Saudi Arabia and the Paradox of Plenty

What is the Paradox of Plenty? It is also called the Resource Curse. Simply put it is like this: A country which is very rich in natural resources becomes dependent on these resources, and less likely to invest in other things which might be economically important, such as manufacturing. Countries like Saudi Arabia are textbook examples of what economists call the ”Paradox of Plenty”, or ”Resource Curse”. Such countries are rich and poor at the same time. They show no or very little growth, they are underdeveloped, politically and economically.

A 1995 study of ninety-seven developing countries by the economists Jeffrey Sachs and Andrew Warner found that the more important natural resources were to a country’s economy, the lower its growth rate was. Of all the resource-rich countries they studied, only two were able to grow as fast as two per cent a year, while a host of the resource-poor nations grew much faster. “Just look around the world, and tick off the countries that are resource-rich,” Warner says. “They are not rich countries, and they obviously haven’t grown rapidly, because otherwise they would be.” The biggest economic flops of the last decade—Russia, Argentina, Nigeria—abound in natural resources.

In Saudi Arabia it’s almost as if the money comes straight out of the ground, Saudi Arabia generates enourmos amouts of money for doing very little. As a result everything inside the country becomes expensive, labor included. Which means you cannot set up a factory, staff it with Saudi workers, and compete with the surrounding area. On the contrary,  although having a large percentage of unemployed men, and a close to complete unemployment rate for it’s women, Saudi Arabia’s workforce consists of about 80 to 90% foreign, temporary workers. (Foreigners are not allowed citizenship, even after decades of working in Saudi Arabia).
All these workers send their money home, so there is a constant drain of money out of Saudi Arabia.

When a country strikes it rich as an energy supplier, the collective attention of both the government and the civil society can become devoted solely to maximizing profits from the energy industry. This single-minded focus comes at the expense of other economic and development priorities, and can begin to dominate a country’s political and social life.

Saudi Arabia today has the added problem of a socially engineered society, which now incorporates gender segregation and gender apartheid. It is the oil wealth which actually enabled the Saudi government to implement the complete segregation of the sexes. When people need to work and earn an living by working, men and women have to ”mingle”. Now this gender segregation is in place, it is very difficult to create jobs for Saudi citizens. For foreign workers the segretation is not enforced in work environments, and this again strengthens the stigma for Saudi citizens, and especially women, to actually get a job.
This is one of the reasons Saudi imports millions of foreigners to do the manual jobs.  (Although for the really specialized jobs Saudi also imports a lot of foreign workers)
In the Saudi system it’s ok for a foreign woman to work in a Saudi household with unrelated men. But it is impossible for a Saudi woman to work for another Saudi family for a Saudi woman cannot be in contact with non-related men. A Saudi man cannot chauffeur an unrelated Saudi woman, but a foreign man can. And as Saudi women are not allowed to drive their own cars there are many foreign male drivers.
It is even problematic for a Saudi citizen to sell goods to another Saudi citizen of another gender. But, again,  it is ok for a foreign man to sell goods to Saudi women.
Another problem for the growth of a Saudi economy is that 50% of the population (women) cannot open or run businesses on their own. They need permission and complete assistance of a close male relative.
All these economical problems have been made possible only by the injection of oil wealth, virtually free money, into the Saudi society, and thereby halt it’s natural development and take it in a completely new, different, and unique direction.

Another negative effect we see in countries with vast natural wealth is corruption. Corruption flourishes alongside the income generated by the resource industry. Money that could be invested for the public good drains away into the hands of a small elite loyal to the ruling clique, whether the military (the BICC’s Global Militarization Index shows that many of the highly militarized countries are oil-rich states in the Middle East) or tribal leaders, who in turn safeguard the power of incumbent rulers.

 

A dependence on natural resources fosters the illusion that you get rich by taking what’s already there, rather than by creating something new. But the automobile, the electric turbine, and the computer chip were not there for the taking; they had to be created. There are countries that have recognized this and, in doing so, evaded the resource curse. Warner points to the example of Chile, which, despite vast copper fields, boomed in the nineteen-nineties. The growth rates of Malaysia and Indonesia over the past thirty years have far outpaced those of Middle Eastern states. And the little African nation of Mauritius became a powerhouse even though it started out with an economy that relied almost entirely on sugar exports.

These countries succeeded because they used their resource wealth to diversify their economies. They set up special export zones to encourage manufacturing. They countered the impact of high prices by devaluing their currencies. They opened their markets to free trade. And they invested heavily in education.

