Issuu on Google+


Middle East Oil Exporters


DEDICATION To my father Hashem Askari. During the nine brief years that I knew him he gave me a lifetime of caring and moral direction. From him I learned the importance of social and economic justice. His example has sustained and guided me through this troubled and directionless world.


Middle East Oil Exporters What Happened to Economic Development?

Hossein Askari Iran Professor of International Business and Professor of International Aairs, The George Washington University, USA

Edward Elgar Cheltenham, UK • Northampton, MA, USA


© Hossein Askari 2006 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited Glensanda House Montpellier Parade Cheltenham Glos GL50 1UA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data Askari, Hossein, Middle East oil exporters : what happened to economic development? / Hossein Askari. p. cm. Includes bibliographical references and index. 1. Middle East—Economic conditions. 2. Middle East—Economic policy. 3. Petroleum industry and trade—Middle East. I. Title. HC415.15.A853 2006 338.956—dc22 2006021051

ISBN-13: 978 1 84542 909 6 ISBN-10: 1 84542 909 5 Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall


Contents Foreword Robert M. Solow Acknowledgements

vi ix

1 2 3 4 5 6 7 8 9 10 11

Introduction The blessing and the curse of oil Islam, governance and economic development Instability, regional conflicts and external intervention Physical and social indicators Broad economic indicators and performance Government finances External sector Labor and employment Capital flows Law and order, business climate, economic freedom and country risk 12 Military expenditures and the cost of conflicts 13 Policy assessment: a synthesis of successes and failures 14 The way forward

230 263 309 329

Appendix 1 Growth rate calculations Appendix 2 Additional tables and figures for Chapter 6 Appendix 3 Additional table for Chapter 11 Bibliography Glossary Index

337 339 344 347 358 361

v

1 8 21 36 53 83 116 148 175 197


Foreword Robert M. Solow Hossein Askari aims in this book to weave seamlessly together three related themes. First and foremost, he provides a detailed picture of the economic structure and a critical survey of the recent economic performance of the Middle East and North Africa (MENA) region. The focus is especially on the large oil-exporting nations – Iran, Iraq and Saudi Arabia – although the smaller producers are not forgotten. He makes interesting comparisons with the non-oil countries of the region and, in a nice touch, with a few outof-region countries whose characteristics are in one way or another appropriate. Anyone who wants to grasp the economic status of this rather special, perhaps unique, part of the world will find here a knowledgeable and assiduous guide. Secondly, the book presents a strong and uncompromising argument about what these countries must do, and what the West must do, to improve the economic performance and social fabric of the MENA region, and thus better the daily lives of the inhabitants. Western readers are accustomed to think of the Middle East as a ‘trouble spot’, or as an obstacle to or instrumentality of Western foreign policy. Professor Askari wants us to see it as a place where people live and work, save and consume, just with a different history and a differently shaped society. Since these societies have not provided very well for their people, they could use improvement, and the West has generally not helped. Neither have the local rulers. Askari’s third theme is a view of the social, economic and political implications of Islamic doctrine. His interpretation is dramatically different from the conventional picture that is propagated today by interested parties inside and outside the Middle East. In this context he looks at the institutions of governance in the region, finds that they have performed poorly for their people, and argues further that they can not justify themselves as somehow embodying specifically Islamic principles. If anything, he claims, they are in blatant violation of those principles. Above all, the reader of this book will have the unusual experience of seeing the Middle East primarily in an economic context. It is a place where normal economic categories apply, where we can talk about saving and investment, wages and profits, imports and exports, taxes and subsidies. vi


Foreword

vii

Of course it is also an unstable area, currently, as so often before, a locus of violence and political strife, internally and externally generated. It is almost shocking right now to realize that in the absence of violence and strife one could think about the area as in many respects a normal place with normal economic problems, and the normal decisions to make. Well, there is an important difference, and this is another angle that Professor Askari knows how to exploit. A sparsely populated country sitting on a pool of a very valuable natural resource, like oil, has problems and advantages of its own. The advantages are obvious. Many poor countries find it difficult to make the first step on the way to economic development. Their margin above subsistence is so small that domestic saving can not finance the necessary initial capital investment. Foreign aid is often too small or too onerous in other ways. Wealth in the form of exportable natural resources can pay for the start-up capital, if it is productively used. Askari shows that the history of the region is a clear demonstration of the importance of that last clause. But why should mineral wealth create problems? There are two important examples, one obvious and the other less so. The obvious example is that oil attracts imperialism and domestic corruption, often in tandem, in fact often in cahoots. The other example is sometimes known as ‘the Dutch disease’; in this case natural gas was the resource in question. A country exporting a scarce natural resource product and facing strong and increasing demand is likely to see its currency appreciate as foreigners bid for the resource. That is very nice in one sense, because it cheapens the domestic price of imports. But the flip side is that this very appreciation also makes the home country’s domestic industries less competitive on world markets. The home-country producers of other tradable goods have a hard time establishing themselves and growing. It is not difficult to see the shape of a responsible strategy. Oil is not a renewable resource, at least not on a human timescale. So using oil revenues simply to subsidize current consumption is a way of cheating future generations out of their share of the natural inheritance. Instead an adequate share of current revenues should be invested in earning assets. These will increasingly substitute for oil as it runs out or becomes high cost and less profitable or faces competition from alternative fuels. The post-oil future thus shares indirectly in the inheritance. Those stockpiled assets could take the form of domestic productive capacity in any viable industries. At the other extreme, even a totally inhospitable desert society could use oil revenues to acquire foreign assets capable of providing a continuing income stream when oil fails. The active purchase of imported capital goods and foreign securities can also fend off currency appreciation, and thus serve as a natural offset to the Dutch


viii

Middle east oil exporters

disease. Such a foresighted strategy would be fully consistent with Islamic doctrine, according to Askari. The problems of the non-oil countries of the MENA region are more like those besetting other poor, developing economies. They suffer from the oil-induced instabilities, without the benefit of oil. When he measures the performance of the oil exporters against this standard, however, Professor Askari sees mostly failure. Oil revenues have gone disproportionately into subsidized bread and circuses, not to mention plutocratic luxury and wasteful and dangerous military expenditure. Chapters 12 and 13 tell a truly ghastly story calmly, if not exactly dispassionately. It is not easy to imagine how the region could move from the current chaos toward a rational socially, politically and economically inclusive strategy. If that were to happen by some near-miracle, the protagonists of that transformation would find this book a useful starting-point, both as a compendium of facts and ideas, and as an example of the spirit in which rational reform could be approached. Western readers also have some thinking to do. It is pretty clear from Askari’s exposition that their governments and their oil companies have long been part of the problem, not part of the solution. The addition to the world market of a large continuing Chinese and Indian demand for oil will make the West’s situation more complicated. It is not easy to see what a constructive role might be; and achieving it will be even harder. Again, Professor Askari has tried to help, by documenting the record of historical failure, and sketching out the fairly dramatic changes that will be necessary if the West is to begin to play a constructive role in the Middle East.


Acknowledgements This manuscript would not have been completed without the assistance and support of a number of people. I am indebted to Kelvin Teo for his assistance in putting Chapter 5 together and for his technical support, to Roshanak Taghavi for her help in background research for Chapter 3 and for developing Chapter 12, and to Noora Arfaa for her assistance in completing a number of tables, putting together the Bibliography and Glossary, and for preparing the manuscript for the publisher. I am especially grateful to Meera Narayan for her dedication to the project and for developing the first drafts of Chapters 6–11. My admiration, gratitude and debt to Professor Robert Merton Solow, my teacher, role model and friend, have grown continuously since I first met him as an undergraduate student at MIT in 1964; for me it is a thrill that he has yet again graciously written the Foreword to one of my books. My wife, Anna, besides editing the first draft of this book and getting the manuscript ready for the publisher, gave me her total support and encouragement to put my thoughts on paper. To all of them I want to express my heartfelt gratitude and thanks. This manuscript, besides any shortcomings that remain, is truly a reflection of their hard work, dedication, support and encouragement. Finally, I must acknowledge the generosity of Iran for endowing the Iran Chair (originally Arayamehr) at the George Washington University in 1974. I am honored to be the second holder of this Chair.

ix


1. 1.1

Introduction BACKGROUND

Over the past 30 years, after writing three books on economic development in the Middle East, a book on Islamic taxation and numerous articles and popular opinion pieces on the economic performance of the region, it is clear to me that the reasons for economic and social failure in the Middle East are far deeper than simple shortcomings in the quality of economic policies adopted, availability of financial resources and governance. Political, legal, social, cultural and religious factors, regional conflicts and instability, and external meddling in the region have also shaped the economic landscape. In the past, I relied too heavily on economic policies and paid lip-service to some of these other important factors. The reasons for the disaster that is the Middle East of today are interrelated and straddle these and other disciplines. There is no simple economic policy explanation for the failure of the region. I believe that the explanation lies in what has happened in the region since World War II and especially over the past 30 to 35 years. In brief, my simple conclusion is that there can be no sustained economic growth, development and prosperity in the Middle East without peace and stability. But there can be no stability without economic prosperity. The major powers, instead of supporting social, political and economic progress, have made matters worse by focusing on their own narrow short-term interests and at times even fueling conflicts. The reasons for the turmoil in the region are multifaceted. From the economic perspective, policies have been misguided, shortsighted and inconsistent, and have been adopted in order to ‘buy’ local loyalty and thus support the regimes in power. Politically, most governments have lacked legitimacy. The rule of law has not been respected and nurtured. Revolutions, civil wars, regional conflicts and wars have drained the economic lifeblood of the area. In the case of the oil-exporting countries in the region, the focus of my studies, oil has been more of a curse than a blessing; it has become the crutch to avoid policy reform and to keep unpopular governments in power.1 Oil has destroyed the work ethic of the region, fueled corruption and poisoned the cultural and social fabric of society. Islam has been invoked to garner legitimacy for illegitimate regimes and to 1


2

Middle east oil exporters

gain support where support has not been earned. Islamic teachings have been perverted and conveniently adapted and adopted to support the dictator of the day, with concessions to the religious establishment to gain their backing. The great powers, especially those in the West, have supported and exploited illegitimate, dictatorial and economically bankrupt regimes to promote their own short-term interests. FDR said more than half a century ago that similar rulers in Latin America were ‘sons of bitches’ but they were America’s ‘sons of bitches’! For the West it might have been easier to deal with little dictators or sons of bitches than with legitimate and nationalistic regimes with checks and balances. Unfortunately, there is now a price to pay: miserable economic growth (even declining real per capita economic output), high unemployment and a dejected, desperate and radicalized new generation of Muslims; Osama bin Laden on the loose, with potentially many more Osamas to follow; Afghanistan and Iraq rife with internal conflict; and much more to come unless the reasons for failure are acknowledged and new policy directions are adopted both within the region and toward the region. If change is simply imposed from the outside, it will fail. Yet under existing circumstances change will not readily come from the inside of its own accord. Effective change will come about only if the disparate reasons for failure are seen as a whole. Change will only be effective if it comes from the inside and is encouraged and supported by the West in word as well as in deed. The West’s principled rhetoric has been trumped and buried by its own selfish deeds. Western credibility, especially that of the United States, is at an all-time low in the region. Middle Eastern cynicism must now be bested by Western actions that are, in deed as well as in talk, supportive of pluralism, rule of law, economic development and social and economic justice. Such an enlightened approach toward the region is in the long-term interest of the West and of the United States.

1.2

AN ACCOUNT OF HOW WE GOT HERE

Whenever a topic becomes of general interest, the public and people from all walks of life become overnight experts. In the case of the stock market boom of the 1990s everyone, from hairdressers in Los Angeles to cab drivers in New York, had advice on what stocks to buy – with New York cab drivers probably more qualified than most. Since the tragic events of September 11, 2001, Islam and the Muslim countries of the Middle East have become a topic of great interest. The first Arab Human Development Report received widespread attention in the media.2 Americans are interested in Al-Qaeda, know where Iraq is and are aware that there are Sunni


Introduction

3

and Shia Muslims. But in the process of acquiring this superficial knowledge, there has been a rush to judgement. In their quest to satisfy the public’s thirst for more information and simple solutions, pundits and the media have become specialists on the Middle East, from politics to religion to economic development. They have generally blamed Islam, the Middle Eastern character and corruption, most often in that order, as the reasons for dictatorships, economic backwardness, social malaise and terrorism. During 1974–75, I wrote my first book on economic prospects for the Middle East and North Africa.3 This was a time of great hope for the region. Oil prices had increased significantly after the Teheran Agreement of 1971 and had started to shoot through the roof after the Arab oil embargo in 1973–74. This was also a time when economists generally believed that economic development and growth could be readily achieved by government investments in infrastructure and in key industries that embodied and supported areas of long-term comparative advantage. The difficulty was seen as the dearth of financing, especially the availability of foreign exchange, giving rise to the then famous Two-Gap Model (the gaps being savings and foreign exchange). With dramatically higher oil revenues, it looked as if the Middle East and much of North Africa had overcome any and all financing problems and that, as far as economic development was concerned, the sky was the limit. Oil exporters with their surplus capital were expected to invest in infrastructure, education, manufacturing and more; economies would grow rapidly, and their growth and surplus capital would in turn fuel growth in the rest of the region. It was a plausible story then and one that I generally espoused in the above-mentioned book. Sadly, it was just naive and wishful thinking, with little factual basis. What happened, what went wrong and what can be done to turn things around are what I endeavor to explore in this book. It was not long after 1976 that it became obvious that the optimistic expectations were way off the mark and were nothing more than a simple fairy tale. Leaders (dictators or at best autocratic rulers) in the oilexporting countries of the region became drunk on the vast transfer of wealth. Some embarked on showcase projects and extravagant celebrations to impress the world. Most increased military expenditures dramatically and imported the most sophisticated arms that money could buy, but that nobody knew how to maintain. Some sent their brightest and best to get a Western education even before they had finished high school in their own country. In many countries there was a rush to modernize, which became translated into emulating everything Western. In most cases, subsidies for food, fuel and electricity became the overnight birthright of citizens. Oil was gushing from the ground and everyone wanted a share, with the powerful taking more than their share. Corruption took off


4

Middle east oil exporters

at an even faster rate than did oil revenues, with everyone who could do so grabbing as much as possible, quickly and with little or no productive output. Economic disparity among the citizenry grew. It was a period that could easily be compared to the gold-rush era in the US but it was not clear whether its aftermath would turn out to be more like that of California or that of the Yukon.4 In the Middle East it was oil that made all of this possible, while Middle Eastern governments seemed to forget that oil was a depleting resource, and a resource whose price could fluctuate wildly. In 1978, I had the rare opportunity to see some of the policies and practices first-hand as Advisor to the Saudi Arabian Executive Director at the IMF and as Special Advisor to the Minister of Finance of Saudi Arabia. The IMF was preaching responsible fiscal and monetary practices, open trade policies and market reforms to the non-oil exporters of the region, but was quite mute when it came to the oil exporters, especially those who were oil rich and were lending money to the IMF (Saudi Arabia). In 1980, I collaborated with Martin Weitzman, who wrote a seminal paper on economic management in a depletable resource-based economy.5 The results are quite intuitive. An oil-exporting country should save a higher percentage (than countries that do not rely heavily on a depletable resource) of its net national product (NNP) in order to compensate for the depletion of oil resources over time; the required savings rate depends on the size of oil reserves and their rate of depletion (that is, the expected number of years to the depletion of reserves), on the rate of return on non-oil investments and on where the country wants to be economically when oil runs out. In other words, oil exporters should see themselves as being in the asset transformation business; the asset, oil, belongs to the current and all future generations; oil exporters have to transform oil reserves into non-oil sources of economic output as efficiently as possible to benefit current and future generations in an equitable manner. During the mid-1980s, I wrote a second book outlining the policy shortfalls of oil exporters and what had gone wrong since 1975.6 However, in order not to offend a number of individuals and especially the government of Saudi Arabia, regrettably I did not publish this book until 1990. Its message was that delay in economic policy reforms (reduction in subsidies and the need for a policy environment to encourage private sector growth) would only make matters more difficult, both politically and practically, especially in the face of explosive population growth. This was followed by another book in 1997, with essentially the same message but with an examination of a broader range of oil-exporting countries.7 So why another book now, on what seems to be generally the same topic? The need for sustained and equitable economic growth (and for social and political change) in the region is ever more urgent. Experts preach the


Introduction

5

pressing need for democracy in the Middle East and North Africa and invariably recommend that this come from the outside, and quickly. Yet they ignore the economic history of the past 50 years, especially since 1970: the role of oil, economic rape and pillage by autocratic rulers, governments, their relatives and close associates, economic mismanagement on the grandest of scales, the impact of internal and regional conflicts, and the resulting dissolution and despair of the region’s general population, especially among its youth. The West has been a party to the region’s economic decline. To address the prevailing malaise in the region, political change must be accompanied by radical economic change. The two must go hand in hand. A solution has to incorporate more than economic reforms, the message in my previous books. It is time to give this broader message in blunt terms so as to have a prayer of a chance of avoiding catastrophic social and political disaster in the future. The message is simple enough. The Middle East (along with SubSaharan Africa) has been the worst economic performing region of the world over the past 25 to 30 years.8 This is all the more surprising because a number of countries in the region have received a vast transfer of wealth in the form of oil revenues. While political instability, an unfavorable business climate, shortsighted and inconsistent economic policies and ineffective institutions have contributed significantly to the dismal performance of the countries in the Middle East, military expenditures, regional disruptions, conflicts, wars, contempt for the rule of law and pervasive corruption have also played a decisive role. All of this has been nurtured under oppressive political regimes that have had their own selfish survival as their primary goal. The Middle Eastern landscape of today is devoid of economic and social justice and is plagued by high levels of unemployment, lack of educational opportunities and little hope for economic advancement through determined hard work. In most cases, a bloated government sector is seen as the best source of employment opportunities. Generally speaking, the governments in the region are reluctant to make the difficult policy choices that would put them on the path of sustained economic growth but that might endanger their short-run survival. But the longer they wait, the more difficult their policy dilemma and the less likely their political survival will become.

1.3

PRESCRIPTION FOR A TURNAROUND

The major beneficiaries of the boom in oil revenues have been a few countries in the Middle East and North Africa. In this book, we take a detailed look at the performance of these countries relative to other countries in


6

Table 1.1

Middle east oil exporters

The examined countries

Selected Middle East oil-exporting countries (MEOE)

The comparison countries in the region

The comparison countries outside the region

Comparison country groups

Iran Iraq Kuwait Qatar Saudi Arabia United Arab Emirates (UAE)

Egypt Jordan Morocco Syria Tunisia

Chile Malaysia Singapore South Korea

All developing countries Sub-groups as available in World Bank data High income Middle and low income Middle East & North Africa East Asia & Pacific World

the region and outside the region. Our aim is to present a broad picture of how the Middle East oil exporters (referred to as MEOE, see Table 1.1 for list of countries) have performed and where they stand today relative to other country groups (the world, all developing countries, other developing-country groupings) and to select countries, both in and outside the region. The comparison countries are used to provide a benchmark for assessing progress in the major oil-exporting countries; thus the basis for selecting these countries incorporates country size, oil exports, Muslim and non-Muslim countries, and economically high-performing countries. Has Islam indeed been followed in formulating economic and social policies? We hope to draw useful lessons and policy conclusions for reversing the region’s dismal economic trend of the past 25 to 30 years and to emphasize why it is ever more important to achieve success as soon as possible. While we will generally refer to the post World War II era, our data and our detailed examination of facts will be focused on the period after 1975.9 The world is truly at a crossroads. The leaders of the Middle East and the West have to exhibit unprecedented statesmanship if we are to avoid even more pronounced turmoil in the future. A principled approach in a number of areas has to be sustained for many years before there can be a successful turnaround. There is no spigot that can be turned on and off, when it suits rulers in the region and their supporters in the West, to instill the rule of law, justice, stability and sustained economic growth and development.


Introduction

7

NOTES 1. Those readers who have visited Abu Dhabi, Dubai and Qatar will think the author mad for saying that oil has been a curse. The depiction of oil as a curse here relates to the Persian Gulf region as a whole: a region where Iran’s population is larger than the combined population of all the other countries bordering the Persian Gulf, and where the combined population of Iran, Iraq and Saudi Arabia represents over 95 percent of the region’s population. As we will see, some of these small countries and sheikdoms are so rich in oil or gas that they would really have to try very hard not to be prosperous. At the same time, we should note that economic development is not synonymous with shiny buildings and malls. If you have the money, one of the large international engineering firms can build you a palace out of ice in the middle of the desert, or an indoor ski resort, if that’s what you want. Again, this could hardly be called economic development. 2. The United Nations Development Program and the Arab Fund for Economic and Social Development, Arab Human Development Report 2002: Creating Opportunities for Future Generations. 3. Askari, Hossein and John T. Cummings, The Economies of the Middle East in the 1970s: A Comparative Approach. There are numerous definitions of what countries constitute the Middle East. We define the Middle East as Afghanistan, Iran, Iraq, Kuwait, Bahrain, the UAE, Saudi Arabia, Oman, Qatar, Jordan, Syria, Lebanon, Israel and the Palestinian Territories; and North Africa as Egypt, Libya, Tunisia, Algeria and Morocco. 4. Askari, Hossein, John T. Cummings and H. Reed, ‘The Gulf: Gold Rush or Economic Development?’ 5. This is contained in an appendix in Askari, Hossein, Saudi Arabia: Oil and the Search for Economic Development. 6. Askari, Hossein, Saudi Arabia: Oil and the Search for Economic Development. 7. Askari, Hossein, Vahid Nowshirvani and Mohamed Jaber, Economic Development in the Countries of the GCC: The Curse and Blessing of Oil. 8. Because the Middle East oil exporters rely so heavily on oil (for exports, government revenues and GDP), economic performance, such as GDP growth, fluctuates dramatically when oil prices change sharply. Oil prices moved significantly upwards during 2004–2005. Thus some of the calculations and conclusions in this volume do not capture this upward surge, which also occurred in 1973–74 and 1979–80. Such sharp annual movements in economic growth or per capita income underscore the fact that the economies of these countries are still significantly affected by oil prices and oil revenues. 9. To avoid data inconsistencies, our data is drawn largely from the World Bank’s World Development Indicators and Global Financial Indicators, and from the United Nation’s Human Development Report.


2. 2.1

The blessing and the curse of oil INTRODUCTION

To an optimist, the possession of oil reserves is an unqualified blessing. To a pessimist, the possession of oil is a predictable curse. To a realist, oil, as anything else in life, can be a blessing or a curse; it all depends on what is done with it. Wealth that is handed down in families can on the one hand afford future generations added opportunities, open many doors and help increase family wealth; and on the other hand it can make family members lazy, unproductive and can drive them to deplete what has been accumulated by the generations before them, leaving nothing for future generations. The role of oil in the Middle East is similar to that of inheritance in a family, but its history so far is unfortunately more akin to the development of a lazy and unproductive family.

2.2

OIL AND ECONOMIC POLICY

The rich are different from the rest of us, they have money; oil and gas exporters are different from other countries, they have oil and gas. But even rich people are not all the same; there are important nuances. The owner of a successful income-generating company will have a continuous source of income while maintaining his productive base or asset, namely, the company. An art collector may be rich but have no income whatsoever; he must find a way to generate income from his art collection (charging art enthusiasts to look at his art, for example) or, if this is not possible, he must transform at least some of the wealth that is locked up in art into incomegenerating assets. If he sells his art collection and spends all the proceeds having a good time, then he will have nothing left and will no longer be rich. This is quite similar to the dilemma of oil exporters. Countries that own large pools of oil are rich in oil, but not rich in the normal sense of the word (income generation for all future time) unless they do something productive with their oil before it is all depleted. Unfortunately, they have even fewer options than the rich art collector, because no one in their right mind is likely to pay very much just to look at oil. In the extreme, if a country such as Saudi Arabia produced all of its oil this year and spent its revenues 8


The blessing and the curse of oil

9

on consumption, then its national output next year would be significantly lower, because it would have no oil revenues and no alternative sources of income to take the place of oil. In economies that do not rely heavily on a depletable resource such as oil, economic output, or net national product (NNP), does not diminish with time but indeed can normally be expected to increase with time. In an oilbased economy, if the income from oil is consumed (and, as is the practice, if oil output is counted as a part of NNP), then NNP declines as oil reserves are depleted. So at least a part of current oil revenues must be saved and invested, domestically or abroad, to even out NNP and to thus avoid a decline in national output in the future.1 Put differently, the normally or conventionally measured NNP in an oil-producing country diverges from the ‘theoretically correct’ measure of NNP for a country that has no depleting resource such as oil. In a sense the conventionally measured NNP for a depletable resource-based economy usually overstates2 theoretically correct NNP because at some point in the future the depletable resource will run out and will no longer contribute to NNP. The ratio of conventionally measured NNP to ‘theoretically correct NNP’ is given by: Y/Y *  1/RT where: Y  conventionally measured NNP Y*  theoretically correct NNP R  real rate of return on investment T  life of oil reserves (in years) The result is intuitive. The higher the return on investments, that is, the more compensation made for resource depletion, and the higher is T, that is, the longer the resource will last at the current rate of extraction, the closer (more comparable) are the conventionally measured and theoretically correct NNP. An alternative way of looking at the problem is that depletable resourcebased economies need a higher savings rate during the period that the depletable resource is contributing to national output. As mentioned in Chapter 1, the indicated savings rate (to compensate for oil depletion) is lower the higher the life of reserves (in the extreme, no savings from oil revenues are needed if oil revenues were to last forever), the higher the return on investments (if the rate of return were infinite then a miniscule amount of savings would compensate for oil depletion), the lower the current generation’s concern for future generations (if the current generation did not care if future generations starved, then there would be little need for


10

Middle east oil exporters

savings), and the lower the share of oil in a country’s aggregate NNP. In other words, if a country has many years of oil output, it has less to worry about in comparison to a country whose oil will soon run out. But if society cares for future generations, it is important to save, and above all to make investments that count – namely, with a high rate of return – to afford future generations the same benefits that current generations derive from oil. This can be put into a simple equation: for an economy that is 100 percent depletable-resource-based, the required savings rate to compensate for resource depletion is:3 S  1RT(1S) where: S  required savings rate S  desired post-resource (when the resource is depleted) savings rate R  real rate of return on investment T  life of oil reserves in years This result is for an economy that derives 100 percent of its NNP from oil. For such an economy it is conceivable that today’s indicated savings rate could even be negative. The reason for this seemingly perverse result is essentially this: imagine a region or country that has many years of oil reserves (such as Abu Dhabi, a part of the United Arab Emirates) at current depletion rates and wants a modest savings rate when oil is projected to run out. Under these circumstances it could even afford to dissave today. This result is clearly the exception and is not indicated when we account for the fact that in reality for most countries there is a significant percentage of non-oil NNP (see the adjusted equation below) and that countries want to be in a position to have a high savings rate when oil runs out. For an economy that is not 100 percent resource-based, the equation is: S  PS(1P)[1RT(1S)] where: P  proportion of national output that is not depletable-resource-based This relationship can be put into a simple table for assumed values of S, R, T and P (Table 2.1). Clearly countries that have very high levels of oil and gas reserves per capita (for example, Abu Dhabi, Kuwait and Qatar) have less to worry about or more time to do the right thing than do countries that are less endowed on a per capita basis, such as Iran, Iraq and even


11

The blessing and the curse of oil

Table 2.1 Required savings rate for a depletable resource-based economy in percentage (assuming S of 20 percent) Life of oil reserves at current depletion rate in years 20

40

60

80

100

Non-oil economy  40% R  0.25 R  0.5 R  0.75

66 63 61

63 58 54

61 54 46

58 49 39

56 44 32

Non-oil economy  60% R  0.25 R  0.5 R  0.75

50 49 47

49 46 42

47 42 38

46 39 33

44 36 28

Saudi Arabia. Abu Dhabi is so rich in oil and has such a small indigenous population that its oil per capita is simply staggering; Kuwait is nearly as fortunate as Abu Dhabi; and Qatar is rich in natural (unassociated) gas. These small countries are an anomaly in that they can just pump their oil, invest some of the revenues abroad wisely and live o the income. But the countries with larger populations do not have that same luxury. Whether a country is saving or not, and what it should be saving, depends on all the variables in the above equation, but the importance of one variable should not be underestimated, namely, the rate of return on investment.4 Even Abu Dhabi must earn something on a portion of the oil it produces before oil is depleted, in order to have income when it has no more oil. If it earns a high rate of return, it can get by with a lower savings rate today. This lesson is even more important for a country that is not as oil rich, for example Iran, which must use its oil even more wisely than the UAE because it has less of it on a per capita basis and it will deplete its oil faster.

2.3

OIL, ISLAM AND THE UN-ISLAMIC OUTCOME

The issue of equity is an important consideration even for countries with large oil and gas resources. Islam is very clear in its treatment of land and in the depletion of minerals. God created the earth. As a result land in its natural form, namely, with no improvements by man, belongs to society at large; thus if a piece of land is still in its original God-created state its price must be zero when it is sold.5 Man can only charge a price for land that is


12

Middle east oil exporters

equivalent to improvements made on that land since its creation by God. As will be discussed in Chapter 3, in Islam ownership is not absolute. Most schools of Islamic thought support some variant of the above when it comes to land. When it comes to resources below the ground, Islam is equally unambiguous. Anything under ground belongs to society at large; that is, all citizens should have an equal share in the fruit of what is under the land; this applies to both current and future generations. The task for Muslim governments is clear but difficult. First, governments must take control of all minerals. Second, governments must make sure that they do not waste depleting mineral resources, because they are the birthright of all citizens and must be used productively. Third, as minerals are depleted, governments must make sure that they use their revenues in such a way – through consumption and investment – that all citizens today and for all future time receive similar benefits. We have earlier emphasized the importance of economic and social justice in Islam. The application of equity in the depletion of a depletable resource is a perfect example of how Islamic teachings must be practiced by any legitimate government in a Muslim country. While the dictates of Islam are clear, it is evident to every student of the Middle East that no Middle Eastern oil-exporting country has practiced anything remotely approaching Islamic doctrine when it comes to the management of oil resources. Most oil exporters in the region have wasted revenues from oil extraction beyond imagination, and the ruling elites have in the past and will in the future take the lion’s share of all benefits of oil unless these governments immediately do a 180-degree U-turn. If governments had managed the exploitation of their oil and the ensuing oil revenues according to Islamic principles the economic landscape today would be significantly more favorable. Broad social and economic conditions would be far more equitable (see Chapters 5 and 6), affording all citizens among the current generation similar benefits. Their failure will also have implications in years to come: future generations will not reap similar benefits or enjoy comparable opportunities as do some among the current generation. Fortunately, it is still not too late for the major oil exporters to reverse their policies because most of them still have significant oil and gas reserves. Why have governments and societies of Middle Eastern oil-exporting countries failed so miserably in implementing Islamic principles, which are, by the way, totally in accord with the dictates of Western economic efficiency? To be fair, we must acknowledge that applying Islamic principles to today’s economies is a difficult task. But most governments have not even tried to do so. The main reasons for their lack of effort are short-term selfinterest and short-term survival instincts. Interestingly, the popular press wrongly attributes the treatment of women in Islamic countries to the


The blessing and the curse of oil

13

teachings contained in the Quran and to the Sharia (the collective body of laws deemed to derive from the Quran and the Sunnah) yet does not correctly point out that economic mismanagement, especially that of oil, is in defiance and in contradiction of the same. It appears to be easier in the West to discredit Islam than to credit it. Ironically, the management of oil resources in Norway and in the US state of Alaska is more in accord with the Quran and with Islamic teachings than is the case in most, if not all, Muslim countries. Oil revenues, as stipulated by Islam, accrue to governments (as the custodians for present and future generation). In some cases, rulers see themselves both as the government and as the ‘owners’ of the country, and thus by extension as the owners of all oil resources; this continues to be the case in Abu Dhabi and in Saudi Arabia. In a country such as Saudi Arabia, the line between the Ministry of Finance and the personal bank accounts of the Al-Sauds is at best murky. In other cases, the so-called ‘elected’ politicians seek power largely in order to take what they can from oil revenues; invariably this is justified on the grounds that others have done so in the past, or that they will be accused of stealing anyway. Corruption in the oil and gas industries is rampant, with commissions for any and all contracts; corruption has permeated the non-oil sectors and indeed has soaked the fabric of life. Oil revenues, because of their significant size, have made such large-scale and widespread corruption possible; a few cents on a couple of million barrels of oil a day or a small percentage of a large oil or gas service contract is a big temptation to many, Middle Eastern and Western alike. Government officials do not have to tax citizens to get these oil revenues and to get their share; thus it looks like there is no ‘direct’ pain inflicted on the general citizenry, but in fact the general citizenry is robbed of its inheritance. Rulers have thus convinced themselves that citizens are not paying for their kickbacks. This in turn has led to a mental corruption trickledown effect. Most citizens, like their rulers, want a piece of the oil pie without having to work for it. Citizens see handouts, in the form of indiscriminate subsidies (used to buy loyalty), as their birthright because government revenues are largely derived from oil and oil is the dominant sector in most of these economies. To protect the status quo, rulers and politicians have obliged and have tried to buy off citizens by giving indiscriminate subsidies for fuels, electricity and food.6 Most citizens have grown accustomed to these handouts and expect them to continue. The importance of hard work, a central feature of Islamic teaching (see Chapter 3), has been all but forgotten. Again, it is oil that has allowed these countries to give subsidies, all financed from oil revenues, with little regard for economic development and growth, or for the future and for future generations.


