The Middle Eastern Economic Landscape

 The Middle Eastern Economic Landscape

Brad Bourland, chief economist at the Saudi American Bank (SAMBA), broke the customary awkward quiet that speakers at Middle Eastern gatherings often experience at the Islamic Financial Forum in Dubai on February 24, 2003. He reminded the audience that the region's nations, with the exception of Israel and Turkey, had failed to modernize their economies and had instead prospered for decades due to the fortunate windfall of oil income.

Due to structural flaws, slow growth, chronic unemployment, and worsening government funding, Arab governments were reduced to playing the role of pawns in the oil trade. According to Bourland, as cited by Middle East Online, the Arab world's GDP is lower than that of Mexico (or Spain, according to The Economist), at $540 billion.

In 2001, the combined GDP of all Arab League member states was $712 billion, or 2% of global GDP—just twice that of sub-Saharan Africa, according to the league.

Their population and labor force continued to rise at a faster rate than even the recent tripling of the price of oil, their primary export commodity. The official unemployment rates in six Middle Eastern countries are as follows: 26.4% in Algeria, 17.2% in Oman, 15.6% in Tunisia, 14.4% in Jordan, 13.0% in Saudi Arabia, and a shocking 7.1% in Kuwait. Egypt, according to the World Bank, has to expand at a rate of 6% per year just to remain in its current position, even with 8% of the population unemployed.

Yet the actual numbers are substantially more. One in five Egyptians and Saudis lose their jobs every year. Among Saudi women, hardly 10% have any kind of job experience. The population of the area has increased to 300 million, nearly doubling in the past 25 years. Children make up over 25% of the Arab world's population.

As reported by the Iranian news agency IRNA, the European Commission on the Mediterranean Region has estimated that the purchasing power parity income per head in the region is just 39% of the EU's 2001 average, which is similar to the situation in many transitioning post-communist nations. This number comes out to 28% in nominal terms. In these numbers, you can see that Israel's GDP per capita is 84% of the EU's and that the Palestinian Authority's GDP plummeted 10% in 2000 and 15% in 2001.

The Arab regimes, which do not have democratic legitimacy, are becoming more and more frantic as they face the terrifying rise of civil discontent. For example, "Saudisation" means 3 million foreign workers being kicked out of the country to make way for locals who aren't interested in working the menial occupations that are being filled. Roughly one million expat specialists, most of whom are Western, have not been impacted.

There is a complete breakdown of Arab polities' national accounts. The most recent spike in oil prices was the first time Saudi Arabia had achieved a budget surplus since 1982. In 1981, the kingdom's per capita income was $26,000; by 2003, it had dropped to $7,000. The catastrophic situation of the economies in the area would be further obscured if higher oil prices persist throughout 2006. While this may delay the inevitable, it would not solve the problem.

There is a lack of economic integration among Arab countries. Outside of Africa, it might be the only continent that has completely escaped the technological and globalization wave. The position of United States Trade Representative was held by Charlene Barshefsky from 1997 until 2001. She made the following observation in a column she wrote for the New York Times in February 2003:

The region's Muslim nations engage in far less trade with one another than their African, Asian, Latin American, and European counterparts. The high trade barriers and the profound isolation that Iran, Iraq, and Libya have caused themselves as a result of their violent actions and backing for terrorist groups are both reflected in this. Natural gas is still vital to the economies of the Middle East. The 22 Arab League countries, Afghanistan, and Iran account for about half of the United States' value-added imports; together, these nations send over $5 billion in manufactured and agricultural items to the US.

Aside from secular Turkey and Jewish Israel, eight out of the eleven biggest Middle Eastern economies have not yet joined the World Trade Organization. Twenty years ago, Arab countries received twenty percent of the world's FDI and one dollar for every seven dollars in export income.

Less than 1.5% of global trade and FDI flows through the Middle East today, with 50% going to the EU. Sweden and other medium-sized economies get more investment money than all of the Muslim countries in the Middle East combined.

