The International Monetary Fund estimates that Venezuela and Iran needed an oil price of $90 to $95 a barrel to balance their budgets. When the price rose to $147 a barrel, these countries, awash in petro‐dollars, made grandiose plans. Chavez offered half his oil to Latin American friends at concessional rates. As oil prices have crashed, his spending plans are in disarray and Chavez has to run down his foreign exchange reserves. Chavez now needs a rebound in the U.S. system he derides to survive.
President Ahmedinajad in Iran also went on a spending spree when oil revenues were high. He switched Iran’s foreign reserves from dollars to euros to teach the “Yankees” a lesson. But his spending plans become untenable after oil revenue plunged by two‐thirds. Inflation is running at 26%. Ahmedinajad could well lose the coming Iranian election.
The Russian economy, which soared along with oil prices, is now crashing in tandem. Putin and his former KGB colleagues own chunks of natural‐resource companies, some of which are nominally state‐controlled. They allow other oligarchs to flourish on the condition that they toe the party line. The Russian stock market has fallen almost 80% — more than any other. Even after Russia spent a third of its foreign exchange reserves defending the ruble, it fell from 25 to 35 to the dollar.
It is no accident that so many critics of Western capitalism are petro‐states. A market economy succeeds by providing incentives for higher productivity and incomes. A state‐controlled system is lousy at providing the right incentives and is bad for productivity. But a petro‐state thrives on mineral wealth, not productivity or efficiency.
Socialists bemoan the capitalist emphasis on profit and growth, and focus on distributing wealth instead. This would be fine if wealth appeared out of nowhere, and all governments had to do was distribute it. But if the wealth had to be produced first, markets do it much better.
However, in petro‐states, oil revenue is the equivalent of manna from heaven, so the ruler can, at least for a while, focus on distributing wealth rather than creating it. Under Chavez, Venezuela’s oil production has dropped from 3.2 million barrels a day in 1998 to just 2.4 million barrels a day in 2008. The manifest inefficiency of his system was cloaked by the bonanza arising from high oil prices. Ditto for Ahmedinajad’s Iran.
Many critics of the U.S. model are in fact pathetically dependent on it. When capitalist economies decline, so do the supposedly rival models. Far from being rival models, they could, with only modest exaggeration, be called parasites of Western capitalism.
Now, being a parasite is not comfortable, so petro‐state rulers are understandably irked by their dependency. But why do Singapore and Mauritius, which are just as dependent on Western economic prosperity, not feel shackled by the linkage? The answer is that global inter‐dependence has been used by Singapore and Mauritius to strengthen their skills and human capabilities and become globally competitive. They are the richest states in their neighborhood because they are the most productive. This is not true of petro‐states, which owe their high incomes to exhaustible mineral wealth.
In April 2008, Iran started pricing its oil in euros and yen rather than dollars and switched the bulk of its foreign exchange reserves out of dollars into euros and yen. But it weakened only itself, not the U.S. The dollar has strengthened hugely in the last year — the euro is down from a peak of $1.60 to just $1.28. Countries that switched their reserves to euros and yen have lost heavily.
The true strength of a system is revealed in times of adversity. Today, despite U.S. economic travails, the world views the dollar as a safe haven. The U.S. system is flawed, but the others are no better and are sometimes worse.
The G-20 meeting needs to focus on major reforms of the existing system. But these should aim at a better Western capitalism, not a Bolivarian or Iranian alternative.