Courtesy Reuters

Oil Wealth: A Very Mixed Blessing

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For nearly a decade now, the spotlighted fortunes of some oil-exporting countries have been a focus of global interest. Raw materials exporters among the less-developed countries have dreamed of being able one day to establish a producers' association similar to the Organization of Petroleum Exporting Countries (OPEC). The industrial powers have helplessly watched their political clout and economic affluence dwindle before the kingdom of oil. The capital-short and aspiring Third World planners have kept telling themselves (and each other) that if only they had this black gold, the magical élan vital for their economic takeoff would be close at hand.

With the significant jump in the price of oil in 1973-74, and the projected transfer of wealth to the oil exporters, the dawn of prosperity and progress for the petroleum-rich countries was widely and uncritically presaged. OPEC's immense and growing revenues were exponentially projected not only to improve balances of external payments, but also to help finance domestic development and defense needs. The Midas touch of oil was expected to reduce domestic costs of living through larger supply of (oil-financed) imports. Massive oil receipts were widely believed not only to enlarge and extend domestic goods and services, but to make budgetary deficits fiscally extinct. Vast new opportunities for wise domestic investments were to guarantee gainful employment for the rising labor force. Rapid, all-around economic prosperity was thought to be achievable without forced saving or painful belt tightening. Material prosperity and progress, in turn, were hopefully believed to lead to more social cohesion, greater political stability, a meaningful industrial democracy, and an eventual advanced-country status.

The outcome, as even the dullest observer knows by now, has been astonishingly less rosy and far more checkered. Prosperity has been achieved at the cost of mystifying new sociopolitical tensions in some countries. In others, progress, although palpably evidenced, has put in motion destabilizing internal forces. Except for a dwindling few countries, initially large balance-of-payments surpluses have turned into deficits. Skyrocketing imports, while contributing to both higher standards of living and greater productive capacity, have oddly enough exacerbated domestic inflation. Budgetary gaps in most countries, while partly the result of expanded public services, have been further aggravated. The sweet dreams about sociopolitical integrity, middle-class solidarity, and genuine technological progress still remain to be fulfilled.

In short, many oil exporters now seem to think, and some even publicly admit, that the "oil bonanza" has not been a clear or unmitigated blessing for them. A disenchanted statesman among OPEC insiders goes as far as to say that history may show that the oil-exporting countries "have gained the least, or lost the most, from the discovery and development of their resources."1

Even if a more sympathetic evaluation of the past record, or a brighter outcome of still future events, should significantly blunt this rather pessimistic assessment, the oil exporters' manifestly enormous social, political and economic problems cannot be summarily dismissed as temporary aberrations. For most of the oil-rich countries, the tradition-shattering changes, the political uncertainties, the security risks, the economic bottlenecks, and the structural distortions are probably greater today than in the pre-1973 era. The question being asked now is not merely what the oil affluence has done for the petroleum exporters, but also what it has done to them!

II

The purpose of this brief review is to examine the experience of some major oil countries over the past several years, and to relate that experience to what (with the benefit of some hindsight) might be regarded as the inexorable dynamic of an oil-reliant economy.2

Some of the troublesome and unpropitious consequences that have attended development strategies in the oil-rich countries during the period from 1973 to 1980 have been so similar in form and substance as to rationally rule out mere circumstantial coincidence. When such different economies as Algeria and Venezuela, Ecuador and Saudi Arabia, Gabon and Norway, Indonesia and Libya, Kuwait and Nigeria, Iran and Mexico end up facing nearly identical economic problems, there must be reasons other than happenstance.

These countries differ from one another in many respects-in area, size of population, natural resource endowment (including oil reserves), ethnic and religious origins, stage of economic development, standard of living, type of government, international association, and a host of other social and cultural values. In area, they range from Kuwait with only 18 thousand square kilometers to Algeria with nearly 2.4 million. In size of population, they rank from slightly over a million for Gabon to upward of 146 million for Indonesia. In volume of oil reserves, Saudi Arabia is reportedly endowed with 178 billion barrels of crude, compared to Ecuador with less than 2.5 billion. Some of the so-called low-absorbing countries in the group (e.g., Kuwait and Saudi Arabia) are dependent on oil for more than four-fifths of their government revenues, while such dependence in others (e.g., Mexico and Norway) is about one-fifth. Several countries in the group-the "high absorbers"-are endowed in varying degrees with other raw materials, a large supply of arable land, and a moderate to good industrial base (e.g., Algeria, Indonesia, Iran, Nigeria, Norway, Venezuela). While the non-oil sector accounts for as little as 28 percent in Saudi Arabia, it amounts to as much as 67 percent in Indonesia and Nigeria.

In ethnic and religious composition, some countries are Muslim Arabs; others are non-Arabs with a Muslim majority; others still are non-Arab Christians of different cultural and historical heritages. The stage of economic progress is highly advanced in Norway, and moderately forward in Mexico and Venezuela, but largely nascent in Saudi Arabia. Per capita gross national product (1979) ranges from less than $400 a year for Indonesia to nearly $11,000 for Norway, and over $17,000 for Kuwait. Political regimes vary from a conservative theocracy in Saudi Arabia to a highly advanced democracy in Norway-with a full spectrum of several party and nonparty systems in between. Some countries are members of OPEC; others are not. In short, there are probably greater heterogeneities in this group than there are in any other identifiable group of nations.

In the face of such outstanding physical diversities and inequality of natural and technological endowments, the one common binding element among these countries has been oil wealth. They all have been blessed with the shared prospect of receiving revenues from petroleum exports in a most fortuitous form which economists call rent.3 They have also shared the aim of using the oil proceeds to achieve three targets: raise the living standards of the present generation; follow a domestic development strategy which can ensure the welfare of future generations; and reduce dependence on oil through domestic diversification and/or external investments.