14

Middle east oil exporters

In part because oil revenues accrue to the government, the relative share of the public sector in GDP in most of these economies is large, and the public sector has stifled the development and growth of the private sector. The governments’ generous public sector employment compensation in the richer oil-exporting countries (the UAE, Kuwait, Qatar and Saudi Arabia) has adversely affected private sector employment. In the more heavily populated countries, namely, Iran and Iraq, a high level of protection has restricted competition from abroad. In most, if not all of these countries, sensible economic policies, such as the pursuit of a competitive exchange rate, have been ignored, resulting in overvalued exchange currencies that have discouraged the development of the non-oil export sector. After two decades of rapid population growth, shortsighted policies, coupled with oil revenues that have not kept pace, have resulted in high unemployment and broad social dissatisfaction in the more heavily populated countries. Today, most of the governments in the region, with the exception of the small, very rich Persian Gulf countries, cannot continue the historic and destructive largesse enabled by oil revenues. In all of the region’s oil exporting countries, governments continue to rely on oil as their major source of revenue. Most of these countries do not have a system of income taxes and in the few that do, taxes are to be avoided, not paid. Government employees and foreign corporations are the only ones that pay any attention to the question of tax. Governments do not seem to appreciate the fact that oil revenues fluctuate and will someday run out, requiring an alternate source of revenue; nor do they want to face up to the fact that income taxes would afford them an important instrument for improving their heavily skewed income distribution. Convincing the citizenry of the need for an effective income tax system is itself a monumental task, because there is no faith in the government and thus the average citizen does not believe that the government will set up a fair social safety net to take care of the less fortunate. Realistically, the implementation of an effective tax system will, at a minimum, require at least a decade or so. If oil revenues did not exist, these governments would need a thriving private sector to provide them with a tax base. As the governments garner sufficient revenues from oil and are the major source of employment, the importance of economic growth in the private sector becomes less urgent to those in power. Instead of having economic growth as a major policy focus, rulers are preoccupied with the question of how to spread the minimum amount of oil revenue around the country to ‘buy’ the general citizenry and to maintain their hold on power, and in turn to get the maximum in the form of kickbacks for themselves. Thus oil has been an instrument enabling illegitimate rulers to stay in power, it has allowed a small fraction of the population to acquire fabulous wealth at the expense


The blessing and the curse of oil

15

of the general citizenry and it has allowed countries to avoid painful economic, social and political reforms. In the absence of elective legitimacy and general dissatisfaction with economic and social progress, rulers and governments also require force to maintain power. Military expenditures and arms imports (see Chapter 12), which also afford a lucrative channel for corrupt practices, have been championed in the region. Sadly, when there is such military build-up, there is a tendency to fuel regional conflicts with heavy economic consequences. Again, easy-come oil revenues have made all this possible. The West has been a willing accomplice and has exploited these developments since the discovery of oil in the region in 1906. Indeed, with increasing oil revenues from the mid-1970s, foreign corporations have been happy to secure large lucrative contracts with little or no competition and scrutiny. In the aftermath of the tragic events of 11 September, 2001, the eloquent speeches of some Western leaders for democracy and economic growth in the Middle East ring hollow to the people of the region and are viewed as hypocritical. The West has favored dealing with dictators as long as these are ‘their’ dictators, and has relished taking back as much as possible of the income transfer to these countries that occurred in the form of oil revenues. It is much easier to reach a ‘favorable’ agreement with a corrupt ruler who invariably sacrifices his country’s interest for a larger kickback than with a legitimately elected government that has checks and balances. As Western companies profited and became ever more comfortable with the status quo, Western governments toed the line. While the US has condemned corruption, American companies have been willing participants in corruption. The US has done nothing to combat America’s contribution to corruption in the Middle East; hardly any US corporations have been prosecuted under the Foreign Corrupt Practices Act (FCPA). The French, to their credit, at least used to acknowledge reality and allowed such payments to be deducted from income before assessing taxes. Today, after about $4 trillion in oil revenues over the past 25 years or so, economic despair and dissatisfaction are the common features of the region. Long-term economic growth has been anemic. Essentially, economic growth in the region continues to reflect oil revenues (see Chapter 6); when oil revenues go up growth goes up, and vice versa.7 The private sector is still in its infancy and can hardly compete in the global marketplace. There is massive unemployment. The quality of education and healthcare are generally low. Effective institutions have not been set up to develop and implement economic policies; instead the course of national policy is determined at the whim of whoever is in power. Economic and social justice, the core elements of Islamic teachings, are but a mirage on the Middle Eastern landscape.


16

Middle east oil exporters

While oil cannot be the only cause of this dismal state of affairs, it has certainly enabled it. Oil has corrupted individuals and governments on an unimaginable scale; rulers have not provided the environment, infrastructure and foundation for sustained growth of the private sector; governments have seen little need for promoting rapid private sector economic growth and an effective tax system; the importance of honest work, so elevated in Islam, has been trashed; economic inequality has widened; there is an inadequate social safety net; and all the while the economic well-being of future generations is being squandered. Oil has been an enabling factor in every one of these developments.

2.4 ECONOMIC DEVELOPMENT WITH AND WITHOUT OIL Economists generally believe that a government should nurture institutions and adopt policies that promote private sector growth. Governments cannot be the engine of economic growth and development but have a critical and supportive role to play, especially in creating the business and regulatory environment. At a minimum, essential institutions should include: legal and judiciary, tax collection, an entity to provide a minimal social safety net, government expenditure control and promotion of competitive markets. If they are to be effective, these essential government activities must be free of corruption and they must treat all citizens the same, they must uphold all property rights, enforce all contracts, enforce tax collection according to the law and spend government revenues as stipulated. A free and independent press and media provide a helpful check on the effectiveness of these institutions. The government should enact laws and provide the necessary regulatory framework to ensure competitive factor and product markets. Countries need flexible labor markets with laws that encourage employment. Another indispensable element for growth is the existence of competitive financial markets that provide appropriate incentives and security for savings and that channel resources to the most productive investments. A product market that affords all individuals and companies the same access is an essential element of an efficient economy that can compete in the global marketplace. Governments play an important role in the provision of education. A highly educated labor force is almost a precondition for growth in today’s global economy; it is not just the quantity of education but also its quality that matters. Adequate healthcare for all is an important input for an efficient labor force and something that can be provided in a public–private partnership. The government should adopt tax policies and other incentives


The blessing and the curse of oil

17

that encourage research and development, an important engine of growth. The government should provide, or ensure that the private sector provides, the basic infrastructure for a modern economy – roads, power and communication. The government must provide basic security. In addition to all of the above, governments should adopt and implement sensible trade and consistent macroeconomic policies. A good startingpoint is to reduce protectionism so as to enhance competition and efficiency, and to increase the welfare of the average citizen. An important element of trade policies is a sound exchange rate policy resulting in a competitive exchange rate to encourage exports and the diversification of exports. Generally, a managed float or a floating system, as opposed to a fixed system, is the best for most countries. The opening up of financial markets to international capital flows should be coupled with sound prudential banking regulations. In this way bad lending practices can be avoided and the inflow of hot short-term funds can be deterred. As for macroeconomic policies, a good starting point is to have a central bank that is independent from the government in its decision-making. Structural budget deficits and excessive credit creation are to be avoided, and doubledigit inflation should not be tolerated. The above provides a reasonable basis for development and for growth to emerge and be sustained. We must add that all of these policies are totally compatible with Islamic principles as discussed in Chapter 3. How does oil change these policies? Earlier we discussed the need for higher than normal savings and investment to compensate for future declines in revenue as oil is depleted. We also touched upon the need for reducing the overbearing role of the public sector to encourage private sector growth. But there is more to it. The major oil exporters must diversify their economies. Export diversification requires sound exchange rate policies, limited production (not input) subsidies, access to foreign markets and most of the other policies listed above for all countries. In the case of exchange rate policies, oil exporters face a particular problem, namely, the undesirable appreciation of their exchange rate (commonly known as the Dutch Disease in the economics literature), which in turn discourages the development of a diversified and competitive export base. The reason is that the inflow of oil revenues tends to increase the price of non-tradeables, for example, goods such as housing, services and the like, relative to the price of tradeable goods, because nontradeables cannot be readily imported. Thus individuals and companies are given the incentive to produce these non-tradeables to the detriment of exports. Governments can counter such a real exchange rate appreciation by reducing government expenditures, giving production subsidies to favor tradeables and thus exports, or an appropriate combination of the two.


18

Middle east oil exporters

Although export diversification may present a policy challenge as described above, the benefits of oil revenues must not be forgotten. They are akin to a foreign loan that carries zero interest and does not have to be paid back to foreigners, but must instead be paid in some fashion to future generations of citizens. Chile, a major copper (another depletable resource) exporter, has managed to benefit from its copper exports while diversifying its export base. But even a country as successful as Chile still relied on copper for nearly 40 percent of its export earnings in 2004. The other issue regarding oil, one that has been mentioned several times before and is also related to broader economic policies, is the issue of equity over generations. The easiest way to ensure equity is to save and invest most of the oil revenues in domestic productive assets and in international investment markets, to predict future revenues and population growth, and to issue every individual an annual check. The size of the annual payment will change from year to year due to market fluctuation and less-than-perfect estimates of all future variables. The government could be allowed to borrow from such a fund but on a regulated and commercial basis, and even then with strict limits. In short the government would ‘behave’ as if it did not own the oil but the people did on a direct basis. At the other extreme, one could invest all of the oil proceeds in productive domestic activities to generate future national output and to replace oil depletion; but in this case a sophisticated tax and government procurement system is needed to account for the uneven benefits of oil as government develops the non-oil sectors. A more practical option is a combination of the two, one that has been adopted by the US state of Alaska. The other related facet of oil policy is that oil revenues fluctuate. Thus regardless of any equity considerations, a government may want to set up an oil stabilization fund to stabilize oil revenues; a number of oil exporters have done this. To be useful, the drawdown on such a fund should be determined by a decline in revenues and not by political considerations. We cannot overemphasize the Islamic requirement that oil should benefit all members of the current generation equally, with the implication of relatively even distribution of income given the overwhelming role of oil (as opposed to hard work and sound productive investments) in these economies, and that these benefits should be similar for all generations. A casual glance at these economies, just an informed visit to the region, would indicate that they have in fact done almost the opposite of what Islam requires. How have oil exporters performed in developing appropriate economic policies and in managing their oil revenues? Hopefully a comprehensive answer to this question will become evident in Chapters 5–14 but it may be instructive to give a very brief summary here.


The blessing and the curse of oil

19

Institutions in Middle Eastern oil-exporting countries are woefully inadequate. Education has increased in quantity but little in quality. The provision of healthcare and other social services has improved somewhat. Economic performance has been dismal. Export bases are slightly diversified from oil, gas and related products. A few of these economies have slightly diversified from oil, but only under heavy protection and producing goods that are of a low quality or are priced uncompetitively. Essentially these markets are not competitive and most of their private sectors are not vibrant. Unemployment is high, and the state employs a disproportionate share of the labor force. Oil has made the neglect of private sector growth possible. These policies, coupled with the promotion of rapid population growth, have come home to roost. The resulting adverse economic conditions and the rapidly increasing labor force with little hope of gainful employment will soon translate into insurmountable discontent unless governments undertake immediate and drastic policy reforms. The implementation of reforms could cost governments support in the short run unless they persuade the general public to buy into these policies with a well-designed system of direct income transfers to the needy, a political campaign to convince citizens of the need for reforms, hope for the unemployed, a crackdown on corruption and policies to attract foreign direct investment. One thing is clear: time is running out for Middle Eastern governments, but some are more fortunate than others because they still have lots of oil. The sooner governments adopt the needed policies the more likely their chance of success. Higher oil prices and revenues, in the aftermath of the US invasion of Iraq, have afforded the region a truly opportune moment to embark on reforms. Unfortunately, governments see the added revenue as an opportunity to put off needed reforms. For the West it is equally important to appreciate the economic as well as the political changes that are called for; one without the other will do little to reverse the dangerous prognosis for the region. The West should acknowledge its own past shortsightedness and support needed changes wherever and whenever possible, especially in more optimal depletion and use of oil to enhance broad-based economic growth and development. This is the topic of Chapter 4. In the course of this book I hope to show that while oil could have been a blessing, in the Middle Eastern context it has so far largely turned out to be a curse, at least for the more heavily populated countries. Rulers have conveniently ignored indisputable Islamic tenets. Oil has been a crutch enabling rulers and governments to avoid reforms. Oil has enabled heavy military expenditures and has fueled conflicts. Oil has made corruption more rewarding and denigrated the importance of hard work and productive


20

Middle east oil exporters

investment. Oil has encouraged more foreign intervention. It is important to conclude this chapter by affirming that fundamental Islamic tenets have been ignored. Islam, the broad topic of the next chapter, should not be blamed for the failures of unelected rulers and governments.

NOTES 1. The conceptual interpretation of NNP in an economy is that it represents the highest level of sustainable consumption. In the development of the conceptual framework of national income accounting, extractive industries were treated as any other source of national product. As a result, the value of the extracted resource was added to national product at the point of extraction. This method of valuing the contribution of extractive industries, as is now widely recognized, is ill conceived and results in significant distortions. For the derivation of the required rate of savings see Askari, Hossein, Saudi Arabia: Oil and the Search for Economic Development, and for a calculation of the savings rate for individual oil-exporting countries see Askari, Hossein, Vahid Nowshirvani and Mohamed Jaber, Economic Development in the Countries of the GCC: The Curse and Blessing of Oil. 2. It is possible that conventionally measured NNP understates theoretically correct NNP for a country that has lots of oil and a low extraction rate (namely, a very high T) and a high R. 3. Askari, Hossein, Vahid Nowshirvani and Mohamed Jaber, Economic Development in the Countries of the GCC: The Curse and Blessing of Oil, pp. 12–15. 4. For a calculation of whether savings rates have been ‘adequate’ see Askari, Hossein, Vahid Nowshirvani and Mohamed Jaber, Economic Development in the Countries of the GCC: The Curse and Blessing of Oil, p. 18. 5. For a detailed discussion see Askari, Hossein and Ahmad Mustafa, ‘Economic Implications of Land Ownership and Land Cultivation in Islam’ in Munawar Iqbal, Distributive Justice and Need Fulfillment in an Islamic Economy. 6. For a detailed calculation of subsidies see Askari, Hossein, Saudi Arabia: Oil and the Search for Economic Development and Askari, Hossein, Vahid Nowshirvani and Mohamed Jaber, Economic Development in the Countries of the GCC: The Curse and Blessing of Oil. 7. See Askari, Hossein, Vahid Nowshirvani and Mohamed Jaber, Economic Development in the Countries of the GCC: The Curse and Blessing of Oil.


3. Islam, governance and economic development 3.1

INTRODUCTION

In some quarters, economic and social malaise in Muslim countries, especially in the oil-exporting countries of the Middle East, is without justification attributed to Islam. Most Muslim countries have not performed well economically and socially; therefore Islam must be hostile to economic and social progress. That is more or less the sophistication level of the attack on Islam promulgated in the popular Western media. Ironically, the opposite assertion would be more accurate: economic and social malaise may be attributed to the fact that Muslim countries do not follow Islamic tenets of social and economic justice (in part because most Muslims do not have a solid grasp of these tenets); if countries followed Islamic teachings, their economic, social and political performance would likely be far superior. What these countries need is more real Islam, and less false Islam. To analyze and assess from primary sources (the Quran, namely, the revelations of Allah to the Prophet Mohammad over a period of about 23 years and the Sunnah, namely, the teachings of the Prophet Mohammad) the potential contributions of Islamic teachings to economic development, economic growth, fiscal affairs, the role of the state, economic justice and an economic safety net, and so on, would require a lifetime and numerous volumes. Our goal here is infinitely more manageable: to summarize the major teachings, the foundation and themes (with modest reference to a few critical primary sources) that might be helpful in explaining recent economic performance in the Middle East. In this endeavor we will try, subject to an acceptable level of human biases and shortcomings, to present the conventional interpretations. The problem is that the Quran and the Sunnah provide only basic principles and rules for establishing an Islamic society. In order to understand a verse in the Quran or a teaching of the Prophet it must be interpreted in the context of other relevant verses, that is, it must be seen as a whole. Moreover, while these fundamental principles and laws are the basis of an Islamic society and are thus broadly independent of time, other actions and decisions attributed to the Prophet were 21


22

Middle east oil exporters

made at a special time and place and are thus subject to different interpretations as circumstances change. In this chapter we will set out the basic Islamic principles, while in other chapters, as we discuss specific economic issues such as management of oil reserves, land policy, education, healthcare, poverty, taxation, labor laws and the like, we will delve into particular Islamic teachings as necessary.

3.2

BROAD TENETS1

The principal aim of Islam is to establish a just, moral and viable society.2 The two principle themes in the Quran are submission to Allah (propagation of the Faith) and the institution of social and economic justice. The essence of the Islamic system is that it is a rules-based system centering on the concept of justice. All issues faced by government and by those who govern fall within this central axiom. This in turn is derived from the central axiom of Tawhid: Uniticity of the Creator and of His creation. In the Quran there is a clear sense that one cannot believe in the first without believing in the second. Allah is the Creator and each man (His creation) is brother to other men. In Islam rules are critical for developing and preserving the community. Rule compliance promotes and preserves the unity of humanity and noncompliance leads to discord and division. Every rule is designed to pull mankind together. The basic message for economic doctrine is economic progress, cooperation, equality and justice. As a result, harmful actions such as corruption, bad governance, mismanagement, theft, bribery, and neglect of education, of economic development, of healthcare, and the suppression of human freedom (as manifested in dictatorships) can all be viewed as causing discord and division and are therefore haram, that is, forbidden, in Islam. Contrary to popular Western beliefs, Islam does not condone dictatorships and suppression of freedom; it forbids them. It is up to the ummah (the Muslim community or fraternity) to determine what governmental structure is appropriate at a particular point in time. Governments and the collective Islamic community must create a society where every individual can realize his or her full potential. Allah created all mankind as equals and no individual can be favored over another. Specifically, everyone is equal before the law and is free to pursue their dreams as long as they do not violate the right of others and those of the community at large. For the preservation, cohesion and well-being of society there is a need for authority.3 The political authorities must, however, conform to the principles of Islam and must always keep the interests of society in mind. As a result


Islam, governance and economic development

23

governments must uphold Islamic principles, and to the extent that they do so, they earn legitimacy. The community should change governments that do not uphold these principles. Justice is at the foundation of an Islamic society and the unity of religion and justice (law) must be implemented in practice.4 For this to happen, the individual must be aware of the limits of his or her actions and the government must at all times make sure that laws are faithfully implemented and all members in the community receive equal treatment. In turn the Islamic economic system (including permissible economic behavior) is based on the Islamic concept of justice and ownership. While private ownership is allowed, it is not an absolute concept in Islam; man must know that he is not the Creator and cannot exert unequivocal ownership over Allah’s creation.

3.3

ISLAM, PLURALISM AND GOVERNANCE

The Islamic treatments of the conscience, free will and tolerance toward other religions have preoccupied many scholars. Before proceeding to their place in Islam, it may be instructive to begin with one summary of the Western perspective on these topics: [Human beings] are purposeful and deliberative rather than simply passive, externally determined creatures. It is to believe that the right to religious freedom and conscience rests upon the deep conviction that human beings are fulfilled in being guided by ‘reasons’ and by persuasion, rather than by external ‘causes’ and controls. In short, to conceive of human beings in terms of an indefeasible ‘right to freedom of thought, conscience, religion and belief,’ in the words of the Declaration against Intolerance, is itself to affirm and to seek to guarantee the ‘natural’ irreducibility of the human spirit.5

As for the Islamic perspective on this topic, the same authors conclude: . . . the Qur’an posits, or contains evidence for, a kind of universal guidance which, in its availability to all humanity seems parallel to the Western-Christian idea of a natural moral law. Similarly, careful study of the Qur’an seems to indicate that several notions combine to suggest a personal capacity to know and act on the good that is analogous to Western-Christian conscience . . . [the Qur’an] implies the personal, inward nature of faith, or of the choosing of faith, which in the hands of some Christian theologians has produced the doctrine of religious liberty. This idea, made explicit in such Qur’anic verses as ‘There is no compulsion in religion’ (2:256), would seem to be at the heart of Qur’anic teaching on the relation between God and humanity. It would also seem to have important implications for any Islamic polity; it certainly suggests a number of possibilities for the discussion of human rights in relation to the cultures of the West and Islam.6


24

Middle east oil exporters

And in comparing the two religions: And thus Christianity presents us with problems as well as possibilities for human rights discussion no less, it seems, than does Islam.7

The basic Islamic doctrine that forms the foundation of religious and democratic pluralism is that mankind is but a single community. This assertion is best illustrated by quoting Sachedina on the subject: In the citation that introduces this chapter (K. 2:213), three facets emerge: the unity of humankind under One God; the particularity of religions brought by the prophets; and the role of revelation (the Book) in resolving the differences that touch communities of faith. All three are fundamental to the Koranic conception of religious pluralism. On the one hand, it does not deny the specificity of various religions and the contradictions that might exist among them in matters touching on correct belief and practice; on the other, it emphasizes the need to recognize the oneness of humanity in creation and to work toward better understanding among peoples of faith. The major argument for religious pluralism in the Koran is based on the relationship between private faith and its public projection in the Islamic polity. Whereas in matters of private faith, the position of the Koran is noninterventionist (namely, human authority in any form must defer to the individual’s internal convictions), in the public projection of that faith the Koranic stance is based on the principle of coexistence, the willingness of a dominant community to recognize self-governing communities free to run their internal affairs and coexist with Muslims.8

Sachedina further elaborates: Instead of regarding this diversity as a source of inevitable tensions, the Koran suggests that human variety is indispensable for a particular tradition to define its common beliefs, values, and the traditions for its community life: ‘O humankind, We have created you male and female, and appointed you races and tribes, that you may know one another.’9 (K. 49:14)

And: Instead of denying the validity of other human experiences of transcendence, Islam recognizes and even confirms its salvific efficacy within the wider boundaries of monotheism: ‘Surely they that believe, and those of Jewry, and the Christians, and those Sabaeans, whoso believes in God and the Last Day, and works righteousness – their wage awaits them with their Lord and no fear shall be on them, neither shall they sorrow.’10 (K. 2:62)

And as Sachedina rightly concludes:


Islam, governance and economic development

25

The unique characteristic of Islam is its conviction that belief in the oneness of God unites the Muslim community with all humanity because God is the creator of all humans, irrespective of their religious traditions.11

Islam, if practiced as written in the Quran, is an inclusive and not an exclusive religion. Pluralism is at the root of Islam. Yet today and throughout recent history, Muslim fundamentalists, both those who rule and those who aspire to rule, have adopted a posture that is anti-pluralistic and thus in our view anti-Islamic. As Sachedina points out, Muslims must embrace the principle of Quranic co-existence if they are to realize the civil society that was encouraged by the Prophet. Moreover, as the Quran clearly places God–human relations on a footing of accountability to God, in contrast to inter-human relations, which are governed by personal responsibility and social accountability, there is a clear sense that in practice there can be a separation of church and state. These teachings confirm such a separation, although some religious rulers say otherwise in order to rule and to gain legitimacy for their rule. The Quran stresses that all members of the human race, regardless of any differences in gender, religion and ethnicity, share the same essence (nafs)12 and are considered by God to be inherently identical.13 Any form of discrimination against members of the Muslim community or ummah – including any non-Muslims living within it – is therefore strongly condemned and prohibited by Islamic law.14 Non-Muslim communities living within the ummah have the same social, economic and religious rights as Muslims. They may adhere to their own religious laws and customs, and can set up their own religious institutions.15 No individual is required to practice or convert to the Islamic faith if he or she is living under the auspices of a predominantly Muslim state.16 The ummah must uphold the safety and security of its non-Muslim communities, and is expected to confer and cooperate with them on public policy issues.17 Thus culturally, ethnically and religiously distinct communities may live freely within an Islamic state and have the same economic and social rights as the Muslim ummah. The Quran grants men and women equal religious, social and economic rights. Both sexes are expected to adhere to Islamic ethical standards,18 participate in civil society and play a role in the formation of public policy.19 Men and women may both own property, and must be granted equal access to education and social benefits. Both sexes must strive to enhance their intellectual capacity, maintain their health and contribute to the social and economic development of the state.20 They are both expected to work – and are permitted by Islam to work in virtually every field of work – and have the right to become financially independent.21


26

Middle east oil exporters

There is little disagreement when it comes to the role of the state in Islam. For example in Ul Haq’s words the message is: The purpose of the Islamic political order or the objectives of the Islamic state can be summarized as follows: to prevent injustice and to establish all-encompassing justice – legal, social, economic, and political; to ensure freedom, dignity and equality of all; to enable all Muslim men and women to realize the ethical goals of Islam, not only in their beliefs, but also in the practical spheres of their lives; to ensure to all non-Muslim citizens complete physical security as well as complete freedom of religion, of culture, and of social development; to defend the country against internal subversion and external aggression; and to create an environment conducive to the teaching and the preaching of Islam.22

No matter which school of thought one subscribes to, rulers are responsible for failure in Muslim societies. Rulers and governments earn legitimacy to the extent that they uphold Islamic principles. For Islam to succeed, there is the presumption of justice and ethical order on earth. There is a clear sense that rulers should be chosen by the people. But there is no detailed, clear-cut prescription as to how this should be done. For instance, it would be perfectly permissible in Islam to have a democratic vote as in the US, the UK or the French system. And yes, women should have a vote and should be eligible for any public office. A modern-day example of the importance of choosing rulers was the insistence of Grand Ayatollah Ali Sistani for direct elections in Iraq in 2005. Elections in Iran, for example, present the following problem: in that country it is argued that candidates who do not possess proper Islamic credentials should be excluded from candidacy. The practical problem with this interpretation of Islam is that it is open to human corruption; the unelected committee (the Council of Guardians) that excludes candidates can be (and is) motivated by political as opposed to religious considerations. Moreover, an educated electorate (an Islamic requirement) should decide for itself on the qualification of candidates. While these serious questions of representation do exist, Islam in its purest form dictates that the people should choose their rulers. Although governments should be chosen by the people and rules obeyed in Islam, there is clearly room for dissent. Ul Haq provides a good summary in this regard: The limits of allegiance to a government have also been given by the Prophet. He states: ‘No obedience is due in sinful matters; behold obedience is due only in the way of righteousness’ and ‘No obedience is due to him who does not obey God.’ For such situations as outright immoral and illegal behavior or unjust policies on the part of governments, the Prophet has made it virtually obligatory


Islam, governance and economic development

27

for Muslims to speak up and to stand up for justice: ‘The highest kind of selfexertion (jihad) is to speak the truth in the face of a government that deviates from the right path.’23

There is a difference of degree between Shia and Sunni schools of thought as to what to do if confronted by an unjust ruler or government. For the Shia, Islam is based on five axioms: Tawhid, Nubuwwah, Adl, Imama and Ma’ad. For the Sunnis, there are only three axioms: Tawhid, Nubuwwah and Ma’ad. The Shia sect insists on the justice of a ruler, whereas for Sunnis, the overriding goal is communal harmony. For the Shia, while the peace of the community is also of paramount importance, Justice of God (Adl) and the rule of just individuals (Imama) are critical; a ruler must be just. By definition, the 12 Imams of Shia are just. A Shia should not extend loyalty to an unjust ruler; cooperation with an unjust ruler is haram, that is, forbidden. In fact, according to some interpretations, disobedience to unjust rulers is seen as obedience to God.24 In Islam, and particularly in Shia Islam, all of these admonitions follow from the general obligation of ‘enjoining the good and forbidding the evil’.25 Economic and social justice have particular importance in Islam. The role of the state is critical in ensuring both equal opportunity (in terms of education, skills and access to technology)26 for all citizens and the eradication of poverty (second in importance to the propagation of the faith in Islam). The role of the state can be summarized: . . . first to ensuring that everyone has equal liberty or access to natural resources and means of livelihood. Second, to ensure that each individual has equal opportunity including education, skills and technology – to utilize these resources. Third, to ensure that markets are supervised such that catalectic justice can be attained. Fourth, to ensure that transfer takes place from those more able to those less able . . . And, finally, that distributive justice is ensured for the next generation through the laws of inheritance. The state is then empowered to design any specific economic policy that is required in order to guarantee the attainment of these objectives.27

As Islam preaches co-existence of different races and religions, so it also advocates peaceful resolution of differences. In Islam war is seen as an illness and the worst thing known to man.28 Similarly, the killing of innocent people and violence are antithetical to Islam. The taking of innocent hostages as pawns and terrorist attacks on innocent civilians are clearly forbidden in Islam. Conflicts are always to be resolved through dialogue and peaceful means, not through hostilities and war. Only peace and the pursuit of peace are great achievements to be praised and rewarded.


28

Middle east oil exporters

3.4 THE FUNDAMENTALS OF AN ISLAMIC ECONOMIC SYSTEM Western thinkers advocate the separation of church and state in all aspects of governance. In the case of Islam, this is somewhat problematic because Islam, unlike other major religions, gives Muslims detailed guidelines for an economic and social system. The details of an Islamic economic system are outlined through a number of channels – the Quran, the Sunnah, the Ijma (the consensus of religious scholars known as Mujtahids) and Qiyas (opinions based on religious doctrine and analogy); Shia Muslims make use of only the first three sources.29 These details include but are not limited to: competition, taxation, government finances, the behavior of financial institutions, social and economic expenditures affecting poverty, income distribution, private ownership, rule of law and sanctity of contracts, land tenure, wage policy, natural resource management including depletable resources, and inheritance. The basic philosophy of Islamic economics can be summarized as capitalism (competition in business, private property rights with some limitations, economic gains through hard work and taking risk in investments, and the right to enjoy the fruits of labor and return on investment) and self-interest (‘Islam, in fact, considers self interest a primary factor in its incentive-motivation system; it is a necessity in any organized society if the individual is to find it utility maximizing to follow behavioral rules prescribed by the system’)30 but with some important qualifications.31 The first and foremost qualification is that the basic principles of capitalism are encouraged in Islam as long as they are in harmony with the basic goals of society, are consistent with Islamic social order and justice, and reinforce the social fabric. Thus if capitalism is adopted in such a way that there are a significant number of people without adequate and equal economic opportunity or the basic human needs of food, shelter and clothing, then society’s needs must take precedence over the ‘efficient and most productive’ practice of capitalism and the rights of the wealthy. In other words, in an Islamic economic system there are clear ‘maximums and minimums’; clear limits to the extent that capitalism can be adopted in Islam. Mirakhor has stated this succinctly: Islam asserts unambiguously that poverty is neither caused by scarcity and paucity of natural resources, nor is due to the lack of proper synchronization between the mode of production and the relation of distribution, but as a result of waste, opulence, extravagance and nonpayment of what rightfully belongs to the less able segments of the society. This position is illustrated by the Prophetic saying that: ‘Nothing makes a poor man starve except that with which a rich person avails in luxury.’32


Islam, governance and economic development

29

And Mirakhor goes on to add: Eradication of poverty is undoubtedly one of the most important of all duties made incumbent upon the state, second only to the preservation and propagation of faith whose very existence is considered threatened by poverty.33

Second, honest capitalism and the sanctity of contracts are stressed and are integral elements of an Islamic economic system: . . . when the Prophet was asked ‘Who is the believer?’ He replied, ‘A believer is a person in whom people can trust their person and possession.’ He is also reported to having said that ‘a person without trustworthiness is a person without religion.’34

Corruption in the pursuit of wealth is abhorred in the Quran: The Qur’an states: ‘Seek with [the wealth] which God has bestowed on you the home of the Hereafter, nor forget your portion of this world; but do good [unto others] as God has been good to you; and seek not corruption on earth, for verily, God does not like the spreaders of corruption.’35 (28:77).

Third, while private ownership is endorsed in Islam, absolute ownership (as in Western capitalism) is not. In Islam absolute ownership belongs to the Creator (the principle of Tawid). Man cannot own without any limitations what God created (raw land, water, mineral deposits, and so on) in the first place. This has critical implications for the sale of raw land, for the management of minerals and the like. As Mirakhor notes: The relationship between laboring and owning is central in Islam which recognizes two ways in which an individual can obtain rights to property: (i) through his own creative labor and/or (ii) through transfer – via exchange, contract, grants, or inheritance – of property rights from another individual who has gained title to the property or asset through his own labor.36

Work and investment (and inheritance) are the only legitimate methods of acquiring property rights. A clear implication of this is that an individual may enjoy raw land (in its God-created state) but cannot sell it for a price if no improvement or investment has been made. Moreover, ownership in Islam carries with it social responsibilities. Fourth, there are clear laws and guidelines set out in Islam that govern economic policies and practices. These include, but are not limited to, economic development and growth, population policy, rule of law, labor, capital, public finance and taxation, interest, rent, wealth, inheritance, income distribution, education, social safety net and natural resource management. Clearly, when


30

Middle east oil exporters

it comes to the prescribed economic and financial behavior of individuals and society, Islam differs from other religions. In Islam, acceptable behaviors are spelled out in quite some detail. This is an important reason why the separation of church and state is problematic in Islam. We will address Islam’s prescriptions on each of these topics as we examine Middle East Muslim countries. How have their economies performed? Have they followed Islamic prescriptions? Is their success or failure attributable to the fact that they have or have not followed the path of Islam? Where has Islam hurt economic performance and where could it have helped? It may be appropriate, however, to address briefly here the two aspects of an Islamic financial system that have received the most attention in the nonIslamic world: (1) the prohibition of interest and its impact on the financial sector, on the conduct of monetary policy and on economic growth and development; and (2) Islamic charity tax or zakah. The fundamental reason for the prohibition of interest in Islam is that the depositor should not profit unduly from the hard work and risk-bearing of others. To a Western-trained economist, a competitively determined market interest rate serves an indispensable function in a market economy. Interest rates affect savings and investment and efficiently allocate capital from where it is plentiful to where it is scarce. In competitive markets this allocation of capital is achieved most efficiently, namely, capital is attracted to where it will earn the highest rate of return. Moreover, interest rates offer policymakers an important instrument for macroeconomic management. Although Islam prohibits interest (riba), it encourages profit and return from investment where the investor takes calculated risk. Thus financial institutions can offer an investor a share of their annual profits (and losses) in proportion to the investor’s deposit (the share of an individual’s deposit relative to total assets of the bank). This rate of return to the investor is different from interest in two important ways: a priori its size is unknown (there are no guarantees), and the investor has to take more of a risk (in a Western system the depositor takes less of a risk because the capital of the financial institution’s stockholders is first at risk before the capital of the depositors). Clearly institutions that are better managed will develop a better track record, offer historically higher returns and thus attract capital before institutions that are not managed as well. Thus profit rates of Islamic institutions can serve the same function as Western interest rates in attracting savings and allocating capital efficiently. In the case of macroeconomic management, policymakers can look at rates of return of financial institutions as an indicator of financial liquidity and can issue ‘participation’ bonds (carrying no fixed rate of interest but an average of private sector rates of return) to finance budgetary shortfalls.