The oil-producing nations of the Middle East and North Africa, by contrast, have done none of these things. Their economies are still, for the most part, closed to the world. They have little or no manufacturing and, perhaps as a result, little or no technological innovation. They spend far more time fighting over how to divvy up the spoils than over how to create new wealth, which means that every economic decision becomes a political one. And they have invested very little in education. Saudi Arabia’s wealth is firmly in the hands of the royal family, from where it gets distributed to loyal citizens, and the military, police, clerics and religious police who keep the population under control. This was made clear during the Arab spring, instead of implementing much desired change and more democracy, king Abdullah opted for handing out larger sums of money to select groups to stave off any chance of the populace being inspired and rising up, and to buy himself loyalty of those who can suppress the rest of the population.

The oil producers are addicts. They prefer the comfortable squalor of staying hooked, to the work it would take to kick the habit. Ultimately, the resource curse is less something they are afflicted with than something they have inflicted on themselves.

Natural resources dwindle. If Saudi Arabia, and other Middle Eastern oil-dependent countries do not start to act soon, they are moving towards a miserable future.

Further reading:

Avoiding the resource Curse

The Resource Curse

The Real price of Oil

Globalization: the resource curse

1 hour lecture, Stanford University, this is really good!:

 

AA

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15 Responses

  1. “Natural resources dwindle. If Saudi Arabia, and other Middle Eastern oil-dependent countries do not start to act soon, they are moving towards a miserable future.”
    All too true. However, to implement the changes necessary would take at least one generation. Probably two generations.
    Of all of the Middle Eastern nations that produce oil, none have that much time remaining at current rates of consumption. While Saudi tends to keep the amount of oil remaining in the ground, there are approximations available that suggest that Saudi is either already at peak oil or very, very close to it.
    In short, too many changes to implement, including changing the society and too little time to do so.
    Of course, many of the oil producing nations DO have vast amounts of money in the banks, but that is also a finite resource.

  2. You’ve certainly said a mouthful! KSA is special as in ‘special needs’. As long as the extremely large royal family share control of the country with the extremely conservative religious controllers I see no hope.

  3. Much Saudi citizens are without job! People come from outside to work with a very good monthly salary. Some Saudi citizens don’t have something to eat except white rice!

  4. Very informative article, Carol! Hope you are feeling much better, you are in my prayers always ….

    Just read an article last week, which very much pertains to Paradox of Plenty or Resource Curse. It is about the annual ritual of ramadan gold rush: that time of year when the Arab royal plutocracy descends on austerity London to party and spend.

    And their shopping sprees are more blingtastic than ever. And some of the “stuff” they indulge in are just plain gaudy and outright sick. What’s the matter with these royals, Carol :)-

    Read More: http://www.dailymail.co.uk/news/article-2166706/Ramadan-gold-rush-Time-year-Arab-plutocracy-descends-austerity-London-party-spend.html#ixzz1zlzbhDsD

  5. Thanks for the report, AA. Interesting stuff!

  6. hi. the video by professor was worth watching the whole hour. i think i am going to order her book to read. scary stuff. hope the rulers of opec pay heed to these things. not just live for today but plan for tomorrow when the oil is gone. blessings

  7. Islam is the Best just that

    This website is not a platform for proseletizing, none of your comments are on-topic or add to the discussion. Your comments are spam. If you keep this up you will be put into moderation and your comments will be deleted.
    Moderator

  8. There’s a French saying that goes like this: “le chien aboie la caravane passe”. This si for Reza.

  9. And often the caravan doesn’t make it!

  10. The Saudi system is unsustainable as it is. Gender segregation only works by deciding that some men (ie: foreign men) are not really men so it isn’t mixing if they are driving the car.

    There are numerous models out there on how to progress from poverty to at least moderate wealth in a generation or two. Certainly countries like Taiwan did not have resources, but they value education for all and value human capital.

  11. Yes, I liked the video also! In 53-fascinating minutes, Professor Terry Lynn Karl summarized all the half dozen articles, referenced by AB.

    I was kinda disappointed (unless I missed it) that all the authors, including the professor, neglected to mention few other resource poor countries which are huge success stories today. I am, of course, referring to China and South Korea. There is also another country in the ME which has been equally successful. But I won’t mention it to keep peace and harmony on this forum and so as not to get this topic hijacked :)-

    In the early 60s, when the World Bank extended its first development loan to South Korea, the bank’s directors famously asked their researcher whether there was any chance of this impoverished and war-torn country ever catching up with the living standards of such wealthy African countries as the newly liberated republics of Ghana, Nigeria and Senegal, with their huge endowments of gold, oil, diamonds and forest products.

    Today, South Korea’s national income per head is 35 times higher than Ghana’s and three times that of Africa’s richest country, Botswana. Meanwhile, Peoples Republic Of China …. you can call it by any other names to your heart’s delight such as Thieving, Discriminating, Lying, Murdering, Undermining, Dehumanizing, Coercing, Subjugating …. which as recently as 25 years ago was less prosperous than even the poorest African nations, now has an economy five times larger than the entire African continent. You can google yourself the “other” very successful but resource poor country that I purposefully didn’t mention.

