Are Middle East economies back to the 1970s again?

Federal Reserve Chairman Alan Greenspan told the American-Italian Association on Friday night that the present economic situation - with spiraling oil prices - did resemble the 1970s.

But he was keen to stress that the reliance of the US economy on oil was far less that in the 1970s, so the impact of high oil prices will be lower.

This was still a stunning admission from the world's most powerful central banker. It ranks on a par with his speech on 'irrational exuberance' about the US stock market back in 1996.

Remember that for the United States and industrialized world the 1970s was a decade of high inflation and low growth due largely to high oil prices. Stagflation was the term coined to describe it.

For the Oil States, the other side of the coin was a decade of fantastic growth in the 1970s and the creation of a modern infrastructure built in place of mud-huts and sand. This party only came to an end in February 1981 when the oil price peaked and dropped into an almost 20-year bear market.

However, just as Mr. Greenspan does not see history repeating itself in entirety in the US, so the impact of sudden oil wealth will be different in the Oil States this time. For one thing, these are far more sophisticated societies with a more diverse economic base.

The coming of massive oil windfall revenues also comes at a time of structural change in the region. There has been a decisive shift towards deregulation - in terms of dismantling state monopolies like telecommunications, and in capital markets and real estate with foreign ownership now moving up the agenda.

This means that the region is far more able to absorb and profit from its new oil wealth than in the 1970s. Then the state controlled all investment, and large trophy projects predominated. Money was not always spent wisely, or it was simply re-invested back into Western economies.

In the UAE, for example, each of the seven emirates constructed an international airport - an absurd investment for such a small country. Contrast that today with investment in a myriad of real estate projects which might be initiated by the public sector but are heavily dependent on a public-private partnership.

Other Oil States are also following the same route. Just look at the reforms and investment underway in Qatar and Bahrain, and the new approach to investment in Saudi Arabia being championed by the Saudi Arabian General Investment Authority.

What this means is that when oil prices cool in the future not just the infrastructure but the economic fabric of these nations will be in much better order. That will make this oil boom very different to that of the 1970s, and the benefits will be more permanent and sustain higher levels of economic growth.