What Are the Key Economic Challenges Facing the Middle East?

In January 2009 the BBC ran a story detailing the fragile economy of Dubai and how it had been severely affected by the global recession (BBC News, January 22nd 2009). Unsurprisingly sensationalist in nature, I saw beyond this story which at the time could so easily have been reapplied to almost any other modern city or country in the world. I noticed that it was one of the few economic stories pertaining to the Middle East that was ever carried by major international news broadcasters which was not specifically about oil. I realised that unless an energy crisis had hit, was about to hit, or would possibly hit, then very few people seemed interested in the economy of the Middle East. If one then investigates further into history, the region has always been considered as geopolitically crucial, yet the ‘stagnant economy’ as described by Thomas Friedman’s seminal book “The Lexus and the Olive Tree” has often been acknowledged, and yet merely accepted as a de facto element to world order. As a result, it is unsurprising that the Middle East has been labelled as being “markedly underdeveloped” in comparison to many other regions (Kuran, 2004). However, although it seems often overlooked, the stability of the world does indeed depend on economic trends in the Middle East; not solely for energy prices, but also in for things such as inhibiting radicalism or indeed terrorism.
Throughout this essay I will establish the major obstacles to economic stability and prosperity facing the contemporary Middle East. I will take the examples of both a rentier state and a non-rentier state – Bahrain and Egypt respectively – in order to highlight such challenges. Whilst of course some problems identified in Egypt for example may not be equally applied to all states, Egypt’s size and diverse economic shape (and distinct stagnation) is a decent representative for most non-rentier states in the region. With regards rentier states, most function with a similar economic model and face similar challenges. Therefore Bahrain is a fairly representative country for many of the rentier states in the Middle East. With the use of these two countries in order to represent the wider Middle East, this will enable me to present the argument that a multitude of challenges have led to economic underdevelopment which has left many states (non-rentier) of the Middle East behind most other regions in the world. In the case of Egypt, I would argue that a cyclical system of economic stagnation and migration of educated classes, coupled with lack of workable reform of the private sector leads to a spiral of either slow growth or genuine decline. I will highlight how the current system is overwhelmed by an already large population and will show that if current trends continue, Egypt, along with most other non-rentier states in the Middle East are faced with a dismally impecunious future. With regards to rentier states, I will propose the argument that lack of diversification and a consequential reliance on a single commodity may have led to short term economic strength. However, without diversification the future economic strength will truncate markedly quite soon.
The first part of this essay concerns Egypt, which until the early nineties had maintained a long standing socialist economic model. Enjoying a relatively diverse economy, Egypt not only relies heavily on agriculture and crop export but also has significant energy resources (9% of the GDP). Egypt also enjoys the financial benefits of tourism which accounts for approximately 10% of the GDP. Egypt’s economy only developed as it has due to the reforms of 1991 when Mubarak moved the country from its socialist model to that of a capitalist structure (Löfgren 1993). When Mubarak moved from a Socialist Economic structure to that of Capitalism his fundamental reform effectively widened the private sector by privatising previously state-owned and state-controlled services. This was to have the overall aim of improving the economic situation for Egyptians by fostering “efficient competitive economic circuits” (Kenawy, 2009). This reform was rather successful and Egypt saw its comparatively diverse economy increase with a steady GDP growth of an average of 4.53% between 1991 and 2008 (World Bank WDI, 2008). Although growth was sometimes greater prior to the reforms, it was also very limited in other years. Nowadays Egypt’s economy enjoys consistent and reliable growth. With the fact that positive steps have been introduced and have been proven to be effective, one would anticipate a positive future for Egypt. This is very much the impression given by Rachid Mohammed Rachid (Egyptian Minister for Trade and Industry) during an interview with renowned Al-Jazeera correspondent Riz Khan. Rachid briefly acknowledged some shortfalls in the economy, but focussed almost exclusively on the positive impact the reforms had made and would continue to make (Khan & Rachid, 2008). However I would strongly suggest that the reality is far from positive, and compels many commentators, including the much distinguished and award winning Egyptian economist Aladdin Elaasar to suggest that the Egyptian economy is “in trouble” with the potential for “profound social ramifications” (Elaasar, 2009).
The social ramifications about which Elaasar speaks refer to a growing number of disenfranchised young males who face a future blighted by a lack of employment in the country. Indeed the unemployment rate in Egypt among 15-24 year old males is a staggeringly high 23% as of 2005 (World Bank Data, 2005). These problems in isolation of course do not necessarily infer economic ruin. However, they do provoke further trends which tend to exacerbate existing economic difficulties. In very broad terms, labour migration from a developing country tends to create a paradox – on one hand it is beneficial, and on the other it is damaging. The key difference is whether the migrant worker is skilled or unskilled. Unskilled labour migration can reduce the strain on the economy, and consequently reduce the rate of unemployment. Furthermore, unskilled migrants will often send money back to their home country to family members. This trend is, in general terms, beneficial to a developing but fragile economy. A demographic of young males who would otherwise be underemployed or unemployed and thus a burden on the economy suddenly becomes an economic and political asset with little or no expense for the state. The case of Egypt is not very different to that of many other developing countries – particularly in the Middle East. There is however one huge flaw to its migration trends which not only undermines the positive effects of labour migration, but in reality makes it a crippling problem for the country.
According to a survey conducted by Dr Talani of UCLA in 2005, of all migrant workers to leave Egypt, mainly for Europe or the US and Canada, 47.6% are degree holders or hold post-graduate qualifications. Although falling short of western standards of a ‘welfare state’, it is still rather prosaic to suggest that from birth to completion of university, this portion of society are an economic encumbrance on the country. Theoretically of course, they are an economic investment as the future business minds foster private sector growth, entrepreneurs develop international trade, and doctors and teachers provide a high standard of public service. Unfortunately, the reality facing the Egyptian government is plainly obvious; these degree holders simply leave for more prosperous lands thus exacerbating and perpetuating the cyclical problem of economic stagnation. Economic stagnation then leads to wide unemployment which in turn encourages people to leave. I would argue most vociferously that this is one of the fundamental challenges facing not just Egypt, but the majority of the non-rentier states in the Middle East.