III

That the receipt of massive revenues for oil-rent taxation has been a clear financial boon to the economies of major oil exporters is a matter of consensus. Whether or not this oil wealth has put the recipients on the path to sustainable growth, prosperity, and progress, however, still remains to be answered. On the positive plane, there have been a number of integrative forces leading toward economic growth and material prosperity.

First, the quadrupling of oil prices in 1973-74, and corresponding revenues accruing directly to the state treasuries, helped finance increased public spending, and gave a thunderous boost to domestic economic activities. The immediate expansion of government expenditure varied from an annual rate of 26 percent in Algeria to 120 percent in Nigeria and 155 percent in Iran. Fiscal outlays in some of these and other oil-exporting countries were two to five times larger than the corresponding annual averages during the previous five years, 1968-1973.4 A large part of public expenditure went for investments in infrastructure, social service facilities, and productive capacity expansion. The ratio of investment to gross domestic product (GDP)-a good measure of national capital formation-more than trebled in Saudi Arabia, and doubled in Iran, Kuwait, Nigeria and Venezuela. Five years after the first oil price rise, 9 of the 13 OPEC members were devoting between one-fourth and one-half of their GDP to domestic investment-a feat scarcely matched by most of the developed or developing nations.

Growing public expenditure and investment caused, and was followed by, expansion of credit to the private sector. Annual private credit expansion in most countries in the five years after 1973 was more than twice the figure for the previous five years. Expansion of public and private demand, in turn, led to the growth of real GDP for all countries during most of the 1973-79 period. The average annual growth rate varied from less than 6 percent for Algeria and Venezuela to about 7.5 percent for Indonesia and Nigeria and over 11 percent for Saudi Arabia. More impressive were the rates of growth of non-oil GDP, which averaged about nine percent for all OPEC members, and as high as 13 percent for Kuwait and 15 percent for Saudi Arabia. The impact of oil was thus positive, extensive and enduring.

The second integrative force released by the oil affluence manifested itself in the government's ability to enhance public welfare through a series of measures such as expanded and improved public goods and services; increased labor employment particularly in the public sector; enlarged supply of consumer necessities (including food and fuel) at subsidized prices; higher national standards of living through larger domestic output and sizable imports; and, not least, reduced tax burdens. In some of the Arab countries in the Persian Gulf, national commitment to the creation or expansion of a state welfare system followed, and replaced, tribal and paternal attitudes and customs. In others (pre-1979 Iran in particular), the creation of a welfare state was modeled after some of the more "progressive" states of Northern Europe, and became an end in itself.

In the Gulf countries, free medical services for all ages, free education at all levels, housing and home sites at below-market prices and on easy credit terms, highly subsidized basic services and essential items, generous retirement pensions at a relatively early age, and the right to government employment at last resort became some of the outstanding manifestations of instant economic well-being. In these and other oil-exporting countries, not only was the physical landscape (particularly in large cities) changed beyond recognition, but the standard of living for a large portion of the population reached unprecedentedly high levels. Private consumption-a clear indication of improved material welfare-rose at the median annual rate of at least seven percent for all major oil-exporting countries in the period from 1970 to 1979, almost twice as fast as the 1960-70 rate, and almost twice as much as in low-income developing countries. For some countries (e.g., Saudi Arabia, Iraq and Libya) the average annual growth was around 18 percent. For Nigeria, the yearly rate of acceleration was five times faster than the decade before the oil price rise.5 Crowning the plethora of welfare measures, and higher consumption levels in most countries, there was a reduction or elimination of taxes on income, excises, imports and inheritance.

Third, there was a strong impetus to the rise of the middle class. The sheer increase in wealth, and the seemingly unstoppable dynamism of economic growth, clearly paved the way for the emergence and solidification of new middle-income strata in society-civil servants, entrepreneurs, professionals, medium-sized shopkeepers, skilled technicians and the like. The existence and growth of such a constituency is historically regarded as the main rudder of stability in the inherently destabilizing process of economic development-what Joseph Schumpeter called "creative destruction." Although this role has not been played unfailingly in all oil-exporting countries, the growing middle class has nevertheless been a progressive element in discarding some of the traditional growth-inhibiting factors in society, and in championing certain modernization causes. In particular, this class is potentially capable of blending together agreement on an identifiable national purpose, as well as the nature and scope of an internally relevant form of government.

Finally, public ownership of oil reserves in almost all major oil-exporting countries, combined with a captive export market where increasing volumes of oil could be sold, frequently at sharply higher prices, and paid for in hard currencies, gave national economic planners a rare and unconstrained opportunity to shape national economic destinies. Freed from stringent and back-breaking requirements for mobilizing domestic savings or obtaining investment capital abroad, national authorities had extensive and flexible options to put together a set of economically rational, socially unifying, and politically acceptable policies for the use of oil proceeds. The inevitably dominant role of the government in the economic development process had the potential of serving as a very stabilizing force.

IV

These beneficial aspects of the oil price rise for the major oil exporters are thus undeniable. What has been perhaps less clearly acknowledged or agreed upon are the cost factors. As time has passed, a number of unforeseen socioeconomic setbacks and reversals have emerged. These vigorous and persistent negative forces, initially affecting the economic arena, have subsequently engulfed the entire national superstructure in a chain reaction.

