot hold the government accountable and since the state makes revenue from oil and not taxes, it ignores the demands of the people. Moreover, high oil revenues are exploited to feed all sides, silence opponents and curb democratic pressure. Additionally, being rich in resources helps the government control all civilian groups and stifle the formation of anti-regime civilian organizations. Another factor is that administrations with rich oil resources build large police, intelligence and army organizations and don’t give their opponents any respite. Finally, oil wealth removes the pressure for urbanization, specialization and higher education from the country and causes lethargy.

The paradox of plenty brings to my mind claims that people in our country have been voicing for many years about how Turkey’s underground is teeming with valuable minerals but that their excavation is prevented by foreign powers, or how we would be swimming in wealth if only we had oil or gold. Perhaps our biggest fortune as Turks is not having won a “lottery” from underground and having had to make our own living. Why else would resource-poor Turkey be shown as an example by the world to its neighbors? We are no longer in the minerals age. We are now living in the information age. Winston Churchill’s prophecy that “the empires of the future are the empires of the mind” solves this paradox. Today, products of the mind make up 70 percent of the world’s top companies. The social network site Facebook, which has 500 million members, was set up by a young man and is invaluable. The founder of Microsoft, Bill Gates, who is richer than close to a hundred countries, is not an oil sheikh, he is a knowledge worker. It is evident that in this era that a country’s biggest wealth is not the stones underground but the heads above ground.