Islam, governance and economic development

31

An individual who earns more than what he or she consumes must pay zakah, which is calculated according to his or her level of net worth (essentially a wealth tax). Business capital and housing are exempt from zakah taxation in order to promote investment in capital and construction and to encourage home ownership.37 It is important to note that zakah is not a substitute for taxation by the state, which may institute other forms of taxation to finance additional social, economic, infrastructural and related programs to attain social and economic goals.38 While Islam encourages people to save their earnings after consumption, it calls for the investment of savings. The hoarding and accumulation of idle wealth are haram. Taxation is viewed as a mode of social investment.39 Islam reasons that God bestowed natural resources to the entire human population, thus all people are entitled to a share of world production. Those who are impoverished, unemployed, underemployed or who lack the ability to work are the primary beneficiaries of zakah payments.40 Individuals who are employed but underpaid may receive zakah payments so that they can earn a living wage, and those with refugee status may receive zakah as well. Surplus zakah funds may be saved, invested in infrastructure and development, or donated to impoverished countries.41 Islam holds that the payment and distribution of zakah promotes a more equitable income distribution that ultimately enables those on a lower income scale to begin saving as their standard of living improves.42 Evading this obligation, according to Islam, will cause an inequitable distribution of income and encourage an increase in poverty.43 Again, it must be stressed that zakah is not a substitute for taxation by the state to address the broad social and economic needs of society. Islam instituted compulsory zakah payments because every capable member of the ummah is required to contribute to the development of a learned and economically prosperous social order. Zakah is a major component of infaq and sadaqah, compulsory and voluntary social expenditures made for the creation of non-profit and non-governmental institutions such as schools, health clinics, hospitals and libraries.44 Poverty exists, Islam reasons, not because economic resources are scarce, but because they are misallocated, inefficiently managed, unproductively hoarded and unevenly distributed.45 Independent social spending, according to Islam, is the best possible way for members of the Islamic social order to promote a more equitable distribution of wealth and resources. Muslims with the financial capacity to donate beyond their zakah requirements are therefore strongly encouraged to further invest in infaq and sadaqah.46 Islam does not require social institutions built through infaq and sadaqah to register with or be approved by a central political authority.47 Thus by advocating extensive popular participation in the development of society, Islam reduces the


32

Middle east oil exporters

need for an authority to intervene on behalf of the socio-economic interests of the community.48 But before leaving this brief treatment of Islamic economics, it is may be useful to conclude by addressing the broader and often-asked question of whether Islam discourages economic progress. This may be largely answered by a quote: . . . we have cited considerable evidence that Islam not only does not rule out economic progress, but that it clearly endorses several of the basic factors cited frequently by Western commentators as essential in historic economic transformation – private property, recognition of the profit incentive, a tradition of hard work, a link between economic success and eternal reward. Thus Islam seems unlikely to rule out rapid economic growth or even the construction of a strong system more or less capitalist in essence. On the other hand, Islamic principles cannot readily, if at all, be reconciled with economic ‘progress’ that is contradicted by blatant economic and social injustice in the context of general social welfare.49

But even this quote needs important additions. Islam also endorses and encourages competition, institutions, the rule of law and a level playing field, all increasingly seen as the critical foundation for sustained economic growth and prosperity. Moreover, hard work (not subsidies) is given special attention in Islam: Work, however, is not only performed for the purpose of satisfaction of needs and wants, but it is considered a duty and an obligation required of all members of society.50

3.5

SUMMARY

Islam was revealed to bring justice, particularly economic and social justice, to the people. The Quran states that Allah sent all the prophets and messengers to induce the people toward justice. The all-inclusive and universal religion that is Islam is here for the purpose of making the lives of the people better. The religion is for the people, and not the other way round. Governments are there to facilitate the functioning of the institutions that Islam promulgates. Therefore, governments are for the religion, and the religion is for the people. The problem is that in Muslim countries governments use the religion to sustain themselves and often what they practice bears no resemblance to true Islamic teachings. Throughout this volume, we hope to assess whether Islamic teachings have been followed; and if so, whether Islam has been an impediment to growth and development; and if not, whether Islamic teachings could have supported growth and development.


Islam, governance and economic development

33

NOTES 1.

2.

3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

14.

For a discussion of many of these same points with direct references to Quranic verses, see Askari, Hossein and Roshanak Taghavi, ‘The Principle Foundations of an Islamic Economy’. We use passages from this paper. For the English version of the Quran, we use Asad’s 1980 translation. Mirakhor, Abbas, ‘The General Characteristics of an Islamic Economic System’, in Essays on Iqtisad, the Islamic Approach to Economic Problems. On this point there is universal agreement by all Islamic scholars. Ul Haq, Irfan, gives a slight variant in Economic Doctrines Of Islam: A Study in the Doctrines of Islam and Their Implications for Poverty, Employment, and Economic Growth, p. 65: ‘[Man’s] task is to create an ethical social order on earth that is just and humanitarian.’ Mirakhor, Abbas, ‘The General Characteristics of an Islamic Economic System’, in Essays on Iqtisad, the Islamic Approach to Economic Problems. Mirakhor, Abbas, ‘The General Characteristics Of An Islamic Economic System’, in Essays on Iqtisad, the Islamic Approach to Economic Problems. Little, David, John Kelsey and Abdulaziz A. Sachedina, Human Rights and the Conflicts of Culture: Western and Islamic Perspectives on Religious Liberty, p. 26. Ibid. pp. 91–2. Ibid. p. 94. Sachedina, Abdulaziz A., The Islamic Roots of Democratic Pluralism, pp. 23–4. Ibid. p. 27. Ibid. pp. 27–8. Ibid. p. 28. Nafs may also be defined as self; person; soul; life (ibid.) Mirakhor, Abbas, ‘Outline of an Islamic Economic System’, Zahid Husain Memorial Lecture Series – No. 11. Verses supporting this assertion: Quran 49:13: ‘Behold, We have created you all out of a male and a female, and have made you into nations and tribes, so that you might come to know one another.’ Also see the Prophetic verse (hadith): ‘We are all children of Adam and Adam was of dust.’ (Source: Ul Haq, Irfan, Economic Doctrines of Islam: A Study in the Doctrines of Islam and Their Implications for Poverty, Employment, and Economic Growth.) The Prophet is reported to have said: ‘Those who commit an act of aggression against a member of the non-Muslims, who usurp his rights, who make any demand upon him which is beyond his capacity to fulfill, or who forcibly obtain anything from him against his wishes, I will be his [namely, the oppressed’s] advocate on the Day of Judgment.’ He is also reported to have said: ‘He who harms a non-Muslim harms me, and he who harms me, harms God.’ (Source: Ul Haq, Irfan, Economic Doctrines of Islam: A Study in the Doctrines of Islam and Their Implications for Poverty, Employment, and Economic Growth.) See also: Quran 29:46: ‘And do not argue with the followers of earlier revelation otherwise than in a most kindly manner – unless it be such of them as are bent on evildoing – and say: “We believe in that which has been bestowed upon you: for our God and your God is one and the same, and it is unto Him that We [all] surrender ourselves.” ’ The Prophet is also reported to have said: ‘He who kills a man from the People of the Dhimma [Non-Muslims living under the protection of an Islamic system of government] will be forbidden Paradise the perfume of which can be smelled at a distance of twelve years traveling.’ See Quran 6:108: ‘But do not revile those [beings] whom they invoke instead of God, lest they revile God out of spite, and in ignorance . . .’ (Source: Shirazi, Imam Muhammad, War, Peace and Non-Violence: An Islamic Perspective.) See Quran 2:12: ‘Nay, but whosoever submits his will to God, while being a good-doer, his wage is with the Lord, and no fear shall be on them, neither shall they sorrow.’ (Source: Sachedina, Abdulaziz A., The Just Ruler in Sh’ite Islam.) Quran 2:23: ‘And if you doubt any part of what We have bestowed from on high, step by step, upon Our servant [Muhammad], then produce a surah of similar merit, and call upon any other than God to bear witness for you – if what you say is true!’ This verse can literally be translated as: ‘come


34

15.

16.

17. 18.

19.

20. 21.

22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35.

Middle east oil exporters forward with a surah like it, and call upon your witnesses other than God . . . to attest that your hypothetical literary effort could be deemed equal to any part of the Quran.’ Support in the Sunnah: the Prophet granted the Jewish community autonomous status while drafting the constitution of the Islamic state of Medina, and did the same for the Christian community when it came under Islamic dominion. Future Muslim caliphs followed this precedent. (Source: Ul Haq, Irfan, Economic Doctrines of Islam: A Study in the Doctrines of Islam and Their Implications for Poverty, Employment, and Economic Growth.) See Quran 2: 256: ‘There shall be no coercion in matters of faith.’ Quran 9:1: ‘Disavowal by God and His Apostle [is herewith announced] unto those who describe divinity to aught beside God, [and] with whom you [O believers] have made a covenant.’ Disavowal in this context means immunity. Background: the majority of the Meccan population remained Polytheistic after Mecca became a Muslim state. The Prophet did not pressure them to convert; they were allowed to live as a religiously autonomous unit within the Muslim community. (Source: Shirazi, Imam Muhammad, War, Peace and Non-Violence: An Islamic Perspective.) Ul Haq, Irfan, Economic Doctrines of Islam: A Study in the Doctrines of Islam and Their Implications for Poverty, Employment, and Economic Growth. Quran 4:124: ‘anyone – be it man or woman – who does [whatever he can] of good deeds and is a believer withal, shall enter paradise, and shall not be wronged by as much as [would fill] the groove of a date-stone.’ See also Quran 40:40, 16:97, 9:71: ‘And [as for] the believers, both men and women – they are friends and protectors of one another: they [all] enjoin the doing of what is right and forbid the doing of what is wrong, and are constant in prayer, and render the purifying dues [zakah], and pay heed unto God and His Apostle.’ (Source: Ul Haq, Irfan, Economic Doctrines of Islam: A Study in the Doctrines of Islam and Their Implications for Poverty, Employment, and Economic Growth.) See Quran 3:195: ‘I shall not lose sight of the labor of any of you who labor [in My way], be it man or woman: you are all members of one and the same human race, and therefore equal to one another.’ (literal interpretation). In the Sunnah it is reported that Muslim women played an active role in the administration of community life during the early Islamic period in Medina. (Source: Ibid.) The Prophet deemed ‘striving after knowledge’ to be ‘a religious duty of all Muslims.’ (Source: Ibid.) See Quran 4:32: ‘Men shall have a benefit from what they earn, and women shall have a benefit from what they earn.’ No Quranic verses speak against women working, earning a living or becoming financially independent; Islam has left it up to society to determine what types of work and training promote growth and development during a specific time period and within a particular socio-economic context. (Source: Ibid.) Ul Haq, Irfan, Economic Doctrines of Islam: A Study in the Doctrines of Islam and Their Implications for Poverty, Employment, and Economic Growth, p. 69. Ibid. p. 73. Sachedina, Abdulaziz A., The Just Ruler in Sh’ite Islam, p. 99. Ibid. p. 101. See Mirakhor, ‘The General Characteristics of an Islamic Economic System’. See Mirakhor, ‘The General Characteristics of an Islamic Economic System’, pp. 28–9. Shirazi, Imam Muhammad, War, Peace and Non-Violence: An Islamic Perspective. Cummings, John Thomas, Hossein Askari and Ahmad Mustafa, ‘Islam and Modern Economic Change’, in John L. Esposito (ed.), Islam and Development: Religion and Sociopolitical Change. Mirakhor, Abbas, ‘The General Characteristics of an Islamic Economic System’, p. 12. This is also true of medieval Christian and Judaic debates on usury and, more importantly, and much more recently, the continuing Catholic problems with Western capitalism. Mirakhor, Abbas, ‘The General Characteristics of an Islamic Economic System’, p. 25. Ibid. p. 28. Ibid. p. 16. Ul Haq, Irfan, Economic Doctrines of Islam: A Study in the Doctrines of Islam and Their Implications for Poverty, Employment, and Economic Growth, p. 87.


Islam, governance and economic development 36. 37. 38. 39.

40.

41. 42. 43. 44. 45.

46.

47. 48. 49. 50.

35

Mirakhor, Abbas, ‘The General Characteristics of an Islamic Economic System’, p. 14. Source: Ul Haq, Irfan, Economic Doctrines of Islam: A Study in the Doctrines of Islam and Their Implications for Poverty, Employment, and Economic Growth. Askari, Hossein, John T. Cummings and Michael Glover, Taxation and Tax Policies in the Middle East. The terms ‘taxes’ and ‘social spending’ are used interchangeably throughout the Quran. See also Quran 59:7, which says that ‘it [wealth] may not be [a benefit] going round and round among such as you may [already] be rich’. (Source: Ul Haq, Irfan, Economic Doctrines of Islam: A Study in the Doctrines of Islam and Their Implications for Poverty, Employment, and Economic Growth.) See Quran 9:60: ‘The offerings given for the sake of God (zakah) are [meant] only for the poor and the needy, and those who are in charge thereof (who collect the tax), and those whose hearts are to be won over, and for the freeing of human beings from bondage, and [for] those who are overburdened with debts, and [for every struggle] in God’s cause, and [for] the wayfarer: [this is] an ordinance from God – and God is All-Knowing, Wise.’ Quran 70:24–5: ‘in whose (the faithfuls’) possessions there is a due share, acknowledged [by them], for such as ask [for help] and such as are deprived [of what is good in life]’. 51:19: ‘[But,] behold, the God-conscious . . . [would assign] in all that they possessed a due share unto such as might ask [for help] and such as might suffer privation.’ The Prophet is also reported to have said that ‘charity is halal (permitted) neither for the rich nor the able-bodied’. (Source: Ibid.) Ul Haq, Irfan, Economic Doctrines of Islam: A Study in the Doctrines of Islam and Their Implications for Poverty, Employment, and Economic Growth. Zaman, S.M. Hasanuz, Economic Guidelines in the Quran. Mirakhor, Abbas, General Characteristics of an Islamic Economic System. Ul Haq, Irfan, Economic Doctrines of Islam: A Study in the Doctrines of Islam and Their Implications for Poverty, Employment, and Economic Growth. The Prophet is reported to have said: ‘Nothing makes a poor man starve except that which a rich person avails in luxury.’ (See: Mirakhor, Abbas, General Characteristics of an Islamic Economic System.) In 20:118–19, Adam is told: ‘Behold, it is provided for thee that thou shalt not hunger here nor feel naked, and that thou shalt not thirst here or suffer from the heat of the sun.’ The Prophet is reported to have said: ‘He is not a faithful who eats his fill while his neighbor [or fellowman] remains hungry by his side.’ (Source: Ibid.) See: Quran 30:39: ‘And [remember]: whatever you may give out in usury so that it might increase through [other] people’s possessions will bring [you] no increase in the sight of God – whereas all that you give out in charity, seeking God’s countenance, [will be blessed by Him:] for it is they, they [who thus seek His countenance] that shall have their recompense multiplied!’ Quran: 3:92: ‘[But as for you, O believers,] never shall you attain true piety unless you spend on others out of what you cherish yourselves; and whatever you spend – verily, God has full knowledge thereof.’ Quran 2:276: ‘Allah . . . will give increase for goods of charity.’ (Source: Iqbal, Munawar (ed.), Distributive Justice and Need Fulfillment in an Islamic Economy.) Quran 2:177: ‘True piety does not consist in turning your faces towards the east or the west – but truly pious is he who believes in God, and the Last Day, and the angels, and revelation, and the prophets, and spends his substance – however much he himself may cherish it – upon his near of kin, and the orphans, and the needy, and the wayfarer, and the beggars, and for the freeing of human beings from bondage; and is constant in prayer, and renders their purifying dues (zakah) . . . it is they that have proved themselves true, and it is they, they who are conscious of God.’ Iqbal, Munawar (ed.), Distributive Justice and Need Fulfillment in an Islamic Economy. Mirakhor, Abbas, General Characteristics of an Islamic Economic System. Ibid. pp. 45–6. Mirakhor, Abbas, ‘The General Characteristics of an Islamic Economic System’ in Dr Al-Hasani, Baqir and Dr Mirakhor, Abbas (eds), Essays on Iqtisad: The Islamic Approach to Economic Problems, p. 14.


4. Instability, regional conflicts and external intervention 4.1

INTRODUCTION

The Middle East has been plagued by revolutions, conflicts, wars, instability and uncertainty, all initiated and driven from within the region, and invariably exploited, and sometimes even sparked, by external powers. All this turmoil has taken its economic toll. The direct, indirect and related economic losses of instability may go a long way to explain the dismal economic performance of the region (see Chapter 12 for the impact of military expenditures and the economic burden of some recent conflicts). In this chapter we take a brief look at the intersection of regional instability and external intervention from my perspective as a Middle Easterner and at the policy lessons that emerge. Are outside powers responsible for a significant part of regional instability, and how can their intervention become a positive factor for the future? The major disruptions, conflicts and wars in the region since World War II include: ●

● ● ● ● ● ● ● ● ● ● ●

The 1948 creation of the state of Israel and subsequent conflicts, including the Six-Day War of 1967, the 1973 Yom Kippur War, and the eruption of the Intifada in 2000. The 1953 US–UK-sponsored coup and the ousting of Mohammad Mossadeq in Iran. The Egyptian Revolution in 1956. The 1956 Suez Canal War. Numerous revolutions in Iraq. Numerous revolutions in Syria. The Libyan Revolution in 1969. The war between North Yemen and South Yemen in 1972. The civil war in Lebanon from 1975 to 1990, the Israeli incursion into Lebanon and Lebanon’s occupation by Syria. The Iranian Revolution in 1979. The Iran–Iraq War from 1980 to 1988. The invasion of Kuwait by Iraq in August 1990. 36


Regional conflicts and external intervention ● ●

37

The Persian Gulf War in January 1991. The US–UK invasion of Iraq in March 2003.

These events have drained available resources, in the form of military expenditures and economic destruction, which, in turn, have reduced investment and future national output. They have resulted in human tragedies and have generally polluted the climate for sustained long-term development and growth. Beginning at the dawn of the twentieth century and throughout this strife-ridden period, the great powers have intervened in Middle Eastern affairs for their own oil and related geopolitical interests. Such interventions are expected to continue as available oil and gas reserves become even more concentrated in the Persian Gulf region, as the demand for energy increases rapidly in the developing world, especially in China and India, and as countries compete to secure their access to energy supplies. The economic, social and political impact of intervention in the region from the outside is well beyond our scope. Here we wish to shed some light on whether external intervention has generally supported economic, social and political progress in the region and how regional progress may be reinforced from the outside. Revolutions may be a normal event in the process of political change and in the move toward pluralistic democracies. Still, most revolutions have an economic side to them. Some of the following costs are invariably incurred: direct loss of output, capital flight, human flight (most frequently it is the educated and the economically advantaged who can flee) and a period of increased uncertainties resulting in reduced investment (from both domestic and foreign sources). While the economic costs of revolutions may in some cases be significant, revolutions are arguably less under the control of governments than are conflicts, wars and military expenditures. The Middle East region has had its fair share of revolutions since World War II: one in Egypt, several in Iraq beginning in 1958, one in Libya, several in Syria beginning in 1960 and, most recently, one in Iran in 1979. Although estimating the economic costs of all of these revolutions is a monumental task, these economic and financial costs are real and highly significant.

4.2

THE BROAD IMPACT OF CONFLICTS

The socio-economic costs of wars and conflicts should be recognized, especially because they are subject to government policies and external influences. As for the social fallout, there is loss of life and permanent injuries. Children are orphaned; women are widowed; and while some residents are displaced, others become permanent refugees. Injuries and malnutrition reduce life


38

Middle east oil exporters

expectancy. A large segment of the population turns its back on work and opts instead for non-productive pursuits. Educated personnel (for example, engineers, medical doctors and managers), who are invariably in short supply, are taken from the economically productive sectors and called upon to devote themselves to military and security endeavors. All of these factors have had tremendous economic consequences for countries and the region. Most directly, military expenditures take scarce capital away from productive economic activities. The standard motivation for military expenditures includes national defense, national security, the waging of war, the maintenance of power by a ruling elite, ‘pay-backs’ to foreign supporters of unpopular regimes, and a convenient conduit of commissions for corrupt rulers. In the Middle East, all of these reasons have motivated military expenditures at different times and in different countries. The payment for military equipment and military might have been in most cases facilitated by oil revenues (namely, the availability of easy come unearned foreign exchange from oil as opposed to unpopular taxation, which could hold governments more accountable) or by military aid (in the case of Egypt and Israel). Support for the military has been further facilitated by the fact that the region is one of the most underdeveloped and undemocratic in the world. Historical divisions between countries and between ethnic groups in the region, many of them a direct legacy of colonialism, have been numerous and seem irresolvable, although most of the region is tied by a common religion, language and/or cultural heritage. Today’s conflicts invariably sow the seeds of future conflicts, as it is difficult to forget the past. Conflicts and wars in the region have resulted in the destruction of infrastructure and other property, have reduced economic output (foregone GDP), have led to the emigration of many of the educated class (both Arabs and Iranians), have drained labor from economically productive endeavors and have further reduced economic growth and development because of increased risk and uncertainty. The increased risk and uncertainty in individual countries and in the region as a whole have reduced its attractiveness to foreign corporations and investors. Who would want to invest in a place that they really don’t want to visit and where they definitely don’t want to live? The only arena for investment worth the risk is oil and gas; little else seems attractive.

4.3

THE INTERVENTION OF FOREIGN POWERS

Today the great powers, especially the United States, bemoan the economic, social and political backwardness of the Persian Gulf and the broader


Regional conflicts and external intervention

39

Middle East region. The US preaches the need for democracy, pluralism and economic and social justice, while supporting its own favorite dictators. The US admonishes the interference of some Middle Eastern governments in the internal affairs of their neighbors, while the US has overthrown and threatens to overthrow legitimate governments. The US presses for regional economic cooperation, yet some countries are targets for economic isolation. US actions frequently do not support US rhetoric.1 The great powers have conveniently forgotten that they have intervened in the Middle East to promote their own selfish short-term political and commercial interests, with little regard for the region’s economic, social and political progress. They have invaded, fueled internal strife, played one country against another, undermined regimes, overthrown legitimate governments, supported corrupt dictators and regimes, and sold military equipment and weapons of mass destruction to anyone they wished. The intervention of the great powers, especially the United States since World War II, has caused immeasurable damage to the region. From a Middle Eastern perspective it is ironic that the US today deplores the region’s undemocratic landscape, yet it has both openly and covertly overthrown legitimate regimes and overtly supported brutal dictators. The US vehemently criticizes the acquisition of weapons of mass destruction, yet it sold those very weapons to its client dictators in the Middle East. In its annual report on human rights, the US Department of State criticizes countries whose rulers are not in US pockets, for example, Iran and Syria, and largely ignores countries that it supports but which arguably have worse human rights conditions, for example, Saudi Arabia and Egypt, a glaring duplicity that has not escaped most Middle Easterners. Over the past 50 years no region has been more affected by US policy than has the Middle East. Even now the US largely reserves its most bellicose attacks for those countries it does not control.2 The lessons of its policy failure toward the Middle East have been, and continue to be, hard to learn for the United States. Although we cannot look in any detail at all Western and former Soviet intervention in the region since World War II in the space of a few pages, it may still be useful to recall, albeit briefly, the recent experience of Iran, with more limited reference to Iraq, Saudi Arabia and the Palestinian dilemma, in order to arrive at a few policy lessons for the US and others who wish to understand what went wrong and how to influence the region in the future.

4.4

A LOOK AT THE IRANIAN EXPERIENCE

After World War II, in large part because of the Cold War and the importance of oil, US interest in Iran became increasingly keen. The first arena of


40

Middle east oil exporters

US–Soviet rivalry during the Cold War was arguably not in Europe but in Iran. From 1951 to 1953, Mohammed Mossadeq (the initially popular and democratically elected Prime Minister of Iran) was financially squeezed through a boycott of Iranian oil. The US and Britain were suspicious of Mossadeq because of his alleged ties to the Tudeh Party, a party that was assumed to be financed and supported by the Soviets. On the surface, the boycott was instituted because Mossadeq had nationalized (allegedly illegally) Iran’s oil industry, much to the detriment of British oil interests at the time. Despite the fact that nationalization with appropriate compensation to interested parties was and is a totally legal option for a sovereign nation, Mossadeq’s stance was unacceptable to the US and to the UK. After Mossadeq stood firm and consolidated his power, the Shah of Iran fled the country. In 1953 Mossadeq was overthrown with support from the CIA and British intelligence services and the Shah was reinstated, with British and US participation in the Iranian oil industry. Thereafter, for the next 25 years, the US supported and assisted the Shah’s regime, a corrupt and repressive regime that adopted flawed economic policies. Such support for the Shah resulted in deep resentment toward the US. The average Iranian blamed much of his or her misfortune on the United States; American actions did not promote democratic rule and did not win, but instead alienated, average Iranian hearts and minds. The US had only its own short-term interests in mind and cared little about the long-term implications of its meddling and even less about the welfare of the average Iranian. To the Iranian citizenry the United States was in large part to blame for their misfortunes under the Shah’s rule; this excluded the elite and the fortunate, but over time even members of this select group became increasingly disillusioned with the Shah’s regime and its US support. US politicians called this realpolitik and had little interest or comprehension of where their decisions would take Iran, US–Iranian relations, the region and relations with the Muslim Middle East. The Shah’s misguided economic, social and political policies and his US support were the fundamental cause of the Iranian Revolution. The US wanted stability in Iran and in the Persian Gulf region and what it got was a revolution that eventually turned the entire region upside-down. The US still has not fully appreciated the lessons of its failed Iran policy. US support for undemocratic rulers in the Middle East, most notably for the Al-Sauds in Saudi Arabia, would again come to haunt the US in the form of 11 September, 2001, but this time on US soil. After the Iranian Revolution and the taking of US hostages, the US changed its focus from what could be classified as the destabilization of Iran from the inside to destruction of Iran from the outside: the US supported Saddam Hussein to undermine the mullahs in Teheran. The US disregarded


Regional conflicts and external intervention

41

Saddam’s atrocities toward the Shia and Kurds in Iraq and effectively kept silent after Saddam invaded Iran. They refused to condemn Iraq or to take a stand for the international rule of law. Through its actions and inactions the US allowed the credibility of the UN to be undermined and its effectiveness to be questioned. The US and the Europeans supplied Saddam Hussein with cluster bombs, components for nuclear weapons, political support, equipment to manufacture poison gas and other chemical weapons, poison gas and intelligence to fight an eight-year brutal war with Iran.3 When relations soured with Saddam, the US condemned Saddam’s acquisition of the very chemical weapons the US and Europeans had supplied, and for its use of those weapons on Iraqi Kurds. When the US today deplores the development and use of chemical weapons it serves only to remind Middle Easterners of Western duplicity and reinforces their suspicions of Western rhetoric. For Iranians the effect of Iraqi invasion and US complicity is seen on the faces of the mutilated war victims on a daily basis in the streets of Teheran and in other major Iranian cities. Iran has lost more lives to WMD (weapons of mass destruction) than any other country since the dropping of atomic bombs on Japan. Less than a decade after its wholehearted support of Saddam Hussein, the US did another turnaround: it discovered that its newfound ally was no longer controllable. At the behest of the rich Persian Gulf countries, the US denounced Saddam’s invasion of Kuwait. Kuwait, Saudi Arabia and the United Arab Emirates footed the entire bill for the US to evict Saddam from Kuwait. When relations with Iraq further soured, the US and the UK invaded Iraq in 2003. US policies toward Iran and Iraq, as briefly summarized here, are hardly policies to win the support of average Iranians and Iraqis and to gain the trust of the average Middle Easterner, but they have certainly placed tremendous economic burdens on Iran and Iraq and on the region as a whole. If one looks at the full circle of US policies toward Iran and Iraq, a reasonable assessment would be that US policies were blatantly shortsighted. A cynic could easily say that the US intended all along to destroy the two countries economically in order to keep them weak and more malleable. In the Muslim Middle East the US is seen at best as hypocritical and at worst as an accomplice of brutal rulers. The US is interested in maintaining stability only to promote its own economic interests. For all the US rhetoric, the Middle East has been no more democratic and stable since US meddling after World War II. The US has earned its reputation as the underlying source of much misery: it deplores dictators, yet it supports many; it is against weapons of mass destruction, yet it supplies them to its regional clients; it objects to the acquisition of nuclear capabilities, yet it says nothing about Israel’s arsenal and did little to reverse Pakistan and


42

Middle east oil exporters

India’s acquisition of nuclear arms. To develop successful policies toward the region, the US will have to appreciate how Middle Easterners think after so many years of Western intervention, and not how the US imagines or wishes Middle Easterners to think. After years of the tragic consequences of Western meddling there is still no real remorse on the part of the US and its allies. People have long memories, as seen in the case of other abuses and atrocities during other conflicts: those of the Chinese and the Koreans against the Japanese, to name just two. Only by showing remorse voluntarily and quickly can one even dare to hope for any future goodwill. A country has to acknowledge its mistakes before it can change its policies and be credible to those who are affected. On 19 May 2005, the interim Iraqi government, to its credit, for the first time acknowledged Iraq’s aggressive role in invading Iran. The Iraqis blamed Saddam Hussein for the atrocities and absolved the Iraqi people of all responsibility:4 ‘The file of the war, we want to put it behind us,’ said Abbawi, who helped write the statement. ‘We want to open a new path of cooperation.’ The West conveniently places the blame for all problems in the region on Islamic fundamentalism. But after his extensive study of suicide bombers Robert Pape concludes: Over the past two years, I have compiled a data base of every suicide bombing and attack around the globe from 1980 through 2003 – 315 in all. This includes every episode in which at least one terrorist killed himself or herself while trying to kill others, but excludes attacks authorized by a national government (like those by North Korean agents against South Korea). The data show that there is far less of a connection between suicide terrorism and religious fundamentalism than most people think. The leading instigators of suicide attacks are the Tamil Tigers in Sri Lanka, a Marxist-Leninist group whose members are from Hindu families but who are adamantly opposed to religion. This group committed 76 of the 315 incidents, more than Hamas (54) or Islamic Jihad (27) . . . Before Israel’s invasion of Lebanon in 1982, there was no Hezbollah suicide terrorist campaign against Israel; indeed, Hezbollah came into existence only after this event. Before the Sri Lankan military began moving into the Tamil homelands of the island in 1987, the Tamil Tigers did not use suicide attacks. Before the huge increase in Jewish settlers on the West Bank in the 1980s, Palestinian groups did not use suicide terrorism. And, true to form, there had never been a documented suicide attack in Iraq until after the American invasion in 2003.5 Rather, what nearly all suicide terrorist campaigns have in common is a specific secular and strategic goal: to expel liberal democracies to withdraw military forces from territory that terrorists consider to be their homeland. Religion is rarely the root cause, although it is often used as a tool by terrorist organizations in recruiting and in other efforts in service of broader strategic objectives.6


Regional conflicts and external intervention

4.5

43

A LOOK AT SAUDI ARABIA

The signing of an oil exploration contract in 1933 sparked initial US interest in Saudi Arabia. The rulers of Saudi Arabia have little legitimacy, have no respect for religious freedom, have no tolerance for freedom of speech and treat all dissent harshly. Saudi Arabia has no constitution and has only recently held municipal elections (2005), and even then with half of the municipal representatives appointed and with women banned from voting, let alone from standing for office. There are no churches or synagogues allowed; to hold a non-Muslim religious service in one’s own home or to have a Christmas tree is a crime. Protests are strictly forbidden. The rulers of Saudi Arabia have adopted detrimental economic policies, have directly diverted oil revenues from the country’s treasury to their own bank accounts and have demanded kickbacks from foreign contractors. The country continues to waste its finite oil resources, wraps itself in Islam and gives Islam a bad name around the world. Despite all of this, the US has consistently supported the House of Saud. Even after September 11, 2001, with proof that most of the terrorists were Saudi citizens, the US conducts its business with Saudi Arabia as if nothing had happened. Imagine what would have happened if the 9/11 terrorists had been Syrian citizens. Under the Shah, Iranians squarely placed their dissatisfaction at the doorstep of the United States and turned to the mullahs for cultural and religious salvation. This is precisely what we see today in Saudi Arabia, with Saudis who clamor for reform and for justice blindly supporting the likes of Osama bin Laden. How farfetched an idea is it that future Iraqis could support an as yet unknown anti-American individual or group? Up to now the US has hardly had democracy and sustained economic development at the top of its list of policy priorities for the region. US support for similar bankrupt regimes in the Middle East such as Egypt and Jordan only serves as further proof of its duplicitous policies toward the region. In time, US support of these regimes will backfire because the general citizenry blame the US for their grievances with these illegitimate regimes.

4.6

THE PALESTINIAN PROBLEM

It is impossible to mention the recent role of foreign powers in the Middle East, especially that of the US, without a brief mention of the Palestinian issue. Simply said, the US has not played an impartial role. No matter what one considers a ‘just’ solution to the plight of the Palestinians, the US harshly condemns all violent acts by Palestinians and mildly rebukes Israel for its violent acts against Palestinians. The US should condemn, as should


44

Middle east oil exporters

everyone, all violent acts against innocent Israeli civilians and against innocent Palestinians. The analysis of Pape, mentioned above, would offer the best basis for understanding Palestinian violence against Israel and Middle Eastern feelings toward the US as the supporter of Israel and of Middle Eastern dictators.