In the World Bank's tactfully guarded language, few of the oil-exporting countries have yet found "a development strategy that promises not only industrial growth, but improved rural development, expanded employment and redistribution of incomes, the provision of basic services to the poor and limitation of population growth."6

Foreign correspondents and press commentators have been harsher and more blunt in their assessments. The oil-exporting countries have been frequently criticized (although not always fairly or objectively) for misguided economic policies, megalomania, bureaucratic bungling, waste, inefficiency-and worse. None has come out with a clean bill of economic health. For example:

- Algeria's economic performance, under its own brand of socialism, has been blamed for its slow pace of industrial progress despite one of the highest investment/GDP ratios in the world; "abysmally low" productivity of its state corporations; imbalances in intersectoral priorities; and other shortcomings.7

- Ecuador has been scolded by its own President Osvaldo for the "extravagance of the 1970s," with agriculture declining, much of the new oil wealth "squandered," and forecasts of lean times ahead.8

- Indonesia-blessed with "endless resources"-is portrayed as suffering from chronic and high unemployment; immodest inflation; swollen bureaucracy; "skyrocketing" subsidies; "galloping" fuel consumption; and other "deep" economic troubles.9

- Iran's modernization under the Shah has been termed a blunder with "disastrous consequences" because of unduly activist government intervention in the economy; high wages paid to workers in nationalized and subsidized industries; crowding out of private sector investments; and the creation of a frustrated educated class.10

- In Mexico, oil has been considered responsible for bringing in massive economic imbalances-hyperinflation; a stagnation in tourism and non-oil exports; the highest balance-of-payments deficits in the country's history; one of the largest external debts for any developing country; towering interest rates; an explosion of consumerism; and a reduction of real purchasing power for "ordinary" Mexicans.11

- Nigeria has been faulted for an uneven pattern of sectoral growth; a large domestic resource gap despite $30 billion in annual income from oil; a snail's-pace growth in the standard of living of the masses; larger dependence on imports (even on food which was once exported); periodic food shortages; badly deteriorating public services; emphasis on the production of non-traded goods combined with heavy restrictions on external trade and exchange; a double-digit inflation rate; one of the highest annual population growths in the world; and declining non-oil exports.12

Even Saudi Arabia, which seems to have had better success with its development efforts than many others, has been subjected to rumblings about skewed income distribution between Saudi citizens and guest workers; the torrid pace of real estate speculation; clashes between concepts of modernization, industrialization and materialism on the one hand, and traditional Islamic fundamentalism on the other; concern over a permanent population of immigrant workers; eroding traditions of seniority, hospitality and thrift; and waste.13

Judgments on Venezuela-Latin America's richest country-have run along similar lines. Although the Venezuelan economy is still in better overall condition than those of other Latin American countries, there are criticisms that oil riches have failed to "trickle down" despite more than 20 years of democratic government. A nearly ninefold increase in oil incomes in six years has not produced a better life for the average Venezuelan, but led to economic dislocation and steep inflation; virtually all the grandiose schemes have fallen short of expectations; out-of-control bureaucratic expenditures have surpassed the oil income with the national debt climbing upward; the country has faced the first trade deficits in 50 years; unemployment has reached a two-digit figure; and state industrial losses have been on the rise. In the words of its own elder statesman, Perez Alfonso, nothing was better in 1980 than in 1974-not even the growth rate.14

And Norway-a country with a long tradition of democratic and efficient economic management, the advantages of a late start in the oil game, and every chance to avoid the oil trap-has not escaped the oil "curse." While Norway's plight has been dubbed the "disease of the rich," and its problems portrayed as "golden ones," the dilemma created by the oil wealth has apparently been both real and painful. By various accounts, the newfound oil wealth has priced some traditional industries out of world markets due to high wages paid to skilled workers and the effects on domestic prices. The traditional manufacturing industries have faced spiraling costs and dwindling productivity; their exports have stagnated in the face of an appreciating krone. Oil riches have been used to subsidize consumption, job creation and decaying industries. Inflation has been kept partly in check only by a long wage and price freeze and is now running at a double-digit rate. Industrial production in 1981 was only at the 1973 level. And there has been a population shift toward the Oslo region.15

V

Such assessments of individual countries may be regarded by their authorities as too harsh-unjustified or at best one-sided. Yet they often reflect factual information supplied by the countries themselves. Certainly the relatively hard figures alone-on inflation, budgetary gaps, external imbalances, rising dependence on oil, etc.-would be enough to call for an attempt at explanation as to what went wrong. A brief glance at the pattern of developments since 1973 in the major oil-exporting countries may offer some clues.

As already noted, the immediate and almost simultaneous result of the 1973-74 oil price rise, for the producing countries, was a sharp increase in public investment-in infrastructure, basic services, and industries with long gestation periods. There was also a substantial expansion of credit to the private sector. In consequence, investment, wage levels and consumer demand shot up, with domestic production lagging far behind, in the producers' largely underdeveloped economies with their many supply rigidities.

Thus, internal price levels began to rise steeply. The consumer index, which rose at an average annual rate of only 0.6 percent in Kuwait during the 1960-70 period, accelerated at an annual rate of nearly 18 percent in 1970-79; for Nigeria, the figures were 2.6 percent versus 19 percent; for Iraq, 1.7 percent and 14 percent. In Iran, the index climbed from an average of about five percent in the 1968-73 period to more than 15 percent in 1974-79. Venezuelan price levels went up eightfold within a decade, and inflation in Mexico rose to a rate of 30 percent in 1981. Even in Norway, the inflation rate during the 1970-79 decade was twice the 1960-70 rate. Among the low-absorbing surplus group, Saudi Arabia had the highest rate-an average of 16 percent a year between 1974 and 1979, with a peak of 35 percent in 1975, compared to less than five percent a year from 1968 to 1973.

