Blood for Oil

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MARCH 31, 2003

Blood for Oil

Ask pessimists why Iraq will never be a democracy, and they most
often cite its ethnic and religious divisions. A post-Saddam Hussein
Iraq, they warn, could devolve into an Arab Yugoslavia, with open
warfare between the Sunnis, Shia, and Kurds, and with Iran, Turkey,
and Saudi Arabia taking sides. Optimists like The New Republic's
Lawrence F. Kaplan respond that a federation could manage these
divisions. Except that federations don't work well in countries
where mineral wealth is concentrated in potentially secessionist
regions, as the experiences of Nigeria, Sierra Leone, and the former
Belgian Congo attest. And most of Iraq's oil lies away from
Baghdad, near the Kurdish North and in the Shia South.But there's another--potentially greater--obstacle to democracy that
gets much less attention, perhaps because American policymakers
mistakenly see it as an advantage rather than a serious problem.
And that is oil itself. As Vice President Dick Cheney put it last
weekend, "This is not a nation without resources, and, when it
comes time to rebuild and to make the kinds of investments that are
going to be required to give them a shot at achieving a truly
representative government, ... Iraq starts with significant
advantages." On its face, Cheney's statement simply echoes Seymour
Martin Lipset's famous adage: "The more well-to-do a nation, the
greater its chances to sustain democracy." But, according to
political scientists and economic historians, oil states are the
exception that prove Lipset's rule: Oil wealth actually hinders,
rather than helps, a country's transition to democracy. Newsweek
columnist Fareed Zakaria makes this argument in his important new
book, The Future of Freedom. If he and the academics are correct,
American postwar planners are naive in thinking that oil will
facilitate democracy in Iraq. Rather, they will have to figure out
how to avoid the authoritarian fate that has befallen almost every
other nation that has become dependent on oil.

Democracy is based, above all, on the separation of civil society
from the state. It depends on the existence of an independent realm
of social and economic power, protected from arbitrary state power
by the rule of law. The components of civil society include what
Tocqueville called "civil and political associations"--social
clubs, churches, charitable organizations, and political
parties--but the most important are private businesses and unions
organized in a competitive, capitalist marketplace. It is these
institutions-- not the formal apparatus of elections--that
guarantee popular self-rule by erecting a barrier against lawless
government. Without these underpinnings, individuals and groups are
absorbed into the all-powerful state, as they were under communist
and fascist rule, and still are under many of today's authoritarian
regimes. Elections become merely staged rituals.

In the United States, democracy arose largely through the spread of
entrepreneurial capitalism in the early nineteenth century, the
product of the small farmers and urban craftsmen whom Thomas
Jefferson and Andrew Jackson celebrated. In Great Britain,
democracy grew out of the millennial struggles among the king,
landed aristocracy, business, and, finally, labor--from the Magna
Carta to the Glorious Revolution to the electoral-reform laws of
the nineteenth and early twentieth century. The struggle for
liberty, as Zakaria puts it, preceded democracy. In continental
Europe, labor's rise spurred an initial move toward democracy, but
it took World War II to sever the link between big business and the
state and military that had made fascism possible. In countries
such as South Korea and Taiwan today, independent labor, business,
and professional organizations are allowing democracy to emerge
tentatively from what were once command economies.

It is no coincidence that this transition has not happened in
countries with massive oil wealth. Today, Norway is the only
full-fledged democracy that depends primarily on oil for its export
income. But Norway was already a democracy with an independent
civil society when it found oil in the North Sea in the 1960s. The
rest of the world's oil nations had authoritarian regimes before
they struck black gold. Many of them, including Iraq, Kuwait, and
Algeria, were colonial possessions. Some, such as Iraq and Libya,
were arbitrarily created by their European conquerors out of
separate provinces. Most either already had monarchical traditions
of rule or had them imposed on tribal, patrimonial systems by their
colonial overseers. The British, for instance, imposed a king on
the newly created Iraq in 1921.

Oil wealth didn't undermine these authoritarian structures; it
strengthened them. After the colonial powers departed at the end of
World War II, oil provided the newly independent governments of the
Middle East a veritable windfall--either through concessions or
later through outright ownership of their country's oil facilities.
With their new income, the states' kings, emirs, and sheiks were no
longer dependent on their countries' merchants or workers for tax
income. They could finance their governments entirely out of oil
revenues. They could also use these oil revenues to buy off the
citizenry through social-welfare systems, state jobs, land grants,
and lucrative contracts. Their citizens became passive recipients
of government largesse-- paying no taxes and receiving no
representation.