4.7 A SUMMARY MIDDLE EASTERN PERSPECTIVE ON THE ROLE OF THE US IN THE REGION Ongoing policies of the US demonstrate that America has learned very little from its short history in the Middle East, let alone anything from the long involvement of the British and the French in the area. An article in the British newspaper the Guardian is reflective of even how recent US pronouncements for democratic change in the Middle East are viewed by the overwhelming majority of Middle Easterners: The claim that democracy is on the march in the Middle East is a fraud. It is not democracy, but the US military, that is on the march. The Palestinian elections in January took place because of the death of Yasser Arafat – they would have taken place earlier if the US and Israel hadn’t known that Arafat was certain to win them – and followed a 1996 precedent. The Iraqi elections may have looked good on TV and allowed Kurdish and Shia parties to improve their bargaining power, but millions of Iraqis were unable or unwilling to vote, key political forces were excluded, candidates’ names were secret, alleged fraud widespread, the entire system designed to maintain US control and Iraqis unable to vote to end the occupation. They have no more brought democracy to Iraq than USorchestrated elections did to South Vietnam in the 1960s and 70s. As for the cosmetic adjustments by regimes such as Egypt and Saudi Arabia’s, there is not the slightest sign that they will lead to free elections, which would be expected to bring anti-Western governments to power. What has actually taken place since 9/11 and the Iraq war is a relentless expansion of US control of the Middle East, of which the threats to Syria are a part. The Americans now have a military presence in Saudi Arabia, Iraq, the UAE, Kuwait, Bahrain, Oman and Qatar – and in not one of those countries did an elected government invite them in. Of course Arabs want an end to tyrannical regimes, most of which have been supported over the years by the US, Britain and France; that is the source of much anti-Western Muslim anger. The dictators remain in place by US license, which can be revoked at any time – and managed elections are being used as another mechanism for maintaining pro-Western regimes rather than spreading democracy.7

The article could have also mentioned the fact that the Afghan elections, which took place too early in a very unstable security situation, were more for the US public than for the Afghan people. Moreover, Hamid Karzai, with US support, made deals with many of the candidates to drop out of


Regional conflicts and external intervention

45

the election. The Afghan election is not a democratic election by any stretch of the imagination. US rhetoric from 2003 to the present may have been supportive of pluralistic governments in the Middle East, but democracy is not a spigot that the US can turn on and off, where and when it wishes. Like it or not, the US is weighed down by the baggage of its past actions to the detriment of the region, and Middle Easterners cannot be expected simply to forget and pretend that history never happened. It will take US admission of past harmful interventions in the internal affairs of Middle Eastern countries, consistent positive actions and time before the US will be accepted and trusted by the average Muslim in the region. The Truth and Reconciliation Commission was needed in South Africa and something along the same line may be needed for the West as a basis for relations to improve with the Middle East. In sum, over the past 50 or so years US foreign policy toward the Middle East has had one overriding feature – unquestioned support for certain corrupt regimes in the Middle East and for Israel, with little regard for human rights and democratic values. US Middle Eastern foreign policy, while seemingly expedient in the short run, has had ominous social and economic implications in the longer run. Harmful economic policies, bad governance, military expenditures and the direct and indirect impact of conflicts have taken a heavy economic toll on the region. The US has become broadly disliked in the region.8 In fact a number of polls show that in the Muslim Middle East the US is most popular in Iran. Our unsubstantiated reason for this unexpected result is that the US is not seen as the supporter of a regime that is not popular with the majority of Iranians. To turn things around, in addition to insisting on a just settlement in the Arab–Israeli conflict, the US must end its support for corrupt regimes, admit its past harmful policies and actions, be more credible in its rhetoric and accept the fact that a turnaround can come only in an Islamic context and that it will take time.

4.8 THE NOTION OF HONESTY AND EVEN-HANDEDNESS In the aftermath of 9/11 the US bashed Iran for its tyrannical policies more or less constantly, while it has said very little about Saudi Arabia, Jordan and Egypt. At the outset it must be stressed that none of the aforementioned regimes and societies could be even remotely classified as democratic, free or Islamic (as described in Chapter 3). If such rhetoric were to be credible in the Muslim world, and to confirm that the US is indeed now interested in promoting free societies in the region, Iran would in fact have


46

Middle east oil exporters

to be significantly more corrupt and repressive than Saudi Arabia and Egypt. Let’s take a brief look at just some facts: constitution, elections, freedom of religion, women’s rights, the rights of minorities, freedom of the press and corruption. Iran and Egypt have constitutions, though flawed in important respects; Saudi Arabia does not. In Iran there are elections, albeit with very serious shortfalls, for everything except for the Supreme Ruler, the Council of Guardians and the Expediency Council. While the elections are fair, the critical flaw is that the candidate list for President and for members of parliament has to be approved by the Council of Guardians. An additional undemocratic element in the Iranian Constitution is the limited role of the parliament, because the Expediency Council can overturn any Act of Parliament. In Saudi Arabia there are no parliamentary elections. While Egypt has elections, no one besides the one candidate was allowed to participate until 2005, in the past there has been only one candidate for President, and, more importantly, elections are rigged. In December of 2005 the opposition leader in Egypt, Ayman Nour, was convicted and jailed for what appear to be trumped-up charges. Although not one of the three countries rely on true Islamic principles to select their government and leaders through free and representative participation, and while none of them have anything to boast about, Iran seems to be marginally better than Egypt and far better than Saudi Arabia. But again, let’s emphasize that none of the three have a constitution or elections that are truly reflective of fundamental Islamic teachings. In Iran, there are churches and synagogues as well as mosques, though they are significantly fewer in number given the predominance of Islam; in Iran Baha’is have been wrongly persecuted since the Revolution. In Saudi Arabia there are only mosques; Christians cannot legally hold a service in the sanctity of their home because the mutawa, or religious police, may break in. In Egypt there is freedom of religious worship, although members of the Muslim Brotherhood are locked up in jail for no apparent transgression. Egypt and Iran are about the same in their tolerance of other religions, and far ahead of Saudi Arabia. In Iran, women vote, are members of parliament, are cabinet ministers, are doctors and work alongside men in almost every profession; and yes, women drive. Contrary to our understanding of the teachings of Islam, women cannot run for the office of President of Iran. Unfortunately, the regime forces women to wear a headscarf and to wear a long cover-up (akin to a raincoat). In Saudi Arabia, Saudi women must dress in such a way that their body and face are covered; they don’t vote even in municipal elections; their right to work openly in most positions, namely, alongside men, is severely limited; and they cannot drive. In both Iran and Saudi Arabia, men


Regional conflicts and external intervention

47

and women are separated in schools and universities. In Saudi Arabia, women cannot attend public events, such as soccer matches, with men. In Egypt, women are not discriminated against in these ways. The rights of minorities are largely respected in Iran and in Egypt, but Shia Muslims in Saudi Arabia, where they are a significant minority, have been historically disenfranchised and are at best third-class citizens, although since about 1990 they have received some economic benefits. In Iran there is freedom of the press but it is not consistent and there is a limitation: while the government and the President are fair game, the Supreme Leader and Islam cannot be criticized. If an editor goes too far the paper is shut down and restarts under a new name. In both Egypt and Saudi Arabia there is much more censorship. In Saudi Arabia even the call for establishing a constitutional monarchy can have dangerous consequences, as happened in the case of three academics in May 2005, whose sentences ranged from six to nine years. Corruption is rampant in all three countries, with governance that is in no way Islamic. Let’s add up the scorecard. If you accept this summary, none of the countries get a good grade but it would appear that Iran and Egypt come out better, distantly followed by Saudi Arabia. Is the US credible when it bashes Iran on its tyrannical government and is so accepting of Egypt and especially of Saudi Arabia, not to mention others outside the region such as Pakistan, Azerbaijan and Kazakhstan? The answer is an emphatic no. The US has said it espouses democracy for the region, but has in fact always supported the dictators who further US interests.

4.9

THE NUCLEAR DILEMMA

The US looks at how Muslims and Middle Easterners think through a narrow US prism. An example of this are the bellicose US attacks on Iran’s alleged nuclear weapons programs. The important question is not whether or not Iran is taking deliberate and concrete steps to acquire nuclear weapons, but whether or not Iran has actually been given incentives to acquire nuclear weapons. If the answer to this question is yes, then policymakers must learn to understand the nature of these incentives before attempting to turn things around. Iran and Iranians, and not just those who oppose the mullahs, feel more insecure than at any time since World War II. They also feel that acquiring a nuclear weapon may be the only way they can get the security they seek. Iraq’s invasion of Iran in 1980 along with the West’s subsequent support for Saddam Hussein fueled Iranian feelings of insecurity, shaped the


48

Middle east oil exporters

Iranian psyche and affected Iranian attitudes toward the West, and especially toward the United States. Iranians do not trust US intentions toward Iran. Most ominous is that the acquisition of nuclear arms would not be just another provocation on the part of the mullahs, but is an increasingly popular policy in the eyes of the average Iranian. It is for this reason that we must understand Iranian motivations if we are to dissuade Iran from this course of action; it is only by understanding how the rulers in Teheran and the average Iranian think that we can devise an effective policy. When Saddam Hussein invaded Iran and the United Nations and the West took no serious diplomatic actions against Iraqi aggression, Iranians felt that they could not rely on outsiders for their security. During the course of this bloody eight-year war, Saddam Hussein used US and European-supplied chemical weapons to kill and to maim Iranians in their thousands, while the West embargoed the sale of even conventional weapons to Iran and supplied Iraq with all its needs, including satellite intelligence. The result was that well over 500 000 Iranians died (some have put this number closer to 1 million) and even more were injured, with many permanently disabled from chemically inflicted injuries. Average Iranians, not just the mullahs who rule, painfully learned what it was to be isolated and to be vulnerable from external aggression. The United Nations and international agreements did not provide peace of mind for Iran’s citizens. In the aftermath of the Iran–Iraq War came the first Persian Gulf War. While Iran played a positive role, not only did it receive no recognition, but it was also excluded from the ensuing regional US-sponsored security arrangements that included even faraway Egypt. Iran has not received any war reparations from Iraq. The US further alienated Iran by opposing Iranian participation in Caspian Sea oil development and especially in the construction of pipelines through Iran and oil swaps (Caspian oil for Iranian oil refineries in northern Iran, for Iranian oil in the Persian Gulf). Finally, US economic sanctions on Iran were further tightened. The first Persian Gulf War was followed roughly a decade later by the US-led invasion of Afghanistan, on Iran’s eastern border. Iran, the country that had supported the Northern Alliance throughout the Taliban rule and that had accepted over 2 million refugees, had another opportunity for quiet rapprochement with the US and the rest of the West. Iran was especially optimistic given that the Northern Alliance was the main indigenous fighting force for the US-led war effort. Again Iran was to be disappointed. Iran did not get any positive recognition, but was almost immediately named a founding member of the so-called ‘Axis of Evil’ by the President of the United States, further alienating average Iranians (not just the mullahs as generally believed in the US) and adding to their feelings of insecurity.


Regional conflicts and external intervention

49

During the first year of the US-led invasion of Iraq, Iran did not appear to interfere in Iraqi affairs, especially in the Shia south where it has some influence. Again, the rhetoric against Iran continued. By 2004 the US was on Iran’s eastern and western borders, with US bases to the north and a massive US naval presence in the Persian Gulf. US presence all around hardly reassures the average Iranian after 25 years of US action against Iran. Meanwhile, India and Pakistan have acquired nuclear weapons. While they were initially slapped with sanctions, both countries now receive more respect from the international community. In 2005 the US administration approved the sale of advanced nuclear technologies to India. In the case of Pakistan this is even more difficult for Iranians to swallow, because Pakistan was the main supporter of the Taliban. At the same time, Israel is estimated to have at least 200 nuclear weapons and threatens Iran. Iran and Iranians feel insecure. In the face of these developments, more vocal and bellicose threats from the US can only make matters worse, especially when the nuclear powers have themselves not lived up to the spirit or the letter of the Nuclear Nonproliferation Treaty (NPT).9 The mullahs are becoming ever more determined and average Iranians are being driven by nationalistic fervor to support the current regime in Teheran. The essential issue for Western policymakers to think about is not whether the mullahs intend to build a nuclear bomb and what they might do with nuclear arms. The real issue is how to make Iranians feel more secure because the average Iranian is increasingly convinced of Iran’s need for defensive nuclear weapons. Iran-bashing by Washington makes passions run ever higher among the regime’s supporters on the streets of Teheran. Iran’s acquisition of nuclear weapons may be a self-fulfilling prophecy more because of Washington rhetoric and its belligerent actions affecting average Iranians than because of what US policymakers see as the underlying intentions of the regime in Teheran. A productive approach would be to start a dialogue with Teheran so as to address Iran’s legitimate security needs on the one hand and to incorporate Western concerns about Iranian nuclear intentions and the future of the Middle East on the other hand. It is worth asking the question: why don’t the US and the other major powers declare the Middle East a nuclear-free zone, including eliminating Israel’s arsenal, and guarantee each country’s borders against external aggression? A positive reaction to this proposal would rid the region of nuclear arms, bring stability and promote economic growth. In sum it is an inescapable fact that foreign intervention in the Middle East has not had a positive influence on political, social and economic developments. In the absence of foreign meddling, change would have


50

Middle east oil exporters

occurred gradually. Rage and anger would not have exploded the way that it has (as in the Iranian Revolution and in the form of 9/11).

4.10

THE QUESTION OF ISLAM

It has become a popular strategy to blame our failed policies on Islam. It is the tactic of a scoundrel to blame his failure on what he assumes to be an irreparable defect in his adversary. If one studies the entire Quran, as opposed to a verse here and there, there is no doubt that the hallmark of Islam is threefold: obedience to Allah and the spreading of the faith, economic and social justice, and tolerance toward others. There is no Muslim regime that is Islamic, not 90 percent, not 70 percent and not even 50 percent. Governments in the region have embraced false Islamic tenets to garner legitimacy, to hold on to power and to continue their corrupt rule. While Islam is not per se the solution to the political, social and economic problems facing the Muslim Middle East, any turnaround in the Middle East will have to come about within a ‘true’ Islamic context. Stop even subtly bashing Islam and start supporting its tenets. It is an inescapable fact that governments and rulers will come and go in the Middle East and that the US will eventually become a second-rate power. Islam, however, will stay. Hopefully, Middle Eastern governments will adopt the real Islamic principles of social and economic justice. If US ‘experts’ were in any way interested in the region’s political, social and economic progress, they would advocate true Islam and use its tenets to pursue peace in the region and, ultimately, in the world.

4.11 ● ●

● ●

FIVE BROAD LESSONS FOR US POLICY Lesson 1: Try to understand the Muslim Middle Eastern perspective. Lesson 2: If you support repressive, corrupt and failed regimes, you will become as unpopular as the regimes you back and it will take time to regain people’s trust. Lesson 3: Be accurate, fair and consistent in what you say about every country, and support your rhetoric with your deeds, otherwise you erode your own credibility. Lesson 4: A successful policy must incorporate the thinking, motivation, history and culture of the other side. Lesson 5: Don’t blame Islam for US failure but instead use its true principles to shame the governments of the region to turn things around.


Regional conflicts and external intervention

4.12

51

CAN THE US LEARN FROM THE PAST?

Can the US follow such a course? The answer ultimately lies in the power of the special interests of US administrations with business interests in the bankrupt countries of the Middle East. The reason why Iran-bashing is so painless and popular in Washington is that there are no ongoing US business interests in Iran. What may be difficult for the US and Europe is to acknowledge openly past harmful intervention in the region. Such an admission would go a long way in healing wounds and winning hearts and minds. In South Africa it was useful, and countries in Latin America are going through a version of the same process. It is no good pretending that the US has always been the good guy and that it was just the bad local guys who brought years of failure and misery to the region. It would be a gesture of reconciliation to offer the same to the people of the Middle East. The average American may believe the US government’s rhetoric that the US always pursues democracy, freedom and economic progress in the Middle East, but the average Middle Easterner’s trust of US noble intentions has eroded. At the same time we must add that the governments in the region have not followed the teachings of their own religion. They have not settled disputes peacefully. They have fought offensive battles. They have not allowed their people to implement the broad prescription of Islam and select their own rulers. The role of foreign powers in the region is important because it has affected the nature of governance in the region, and peace and stability. In turn governance, peace and stability are critical determinants of long-term economic development and growth. A worthwhile assessment of economic failure and success in the Middle East can only be made in the context of economic policy decisions, of social and political factors, religious teachings, the economic and social impact of oil, of regional conflicts and disruptions, and of external interventions. This will be our goal in the chapters that follow.

NOTES 1. For an outstanding analysis of US foreign policy, including that toward the Middle East, Walt, Stephen M., Taming American Power: The Global Response to US Primacy. Our only reason to briefly take up the topic here is that foreign intervention has significantly affected political, social and economic developments (the focus of this study). 2. In April 2005 President George Bush entertained Crown Prince Abdullah at his ranch in Crawford Texas and made a point of walking ‘hand-in-hand’ with this de facto ruler of one of the most despotic regimes in the world.


52

Middle east oil exporters

3. In December 1983 President Reagan sent Donald Rumsfeld as his special envoy to meet Saddam Hussein and to promise him anything he required in order to forestall an Iranian victory. 4. International Herald Tribune, 20 May 2005, p. 4. 5. Pape, Robert A., ‘Blowing up an Assumption’. 6. Pape, Robert A., ‘The Strategic Logic of Suicide Bombers’. 7. Milne, Seumas, ‘Managed Elections are the Latest Device to Prop Up Pro-Western Regimes’. 8. See Walt, Stephen M., Taming American Power: The Global Response To US Primacy. 9. In 1968, the idea behind the Nuclear Nonproliferation Treaty (NPT) was simple and persuasive. The US, the UK, France, Russia and China (the countries that had nuclear weapons) agreed to provide non-nuclear states with peaceful nuclear technologies, to reduce and ultimately eliminate their own nuclear arsenals and never to use nuclear weapons against non-nuclear states in exchange for others not to develop nuclear weapons. Yet today the nuclear states have not kept their end of the bargain in a number of ways, but expect the non-nuclear states to do so. First, the reduction of nuclear arsenals has not moved forward for a number of years, and in fact the US is now developing a new class of warheads. Second, the US, the UK, France and Russia now reserve the right to use nuclear weapons against non-nuclear states and to strike first. Third, an integral component of the NPT was the comprehensive test ban treaty, which the US has rejected and which is therefore unlikely to come into force. In May 2005 the treaty could not be strengthened during the one-month meeting at the United Nations in New York in large part because the US administration was unwilling to recognize and implement the promise made by the nuclear states to reduce and eliminate their arsenals.


5. 5.1

Physical and social indicators INTRODUCTION

We begin by looking at the broad physical and social indicators of our focus countries. In subsequent chapters, we will isolate some of the critical factors summarized here and provide a more in-depth analysis. The countries under study are classified into three main categories: (1) the Middle East oil exporters (or oil-exporting countries, or MEOE); (2) the in-region country group; and (3) the out-of-region country group. Unless otherwise stated, we define the Middle East oil exporters as including the Islamic Republic of Iran (‘Iran’), Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates (‘the UAE’). The group of in-region countries includes the Arab Republic of Egypt (‘Egypt’), Jordan, Morocco, the Syrian Arab Republic (‘Syria’) and Tunisia. Chile, Malaysia, Singapore and the Republic of Korea (‘South Korea’ or ‘Korea’) make up the out-ofregion group. Given World Bank regional classifications, we sometimes refer to the broader region as the Middle East and North Africa Region or MENA. The reason for comparing the oil exporters to the in-region group is that one group has oil while the other has very little oil but shares the same basic religious, cultural and ethnic (except Iran) background. The out-of-region group represents countries that have been star performers but do not share the same background (except Malaysia, which has a large Muslim population of roughly 60 percent). Where data is available and appropriate, these oil-exporting countries are also compared to various aggregate country groupings.1 These include the Middle East and North Africa (MENA) region as defined by the World Bank, the high-, middle- and low-income groups, and the world.

5.2

PHYSICAL CHARACTERISTICS AND LAND USE

As a group, the Middle East oil exporters have a total land area of approximately 4.3 million square kilometers. This represents approximately 3 percent of the world’s total surface area. Within the group, Saudi Arabia is the largest in size, followed in order by Iran, Iraq, the UAE, Kuwait and Qatar (Table 5.1). Compared to the oil exporters, the in-region countries 53


54

Table 5.1

Middle east oil exporters

Physical characteristics Land area (sq km)

Arable land (% of land area)

Crop land (% of land area)

Middle East oil exporters Iran 1 636 200 Iraq 437 370 Kuwait 17 820 Qatar 11 000 Saudi Arabia 2 149 700 UAE 83 600

8.7 13.1 0.7 1.6 1.7 0.6

1.4 0.8 0.1 0.3 0.1 2.2

45.3 57.9 86.7 61.9 42.7 31.9

In-region countries Egypt Jordan Morocco Syria Tunisia

995 450 88 930 446 300 183 780 155 360

2.9 2.7 19.6 25.2 17.9

0.5 1.8 2.2 4.4 13.7

100.0 20.0 13.8 23.2 7.8

Out-of-region countries Chile Malaysia Singapore South Korea

748 800 328 550 610 98 730

2.6 5.5 1.6 17.2

0.4 17.6 0.0 2.0

82.6 4.8 .. 60.6

30 996 000 66 725 000 32 424 000 130 140 000

11.6 9.6 12.5 10.8

0.5 1.0 1.5 1.0

12.2 19.3 26.3 19.5

Comparators High income Middle income Low income World

Irrigated land (% of crop land)

Source: WDI (2004) refers to the World Development Indicators and is used throughout this volume.

and out-of-region countries are significantly smaller, with a combined land area of 1.9 million square kilometers and 1.2 million square kilometers respectively. The largest in-region country is Egypt. With a land area of 995 450 square kilometers, Egypt is larger than most of the oil exporters except Iran and Saudi Arabia. For the out-of-region group, the largest country is Chile, followed by Malaysia, South Korea and Singapore. Singapore has a total land area of only 610 square kilometers, and is the smallest country in all our comparison groups. In terms of arable land, the in-region group has the largest percentage – roughly 10 percent – of its land area suitable for general agricultural purposes. Arable land in the Middle East oil-exporting and the out-of-region


Physical and social indicators

55

countries is roughly identical at 5 percent of their respective total land area. Despite the identical proportion of arable land to total land area, the oil exporters have a significantly lower percentage of actual cropland and irrigated land (0.8 percent and 0.4 percent of total land area respectively) compared to the out-of-region countries (5 percent and 0.8 percent of total land area respectively). It would appear that the presence of oil and oil revenues might have negatively affected agriculture and farming in the oil-exporting countries.

5.3

SIGNIFICANT DEPOSITS AND MINERALS

In terms of proven oil reserves, the Middle East oil exporters own unequivocally the largest share of the world’s total proved oil reserves. As of the end of 2003, the six countries controlled 62.5 percent of the world’s total oil reserves (Table 5.2). Proven natural gas reserves in the Middle East were somewhat lower at 39.8 percent of the world’s total reserves. However, this is still the largest concentration of natural gas reserves in the world. For the in-region and out-of-region countries, oil and natural gas reserves are significantly lower in comparison to the Middle East oil exporters. In relation to the global reserves of oil and gas, oil and gas reserves in the in-region and out-of-region countries is quite small and insignificant. Still, for Egypt oil revenues make up a significant percentage of total export revenues. While the oil exporters have other mineral deposits, such as copper and chromium in Iran and gold in Saudi Arabia, these are dwarfed in importance by oil and gas and they have not received their due attention. Oil and gas have clearly undermined the development of other mineral resources. For the other two country groups, copper is important for Chile and phosphate is a significant export for Morocco. In the case of Chile, copper does not appear to have had the same detrimental effect on the development of other sectors.

5.4

POPULATION

Although Iran has the second-largest land area among the Middle East oil exporters, it has by far the largest population of 65.5 million, almost three times as large a population as the next most populous country, Iraq, with 24.2 million people (Table 5.3). Saudi Arabia has the third-largest population among the oil exporters, followed by the UAE, Kuwait and, lastly, Qatar with only a little over half a million people; and in the latter four


56

Table 5.2

Middle east oil exporters

Oil and natural gas reserves Oil proven reserves thousand million barrels at end 1983

at end 2003

Middle East oil exporters Iran 55.3 Iraq 65.0 Kuwait 67.0 Qatar 3.3 Saudi Arabia 168.8 UAE 32.3

130.7 115.0 96.5 15.2 262.7 97.8

4.0 .. .. 1.5 2.5

Out-of-region countries Chile .. Malaysia 2.6 Singapore .. South Korea ..

In-region countries Egypt Jordan Morocco Syria Tunisia

Comparators World OECD OPEC

723.0 110.3 475.3

Natural gas proved reserves

Share of world total at end 2003 (%)

trillion cubic meters

Share of world total at end 2003 (%)

at end 1983

at end 2003

11.4 10.0 8.4 1.3 22.9 8.5

14.1 0.8 1.0 3.4 3.5 3.1

26.7 3.1 1.6 25.8 6.7 6.1

15.2 1.8 0.9 14.7 3.8 3.4

0.5 .. .. 2.3 0.5

0.3 .. .. 0.2 ..

0.2 .. .. 0.1 ..

1.8 .. .. 0.3 ..

1.0 .. .. 0.2 ..

.. 4.0 .. ..

.. 0.3 .. ..

.. 1.4 .. ..

.. 2.4 .. ..

.. 1.4 .. ..

1147.7 85.8 882.0

100.0 7.5 76.9

92.7 15.2 ..

175.8 15.5 ..

100.0 8.8 ..

Note: proved reserves are generally taken to be those quantities that geological and engineering information indicates with reasonable certainty can be recovered in the future from known reservoirs under existing economic and operating conditions. Source: BP Statistical Review of World Energy, June 2004.

countries a signiďŹ cant proportion of the population consists of foreign workers. Iran’s population is thus more than that of all the other oil exporters combined. In terms of population density, Kuwait has the highest number of people per square kilometer, while Saudi Arabia, owing to its large land area, much of which is barren land, has a population density of only ten people per square kilometer. The ratio of females to males is fairly balanced among the Middle East oil exporters, except in the UAE and Qatar, each with a disproportionately lower percentage of


57

Physical and social indicators

Table 5.3

Population Total population

Population density (people/km2)

Female population (% of total)

Middle East oil exporters Iran Iraq Saudi Arabia UAE Kuwait Qatar

65 540 000 24 174 000 21 886 000 3 218 000 2 328 000 610 000

40 55 10 38 131 55

49.8 49.2 45.9 34.4 46.7 35.8

In-region countries Egypt Jordan Morocco Syria Tunisia

66 372 000 5 171 000 29 641 000 16 986 000 9 781 000

67 58 66 92 63

49.1 48.3 50.0 49.5 49.5

Out-of-region countries South Korea Malaysia Chile Singapore

47 640 000 24 305 000 15 589 000 4 164 000

483 74 21 6826

49.7 49.4 50.5 48.7

966 170 000 2 737 900 000 2 494 600 000 6 198 700 000

31 41 77 48

50.6 49.6 49.2 49.6

Comparators High income Middle income Low income World

Source: WDI (2004); as of 2002 census data.

females at around 35 percent of their respective total population; this unusual fact is due to the large number of foreign male workers in these countries. Egypt is the largest country in physical size among the in-region country group, and it also has the largest population, with a total population exceeding 66 million (about the same as Iran in the oil-exporter group); Morocco, Syria, Tunisia and Jordan follow Egypt. With the exception of Syria, population densities are similar among the in-region countries. The female-to-male ratios of all ďŹ ve countries are also relatively similar and well balanced. For the out-of-region group, South Korea is the most populous nation with a total of more than 47 million. Malaysia is a distant second with


58

Middle east oil exporters

24.3 million, followed by Chile and Singapore with 15.6 million and 4.2 million respectively. Not surprisingly, the countries with the smallest land area in this group, namely, South Korea and Singapore, have the highest population density both within the group as well as across all country groups under study. An important dimension of a country’s population is its age structures. From Figure 5.1, it is evident that the oil exporters and the in-region countries have populations that are skewed toward the young, that is, the age 0 through 14 segment of the population. Population growth has been quite high in Muslim countries in recent years. Most strikingly, the age structures of Saudi Arabia, Iraq, Syria, Jordan, Egypt, Morocco and Malaysia have at least one-third or more of their total population below the age of 15 – a trend that is also shared by low-income countries in general. In contrast, high-income countries have a sizable proportion of their population skewed toward the elderly, namely, those above the age of 65. As a group, high-income countries have 14 percent of their total population aged 65 31%

Iraq UAE Qatar

65% 57%

3%

41%

57%

3%

23%

74%

3%

25%

73%

2%

25%

72%

3%

Egypt

34%

62%

38%

Morocco

59%

33%

62%

39%

Tunisia South Korea

58%

28%

66%

21%

Chile

65%

21%

64%

Age 15–64

Source: WDI (2004); as of 2002 census data.

Figure 5.1

7% 59%

29%

Age 0–14

4%

14% 67%

36%

World

3%

7%

67%

26%

4%

7%

71%

18%

3%

7% 63%

27%

4%

6%

72% 33%

Middle income

5%

40%

Population distribution by age range

Age 65 and more

4% 7%


59

Physical and social indicators

and above. In the Middle East oil-exporting countries, the elderly segment of the population is 5 percent or less. To appreciate the distinctive age structures in the Middle East oil exporting countries, one has only to examine the historical population growth rate (Table 5.4). All countries in the oil exporting group exhibit a unique common characteristic: an extremely high population growth rate. Between 1961 and 2002, the average annual population growth rate in the Middle East oil exporting group is an astounding 5 percent per annum.2 This figure is almost three times higher than the world average annual population growth rate over the same period. Although the oil-exporting group has been experiencing a steadily declining population growth rate in recent years – a general trend shared by the rest of the world – population growth rates remain high relative to other country groups and relative to the world. Table 5.4

Average annual percentage population growth rate 1961–02 (%)

1961–70 (%)

1971–80 (%)

1981–90 (%)

1991–2000 (%)

2001–2002 (%)

2.8 3.2 10.4 9.5 3.5 9.4

3.2 3.3 6.31 7.51 5.0 16.9

3.4 3.31 4.51 7.8 5.4 5.91

1.61 2.51 1.31 1.91 2.71 4.31

1.51 2.01 3.1 2.1 2.81 7.0

2.3 4.4 2.3 3.2 2.0

2.5 6.0 2.8 3.2 2.0

2.11 3.81 2.41 3.4 2.2

2.5 3.8 2.21 3.4 2.5

2.01 4.5 1.81 2.91 1.61

1.91 2.91 1.61 2.41 1.11

Out-of-region countries Chile 1.7 Malaysia 2.6 Singapore 2.2 South Korea 1.5

2.2 2.9 2.3 2.5

1.61 2.41 1.51 1.81

1.6 2.8 2.4 1.2

1.51 2.51 2.8 0.91

1.21 2.21 1.81 0.71

Comparators High income Middle income Low income World

1.1 2.1 2.4 2.0

0.91 1.91 2.5 1.91

0.71 1.61 2.31 1.71

0.7 1.21 2.01 1.41

0.61 0.91 1.81 1.21

Middle East oil exporters Iran 2.7 Iraq 3.0 Saudi Arabia 5.5 UAE 6.5 Kuwait 4.1 Qatar 9.0 In-region countries Egypt Jordan Morocco Syria Tunisia

Note:

1

0.8 1.7 2.3 1.7

indicates a decline in average annual growth rate from the previous decade.

Source: WDI (2004).


60

Middle east oil exporters

The unusually high population growth rates of the 1960s and early 1970s explain the fact that the age distribution is skewed toward the young. Judging from recent growth rates, this ‘youth-heavy’ population distribution pattern in the Middle East oil exporters is likely to persist well beyond 2010. The rapid population growth rate in the oil-exporting countries could be explained by a number of factors: the hike in oil revenues in the late 1960s to mid-1970s, which afforded generous government consumer subsidies; the opposition of religious leaders to contraception, which has now been reversed in some countries, especially Iran; and a broad policy to increase population because of perceived labor shortages and reasons of national security in all of the sparsely populated oil-exporting countries of the Persian Gulf. The average annual population growth rates of the in-region countries and the out-of-region countries were 3 percent and 2 percent respectively for the period between 1961 and 2002. While not as high as the Middle East oil-exporting group, these are above-average growth rates by global standards. For the in-region group, Jordan has had a persistently higher population growth rate than Egypt, Morocco, Syria and Tunisia. For the out-of-region group, Malaysia, a majority Muslim country, has sustained a higher population growth rate than Chile, Singapore and South Korea. Like the rest of the world, these in- and out-of-region country groups have seen their population growth rates decline over the past 30 years. In fact, the population growth rates in 2002 for Singapore, South Korea and other developed nations have dropped below 1 percent per annum.

5.5

LIFE EXPECTANCY

Life expectancy at birth indicates the number of years a newborn infant would live if prevailing patterns of mortality at the time of birth were to stay the same throughout his or her life. For the Middle East oil exporters, Kuwait had the highest life expectancy at 77 years, and Iraq had the lowest at 63 (Table 5.5); the simple average of life expectancies for these countries was 71.7 in 2002, and it had increased by an average of 7.1 years over a period of 22 years. For the in-region countries, life expectancy was the highest in Tunisia at 73 years, followed by Jordan, Syria, Egypt and Morocco; the average life expectancy for this group was 70.4 in 2002, and it had risen by an impressive ten years over the period. In the out-of-region group, Singapore had the highest level of life expectancy at birth at 78 years, while Malaysia had the lowest at 73 years; the average life expectancy was 75.2, and it had risen by 6.7 years. Regardless of the country grouping, all countries under study share two similar trends:


61

Physical and social indicators

Table 5.5

Life expectancy at birth Total

Female

Male

1980

2002

Middle East oil exporters Iran Iraq Kuwait Qatar Saudi Arabia UAE

58 62 71 67 61 68

69 63 77 75 73 75

70 64 79 75 75 77

68 61 75 75 71 74

In-region countries Egypt Jordan Morocco Syria Tunisia

56 64 58 62 62

69 72 68 70 73

71 74 70 73 75

67 70 66 68 71

Out-of-region countries Chile Malaysia Singapore South Korea

69 67 71 67

76 73 78 74

79 75 80 78

73 70 76 71

Comparators High income Middle income Low income World

74 66 53 63

78 70 59 67

81 72 60 69

75 68 58 65

Note: Gender data as of 2002, except for Singapore, which is as of 2001. Source: WDI (2004).

first, the average total life expectancy has increased over time from 64 to 72 years; second, the female population in all countries tends to have higher life expectancies than their male counterparts by an average of about four years. While the three country groups have made great strides in increasing life expectancy, the average performance of the oil exporters is not as stellar as it at first seems if one takes a weighted average of life expectancies. Iraq’s dismal performance and its relatively large population in comparison to Kuwait, Qatar and the UAE, coupled with Egypt’s stellar performance and its large population, means that average life expectancy is about the same in the oil-exporting and the in-region countries, while the increase for


62

Middle east oil exporters

the in-region countries over the period becomes even more dramatic in comparison to the oil exporters. Oil revenues by themselves have not in all cases supported an exceptional increase in life expectancy.

