Libyans have a new lease on life, a feeling that, at long last, they are the masters of their own fate. Perhaps Iraqis, after a decade of warfare, feel the same way. Both countries are oil producers, and there is widespread expectation among their citizens that that wealth will be a big advantage in rebuilding their societies.
Meanwhile, in Africa, Ghana has begun pumping oil for the first time, and Uganda is about to do so as well. Indeed, from West Africa to Mongolia, countries are experiencing windfalls from new sources of oil and mineral wealth. Adding to the euphoria are the historic highs that oil and mineral prices have reached on world markets over the last four years.
The possibility that some Gulf states, particularly the United Arab Emirates, might abandon their long-time pegs to the dollar has been getting increasing attention recently (for example, from Feldstein and, especially, Setser).It makes sense.The combination of high oil prices, rapid growth, a tightly fixed exchange rate, and the big depreciation of the dollar against other currencies (especially the euro, important for Gulf imports) was always going to be a recipe for strong money inflows and inflation in these countries. The economic dynamism — most striking in Dubai –is admirable and fascinating as a longer term phenomenon, but also now clearly shows signs of overheating.Indeed inflation has risen alarmingly, as predicted. Among other ill effects, it is producing unrest among immigrant workers. An appreciation of the dirham and riyal is the obvious solution.
At the 5th anniversary of the war in Iraq, estimates of its long-run cost range from $1.2-$1.7 trillion by my former colleague Peter Orszag, now Director of the Congressional Budget Office, to $2 – 3 trillion by my current colleague Linda Bilmes with another former colleague Joe Stiglitz (in a book that is appropriately getting lots of attention, including for example from John Cusack). The important point is that the costs far exceed the $50-$60 billion that the White House predicted ahead of time.