Natural Resources And The Economy Of Middle East Essay

The role of oil in the economies of the Middle East has altered over time and it is possible to recognize stages in its development. At first the main benefit was financial for the reason that, even though revenues were modest from the 1930s to the 1960s, these met most of the expenditure needs of the royal households in the Gulf and funded the major proportion of government current spending. Since oil production expanded in the 1960s revenues grew, and the quadrupling of oil prices in 1973-4 resulted in an enormous windfall. This could be interpreted as the second stage. Oil revenue was viewed mainly as a means of funding investment rather than just current expenditures, despite the fact that for some of the Gulf states the revenue was so great that it was probable to put some aside into ‘funds for future generations’. Because Middle East production stagnated and declined in several countries, the link between oil prices and development became of crucial significance. This was obvious from the infrastructure boom ensuing from the 1979 oil price rises, and the virtual halt to major investment projects following the price falls of the 1980s. (Mohamed Rabie, 1992). A third phase has now started in which the volume of exports and the price of crude oil is becoming of less importance for the economies of the region. Oil is less vital as an output however more crucial as an input. It is the marketing of refined products and petrochemicals which matters more and more, not the sales of crude oil. In these state of affairs pricing issues turn out to be more complex. Low domestic pricing of oil inputs can assist the international competitiveness of the Middle Eastern refining and petrochemicals industry, particularly during the entry, start-up and infant-industry phases. In the longer term Middle Eastern crude oil may not be internationally traded, instead it is oil products exports which will matter. In this situation OPEC’s declining significance as a cartel is less damaging to the economies of the Middle East than might otherwise have been the case. Diversification into downstream production means that it matters much less that oil prices are performing like those of other main commodities, with cyclical volatility and a long-term tendency to decline. The economies of the Middle East may still be oil-dependent; however the nature of this dependence is altering from output to input dependence. This has the advantage of being more controllable. Some of the issues which were important in the literature on the oil and development link are debatably now less pertinent in a period of lower oil prices. There was a long debate in the 1970s and 1980s regarding whether oil windfalls were a blessing or a curse. One argument for the latter view was the view that oil-dependent economies tended to undergo from ‘Dutch disease’, so called due to the effect of gas exports from the Netherlands in driving up the guilder, making manufacturing exports uncompetitive and imports cheaper, with ensuing adverse consequences for unemployment. Even though this argument is at first sight persuasive, and there was certainty proof in its support in the Netherlands and arguably in Britain, its relevance to the Middle East is open to question. (Mohammed Akacem, 1992). The countries of the Gulf had little local manufacturing capacity in the 1970s which could have been threatened, and the lack of labour was more of an issue than unemployment. Oil exports were in any case denominated in dollars, as were most imports, consequently the level of the exchange rate was of comparatively minor significance for trade. A strong exchange rate checked inflationary pressures, and any depreciation would merely have resulted in imported inflation which would have added to that generated domestically through supply bottlenecks. For countries such as Egypt, with manufacturing capacity and non-oil exports for instance cotton and textiles, Dutch disease was more likely, particularly as oil became more and more the leading export after the return of the Suez fields by Israel, and there was as well the indirect effect of Gulf oil exports on the exchange rate through remittances. Investigation by economists, particularly Bent Hansen, made known little empirical support for Dutch disease in Egypt. Cotton and textiles were mainly exported to Eastern Europe under bilateral trade deals that had administered rather than market prices. Imports were subject to tariffs, quotas, foreign exchange controls and other restrictions. The official exchange rate was itself-controlled, while admittedly at a high, and perhaps overvalued, level in the 1970s. It is uncertain, though, if a lower rate would have done much to boost exports, given the supply constraints in the Egyptian economy. (R. K. Ramazani, 1998). Oil revenues were most likely of more consequence at the political economy level, as they reinforced the role of the state by increasing both its power of patronage and its capability to control economic activity. There was less need to collect other forms of tax revenues due to the significance of oil revenues, and also conceivably less government accountability. All countries in the Gulf adopted some form of development planning, simply so as to find out their expenditure priorities and ascertain how spending plans interacted. The consultation when planning the expenditure of oil revenues merely extended to the government ministries, though, and not to the general public. In addition, governments often ignored their own development plans if circumstances changed, either through new defence and security concerns or due to the changing price of oil. References: John Page (1999). The Impact of Lower Oil Prices on the Economies of Gulf States; Middle East Policy, Vol. 6 Marc J O’Reilly (1999). Oil Monarchies Without Oil: Omani & Bahraini Security in a Post-Oil Era; Middle East Policy, Vol. 6 Mohamed Rabie (1992). The Politics and Economics of Oil; Middle East Policy, Vol. 1