To meet rocketing demand for development, defense and consumption needs, the authorities opened wide the import gates. An extensive array of capital and consumer goods soon found their way into the activity centers of the oil-exporting lands. For example, foreign purchases during 1970-79 grew at an average annual rate of 12 percent in Venezuela, 20 percent in Nigeria, and 39 percent in Saudi Arabia. Compared to annual imports in the 1960-70 decade, the lowest growth ratio was still three times higher in the case of Venezuela, and as much as six times more for Indonesia, 13 times larger for Nigeria and 15 times bigger for Algeria.16 While a substantial part of these imports were in the category of capital goods and defense needs, consumer items too kept their distinct share.

In theory, and under normal circumstances, such unrequited imports (i.e., paid for by extra incomes from higher export prices and more favorable terms of trade) should have served as a buffer against immoderate price hikes. In the case of the oil economies, however, the salutary effects of increased imports (and additional supplies) were substantially offset by two attending unwelcome factors. Import prices in the industrial countries were themselves on the rise due to internal inflation (partly blamed on higher fuel costs) and because of worldwide shortages of certain items.17 Moreover, a series of impervious physical and administrative bottlenecks (e.g., port congestion, overworked transport, poor distribution systems, and inadequate experience in inventory management) played havoc with the planned deliveries and utilization of imported capital and consumer goods. The results were admittedly much waste and more inflation, particularly in the urban centers.

Rapidly rising prices, in addition to triggering familiar imbalances in the economy (i.e., unintended income redistribution, unproductive speculation, commodity hoarding, capital flight and other social ills), went hand in hand with other similar distortions. First, wages and salaries in the expanding public sector (and among growing public enterprises) accelerated upward beyond modest gains in productivity. With the tacit approval if not actual encouragement of the state, private sector wages and salaries soon followed the trend. Thus, wages rose at an average of 30 percent in Iran in 1974-75 alone; for certain special categories (e.g., industrial and construction workers) the 1975-76 wage index went up as much as 48 percent. In the mid-1970s, labor remuneration rose at an average annual rate of nearly 19 percent in Venezuela; in Mexico, urban minimum wages went up at an average annual rate of 27 percent-exceeding both productivity gains and cost-of-living increases. In Kuwait, wages rose by an average of about 25 percent in the period from 1973 to 1979; in Saudi Arabia weekly pay rose at an annual average rate of 15 percent in the 1976-80 period and as high as 35 percent in 1977. In all other oil exporters the heightened demand for housing, construction projects, and non-tradable goods and services was reflected in a drastic rise in local wages (particularly for skilled and semiskilled groups)-with the private sector having to follow high public sector rates. In some countries around the Persian Gulf, manpower shortages and spiraling wage hikes were somewhat eased through immigration. In others, higher wages added to rising production costs.

At the same time, prices of imported goods and those of the nationalized and "modern" industrial enterprises were kept down by increasing subsidies out of the national budget.18 In Indonesia, subsidies grew 15 times larger in six years. In the six surplus countries (i.e., Iraq, Kuwait, Libya, Qatar, Saudi Arabia and the United Arab Emirates), food, fuel, water, electricity and other basic necessities were heavily subsidized. Notably cheap fuel prices in a number of oil exporters (e.g., Indonesia, Ecuador) encouraged domestic consumption to the point of jeopardizing the growth and indeed the continuation of petroleum exports beyond 1990.19 In others, the subsidized new industries became increasingly inward-oriented and unable to compete in world markets.

Furthermore, welfare benefits and entitlements were increased and broadened generously-with scant regard to their snowballing effects. Stark warnings came later. The relative stability of nominal oil prices after 1975-in the face of worldwide inflation-coupled with the paucity of non-oil taxes and climbing public expenditures in a majority of oil-exporting countries, pushed budgetary deficits to historically high levels in some countries (e.g., Nigeria) and to an uncomfortable magnitude from time to time in others (e.g., Algeria, Indonesia, Iran, Mexico, Norway and Venezuela). Even such low-absorbing countries as Libya and Saudi Arabia experienced budgetary deficits in some years between 1974 and 1979. And with the exception of six relatively small countries (e.g., Iraq, Kuwait, Libya, Qatar, Saudi Arabia and the United Arab Emirates) all other major oil-exporting countries ran into periodic or protracted balance-of-payments deficits during the 1973-80 period.

Still further, the exchange rate was allowed to rise effectively and to remain overvalued. By keeping prices of foreign goods and services relatively cheap in local currencies, the authorities sometimes managed to keep domestic inflation temporarily or partially suppressed. But relatively high and stubborn inflation throughout the 1970s caused the effective exchange rate (i.e., the nominal rate adjusted for local rates of inflation compared to those of trading partners) to appreciate by various degrees among some oil exporters. The 1973-78 effective appreciation was about 50 percent for Nigeria, 70 percent for Indonesia, 40 percent for Gabon and 25 percent for Ecuador.

In other countries (e.g., Saudi Arabia) the exchange rate was officially adjusted upward periodically against the U.S. dollar. Only Indonesia and Mexico reduced their exchange rates to improve competitive positions. In other countries, the rate was linked to a weighted average of currencies of major trading partners. To the extent, however, that local inflation generally surpassed the prevailing rates abroad, the nominal exchange rates adversely affected non-oil exports. Instead of keeping pace or increasing relative to oil exports, the percentage of these non-fuel items in total merchandise exports dropped after 1973 in almost all oil-exporting nations.

Finally, troubles became overpowering when domestic infrastructure facilities (e.g., port capacity, warehousing space, urban dwellings, transport, power supplies, building materials, etc.) gave way, as they did in almost all the nonindustrialized producing countries. Racked by spiraling costs, and ravaged by frequent breakdowns of incapacitated facilities, many governments were faced with a situation that called for immediate remedies. The authorities' reaction to the urgent physical and financial needs of the overheated economy was reflected in their resort to price controls, anti-profiteering campaigns, forced sale of privately "hoarded" merchandise, customs auctions, importation of foreign labor, foreign borrowing, contracting out of many public projects to foreign firms on a "turn-key" basis, etc. With the exception of a few small Persian Gulf states which followed liberal trade and exchange policies, most other major oil exporters were forced to exercise routine controls on prices and incomes. Most also kept domestic interest rates on deposits and loans at lower levels than the prevailing world market rates-for different reasons, but mostly in the hope of keeping inflation down. In certain "open" economies like Iran, Kuwait, Mexico and Venezuela, these interest differentials gave rise to considerable flights of capital.