Periodically, some Arab nations undergo superficial reforms, only to relapse into corruption and backwardness. In an effort to restructure their economies, oil producers made certain moves in the 1990s. Two Middle Eastern countries, Jordan and Syria, privatized small state-owned businesses. Iraq and Iran reduced their subsidies. Nearly every country—Lebanon, Egypt, Iran, and Jordan included—increasingly relied on foreign help and multilateral credit.

For example, Jordan's young king, Abdullah II, experiments with liberalization, deregulation, tax reform, reducing tariffs, and slashing red tape. With the help of a free trade agreement that was approved by Congress in 2001, Jordan's exports to the US skyrocketed from $16 million in 1998 to $400 million in 2002.

The European Union and its sluggish "Barcelona Process" Euro-Mediterranean Partnership are being irritated, in part, by the application of a comparable nostrum to Morocco. However, it is well understood that the root causes of the region's issues go beyond simple modifications to the customs legislation.

United Nations Development Program (UNDP) published the "Arab Human Development Report 2002" in June 2002. The report was written entirely by Arab researchers. It paints a gloomy picture, as one would expect: 20% of the population lives on less than $2 per day; income per capita has grown at a rate of 0.5% per year over the past 20 years, second only to sub-Saharan Africa; and 20% of the population is unemployed.

Freedom, knowledge, and manpower are the three "deficits" that the report bemoans in the region. Autocratic and intolerable are the hallmarks of Arab states and communities. Education is scarce and illiteracy is widespread. Half of the workforce consists of women, yet they are mistreated and ignored. When it came to limiting innovation and progress, pervasive Islamization took the place of more radical beliefs.

Ali Abootalebi, an assistant professor of political science at the University of Wisconsin, Eau Claire, came to the following conclusions in his paper "Middle East Economies: A Survey of Current Problems and Issues" that was published in the September 1999 issue of the Middle East Review of International Affairs:

As far as global regions go, the Middle East is second to Africa in terms of development. Its strategic significance has diminished significantly since the fall of the Soviet Union... To run state affairs efficiently and modernly, most Middle Eastern states likely have the technocrats and professionals on staff. What they lack, though, is the will or ability of the ruling elites to break away from the old coalitional interests that control these governments.

That was before the Iraq War altered everything. Intellectuals in the area, including those who were passionately against America's authoritarian dominance, held this desperately in high regard. However, this could just be the latest false dawn. More despotism, not democracy, will result from the enormous postwar damage to the region's already frail economies.

The Economist reports that $2.2 billion, or 6% of GDP, has already been pumped into Kuwait's economy as a result of the military expansion. Real housing and automobile prices, among others, are increasing at a rapid pace. A one-third increase has been recorded in the stock exchange index. With $5 billion in grants, $1 billion in oil, and $10 billion in loan guarantees, Turkey is the lucky recipient of American generosity. Both Egypt and Jordan will receive $1 billion, and there's a chance that Saudi Arabia may also receive subsidised oil. Absconding with billions of dollars in cash and $8 billion in collateral is what Israel does.

However, the celebration might not last forever, particularly because the war wasn't as quick and definitive as the Americans had anticipated.

American oil corporations are likely to be encouraged by the US to increase Iraq's postbellum production, according to Stratfor, a strategic forecasting company. Despite the easing of global tensions and Venezuela's return to the grid, oil-dependent nations like Algeria and Iran could feel the pinch of falling petroleum prices.

It is highly improbable that the ensuing social and political turmoil, together with violent but usually fruitless demonstrations against the war, the United States, and the political leadership, will persuade regimes in a state of panic to grant more political transparency and participatory democracy. Case in point: Egypt's 2005 mock presidential elections.