Empowered through oil wealth, Arab governments destroyed what had
existed of civil society. The classic case is Kuwait. Kuwait has
been ruled by the Al Sabah family since the eighteenth century. In
1899, it became a British protectorate. Kuwait's main export
industry in the early twentieth century was pearls, and its most
powerful class comprised the merchants who owned the pearl- fishing
boats and who transported the jewels to and from Kuwait. The Al
Sabah rulers depended on taxes from this merchant class and their
boats, giving the merchants considerable power. In her history of
Kuwait, Kuwait: The Transformation of an Oil State, Auburn
University political scientist Jill Crystal recounts how, when
Sheik Mubarak Al Lahab ibn Sabah Al Sabah tried to impose new taxes
in 1909, the merchants exited for Bahrain, returning only after the
Sheik retracted the tax increase and apologized.

Eventually, an independent civil society might have evolved among
the merchants and the sailors they employed. Trade might have
nourished an independent business and professional class as it did
in Southeast Asia. But, in 1938, the British-American Kuwait Oil
Company discovered a massive oil field. That same year, fearing
political extinction, the merchants began to organize, choosing a
legislative assembly from their ranks and demanding that it have
control over how the new oil revenues were disposed. But Sheik Ahmad
Al Jaber Al Sabah, buoyed by the prospect of no longer depending on
the merchants for state revenue, dissolved the assembly and used
his augmented police force-- hired with new oil wealth--to arrest
the merchants who continued to protest. That was the end of the
pearl merchants as an independent force in Kuwaiti politics.

Over the following decades, Kuwait's pearl industry disappeared.
Investors found they could make a higher return in oil, and sailors
sought lucrative government jobs. The merchants might have
disappeared too, but, in the spirit of co-optation that
characterizes much of Gulf politics, Kuwaiti rulers retained them
by giving them state contracts and by demanding that foreign firms
trading with Kuwait employ them as partners. And so, the once
feisty, independent merchants became clients of the state.

Kuwait also used its oil wealth to create one of the Arab world's
first welfare states. (Unlike in Western Europe, Kuwait's new
social protections were motivated by co-optation from above rather
than agitation from below. They were premised not on the idea that
citizens had rights to the pursuit of happiness that the state must
uphold but rather that a happy citizenry would not disturb the
state's autocratic rulers.) Kuwait's citizens did not have to pay
taxes. The state provided free health care and education, including
university education. The government even paid for Kuwaitis to
attend universities abroad, and it guaranteed a state job to any
Kuwaiti citizen who wanted one. The same thing happened in the
other Middle East oil states. As many as 75 percent of Libya's
citizens had become state employees by the late '80s. In Saudi
Arabia, the government used its oil revenues to buy off potential
critics in the fundamentalist Wahhabi clergy. They built mosques
and schools and paid the wages of the clerics themselves.
University of Vermont political scientist F. Gregory Gause III
writes, "Everyone in the religious sector, from the grand mufti
through the members of the Higher Council of Ulama and the officials
in the religious ministries to the teachers in the religious
colleges and the prayer leaders of the local mosques, is an
employee of the Saudi state." Whatever opposition could not be
bought off has been brutally repressed by oil- funded security
services. Iran's Shah, Mohammed Reza Pahlavi, became notorious for
his secret police, SAVAK, but his clerical successors merely
replaced SAVAK with SAVAMA.

In the Middle East, oil wealth provided a shortcut around the
centuries-old transition from feudalism to capitalism and from
absolutism to democracy that had taken place in Western Europe. The
oil states did not have to endure the privations of what Karl Marx
called the "primitive accumulation of capital." They didn't have to
coerce peasants to leave their land to become impoverished
wage-laborers in order to provide profit margins for fledgling
entrepreneurs. They didn't have to extract taxes from a reluctant
population. And they didn't have to grant democratic rights to a
citizenry that grew increasingly restive under these demands.
Because of its oil wealth, Libya could go from one of the poorest
countries in the world, with a per capita income of $50 in 1960, to
one of the well-to-do, with a per capita income of $2000 just a
decade later, without exacting sacrifice from its people. Lost in
this developmental shortcut, however, was the creation of an active
citizenry, a thriving civil society, and a democratic political
system.; "Oil wealth has not inspired but rather stifled the
development of an autonomous bourgeoisie. It has increased citizen
incomes, but..."

Today, all of the world's oil nations, except Norway, have either
authoritarian governments, such as those in Saudi Arabia and Iraq,
or what Carnegie Endowment for International Peace political
scientist Marina Ottaway calls "semi-authoritarian" governments.
Some of the latter, such as Algeria, Indonesia, and Nigeria, have
embraced aspects of democracy only to fall back onto
authoritarianism and one-party domination as oil revenues have
provided the means for repression and corruption as well as
co-optation.