VI

The cost of economic progress in the major oil-exporting countries has thus been neither small in magnitude nor limited in scope. World Bank data show that despite the average annual growth rates of domestic investment in many oil economies during the 1970-79 decade running more than three times faster than similar rates in the period from 1960 to 1970, these countries managed to increase their overall annual GDP growth in the 1970s by no more than one-third over their respective rates in the 1960s.20 Almost all countries were also faced with a decline in agricultural activity, and an increased dependence on petroleum as a source of sustained livelihood and continued growth. For some countries, growing budgetary deficits, rising external debt, and internal unemployment were additional costs.

The question is why? Why did things not work out as expected? Why have so many different countries been so uniformly trapped not only by severe economic problems but by internal political ferment, social tension, identity crisis, and an overall malaise? Has there been coincidental bad luck? Or have there been identifiable causative forces at work?

The answers are frustratingly elusive. Only certain corroborating clues may perhaps offer plausible explanations for the oil countries' embarras de richesse-though still at the risk of some oversimplification.21 At the top of the list, one may place what the French call a "lyrical illusion," i.e., an exhilarating state of near euphoria where state planners and the rank and file alike were disingenuously confident that oil money would solve all problems. Having considered the shortage of foreign exchange in much of the postwar period as the most critical single impediment to domestic economic development, national authorities saw their sudden affluence as the key to meeting all their needs. The preamble to Iran's Fifth Plan before the 1979 revolution epitomizes this supreme confidence. Based on the assumption that foreign exchange was no longer a constraint, the new plan was regarded as the "spearhead of one of the country's most brilliant and significant transformations [toward] the period of Great Civilization" when the country was to become the world's fifth largest industrial power.

Similarly ambitious outlooks and aspirations prevailed in Algeria, Ecuador, Mexico, Nigeria, Venezuela and others. Planned expenditures in almost all major oil exporters were geared to projected oil revenues rather than domestic absorptive capacity. Making the task of planning and implementation many times more difficult was the paucity of basic data, the dearth of experienced planners, and the acute shortage of skilled work force and bureaucratic superstructure. Blind confidence masked stark realities.

Second, where development and current outlays were not totally out of line with a country's potential absorptive capacity, the subsequent behavior of oil exports and prices made a hash out of confident expectations. Many post-1974 plans in the oil countries were based on the assumption of a steady rise in the volume and price of oil exports. However, the small nominal increase (and an actual real decline) in crude prices between 1975 and 1979, followed by a gradual decline in world demand for oil (and particularly OPEC oil) in 1980-82 drastically cut crude exports in some countries. Weakening spot market prices led to a series of official price cuts by many exporters (and in the case of Iran to even below the benchmark price). Plummeting oil revenues, in turn, delivered devastating blows to the launching or completion of certain major projects.22 As a result, the resource balance in many countries turned negative, and resort was made to borrowing from international capital markets. Severe contractionary policies were also introduced in nearly all high-absorbing countries in the late 1970s. In the process of this deflationary adjustment, private investment was seriously "crowded out" by public sector outlays.

Third, a basic inhibitive element seems to have been the inherent character of oil extraction and export. Unlike other dominant single industries (e.g., automobiles, housing, shipbuilding, or arms) which draw their inputs of land, labor and capital from a wide variety of other smaller industries, and in turn stimulate and evoke a wider range of productive and entrepreneurial activities, oil offers few such backward and forward linkages. In spite of major progress made in expanding domestic use of crude in meeting local demand for oil derivatives and for export, petroleum still remains a highly insulated and technologically advanced industry with little direct spillover into other economic sectors. Forward linkage projects such as petrochemicals, aluminum and steel, which are being developed now as an integral part of development strategies, are deliberately created to fill the void.

Fourth, a highly crucial seed of subsequent troubles in the less-developed members of the group appears to have been an uncritical identification of the "development process" with industrialization, and the equation of industrialization with modernization. From Algeria to Venezuela and from Gabon to Saudi Arabia, highest priority in public investment (or subsidies to the private sector) was given to a technologically advanced group of industrial schemes.

Advanced Western countries' politico-economic clout was generally attributed to their military/industrial might. Excessive reliance was also placed on the once fashionable theory, propounded in the 1950s by Albert Hirschman in particular, that deliberate tilting of the economy in favor of strategically selected industries is the best way to get an underdeveloped country off dead center.23 State planners in nearly all countries accordingly opted for heavy industrialization as a major development priority. The belief was that a big industrial push would stimulate a cluster of other activities whose benefits would soon "trickle down" to all lower social strata. For the oil-producing countries, however, the result in the 1970s was a much-regretted neglect of agriculture and rural development-with many dire consequences. The depopulation of rural areas not only reduced farm output, but contributed to the catastrophic overcrowding of urban centers and the explosive onset of social tensions.

Closely related to the preference for industrialization over agriculture, and protected import substitution over competitive export promotion, has been the choice of capital-intensive industries as the focus of public investment. Almost all countries bent on industrialization (read: modernization, progress) have preferred projects such as direct-conversion steel, petrochemicals, heavy machine tools, metallurgical and fully mechanized state farming. This phenomenon, dubbed Pharaohism by the critics, has meant the introduction of advanced technology in countries with little or no tradition in such sophisticated undertakings. In Saudi Arabia and a few smaller and sparsely populated Gulf states, this strategy may still prove to be appropriate, but the labor-saving character of such projects makes them more questionable in richly populated countries like Iran, Nigeria and Mexico.