    Why have almost no African countries managed to achieve the sustained economic development which has lifted billions of people in China, South Korea, Singapore, Malaysia, Taiwan, etc. out of extreme poverty? The reasons are simple: war, corruption, and the curse of natural resources. Sadly, in Africa’s case, however, it is politics (war and corruption) more than economics that is to blame.

  12. Actually, I had the opportunity to read Professor Terry Karl’s book, assigned to us in an advanced macro-economics course, as part of the MBA program. The first half of the book is pretty much dry and wry. It picks up the tempo real fast after that when analyzing real world problems.

    Needless to say, her book is a good contribution to the scholarship of one-good exporters, such as oil for many Middle Eastern countries and Venezuela. The author sharply focuses like a laser-beam on Venezuela, with occasional reference to other countries.

    HA described many African countries who are resource rich but below the UN poverty guidelines, versus quite a few Asian countries who are quite the opposite. In the case of Africa, minerals provoke and finance territorial wars, as evidenced by the horrors of Zaire, Liberia and Sierra Leone, and can make politics a zero-sum struggle over mining rights, as in Nigeria since the Biafran war.

    They encourage corruption among politicians who have the power to grant these rights, and strengthen the military, whose job is to protect them. When the state’s revenues depend on oil and mining operations, rather than taxes on personal incomes, politicians and generals have every incentive to run their countries as kleptocracies. It’s a vicious cycle which continuously goes around and around and around, non-stop.

    In the not too recent past, well over a dozen African governments have responded to these pressures by signing up to the Extractive Industries Transparency Initiative, a UN-sponsored program committing member governments to publish details of their revenues from oil, minerals, forest products and other resources. The EITI, however, is a voluntary code depending largely on the honesty of governments and their susceptibility to pressure from the IMF/World Bank. To reinforce these pressures, NGOs have come together lately to create another institution, Publish What You Pay, to demand mandatory government disclosure of payments.

    Here’s the clincher: Enter China into this foray. Corrupt African governments suddenly discovered a “creative” way round this pincer movement – via China. Far from abiding by the ethical principles established by international transparency programs, China has used its ideology of absolute national sovereignty to cloak secretive natural resource deals with corrupt politicians in an anti-colonial guise. Chinese financial support for Sudan’s genocidal political leaders is the most familiar example of her indifference to international moral pressure, but there are many others. In Zimbabwe, Angola and Equatorial Guinea, Chinese resource deals have encouraged politicians to escape public scrutiny and dodge the demands for transparency from global institutions.

    Africans’, or for that matter Saudi Arabians’, hopes for development depend on drawing inspiration from the success of Asia. But if China’s economic expansion now thwarts the efforts of both Western and African civil society to lift the curse of natural resources, the gulf between Africa and Asia will grow even faster in the next generation than it did in the last.

    Day of reckoning is approaching fast, if it has not already, for resource rich but impoverished countries, to meet their doomsdays!!!

  13. Saudi cannot sustain the peak to less than peak production along with the number of native welfare participates and the majority of the work force being expats.

    Soon or later the spoiled backwards brutal brats are going to have an ugly awakening and with no allies but a list of enemies.

    In other words, when they run out of oil and/or money they will be treated accordingly as a brutal human violator who in the end had the life suck out of it as it offered nothing really of great worth other than black crude.

  14. Bigstick, you forget two important facts.
    1: Saudi has a HELL of a lot of money socked away in a number of banks from that oil.
    2: Desperate people, who yearn to retain power and position in the world, when left with nothing to lose, are quite capable of causing great, erm, mischief in the world.

    That isn’t the “ultimate plan”, it’s just how it goes, as proved repeatedly in history when powers began to fall.
    Now, the spoilage for the world at large can go two ways, towards the consumer nations OR towards the major powers, blaming them for their upcoming poverty.

    Off topic of your comment, I saw a few mentioning China as resource poor. Apparently, the commenters failed to consider the fact that China holds the majority of rare earth minerals, as well as a few other sparse commodities. As well as a large labor base, with cheap wages that can be sustained for at LEAST two generations, as wealth and work expands toward the most poverty stricken regions. Rather large, geographically speaking, nation and a SUPER large population.
    So, they can buy time before a weakening of their labor front, permitting a gradual shift over time to other profit centers.
    Pity that the US didn’t follow, after the Reagan years, my team’s suggestion: Make the US the R&D capitol of the world, license production out, but we hold the license and its fees.

  15. Wzrd:

    Yes they do have a lot of money but my understanding is that many of the royals spend right through it in a hurry.

    Often times desperate people inflict the worst upon their own.

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