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October 23, 2008 Edition 39

The vulnerability of Arab economies
Anouar Boukhars

The perfect financial storm now descending on the Middle East threatens to derail the economic ambitions of the oil rich Gulf states and wipe out the modest economic growth and progress witnessed in the non-oil producing areas of the region. Perhaps even more troubling, the crisis has exposed the vulnerability and inadequacy of the institutional foundations of Middle Eastern economies and raised serious questions about the economic judgment of the region's authoritarian leaders and their ability to weather the current financial tsunami.

Articles in this edition
Managing challenges - Abdel Monem Said Aly
Needed: a new vision of inter-state cooperation - Soli Ozel
The vulnerability of Arab economies - Anouar Boukhars
Education and the pursuit of justice - Rime Allaf
To be sure, the Gulf states have an advantage over other Middle Eastern countries thanks to their huge budget surplus, funds which can act as a cushion against heightened global volatility and further drops in oil prices. Nevertheless, the substantial losses incurred by Gulf stock markets and their sovereign wealth funds have dampened the exuberance in the region and reignited anxiety and fear about a replay of the tragic mistakes of the 1970s and '80s when oil producers squandered their wealth on grandiose luxuries, unproductive projects and useless military hardware.

When the oil boom turned into bust in the 1990s, a plethora of domestic problems finally boiled over, igniting the simmering discontent of bursting populations with the cronyism and incompetence of their leaders. This political and social discontent did not turn into a revolution like the one that swept the Shah of Iran in 1979 but it did contribute nevertheless to a troubling rise in political radicalism.

With the oil boom of the new millennium, however, the oil producers displayed a modest amount of economic sense. Billions of dollars were directed toward shoring up their ailing infrastructure and building economic cities and knowledge-based industries. The goal was, and still is, to diversify their economies, increase regional growth and generate employment opportunities for their restless and youthful populations. In some areas, these investments have paid off. Foreign investment, trade and gross domestic product have all increased quite substantially.

But the new economic policies were not all efficiency-driven. Economic development and growth is still foreign manned. Worse, the expansion of the economy has not significantly dented unemployment among nationals. This inability to absorb masses of unemployed youths productively is due in part to shortages of skilled labor. But the larger problem is that much of the newly acquired wealth was invested in non-productive industries and generated by "commodity and asset market booms". Investments in energy-intensive products and automated factories are important but do little to create new jobs. The same thing happened regionally. Gulf investments poured in but were not spent where most needed. Much of the money went into real estate, non-productive commercial trade and other non-tradable sectors. These investments do not bring any new technology or help raise the capital of knowledge and capital of the people's of the region. Furthermore, they are subject to the vagaries of the international environment.

The non-oil producers of the region will probably suffer the most from this current financial turmoil. Like the Gulf states, they've witnessed respectable economic growth but have failed to effectively shift their economies toward allocative and productive efficiency. From Morocco to Egypt, non-oil producers did not take full advantage of the oil-fuelled economic boom of the last eight years nor did they smartly channel the significant flow of remittances and at times direct Gulf aid into productive activity. Today, these countries still have the world's lowest employment rates. A deep and prolonged international recession threatens to badly hit their main job creation industry (tourism) and squeeze out funding for projects that are vital to sustaining economic growth and containing mounting unemployment.

The net result is that Arab middle classes and many ordinary people will be choked further. Already the region suffers from an enormous disparity of wealth between the obscenely rich and the rest. This wealth chasm is widening within and between oil and non-oil producers with serious repercussions for social peace and order. Even before the financial crisis unfolded, all Middle Eastern countries suffered from mounting inflation pressures and a dramatic increase in food prices, caused in part by the reliance of the region on food imports and the failure of Arab countries with arable land to develop it and grow their own food. Those countries with huge budget surpluses can still afford to buy their way out of trouble by significantly raising the wages of public sector employees and increasing subsidies for food staple products. The non-oil producers have to grapple with public protests and occasional rioting. But throughout the region, public resentment is widespread. The fact that the middle and lower classes feel the pinch of rampaging inflation at a time of massive oil revenues only exacerbates feelings of anger at their governments' failure to spread the wealth.

The current financial crisis has demonstrated that the fundamentals of Middle Eastern economies, including wealthy ones, are not strong. Most countries are still held back by the same structural problems and underlying labor market troubles. Despite years of economic growth and efforts to diversify their economies and reform their educational systems, Middle Eastern nations are still weighted down by problems in economic governance and political inertia. This crisis might serve as another wake up call for the region to revise its investment strategies and channel its resources into regional and intra-regional productive projects and industries that better utilize regional skills, create jobs and yield long term political and economic benefits.- Published 23/10/2008 © bitterlemons-international.org

Anouar Boukhars is assistant professor of political science and international studies at McDaniel College in Maryland.

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