Even in countries with relatively small populations per square kilometer of land (e.g., Algeria, Saudi Arabia, Venezuela), the tightly "encapsulated" and imported technology has imposed heavy burdens on the meager stock of skilled workers, technicians, engineers, teachers and managers. As the skilled labor shortage became more acute, poaching and pirating among various public and private enterprises tended to increase.24 National planners have tried to justify their strategy by arguing that modern equipment is both more cost-effective and a better source of training modern skilled workers. But in practice, things have turned out differently: equipment has often not been properly used or maintained, and local unskilled labor, instead of being properly trained, has often been replaced by foreigners.

Fifth, many governments, inadvertently or by design, have assumed an increasingly dominant role in the economy without adequate administrative and bureaucratic capabilities. There has been an inherent ambiguity in their pursuit of the double-barreled aim of nationalization of a large sector of the economy and, at the same time, creation of a welfare state. As rural migration quickened, a growing number of unemployed (and unemployable) migrant workers from farm areas became wards of the state-helping to increase overstaffing of public enterprises and inefficiency in public services. A staggering chunk of the public budget was subsequently diverted from productive investment to the support of a European-style welfare system without the benefits of prior industrialization and adequate government machinery. Under irresistible political pressures from a largely poor, frustrated, and impatient population demanding to receive its share of the oil revenues for a better life now, most government leaders simply could not afford to sit on the oil money and avoid spending it in one way or another.

Sixth, there has been a tendency toward a "maximalist" approach to domestic investment and public spending. Rooted in Hirschman's contestable "big push" theory, state planners have tried to hitch their economic wagons to unreachable stars. The justification has been disarmingly simple: without a broad vision, lofty goals and hard-to-reach targets, the resources and energies of a nation cannot be optimally mobilized.25 The outcome of this bold assertive philosophy, however, has invariably been a hyperboom. For a number of political, psychological and security reasons, most governments-particularly in the high-absorbing countries-seem to have opted for spending almost all of their new wealth at home instead of placing it abroad for slower and more orderly domestic investment at a later date.26 An impatience with the pace of progress has led national planners to go for highest-growth scenarios about which they themselves must have harbored some doubts.

Under the pressures of unmeetable demands by the public and private sectors, the fragile domestic productive structure thus became intolerably strained. And when the warning signals flashed, the authorities' response was inescapably political, and their measures often expedient. Many hurried and inadequately planned public undertakings, lacking experienced managers and skilled workers (and overburdened with politically vocal but economically underproductive labor) are now judged by outside observers to be much costlier than anticipated. They have surely accomplished much less than expected, or than could have been achieved in a calmer and more resilient atmosphere.

Seventh, in order to combat raging inflation, the authorities have somewhat wishfully resorted to the sort of "over-the-counter" remedies which helped relieve the symptoms temporarily, but like all such medication, made the removal of underlying causes perhaps more difficult. The benign policy of reducing high costs of living for the poorer strata in society (and spreading oil benefits to the widest possible segment of the population) has been implemented through public subsidies to high-cost domestic producers and inflation-ridden imports. The threefold objectives of these subsidies, i.e., helping low-income consumers, reducing costs of inputs in other economic activities, and protecting the new "infant" industries against foreign competition, were both popular and plausible. But these galloping outlays-easily financed while government's oil revenues were on the rise in 1974-75-turned into major burdens on the budget in the subsequent slack periods, 1976-78 and 1981-82.

Meanwhile, the control of inflation was undercut by the decision to allow wages and salaries to rise for public servants and urban workers-a policy designed to mitigate inflationary hardships, secure industrial peace and insure political loyalty. These increases necessarily spread to small-scale industries, non-oil exports and import-substituting activities, so that increased overall inflation canceled out the possible benefits of official or de facto currency devaluations in some countries.

Moreover, higher wages in the private sector were no help in reducing unemployment; in some high-absorbing countries (e.g., Indonesia, Mexico) the jobless reportedly remained perhaps as high as 30 percent of the labor force. Resort to a cornucopia of "quick fixes," like price controls, credit and interest-rate ceilings, import licensing, private investment regulations, etc., was psychologically effective for a brief period, but proved both socially divisive and economically counterproductive at a later stage in many countries.

Eighth, incontestably the massive influx of foreign exchange revenue from oil caused domestic currencies to appreciate officially, or in real terms, through domestic inflation. Oil-inflated and overvalued exchange rates were often allowed to prevail mainly in the hope of reducing inflation through cheapening imports.27 As a result, exporters of traditional items found themselves at a serious competitive disadvantage both in world markets, and in meeting prices of substitute imports. In consequence, almost all major countries saw the shares of agriculture and manufacturing (so-called directly productive sectors, which are at the mercy of foreign competition) shift downward in favor of government bureaucracy, domestic and external trade, and "luxury" construction (which are non-traded goods and thus immune to exchange rate changes). Despite the earnest pledge to reduce dependence on oil as a fountainhead of economic life and the locomotive of domestic development, the share of this sector in GDP increased in almost all countries.

Finally, there is the divisive social impact of the new "oil psychology"-variously termed petromania, quick-money fever, or the catch-as-catch-can syndrome-that emerged in nearly all countries. On the one hand, those groups seized by what was called the "lyrical illusion" have been both eager for progress and impatient with its slow pace. On the other hand, in countries where deeply ingrained patterns of behavior had not been altered for centuries, there has been intense resistance to change by other groups. Whereas the reformist middle class and other groups caught up in the oil boom tend to identify cultural traditions with poverty, suffering, inferiority and weakness, traditionalists (or religious fundamentalists) consider these same traditions as the source of inner strength and prideful identity. Hence, petromania has triggered what many observers see as an interminable struggle between privileged, "Westernized" progressive elites and cultural traditionalists.

