The Economies of the Middle East

By Sam Vaknin
Author of "Malignant Self Love - Narcissism Revisited" On February 24, 2003, in the Islamic Financial Forum in Dubai, Brad
Bourland, chief economist for the Saudi American Bank (SAMBA),
breached the embarrassed silence that invariably enshrouds speakers
in Middle Eastern get-togethers. He reminded the assembled that
despite the decades-long fortuity of opulent oil revenues, the
nations of the region - excluding Turkey and Israel - failed to
reform their economies, let alone prosper.

Structural weaknesses, imperceptible growth, crippling unemployment
and deteriorating government financing confined Arab states to the
role of oil-addicted minions. At $540 billion, said Bourland, quoted
by Middle East Online, the combined gross domestic product of all
the Arab countries is smaller than Mexico's (or Spain's, adds The
Economist).

According to the Arab League, the gross national product of all its
members amounted to $712 billion or 2 percent of the world's GNP in
2001 - merely double sub-Saharan Africa's.

Even the recent tripling of the price of oil - their main export
commodity - did not generate sustained growth equal to the
burgeoning population and labor force. Algeria's official
unemployment rate is 26.4 percent, Oman's 17.2 percent, Tunisia's
15.6 percent, Jordan's 14.4 percent, Saudi Arabia's 13 percent and
Kuwait sports an unhealthy 7.1 percent. Even with 8 percent out of
work, Egypt needs to grow by 6 percent annually just to stay put,
estimates the World Bank.

But the real figures are way higher. At least one fifth of the Saudi
and Egyptian labor forces go unemployed. Only one tenth of Saudi
women have ever worked. The region's population has almost doubled
in the last quarter century, to 300 million people. Close to two
fifths of the denizens of the Arab world are minors.

According to the Iranian news agency, IRNA, the European Commission
on the Mediterranean Region estimates that the purchasing power
parity income per head in the area is a mere 39 percent of the EU's
2001 average, comparable to many post-communist countries in
transition. In nominal terms the figure is 28 percent. These
statistics include Israel whose income per capita equals 84 percent
of the EU's and the Palestinian Authority where GDP fell by 10
percent in 2000 and by another 15 percent the year after.

Faced with ominously surging social unrest, the Arab regimes - all
of them lacking in democratic legitimacy - resort to ever more
desperate measures. "Saudisation", for instance, amounts to the
expulsion of 3 million foreign laborers to make room for indigenous
idlers reluctant to take on these vacated - mostly menial - jobs.
About one million, typically Western, expat experts remain untouched.

The national accounts of Arab polities are in tatters. Until the
recent surge in oil prices, Saudi Arabia managed to produce a budget
surplus only once since 1982. Per capita income in the kingdom
plunged from $26,000 in 1981 to $7000 in 2003. Higher oil prices may
well continue throughout 2006, further masking the calamitous state
of the region's economies. But this would amount to merely
postponing the inevitable.

Arab countries are not integrated into the world economy. It is
possibly the only part of the globe, bar Africa, to have entirely
missed the trains of globalization and technological progress.
Charlene Barshefsky was United States Trade Representative from 1997
to 2001. In February 2003, in a column published by the New York
Times, she noted that:

"Muslim countries in the region trade less with one another than do
African countries, and much less than do Asian, Latin American or
European countries. This reflects both high trade barriers ... and
the deep isolation Iran, Iraq and Libya have brought on themselves
through violence and support for terrorist groups ... The Middle
East still depends on oil. Today, the United States imports slightly
more than $5 billion worth of manufactured goods and farm products
from the 22 members of the Arab League, Afghanistan and Iran
combined - or about half our value-added imports from Hong Kong
alone."

Indeed, Jewish Israel and secular Turkey aside, 8 of the 11 largest
economies of the Middle East have yet to join the World Trade
Organization. Only two decades ago, one of every seven dollars in
global export revenues and one twentieth of the world's foreign
direct investment flowed to Arab pockets.

Today, the Middle East's share of international trade and FDI is
less than 1.5 percent - half of it with the European Union. Medium
size economies such as Sweden's attract more capital than the entire
Middle Eastern Moslem world put together.