One might assume that, as these oil nations grew wealthier and their
surplus profits spilled over into the population and fueled new
investments, they would eventually create an independent business
class not directly dependent on the state or its oil revenues. That
class would in turn provide the basis for an independent civil
society and for democracy. That could still happen, but it has not
so far, and the reason lies in the peculiar influence that oil
wealth exerts.

Oil wealth has not inspired but rather stifled the development of an
autonomous bourgeoisie. It has increased citizen incomes, but it has
not led to economic growth outside the oil industry. In most
oil-rich countries, agriculture and non-oil industries have shrunk
or disappeared entirely. Iraq became a net food importer in the
early '70s. The Shah of Iran's hopes of creating an industrial
giant were dashed. Kuwait invested much of its surplus overseas in
other countries' industries rather than trying to develop its own.
The reason? Oil wealth creates what economists call the "Dutch
disease," after what happened to Dutch industry during the '60s
with the discovery of North Sea oil. In oil states, oil revenues
boost exports and therefore tend to increase a country's exchange
rate. By 1982-1983, after a decade-long oil boom, exchange rates in
seven oil countries were 40 percent higher than in 1970-1972. That
made these countries' exports more expensive to purchase and
therefore undermined any incentive for entrepreneurs to start
non-oil industries. Oil wealth also boosts average wages for
skilled workers, pricing many fledgling industries out of the world
market. Why work on a pearl boat when you can take home ten times
as much sitting behind a desk in a government office? Why start a
risky new business when you can live off government contracts?

Several Arab governments, facing declining oil revenues, have sought
to develop more diversified and independent industries, but they
have been constrained by the nature of the states they created. Oil
states, which depend on free trade to ensure their export revenues,
can't start using tariffs to protect fledgling manufacturing
industries. And, when governments in the Gulf states and Libya,
like governments in other underdeveloped countries, have tried to
privatize government businesses, they have run into popular
resistance and resistance from within their own ranks. Gause writes
of the Gulf states, "First and foremost, privatization means a loss
of at least some measure of control over the economy. [These]
regimes, having spent the last three decades consolidating their
dominance of their economies, are reluctant to give that up. ...
[P]rivatization also means higher prices for consumers used to
subsidized goods and services."

As oil revenues have declined since the booms of the '70s, many oil
states have been forced to cut back their welfare expenditures.
Unemployment has also risen, causing considerable popular unrest,
even in the Gulf. But the opposition to authoritarian rule has not
come, as it did in the early Western democracies, from an organized
bourgeoisie or working class or even from political parties. The
business class in these societies remains tied to the state; and
the working class is either employed by the state or, as in Kuwait
or Saudi Arabia, composed of foreigners with no political rights.
Instead, in the Middle East oil states, the realms of potential
independence from state power are occupied by the military, the
Islamic clergy, and some urban professionals and students. The
military has led or attempted coups in Algeria, Libya, and Iraq.
And, in Iran and the Gulf states, secular professionals exerted
some influence. But, in most of the oil states, the political
opposition is rooted in radical or conservative Islam.

As a result, when oil-state governments have opened the door to
legal opposition, Islamic radicals have most often taken the lead.
In 1977, Ayatollah Ruhollah Khomeini's Islamists took advantage of
the Shah's liberalization measures (strongly urged on him by the
Carter administration) to launch a movement that toppled him. In
1991, when Algeria held its first multiparty elections since
independence, the radical Islamic Salvation Front (FIS) won an
overwhelming victory. When Kuwait held elections to a new parliament
in 1992, Islamists won the largest bloc of seats. By contrast, the
liberal Democratic Forum won only two of 50 seats. One Kuwaiti
cleric boasted to The Washington Post last month, "Whenever there
is true democracy, the Islamists will prevail."

These radical Islamic movements may have demanded democratic
reforms, but, for the most part, they don't believe in democracy.
The Islamic movement led by Ayatollah Khomeini that overthrew the
Shah in the late '70s proved no less autocratic. After the Algerian
military had ousted the Islamic party in a coup, a female Algerian
intellectual described the choice between the FIS and the military
as being between "the plague or cholera." In the Gulf states today,
many of the clerics calling for elected national assemblies remain
deeply hostile to the West and to democracy.

Bush administration officials who think they can take the countries
of the Middle East directly from oil autocracies to democracies are
repeating historic mistakes. Vladimir Lenin and Leon Trotsky
thought they could take Russia directly from peasant feudalism to
proletarian socialism. Mao Zedong wanted to leap past socialism
directly to communism. And Libya's Muammar Qaddafi imagined a
stateless utopia on the desert sands. But the history of the Arab
oil states shows the difficulty of building democracy in countries
that have not yet developed full-fledged capitalist economies. When
democratic reforms are introduced in a society that lacks a
thriving civil society sustained by independent business- and
working-class organizations, reform can create despotic reaction
rather than freedom. In the Middle East, monarchy has given way to
Libya's neo-communist tyranny and to Iran's theocracy.

