Commentary: Economics of the Middle East-2

www.upi.com By Sam Vaknin UPI Senior Business Correspondent From the Business & Economics Desk Published 2/27/2003 1:34 PM

SKOPJE, Macedonia, Feb. 27 (UPI) -- The "Arab Human Development Report 2002," published last June by the U.N. Development Program, 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 labor. 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) willingness or ability of the elites in charge to disengage the old coalitional interests that dominate governments in these countries."

The looming war with Iraq will change all that. This is the fervent hope of intellectuals throughout the region, even those viscerally opposed to America's high-handed hegemony. But this might 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 build-up has already injected $2 billion into Kuwait's economy, equal to 6 percent of its gross domestic product. 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 might be short-lived, especially if the war proves to be as decisive and nippy as the Americans foresee.

Stratfor, the strategic forecasting consultancy, correctly observes that the United States is likely to encourage American oil companies to boost Iraq's post-bellum production. With Venezuela back on line and global tensions eased, deteriorating crude prices might 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.

War will traumatize 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, Egyptian Minister of State for Foreign Affairs, Faiza Abu el-Naga, pegged the immediate losses to her country at $6 billion to $8 billion. More than 200,000 jobs will be lost in tourism alone.

Egypt's Information and Decision Support Center distributed a study predicting $900 million in damage 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 might be too pessimistic.

But even the optimists talk of $30 billion in lost revenues. The reconstruction of Iraq could revitalize the banking sector -- but U.S. and European banks will probably monopolize the lucrative opportunity.

War is 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 halved in the last two years. This year, flows will revert 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 last year. 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 overall business at Western fast-food and drinks firms has dropped by 40 percent in Arab countries. Trade in American branded goods has shrunk by a quarter."

This is 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, says 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 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, he says.

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 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. -0- Part 1 of this analysis appeared Wednesday. Send your comments to: svaknin@upi.com.