Some Arab countries periodically go through spastic reforms only to
submerge once more in backwardness and venality. Oil-producers
attempted some structural economic adjustments in the 1990s. Jordan
and Syria privatized a few marginal state-owned enterprises. Iran
and Iraq cut subsidies. Almost everyone - especially Lebanon, Egypt,
Iran and Jordan - increased their unhealthy reliance on
multilateral loans and foreign aid.

Young King Abdullah II of Jordan, for instance, dabbles in
deregulation, liberalization, tax reform, cutting red tape and
tariff reductions. Aided by a free trade agreement with America
passed by Congress in 2001, Jordan's exports to the United States
last year soared from $16 million in 1998 to $400 million in 2002.

A similar nostrum is being administered to Morocco, partly to spite
the European Union and its glacial "Barcelona Process" Euro-
Mediterranean Partnership. But, as everyone realizes, the region's
problems run deeper than any tweaking of the customs code.

The "Arab Human Development Report 2002", published in June 2002 by
the United Nations Development Program (UNDP), was composed entirely
by Arab scholars. It charts the predictably dismal landscape: one in
five inhabitants survives on less than $2 a day; annual growth in
income per capita over the last 20 years, at 0.5 percent, exceeded
only sub-Saharan Africa's; one in six is unemployed.

The region's three "deficits", laments the report, are freedom,
knowledge and manpower. Arab polities and societies are autocratic
and intolerant. Illiteracy is still rampant and education poor.
Women - half the workforce - are ill-treated and excluded. Pervasive
Islamization replaced earlier militant ideologies in stifling
creativity and growth.

In an article titled "Middle East Economies: A Survey of Current
Problems and Issues", published in the September 1999 issue of the
Middle East Review of International Affairs, Ali Abootalebi,
assistant professor of political science at the University of
Wisconsin, Eau Claire, concluded:

"The Middle East is second only to Africa as the least developed
region in the world. It has already lost much of its strategic
importance since the Soviet Union's demise ... Most Middle Eastern
states ... probably do, possess the necessary technocratic and
professional personnel to run state affairs in an efficient and
modern manner .... (but not) the willingness or ability of the
elites in charge to disengage the old coalitional interests that
dominate governments in these countries."

The war with Iraq changed all that. This was the fervent hope of
intellectuals throughout the region, even those viscerally opposed
to America's high-handed hegemony. But this may well be only another
false dawn in many. The inevitable massive postwar damage to the
area's fragile economies will spawn added oppression rather than
enhance democracy.

According to The Economist, the military buildup has already
injected $2 billion into Kuwait's economy, equal to 6 percent of its
GDP. Prices of everything - from real estate to cars - are rising
fast. The stock exchange index has soared by one third. American
largesse extends to Turkey - the recipient of $5 billion in grants,
$1 billion in oil and $10 billion in loan guarantees. Egypt and
Jordan will reap $1 billion apiece and, possibly, subsidized Saudi
oil as well. Israel will abscond with $8 billion in collateral and
billions in cash.

But the party may be short-lived, especially since the war did not
prove to be as decisive and nippy as the Americans foresaw.

Stratfor, the strategic forecasting consultancy, correctly observes
that the United States is likely to encourage American oil companies
to boost Iraq's postbellum production. With Venezuela back on line
and global tensions eased, deteriorating crude prices may adversely
affect oil-dependent countries from Iran to Algeria.

The resulting social and political unrest - coupled with violent,
though typically impotent, protests against the war, America and the
political leadership - is unlikely to convince panicky tottering
regimes to offer greater political openness and participatory
democracy. The mock presidential elections in Egypt in 2005 are a
case in point.

War also traumatized tourism, another major regional foreign
exchange earner. Egypt alone collects $4 billion a year from eager
pyramid-gazers - about one ninth of its GDP. Add to that the effects
of armed conflict on traffic in the Suez Canal, on investments and
on expat remittances - and the country could well become the war's
greatest victim.