The second major obstacle to prosperity facing Egypt is that of population growth. To highlight this I will draw upon Sirageldin (2003) who conducted a study which showed quite clearly that population growth at current trends will have a profoundly deleterious effect on the economic health of Egypt. The study showed three different possible trends of population growth which of course would produce three different results – a streamlined economy, a sluggish economy, or an utterly stagnated economy. These results were predicted as of 1994, however with the benefit of the last fifteen years to calculate which trend has actually happened, it produces a worrying result. At current trends based on population growth, the Egyptian economy will fall roughly in the middle between Sirageldin’s predictions of sluggish to stagnated economy with a population of over 140 million by 2045 (the threshold for utterly stagnated fell at 157 million people). So although nowadays the economy is suffering, and recent reforms have yet to have a tangible impact on the lives of the average Egyptian, such deterioration would of course exacerbate existing problems like migration of educated classes. This prediction is also readily and accurately applied to other non-rentier states throughout the Middle East. It seems that without major upheaval, the future falls somewhere between bleak and lugubrious for these countries.
Nevertheless, as is so often the case with the Middle East, the details are more complex and there is a distinctly dichotomous nature to the economic environment. Rentier states are states which rely heavily on one single commodity or a very small number of often interrelated commodities for economic prosperity. They are usually associated with rapid growth and rapid wealth, but the discovery of the commodity can also have a pejorative effect on internal stability. An obvious example would be the difference between Qatar and Nigeria, both of whom rely almost exclusively on export of energy resources. However, Qatar enjoys relative peace and incredible riches, whereas Nigeria suffers from an underreported internal conflict and widespread poverty .
Bahrain is a state which falls under the definition of a rentier state and enjoys comparative prosperity. However, even with this ostensible prosperity it is often very easy to overlook important issues. The economy is based on the single commodity of energy, and is therefore by default almost completely reliant on the global oil and gas price for economic growth. However, the issue is that although often financially beneficial, it can also be subject to massive volatility – when the oil price collapses, the economy of Bahrain suffers. This effect may seem simplistic, but applying a workable solution to oil price reliance is much less so, and very few rentier states have succeeded in doing so. Nevertheless, this is not the only problem facing Bahrain.
Although Bahrain, along with other oil-reliant states in the region, enjoys relative prosperity it is still affected greatly by unemployment (UN HDR 2009). Blighted by a high unemployment rate (although lower than Egypt) and the issue of population growth, Bahrain too will also face difficult challenges associated with a saturated labour market and consequential migration of educated classes. Bahrain is of course a richer country and therefore one would anticipate that the level of migration would fall short of that of Egypt. Nevertheless, it remains problematic in economic and socio-economic terms. However, this is not the largest worry of the country, and of course its oil-rich neighbours. The aforementioned volatility with global energy prices is one huge drawback to single commodity economic reliance, but it is not the most fundamental problem. Simply speaking, the oil will eventually run dry. In the case of Bahrain and many other rentier states, there have been concerted efforts to not only diversify the economy, but also to use revenue generated from oil more wisely by investing in oil stabilisation programs and the property market amongst other things (UN HDR 2009). Whilst this is evidently a positive move towards economic surety, it also exposes the economy to even more external risks as demonstrated by the ongoing fiscal crisis in Dubai following the global financial downturn. Nevertheless, diversification is a paramount necessity and certain conditions are required to achieve it; an efficient taxation system for example (many of the GCC countries have little or sometimes no system of taxation) and assurances against economically damaging events such as the global financial crisis (Fasano & Iqbal, 2003). Without such elementary reforms, Bahrain along with many other GCC countries will still remain speciously wealthy, but incredibly susceptible to collapse. Moreover, their source of income is finite.
As previously suggested, the Middle East is an economically dichotomous region. Yet both sides suffer from economic problems. Rentier states are currently experiencing a brighter time, yet they still face a problematic future unless serious reforms are introduced. Economic reliance on a single diminishing commodity accompanied by outdated taxation systems and the additional (although less prominent) problems such as population growth and labour migration all give rise to a certain future – a bleak one. Non-rentier states suffer from the more basic (but no more easily resolvable) problems associated with general stagnation – those of poverty, unemployment and migration of educated classes. This is greatly exacerbated by a rising population and if trends continue, Egypt’s future, like that of many other non-rentier states, also looks unavoidably abysmal.


References

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