MENA: Oil, Revolution and a Path to Stability 
Oil has played a critical role in the uprisings in the Arab world, in ways not always apparent to the region's long-time rulers or to new governments seeking political stability. If oil-rich states in the Middle East and North Africa are to promote economic prosperity and democratic change, they must make radical changes in their management of natural resources.
BACKGROUND
In 2008, the region saw a preview of how a government's poor management of natural resources could fuel political turmoil, thanks to Tunisia. That year, phosphate miners and other workers in Tunisia's Gafsa region went on strike to protest the high cost-of-living, corruption in hiring practices at the mines, as well the lack of job opportunities due to mechanization. Authorities arrested many of the protestors, imprisoning some for more than a year. Economic conditions, however, remained unchanged—as did dissatisfaction among the workers.
In January 2011, Tunisian protestors demonstrating against many of the same issues—corruption and high prices, as well as a lack of political freedom—toppled Tunisia's government.
Within days, other governments tried to use wealth from natural resources to buy stability. Kuwait promised a cash bonus for every citizen, as well as free food for 14 months. Saudi Arabia, unveiling a $36 billion public spending program, announced a 15 percent increase in salaries for all government workers. In an attempt to stop a revolt already underway, Libya's government promised cash grants to each household to offset rising food costs, and pledged to raise salaries of government workers by 150 percent.
Efforts to "buy" stability, however, cannot succeed over the long-term, since they fail to resolve the underlying problems that triggered the revolts. Oil wealth has enriched many of the region's governments—but also undermined national economies and the social contract between governments and their citizens.
OIL AND DEVELOPMENT
Oil has not always been a "curse" to the Arab countries. According to UNDP, for example, life expectancy in North Africa increased to 71 years from 51 years, between 1970 and 2001. The percentage of children in school grew to 70 percent from 37 percent—better performance than any other region during the same period.
Economic growth has been mixed, averaging 3.7 percent a year between 1960s and 1980s but a modest 1.7 percent a year in the 1990s. More significant is that these decades included great volatility in oil prices.
Volatility significantly hinders economic and social progress, and creates unstable foundations for nations' economies: When oil prices rapidly climb or fall, oil-dependent economies encounter large swings in their revenues and budgets, making long-term planning more difficult.
When prices fall, as happened in 2008 when prices dropped from $140 to $40 per barrel in less than six months, governments have to make cuts in their social and investment programs—unless they have saved part of the revenue windfall when prices were high and also followed prudent public expenditure policies that evened-out spending over time. When government spending is uneven, economic growth is also uneven and leads to higher unemployment.
Many states in the region were less industrialized in 2010 than in 1970. According to UNCTAD, the size of the manufacturing sector relative to total GDP declined to five percent from nine percent in Algeria between 1974 and 2006, to 15 percent from 18 percent in Egypt, to 15 percent from 20 percent in Syria, and stagnated at two percent in Libya. Even in countries where the manufacturing sector grew, such as Tunisia and Jordan, products remain relatively unsophisticated compared to other regions. In 2008, non-oil exports accounted for only 16 percent of the region's GDP, compared to 44 percent in East Asia.
Oil has also played a role in the loss of competitiveness of other sectors of the economy (a phenomenon often called "Dutch disease"): The accumulation of foreign reserves drives up the exchange rate of the currency, making the country's other exports more expensive and leading to an increase in imports. A weak, declining manufacturing sector also means that Arab countries are oil rich but job poor. The International Labor Organization estimates that the unemployment rate for 15- to 24- year olds in the Middle East is 25 percent. A survey of 1,500 youth by the World Bank found that the self-declared or perceived jobless rate was even higher—35 to 40 percent.
The dependency on oil revenues has also encouraged patronage, fuelled corruption and undermined state institutions. A society's elite benefits from the low taxes made possible by high government revenues from oil, and it may also benefit from corruption in the spending of those revenues.
Moreover, governments often prefer to spend the windfall from natural resources rather than save it, out of fear that if they don't spend now, others will use the revenues later (sometimes called the "voracity effect"). According to the Worldwide Governance Indicators, voice and accountability has deteriorated over the last decade in most Arab countries—notably in Egypt, Libya, Saudi Arabia and Yemen. Oil appears to have played a central role in breaking the social contract in many countries in the Middle East.
REFORMING OIL MANAGEMENT
What does this tell us about the way forward? Governments need to realize that oil—however high the price—cannot and will not save them. Decision makers in Sana'a, Riyadh and Tripoli—whether they are old autocrats or new democrats—face an unpromising future unless they quickly make significant reforms in their management of natural resources.
In the short term, governments need to be more open and transparent about revenues from oil and about how those monies are spent. Greater openness will inhibit corruption and build trust in government institutions. And governments can begin to become more transparent by taking relatively simple steps:
- Publish what they earn from the oil sector and follow international best practice. All resource-rich countries in the region should work to implement the Extractive Industries Transparency Initiative, following the example of Iraq.
- Make public all oil and gas contracts.
- Disclose on a regular, timely basis detailed information about reserves accumulated in sovereign wealth funds.
- Make public the revenues, spending and assets of state owned companies such as Saudi Aramco.
- Ensure free and full participation by civil society in the oversight of the oil and gas sector.
In the longer term, countries need to alter the role of oil in their economies, an undertaking that will require many years. Yet there is no alternative, if these states are to have sustainable economic development, and political and social stability.
To alter the role of oil, these states must make large, long-term investments in other sectors of their economies, a necessary step toward creating jobs. According to the UNDP, the region will need 51 million new jobs by 2020, requiring GDP to grow 7.6 percent a year—about double the current rate.
Oil has been a mixed blessing for Arab countries. It brought wealth but also autocracy. It failed to create jobs. It is oil that helped drive millions of educated, unemployed young Arabs into the street. The region's decision-makers face a frightening future unless they take quick and decisive reforms to harness oil to sustainable development.
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