5.6 POVERTY AND SOCIAL INDICATORS OF POVERTY Poverty cannot be narrowly defined and measured because it is too complex to be reduced to a single number. Elements and dimensions of poverty in the developing world include hunger, malnutrition, illiteracy, epidemics and the lack of health services and safe water. These elements are less central to developed countries where hunger is rare, literacy is close to universal, most epidemics are well controlled, health services are widespread and safe water is easy to tap. Instead, poverty in more developed countries concentrates on variables such as social exclusion.3 Perhaps due to these measurement difficulties, data on national and international poverty and social indicators of poverty are sparse at best. In 1990, the United Nations launched the Human Development Report in an attempt to measure and study world poverty. The report defines poverty as the denial of opportunities and choices most basic to human development. Three basic dimensions – a long and healthy life, knowledge and a decent standard of living – characterize human development. By measuring the average achievement in these three dimensions, the UN is able to ‘standardize’ a country’s progress in its human development effort, and thus its progress toward reducing poverty. In the mid-1970s, the in-region countries seem to have had the poorest record of human development – the group’s average human development index was only about 0.48, followed by the oil exporters and the out-ofregion countries, with group averages of the human development index of 0.67 and 0.69 respectively (Table 5.6). Throughout the past three decades or so, all the countries under study have experienced progress in their human development efforts.4 In terms of the growth rate of the human development index, or the rate of progress of reducing poverty, the inregion countries experienced the fastest growth over the past 28 years. This is not surprising given the low original base. Progress in the Middle East oil exporters and in the out-of-region countries is roughly comparable over the same period, but the level is higher in the latter group of countries. There is a positive correlation between a country’s GDP per capita and its human development index. From Figure 5.2, we observe that countries with a high human development index value (for example, Singapore, the UAE, Qatar) tend to have higher GDP per capita. Similarly, countries with


63

1975 0.61 .. 0.78 .. 0.67 0.79 0.54 0.66 0.51 0.61 0.62

0.49 0.64 0.47 0.58 0.57

1985

0.57 .. 0.78 .. 0.66 0.77

1980

0.58 0.68 0.54 0.64 0.66

0.65 .. .. .. 0.71 0.81

1990

0.61 0.71 0.57 0.66 0.70

0.69 .. 0.81 .. 0.74 0.80

1995

Human development index

Poverty and social indicators of poverty

Middle East oil exporters Iran 0.57 Iraq .. Kuwait 0.76 Qatar .. Saudi Arabia 0.60 UAE 0.73 In-region countries Egypt 0.44 Jordan .. Morocco 0.43 Syria 0.53 Tunisia 0.52

Table 5.6

.. 0.74 0.60 0.68 0.73

0.72 .. 0.83 .. 0.76 ..

2000

0.65 0.75 0.62 0.71 0.75

0.73 .. 0.84 0.83 0.77 0.82

2002

3 810 4 220 3 810 3 620 6 760

6690 .. 16 2401 19 8442,3 12 6501 22 4201,2

Per capita GDP PPP in US$ 2002

11 5 9 7 4

11 16 10 6 14 14

Children underweight for age % under age 5 1995–20024

44 9 49 17 27

23 60 17 16 22 23

Adult illiteracy rate % age 15 and above 2002


64

0.74 0.66 0.76 0.74

Out-of-region countries Chile 0.70 Malaysia 0.61 Singapore 0.72 South Korea 0.71 0.76 0.69 0.78 0.78

1985 0.78 0.72 0.82 0.82

1990 0.81 0.76 0.86 0.85

1995

Human development index

0.84 0.79 .. 0.88

2000 0.84 0.79 0.90 0.89

2002

Source:

Human Development Report 2004, United Nations.

Notes: 1 Data based on regression; 2 Data refers to year other than specified; 3 From the Penn World Tables, differ from standard definition; 4 Data for most recent year available during specified period; 5 Data refers to a year or period other than specified, differs from standard definition.

1980

(continued)

1975

Table 5.6

9 820 9 120 24 040 16 950

Per capita GDP PPP in US$ 2002 1 12 145 ..

Children underweight for age % under age 5 1995–20024

4 11 8 2

Adult illiteracy rate % age 15 and above 2002


65

Physical and social indicators $30 000 Singapore

$25 000 UAE

Qatar

$20 000

$15 000 S. Arabia Malaysia

$10 000

Iran $5000

$0 0.50

S .Korea

Kuwait

Morocco

0.55

0.60

Egypt

Syria

0.65

0.70

Chile

Tunisia Jordan

0.75

0.80

0.85

0.90

0.95

Note: Iraq not shown.

Figure 5.2 Per capita GDP (PPP US$) versus human development index in 2002 a low human development index value (for example, Morocco, Egypt, Syria) tend to have lower GDP per capita. However, the human development index of the oil exporters, when adjusted for per capita income levels, namely, at a given level of per capita income, is lower than the human development index of the out-of-region countries, which might indicate that while oil revenues may support average income levels it may not be translated into broader human development achievement. Similar patterns can be observed between the level of human development and adult illiteracy rates; namely, high values of the human development index tend to be associated with low levels of adult illiteracy rates and vice versa. The relationship is somewhat less evident when one compares the human development index to the percentage of children underweight for age – another social indicator of poverty. For instance, the data suggests that the UAE and Singapore – both with very good opportunities for human development and relatively low levels of poverty – have an inexplicably high percentage of children aged five and below who are underweight. This unusual observation further substantiates the fact that poverty is multidimensional in character and it underscores the hazard of evaluating poverty through any single indicator.


66

Middle east oil exporters

Another way to gauge poverty is to examine the concept of the poverty line, or minimum income needed for the necessities of life. The difficulty of applying this definition is that the ‘necessities of life’ is a relative concept. One could argue if the standard of living is higher in one country than in the other, then the country with a higher standard of living is expected to have a higher monetary poverty line, all else being equal. Further, income that is not adjusted for purchasing power is not readily comparable from one country to another. Even within a nation, one may argue that the cost of living is typically higher in urban than in rural areas. So the urban monetary poverty line should be higher than rural poverty line. That being said, there are standardized measures under which the poverty line may be drawn. These measures are expressed in some common currency base, usually the US dollar, and adjusted for purchasing power parity. According to the Human Development Report in 2004, the proportion of Iran’s population living on less than $1 and $2 per day is less than 2 percent and 7.3 percent respectively (Table 5.7). Unfortunately, data on similar statistics is unavailable for the rest of the region’s oil exporters. For the inregion countries, the proportion of population living on less than $1 and $2 per day is largest in Egypt and Morocco. Additionally, close to one-fifth of the population in these two countries is reportedly below the national poverty line. Clearly, oil may have been important in reducing the number of Iranians living below the poverty line in comparison to the in-region countries that are not major oil exporters. Although data does not exist for the other Persian Gulf countries, it would be safe to say that poverty rates are generally lower than Iran’s with the exception of Iraq; Iraq’s poverty rate is in all likelihood much higher than that of any other oil exporter because of repeated wars and conflicts. Although the out-of-region countries seem to have a lower percentage of their populace living under $1 and $2 per day, the segment of population under the respective national poverty line seems roughly equivalent to the in-region countries. For the future, the countries of the Persian Gulf will face increasing pressures because of the rapid population growth of the 1980s followed by a lower rate of population growth. The number of elderly can be expected to rise (4 percent per annum up to 2025) for some time to come, while the younger population grows at a much lower rate (1.4 percent).5 Although social sector expenditures may already be inadequate in the oil-exporting and in-region countries today, the problem may become much more acute in the future unless decisive action is taken soon. Iran, the only country where data exists among the oil exporters, does not fare favorably with the in-region countries (Table 5.8). All of these countries, with the possible exception of the low-population and high-income countries (Kuwait,


67

$1 a 1990–20021

2 .. .. .. .. ..

3.1 2 2 .. 2

In-region countries Egypt Jordan Morocco Syria Tunisia

day2

43.9 7.4 14.3 .. 6.6

7.3 .. .. .. .. ..

$2 a 1990–20021 day3

16.7 11.7 19 .. 7.6

.. .. .. .. .. ..

National poverty line 1990–20021

Population below income poverty line

Poverty lines and inequality measures

Middle East oil exporters Iran Iraq Kuwait Qatar Saudi Arabia UAE

Table 5.7

1999 1997 1998/99 .. 2000

1998 .. .. .. .. ..

Survey year

8.0 9.1 11.7 .. 30.6

17.2 .. .. .. .. ..

Richest 10% to poorest 10%

5.1 5.9 7.2 .. 17.6

9.7 .. .. .. .. ..

Richest 20% to poorest 20%

34.4 36.4 39.5 .. 82.8

43.0 .. .. .. .. ..

GINI index4

Share of income or consumption

Inequality measures


68

(continued)

2 2 .. 2

$1 a day2 1990–20021

9.6 9.3 .. 2

$2 a day3 1990–20021

17 15.5 .. ..

National poverty line 1990–20021

Population below income poverty line

2000 1997 1998 1998

Survey year

40.6 22.1 17.7 7.8

Richest 10% to poorest 10%

18.7 12.4 9.7 4.7

Richest 20% to poorest 20%

Source:

Human Development Report 2004, United Nations.

57.1 49.2 42.5 31.6

GINI index4

Share of income or consumption

Inequality measures

Notes: 1 Data for most recent year available during specified period; 2 Poverty line is equivalent to $1.08 (1993 PPP US$); 3 Poverty line is equivalent to $2.15 (1993 PPP US$); 4 A measure of income inequality over the entire distribution of income – a value of 0 represents perfect equality and a value of 100 perfect inequality.

Out-of-region countries Chile Malaysia Singapore South Korea

Table 5.7


69

Physical and social indicators

Table 5.8

Social sector expenditures in 1995 as a percentage of GDP Food Cash/ Public Public Housing Health Education Total subsidies in-kind works pension

Iran Egypt Jordan Morocco Tunisia

2.9 1.7 0.0 1.7 1.7

1.2 0.3 1.5 0.1 1.0

.. 0.3 .. 0.7 0.4

1.5 2.5 4.2 1.8 2.6

1.5 2.0 0.7 0.1 1.7

2.4 1.6 3.7 1.3 3.0

4.0 5.4 6.0 5.5 6.5

13.5 13.8 16.1 11.2 16.9

Source: Economic Research Forum for the Arab countries, Iran and Turkey, 2002, Economic Trends in the MENA Region, 2002.

Qatar, the UAE) will need to develop a comprehensive policy for developing an adequate social safety net. Most countries under study show moderate to high levels of income inequality between the richest and the poorest segment of the population. The inequality is particularly severe in Tunisia and Chile, where the GINI indexes were 82.3 and 57.1 respectively.6 This would imply that the richest segment of the population in these two countries possesses a disproportionate share of total national income.

5.7

EDUCATION

Generally, statistics on education fail to provide a complete and accurate picture of a country’s education system. This is for a variety of reasons: inconsistencies in survey results provided by education authorities, differences in coverage and data collection methodologies, and/or significant time lags between each survey. Hence, data on education should be interpreted with some degree of caution. Despite the data challenges, one can observe from Table 5.9 a general trend of increased public expenditure per student at the primary, secondary and tertiary levels over the past ten years or so. Regardless of country grouping, most countries seem to deploy a large proportion of their trained teachers to the primary education level. In terms of the primary pupil-toteacher ratio, the Middle East oil exporters averaged just over 17 students to one teacher. In contrast, the primary pupil-to-teacher ratio for the inregion and out-of-region countries averaged 24 and 28 respectively. According to the World Bank’s definition, a person is considered literate if they can, with understanding, read and write a short, simple statement on their everyday life. Based on this definition, the average literacy rates


70

.. 16.0 17.9 12.8 15.8

.. .. .. .. ..

In-region countries Egypt Jordan Morocco Syria Tunisia

2001/021

11.6 .. .. .. .. ..

1990/91

Primary

Education inputs

Middle East oil exporters Iran 6.2 Iraq .. Kuwait 35.4 Qatar .. Saudi Arabia .. UAE ..

Table 5.9

.. .. 47.1 15.0 27.6

14.1 .. 13.6 .. .. ..

1990/91

.. 19.0 47.5 23.1 25.7

13.6 .. .. .. .. ..

2001/021

Secondary

Public expenditure per student % of GDP per capita

.. 78.9 73.1 46.6 115.5

79.7 .. 353.8 .. 133.2 ..

1990/91

9.3 .. .. .. 68.0

81.5 .. .. .. .. ..

2001/021

Tertiary

19.4 20.6 .. .. 17.4

21.7 .. .. .. .. ..

Public expenditure on education % of total govt expenditure 2001/021

.. .. .. .. 94.1

97.9 .. .. .. 93.3 ..

Trained teachers in primary education % of total 2001/021

26 20 28 24 22

24 21 14 .. 12 15

Primary pupil– teacher ratio pupils per teacher 2001/021


71

Source:

Note:

is preliminary.

WDI (2004).

1 Data

26.2 .. .. ..

Comparators High income Middle income Low income World

40.2 .. .. ..

14.3 17.0 .. 18.4

Out-of-region countries Chile 8.4 Malaysia 12.4 Singapore .. South Korea 12.0 31.0 .. .. ..

7.7 16.9 13.6 9.9 .. .. .. ..

14.7 27.5 .. 16.8 47.1 .. .. ..

27.1 116.6 43.4 5.8 66.5 .. .. ..

19.2 83.5 .. 7.4 11.5 .. .. ..

17.5 25.2 .. 17.4

.. .. .. ..

94.9 .. .. ..

17 22 40 ..

32 20 .. 32


72

Middle east oil exporters

have been on the rise in all countries over the past ten years. In the Middle East, the literacy rate of the oil exporters is about 84 percent. Adult – those age 15 and above – literacy rates averaged 80 percent compared to 93 percent for the youth – those age 15 and below – segment of the population (Table 5.10). Literacy rates in the out-of-region countries are the highest among all comparison groups, at an average of 93 percent of the adult Table 5.10

Education outcomes Adult literacy rates % ages 15 and older Male

Youth literacy rates % ages 15–24

Female

Male

Female

20021

1990

20021

1990

20021

1990

Middle East oil exporters Iran 72 Iraq .. Kuwait 79 Qatar 77 Saudi Arabia 76 UAE 71

84 .. 85 852 84 76

54 .. 73 76 50 71

70 .. 81 822 69 81

92 .. 88 88 91 82

.. .. 92 942 95 88

81 .. 87 93 79 89

In-region countries Egypt Jordan Morocco Syria Tunisia

60 90 53 82 72

67 96 63 91 83

34 72 25 48 47

44 86 38 74 63

71 98 68 92 93

79 99 77 97 98

51 95 42 67 75

67 100 61 93 91

Out-of-region countries Chile 94 Malaysia 87 Singapore 94 South Korea ..

96 92 97 ..

94 74 83 ..

96 85 89 ..

98 95 99 ..

99 97 99 ..

98 94 99 ..

99 97 100 ..

Comparators High income Middle income Low income World

.. 92 72 84

.. 75 42 63

.. 83 53 71

.. 95 75 87

.. 97 82 89

.. 91 59 78

.. 94 70 83

1990

.. 99 64 79

Notes: 1 Data is preliminary; 2 data as of 1997. Source: WDI (2004); national estimates based on census and survey data.

20021 .. .. 94 962 92 95


Physical and social indicators

73

population, and 99 percent for the youth population.7 At 71 percent the inregion countries of Egypt, Jordan, Morocco, Syria and Tunisia have the lowest average adult literacy rates. The group’s youth literacy rate averaged 86 percent as of 2002. From Table 5.10, it can be seen that adult literacy rates tend to be malebiased. For instance, the male and female adult literacy rates in Saudi Arabia are 84 percent and 69 percent respectively, a 15 percent differential in literacy rates in favor of the male adult population. This male-biased tendency in literacy rates is even more pronounced for the in-region countries, where the average differential is roughly 19 percent. When literacy rates are measured for the youth segment of the population, the male-biased tendencies are smaller, and in some cases such as Kuwait and Jordan, they become negative, which suggests higher female literacy rates relative to male literacy rates. Looking broadly at the male–female literacy rates for all country groups, a few tentative observations are in order: in the Middle East male education has been favored relative to female education; this gender education gap is closing; and oil may have at least assisted the oil exporters to do better in this regard than the in-region countries.

5.8

HEALTH SERVICES

Total health expenditure is the sum of public and private health expenditure. This covers the provision of both preventative and curative health services, family planning activities, nutrition activities and emergency aid designated for health, but does not include provision of water and sanitation. With the exception of Iran, total health expenditure as a percentage of GDP for the Middle East oil exporters averaged 3.9 percent. This is lower than the 4.4 percent health expenditure to GDP ratio of low-income countries. Iran’s total health expenditure to GDP of 6.6 percent is above the level observed for middle-income nations. The in-region and out-of-region countries have average total health expenditures of 6 percent and 5 percent respectively. These levels are comparable to middle-income countries as a whole (Table 5.11). It is interesting to note that Jordan has an exceptionally high level of health expenditure to total GDP of 9.5 percent. When the public portion of total health expenditure is expressed as a percentage of total health expenditure, we get an indication of the level of private investments in the nation’s healthcare. For Kuwait, Saudi Arabia, the UAE and Tunisia, public health expenditure dominates private expenditure by a ratio of almost 4 to 1. In contrast, both public-to-private health expenditure ratios in Iran and Iraq are less imbalanced, at 7:10 and 5:10


74

Table 5.11

Middle east oil exporters

Health expenditure and services Health expenditure Total % of GDP

Health expenditure per capita in US$

Number of physicians per 1000 people

Hospital beds per 1000 people

Public % of GDP

Public % of total

Middle East oil exporters 6.6 Iran4 3.2 Iraq2 4.3 Kuwait3 .. Qatar3 4.6 Saudi Arabia3 UAE 3.5

2.7 1.0 3.5 .. 3.4 2.6

41.9 31.8 81.0 .. 74.6 75.8

363 225 630 .. 375 849

0.9 0.6 1.9 1.3 1.7 1.83

1.6 1.5 2.8 1.7 2.3 2.64

In-region countries Egypt Jordan Morocco3 Syria1 Tunisia3

3.9 9.5 5.1 5.4 6.4

1.9 4.5 2.0 2.4 4.9

48.9 47.0 39.3 43.9 75.7

46 163 59 65 134

1.63 1.73 0.5 1.3 0.7

2.13 1.83 1.0 1.4 1.7

Out-of-region countries Chile 7.0 Malaysia4 3.8 Singapore 3.9 South Korea1 6.0

3.1 2.0 1.3 2.6

44.0 53.7 33.5 44.4

296 143 816 532

1.15 0.5 1.62 1.3

2.74 2.0 3.66 5.5

Comparators High income Middle income Low income World

6.3 3.1 1.1 5.6

62.1 51.1 26.3 59.2

2841 118 23 500

2.8 1.9 0.4 ..

7.4 3.7 1.2 ..

10.8 6.0 4.4 9.8

Notes: data for health expenditure as of 2001; for high-/middle-/low-income groups, data as of most recent year available; 1 as of 1999; 2 as of 1998; 3 as of 1997; 4 as of 1996; 5 as of 1995; 6 as of 1994. Source: WDI (2004).

respectively. For the remaining countries in the in-region and out-of-region groups, public-to-private health expenditure ratios are almost 6:7 in most cases. Generally speaking, for both the Middle East oil exporters and the in-region group, public health expenditure tends to be higher than private health expenditure; this is not the case for the out-of-region country group. When health expenditure is calculated on a per capita basis in US dollar terms, we observe that the Middle East oil exporters spent an average of $488 per person. Excluding the UAE – the country with the highest


Physical and social indicators

75

per capita health expenditure among the oil exporters – the average per capita health expenditure in the Middle East falls to $398. In comparison, the out-of-region country group has an average per capita health expenditure of $447, and the in-region country group has a meager $93 per capita health expenditure. Again, oil has helped the oil exporters to do more in the area of health than the in-region countries but not in comparison to the out-of-region countries, who in 1975 were not as well off economically as the oil exporters. The average number of physicians and hospital beds per 1000 people are approximately 1.3 and 2.1 respectively for the oil exporters in the Middle East. This compares to approximately 1.2 and 1.5 for the in-region countries, and 1.1 and 3.5 for the out-of-region countries. Interestingly, despite the comparable levels of per capita health expenditure between the oil exporters and the out-of-region countries (of $488 and $447 respectively), the level of health services that are actually available per 1000 people seems to be lower in the former group.

5.9

DISEASE PREVENTION

The lack of clean water and basic sanitation facilities is one of the major causes of diseases transmitted through feces. Therefore, a country is at a higher health risk if the access to improved water sources and sanitation facilities is poor. Despite the lack of data in some countries, we can see from Table 5.12 that the percentage of population with access to improved sanitation facilities and water sources is relatively high in all three country groups. Over time, most countries have also increased access to improved sanitation facilities and water sources; an encouraging trend that should lead to lower disease transmittal rates through water and feces.

5.10

REPRODUCTIVE HEALTH

Total fertility rate represents the number of children that would be born to a woman if she were to live to the end of her childbearing years and bear children in line with prevailing age-specific fertility rates. Based on this definition, women in the Middle East oil-exporting countries have relatively high fertility rates. On average, the oil-exporting group has a total fertility rate of 3.4 births per woman in 2002, down from an average of 6.2 in 1980 (see Table 5.13). A similar decline in total fertility rates is observed for the in-region countries, from 6 births per woman in 1980 to 3 births per woman in 2002. For the out-of-region country group, the rate of decline in total


76

Table 5.12

Middle east oil exporters

Disease prevention Access to an improved Access to improved water source sanitation facilities % of population % of population 1990

Child immunization rate % of children ages 12–23 mth

2000

1990

2000

Measles 2002

DPT 2002

Middle East oil exporters Iran .. Iraq .. Kuwait .. Qatar .. Saudi Arabia .. UAE ..

92 85 .. .. 95 ..

.. .. .. .. .. ..

83 79 .. .. 100 ..

99 90 99 .. 97 94

99 81 98 .. 95 94

In-region countries Egypt Jordan Morocco Syria Tunisia

94 97 75 .. 75

97 96 80 80 80

87 98 58 .. 76

98 99 68 90 84

97 95 96 98 94

97 95 94 99 96

Out-of-region countries Chile 90 Malaysia .. Singapore 100 South Korea ..

93 .. 100 92

97 .. 100 ..

96 .. 100 63

95 92 91 97

94 96 92 97

.. 82 76 81

.. 47 30 45

.. 60 43 55

90 80 65 72

95 85 65 75

Comparators High income Middle income Low income World

.. 76 66 74

Note: DPT stands for diphtheria, pertussis (whooping cough), and tetanus. Source: WDI (2004).

fertility is less dramatic. The average total fertility rate for women was 2.8 in 1980, and 2 in 2002. It is interesting to note that Saudi Arabia’s total fertility rate of 5.3 births per woman is unusually high by today’s standards. Data on reproductive health depends on the availability of a national registration system or other types of health information systems. In the absence of such systems, the World Bank extrapolates data using recent surveys and censuses. Despite the lack of complete data, we can still observe and reasonably expect a high negative correlation between contraceptive prevalence rate and total and adolescent fertility rates. In Saudi


77

Physical and social indicators

Table 5.13

Reproductive health Total fertility rate births per woman

1980 2002

Adolescent fertility rate births per 1000 women ages 15–19 2002

Contraceptive prevalence rate % of women ages 15–49 1990–20021

Maternal mortality ratio per 100 000 live births National Model estimates estimates 1985–20021 2000

Middle East oil exporters Iran 6.7 Iraq 6.4 Kuwait 5.3 Qatar .. Saudi Arabia 7.3 UAE 5.4

2.0 4.1 2.5 .. 5.3 3.0

25 35 30 .. 91 64

73 .. .. .. 21 ..

37 290 5 .. .. 3

76 250 5 .. 23 54

In-region countries Egypt Jordan Morocco Syria Tunisia

5.1 6.8 5.4 7.4 5.2

3.0 3.5 2.8 3.4 2.1

46 30 44 38 10

56 56 59 45 60

84 41 230 .. 69

84 41 220 160 120

Out-of-region countries Chile 2.8 Malaysia 4.2 Singapore 1.7 South Korea 2.6

2.2 2.8 1.4 1.5

43 23 8 4

.. .. ..

23 30 6 20

31 41 30 20

Comparators High income Middle income Low income World

1.7 2.1 3.5 2.6

24 36 98 63

.. .. .. ..

.. .. .. ..

13 112 657 403

Note:

1 Data

1.9 3.2 5.5 3.7

is for most recent year available.

Source: WDI (2004).

Arabia for instance, the relatively low contraceptive prevalence rate corresponds to the nation’s high fertility rates in general. Maternal mortality ratio is the number of women who die from pregnancy-related causes during pregnancy and childbirth per 100 000 live births. As with most cause-specific mortality indicators, maternal mortality ratios are generally of unknown reliability. Measurement and survey time-lags can both introduce a high number of errors. Maternal mortality ratios shown as model estimates are regression estimates based on an exercise carried out by the World Health Organization, the United Nations


78

Middle east oil exporters

Children’s Fund and the United Nations Population Fund. Both the national estimates and model estimates can only be assumed to provide approximate guidance on a country’s state of maternal mortality.

5.11

HEALTH RISK FACTORS AND CHALLENGES

According to the WDI (2004), the prevalence of smoking has been declining in some high-income countries, but increasing in many developing countries. Tobacco use, with smoking being the most common form, causes numerous types of cancer, heart and other diseases. Given the long delay between the age when smoking is started to the onset of disease, the health impact of smoking in developing countries will increase rapidly in the next few decades. Syria, Tunisia and South Korea are among the countries with the highest overall rate of smoking (Table 5.14). On the whole, smoking is most prevalent in the out-of-region countries, followed by the in-region countries and the Middle East oil exporters. According to the World Bank, tuberculosis remains one of the main causes of death from a single infectious agent among adults in developing countries. The populations of Iraq, Morocco, Malaysia and South Korea seem particularly affected by tuberculosis, with incidences approaching or exceeding 100 per 100 000 people. HIV prevalence among adults is an indication of HIV infection in each country’s population. However, low incidences of HIV infection should not be construed as being suggestive of low health risk. Due to the data collection methodologies, concentrated incidences of HIV infections in certain localities or among specific population groups may not be reflected in the data. That said, the prevalence of HIV among adults is relatively low in the Middle East oil-exporting and in-region countries.8 It is slightly higher though in the out-of-region country group, especially for Malaysia and Chile.

5.12

MORTALITY

Infant mortality rate is the number of infants dying before reaching one year of age, per 1000 live births in a given year. Adult mortality rate is the probability of dying between the ages of 15 and 60, namely, the probability of a 15-year-old dying before reaching age 60, if subject to current agespecific mortality rates between ages 15 and 60. From Table 5.15, we see that mortality rates in the Middle East oilexporting countries are extremely varied. In Iraq, only about 90 percent of infants survive past the age of one while in Kuwait and the UAE more than


79

Physical and social indicators

Table 5.14

Health risk factors and future challenges Prevalence of smoking % of adults Male

Female

Incidence of tuberculosis per 100 000 people

% of adults

Prevalence of HIV % ages 15–24 Male

Female

Middle East oil exporters Iran 27 Iraq 40 Kuwait 30 Qatar .. Saudi Arabia 22 UAE 18

3 5 2 .. 1 1

29 167 26 .. 42 18

0.10 0.10 0.12 .. 0.01 0.18

0.05 .. .. .. .. ..

0.01 .. .. .. .. ..

In-region countries Egypt Jordan Morocco Syria Tunisia

35 48 35 51 62

2 10 2 10 8

29 5 114 44 23

0.10 0.10 0.10 0.01 0.04

.. .. .. .. ..

.. .. .. .. ..

Out-of-region countries Chile 26 Malaysia 49 Singapore 27 South Korea 65

18 4 3 5

18 95 43 91

0.30 0.40 0.20 0.10

0.35 0.70 0.14 0.03

0.13 0.12 0.16 0.01

Comparators High income Middle income Low income World

21 10 7 11

15 108 226 142

0.33 0.69 2.31 1.27

0.26 0.68 1.11 0.83

0.14 0.91 2.51 1.57

36 56 37 46

Note: data for prevalence of smoking, tuberculosis, and HIV as of 2000, 2002, and 2001, respectively. Source: WDI (2004).

99 percent of infants survive beyond the age of one. Similarly, the adult mortality rate in Iraq is high when compared to other countries within the Middle East oil-exporting countries. As noted before, Iraq is clearly a special case given its involvement in numerous conicts and wars. Mortality rates in the in-region countries are less dispersed, but comparable to the overall rates observed in the Middle East oil-exporting group of countries. Infant and adult mortality rates are 2.9 percent and 15.6 percent respectively. In contrast, the out-of-region countries have much lower


80

Middle east oil exporters

Table 5.15

Mortality Mortality Rate Infant per 1000 live births

Female per 1000 female adults

Male per 1000 male adults

34 102 9 11 23 8

139 208 68 121 116 93

170 258 100 173 181 143

In-region countries Egypt Jordan Morocco Syria Tunisia

33 27 39 23 21

147 144 113 132 99

210 199 174 170 169

Out-of-region countries Chile Malaysia Singapore South Korea

10 8 3 5

67 113 61 71

151 202 114 186

Comparators High income Middle income Low income World

5 30 79 55

66 128 259 166

128 211 310 234

Middle East oil exporters Iran Iraq Kuwait Qatar Saudi Arabia UAE

Note: Female and male adult mortality data as of 2000. Source: WDI (2004); Infant mortality data as of 2002.

infant and adult mortality rates of 0.7 percent and 12.1 percent respectively. Across all three country groupings, adult male mortality rates are higher than those for adult females.

5.13

SUMMARY

There is no doubt that social conditions have generally improved for the average person in the oil-exporting countries of the Middle East, with more


Physical and social indicators

81

significant advancement in the less populated (and richer in oil) countries – Kuwait, the UAE and Qatar. This average improvement for the more populated oil exporters, Iran and Iraq, is not significantly different than for the in-region countries that do not have big oil deposits. At the same time, neither the oil exporters as a group nor the in-region countries have done as well as the out-of-region countries, with Iraq as the worst performer of all. Looking at the oil exporters alone, there are some obvious implications. It is clear that devastating conflicts, specifically those in Iraq and Iran, have probably taken a huge toll. If a country has a very high level of oil revenues per capita, as do Kuwait and the UAE, then there are enough available resources to do almost everything, including satisfying reasonable social needs and allowing rulers to take what they want; even, as we shall see later, if economic policies are not what they should be. We should conclude by asking two critical questions: have the oil exporters followed Islam in developing their oil policies, and has oil helped or hurt the cause of social welfare in these countries? As we discussed in Chapter 3, Islam places great emphasis on providing the average citizen with their basic needs – food, healthcare, shelter and education – while avoiding significant income inequality. From the facts and our discussion it would appear that the richer group (Kuwait, Saudi Arabia, Qatar and the UAE) have succeeded in the areas of food, healthcare and shelter. Their achievements in education have been no better than the in-region countries and inferior to the out-of-region group. As far as income distribution is concerned, they have failed. Iran has done only marginally better than the in-region group in food, healthcare and shelter, and in education and income distribution Iran is in the same situation as the richer countries. Iraq has failed in every area. All in all, these oil-exporting countries have been no more Islamic than the in-region countries and, ironically, they have been less Islamic than the non-Islamic countries we have examined when it comes to the eradication of poverty, and improvements in education and income distribution. Because income distribution data is either unavailable or totally unreliable for the oil-exporting countries, we may have to substitute our Godgiven eyes to at least make a few anecdotal observations. There is significant and un-Islamic concentration of wealth and income in the oil-exporting countries. Yes, in the wealthier and more sparsely populated countries, there may be little or no poverty, but a small group control the lion’s share of income and wealth. There are lavish palaces and conspicuous consumption on the grandest of scales, while the lower classes have to worry about their normal human needs. But in the less rich and more densely populated Iran, the disparities among the rich in northern Tehran and the poor in southern Tehran and in rural areas are even starker, in the areas of housing,


82

Middle east oil exporters

medical care, personal appearance and foodstuffs in stores. The case of war-ravaged Iraq is the worst of all. Oil has clearly helped the richer oil exporters to improve social conditions in comparison to Iran and Iraq; these richer countries have such high oil revenues per capita that they would actively have to try to do harm in order to do worse than they have done. But even these richer countries have done worse with oil than have the out-of-region countries. In the case of Iran and Iraq, oil seems to have afforded them little benefit in comparison to our other groups. In fact, oil may have made the devastation of the Iraq–Iran War more significant because of the destructive weaponry that oil financed. In comparing the oil exporters to the in-region countries, and especially to the out-of-region countries, we see that other factors more than make up for the supposed benefits of oil. As we will see in upcoming chapters, policy, institutions, rule of law, absence of conflicts and stability are all critical in achieving sustained economic and social progress.

NOTES 1. We have adopted the country/regional grouping system as defined by the World Bank in their annual World Development Indicators (WDI) publication. 2. To get some perspective, a country (or region) growing at a constant annual net growth rate of 5 percent will double its population in roughly 15 years. In contrast, a constant annual net growth rate of 1 percent would imply population doubling every 70 years. 3. The United Nations Development Program, Human Development Report 1997. 4. This statement is generally true only for countries where the human development index was consistently available. 5. Economic Research Forum for the Arab Countries, Iran and Turkey, Economic Trends in the MENA Region, 2002. 6. The GINI index is a measure of income equality across the entire income distribution of the population group in question. A zero GINI value signifies perfect income equality, while a GINI value of 100 signifies perfect income inequality. 7. Literacy rate data for Iraq and South Korea are not available from the WDI 2004 databank. However, based on our judgement, we believe that literacy rates in Iraq and South Korea are comparable to their respective country groups. 8. Media reports in 2005 indicate that the prevalence of HIV is increasing rapidly, at least in Iran, largely because of heroin addiction.


