The ongoing hysteria over OPEC and oil prices are acting to disguise the deeper economic challenges and opportunities for two strong developing nations. To understand the reality of what is happening in Saudi Arabia and Iran one needs to look deeper in the structure of each country and stop comparing it with past oil booms which squandered human capital. To understand what will happen in the region the focus should be non oil sectors such as education, food production, healthcare, automotive and services.
Forty years after the 1973 - 1974 oil price quadrupling, there remains much disagreement about what happened and what the market can expect in the future. At that time many people thought that OPEC had made a mistake and that oil price would collapse.
The most prominent person to hold such an opinion was Milton Friedman (Newsweek, March 1974) who belied that OPEC would fail because it was a cartel which was in direct competition to his neoliberal economic doctrine. OPEC survived, so did neoliberalism, however the point is not everything is what it seems.
Oil booms and great wealth from natural resources have interesting impacts on countries. “There are twenty-three countries in the world that derive at least 60 percent of their exports from oil and gas” observes Larry Diamond of Stanford University. In some ways it is money for nothing the only thing that has to be worked at is the extraction. The desire of the need to diversify the economies is not there. Nations in such a position witness the growth of the public sector and a lack of focus on the services and SME market. In a certain way the economy is trapped, stagnant, sufficient but moving on one level.
The hysteria over the oil price has tendency to trap western analysts and journalists to predict the failure of the these two regional powers. It is important to imagine this two powers without oil. What are the attributes and where will the future development come from? If we remove oil from the picture the similarities between Saudi Arabia and Iran are actually very clear.
In terms of human capital both countries have an excess of skills of an educated workforce which must now be put in a position to prosper. On a macro-level both economies need to modernise and grow to support internal populations. Both countries have either sent citizens abroad or invited in western companies in to gain the knowledge to develop their economies. Both recognise that the economies now need to modernise and operate beyond oil. This will bring true independence.
Western analysts have always assumed that Saudi Arabia squandered the many years of high oil. It did not and this analysis does not reflect the reality on the ground or the point of growth of the nation compared to the west. Huge investment was made investing in education for this and the next generation who will be going the private sector now. For young saudis - 70 percent who are under 30 - the oil change has meant a change from going to work for the government sector to the private sector. The new opportunities will come from demand for engineering, healthcare, telecommunications, professional services, teaching and sections within the economy which had been filled by expat and overseas. These jobs and these sectors need to be repatriated and 'Saudisation' must become effective and results focused.
Economic growth in Iran, for one reason or the other, has been frozen in time for the last decade. Again the population is highly educated and skilled. Trading towards Asia and Africa has always been an strength of the population and merchant class. In 2009 Iran ranked fifth in car production growth standing next to China, Taiwan, Romania and India. The Auto and the Aviation industry are two sectors which are set to boom. In region which faces drought and increasing demand for ‘safe traceable’ food Iran’s food security index stands at around 96%. This creates a market on the doorstep.
The framing of the debate with only a focus on oil is limiting. The analysts are always looking for ’trade-offs’. On the one side they predict doom and gloom but recommend solutions to fix the problems that will create greater imbalances and longterm shocks within both economies that the last 14 months of lower oil prices.
The solution is always in selling state assets (Saudi Aramco IPO), opening markets to outside ownership and control and devaluing the currency to export at a cheaper rate than China, Bangladesh and other Asia. So on the one side it is let western companies in to sell products and services at high rates while exporting what is available on the balance. Milton Friedman would be delighted with such policies as it taken directly from his economic playbook.
The oil prices are stabilising and one could argue it is not the end in fact it is only the beginning. Looking beyond the hysteria of OPEC maybe the focus should be on the human capital and the potential for growth. There is considerable inbuilt value and opportunities to work on today which can create growth tomorrow.