War also devastated the tourist industry, which was a key source of revenue for the region. Annually, Egypt receives $4 billion—roughly one ninth of its GDP—from curious onlookers at its pyramids. The country stands a good chance of becoming the war's biggest casualty if the impacts on Suez Canal traffic, investments, and expat remittances are any indication.

Former Egyptian Minister of State for Foreign Affairs Faiza Abu el-Naga estimated $6-8 billion in immediate damages for her country during a recent Arab League economic summit. The tourist industry alone lost around 200 thousand jobs. A report predicted that Saudi Arabia, which is rich in oil, would suffer billions of dollars in damages and that Jordan's economy would suffer $900 million in losses, according to Egypt's Information and Decision Support Centre (IDSC).

As a result of the war's impact on the economy and its aftermath, the Arab Bank Federation estimates that financial institutions would lose as much as $60 billion. I worry this is being overly gloomy. Still, $30 billion in lost revenue is a topic that even optimists bring up. Rebuilding Iraq might breathe new life into the industry, but the lucrative opportunity will likely be cornered by banks in the US and Europe.

An investment-friendly environment is not expected to emerge from the conflict or its lengthy aftermath.

Two countries that receive twice as much FDI as Iran do include Saudi Arabia and Egypt, each of which receives about $1 billion annually. Global foreign direct investment, however, was cut in half from 2000 to 2002. Flows only returned to 1998 levels in 2003. Destinations like Israel, Turkey, Iraq, and Iran, which are becoming more appealing, may be impacted by this collapse.

The conflict and the rising tide of vicious and violent xenophobia will both discourage investment from outside. One long-standing tool in Arab political toolbox is consumer boycotts. Sales of Coca-Cola in these dry regions fell 10% in 2002 alone. When Arabs rejected Pepsi's elixirs, the company's international sales fell flat. Fast food franchises in the United States witnessed a 50% drop in revenue. A number of McDonald's locations in Jordan were forced to shut down.

Even in the Gulf nations, foreign company buildings have been targeted in vandalism. In Arab countries, overall business at western fast-food and drink enterprises has decreased by 40% in the past year (2002), according to The Economist. A fourth of the world's trade in American-branded items has decreased.

The news is not good. International corporations employ a large number of people. Two hundred and twenty thousand Middle Eastern jobs are directly attributable to Coca-Cola. A hundred million Egyptian pounds were put up by Procter & Gamble. Companies based abroad offer competitive salaries and help their local joint venture partners develop their managerial and technological capabilities.

Foreign participation extends outside the retail sector as well. The $35 billion petrochemicals industry in the Middle East depends on the generosity of total strangers—people from India, Canada, South Korea, and, more recently, China. The tourist sector, particularly in the Gulf region, is of interest to Singapore and Malaysia. Their departure from the native economies could have catastrophic consequences.

Even global saviors will fail to save these shattered nations.

Edward Gresser of the Progressive Policy Institute has produced a paper titled "Blank Spot on the Map: How Trade Policy is Working Against the War on Terror" in which he criticizes the Bush administration of ignoring Islamic economic growth.

Agricultural and textile exports to Western countries are vital to the economies of Egypt and other Muslim nations. However, according to the author, by 2015, they would encounter fierce competition from countries that have been granted trade advantages by the US through contracts.

However, long-standing Middle Eastern economic interest groups are equally to blame. They oppose deregulation, free trade, and liberalization because they are terrified of the competitive environment that would follow from these measures.

Take the Persian Gulf as an example; its economy is based on trade with countries abroad.

The majority of the Arab Gulf Cooperation Council's member states have, unsurprisingly, long since become members of the World Trade Organization. According to international bankers and economists who spoke with the Times of Oman, the club's strong and sinister business families are preventing their citizens from benefiting from the club until at least 2010.

The core issues in the region stem from the inflexibility and nefarious egotism of the ruling class, as well as from the intersection of oppression and greed. The harmful and long-lasting impacts are unmatched by any other external shock, including the Iraq War.

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