In a recent economic conference of the Arab League, then Egyptian
Minister of State for Foreign Affairs, Faiza Abu el-Naga, pegged the
immediate losses to her country at $6-8 billion. More than 200,000
jobs were lost in tourism alone. Egypt's Information and Decision
Support Centre (IDSC) distributed a study predicting $900 million in
damages to the Jordanian economy and billions more to be incurred by
oil-rich Saudi Arabia.

The Arab Bank Federation foresees banking losses of up to $60
billion due to contraction in economic activity both during the war
and in its aftermath. This may be too pessimistic. But even the
optimists talk about $30 billion in foregone revenues. The
reconstruction of Iraq could revitalize the sector - but American
and European banks will probably monopolize the lucrative
opportunity.

The war, and more so its protracted aftermath, are likely to have a
stultifying effect on the investment climate.

Saudi Arabia and Egypt each attract around $1 billion a year in
foreign direct investment - double Iran's rising rate. But global
FDI was halved between 2000-2002. In 2003, flows reverted merely to
1998 levels. This implosion is likely to affect even increasingly
attractive or resurgent destinations such as Israel, Turkey, Iraq
and Iran.

Foreign investors will be deterred not only by the fighting but also
by a mounting wave of virulent - and increasingly violent -
xenophobia. Consumer boycotts are a traditional weapon in the Arab
political arsenal. Coca-Cola's sales in these parched lands have
plummeted by 10 percent in 2002 alone. Pepsi's overseas sales
flattened due to Arabs shunning its elixirs. American-franchised
fast food outlets saw their business halved. McDonald's had to close
some of its restaurants in Jordan.

Foreign business premises have been vandalized even in the Gulf
countries. According to The Economist "in the past year (2002)
overall business at western fast-food and drinks firms has dropped
by 40% in Arab countries. Trade in American branded goods has shrunk
by a quarter."

These are bad news. Multinationals are sizable employers. Coca-Cola
alone is responsible for 220,000 jobs in the Middle East. Procter &
Gamble invested $100 million in Egypt. Foreign enterprises pay well
and transfer technology and management skills to their local joint
venture partners.

Nor is foreign involvement confined to retail. The $35 billion
Middle Eastern petrochemicals sector is reliant on the kindness of
strangers: Indian, Canadian, South Korean and, lately, Chinese.
Singapore and Malaysia are eyeing the tourism industry, especially
in the Gulf. Their withdrawal from the indigenous economies might
prove disastrous.

Nor will these battered nations be saved by geopolitical benefactors.

The economies of the Middle East are off the radar screen of the
Bush administration, accuses Edward Gresser of the Progressive
Policy Institute in a recently published report titled "Blank Spot
on the Map: How Trade Policy is Working Against the War on Terror".

Egypt and most other Moslem countries are heavily dependent on their
textile and agricultural exports to the West. But, by 2015, they
will face tough competition from nations with contractual trade
advantages granted them by the United States, goes the author.

Still, the fault is shared by entrenched economic interest groups in
the Middle East . Petrified by the daunting prospect of reforms and
the ensuing competitive environment, they block free trade,
liberalization and deregulation.

Consider the Persian Gulf, a corner of the world which subsists on
trading with partners overseas.

Not surprisingly, most of the members of the Arab Gulf Cooperation
Council have joined the World Trade Organization a while back. But
their citizens are unlikely to enjoy the benefits at least until
2010 due to obstruction by the club's all-powerful and tentacular
business families, international bankers and economists told the
Times of Oman.

The rigidity and malignant self-centeredness of the political and
economic elite and the confluence of oppression and profiteering are
the crux of the region's problems. No external shock - not even war
in Iraq - comes close to having the same pernicious and prolonged
effects.


Sam Vaknin ( http://samvak.tripod.com ) is the author of Malignant
Self Love - Narcissism Revisited and After the Rain - How the West
Lost the East. He served as a columnist for Global Politician,
Central Europe Review, PopMatters, Bellaonline, and eBookWeb, a
United Press International (UPI) Senior Business Correspondent, and
the editor of mental health and Central East Europe categories in
The Open Directory and Suite101.

Until recently, he served as the Economic Advisor to the Government
of Macedonia.

Visit Sam's Web site at http://samvak.tripod.com