Modernizing the Middle Easts Economies

Prince El Hassan bin Talal of Jordan is a Commissioner on Legal Empowerment of the Poor and Chairman of the West Asia-North Africa Forum.

AMMAN – Rather than speak of the Middle East or the Arab world, I increasingly prefer to use the term WANA, meaning West Asia-North Africa. But, whatever we choose to call it, the danger is that the global economic crisis is providing an almost perfect alibi for governments and others in the region to continue with “business as usual,” when what is needed is a loud wake-up call.

The global economic crisis has merely helped to mask chronic structural imbalances within the region. Over-dependence on aid and oil revenues characterizes almost all the economies of WANA. Indeed, it is no exaggeration to say that they represent a form of life-support system. The problem of how to wean these countries off this addiction seems to be insurmountable.

For the “Dutch disease” and a rentier spirit prevail in WANA, and have affected oil-producing and non-oil-producing countries, ranging from migrant workers’ remittances and financial investment flows from the oil countries (mainly into real estate) to stock-exchange bubbles and foreign aid. A side-effect of this has been the widening of income gaps, both within and between the WANA countries.

Political scientists tell us that rentier economies, or economies that depend on oil and foreign aid, stimulate greed and grievances. Indeed, oil rents eventually weaken state institutions, and this hollowing out of the state often gives rise to growing discontent.

In a non-oil economy, labor is the main engine of wealth. But in a rentier economy, huge revenues from oil or external financial transfers actually create a disincentive to work. Wealth and work are de-linked, and this applies to most industrial and agricultural activities. Social and political mobility become extremely limited, and societies turn from production to consumption. This helps to explain the high level of unemployment in the Arab world.

According to World Bank figures, the Middle East North Africa (MENA) region suffered a 25% fall in per capita incomes during the last 25 years of the twentieth century, when oil prices were low. In this decade, thanks to record-high oil prices, GDP growth rates soared. A recent study by India’s Strategic Foresight Group entitled The Cost of Conflict in the Middle East suggested that the past 20 years of conflict have cost WANA countries some $12 trillion.

Rent-seeking tends to lead to policy failure in the form of intense political competition aimed at gaining short-term access to revenues and benefits, as opposed to political competition over what policies might be in the long-term public interest. The politics of greed and grievance replace more far-sighted policymaking.

So what, then, are the possible policy options? The absence of a modern industrial base diminishes the WANA economies’ ability to absorb the surplus generated by oil revenues. As a result, many countries have established sovereign wealth funds to invest their surpluses in international markets. These funds’ managers rightly complain that insufficient investment opportunities exist in the region in agriculture and manufacturing. The question is how to increase the absorptive capacity of the region and build a modern industrial base.

A precondition for any effective change is a shift in policy orientation from the national to the regional level. For this to be made concrete, new instruments are needed, such as a Regional Stabilization Fund, a Water and Energy Community, regional social cohesion, and a regional industrial policy. Without a regional focus, WANA countries risk sleepwalking into conflict and more pronounced economic decline.

Indeed, funds for “needy countries” may never reach the neediest of individuals, such as internally displaced or stateless persons, because no one takes responsibility for them. How can this be done?

Three years ago, the Commission on Legal Empowerment of the Poor considered ways of empowering the “bottom billion” by expanding and deepening the means by which they could pull themselves out of poverty. Its 2008 report Making the Law Work for Everyone argues that legal empowerment is not about aid, but about policy and institutional reforms that expand the legal opportunities and protection of the poor. It is an example of the methodology urgently needed to initiate a paradigm shift in WANA.

The nations of WANA missed the first industrial revolution based on coal and the steam engine, and then the second industrial revolution based on oil and the internal combustion engine. The silver lining is that the absence of a modern industrial base means that, unlike more developed economies, WANA has no ailing industries to rescue. But what is needed now are policies that will allow WANA to join the third industrial revolution – the post-carbon economy of renewable energy and the fuel-cell plug-in car.

Project Syndicate

Post-Crisis World Institute