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Venezuela proves Gulf prosperity should not be taken for granted

As the political crisis unfolding in Venezuela seizes the headlines, analysts frequently draw attention to the fact that the South American country has the largest oil reserves in the world. The example of Venezuela, as well as several other African and Middle Eastern states, confirms that natural resource wealth is no guarantee of high living standards. In fact, in many cases, it seems as though an abundance of oil and diamonds may have been a leading cause of poverty and instability, rather than a source of prosperity.

Meanwhile, in the United Nations Development Program 2018 Global Human Development Report, all six Gulf countries were classified as exhibiting “very high human development”. Are the Gulf countries simply lucky? And if they have actually achieved something substantial, do they get enough credit in the eyes of commentators?

Contrary to popular belief, one can actually make a good case that the Gulf countries have been unlucky. Their oil and gas wealth is plainly visible, but what is rarely appreciated is the near absence of the traditional cornerstones of a modern economy.

The biggest problem faced by the Gulf states is their desert climate, as it creates an environment that is even harder to live in than the tundra of the Arctic circle. That is why, prior to the discovery of oil in the 1930s, the Gulf states struggled to support non-nomadic life. They had low populations, and very low living standards.

That experience was consistent with what humans have witnessed throughout history. The first step toward economic development is the creation of an agricultural surplus, as that allows society to only have a small percentage of its population engaged in food production, with the rest free to pursue other economic activities, from industry to science and art. In a true desert, a fulltime intellectual or inventor is near fantasy, as a Bedouin’s primary concern is how to avoid starvation over the course of the coming week.

The importance of productive agriculture is a key reason why human civilization started in fertile lands such as Mesopotamia and Egypt, and why it went on to flourish in the temperate regions of Europe. It also explains why one can scarcely think of prosperous desert nation at any point in history.

Until the present day, however. In 2016, in the 50 richest countries in the world according to per capita income, only six had a desert/arid climate—the Gulf states. And they achieved this in spite of their bad luck in the agricultural domain: the average global rank of the Gulf countries in arable land per capita is 193rd, and in forest land per capita is 201st.

How did the Gulf states manage this? As the desperately unfortunate experience of Venezuela confirms, there are many difficult steps involved in transforming oil deposits into high living standards.

One factor emphasized by scholars is the monarchic government structure, especially when compared to the alternative of a military-dominated republic seen in many other African or Middle Eastern countries. Malfunctioning republics are characterized by extreme short-termism by their leaders, as the incumbent benefits little from long-term returns that accrue after their term ends (which often means after their death). This pushes them toward anti-growth policies, including expropriating foreign investors, anemic investment in infrastructure, and so on.

Monarchs, on the other hand, are typically more long-sighted, and that is a key reason why the Gulf countries have historically exhibited extreme respect for property rights, enabling them to attract large volumes of foreign capital. This is reflected in the analyses of global credit rating agencies, who perceive virtually zero expropriation risk in the Gulf countries. Earning the trust of international investors is arguably one of the most important policy successes of the Gulf countries, especially in terms of attracting the top global oil companies, and fully developing their fossil fuel deposits.

As demonstrated by various African and Middle Eastern countries, respecting property rights is certainly not an automatic consequence of being blessed with oil wealth. Moreover, when oil revenues have accrued, the Gulf states have demonstrated a strong willingness to invest those revenues in infrastructure, yielding significant economic returns in the long run.

The Gulf countries’ economic policy successes have not been absolute, however, and the limited progress in diversifying the economy is probably the most glaring shortcoming. Yet even in that case, it is worth noting that there is no proven diversification plan that has been shunned by the Gulf countries.

All previously successful diversification efforts, such as those of Indonesia, Malaysia, and Mexico, have been in countries rich in non-oil resources, and with non-desert climates, meaning that when you take the oil away, there are still many natural resources to work with. The same cannot be said of the Gulf countries, though Saudi Arabia is uniquely blessed with Mecca and its economic potential.

Commentators rarely acknowledge the economic success of the Gulf countries, preferring instead to imply that it is the automatic consequence of their oil wealth. It is seen as analogous to the “unearned” inheritance wealth of an aristocrat, despite the economic failure of so many oil-rich states, and the tough climatic hand that the Gulf countries have been dealt. Ironically, the exception that proves the rule is Dubai, as its economic policies are often lauded, but it is treated as an oil-poor state.