The Age of Uncertainty, Part II

We will look back at the second decade of this century as the Second Age of Uncertainty. The old order provided by the Soviet Union collapsed beginning in 1989, the Age of Uncertainty, Part I. Central and Eastern Europe, by and large returned to its European roots. India, deprived of its subsidies from the USSR, turned to market reforms. With Deng Xiaoping’s market strengthening tour of southern China in 1992, the world was awash with low cost labor and billions of new consumers.

Now we are at another inflection point in world history. The stultifying gerontocracies of the Middle East are in their death throes. The Arab world has begun the process of overthrowing its aged, long serving and repressive leaders.

The first to go was Ben Ali, the 74 year-old, 24-year ruler of Tunisia. Then it was Mubarak, 83 years old and in power for 30 years. Colonel Qaddafi, Libya’s 72 year old dictator for 42 years, is on the way out. But these will not be the last to go.

The angst is so deep and widespread that the oil rich rulers have begun a round of new handouts. The Emir of Kuwait (82 years of age) passed out a check for $3500 to every Kuwaiti. The King of Bahrain (61 years of age, ruler for the last 12 years) has transferred 1,000 Bahraini Dinars, about $2700, to every Bahraini family. Not to be outdone, King Abdullah of Saudi Arabia (86 years of age, effective ruler for 16 years) has announced massive increases in social benefits for his subjects – new housing funds, new funds to allow young Saudis to marry, new aid for Saudis studying outside the Kingdom and for those wishing to start businesses.   

The turmoil has bred massive uncertainty. What follows?

The success of protesters in one country serves to stimulate protests in other countries.

Fear of greater uncertainty leads to a flight of capital to more secure countries, setting off a further chain of instability.

Uncertainty diminishes foreign investment and diminishes economic prospects. A stock sell-off by foreigners follows.

Dropping demand for the currency improves export potential but increases the risk of domestic inflation.

Central authority may weaken, leading to internal strife. Violence and a lengthy political process will be necessary to restore a meaningful state with authority to govern its territory. This will be especially true in countries like Libya. Libya’s substantial oil and gas resources are worth fighting over. Worse, Qaddafi explicitly refused to build a sense of Libyan “nationhood,” preferring to strengthen the country’s tribal structures to keep the population divided and weak. The “new” Libya will be disunited, at a minimum, and possibly divided into mini-states.

As governments whose legitimacy was based on their ability to generate economic growth increasingly fail to do so, discontent and anger will build over the corruption and repression that was otherwise overlooked. Next, more protests.

Demands for revenge will be powerful. “Eat your revenge cold” is an old Middle East expression. But it is unlikely to be followed in the more violence prone states of Libya and Yemen. Executions against the old order are likely.

Islamic sensibilities are bound to strengthen in every country whose ruler has been ousted. Any ruler seeking to appeal to his people (the new rulers will all be males), will necessarily appeal to their dominant culture – Islam.

It is not likely that any of the new rulers will be Islamists of the Iranian variety. But one cannot discount that as a future possibility. After the first free Egyptian elections, a mix of technocrats, politicians, intellectuals and religious figures will form a government. But if that government fails to make measurable progress on ameliorating Egypt’s substantial ills, the following election is bound to bring more Islamists to power; Islamists promising a new way.

That will in turn surely mean a greater sense of asceticism, a toning down of the extravagance of the ruling cadres, a new simplicity.

One danger with simplicity is that it may not require the oil revenues that some of the present rulers consider necessary. Under the clerics, Iran cut oil output from the Shah’s 6.2 million barrels per day to 3 million barrels, seeing oil money as the root of corruption. Punishing consequences would be next for the oil importing economies.

The region has a strong bias for attributing its woes to foreign plots, especially “Zionist” plots. Conspiracy theories are rife. Those woes will not disappear when the new rulers are installed. Far easier to blame outsiders – Israel and the U.S. in particular, than to accept responsibility for one’s own failings. These new rulers will not cozy up to either state anytime soon.

But neither are they likely to rebuild their militaries to prepare for war with Israel. Nor serve as hubs for terrorists, nor for the Iranians. Their principle focus is likely to be internal. They have a lot of work to do.

This new Age of Uncertainty

The Middle East, unfortunately, is not going away any time soon. We are stuck with it, with our voracious appetite for oil. And they are stuck with us as the supreme military power of the region and the world’s chief oil importer. This is going to be a very rough ride.

Marvin Zonis, Professor Emeritus Booth School of Business, The University of Chicago, Co-author of the forthcoming Risk Rules: How Local Politics Threaten The Global Economy