6. Broad economic indicators and performance 6.1

INTRODUCTION

Over the past two to three decades, economic growth in the Middle East and North Africa (MENA)1 region has been anemic, and this despite the fact that the region commands nearly three-fourths of the world’s proven oil reserves and has earned vast oil revenues. Although macroeconomic stability has been more or less maintained over the past decade, the region, as a whole, has failed to generate high growth rates. This sub-par performance over the past 25 to 30 years becomes even more apparent when compared with the consistently high growth rates of other developing countries and other regions, particularly East Asia. The region has also largely missed the opportunity to integrate itself further into the global economy by failing to increase non-oil exports and to attract significant foreign direct investment (FDI) outside of the oil and gas sector. The countries in the region are diverse with fundamental differences in economic structure, most noticeably in the abundance (both in absolute and especially in per capita terms) of oil and gas from country to country. Additionally, there are differences in natural resources other than oil, variations in cultural heritage as well as language, and considerable disparities in education levels and per capita incomes. In the 1970s, annual real per capita GDP growth averaged 2.3 percent, exceeding that of developing countries as a group.2 In sharp contrast, however, between 1975 and 2002, real per capita GDP annual growth in the region stagnated to 0.1 percent, compared to average annual growth of 5.9 percent for East Asia and Pacific and 2.3 percent for all developing countries over the same period (Table 6.1). The absence of growth has been a cause of grave concern for policymakers because it exacerbates all other problems facing the region: high unemployment rates, expected rapid labor force growth well into the future, and burdensome social expenditures. During the 1980s and 1990s, the Middle East region’s overall weak growth performance primarily reflects the poor performance of the more populated oil-exporting countries (which overwhelm the regional average), whose economies have continued to remain heavily dependent on oil and are vulnerable to significant oil price fluctuations. 83


84

Middle east oil exporters

Table 6.1

Snapshot of economic performance 1975–2002

Country

GDP 2002 billions US$

MEOE region Iran Iraq Kuwait Qatar Saudi Arabia UAE

108.2 .. 35.4 17.5 188.5 71

PPP billions US$

GDP per capita 2002 US$

PPP 2002 US$

GDP per capita annual growth ratea % 1975–2002

483.3 1652 6690 .. .. .. 37.8 15 193 16 240 .. 28 634 .. 276.9 8612 12 650 .. 22 051 ..

GDP per capita PPP* US$ Highest Year of value highest during value 1975–2002

0.4 .. 1.2 .. 2.5 2.8

8290 .. 29 180 .. 23 980 47 490b

1976 .. 1975 .. 1977 1975

In-region countries Egypt 89.9 Jordan .. Morocco 36.1 Syria 20.8 Tunisia 21

252.6 .. 112.9 61.5 66.2

3810 .. 3810 3620 6760

2.8 .. 1.3 0.9 2.1

3810 .. 3810 3630 6760

2002 .. 2002 1998 2002

Out-of-region countries Chile 64.2 S. Korea 476.7 Malaysia 94.9 Singapore 87

153.1 4115 9820 807.3 10 006 16 950 221.7 3905 9120 100.1 20 886 24 020

4.1 6.1 4.0 5.0

9820 16 950 9280 24 650

2002 2002 2000 2000

Comparators Developing countries East Asia & Pacific South Asia OECD World

1354 .. 1218 1224 2149

6189.3 19 848.5

1264

4054

2.3

..

..

2562.6

1351

4768

5.9

..

..

757.1 3898.7 516 2658 26 298.9 28 491.5 22 987 24 904 31 927.2 48 151.1 5174 7804

2.4 2.0 1.3

.. .. ..

.. .. ..

9046.9

Notes: a. Growth rates calculated for HDR office by World Bank using least squares method; b. Data refers to period shorter than specified; * PPP is purchasing power parity. Source:

Human Development Report (2004); WDI (2004).

The trend in the oil-exporting countries (as opposed to MENA, that is, the Middle East and North Africa, as a region) shows negative growth rates in real GDP per capita for all the countries under consideration for the period 1975–2002 (Table 6.1). By comparison, growth in the in-region nonoil countries (namely, excluding Persian Gulf oil exporters within MENA)


Broad economic indicators and performance

85

was positive, albeit not as high as that in our group of out-of-region countries and in the East Asia and Pacific region. What is more striking is that the erosion of real GDP per capita incomes in the oil exporters is matched only by Sub-Saharan Africa, despite vastly differing natural resource endowments and other country characteristics. Also noteworthy is that, as to be expected, the highest real GDP per capita income for all the other regions under study, including in-region, out-of-region and other comparison groups, occurs in the 2000s or the late 1990s, indicating positive and ongoing growth; whereas the oil-exporting countries all record their highest GDP per capita levels in the period 1975–77. This was a time of high real oil prices, and these economies relied heavily on oil, as some of them continue to do even today. This rather extraordinary sub-par performance in per capita income is in contradiction to widely held notions that prosperity would be the natural birthright of oil-rich countries, in view of their possession of the twentieth century’s most valuable commodity.

6.2

GDP

The sharp increase in oil prices in the mid-1970s was a significant financial windfall for the oil-exporting countries of the Middle East. The jump in consumption, investment and growth had generally positive repercussions on living standards, with a salutary effect on the other economies in the region as trade flows, workers’ remittances and capital flows increased quickly and significantly. GDP growth rates were high because of higher oil revenues and government expenditures, which were almost entirely financed by oil revenues. Considerable financial assets were accumulated abroad as national savings exceeded domestic investment, especially for the richer oil-exporting countries. The region’s economic performance in the following 20 years weakened considerably, however, as growth rates declined and failed to generate the employment opportunities required by a rapidly expanding labor force. Unfortunately, a concomitant pace of structural reform did not accompany the transfer of wealth. None of these countries diversified their economies away from oil and thus they continue to remain heavily oil dependent (in contribution to GDP, exports or both). The region has also witnessed political upheavals and wars during this period, and these have directly and indirectly exacerbated their economic underperformance. GDP levels in 2000 (and earlier) for the Middle East oil exporters (MEOE)3 were low compared to most other regions of the world, including developing countries (Table 6.2). In fact, the combined economic output of the oil exporters in 1995 as well as in 2000 was less than that of a single East Asian country,


86

Table 6.2

Middle east oil exporters

GDP (billions current US$)

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE Total In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia Total Out-of-region countries Chile Korea, Rep. Malaysia Singapore Total Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income

1975

1980

1985

1990

1995

2000

49.55 16.09 12.02 2.51 46.53 9.92 136.63

92.66 47.56 28.64 7.83 164.31 29.63 370.63

179.81 44.20 21.45 6.15 103.90 27.02 382.53

120.40 48.66 18.43 7.36 116.78 34.13 345.76

87.38 .. 26.56 8.14 142.46 40.04 304.58

101.56 .. 37.02 17.76 188.69 70.25 415.29

11.44 1.36 8.98 6.83

22.91 3.96 18.82 13.06

34.69 5.12 12.87 16.40

43.13 4.02 25.82 12.31

60.16 6.73 32.99 11.40

99.43 8.47 33.33 18.04

4.33 32.94

8.74 67.50

8.41 77.49

12.29 97.57

17.99 129.26

19.47 178.74

7.23 21.13 9.89 5.67 43.92

27.57 62.21 24.94 11.72 126.44

16.49 93.46 31.77 17.69 159.41

30.32 252.62 44.02 36.90 363.87

65.22 489.26 88.83 83.93 727.24

75.52 461.52 90.16 91.47 718.67

249.95 ..

382.45 ..

528.94 ..

674.20 1 099.62

1 300.99 1 007.52

1 604.22 941.29

155.18

403.03

442.64

424.13

511.59

678.51

5 741.50 10 904.88 4 376.55 8 269.05 1 449.49 2 810.59

12 295.82 9 461.08 2 989.31

21 676.05 17 683.77 3 991.26

29 317.90 24 015.40 5 294.90

31 507.99 25 397.99 6 109.56

Source: WDI (2004).

namely, South Korea ($461.52 billion); whereas in 1975 the combined GDP of the oil exporters had been more than six times that of Korea. In terms of purchasing power parity (PPP), the relative (to Korea and others) performance of the oil exporters is somewhat better (see Appendix 2). In Figure 6.1 we see the trend in aggregate output by region. The sharp contrast between the East Asia and Pacific region and the out-of-region countries vis-à-vis the MENA region and the Middle East oil exporters in particular is clearly visible, despite starting from roughly the same base in


87

Broad economic indicators and performance 1800.00 MEOE countries In-region countries Out-of-region countries East Asia & Pacific MENA

1600.00 1400.00 US$ billions

1200.00 1000.00 800.00 600.00 400.00 200.00 0.00

1975

1980

1985

1990

1995

2000

Source: WDI (2004).

Figure 6.1

Aggregate GDP levels: regional comparison

1980. The in-region countries, whose aggregate output in 1980 was similar in level to that of the out-of-region countries, have not been able to achieve their potential. In 2000, the total output of the MEOE region was about 1.3 percent of world output (and accounting for 61.2 percent of the MENA4 region’s GDP), the in-region countries accounted for about 0.6 percent while the out-of-region countries by contrast, despite having a smaller land mass and population with no significant oil resources, comprised 2 percent. In PPP terms5 the same trend is apparent. There are also wide variations by sub-period and by country. The oilexporting countries had very high growth in GDP during the second half of the 1970s in tandem with the sharp increase in oil prices. The following years (1982–95) were years of negative growth for the oil exporters and were followed by return to modest average growth from 1995 onwards. In Figure 6.2 we see the extent to which the GDP of the oil exporters and oil prices are correlated.

6.3

GROWTH OF GDP

Over the period 1975–2000, real GDP growth in the Middle East oilexporting countries (excluding Qatar) averaged about 2.3 percent per


88 450.00

40.00

400.00

35.00

350.00

30.00

US$ bns

300.00

25.00

250.00 20.00 200.00 15.00

150.00

US$ per barrel

Middle east oil exporters

10.00

100.00

5.00

0.00

0.00 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

50.00

GDP-MEOE countries

Oil prices

Source: Federal Reserve Bank of St Louis and WDI (2004).

Figure 6.2

GDP & oil prices: MEOE region

annum, while world GDP grew by about 3.1 percent and that of East Asia and Pacific by 7.4 percent per annum (Table 6.3). In Figure 6.3 we illustrate this trend over time, showing the sub-par growth in the MEOE region. It is apparent that the out-of-region countries have grown much more rapidly, despite comparable starting levels in 1975. Both the in-region and MEOE region that constitute the MENA region (not every country) have posted lackluster growth. A worldwide regional comparison of growth also reveals a dismal picture. In the 1980s as well as the 1990s, the MENA region (the MEOE and in-region countries are subsets of this) as a whole posted 1.4 percent and 3.2 percent growth in GDP, and the corresponding averages for East Asia and Pacific were 7.5 percent and 7.3 percent, South Asia was 5.5 percent and 5.4 percent and the global average was 3.3 percent and 2.7 percent (Table 6.4). Country-by-country comparison of performance is helpful to understanding the particular differences across countries that may be glossed over in the averages. In Figure 6.4 we compare annual real GDP growth in the MEOE region by country to that of comparator countries and regions. GDP growth in most of the oil exporters over the past 25 years was significantly lower than comparable averages for the rest of the world. Iran averaged 1.9 percent growth over the period (1975–2000), Kuwait averaged –1.2 percent and Saudi Arabia 2.2 percent, all ranking much lower than any country in the comparator regions, including Chile, Malaysia, Korea and Singapore. These are significantly lower than the East Asia and Pacific


89

Broad economic indicators and performance

Table 6.3

GDP growth (average annual)

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE Average MEOEa In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia Average in-region Out-of-region countries Chile Korea, Rep. Malaysia Singapore Average outof-region Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income

1975– 80 (%)

1980– 85 (%)

1985– 90 (%)

1990– 95 (%)

1995– 2000 (%)

1975– 2000 (%)

1975– 2002 (%)

3.8 .. 1.1 .. 6.9 15.8 4.3

5.2 .. 4.6 .. 4.6 2.7 1.8

0.2 .. .. .. 3.4 2.4 0.6

4.5 .. .. .. 2.9 2.0 5.2

3.8 .. 0.7 .. 2.6 6.0 3.3

1.9 .. 1.2 .. 2.2 4.5 2.3

2.2 .. 1.0 .. 2.1 4.4 2.3

9.8 15.8 5.5 6.7

6.7 5.2 3.3 2.9

4.2 1.1 4.4 1.5

3.4 7.1 0.9 8.0

5.3 3.1 3.6 2.4

5.9 5.9 3.5 4.3

5.7 5.8 3.6 4.3

6.3 7.9

4.2 5.0

2.9 3.6

3.9 3.3

5.6 4.5

4.6 4.9

4.5 4.8

7.3 6.9 8.5 8.5 7.3

0.9 7.8 5.1 6.4 6.5

6.7 9.5 6.9 8.4 8.8

8.7 7.5 9.5 9.0 8.0

4.3 4.9 4.7 6.3 5.0

5.5 7.3 6.9 7.7 7.1

5.3 7.1 6.6 7.1 6.8

7.0 ..

7.0 ..

7.6 ..

9.8 5.7

5.7 2.6

7.4 ..

7.3 ..

4.5

1.3

2.3

3.3

3.5

3.0

3.0

3.8 3.6

2.5 2.6

3.7 3.7

2.1 2.1

3.1 3.0

3.1 3.0

2.9 2.9

Notes: Growth rates are author’s calculations using the constant 1995 US$ GDP series and the geometric end point method as indicated in Appendix 1; a MEOE regional average does not include Qatar and Iraq. Source: WDI (2004).


90

Middle east oil exporters 1975 2000

1800.00 1600.00 USD billions

1400.00 1200.00 1000.00 800.00 600.00 400.00 200.00 0.00 MEOE

In-region

Out-ofregion

East Asia & Pacific

MENA

Source: WDI (2004).

Figure 6.3 Table 6.4

GDP aggregates: comparison by region Comparison of GDP growth rates by region GDP average annual % growth

Low income Middle income East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa High income World

1980–90

1990–2002

4.7 2.9 7.5 .. 1.7 1.4 5.5 1.6 3.3 3.3

4.3 3.2 7.3 0.5 2.9 3.2 5.4 2.6 2.5 2.7

Source: HDR (2004); WDI (2004).

regional composite, the world average, and also the low- and middleincome countries’ average of 3.6 percent (Table 6.3). The UAE is the single exception with 4.7 percent GDP growth over the same period, ranking it marginally higher (Table 6.5). The in-region (non-oil) countries by contrast have performed better, with Egypt and Jordan leading with 6.1 percent and 6.3 percent respectively.


91

Broad economic indicators and performance

Avg annual % growth

20.0% 15.0% 10.0% 5.0% 0.0% 5.0%

1975–80

1980–85

1985–90

1990–95

1995–00

10.0% Iran

Kuwait

S. Korea

Saudi Arabia

East Asia & Pacific

UAE

Low & Middle income

Note: Growth rates are computed as geometric end point rates. Source: Author’s calculations; WDI (2004).

Figure 6.4

GDP growth (average annual): MEOE by comparison

From Figure 6.5, namely, the trend in GDP over the entire period, we can glean two important facts: economic growth for the oil exporters is lower and is considerably more volatile than in other regions and comparator countries, especially in the 1980s. This volatile pattern of growth has material consequences for economic management. Volatile oil revenues result in volatile government revenues and expenditures. A prime vehicle to offset fluctuating oil revenues is through mechanisms such as an Oil Stabilization Fund, that is, to set revenues aside (usually invested in high-quality liquid foreign assets) in times of high oil prices to be drawn down in times of low prices. A number of oil-exporting countries in the region have adopted such a vehicle, most recently Iran. There is a temptation, as in the case of Iran, however, for politicians to spend even when oil prices are high and to tap into the fund when it suits their political goals.

6.4

GDP PER CAPITA

For the MENA region as a whole, per capita GDP decreased by 1 percent per annum in the 1980s,6 a rate worse than that of any region except SubSaharan Africa. In the 1990s, when there was rapid growth elsewhere in the world, the MENA region reported an average growth of about 1 percent per annum (Table 6.5).


92

Table 6.5

Middle east oil exporters

Comparison of growth in GDP per capita: regional groups Average annual GDP per capita growth rate % 1975–2002

Developing countries Least developed countries Arab States Select Middle East groupings:a MEOE In-region Out-of-region East Asia & Pacific Latin America & the Caribbean South Asia Sub-Saharan Africa Central & Eastern Europe & CIS OECD High income OECD High income Middle income Low income World

1990–2002

2.3 0.5 0.1

2.8 1.4 1.0

2.6b 1.8 4.7 5.9 0.7 2.4 0.8 1.5 2.0 2.1

3.9c 2.1 4.2 5.4 1.3 3.2 NA 0.9 1.7 1.7

2.1 1.4 2.2* 1.3

1.7 2.0 2.3* 1.2

Notes: a Author’s calculations; b excludes Iraq and Qatar and represents rate from 1975–98; c represents growth from 1990–98. Source: HDR (2004).

Real GDP per capita income in the Middle East oil-exporting economies (MEOE) during the past 25 years has stagnated or has been negative. When compared to the rest of the developing world, this poor performance takes on even more meaning: the East Asia region in the same time recorded a growth rate of 5.9 percent; the developing countries’ average was 2.3 percent; and the world average was 1.3 percent; this implies a steady decline in relative living standards for the oil exporters. In part, this reflected the extended weakness in the oil market; however, populations in the Middle East have also burgeoned without resulting increases in output; economic and financial policies have been misguided, with oil revenues used to finance indiscriminate subsidies to buy loyalty, as opposed to being used to promote economic liberalization, reforms and investment in all areas including education and health. Last, but not least, instability and conflicts


93

77

19

79

Iran UAE

19

GDP growth

WDI (2004).

Figure 6.5

Source:

–60

–40

75 19 –20

0

20

40

60

19

81

83

19

87

19

89

19

Iraq East Asia & Pacific

85

19

91

19

Kuwait World

93 19

95 19

99 19

Saudi Arabia

97 19


94

Middle east oil exporters

have taken a heavy economic and financial toll. In turn, economic stagnation on such a scale can be expected to fuel further instability and unrest. Within the selective set of Middle East countries, there are significant and striking differences between the oil-exporting countries and the nonoil in-region countries. The oil exporters are the high-income countries within the region, with the range of per capita incomes clearly higher than the in-region countries. This was true in the 1970s and is also true in the 1990s with a few exceptions such as Tunisia, which has increased its per capita income level to $5754 (PPP) in 2000, a level higher than that of Iran and Iraq. Per capita income in the oil-exporting countries decreased by about 2.6 percent per annum over the period 1970–2002, contrasted with an increase of 1.8 percent per annum for the in-region countries. Significantly higher rates of population growth in the oil exporters, among other things, also contributed to the lower growth in per capita incomes. In-region countries have enjoyed positive, albeit low growth rates for the whole period, mirroring those of developing countries in the 1970s and 1980s (Figures 6.6 and 6.7). In the past 50 years or so, the development experience across the varied regions of the globe reveals that developing countries, on average, have found it easier to initiate growth than to sustain it. In this regard, the experience of the oil exporters is not unique; what is unique in the case of the oil exporters is the volatility of their growth rates and the size of the growth differential (in the negative) in comparison to other developing countries. The real per capita GDP growth rate has been twice as volatile for oilexporting countries in the Middle East region as for the non-oil in-region economies. Of greater concern is the region’s negative growth in per capita GDP during the past 25 years, a period when all other developing countries grew at an average of 2.3 percent per annum. During the 1990s, however, economic performance has improved in the region; the MEOE region (excluding Qatar and Iraq) has posted roughly 3.9 percent growth in per capita GDP. Still, major consequences of this poor performance are the persistently high unemployment rates and deteriorating living standards, both of which are contributing to and reinforced by high population growth rates and the attendant burgeoning labor force. The weak integration of the region into the world’s economy may have also contributed to low growth rates. High oil revenues in the oil-exporting countries have had a negative effect on growth; they have contributed to an appreciation of the real exchange rate by making non-oil exports less competitive (see Chapter 8). Sub-par economic performance, the absence of effective institutions (Chapter 11) and the ensuing instability have in turn had an adverse effect on FDI inflows into the non-oil sector (see Chapter 10). While thoughtful economic policies and the political will to implement


95

Broad economic indicators and performance

Table 6.6

Real GDP per capita (1995 US$) 1975

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

1980

1985

1990

1995

2000

1 969.64

1 379.84

1 476.63

1 291.28

1 482.24

1 657.75

.. 20 255.15 .. 13 021.23 35 097.69

.. 15 695.79 .. 14 076.37 35 398.43

.. 9957.33 .. 8 441.11 23 358.87

.. .. .. 7 826.91 19 634.09

.. 14 738.24 .. 7 825.20 17 105.33

.. 12 586.45 .. 7 803.82 19 049.57

516.17 1 041.24 956.06 609.03

731.40 1 797.89 1 113.93 719.40

890.33 1 911.56 1 172.71 695.39

970.89 1 505.82 1 310.43 641.62

1 034.02 1 603.74 1 250.14 801.40

1 216.65 1 606.39 1 369.46 792.82

1 373.45

1 640.85

1 771.73

1 823.32

2 007.93

2 469.42

Out-of-region countries Chile 2 024.23 Korea, Rep. 3022.93 Malaysia 1 712.15 Singapore 7 874.84

2 665.03 3 910.29 2 297.11 11 093.96

2 577.40 5 322.18 2 586.66 13 332.30

3 282.60 7 967.39 3 104.02 17 898.41

4 589.43 10 849.97 4 310.16 23 803.58

5 304.55 13 198.77 4 808.07 28 295.32

297.20

385.28

510.53

761.50

948.74

..

2 895.38

2 131.30

2 410.10

In-region countries Egypt Jordan Morocco Syrian Arab Republic Tunisia

Comparators East Asia & PaciďŹ c Europe & Central Asia Middle East & North Africa World High income Low & Middle income

229.40 ..

..

1933.92

2072.15

1885.56

1816.08

1898.82

2049.52

3 969.20 16 643.15 851.29

4 383.72 19 142.43 981.10

4 566.22 21 032.92 1001.75

5 018.64 24 420.84 1070.61

5 181.52 26 095.04 1116.53

5 654.49 29 167.02 1253.38

Source: WDI (2004).

these policies could have mitigated these adverse developments, such policies have not been forthcoming (see Chapters 13 and 14).

6.5

STRUCTURE OF OUTPUT

Traditionally, the role of agriculture in the MEOE region has been negligible with the exception of Iran (Table 6.8). This is no doubt due to the terrain, climatic conditions and the generally rugged and desert


96

1975–80

In-region average

World

Saudi Arabia

UAE

East Asia

1995–00

Out-of-region average

1990–95

Kuwait

1985–90

Iran

1980–85

Comparison of per capita GDP growth: 1975–2002 (average annual)

WDI (2004).

Figure 6.6

Source:

–15.0%

–10.0%

–5.0%

0.0%

5.0%

10.0%


97

Broad economic indicators and performance

Table 6.7

GDP per capita growth (average annual) 1975– 80 (%)

1980– 85 (%)

MEOE region Iran, Islamic 6.9 1.5 Rep. Iraq Kuwait 6.7 9.4 Qatar Saudi Arabia 1.4 11.4 UAE 0.6 8.1 Average MEOEa 2.11 8.51 In-region countries Egypt 8.2 4.7 Jordan 12.0 1.8 Morocco 3.4 1.6 Syrian Arab 3.4 0.5 Republic Tunisia 3.7 1.7 Average in-region 6.11 1.81 Out-of-region countries Chile 5.6 1.3 Korea, Rep. 5.5 6.5 Malaysia 6.2 3.2 Singapore 8.2 2.2 Average out-of6.71 3.11 region Comparators East Asia & 5.1 6.1 Pacific Europe & Central Asia Middle East & 0.8 0.1 North Africa World 2.1 1.2 High income 2.8 1.9 Low & middle 2.6 1.5 income

1985– 90 (%)

1990– 95 (%)

1995– 2000 (%)

1975– 2000 (%)

1975– 2002 (%)

2.7

3.0

2.2

0.7

0.42

3.1

2.3

1.22

0.3

2.1

0.9 3.6 7.11

0.9 4.0 6.51

9.41

2.6c1

2.52 2.8b1 4.01

0.3 3.9 2.0 0.4

0.7 1.0 0.9 3.6

3.2 0.7 1.6 1.0

3.4 1.9 1.5 1.4

2.8 1.91 1.32 0.92

0.4 0.51

2.3 1.41

4.2 2.01

2.4 2.11

2.12 2.11

3.4 7.8 3.1 6.2 5.61

6.6 6.4 6.9 5.9 6.31

2.7 4.0 3.0 4.1 3.71

3.9 6.0 4.5 5.3 5.11

4.12 6.12 4.02 5.02 4.71

5.8

8.8

5.3

6.2

5.92

6.5

2.2

0.9

0.9

1.6

0.4

0.62

1.8 2.8 1.7

1.0 1.3 1.4

2.3 2.5 3.0

1.7 2.3 2.0

1.32 2.1 2.1

Notes: a excludes Iraq and Qatar; b 1975–98; c 1975–98; 2 indicate HDR figures (calculated for HDR by World Bank, see Table 6.1); 1 based on author’s calculations. Source: Author’s calculations using GDP per capita PPP (constant 1995 US$) series.


98

Middle east oil exporters 10.0

8.0

%

6.0

4.0

2.0

0.0 1975–80

1980–85

1985–90

1990–95

1995–00

–2.0 East Asia & Pacific MENA World High income Low & Middle income Source: WDI (2004).

Figure 6.7

GDP per capita growth: comparators (average annual)

environment. Consequently, with the exception of Iran, the contribution of agriculture to GDP is not significant in these countries. The contribution of agriculture to GDP has been declining the world over, as economies industrialize and engage in higher value-added manufacturing and in services. The oil industry in the MEOE region overshadows other industries and agriculture, thus the contribution of industry (which includes the oil sector) to GDP is significant. The contribution of industry over the period 1975–2000 declined to almost half its 1975 levels by 1990; in the late 1990s there was modest growth when the oil market picked up. The bulk of this reduction in industry has been absorbed by services as the role of government (employer of last resort) has increased to absorb the growing labor force. For the in-region countries, there has been a decline in the contribution of agriculture, with the exception of Syria, where the contribution of agriculture increased in 1990 to 28.29 percent from 20 percent in 1975 and then


Broad economic indicators and performance

99

decreased to 22 percent in 2000. Industry has increased for all countries from 1975 levels. Services, which include the government or public sector, have increased in all countries with the exception of Tunisia.

6.6

CONSUMPTION

Final consumption expenditure, also referred to as total consumption, is the sum of household, or private, final consumption expenditure and general government final consumption expenditure (Table 6.8). Since the 1980s, the MENA region’s overall consumption has grown in line with world averages. East Asia and Pacific by comparison are lower than the world, high-income, and low- and middle-income averages. There is reasonable convergence in the global average as well as in the high-income and low- and middle-income averages. Household consumption expenditure in the MEOE region is on average a lower share of GDP than corresponding levels in the in-region countries as well as in the out-of region comparators (Table 6.10). There is a great deal of variation by country and by sub-period. From comparatively lower levels in 1975, private consumption has increased in many of these countries, albeit with significant fluctuation. Of the out-of-region countries, Singapore’s private consumption expenditure has declined since 1975 to levels of about 41 percent of GDP in 2000. On average, the out-of-region countries display a declining trend in private consumption expenditure. The in-region countries, while they are at higher levels than those of the out-of-region and other comparator groups, display much less volatility in household expenditure. Government consumption for the oil exporters is much higher than the corresponding figures for comparator countries (Table 6.11). Oil is a significant part of these economies; oil revenues accrue to governments; and the governments spend these revenues to keep the population satisfied and to protect their own rule. Again there is a great deal of variation by country and sub-period. Iran stood at much higher levels in 1975 (24 percent as compared to 16 percent for the world average and 9 percent for East Asia and Pacific), but has steadily declined from then to about 14 percent in 2000, which is lower than the world average of 17 percent in 2000. Saudi Arabia on the other hand, was in line with the world average until 1985 when it increased by a huge margin to 36 percent (at a time when oil revenues and GDP declined but the government maintained its expenditures); from then it has declined to 26 percent in 2000, still much higher than the world average. Kuwait, which in 1975 started out with 11 percent, much lower than the world average, doubled to 22 percent in 1985, further increased to


100 63

58

62 53

Out-of-region countries Chile Korea, Rep. 61 62

79 75 62 59

50 75* 56 16* 37 50**

73 74 65 69

62 50* 57 28* 47 39

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

2002

10 10

16

11 25 15 14

11 26* 39 33* 29 16

1990

12 11

16

10 23 20 11

13 17* 26 20* 26 16**

2002

% of GDP

% of GDP

1990

General government ďŹ nal consumption expenditure

Household ďŹ nal consumption expenditure

Table 6.8 Structure of demand: overall comparison

25 38

32

29 32 25 17

29 23* 18 18* 15 20

1990

23 26

25

17 23 23 22

35 10* 9 23* 20 23**

2002

% of GDP

Gross capital formation

35 29

44

20 62 26 28

22 18* 45 53* 41 65

1990

36 40

45

16 46 32 37

31 14* 48 66* 41 75**

2002

% of GDP

Exports of goods and services

31 30

51

33 93 32 28

24 18* 58 32* 32 40

1990

32 39

49

23 67 37 28

29 13* 40 24* 23 65**

2002

% of GDP

Imports of goods and services

28 37

25

16 1 19 17

27 .. 4 .. 24 45

1990

27 27

21

10 3 18 30

37 .. 18 .. 37 31**

2002

% of GDP

Gross domestic savings


101

Source:

53 63 64 59

59 59 61

61

55

59

51

44 42

54

52 47

17 17 14

20

18

11

14 10

17 18 15

18

16

12

14 13

24 24 25

23

28

34

32 36

20 19 23

23

21

32

24 21

19 19 20

31

23

25

75 ..

24 22 31

34

40

41

114 4**

19 19 19

33

24

24

72 ..

23 22 28

29

38

37

97 2**

24 24 25

21

26

34

34 43

20 19 26

29

23

37

42 45

WDI (2004); * United Nations Statistical Division, National Accounts Main Aggregates Database; ** Relevant IMF country reports.

Comparators East Asia & PaciďŹ c Europe & Central Asia Middle East & North Africa World High income Low & middle income

Malaysia Singapore


102

Table 6.9

Middle east oil exporters

Consumption expenditure as a percentage of GDP

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt Jordan Morocco Syrian Arab Republic Tunisia Out-of-region countries Chile Korea, Rep. Malaysia Singapore Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income

1975

1980

1985

1990

1995

2000

66 56* 33 44* 31 24

74 38* 42 35* 41 28

79 81* 70 60* 85 47

73 77* 96 61* 76 55

77 97* 74 64 71 64

61 90* 66 35* 63 59*

88 120* 85 86

85 108 86 88

85 115 82 87

84 99 81 83

88 88 86 80

88 105 83 73

74

76

76

75

79

76

85 80 77 71

83 76 70 62

80 69 70 59

72 63 66 57

72 64 60 50

77 69 53 52

72 ..

67 ..

70 ..

66 74

62 76

65 74

60

63

81

79

78

70

76 76 75

76 76 74

77 77 76

76 76 75

77 77 75

77 78 75

Source: WDI (2004); * United Nations Statistical Division, National Accounts Main Aggregates Database; ** Relevant IMF country reports.

39 percent in 1990 and has since declined to 22 percent, which is still much higher than the world average. The UAE, which displays the same trend as Kuwait and Saudi Arabia, increased more or less in line with world averages. Broadly speaking, the high share of government expenditure in GDP and its variability are explained by oil revenues and their fluctuation. Almost all the out-of-region countries have a consumption expenditure that is on average less than the world average; and figures for the East Asia and Pacific region are significantly lower than the world average.


103

Broad economic indicators and performance

Table 6.10

Household consumption as a percentage of GDP

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

1975

1980

1985

1990

1995

2000

42 35* 22 23* 15 16

53 23* 31 16* 22 17

64 52* 48 25* 51 27

62 50* 57 28* 47 39

64 75* 41 32* 47 47

47 74* 44 15* 37 44**

In-region countries Egypt Jordan Morocco Syrian Arab Republic Tunisia

63 83* 69 65

69 79 68 65

68 89 66 64

73 74 65 69

77 65 69 66

79 81 63 62

59

62

59

58

62

61

Out-of-region countries Chile Korea, Rep. Malaysia Singapore

69 69 60 60

71 64 54 52

67 59 55 45

62 53 52 47

63 55 48 41

65 59 42 41

63 ..

54 ..

56 ..

54 55

51 59

53 58

39

44

58

59

61

51

60 59 64

59 59 62

60 59 63

59 59 61

60 60 60

61 61 60

Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income

Source: WDI (2004); * United Nations Statistical Division, National Accounts Main Aggregates Database; ** Relevant IMF country reports.

6.7

INVESTMENT

Between 1975 and 2000, investment7 levels in the oil exporting countries declined and were, on average, lower and more volatile than investment levels in the East Asia and the Pacific region (see Table 6.12 and Figures 6.8–6.11). Investment levels for Iran were the highest and averaged in the 20–30 percent range over the period; Saudi Arabia was lower in the


104

Middle east oil exporters

Table 6.11 General government consumption expenditure as a percentage of GDP

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt Jordan Morocco Syrian Arab Republic Tunisia Out-of-region countries Chile Korea, Rep. Malaysia Singapore Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income

1975

1980

1985

1990

1995

2000

24 21* 11 21* 18 8

21 15* 11 20* 16 11

15 29* 22 35* 36 20

11 26* 39 33* 29 16

13 22* 33 32* 24 17

14 16* 22 20* 26 17*

25 37* 16 21

16 29 18 23

17 26 16 24

11 25 15 14

11 24 17 13

10 24 19 11

15

14

17

16

17

16

16 11 17 11

12 12 16 10

13 10 15 14

10 10 14 10

10 10 12 9

11 10 10 11

9 ..

13 ..

13 ..

