More Bad News for the Middle East

Arabies Trends, January 2002

THE UNITED NATIONS Economic And Social Commission For Western Asia (ESCWA) has released its preliminary overview of economic developments in the ESCWA region in 2001. The news is no cause for celebration. According to the report, which contains an annex treating the economic and social consequences of the United Nations sanctions on Iraq, economic growth in the ESCWA region – Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Oman, Palestine, Qatar, Saudi Arabia, Syria, the United Arab Emirates and Yemen – slowed to a crawl last year.

The report attributes the bleak economic news to the obvious culprits: Noting that oil production and prices fell sharply – oil revenues in the region declined to $126.8 billion in 2001, a $29.6 billion drop from 2000 – the commission places the blame for the region’s stagnation on the sharp slowdown in world economic growth and the ensuing decline in global demand for oil; the terrorist attacks of September 11, which crippled non-oil sectors such as tourism and transport; and violence in the West Bank and Gaza Strip. But the Commission stops there, and makes little mention of the deeper structural, political and social causes of long-term economic stagnation in the Gulf and other ESCWA states.

The commission’s estimates indicated that the combined real gross domestic product (GDP) of the ESCWA members, excluding Iraq, grew only 2.2 per cent in 2001, down from a rate of 4.3 per cent in 2000. Only three ESCWA member countries had a budget surplus in 2001, compared to five in 2000. Budget deficit ratios deteriorated significantly in eight of the 11 countries. Falling oil prices drastically reduced the combined balance of trade surpluses of the GCC States and widened trade deficits.

The Commission does not expect the news to improve. The report projects that the real GDP of the GCC States will grow by only 1 per cent in 2002, down from the 4.6 growth rate registered in 2000. The oil sector will perform poorly in 2002, the commission predicts, with adverse effects on economic conditions and government budgets. Labor market conditions will remain weak, with insufficient economic growth to absorb the annual increase in the supply of workers. The fiscal positions of most countries in the region are expected to deteriorate in 2002, and the performance of the external sector is expected to worsen.

According to the Commission’s preliminary estimates, Qatar and Oman registered the highest growth rates of the GCC states; Kuwait and Saudi Arabia the lowest. Real GDP growth in Saudi Arabia for 2001, estimated at 1.7 per cent, was significantly lower than the 4.5 per cent growth rate achieved in 2000. In Qatar, preliminary estimates put real GDP growth rate at a healthy 6.4 per cent for 2001, the highest for any GCC State or other ESCWA member country. This stands to reason: Oman has been most active among GCC States in promoting economic reform and liberalization and attracting FDI. Similarly, the Bahraini economy, which is far more diversified than those of the other GCC States, has taken a less significant hit: Preliminary estimates indicate that real GDP in Bahrain grew by 4.8 per cent in 2001, the third highest growth rate achieved by any ESCWA member country.

Real GDP declined by a devastating 30 per cent in the West Bank and Gaza Strip. ESCWA’s estimates indicated that 100,000 Palestinian workers lost their jobs in Israel and Israeli settlements and industrial zones, and a further 80,000 lost their jobs following the imposition of the Israeli economic blockade, which restricted the flow of exports and imports to the Palestinian territories. The report estimated total Palestinian economic losses since the beginning of the intifada in September 2000 until the end of October 2001 at $6.8 billion.

Interestingly, Yemen, the least developed country in the region, achieved the highest real GDP growth rate of all the more diversified economies of Western Asia – 4.5 per cent. The authors attribute this to the Yemeni government’s economic reform and liberalization program. But real GDP growth in Egypt declined from 6 per cent in 1999 to 3.3 per cent in 2001. The privatization program lost momentum, the tourism sector weakened, financial sector reform was delayed, the national currency was over-valued and tight liquidity and high interest rates contributed to a marked slowdown in economic growth.

Labor market conditions deteriorated in most of the ESCWA countries. Economic growth was far too feeble to provide work for the unemployed or to accommodate the rising number of new entrants to the labor market. The impact of the September 11 attacks on the tourism sector, and its concomitant effects on the labor market, were particularly devastating in Jordan, Lebanon, Syria and Egypt. Egypt’s unemployment rate increased to more than 9 per cent overall, and to more than 35 per cent for people under the age of 35. In Syria, according to 1999 figures, the unemployment rate among those aged 15-24 reached 72 per cent. Alarmingly,  most of the unemployed were illiterate or had only a primary or intermediate level of education. The unemployment rate in the Palestinian territories soared to 35.3 per cent in the second quarter of 2001.

The rate of women’s participation in the labor force rose only very modestly. Figures indicating the share of women in the labor force in Egypt, Jordan, Lebanon, Syria and Yemen ranged between 21 and 30 per cent. In the remaining ESCWA member countries the share was even lower.

The report projected that non-oil producing countries in 2002 would show swifter growth than GCC countries, which are expected to post only 1 percent growth in 2002, compared with 4 percent for non-GCC states. In 2001, growth in GCC and non-GCC countries was nearly identical, 2.3 percent and 2.08 percent respectively. The authors argue that the events of Sept. 11 had a particularly detrimental effect on the area’s drive to attract direct foreign investment needed to halt the widening fiscal deficits in the area. The authors expected the effects of these events to reverberate well into 2002: unemployment will worsen as high population growth rates hold steady.

But, the authors note hopefully, the Sept. 11 attacks and ensuing restrictions on Arab capital could help replenish the region’s economy, particularly as estimates indicate that some $6 billion were repatriated from the United States to Saudi Arabia in the last four months of 2001. Also on the slightly brighter side, inflation rates remained low, with rates in most ESCWA member countries remaining under 3 per cent.

Equally notable is what the commission does not say: Nowhere does the report comment upon the enormous and chronic economic burden of military expenditures in the ESCWA territory, easily the most militarized region of the world. Nor does the report explicitly mention – or condemn – the key sources of chronic economic underperformance in the region, such as the excessive, across-the-board state sector and government control of the ESCWA members’ economies, the over-reliance on the oil and gas sectors, uncertain or inexistent strategies for long-term energy development, over-reliance on non-productive service sectors such as tourism, excessive government employment, the mismanagement of agricultural sectors, the failure to reduce dependence on water, desertification, and painfully inadequate regional infrastructure development. As is typical of a United Nations document, the report produces the damning data, but fails to draw the obvious conclusions or make the unpopular recommendations, preferring to suggest that these broken systems require a bit of tinkering rather than radical revision. Syria, for example, is advised to “enhance efficiency in the public sector … partly through the gradual introduction of some market oriented objectives,” given that Syria has “no plans for privatization.” The report might well have observed that the fact that there are no plans for privatization is, in itself, the problem. But it does not. The Annex treating the economic consequences of UN sanctions on Iraq, similarly, is a deflection from these issues, a political sop rather than a relevant appendix to this document. Of course economic sanctions cause economic harm: That is exactly what they are designed to do. But why include this annex in this document?

Such is the perennial problem with UN reports: Dependent for their existence upon the good will of member states’ governments, these commissions cannot bring themselves to say what needs to be said. In this case, however, the facts speak for themselves.

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