Understanding the Slide in Economic and Personal FreedomAfter the bricks from the Berlin Wall came crashing down, it seemed that democracies would rise from the rubble around the globe.
In the former countries of the Soviet Union, and throughout the world, leaders talked about reforming their economies and political systems.
But those reforms have collapsed for a reason that escapes most observers:
There is a direct link between a country’s economic system and its social system.
More specifically, a nation can’t have a world-class economy without giving its citizens the freedoms that we take for granted in the U.S. ? including a free-market system.
The U.S. won the Cold War with the Soviet Union because its superior economy was based on democracy, free trade, and the free market.
It was impossible for the Soviet government to compete with America because the Communist party’s bureaucrats kept a stranglehold on the economy and the means of production.
Without the freedoms to start businesses or question authority, the Soviets lagged far behind the U.S. in crucial innovations, whether in inventing new weaponry or designing efficient factory processes.
Understanding that, in 1985, Mikhail Gorbachev introduced the concepts of glasnost and perestroika ? openness and restructuring ? that led to the collapse of the Berlin Wall, the disintegration of the Soviet Union, and a halt to the Cold War.
As a result, democracy spread throughout eastern Europe and Russia. At the same time, Deng Xiaoping began to open China’s economy to the world.
Throughout the globe, nations began to embrace privatization, foreign investment, and deregulation.
And with the technological advances brought by personal computers, high-speed communications, and the Internet, it seemed realistic to look forward to an era of unprecedented global prosperity.
Peter Leyden and Peter Schwartz imagined just such a scenario in an influential Wired magazine article called “The Long Boom”1 in 1997.
They asserted that glasnost and digital technologies would bring about what they called “The Long Boom” ? a quarter-century of progress in which all of the world’s countries would form a single integrated economy that brought wealth and personal freedom to every person on the planet.
Why hasn’t it happened?
Unfortunately, oppressive social systems like those in the Middle East, in Russia, and now in Venezuela have survived largely because of the windfall their economies have reaped.
The surging price of oil creates economic advantages for oil-producing countries, regardless of their social systems.
The OPEC countries ? and to a lesser degree other countries whose economies depend heavily on natural resources ? create value without the direct contribution of the great mass of the country’s population.
For example, Saudi Arabia’s GDP is produced almost exclusively by American, British and Pakistani ex-patriots.
The people of the country contribute neither as producers, nor as consumers.
They simply collect whatever check the government chooses to send them each month.
Therefore, rather than encouraging a spirit of entrepreneurship and labor productivity in their people, the government puts all its efforts into keeping them pacified and impotent.
Britain and the United States are the two great middle-class nations of the world; they dominated the 19th and 20th centuries, respectively, because of the rise of a highly productive entrepreneurial economy.
To reach this level of productivity, Britain and America had to foster a political system that encouraged entrepreneurship, respect for law, and risk-taking.
All things being equal, every country would have a strong incentive to transform their social systems to improve their economies.
Japan, Korea, Taiwan, and Singapore have done so with spectacular success. India and China have been trying to do so, despite many impediments growing out of their histories.
But, among countries that are now reaping enormous profits from the rising price of oil, this incentive has vanished.
In fact, there is startling evidence that when oil prices rise, movements toward democracy in oil-rich nations grind to a halt ? and even reverse.
Thomas L. Friedman presents this evidence convincingly in his May/June 2006 Foreign Policy cover story called “The First Law of Petropolitics.”2
According to Friedman, the price of oil, and the pace of freedom in oil-rich countries always move in opposite directions.
In other words, the higher the average global crude price rises, the more dictators clamp down on the freedoms their people once enjoyed. As oil prices rise, free speech, free press, and free elections disappear.
When the price of oil is $70 a barrel, as it has been recently, leaders of oil-producing nations become even more belligerent than usual.
They spout off like an oil well that has hit a gusher. For example, the president of Iran, Mahmoud Ahmadinejad, claimed that the Holocaust was a myth.
In the same vein, the president of Venezuela, Hugo Chavez, told British Prime Minister Tony Blair to “go to hell.” What do these leaders have in common?
Both are sitting on huge supplies of oil at a time when that precious resource is selling at record prices.
When oil prices are high, leaders of oil-producing countries aren’t concerned about what the rest of the world thinks of them.
They also don’t have to invest in education, innovation, or entrepreneurship, because the profits from oil pump billions of dollars into their economy, without any contribution from most of the people who live in those countries.
But what happens when oil prices fall? Suddenly, oil-producing countries need foreigners to invest in their economies, and they need their own citizens to become entrepreneurs. As a result, leaders of these nations become much more concerned about their image, and they become more supportive of personal and economic freedoms.
Research from Michael L. Ross, a political scientist at UCLA, shows that countries whose economies depend on a single natural resource are less likely to have a free-market system.
Ross analyzed 113 countries during the years 1971 to 1997.
