Economics, Capitalism, and Political Development

For those who are interested, one of the Economist's blogs is having a "summer book club" discussion of Milton Friedman's Capitalism and Freedom.

As reported by the Gulf News and linked by Emirates Economist, Abu Dhabi, of all places, is having serious fuel shortages these days.

Washington Post reports on Saudi Arabia's plan for a post-oil economy. Major problems are that education is still poor and Saudi manufactures are extremely few.

These are all related. How? I don't really have the time to go into great detail, but the bottom line is that Gulf states have massive economic resources in their hands due to the riches beneath their soils. These states have been able to extract these resources with relatively little effort and development. The knowledge and expertise for this industry was rented, leased, bought, contracted, however you want to look at it, from developed economies. The technical know-how, the instruments, and the educated citizens were bought, brought to Arabia, and turned to at extracting oil. This came at quite a profit to the oil companies and their employees, but also to the state governments themselves. But, critically, in this jump to prosperity, the ruling elites were never forced to build a state: educated citizenry, capable institutions, far-reaching infrastructure, heavy industrial base, and the rule of law and sense of national identity that binds all of these things together.

Like the communist economic system, this state-centric economic system is showing signs of wear and tear as the Abu Dhabi story points out. An oil rich Emirate cannot supply its own citizens with gas because there is no incentive for companies to do so at unfavorable terms. Gulf states are realizing this, and are moving toward greater degrees of privatization, are attempting to improve infrastructure, and are revamping educational curricula. Yet, some of the most important aspects of state-building, the involvement and investment of the citizens, unified under a national identity and respect for the rule of law as enforced by the government, is lacking. This will be a major challenge in the coming years. How do Gulf rulers change their societies to create post-oil economies that employ citizens in a meaningful way and provide them and their government with a powerful income source without giving up the social provisions, price supports, and other handouts upon which they have based their legitimacy? And once citizens are more educated and involved, can the ruling elites keep the tight grip on the press and other levers of power that they now have?

The Gulf over the coming years will be a real-time laboratory in state-building as they attempt to jump to economic prominence that it took other countries centuries to create. While this project is starting with the economy, there is likely to be a great deal of spill-over into the political realm, which is a main topic of Friedman's book. If the Gulf is successful in creating a post-oil economy capable of maintaining some degree of the income it enjoyed from oil, the political sphere is likely to look quite different than it does today.