11 18

11 17

12 16

20

18

24

20

18

18

16 17 11

16 17 12

17 18 13

17 17 14

17 17 14

17 17 15

Source: WDI (2004); * United Nations Statistical Division, National Accounts Main Aggregates Database; ** Relevant IMF country reports.

15–22 percent range and Kuwait still lower in the 10–20 percent range. The differences across the three countries are to be expected. Iran has a relatively large population (with higher domestic absorptive capacity) and must generate domestic economic growth, while Kuwait has large oil revenues per capita and a small population, resulting in a much lower domestic absorptive capacity than Iran. Kuwait should thus invest its surplus oil revenues abroad to generate future income as oil is depleted.


105

Broad economic indicators and performance

Table 6.12

Investment1 as a percentage of GDP

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt Jordan Morocco Syrian Arab Republic Tunisia Out-of-region countries Chile Korea, Rep. Malaysia Singapore Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income Note:

1

1975

1980

1985

1990

1995

2000

24 35* 13 24* 17 31

30 30* 14 17* 23 28

21 24* 19 18* 21 25

29 23* 18 18* 15 20

20 3* 15 35 20 29

27 11* 8 20* 19 23*

33 27* 25 27

28 37 24 30

27 21 27 26

29 32 25 17

17 33 21 27

18 22 24 19

28

29

30

32

25

27

17 29 23 40

21 32 27 46

17 30 25 43

25 38 32 36

26 37 44 34

22 28 27 32

28 ..

32 ..

33 ..

34 28

38 25

30 22

27

27

25

23

21

21

24 24 26

25 25 26

23 23 24

24 24 25

23 22 26

22 22 23

Gross capital formation – includes fixed assets plus changes to inventory.

Source: WDI (2004); * United Nations Statistical Division, National Accounts Main Aggregates Database; ** Relevant IMF country reports.

While investment for these countries displays a high degree of volatility, the UAE declined more gradually, from about 32 percent in 1975 to 20 percent in 1990. Investment in most countries climbed back modestly in the late 1990s, with the exception of Kuwait. The in-region countries also saw a decline in investment, but with less volatility than in the MEOE region. Tunisia was the exception; its investment levels climbed through


106

Middle east oil exporters 40 35

% of GDP

30 25 20 15 10 5 0 1975

1980 Iran East Asia

1985 Kuwait MENA

1990

1995

2000

Saudi Arabia World

UAE

Source: WDI (2004).

Figure 6.8

Investment in MEOE region with select comparators

the 1980s and have remained mostly within the range of 25–30 percent. Among the out-of-region countries, Korea and Singapore have had very high levels of investment over the period (Figure 6.8). The East Asia and Pacific region has also had a comparatively higher level of investment and also a steadier increase. Investment levels for the MEOE region fell even below the low- and middle-income countries’ average in some years during the 1980s. While rates of investment are important, the efficiency of such investment is critical. On a global scale, the correlation between the rate of economic growth and investment efficiency is significant. As a whole, the MENA region saw investment declining in the 1980s, with variations in volatility by country and sub-period, but as output declined even more, productivity also declined (Figure 6.11), indicating weak investment efficiency of physical capital. The East Asia and Pacific region outstrips the MEOE region and indeed even the whole MENA region in terms of investment efficiency.

6.8

SAVINGS

Savings rates in the MENA region also display high volatilities; from extraordinarily high levels in 1975 savings dipped to very low levels in the 1980s and were below the world average. In the latter half of the 1990s, as


107

1977

1981

1979

Iran East Asia & Pacific

1987

1985 Kuwait High income

1993

1991

Saudi Arabia Low & Middle income

1995

1989

1983

Investment as a percentage of GDP: MEOE with select comparators (1975–2000)

WDI (2004).

1975

Figure 6.9

Source:

0

5

10

15

20

25

30

35

40

45

UAE

1999

1997


108

Middle east oil exporters 140 120

80 60 40 20 0 19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99

% annual growth

100

–20 –40 –60

Iran

Kuwait

UAE

East Asia & Pacific

Source: WDI (2004).

Figure 6.10

Growth in investment: MEOE with select comparators

oil prices recovered, there were significant increases in savings in the MEOE region to levels that were much higher than the in-region countries, out-of-region countries and other comparator groups (Table 6.13, Figure 6.12 and Appendix 2). With the exception of Chile, the other outof-region countries all have higher savings levels than the in-region countries. In general, savings in the oil-exporting countries tend to be higher than in-region countries; this is as it should be (see Chapter 2) because these countries need to save from current oil revenues to compensate for oil depletion.

6.9

EXPORTS

Exports are a major component of GDP in oil-exporting countries because of oil (Table 6.14). Oil (and increasingly gas, especially for Qatar and for Iran in the future) has dominated the export sector of all exporting countries (Table 6.15). Non-oil exports play a minor role not only because oil exports are so large but also because governments have failed to diversify their economies away from oil (Table 6.16). While politicians in a number of oil-exporting countries say that there is little they can export besides oil and oil products, by definition they have a comparative advantage in something. These areas of comparative advantage will develop over time only if supportive policies are adopted.


109

GDP growth

Investment (% of GDP)

MENA region: investment vs. output

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20

0

2

4

6

8

10

12

WDI (2004).

Figure 6.11

Source:

GDP growth %

GDP growth %

16 GDP growth Investment (% of GDP) 14 12 10 8 6 4 2 0 –2 975 976 977 978 979 980 981 982 983 84 985 986 987 988 989 990 991 992 93 994 995 996 997 998 999 000 1 1 1 1 1 1 1 1 1 19 1 1 1 1 1 1 1 1 19 1 1 1 1 1 1 2 –4 45 40 35 30 25 20 15 10 5 0

0

5

10

15

20

25

30

35 Investment (% of GDP) Investment (% of GDP)


110

Middle east oil exporters

Table 6.13

Gross national savings1 as a percentage of GDP

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt Jordan Morocco Syrian Arab Republic Tunisia Out-of-region countries Chile Korea, Rep. Malaysia Singapore Comparators East Asia & PaciďŹ c Europe & Central Asia Middle East & North Africa World High income Low & middle income Note:

1 Gross

1975

1980

1985

1990

1995

2000

.. .. 65 .. 60 69*

27 .. 69 .. 53 66*

21 .. 44 .. 17 50*

28 .. 17 .. 18 ..

22 .. 39 26** 20 36**

39 .. 47 .. 29 41

.. .. 20 ..

21 44 17 28

14 14 21 22

26 22 25 14

19 29 17 23

17 21 22 23

..

25

24

29

20

23

11 .. 20 30

14 23 26 33

8 29 23 43

23 37 30 45

24 35 34 52

21 31 37 47

.. ..

.. ..

29 ..

34 ..

36 24

33 26

..

37

20

23

19

28

21 20 ..

23 23 ..

22 22 22

23 23 24

22 22 25

23 22 24

national savings – includes net current transfer.

Source: WDI (2004); * Askari (1990); ** Relevant IMF country reports.

6.10

SUMMARY

In terms of broad economic performance, it is evident that the oil exporters have generally failed. Their GDP growth has been far lower than highperforming countries outside of the region, lower than the in-region nonoil countries, lower than the middle-income and low-income countries and


111

1975

East Asia & Pacific

UAE

World

1995 Saudi Arabia

1990

Kuwait

1985

Iran

1980

Savings (gross domestic) as a percentage of GDP: MEOE countries with select comparators

WDI (2004).

0

10

20

30

40

50

60

70

80

Figure 6.12

Source:

% of GDP

2000


112

Table 6.14

Middle east oil exporters

Exports as a percentage of GDP

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

1975

1980

1985

1990

1995

2000

43 51* 80 63* 74 74

13 63* 78 74* 64 78

8 24* 54 51* 30 59

22 18* 45 53* 41 65

21 2* 54 44 38 74

25 15* 58 67* 44 50**

In-region countries Egypt Jordan Morocco Syrian Arab Republic Tunisia

20 30* 22 22

31 40 17 19

20 39 25 13

20 62 26 28

22 52 27 31

16 42 31 38

31

40

32

44

45

44

Out-of-region countries Chile Korea, Rep. Malaysia Singapore

25 27 43 ..

23 33 57 ..

28 33 54 ..

35 29 75 ..

31 30 94 ..

30 45 125 ..

13 ..

18 ..

17 ..

25 23

32 32

42 44

47

39

23

31

30

34

17 17 15

19 19 17

19 20 17

19 19 20

21 21 24

25 24 30

Comparators East Asia & PaciďŹ c Europe & Central Asia Middle East & North Africa World High income Low & middle income

Source: WDI (2004); * United Nations Statistical Division, National Accounts Main Aggregates Database; ** Relevant IMF country reports.

even lower than the world average. Their anemic growth has been more volatile than that of any other country group because of their continuing heavy dependence on oil and a number of other related factors. Their performance in per capita GDP has been even worse when compared to any other country groupings because of their misguided policy of rapid population growth in the 1970s and 1980s. Their economies continue to be heavily dependent on oil.


113

Broad economic indicators and performance

Table 6.15

Fuel exports as a percentage of exports: MEOE region

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt Jordan Morocco Syrian Arab Republic Tunisia Out-of-region countries Chile Korea, Rep. Malaysia Singapore Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income

1975

1980

1985

1990

1995

2000

97 34 92 97 99 ..

.. .. 89 .. 99 ..

.. .. .. .. 96 6

.. .. 93 84 92 5

.. .. 95 82 88 ..

89 .. .. 91 92 94

9 1 1 70

64 0 5 79

68 0 4 74

29 .. 4 45

37 0 2 63

42 0 4 76

44

52

42

17

8

12

1 2 11 34

1 0 25 25

0 3 32 27

1 1 18 18

0 2 7 7

1 5 10 10

.. ..

.. ..

.. ..

14 ..

7 ..

8 24

86

87

79

79

73

79

9 6

10 7

11 8

8 5

6 4

9 5

Source: WDI (2004).

At first glance, the dismal economic growth performance of the oil exporters may be attributed to low rates of investment and savings, low investment quality, ineffective institutions (see Chapter 11) and misguided policies such as the indiscriminate subsidies to buy loyalty and inconsequential diversification away from oil. But there is much more in the area of policy and institutional shortfalls (see Chapters 13 and 14). There is also the impact of conflicts and instability. The adverse economic effects of wars may have more than offset oil revenues, as in the case of the Iraq–Iran War (see Chapter 12). In the case of Kuwait, its annexation may have erased many years of economic progress. Military expenditures and related


114

Table 6.16

Middle east oil exporters

Manufactured exports as a percentage of merchandise exports

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt Jordan Morocco Syrian Arab Republic Tunisia Out-of-region countries Chile Korea, Rep. Malaysia Singapore Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income

1975

1980

1985

1990

1995

2000

1.2 15.3 8 2.6 0.6 ..

3.2* 0.41* 10.4 .. 0.6 2.9*

2.0* 0.96* 9.5* .. 3.2 5.6*

3.5* 1.5* 6.4 15.7 7.1 12.1*

8* 1* 4.7 17.5 10.9 21.6*

7.3 0.08* .. 8.6 7.1 13*

34.1 20 12.5 7.8

10.9 33.8 23.5 6.6

10.1 43.3 40.5 12.1

42.5 50.7 52.3 35.7

40.4 48.7 51.4 17.4

38.4 69 64.1 7.8

19.6

35.7

44.5

69.1

79.4

77

10 81.4 17.3 41.5

9.1 89.5 18.8 46.7

6.9 91.3 27.2 51.2

11.3 93.5 53.8 71.7

13.5 93.3 74.7 83.9

16.2 90.7 80.4 85.6

.. ..

.. ..

.. ..

59.4 ..

73.6 ..

79.8 55.4

4

6.1

12.3

15.3

18.9

15.8

66.2 74.2 ..

66.5 73.6 ..

69.2 75.5 ..

74.2 79.2 48.3

76.8 80.6 58.9

77.1 81.9 58

Source: WDI (2004); *Calculations from the WTO Time Series Statistics Database.

payments (such as to the allies in the First Persian Gulf War and to support Iraq in the Iran–Iraq War) caused a big dent in Saudi Arabia’s oil revenues and foreign-held assets. While these factors may all have contributed in different degrees to the dismal economic performance of oil-exporting countries, Islam cannot be blamed. Islamic teachings stress peaceful coexistence, and the importance of economic prosperity for a flourishing ummah. At least as far as economic growth is concerned, the governments


Broad economic indicators and performance

115

and the rulers in the region have failed Islam by not achieving sustained economic growth comparable to other countries around the world, and that with or without oil. Islam stresses the fact that economic failure may cause problems for the faith and cannot be tolerated. Islam prohibits corruption and promotes good governance and the rule of law.

NOTES 1. The MENA region, wherever indicated, comprises the Arab states in the Middle East and North Africa: Algeria, Bahrain, Djibouti, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, Somalia, Sudan, the Syrian Arab Republic, Tunisia, the United Arab Emirates and Yemen, plus the Islamic state of Afghanistan, the Islamic Republic of Iran and the West Bank and Gaza. 2. For GDP data, two main data series have been considered: GDP in current US$ and GDP, PPP (constant 1995 US$). For GDP per capita, GDP per capita in current US$ and GDP per capita, PPP (constant 1995 US$). 3. No information for Iraq. 4. World Bank classiďŹ cation. 5. No information for Iraq, Qatar and the UAE. 6. World Bank, World Development Indicators 2004. 7. Gross capital formation – includes changes to inventories.


7. 7.1

Government finances INTRODUCTION

Most Middle Eastern countries, while ostensibly market economies, are dominated by large state institutions and public sector enterprises, and they suffer from bloated bureaucracies, unviable state companies, a narrow tax base and indiscriminate and expensive subsidies. Several countries in the Middle East, like others throughout the world, experimented with central planning and nationalization during the 1960s and 1970s in an attempt to promote economic growth and development. But for reasons that have become generally accepted with the passage of time, this proved to be a misstep in the quest for economic development. The public sector lacked market motivation and consequently ended up being inefficient, less productive and innovative, and earned low or even negative returns. New industries were often launched in sectors in which the country did not have a comparative advantage and thus required subsidies, explicit or implicit. The pressures on the public purse resulting from losses or subsidies led to underinvestment; any investment that did take place was often misallocated and motivated largely by non-economic criteria. These factors tended to reduce, rather than raise, the growth potential of countries with large public sectors. The share of the state in the economies of the entire MENA region is, on average, one of the highest in the world, even surpassing that of the former Soviet Union and Eastern Europe. The size of central governments is also comparatively large by international standards. Measured by the ratio of government expenditures (plus net lending) to GDP, the share of the central government averaged roughly 30 percent in 2001, versus about 27 percent in developing countries generally.1 In the case of the major oil exporters, government ownership of oil, oil’s dominant role and the countries’ ineptitude to generate sustained non-oil GDP growth have been the major factors in the large share (also in employment) of the government in the economy. Nevertheless, some countries have pursued fiscal reforms, including tax reforms, improved transparency and expenditure control. Some have attempted privatization – particularly in the telecommunications sector. Still, by international standards, the Middle East countries continue to lag 116


Government finances

117

in the development of an economic and financial environment conducive to entrepreneurship, risk-taking and private sector-led investment and growth. Hence public sector reform is critical to reinvigorating these stagnating economies and enabling them to be more effectively integrated into the world economy. A major tenet of the underlying economic and governing philosophy of the Middle East oil exporters has been that the state apparatus tries to serve as a conduit to redistribute oil proceeds to the population, with government being the recipient and custodian of oil wealth. Yet all oil-exporter governments have until now eschewed direct payments of a significant part of oil revenues to citizens and have instead opted for government services and inefficient subsidies. The accrual of oil revenues to the government and the decision not to make direct payment to residents have implied a much larger public sector and government role in the economy than would otherwise have been the case, bringing with it both extensive public employment and a pervasive government involvement in the economy. The transfer of benefits derived from oil wealth and its proceeds to the population has taken several forms: (1) public employment in all oil-exporting countries, coupled with generous salary, retirement and benefit packages in the rich and smaller oil-exporting countries; (2) the development of a state welfare system, providing a wide range of public services (for example, education and health) to the population with minimal, if any, cost recovery; (3) the provision of generous, direct and indirect, consumer and producer subsidies (most prominently and costly in the case of fuels); and all of these with little or no taxation. The provision of these benefits with all attendant distortionary effects has become an entrenched part of the social contract. The governmental distributional imperative pursued in the Middle East countries has introduced highly significant distortions in both product and factor markets and in so doing has contributed to economic inefficiencies and resource misallocation. Questions of equity, compounded by the manner in which producer subsidies have been provided, have arisen. The development of the private sector has been impeded and the private sector that has developed over the past 30 years has become highly dependent upon the public sector. Similarly, the work ethic, once a source of pride among Persian Gulf country nationals, has been undermined by governmental policies. State paternalism, along with a reliance on expatriate labor (with its own attendant consequences), has gone far in subverting national initiatives. As a result, although the oil-exporting economies can be classified, on the one hand, as market-based economies, they could also, on the other hand, be perceived as command economies because of the public sector’s dominant role. Under these conditions, if a government’s goal is to have a ‘traditional’ market economic system, it must gradually promote the


118

Middle east oil exporters

development of a competitive private sector to compensate for oil depletion, to reduce the contribution of the public sector and to diversify its revenue base. The achievement of these goals entails numerous steps for government finances and expenditure policies. For a depletable resource-based economy where resource revenues accrue to the government, the general expectation would be that the government would not run budget deficits during the years of heavy dependence on resource extraction, especially if the social rate of return on public investment is low. This criterion becomes even more important if there is not a broad-based tax system. Otherwise future generations will be robbed by the current generation. To achieve equity as preached in the Quran, the government must ensure that every member of the current and future generations receives similar benefits from the depletion of oil reserves. This is indeed a difficult task at best. A visit to the region would clearly reveal that members of the current generation are not receiving similar benefits from oil depletion because of the great disparities in wealth and the fact that this wealth has not been generated by hard work and investments that have not directly benefited from oil depletion. As for equity of future generations, there is even more reason to be concerned. One way to address this Islamic equity requirement would be to build a fund for future generations, adopt a tax system that would incorporate the fact that private income is dependent on oil depletion and to issue an annual direct payment to every citizen. At the same time, for all practical purposes (with the exception being the rare circumstance when government expenditures carry a very high rate of social return) it would behoove all governments to avoid budget deficits, especially during the years of heavy oil extraction, if they are to fulfill their mission of affording similar benefits from oil extraction to all generations. In this chapter the structure of expenditures and revenues and the budgetary balance and other characteristics and implications of budgetary patterns are examined and contrasted for the oil exporters and in-region countries alongside their out-of-region comparators. In Table 7.1 we give a summary of the state of government finances by key indicators for the oil exporters.

7.2

GOVERNMENT EXPENDITURES

There is considerable disparity in government expenditure patterns within the Middle Eastern countries sub-group as well as in the comparator countries. The oil exporters have traditionally been countries with ‘big governments’, because oil revenues accrue to the government, subsidies are pervasive and the private sector is not supported and encouraged by government policies.


119

Government finances

Table 7.1 Central government finances of MEOE region: summary snapshot MEOE region Iran, Islamic Rep. Revenues1 (% of GDP) Oil as % of revenues Expenditures (as % of GDP) Current Investment Budget surplus (deficit) as % of GDP Iraq Revenues (% of GDP) Oil as % of revenues Expenditures (as % of GDP) Current Investment Budget surplus (deficit) as % of GDP Kuwait Revenues (% of GDP) Oil as % of revenues Expenditures (as % of GDP) Current Investment Budget surplus (deficit) as % of GDP Qatar Revenues (% of GDP) Oil as % of revenues Expenditures (as % of GDP) Current Investment Budget surplus (deficit) as % of GDP Saudi Arabia Revenues (% of GDP) Oil as % of revenues Expenditures (as % of GDP)

1975

1980

1985

1990

1995

2000

48.2 .. 47.8

21.6 62.1** 35.7

18.8 40.0** 22.7

18.1 50.5** 19.9

25.1 25.2** 24

21.0 67.5** 21.9

71.4 .. 0.4

77.6 8.6** 13.8

79.4 4.6** 3.8

75.2 4.8** 1.8

67.5 7.2** 1.3

79.4 5.2** 0.6

.. .. ..

.. .. ..

.. .. ..

.. .. ..

.. .. ..

.. .. ..

.. ..

.. ..

.. ..

.. ..

.. ..

.. ..

71.6* .. 23.5*

89.3* 69.8* 27.7

58.8 69.7* 47.7

58.7 76.6*2 55.3

.. .. 41.7*

59* 17* 58.7

66.1* 23.6* 7.8

46.8***3 36.2** 88.9*2 2 5.4**3 3.2** 11.1* 0.0 13.9 32.7**

72.2* .. 53.7*

66.4* 87.8* 38.2*

43.3* 84.5* 69.6*

47.5*2 70.4*2 50.3*2

.. .. 18.5*

71.8* 28.2* 28.1*

75.6* 24.3* 26.3*

89.2*2 10.8*2 3.4*2

.. 70.7* .. 75.5* 62.1** 54.7*

42.5* 66.2* 58.6*

36.2*2 76.8*2 39.7*2

37.7 68.9*** 51.6

42.2** 61.9*** 47.4** 39.9** 7.5** 5.3

31.1** 72.2*** 37.0**

80.2** 69.6*** 37.0**

38.6** 78.4*** 31.4** 28.2** 3.0** 7.2

36.5** 83.1*** 33.3**


120

Table 7.1

Middle east oil exporters

(continued)

MEOE region Current Investment Budget surplus (deficit) as % of GDP UAE Revenues (% of GDP) Oil as % of revenues Expenditures (as % of GDP) Current Investment Budget surplus (deficit) as % of GDP

1975

1980

1985

1990

1995

2000

69.2*2

28.0** 5.4** 5.8**

29.5** 3.8** 3.2**

.. .. ..

48.8* 51.2* 21.5*

40.5* 48.8* 16.1*

17.4*2 8.9*2

0.1 85.3* 2.9

0.2 95.5* 12.1

1.1 83.3* 16.2

1.6 88.4*2 11.5

2.6 55.8*** 12.1

44.5** 55.7*** 32.0**

.. .. 1.5

40.6* 50.1* 2.1

49.8* 36.1* 0.5

63.9*2 21.8*2 0.4

78.1* .. –0.8

26.9** .. 12.5**

Notes: 1 excludes grants; 2 1992, 3 1996 data. Sources: WDI (2004); * Askari, Hossein, Vahid Nowshirvani, and Mohamed Jaber, Economic Development in the Countries of the GCC: The Curse and Blessing of Oil; ** Relevant IMF country reports or other IMF data; *** Okugu, Bright E. (2003), ‘The Middle East and North Africa in a Changing Oil Market’.

Government expenditures as a percentage of GDP are shown in Table 7.2. An examination of the trend in government expenditures for the oil exporters and the in-region countries vis-à-vis their East Asia comparators (Figure 7.1) reveals the extent of the differential as well as the considerable volatility in expenditure patterns. Nevertheless, in terms of an overall trend, government expenditures as a share of GDP for oil exporters has been generally decreasing in the period 1975 to 2002 (with the exception of Kuwait, which, because of the First Gulf War in 1991, has had periods of reconstruction after the war, and Qatar), from levels of about 55 percent of GDP in 1975 to more comparable world levels in 2000 (Table 7.2). For instance, for Iran, the share of government expenditures was 50.6 percent in 1975 (when the world average was 22.2 percent) whereas in 2000, it had decreased to 24.1 percent. In recent years however, expenditures for the oil exporters overall appear to have leveled off and become more stable and comparable to world levels (again, with the exception of Kuwait). Government expenditures also account for a high proportion of GDP for the in-region countries compared


121

36.39 24.85 28.78 20.55

Out-of-region countries Chile Korea, Rep. Malaysia Singapore 36.39 16.7 34.6 22.5

47.6 48.7 35.0 46.2 30.1

50.6 .. 34.2 54.9 62.1 12.6

1975

Various IMF and national sources.

47.59 36.03 23.21 27.58 20.89

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

Source:

33.55 .. 22.19 19.77 62.11 9.74

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

1970

23.98 19.9 42.8 24.0

23.5 43.5 32.2 40.2 31.1

36.3 .. 30.6 38.2 47.6 15.8

1980

28.71 18.1 31.9 34.5

54.5 36.4 30.3 41.2 34.7

21.6 .. 50.9 45.4 58.6 10.2

1985

19.84 18.6 27.7 18.6

32.9 44.4 27.5 28.3 33.0

20.5 .. 92.3 42.5 53.2 12.6

1990

Table 7.2 Central government expenditures as a percentage of GDP

18.41 18.0 22.1 21.5

28.4 38.3 29.5 29.8 30.4

27.7 .. 54.6 45.8 36.4 10.3

1995

22.29 22.3 23.8 21.3

26.1 34.8 32.6 28.7 27.8

24.1 .. 37.0 31.4 33.3 8.0

2000

22.33 22.6 29.3 22.9

26.8 34.0 30.7 29.6 27.8

25.2 .. 43.5 31.8 37.2 8.2

2001

22.33 20.9 28.7 20.0

26.7 34.9 29.3 31.4 27.9

29.0 .. 45.5 31.9 36.1 8.2

2002

21.74 21.1 28.8 15.3

26.8 38.3 30.1 33.3 27.1

26.9 .. 42.7 31.4 33.3 7.3

2003

20.29 22.0 26.3 15.2

27.0 38.3 30.2 33.4 26.5

27.0 .. 39.4 30.7 31.7 6.3

2004


122

1970

Iran

1980

Kuwait

1975 Qatar

1985

1990 Saudi Arabia

UAE

1995

2001 S.Korea

2000

Government expenditures: MEOE countries with out-of-region comparators

WDI (2004) and various IMF and national sources.

Figure 7.1

0

10

20

30

40

50

60

70

80

90

100

Source:

% of GDP

Singapore

2002

2004 Malaysia

2003


Government finances

123

to their counterparts in East Asia. Egypt had very high levels in 1975, but by the early 1990s, levels had decreased by almost 50 percent. By contrast, the out-of-region countries have had much smaller governments and much lower volatility in the level of government spending in the past 25 years. While there is no pre-determined desirable percentage level of government spending, it should be broadly consistent with the macroeconomic framework as structural and macroeconomic imbalances could otherwise result. At the same time, expenditures have to be balanced with economic development, especially in emerging markets where government often supplants the role of the private sector in providing many goods and services that are normally supplied by the private sector in a market-based economy. Such overbearing public sectors in the oil-exporting countries give rise to twin ills: on the one hand, serving to stifle private sector growth and on the other, raising questions as to the efficiency and equity of such expenditure in terms of its allocation, extent and final uses. The efficiency of government expenditure can be examined in terms of how it achieves development goals of education, employment, health and so on. In the case of Muslim countries, expenditures may also be assessed with regard to whether they achieve the economic and social goals outlined in Islamic teachings, namely, equity across all generations. But one thing is clear: given the importance of a government’s sound fiscal position for a country’s macroeconomic policy flexibility, structural fiscal deficits should be avoided. This should especially be the case for governments in the oil-exporting countries because of the awareness that a significant part of their current revenue will disappear when oil is depleted. At the same time expenditure, besides meeting social needs, should be targeted to areas that would provide future non-oil national output to compensate for oil depletion.

7.3

COMPOSITION OF EXPENDITURES

Government expenditures can be broadly defined as current and capital. Current expenditure includes recurrent expenditure, whereas capital expenditure, by contrast, is targeted toward adding to rather than maintaining the physical and material assets of a nation.2 Alternatively, expenditures can also be analyzed by distribution, namely, by specific sector or category allocations and uses. The trend in capital expenditure as a percentage of total expenditure is shown in Table 7.3. Additionally, in Figure 7.2 we examine the levels of current versus capital expenditures for three select countries – Iran, Egypt and Korea – while in Figure 7.3 we take a regional comparison. It is readily apparent that the levels of capital expenditure are higher for the Middle East as a region compared to the rest of the world and to


124

Table 7.3

Middle east oil exporters

Capital expenditure as a percentage of total expenditures

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia Out-of-region countries Chile Korea, Rep. Malaysia Singapore Comparators East Asia & PaciďŹ c Europe & Central Asia Middle East & North Africa World High income Low & middle income

1975

1980

1985

1990

1995

2000

28.6 .. .. .. .. 25.1

22.4 .. 32.0 .. .. 7.7

20.6 .. 29.9 .. 29.1* 3.4

24.8 .. 18.4 .. 12.8* 1.3

32.5 .. 14.2 .. 14.5* 3.0

20.6 .. 8.0* 10.1* 11.5* ..

17.0 37.4 35.3 46.7

21.4 29.3 31.2 37.1

13.7 22.2 19.3 ..

17.3 16.2 27.9 26.5

19.2 19.3 21.3 38.1

18.9* 15.2 18.5* ..

30.6

29.8

30.4

21.9

19.8

23.2

19.9 21.4 18.9 14.2

9.6 14.0 34.8 22.2

10.0 13.6 10.4 30.9

11.2 15.0 24.2 23.6

15.7 20.0 22.7 22.8

14.7 .. .. 27.0

19.9 ..

24.9 ..

16.4 ..

21.2 ..

22.4 7.9

.. 7.9

32.9

29.3

..

23.3

20.5

..

19.3 9.2 ..

16.9 7.3 22.0

13.7 6.4 ..

12.9 6.9 ..

11.5 5.1 15.5

.. .. ..

Source: WDI (2004); * Relevant IMF country reports.

high-income countries. In most of the period under study, the MENA region records the highest level of capital expenditure, except in 1995; however, this has decreased to levels comparable with East Asia and PaciďŹ c, especially in the late 1990s. The oil exporters have higher levels of capital expenditure with respect to the out-of-region group. The in-region countries also have high levels of capital expenditure, especially Syria, but all also display a decreasing trend from 1975 and recently in the late 1990s. The out-of-region countries display increased levels of


Government finances

125

capital expenditure in the 1990s (for example, for Singapore capital expenditure had increased to 27 percent of total expenditures in 2000), higher than the world average, significantly higher than the high-income average and also higher than the low-income average. A high level of capital expenditure indicates high spending by government to add to the physical and capital stock of a country. While essentially a positive feature, the key question relates to the efficiency of such expenditures. A pattern clearly observable for the oil exporters, as well as for the inregion countries, is the large and growing wage bill. This largely reflects the traditional role of government as the predominant employer as well as the sizeable wage increases to public employees which, over time, have created a large wage differential in favor of the public sector. Wage policy in the future needs to be combined with civil service reform in order to combat the problem of overemployment in the government sector. Table 7.4 provides a point comparison of the shifts in expenditure allocations over a decade. As for interest payments on public debt, this is smaller for the oil exporters than for the in-region countries. Since the oil-exporting countries are recipients of oil revenues, this is akin to a non-interest bearing loan that does not have to be repaid. Thus for them to have large interest payments (for incurred debt) even though they receive large oil revenues would indeed signal even more irresponsible policies on their part. Among the in-region countries, Egypt has a high level of interest payments at 21.7 percent of total expenditures, followed by Morocco. Among the out-of-region countries, Malaysia had high levels of debt service in the early 1990s but has reduced payments to about 13 percent of total expenditures. The world average has been increasing, with that of high-income countries comparable to low- and middle-income groups in 1995 at 10.3 percent. Subsidies have played an important social and economic role in the oilexporting countries, with the broad objective to distribute oil wealth to the population and to support private sector economic activity to compensate for oil depletion. The coverage of subsidies is shown in Table 7.5 and official subsidy figures (which grossly underestimate actual distribution) are shown in Table 7.6 and Table 7.7. Together with other protective policies, subsidies benefiting both consumers and producers have aimed at ensuring low and stable prices for essential foodstuffs and basic services, achieving social objectives in the health and education areas and promoting basic industries and supporting sectors for strategic reasons (for example, food production for security reasons). A comprehensive estimation of all subsidies in each of the countries is difficult because of data limitations. Subsidies can be implicit and explicit. Explicit subsidies through the budget have included cash payments to farmers to maintain high procurement prices


126

Middle east oil exporters

Iran 100 90 80 70 60 50 40 30 20 10 0 1975

1980

1985

1990

1995

2000

Egypt 100 80 60 40 20 0 1975

1980

1985

Capital expenditure

1990

Current expenditure

Source: WDI (2004).

Figure 7.2

1995

Composition of government expenditures


127

Government finances

South Korea 100 80 60 40 20 0 1975

1980

1985

Capital expenditure Figure 7.2

1990

1995

Current expenditure

(continued)

100 80 60 40 20 0 East Asia Middle East & Pacific & North Africa Capital expenditure

World

High income

Current expenditure

Source: WDI (2004).

Figure 7.3

Composition of government expenditures in 1995: comparators


128

53 .. 62 .. 10.7* 88 42 55 48 .. 34 28 35 41 51

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

Out-of-region countries Chile Korea, Rep. Malaysia Singapore

1990

27 .. .. 50

10* 64 46 6.3* 41

68 .. 58 4* 8* 78

2001

Goods & services % of total expenditure

18 13 26 27

23 44 35 .. 28

40 .. 31 .. 30.6* 33

1990

19 .. .. 24

26.2* 45 36 34.5* 34

52 .. 35 27.8* 43.4* 35

2001

Wages & salariesa % of total expenditure

10 4 20 14

14 18 16 .. 10

0 .. 0 .. 3.8* 0

1990

2 .. .. 1

21.2* 10 15 2.3* 10

1 .. 3 13.5* 12.3* 0

2001

Interest payments % of total expenditure

Table 7.4 Composition of government expenditures: summary comparison 1990, 2001

51 46 16 12

26 11 8 .. 35

22 .. 20 .. 4.1* 10

1990

56 .. .. 22

16* 8 16 16* 25

10 .. 26 .. 3.1* 18

2001

Subsidies & other current transfers % of total expenditure

11 15 24 24

17 16 28 27 22

25 .. 18 .. 12.8* 1

1990

15 .. .. 26

15.7* 18 22 36 23

21 .. 13 15.2* 12.4* 4

2001

Capital expenditure % of total expenditure


129

42 .. 53 39 25 ..

.. 30 50 37 29 39

27 .. 35 23 13 ..

.. 12 35 18 .. 21

10 .. 10 10 11 ..

11 8 11 9 7 9

16 .. 11 23 56 ..

.. 51 14 31 59 26

21 .. 23 13 7 ..

