Saturday, January 03, 2009

Running On Hungry

Making the Desert Bloom has cost the oil rich Arabs a blooming fortune. It hasn't been very profitable either.

Saudi Arabia's desert agriculture confirms that money and water can make even a desert bloom until either the money runs out or the water is depleted. Saudi Arabia's experience is noteworthy because within 15 years, the country experienced shortages of both money and later, water. These shortages impacted negatively on the country's heralded commitment to desert agriculture.

In 1993, Saudi Arabia suffered financial strains, so its cereal-growing program of the previous twelve years was scaled down drastically. Then, in early 2008, as the quality and quantity of non-renewable aquifers reached perilous levels, the government declared that purchases of wheat from local farmers would be reduced by 12.5 percent annually, with the aim of relying entirely on imports by 2016.

Farming is alien to desert habitat and the culture of its peoples. As Saudi Arabia became rich following the quadrupling of oil prices in 1973, however, Saudi investors were induced by huge government subsidies to import the equipment and the farm workers to implement a heavily propagated strategy of food self-sufficiency. Within 12 years, between 1980 and 1992, wheat production grew 29-fold--to 4.1 million tons--making the Saudi desert the world's sixth-largest wheat exporting country. To achieve this enormous growth, the wheat-producing areas were increased by 14-fold, to 924,000 hectares. To put 924,000 hectares in perspective, Egypt, with five times as many people, has an irrigated surface for all crops evolved over the centuries of 3 million hectares.

Beginning in 1993, under pressure from declining oil prices since the mid 1980s, the government had to scale down its wheat-growing subsidies. The budget deficits between 1984 and 1992 added up to $130 billion. Liquidity became so tight that the government had to delay (default) for a few years in honoring more than $70 billion in obligations to thousands of suppliers, contractors, and farmers. Between 1981 and 1993, spending on security added up to $225 billion, out of $420 billion in total oil revenues. In addition, the 1980-1988 Iran-Iraq War cost $25.7 billion, the 1991 Gulf War cost $80 billion, and maintaining the profligate lifestyle of some 4,000 immediate members during that period of the al-Saud ruling family's patriarch may be estimated to have cost $4 billion per annum.
So what do the Saudis have to show for all that effort? Empty bank accounts, empty aquifers, and an abundance of sand. The difficulty is that sand is not a scarce resource. They also seem to have an abundance of jihadis and those are also currently a glut on the market. And now with oil income this year expected to be less than half what it was last year they seem to be headed for some troubled waters. Or lack of waters actually.
Under the arid and semi-arid conditions of the Arab world an economist would argue that it would be beneficial to import foodstuffs instead of investing in financially and environmentally non-viable local farming schemes. An economist would also argue that farming in arid or semi-arid areas should be left to rain fed lands. Given that drinking and household water use in every country is typically one tenth the volume of the water needed to become food self-sufficient, it would be necessary to stop further depletion of non-renewable water reserves by abandoning irrigation schemes so that the remaining water may be preserved for drinking and household purposes. International "trade" in virtual water allows water-scarce countries to import high water using foodstuffs and export low water using manufactured products.

However, importing foodstuffs gives rise to three challenges. The first is national security. Importing foodstuffs runs contrary to the popular notion in Arab countries that food self-sufficiency protects national security from the dangers of a boycott. Government propagandists succeeded in incorporating this fallacy into the national discourse. They made it into a sacrosanct belief without regard to their severe water shortage or the fact that they import many items, the boycott of any of which would be as detrimental to national security as the boycott of foodstuffs, if not more; such as, to name only a few, desalination plants, medical equipment, pharmaceuticals, spare parts, etc.

Failure to address critical issues like water scarcity openly and truthfully is not surprising under non-representative non-participatory governance. Such type of rule bans free press, egalitarian non-governmental organizations, and environmental groups--thus, making it impossible to have effective dissent against the mendacity of food independence in a mainly arid region or introduce a balancing perspective into water policy.
It looks as if oil socialism doesn't work any better than industrial socialism and in fact it may be worse.
In allocating scarce national resources, an economist would argue against investing in any project unless justified on a purely rate of return on investment basis. Irrigation and land reclamation projects are no exception. These must be evaluated according to their rate of return on investment with full costing of water that ensures maintaining the quantity and quality of the aquifers and accounting for the negative and positive externalities of production and consumption. A rate of return approach diverts the foreign currencies that would otherwise be allocated to irrigation and land reclamation to higher return investments. In the export and/or import-substitution industries, such diversion would increase foreign currency earnings, which would then be used to import food. A rate of return on investment criterion would diversify GDP sources. The diversification would enhance employment opportunities in rural areas and mitigate the negative effects of food imports on rural employment. A rate of return approach invests taxpayers' money in more rewarding projects for the country as a whole, not to one segment of the population at the expense of the others. A rate of return on investment criterion can help steer GDP on a path of optimal growth.
The difficulty is that the revenues from oil would need to be more widely distributed into private hands. However, that goes against the grain in the Arab world. What can Arabs produce that the world wants? Not much evidently. And there in lies a problem. Oil has led to a population explosion all living off oil. When the oil is gone starvation is sure to follow. I think the Arabs have another three to five decades to work out a cultural change. Right now they are hurting but have some breathing room. But not much because cultures don't change quickly. Fifty years to make the required changes is the blink of an eye. It will be interesting to see how they manage and a tragedy if they don't.

Commenter Fritz at Classical Values suggest a look at When the Rivers Run Dryfor a broader look at the problem of water in the 21st Century.

Cross Posted at Classical Values


Anonymous said...

I linked your article in my italian blog

M. Simon said...