In its most controversial aspect, the new "oil psychology" is portrayed (and deplored) as the materialization of traditional ethos; a ruthless search for wealth driven by frantic lusting after money status; and above all a decline in the cardinal virtues of self-reliance, both national and personal. And the sense of conflict is fed by the contrast between genuine entrepreneurs and less genteel manipulators, the rise of a rentier society, welfare hand-outs, and an ever-widening gap in income between rural and urban populations.28

These social divisions-impossible to quantify-have not only played a part in the economic problems of most of the oil-exporting countries; they may in the end become (as is already the case in Iran) the basis of political convulsions.

VII

From an economic standpoint alone, the near uniformity of problems faced by the major oil-exporting countries in the aftermath of their new affluence seems to point to a dynamic momentum which has clearly defied political, cultural and geographic differences. As each bit of progress has opened up a new pandora's box of fresh problems, the oil-exporting authorities have met similar challenges with like responses. The new oil wealth seems to have imposed its own model on all oil exporters. Given an unavoidable political decision to use the oil money for further development and diversification of the economy, and in the absence of a strictly coordinated planning process, development expenditures proposed by various public agencies have invariably exceeded anticipated revenues. Even with "brutal" pruning of the budgetary requests, national authorities in most countries have found no alternative but to expand (sometimes reluctantly) oil production and exports to meet the "irreducible" minimum budgets. Larger exports at higher prices, in turn, have whetted the agencies' appetite for increased appropriations. And the circles have turned vicious.

The bewildering similarity of the problems faced by oil exporters of different stripes and status, and the uncommon uniformity of responses and reactions shown to these problems, lead one to believe that an oil-generated economy must possess an inner dynamic of its own. This rather mystical belief is reinforced when one notes that both the integrative and the negative forces discussed above seem to have been at work not only in the countries that were suddenly and unexpectedly faced with more money than they knew what to do with (i.e., most OPEC members), but also in such countries as Mexico,29 Norway and even the United Kingdom30 which were latecomers to the scene, evidently well aware of certain risks, and publicly committed to avoiding the pitfalls common to other oil exporters.

Thus, all of them-developing or developed, large or small, rich or poor, northern or southern-seem to have encountered the inherent collision between the requirements of economic rationality (i.e., productive investments dictated by cost-benefit calculations) and the exigencies of social justice (i.e., a welfare state mandated by the availability of easy money). In trying to combine these conflicting objectives, some equity has been achieved at the expense of efficiency: the expansion of the welfare constituency through larger segments of society has unavoidably made fewer resources available for genuine economic growth. Some efficiency also has been obtained at the sacrifice of old economic ways and mainstays: traditional values, non-oil exports and self-sufficiency have been threatened. All in all, the "oil bonanza" has not meant impeccable bliss for any.

Are there lessons for the future in what has happened? With oil prices and production levels now dropping rapidly, in what some see as a continuing trend, what will happen to the economies and political stability of the oil-producing countries, especially those for which oil is the centerpiece of their economic structures?

Firm predictions are impossible. But three fundamental points are worth stressing.

To begin with, in almost all oil countries-even those with a thriving private sector-people's dependence on the state, as a nucleus of authority, assistance and support, has palpably increased. The state has become not only the focus of power but the initiator, promoter and monitor of all major economic activities-without being adequately prepared to assume these responsibilities. A major restructuring and reinforcing of government capacity is essential.

Second, governments themselves have become alarmingly dependent on oil revenues not only for long-term national economic development but for current consumption. Increased national commitment to elaborate and expensive development plans has increasingly bound the leadership to the maintenance, if not expansion, of oil production and export-even in the face of declining world demand. And a majority of increasingly articulate urban populations has become addicted to heightened consumerism. In most cases, national priorities must now be reordered.

Third, and most crucially, oil revenues have themselves become dependent, to a growing degree, on factors outside the control of the governments of the producing countries. With demand now below available supply at the official price, the key determinants are the pace of economic activity and growth in the outside world, oil conservation and increased efficiency in its use, and the supply and price of alternative sources of energy. Domestic monetary, fiscal and exchange policies have always been influenced by developments abroad, particularly for oil countries with substantial foreign assets; now these policies have been, to a troublesome extent, placed at the mercy of extraterritorial decisions, actions and trends.

Thus, governments that have come to be held responsible for the national destiny now face new and unforeseen difficulties. Even in the days of boom, their troubles were legion. How they cope with a continuing situation of stagnation, or worse, in the world oil market is an issue in which not only the oil producers but their major customers have an enormous stake.

1 Ali A. Attiga, "Economic Development of Oil Producing Countries," OPEC Bulletin, November 1981, p. 7.

2 The inner dynamic of an oil-rich economy discussed here connotes neither a Marxian (dialectic) nor a Rostowian (deterministic) approach to stages of development. It speaks only of the universality of certain emerging problems which were neither anticipated nor supposed to occur-but in fact did occur-within a diverse group of petroleum-exporting countries.

3 Economic rent is defined as a special, and fiscally speaking unearned, reward to the least-cost producers of a commodity in temporary short supply. Thus, due to the relatively low costs of extracting a barrel of crude in some oil-rich countries compared to the expenses of oil extraction elsewhere (or the costs of alternative sources of energy), the low-cost producers are able to anticipate and reap "windfall" profits from the sale of their oil.

4 Figures are based on data from International Financial Statistics, International Monetary Fund, Washington, D.C.

5 The increase in average per capita private consumption, however, masks the pattern of internal income redistribution among different social groups, and between individuals in the same group. Although difficult to quantify due to lack of statistical data, it is often argued that the new oil incomes have shown a great measure of maldistribution in many oil-based countries.