He found that a nation’s “reliance on either oil or mineral exports tends to make it less democratic.”3
Because these countries don’t need to tax people, they are not accountable to them and don’t have to listen to them.
Another way that oil revenues suppress freedom is through the trickling down of the wealth to the country’s citizens.
When oil profits reach the billions, the government can provide a relatively high standard of living for people without giving them the means to achieve it on their own.
In other words, there’s no need to improve the educational system, give people access to information technology, or encourage people to start businesses, because there’s already enough wealth to go around.
But, according to Ross, the profits can also be used to discourage a free economy in less subtle ways.
The money can be channeled into institutions that prevent democratic movements from taking root.
For example, governments can fund police forces and intelligence agencies that spy on citizens and break up pro-freedom political movements.
While this is always the case, it is particularly disturbing now because of the rapid rise in the price of oil.
According to a report in The Economist,4 Iran is projecting $36 billion in oil revenues this year because of the price increases.
As a result, Ahmadinejad is in a strong position. He can keep Iranians happy with promises to build 300,000 housing units, while spurning foreign investors.
According to The Wall Street Journal,5 Iran backed out of a deal with Turkcell, a Turkish cell phone service, to create a mobile phone network.
Iran would have received $300 million for the license, and Turkcell vowed to invest more than $2 billion to create the infrastructure.
In addition, 20,000 Iranians would have gotten jobs in the new venture.
Iran’s parliament killed the deal because it supposedly would have made it easier for foreign intelligence agencies to eavesdrop on the country.
But the larger reason is that Iran simply didn’t need the money.
In Russia, Vladimir Putin has shown two faces, depending on the price of oil.
When oil sold for $20 to $40 a barrel, Putin appeared ready to reform Russia’s economy and its corrupt political system.
As prices soared past the $60 mark, Putin morphed into an old-style Soviet-era dictator who has nationalized media companies and prominent independent businesses, including the oil company Gazprom.
What are the implications of the trend toward declining freedoms?
We offer the following four forecasts:
First, if oil prices decline as the Trends editors forecast, countries that have a wealth of oil could see more freedom, less repression, more open elections, and fewer crackdowns on political protests.
The leaders of oil-rich nations will have fewer resources with which to constrain the personal freedoms among their populations.
And, in certain cases, the leaders will feel pressure to open up their economies to global investors and foreign influence.
Second, a buyer’s market for cheap oil will free democratic nations to speak out against human rights abuses and terrorist activities in oil-producing countries. The U.S., Japan and the countries of the EU won’t have to look the other way when dealing with countries like Russia, Iran, Venezuela, and Sudan because their thirst for oil will no longer overwhelm their moral standards.
Third, regardless of whether the price drops precipitously in the next 12 months, the world’s major consumers of petroleum will have to find new sources of oil and alternative fuels.
If the United States ultimately is to win the war on terror, our top priority must be to find alternative energy sources.
As explained in the June 2006 issue of Trends, that can be done by aggressively going after new supplies of oil in North America, using technologies such as: ultra-deep off-shore drilling, which could produce 300 billion barrels; extracting oil from sand, which could produce 175 billion barrels; extracting oil from shale deposits, which could yield 2.6 trillion barrels; and retrieving the residual oil from abandoned oil fields, which could produce 377 billion barrels.
In the face of burgeoning Chinese and Indian demand, we may never be able to get the price back to $15 per barrel as in the mid-1990s, but with these new technologies we can certainly get it back below $30 per barrel over the long term.
Fourth, a new energy source ? methane hydrate ? offers the best potential as a long-term solution.
Methane hydrate is a crystalline lattice of water molecules with methane trapped inside.
Methane is natural gas, an even better fuel than oil, since it burns cleaner.
So, when technology comes on line for recovery and processing of methane hydrate into a usable fuel, we will have enough energy to last us 2,000 years or more at current levels of fuel consumption, and we won’t need to rely on terrorist states to get it.
We will explore this intriguing energy source in detail in next month’s issue of Trends.
References List :
1. Wired, July 1997, “The Long Boom: A History of the Future, 1980 - 2020,” by Peter Schwartz and Peter Leyden. ⓒ Copyright 1997 by The Conde Nast Publications, Inc. All rights reserved.
2. Foreign Policy, May/June 2006, “The First Law of Petropolitics,” by Thomas L. Friedman. ⓒ Copyright 2006 by the Carnegie Endowment for International Peace. All rights reserved.
3. ibid.
4. The Economist, February 9, 2006, “The President Gets Stronger at Home.” ⓒ Copyright 2006 by The Economist Newspaper and The Economist Group. All rights reserved.
5. The Wall Street Journal, February 8, 2005, “Iran, Flush with Oil Cash, Seems to Cool to Foreign Investments,” by Marc Champion. ⓒ Copyright 2005 by Dow Jones and Company. All rights reserved.