Iraq is not an exception to this sorry history of
reform-turned-despotism. After World War I, the British assembled
Iraq out of three Ottoman-controlled provinces and installed King
Faisal on the throne. In 1958, a military coup toppled King Faisal
II. The overthrow of the Hashemite monarchy led to a tyranny--a mix
of Stalinism and tribal warlordism--in which, according to
historian Charles Tripp, "exclusivity, communal mistrust, patronage,
and the exemplary use of violence constitute the main elements." In
1968, Saddam's Baath Party seized power.

Oil played a leading role in this continuing drama. In fact, it has
mixed with ethnic infighting to make despotism even nastier in Iraq
than in its neighboring oil states. Oil was first discovered in
1927, but it was not until the mid-'50s that oil revenues, based on
concessions from the Anglo-American Iraqi Petroleum Company (IPC),
furnished most of state revenues. The military, led by General Abd
Al Karim Qasim, seized power in 1958 partly on the grounds that the
monarchy was too subservient to British oil. The United States
helped Saddam and the Baath Party temporarily seize power in 1963
because they feared Qasim would nationalize the IPC ; but, in 1972,
after the Baath Party and Saddam had regained power, they turned
around and nationalized the IPC themselves, which contributed to a
dramatic increase in oil revenues in the '70s.

During the oil boom of the '70s, the Baath Party and Saddam (who
consolidated his power in 1979) used their newfound oil wealth to
establish patronage networks and buy off the populace with generous
social welfare expenditures on health, education, food, and
housing. Like other oil states, Iraq created an enormous government
bureaucracy that swallowed any hint of independent civil society.
From 1958 to 1977 to 1991 the number of Iraqis employed by the
state ballooned from 20,000 to 580,000 to 822,000. And these
figures don't include the armed forces and pensioners who received
all their income from the state. By 1991, according to University
of Amsterdam political scientist Isam Al Khafaji, about 40 percent
of Iraqi households were directly dependent on the state for their
livelihood. But Iraq also devoted almost half of its oil revenue to
building an extensive army and police force to fight the Kurds--who
in 1969 had attacked the Kirkuk oil fields--and neighboring Iran,
which backed the regime's Shia and Kurd opponents.

Iraq's oil income began to decline in the '80s because of the drop
in world prices. Iraq also faced huge expenditures from its
eight-year war with Iran and later its attempt to annex Kuwait. The
decline in Iraq's standard of living, along with the massive death
toll exacted by two wars, inspired opposition to Saddam's rule.
But, rather than coming from merchants, manufacturers, labor
unions, or political parties--the building blocks of a future
democracy--it came from dissident Shia networks, secessionist
Kurds, and the military. Unlike Iran or the Gulf states, Iraq
doesn't have a noticeable, potentially dissident intelligentsia
inside the country. Much of its professional class fled during the
'80s, and the regime's attempt to diversify Iraqi industry in the
late '80s fell flat. On the eve of war, much of the opposition
inside Iraq still appears to consist of the Kurds, whose demand for
autonomy could fracture the regime, and the Shia, who take their
leadership from conservative Islamic clerics. Saddam may also have
his critics in the military and in the Sunni-dominated bureaucracy,
but they are not the kind of people who are well-suited to lead a
democratic transformation.

None of this suggests that the Bush administration, aided by
returning Iraqi professionals and Ahmed Chalabi's Iraqi National
Congress, could not begin to reconstitute an Iraqi state. But it
will not likely be a democratic one. Given the political history of
oil states, America's primary objective should not be to
immediately hold nominal elections but to gradually create a social
and economic infrastructure that can sustain elected governments
over the coming decades.

In The Future of Freedom, Zakaria argues that fledgling democracies
have been best off with liberal authoritarian regimes like those
that initially ruled South Korea and Taiwan and still govern
Singapore. These regimes established not only order but also the
rule of law and the market. They created the underpinnings for the
rise of stable democracy. But, while South Korea and Taiwan had to
survive treacherous transitions to democracy, they had the odd
benefit of having to fall back on their own entrepreneurs and
citizenry for the creation of wealth. A new regime in Baghdad will
not only have to overcome a fractious citizenry and potentially
hostile neighbors but also what political scientists call the
"resource curse." A post-Saddam Iraq will have to do what no other
Middle Eastern or African oil state has yet succeeded in doing:
building a viable, independent civil society on the economic
foundation of black gold. If Cheney doesn't understand the
difficulties of doing that now, he will soon.

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