6 World Development Report, 1981, Washington: The World Bank, 1981, p. 114.

7 Financial Times, December 24, 1981; and The Economist, January 18, 1982.

8 Reuters, January 4, 1982; and The Wall Street Journal, April 22, 1981.

9 The New York Times, February 8, 1981; and The Wall Street Journal, January 20, 1982.

10 The Wall Street Journal, August 25, 1981.

11 The New York Times, April 6, and December 24, 1981, and February 20, 1982; The Wall Street Journal, August 13, 1981, and January 28, 1982; and The Washington Post, January 2, 1982.

12 The Times (London), March 16, 1981; The New York Times, July 23, 1981; and The Christian Science Monitor, October 8, 1981.

13 The New York Times, March 1, and March 23, 1981; The Wall Street Journal, June 2, 1981; The Washington Post, January 3, 1982; and The Economist, February 13, 1982.

14 The Wall Street Journal, February 3, 1981; The New York Times, August 3, 1981; and The Washington Post, October 7, 1981. Similar indictments have been leveled against Libya. See J.A. Allan, Libya: The Experience of Oil, London: Croom Helm, 1981, Ch. 10.

15 The Christian Science Monitor, March 31, 1981; The Economist, April 18, 1981; Financial Times, December 4, 1981 and The Wall Street Journal, January 13, 1982.

16 All figures are based on data from World Development Report, 1981, Washington: The World Bank, 1981.

17 According to data published by the International Monetary Fund, the export unit value index of the industrial countries-a rough measure of import costs to OPEC members-increased by nearly 25 percent in 1974 and 11.5 percent in 1975, with the average for the 1970-79 decade reaching 12 percent as compared to a mere 1.2 percent for 1960-69. See International Financial Statistics, Sup. No. 2, Washington: IMF, 1981. Some OPEC officials and neutral observers have charged that prices of certain specialty goods and services destined for OPEC were deliberately jacked up by foreign suppliers. See, for example, Walter J. Levy, "The Years that the Locust Hath Eaten," Foreign Affairs, Winter 1978/79, p. 299, and Robert Graham, Iran, New York: St. Martin's Press, 1978, p. 85.

18 The Saudi government reportedly pays farmers more than three times the world price for wheat, while subsidizing half the costs of agricultural machinery and fertilizers, in addition to interest-free loans and free gas for electric generators. In the industrial sector, incentives include free land leases, no-interest credit up to 15 years, tax holidays and custom-free imports. See The New York Times, January 24, 1982, and The Economist, February 6, 1982.

19 Interestingly enough, subsidized domestic prices of petroleum products substantially below world prices have not only been a major drain on national budgets; they have been contrary to the very advice given by OPEC leaders to the Western industrial countries in favor of energy conservation.

20 Part of the surprisingly high capital-output ratios was due to the concentration of public investments on low-yielding infrastructures or long-gestating heavy industries. But there were also other reasons.

21 In a broad sense, the experiences of the major oil exporters have not been too different from those of other countries undergoing commodity booms in the past. In fact, some historical parallels can be found with discovery and development of precious metals in North and South America. What makes the case of oil somewhat sui generis is the prevalence of similar problems in dissimilar countries at the same time, and the seeming disregard of the obvious and experienced risks.

22 In Nigeria, for example, a mammoth $14-billion liquefied natural gas project had to be postponed. In Iran, all the six giant projects which constituted the core of the Sixth Plan fell by the wayside after the revolution. Retrenchments occurred also in Venezuela, Mexico and even Kuwait. See The New York Times, February 20 and 22, 1982.

23 A. O. Hirschman, The Strategy of Economic Development, New Haven: Yale University Press, 1958, p. 36.

24 In Iran, with less than one-third of the per capita income of some European countries in 1978, some run-of-the-mill engineers, bankers and bilingual secretaries received several times higher salaries than their Western counterparts.

25 Western observers point to Saudi Arabia's $250-billion Third Plan (1980-85), compared to its $18-billion First Plan (1971-75); Iran's near doubling of its Fifth Plan (1973-78) from $36 to $69 billion is another frequently cited example. See "Filling a Void," The Economist, February 13, 1982.

26 One clear exception has been Kuwait, which with the benefit of an early start and severe physical limitations for internal development, has chosen consistently to invest a large part of its oil revenues abroad.

27 Mexico's second official devaluation of the peso by 30 percent in 1982, on top of the 40 percent in 1976, has often been cited as a prime example. See The New York Times, February 19 and 22, 1982; and The Wall Street Journal, February 22, 1982.

28 See A. A. Attiga, "How Oil Revenues Can Destroy a Country," Petroleum Intelligence Weekly, Special Supplement, October 19, 1981; and Peter Kilby, "What Oil Wealth Did to Nigeria," The Wall Street Journal, November 25, 1981.

29 As a seasoned observer reports, when Mexico discovered large new oil reserves in the late 1970s, it vowed to avoid the "mistakes" of other energy exporters, i.e., "disastrous political results" in Iran, Venezuela's reliance on food imports, Nigeria's port congestion, and Saudi Arabia's enterprises overrun by foreign technicians. And yet, "almost fatefully," Mexico also became addicted to oil. See The New York Times, February 20, 1982.

30 A recent commentary on the British economic situation finds it "hard to believe" that the British people have benefited from North Sea oil-in view of current output, investment and living standards which are at their lowest in years, with record unemployment and interest rates, and double-digit inflation. It concludes that the government has thus far "frittered away" most of the benefits of North Sea oil, and shows every sign of continuing to do so. See The Times (London), December 14, 1981, p. 15.

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