Will the Saudi Kingdom Collapse Under the Resource Curse?

Will the Saudi Kingdom Collapse Under the Resource Curse? By Daniel Lazare. A strong rain of unearned wealth has perverse effects.

Its economy is in recession due to a 50 percent drop in oil prices. It’s on bad terms with nearly all its neighbors after bombing Yemen, sending troops into Bahrain to crush democratic protests, financing Sunni terrorism in Syria and Iraq, blockading Qatar, and arresting the prime minister of Lebanon. While seeking to lure foreign investors, Crown Prince Muhammad bin Salman has rounded up hundreds of princes and local businessmen in a reported attempt to shake them down for $100 billion or more, hardly a confidence-boosting measure. …

So what’s it all about? The media seem confused. But for those with a sense of history, there’s a growing sense of having seen it before. And indeed we have — in Spain in the 1500s when that country’s power was at its height. What Spain had in common with today’s Saudi Arabia is mineral wealth — lots of it, not oil but precious metals from its new colonies in Mexico and Peru. Gold and silver made Spain rich for a time. But then they made it poor by plunging it into war and debt, turning it from a globe-straddling power to the sick man of Europe in the span of just three or four generations.

Spain and Saudi Arabia, one at the beginning of the modern era and the other at the end, remain the paradigmatic examples [of the resource curse]. …

While sudden riches may solve problems in the short term, they ultimately create many more by detaching labor from wealth creation and fueling the illusion that the nation stumbled into money not because of luck but because of God’s will or some special attribute. As wealth rains down seemingly from heaven, thrift vanishes, the work ethic shrinks, and policy grows more erratic and extreme.

Oil pipeline in Saudi Arabia

“The mines of Potosí brought to the country untold wealth,” summed up one historian, referring to the famous “mountain of silver” in what is now Bolivia:

If money was short today, it would be abundant again tomorrow when the treasure fleet reached Seville. Why plan, why save, why work? Around the corner would be the miracle—or perhaps the disaster. Prices might rise, savings be lost, the crops fail. There seemed little point in demeaning oneself with manual labour, when, as so often happened, the idle prospered and the toilers were left without reward.

Historians have traced the process in Spain in minute detail. Not unlike Tudor England, the newly joined kingdoms of Aragon and Castile were caught up in a tug of war between parliamentary institutions and the crown. But where England’s House of Commons was able to use its control of taxation to impose its will, the Spanish Cortes fell short. In 1519, it tried to rein in a headstrong young King Charles V by refusing him funds to travel to Germany to claim the title of Holy Roman Emperor as heir to the Habsburg dynasty. But Charles was able to use treasure that his conquistadors had seized from the Aztecs to get around the restriction and foot the bill himself.

It was a victory for Spanish absolutism, the first of many. As the silver influx grew, the young king threw himself into one military adventure after another. …

Spanish galleon bringing back gold and silver money from the New World

The effects were ruinous. The arrival of unprecedented amounts of gold and silver triggered an inflationary wave that quadrupled grain prices and brought much of Spain to the brink of starvation. …

Instead of rolling up their sleeves and going back to work, Spaniards sank deeper into despondency. Vagabondage and begging increased as people flocked to the Church in search of either positions or alms. An anonymous picaresque novel known as Lazarillo de Tormes observed in the 1550s that “any no-good wretch would die of hunger before he would take up a trade,” while a prominent reformer named González de Cellorigo complained in 1600 that Castile contained “thirty parasites for every one man who did an honest day’s work.”

It was a morality tale that especially appealed to the Calvinist Adam Smith. … Spain had gone broke on gold and silver while Britain had gotten rich off colonies containing little more than timber, cod, and furs. One country forgot how to work while the other — at least the portion that managed to remain aloof from the slave trade — learned how to work not only harder but more effectively. …

Flash forward to today’s Middle East, and it is clear that little has changed other than the numbers. … Where silver never accounted for more than 29 percent of Spanish state revenue, Saudi oil accounts for better than triple — 91 percent to be exact. But rather than modifying the “wealth paradox,” the only effect is to render it even more virulent.

The parallels are striking. If Philip II was a classic absolutist, Saudi Arabia is one of the most autocratic states in history, a country with no formal constitution, no parliamentary institutions, and next to nothing in the way of legal or political rights. Where the Spanish Inquisition followed at least a semblance of legal procedure under the Habsburgs, the anti-corruption committee that has made hundreds of arrests under Prince Muhammad is explicitly exempt from all “laws, regulations, instructions, orders and decisions.” Where Philip II pushed Spanish military expenditures to the breaking point, the Saudis have escalated military spending to a level that is now the highest in the world relative to GDP. …

As with Charles V, the mechanism driving autocracy is the independent income stream. Thanks to oil, the Al Saud have no need to beg for revenue while the people have no need to grant it in the form of taxes. Glorious as that may seem, there’s a problem: without taxes, the people lack both a stake in government and a means of controlling it. Instead, the state becomes the private property of the crown, which is why Saudi Arabia is the only country on earth named after a private family—rather as if the United States were known as Trump America or the United Kingdom as Windsor Britain. …

The resource curse fuels autocracy in other ways also — by undermining the economy, hampering social development, and promoting religious extremism. After expelling the Muslims, conquering the Aztecs and Incas, and then reaping a reward in the form of an avalanche of precious metal, who could doubt that Spain should continue conquering in the name of Christ? As Spanish armies rampaged across much of Europe in the name of the Counter-Reformation, the result was a form of Catholic Wahhabism so dark and unforgiving that even the pope was taken aback.

By the same token, what Saudi dares question whether God wants the Kingdom to use its oil wealth to spread its own brand of religious militancy? While executing accused sorcerers, banning cinemas, and arresting Ethiopian immigrants for the “crime” of participating in underground Christian services, the Al Saud have spent $75 billion or more since 1979 to build hundreds of mosques, madrasas, and Islamic colleges in Europe, Asia, and Africa in an effort to spread the same hard line abroad. …

The Saudis are on the road to collapse:

Not only are the Kingdom’s oil deposits among the largest in the world, they are also close to the surface, concentrated in easily accessible fields, and therefore among the cheapest to tap. With production costs under $9 a barrel, profit margins are massive even when prices are low. Hence, there is little incentive to do anything other than sit back and watch the money flow. With 60 percent of Saudis under the age of 20, and 60 percent unemployed between the ages of 20 and 24, government has little choice but to provide public-sector jobs for a population that is increasingly threadbare yet doesn’t want to work. …

The more the prince cracks down, the more the non-oil sector will continue to shrink. The upshot is a gold-plated welfare syndrome in which a super-abundance of oil makes it all but impossible for a society to do anything other than live off the overflow. …

It took Spain centuries to break free of the resource curse, which is why a quick fix in Saudi Arabia is exceedingly remote. Oil has the kingdom in its grip and won’t let go. The words of Rashid bin Saeed Al Maktoum, the late emir of Dubai, are worth heeding: “My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel.” Once the riches run out, in other words, little will remain. As in the 16th century, there’s no way this story can end other than in war, poverty, and debt.

Evans - debt to gdp ratio, 2015

The entire West has a mild form of the resource curse right now, with central banking raining down paper money since 1982.

hat-tip Stephen Neil