Source:

WDI (2004); * Relevant IMF country reports

Notes: a Part of goods and services; Expenditure shares may not sum up to 100 percent – components include expenditures financed by grants in kind and other cash adjustments.

Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income

24 9 19 13 5 16


130

Table 7.5

Middle east oil exporters

Coverage of direct subsidies: MEOE region

Type of subsidy

Iran

Iraq

Kuwait

Qatar

Saudi

UAE

Social Housing Health Education Electricity Water Fuel

Yes Yes Yes Yes Yes Yes

.. Yes Yes Yes Yes Yes

Yes Yes Yes Yes Yes Yes/No

Yes Yes Yes Yes Yes Yes

Yes Yes Yes Yes Yes Yes

Yes Yes Yes Yes Yes Yes/No

Productive industry Capital Electricity Water Fuel

Yes Yes Yes Yes

.. Yes Yes Yes

Yes Yes Yes Yes

Yes Yes Yes Yes

Yes Yes Yes Yes

Yes Yes Yes Yes

Productive agriculture Capital Electricity Water Fuel Output/production

Yes Yes Yes Yes ..

.. Yes Yes Yes ..

Yes Yes Yes Yes Yes

Yes Yes Yes Yes Yes

Yes Yes Yes Yes Yes

Yes Yes Yes Yes Yes

Source: Askari, Hossein, Vahid Nowshirvani and Mohamed Jaber, Economic Development in the Countries of the GCC: The Curse and Blessing of Oil.

and to utility companies to cover operating losses. While the magnitude of explicit budgetary subsidies in the oil-exporting countries is not large by international comparisons, there are substantial implicit subsidies in the form of free or below-cost provision of government services (utilities, education, health, transportation and sector-specific inputs). Implicit subsidies are also provided through low petroleum prices (in size the largest subsidy in most oilexporting countries) and through subsidized long-term loans. When these implicit subsidies are added to explicit subsidies, then aggregate subsidies in the oil-exporting countries become very large by international comparisons. Most of these subsidies do not have a good economic rationale, nor are they efficient. Most have been expensive and distortionary. Recognizing these problems, most countries have worked to reduce subsidies and price controls and to make them explicit or to improve the targeting of existing subsidies. However, some countries, such as Iran and Syria for instance, still maintain extensive generalized subsidies throughout their economies. For the most part, it has proved difficult to quantify the magnitude or effectiveness of implicit subsidies. Nevertheless, it is recognized that


131

Government finances

Table 7.6

Electricity, water and fuel subsidies as a percentage of GDP 1975

1980

1985

1990

Kuwait Electricity Water Fuel

0.73 1.61 1.30

1.78 3.08 0.30

3.61 5.30 –0.1

Qatar Electricity Water Fuel

0.49 1.63 4.30

2.19 2.71 9.40

3.14 2.95 5.40

Saudi Arabia Electricity Water Fuel

0.23 1.60 4.90

1.48 3.70 7.20

2.88 5.87 4.90

UAE Electricity Water Fuel

0.41 2.59 1.10

2.08 4.36 1.20

3.13 5.30 1.90

Source: Askari, Hossein, Vahid Nowshirvani and Mohamed Jaber, Economic Development in the Countries of the GCC: The Curse and Blessing of Oil.

Table 7.7 Subsidies and other current transfers as a percentage of total government expenditures

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

1975

1980

1985

1990

1995

2000

19.2 .. .. .. 14.3* 7.8

19.4 .. 23.1 .. 3.5* 12.3

13.2 .. 26.0 .. 5.7* 7.5

22.2 .. 20.1 .. 4.1* 10.3

15.1 .. 22.5 .. 3.6* 18.4

10.3 .. 24.1* .. 4.0* 17.3*

44.7 17.4 20.8 11.6 27.8

32.2 17.0 14.7 21.1 23.9

30.9 14.2 15.2 .. 29.1

26.4 11.1 8.1 .. 34.8

25.4 10.2 11.6 .. 30.7

16.5* 7.2 .. 16.0* 25.0

Source: WDI (2004); * relevant IMF country report.


132

Middle east oil exporters

many implicit subsidies have included substantial hidden costs in terms of resource misallocation, wasteful use and production inefficiencies. A comprehensive plan to rationalize subsidies over the medium term would involve introducing or increasing fees and charges on government services. The impact of higher prices on vulnerable social groups could be mitigated though well-targeted income transfer programs, which would be less costly and more equitable and transparent. Also, plans to reduce subsidies and protection in general should also take into account intra-Middle Eastern considerations in order to prevent sudden shifts in capital and production between the countries. Although spending on subsidies is higher in the region than in other developing countries, some subsidy reform may have paid off because subsidies as a fraction of total government expenditures have gradually declined.

7.4

GOVERNMENT REVENUES3

Tax revenue forms the predominant source of government revenues in most countries. For most oil exporters, however, non-tax revenue including oil revenues forms the major portion of government revenues as oil GDP dominates the economy (Table 7.8 and Table 7.9). The sources of the tax revenue received by governments and the relative contributions of these sources are determined by policy choices about where and how to impose taxes and by changes to the structure of the economy. Tax policy may reflect concerns about distributional effects, economic efficiency (including corrections for externalities) and the practical problems of administering a tax system. Taxes also influence incentives and thus the behavior of economic players and the economy’s broad competitiveness. Table 7.8

Oil GDP as a percentage of GDP for MEOE region

Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

1975

1980

1985

1990

1995

2000

.. .. 70.5 80.6 71.1 67.5

9.5* .. 67.9 67.3 61.6 63.3

13.4* .. 50.2 44.2 33.5 45.3

10.4* .. 38.0 33.6 37.6 46.7

16.1* .. .. 32.5* 36.4* 35.0*

17.5* .. 53.2* 60.4* 41.0* 39.8*

Sources: Askari, Hossein, Vahid Nowshirvani and Mohamed Jaber, Economic Development in the Countries of the GCC: The Curse and Blessing of Oil; * Various IMF and national sources.


133

10 .. 1 .. 0.63* 0

19 16 24 31 13

12 34 31 26

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

Out-of-region countries Chile Korea, Rep. Malaysia Singapore 20 .. .. 33

29.2* 12 24 38 20

17 .. 1 .. 0.83* 0

8 5 1 0

15 0 4 0 13

8 .. 0 .. .. 2

7 .. .. 0

.. 0 5 0 17

9 .. 6 .. .. 1

2001

1990

1990

2001

Social Security taxes % of total current revenue

Taxes on income, proďŹ ts and capital gains % of total current revenue

Government revenues – snapshot: 1990, 2001

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

Table 7.9

43 35 20 16

14 21 38 31 19

4 .. 0 .. .. 36

1990

46 .. .. 19

28.6* 36 36 19 38

6 .. 0 .. .. 51

2001

Taxes on goods and services % of total current revenue

12 12 18 2

14 27 18 7 28

13 .. 2 .. 4.3*1 0

1990

5 .. .. 2

12.6* 17 16 10 11

7 .. 3 .. 3.7*1 0

2001

Taxes on international trade % of total current revenue

3 5 3 14

11 7 4 7 5

4 .. 0 .. .. 0

1990

4 .. .. 9

0.20* 10 3 6 4

1 .. 0 .. .. 0

2001

Other taxes % of total current revenue

21 9 28 43

27 29 13 24 22

60 .. 97 .. .. 62

1990

18 .. .. 38

29.4* 24 16 27 9

60 .. 90 .. .. 48

2001

Non-tax revenue % of total current revenue


134

(continued)

Source:

Note:

duties.

25 13 19 18 26 17

31 .. 21

23 32 19

4 17 0

0 .. 2 5 19 2

0 31 0

2001

1990

1990

2001

Social Security taxes % of total current revenue

Taxes on income, proďŹ ts and capital gains % of total current revenue

WDI (2004); * relevant IMF country report.

1 Customs

Comparators East Asia & PaciďŹ c Europe & Central Asia Middle East & North Africa World High income Low & middle income

Table 7.9

27 28 28

24 .. 17

1990

34 27 35

32 40 19

2001

Taxes on goods and services % of total current revenue

13 1 17

18 .. 15

1990

7 1 9

9 3 14

2001

Taxes on international trade % of total current revenue

3 3 3

3 .. 5

1990

2 3 2

2 1 3

2001

Other taxes % of total current revenue

13 9 13

20 .. 28

1990

12 9 12

11 10 28

2001

Non-tax revenue % of total current revenue


Government finances

135

Most low-income countries tend to rely on indirect taxes on international trade and on goods and services as a primary source of revenue (because the costs of administering these are lower and incomes are by definition low for lower-income countries) while high-income countries prefer to tax income, profits and social security contributions. Since more developed countries have an increased capacity to tax residents, indirect taxes become less important in the share of total revenue as tax nets broaden and there is more streamlining of the tax structure. There is also typically more tax compliance and less avoidance and loss. Current revenue includes all revenue from taxes and non-repayable receipts (other than grants) from the sale of land, intangible assets, government stocks, fixed capital assets or from capital transfers from nongovernmental sources. It also includes fines, fees, recoveries, inheritance taxes and non-recurrent levies on capital. The main components of revenue are classified under revenue from taxes, including taxes on income, profits and capital gains, social security taxes, taxes on goods and services, taxes on international trade, and other taxes and non-tax revenue. Current revenue as a percentage of GDP is shown in Table 7.1. Revenues have been declining as a percentage of GDP over the past 25 years for the MEOE region, with considerable variation between respective countries. During this time the world average has been increasing. A summary snapshot comparison of the sources of government revenue for the MEOE region along with the in-region and the out-of-region groups in 1990 and 2001 is shown in Table 7.9. The shifts in the composition of revenue over the 25 years from 1975 to 2000 are shown for select oil exporters – Iran, Kuwait and the UAE – in Figure 7.4. Although generalizations are invariably imprecise, several do deserve mention. The revenue structure in the MEOE region is clearly dominated by non-tax revenue comprising mainly oil receipts and, until recently, investment income associated with wealth generated by past oil income. Whereas non-tax revenue for developing countries comprises about 12–13 percent, for the oil exporters it can be as high as 90 percent (Kuwait). For instance, in Kuwait, non-tax revenue eclipses almost all other components of revenue. The narrow tax base – consisting mainly of import duties, income taxes with limited coverage, fees and charges – is further constrained by substantial exemptions. Of the out-of-region countries, Singapore derives the highest percentage of its revenue from non-tax sources. For the in-region countries, this contribution is within comparable levels. Tax revenue is very low as a percentage of GDP for the MEOE region versus comparators. Comparing levels of taxation across countries provides a quick overview of the fiscal obligations and incentives facing the


136

Middle east oil exporters Iran

100 80 60 40 20 0 1975

1980

1985

1990

1995

2000

Taxes on income, profits and capital gains

Social security taxes

Taxes on international trade

Taxes on goods and services

Other taxes

Non-tax revenue

Kuwait 100 90 80 70 60 50 40 30 20 10 0 1975

1980

1985

1990

1995

2000

Taxes on income, profits and capital gains

Social security taxes

Taxes on international trade

Taxes on goods and services

Other taxes

Non-tax revenue

Source: WDI (2004).

Figure 7.4 Composition of revenue: Iran, Kuwait, and the UAE (as a percentage of current revenues)


137

Government finances UAE 100 80 60 40 20 0 1975

1980

1985

1990

1995

2000

Taxes on income, profits and capital gains

Social security taxes

Taxes on international trade

Taxes on goods and services

Other taxes

Non-tax revenue

Figure 7.4

(continued)

private sector. The low ratios of tax revenue to GDP may be reflective of weak administration and/or large-scale tax avoidance or evasion. Low ratios may also reflect the presence of a sizable parallel economy with unrecorded and undisclosed incomes. Tax revenue ratios tend to rise with income, with higher-income countries relying on taxes to finance a much broader range of social services and social security than lower-income countries are able to provide. In this respect, low tax revenue may also be extrapolated to assess the state of private sector activity and levels of income per capita. Direct taxes include taxes on income, profit and capital gains and may indicate the stage of economic or fiscal development, because higherincome countries tend to have a higher proportion of tax revenue deriving from direct taxes. The MEOE region derives a much lower proportion of revenue from direct taxes as opposed to their comparators. For instance, for the entire MENA region the contribution of direct taxes on income, profit and capital gains to total current revenue was 21 percent in 1990 and 19 percent in 2001. In sharp contrast, corresponding figures for East Asia and the Pacific were 31 percent and 25 percent respectively. The world average was 23 percent in 1990 and 18 percent in 2001. Most countries in the region have complex and opaque income tax systems and ineffective tax administration leading to high-cost revenue collection as well as leakages and losses.


138

Middle east oil exporters

Social security taxes are not a very significant item of revenue except relatively speaking for Iran (about 9 percent in 2001 and largely paid by government employees). Still, in the period 1975 to 2000, social security taxes have stayed reasonably consistent and increased in 2000. The high-income country average for social security taxes was roughly 20.8 percent of total revenue in 1995. Taxes on goods and services are very low for the MEOE region as compared to other countries and regional averages, with the exception of the UAE, where the proportion of these taxes has increased to 53.3 percent of current revenue in 1995. The level of indirect taxation can also indicate the stage of development of a country’s tax structure and system. Administrative costs of collection on indirect taxes are lower than those for direct taxes – thus developing countries may show a higher proportion of revenue from indirect taxes. Despite some limitations in the data, we can observe that taxes on international trade are reasonably significant for Iran among the MEOE region; however the trend is decreasing. Export and import duties are also important because the burden they impose on the economy and thus on growth is likely to be large. Export duties, typically levied on primary (particularly agricultural) products, often take the place of direct taxes on income and profits, but they reduce the incentive to export and encourage a shift to other production. High import duties penalize consumers, create protective barriers – which promote higher-priced output and inefficient production – and implicitly tax exports. By contrast, lower trade taxes enhance openness – to foreign competition, knowledge, technologies and resources – energizing development in many ways (addressed in greater detail in Chapter 9 and Chapter 11). Seeing this pattern, some of the fastest-growing economies have lowered import tariffs in recent years. The simple mean import tariff in India, for example, declined from almost 80 percent in 1990 to about 30 percent in 2001. Revenue from other taxes is insignificant for all countries except for Iran during the 1980s and early 1990s. ‘Other taxes’ include employer payroll or labor taxes, taxes on property and taxes not allocable to other categories. They may include negative values that are adjustments (for example, for taxes collected on behalf of state and local governments and that are not allocable to individual tax categories). Non-tax revenue is extremely high as a percentage of GDP (roughly 45 to 95 percent) for the MEOE region, which is understandable since it subsumes oil receipts. The highest marginal tax rate levied at the national level on individual and corporate income can also reflect a tax system’s progressivity and could potentially influence domestic and international investors. For


Government finances

139

instance, income taxes levied on Saudi Arabian and expatriate employees working in the Kingdom were abolished in 1975. All Saudi citizens and all Saudi companies, however, must pay a religious tax – zakah – of 2.5 percent annually on profits and on the assessable amount for individuals. In general, Saudi law requires that all foreign and Saudi companies pay a tax on profits earned in the country. Joint venture companies with at least 25 percent Saudi ownership are exempt from income tax for a period of ten years. In Iran the corporate tax rate can vary from 12 to 54 percent in nine rates.4 The oil-exporting countries are blessed with an abundance of oil and it is natural for these countries to derive a considerable portion of their revenue from oil receipts. However, to continue to remain ‘oil economies’ is quite another thing. None of these oil exporters have diversified significantly away from oil and budgets tend thus to be overly dependent on the vagaries of the oil markets. For the oil exporters, revenue policies should be directed not only at mobilizing non-oil revenue in the short run, but also at improving the buoyancy of tax revenue. This requires a reform of the existing tax and non-tax revenue sources as well as the introduction of new broad-based taxes.

7.5

BUDGETARY SITUATION OF GOVERNMENT

In a depletable oil resource-based economy where resource revenues accrue to the government, fiscal containment must be achieved, especially in years of heavy resource extraction. Yet the MEOE region and the in-region countries have been faced with persistent fiscal deficits in many of the years in the period 1975–2000 (Table 7.10), namely, they have been net dis-savers. The overall MENA average deficit is roughly 7.6 percent of GDP in the 1980s and 1990s compared to 4.4 percent for developing countries as a whole.5 In 1999, the combined budget deficit of the Arab countries was almost $31 billion,6 representing almost 5.7 percent of combined GDP. In 2002, however, only Saudi Arabia and Iran – the biggest economies of the region – had recorded budget deficits, representing 5.9 percent and 2.4 percent of GDP respectively. Kuwait recorded, except during the years of its invasion by Iraq, mostly surpluses and also had the highest surplus for the region. Of course with significantly higher oil prices during 2003–2005, all of these oil-exporting countries, as expected, had budget surpluses, yet again confirming their overdependence on oil. For oil-exporting countries it is expected that the rate of return on investment should at least equal expected oil price increases. The only possible justification for a deficit in oil-exporting countries occurs when countries spend heavily on building and developing national infrastructure (roads,


140

Middle east oil exporters

Table 7.10 Central government balance (including grants) as a percentage of GDP

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

1975

1980

1985

1990

0.8 .. 47.6 19.2 19.8 3.0

14.7 .. 58.5 28.2 22.5 0.0

3.7 .. 7.8 0.1 16.1 0.5

2.4 .. 32.0 2.8 14.7 0.4

3.4 .. 1.9 5.1 5.8 0.5

8.6 .. 32.7 7.2 3.2 0.2

2.4 .. 20.9 7.9 5.9 0.0

18.9 27.9 6.2 20.5

9.6 24.5 11.2 5.1

19.8 8.1 7.7 13.9

12.6 6.4 0.6 3.9

1.2 3.9 5.5 3.8

3.9 4.7 6.4 1.4

5.9 5.0 4.6 1.6

3.4

3.3

5.7

5.7

5.2

3.7

3.1

4.8 0.03 2.4 0.7

3.2 0.01 3.8 8.1

3.2 0.01 2.9 11.5

..

..

..

0.9

0.2

..

..

..

..

..

..

3.6

1.3

..

..

..

..

..

..

..

..

4.2 4.4 ..

3.9 4.0 ..

4.8 4.6 6.2

2.8 2.8 2.9

2.9 3.3 1.5

.. .. ..

.. .. ..

Out-of-region countries Chile 2.6 Korea, Rep. 0.02 Malaysia 4.0 Singapore 0.3 Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income

1995

2000

2002

3.3 0.6 1.2 0.00 0.01 0.02 0.8 5.7 5.6 12.2 8.0 4.1

Source: Various IMF and national sources.

telecommunications and public works) on social improvements and, additionally, on improvements to spur private sector activity. These expectations are not confirmed by the share of capital expenditure and especially by GDP growth rates. But even then the question of equitable benefits from oil extraction for all generations would have to be faced. The in-region countries have also been plagued with persistent deficits since 1970, but the


Government finances

141

overall trend shows a decrease in magnitude over the past 25 years. In 2001, budget deficits declined for the MENA region to about 1.1 percent of GDP, reflecting the pay-off of fiscal reform that many countries have embarked upon and have implemented to varying degrees. In sharp contrast, the outof-region group reveals far more austerity and better fiscal management in the relatively small size of their deficits as well as in the relatively lower frequency of their occurrence. Some countries in the Middle East region have initiated fiscal reform since the mid-1980s. Nine countries have introduced value-added tax (VAT) between 1986 and 2002 (Morocco and Tunisia were the first to introduce it in 1986 and 1988 respectively). Efficient and modern VATs are also being contemplated in Iran and some other Gulf Cooperation Council (GCC) countries after successful introduction in Lebanon and Sudan. Still, a number of issues in fiscal management remain: the size of the public sector, high military expenditures, a poorly administered tax system and a revenue structure that remains heavily skewed in favor of non-tax revenues. The trend in budgetary balances as a percentage of GDP for regional blocs from 1975 to 2000 is shown in Figure 7.5. While most regions have grappled with budgetary deficits in this period, it is interesting to note the magnitude of the differentials and the volatility of the deficits as a proportion of GDP for different regions.

7.6 NATIONAL DEBT AND SOURCES OF DEBT FINANCING Countries resort to borrowing in order to close the gap between expenditures and available resources. They can borrow domestically or from external sources. Table 7.11 shows gross central government debt as a percentage of GDP. The sources of government debt – domestic and from abroad as a percentage of GDP – are shown in Tables 7.12 and 7.13. It is apparent that the MEOE run high levels of debt with the exception of the UAE. As a major oil exporter, Saudi Arabia’s level of debt is extraordinarily high at 97 percent of GDP in 2002. Qatar is at more modest levels with about 50 percent of GDP. In light of higher oil prices during the period 2004 through 2006, many countries have paid down their debt and have accumulated foreign assets. Saudi Arabia, for instance, has brought down its debt to GDP ratio to about 76 percent. It is apparent that the MEOE region overall does not conform to our expectations for efficient management of depletable resource-based economies in that these countries exhibit low GDP growth and significant budget deficits in the heavy extraction phase of their depletable resource.


142

East Asia & Pacific South Asia

1980

1990

Latin America & Caribbean High income

1985

Trends in budgetary balances in regional blocs

WDI (2004).

1975

Figure 7.5

Source:

–12

–10

–8

–6

–4

–2

0

2

2000

Sub-Saharan Africa Low & middle income

1995


143

Government finances

Table 7.11

Central government debt (gross) as a percentage of GDP 1975

Iran Iraq Kuwait Qatar Saudi Arabia UAE

0.00* 0.00* 0.00* .. .. ..

1980 0.00* 0.00* 0.00* .. .. 2.73*

1985 0.00* 0.00* 0.00* .. .. 5.54*

1990

1995

2000

2002

0.00* 0.00* 0.00* 10.71* 22.30* 27.15*

0.00* .. 0.00* 43.59* 74.71* 8.02*

0.00* .. 0.00* 54.86* 87.19* 4.57*

0.00* .. 0.00* 53.10* 97.06* 5.56*

Egypt Jordan Morocco Syria Tunisia

.. 36.03 24.55 .. 28.72

.. 40.10 41.70 .. 34.19

.. 56.36 85.59 .. 45.49

99.98* 133.27 89.16* 57.27* 54.77

60.29* 105.06 90.62* 42.46* 58.69*

65.38* 93.65 81.46* 22.18* 60.68*

92.93* .. 71.39* 27.92* 61.55*

Chile Malaysia S. Korea Singapore

.. 45.86 14.72 47.26

.. 42.64 14.10 64.71

.. 80.98 15.68 86.26

47.27* .. 8.35 76.87*

19.57* 41.56* 8.36 72.70*

13.72* 36.73* 0.00* 85.21*

16.49* 45.74* 0.00* 100.68*

Source: WDI (2004); * various IMF and national sources.

Recently many countries in the region have made efforts to implement more intensive debt management strategies and thereby bring more accountability to their debt management. There has been a gradual decline in external debt in the region from 1975 to 2000 with, of course, variations by country and by sub-grouping. Of the MENA region countries, the Global Development Finance report, 2000 ranks Jordan, Iraq, Syria and Sudan as severely indebted. However, there have also been many debt reschedulings and restructurings as well as debt forgiveness by creditors. The growth of public debt leads to an increase in debt servicing costs, leaving correspondingly less for investments in economic infrastructure and for expenditure on such vital items as health, education and social security. Increases in public borrowing can lead to the crowding out of private investments. Of course, if government expenditure is mostly incurred on capital formation, such as the creation of infrastructure, then the implications are somewhat different. The build-up of internal debt generally creates future inflationary pressure and higher interest rates. An increase in fiscal deficits and public debt also places negative pressure on financial systems and growth prospects, eroding a country’s creditworthiness. It is crucial that the oil-exporting countries improve the quality of their fiscal and debt management. This will not only have domestic benefits for the economy and society but will also enhance their image globally in terms of credibility and credit standing.


144

Middle east oil exporters

Table 7.12 Sources of debt financing: financing from abroad as a percentage of GDP 1975 MEOE region Iran, Islamic Rep. 4.01 Iraq .. Kuwait .. Qatar .. Saudi Arabia .. UAE 0.00 In-region countries Egypt, Arab Rep. 9.14 Jordan 4.90 Morocco 3.71 Syrian Arab .. Republic Tunisia 1.01 Out-of-region countries Chile 2.68 Korea, Rep. 1.52 Malaysia 3.79 Singapore 0.25 Comparators East Asia & 1.61 Pacific Europe & .. Central Asia Middle East & .. North Africa World 0.82 High income 0.11 Low & middle .. income Note:

1

Sources:

7.7

1980

1985

1990

1995

2000

0.56 .. .. .. .. 0.00

0.19 .. .. .. .. 0.00

0.01 .. .. .. 0.0*1 0.00

0.08 .. 11.8 1.68* 1.44* 0.00

3.65 5.73 5.28 0.19

1.48 6.93 3.48 0.00

0.70 3.00 3.88 0.00

0.87 1.48 0.75 0.00

2.27

2.83

1.77

2.88

0.75

0.75 0.86 0.57 0.18

2.50 0.54 2.19 0.11

0.00 0.18 0.72 0.13

2.40 –0.09 0.81 0.00

0.26 .. .. 0.00

1.18

0.95

0.38

0.37

1.39

..

..

..

0.98

0.04

2.27

2.83

0.89

0.78

..

0.88 0.42 1.21

0.50 0.42 0.63

0.18 0.17 0.28

0.22 0.19 0.22

.. .. ..

0.09 .. 0.00* 6.4* 0.00* .. 0.54* 0.18 0.17 0.3*

1992. WDI (2004), * IMF country reports.

SUMMARY

Reform of public finances is needed to strengthen savings further and to reduce the vulnerability of oil exporters to adverse external shocks. On the revenue side, efforts aimed at improving the elasticity and efficiency of the tax system need to be supported by improvements in administrative


145

Government finances

Table 7.13 Sources of financing: domestic financing as a percentage of GDP 1975

1980

1985

1990

1995

2000

3.70 .. .. .. .. 1.50

14.40 .. .. .. .. 2.10

4.00 .. .. .. .. 0.50

1.80 .. .. 2.83*1 6.52*1 0.40

1.40 .. 1.7* 0.16* 7.24* 0.80

0.50 .. 4.0* 6.6*2 6.10* ..

8.83 0.09 5.47 ..

8.04 3.58 4.42 9.81

8.89 0.65 3.80 0.00

6.41 0.54 1.64 0.00

0.03 2.52 5.46 0.00

0.44

0.52

2.22

3.64

0.32

1.82

Out-of-region countries Chile 2.54 Korea, Rep. 0.45 Malaysia 3.90 Singapore 1.15

4.66 1.39 5.30 1.97

0.21 0.62 0.32 1.98

0.00 0.86 2.77 10.62

0.18 0.18 1.37 14.55

0.12 .. .. 10.16

2.29

0.32

0.98

2.77

1.18

1.43

..

..

..

..

1.75

0.51

..

4.42

2.22

2.73

0.16

..

2.18 2.78 ..

2.43 2.82 1.85

0.78 2.52 0.35

0.90 0.97 0.72

0.69 2.43 0.20

.. .. ..

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income Notes:

1

8.13* 1.81 2.5* ..

1992, 2 2001.

Sources: WDI (2004); * relevant IMF country reports.

efficiency and tax enforcement. On the expenditure side, an improvement in the quality of public expenditure programs, especially the elimination of indiscriminate subsidies and the adoption of a fair and just social safety net, would enhance their contribution to economic growth. Fiscal management in an oil economy imposes additional burdens when compared to a non-oil economy. These countries must consider how to save


146

Middle east oil exporters

for posterity, how to manage with highly fluctuating oil revenues, how to improve the quality of spending, whether for infrastructure and investment projects, public consumption or subsidies, and also to achieve macroeconomic stability. Some countries have taken preliminary steps to de-link government spending from current oil receipts; however, a much more considered and comprehensive approach is needed to help diversify the economy and remove obstacles to developing the non-oil sector. Reducing dependence on oil revenues requires establishing modern tax policy structures and tax administrations, with broad-based taxes and rates to address serious income inequalities. Serious income inequalities can only be addressed through an appropriate tax system. At the same time, a fund for future generations is an almost indispensable instrument for addressing inter-generational equity issues. But a great deal more thought must be given to the precise operation of such a fund. Several non-oil economies in the region rely on aid, capital flows and worker remittances from the oilproducing MENA countries. As the latter move toward more balanced economic structures, the non-oil economies would also need to make necessary adjustments. However, while not all countries in the region have warmed to the concept of the market economy and broad-based reforms as outlined above (and more comprehensively examined in Chapter 13), nearly all, to varying degrees, have taken timid steps to reduce fiscal costs and improve efficiency by tackling a variety of complex and politically sensitive issues, including the need to broaden the tax base and to reduce budget deficits; to address spending on subsidies, public sector employment, pensions and health; to use taxation and income transfers in order to achieve a fairer distribution of income and wealth; and to introduce greater transparency as part of governance reform. The attendant benefits of the improved fiscal situation are also evident in lower inflation, smaller balance of payments deficits and more resources for private sector investment, and, quite recently, better growth rates. For the oil-producing countries, and especially those in the Persian Gulf region, the surge in oil prices during 2004–2006 has undoubtedly helped turn fiscal deficits into surpluses. However, dependence on the vagaries of the oil markets to serve as an antidote to internal economic woes and to balance books has always proved an unsustainable and risky strategy.

NOTES 1. International Monetary Fund, World Economic Outlook, October 2002. 2. Current expenditures include the following recurrent expenditures: expenditures on goods and services (wages and salaries, employer contributions including social security, pen-


Government finances

3. 4. 5. 6.

147

sions), interest payments, subsidies and other current transfers (to public enterprises, other levels of government, households), and current portion of military expenditure. These numbers represent central government revenues, which may exclude revenues in cases where local and principal governments have their own tax authority. PricewaterhouseCoopers (based on 1999 data). International Monetary Fund, World Economic Outlook, March 2002. Economic Research Forum for the Arab Countries, Iran and Turkey, Economic Trends in the MENA region, 2002.


8. 8.1

External sector INTRODUCTION

The world has witnessed an impressive growth in world trade, with growth in volume averaging more than 6 percent per year in the period 1980–981 (Table 8.1), a rate almost twice as fast as real GDP growth of 3.2 percent. Growth in trade has been supported, among other things, by more stable macroeconomic conditions, widespread trade liberalization, increased flows of financing to emerging markets and reductions in the costs related to trade, including in telecommunications, transportation and administrative procedures. Most countries that have participated in this globalizing environment have achieved more prosperity, broader growth opportunities and enhanced economic efficiency. However, within this broad picture there are striking differences in individual and regional performance. Perhaps most striking is that the Middle East countries (especially the oil exporters in the region) have largely missed out on the opportunity to integrate with the world economy. The reasons for the low participation of oil exporters in globalization include the dominance of oil and of oil export earnings, nascent private sectors that remain overshadowed by overbearing public sectors, economic, financial and political restrictiveness, conflicts and instability, uninviting investment climates and undiversified economies. If trade integration is measured by exports + imports/GDP, the Middle East oil exporters were less integrated in 2004 than they were 30 years ago, with trade as a share of output having actually declined. The GCC countries are perhaps slightly more integrated among the Middle East countries with a high ratio of trade to GDP (only because of oil) and intra-regional trade equivalent to about 7 percent of total trade. Primary exports (highly volatile in value because of volatile oil prices), especially fuel, remain the most important link of Middle East oil exporters to the global economy. The fact that the Middle East countries trade so little with each other (intra-regional trade is only about 7 percent of their total trade) is a reflection of the fact that they export little besides oil. In this chapter we assess the trade performance and competitiveness of Middle East oil exporters relative to the in-region and out-of-region countries. To this end, we analyze export and import performance, trends 148


149

IFS Database, IMF.

9.1 12.3 14.6 12.2

Out-of-region countries Chile Korea, Rep. Malaysia Singapore

Source:

2.1 7.8 5.6 19.4 ..

17.1 2.3 .. .. 6.3 8.9

10.7 15.4 10.7 10.8

2.8 5.3 6.7 1.2 ..

0.9 29.5 20 .. 1.6 2.1

2.9 11.7 .. 8.5

8 1.1 3.1 1 ..

2.4 4.5 .. .. .. 1.3

9.3 9.3 .. 7.1

1.1 3.9 7.2 8.2 ..

7.5 9.8 .. .. .. 9.2

1980–90 1990–2001

1980–90 1990–2001

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Rep. Tunisia

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

Import volume average annual growth %

Export volume average annual growth %

Table 8.1 Growth in merchandise trade

8.1 15 8.6 9.9

3.3 6 6.1 2.4 ..

7.2 4 .. .. 13.3 0.8

8.6 9.1 14 8.6

3.7 6.7 6.6 0.8 ..

1.2 29.4 16.3 .. 3.5 4

1980–90 1990–2001

Export value average annual growth %

2.8 12 .. 8.1

12.6 1.9 3.6 8.5 ..

0.2 2.2 .. .. .. 0.7

8.9 6.5 .. 6.6

3.8 5.2 5.2 10.2 ..

6.5 10.3 .. .. .. 11.2

1980–90 1990–2001

Import value average annual growth %

84 96 .. 111

86 80 95 131 ..

170 132 .. .. .. 174

1990

69 69 .. 92

85 85 115 .. ..

225 162 .. .. .. 213

2001

Net barter terms of trade (1995  100)


150

Middle east oil exporters

in market shares, trends in changes in composition, and progress in diversification.

8.2 HOW IMPORTANT ARE TRADE AND ITS DETERMINANTS? Whether or not trade causes growth is a much-debated question. Dollar and Kraay2 examined a sample of 80 countries in over four decades and concluded that trade liberalization is good for growth, that growth benefits the poor and has a positive impact on the economy much like fiscal discipline and institutional quality; additionally, trade openness proved to be an important determinant of per capita income.3 Trade liberalization caused positive spillovers; helped improve infrastructure, transportation and the performance of the export sector; it discouraged corruption and encouraged institutional reforms; it also had salutary benefits on improving competition for capital goods, services and new ideas. Thus trade openness is considered a major part of the reform process in developing countries. In contrast, other studies conclude that more openness is negatively correlated with growth in income for the poorest 40 percent of the world population, representing roughly 2 billion people.4 Moreover, slower growth has coincided with a period of increased globalization. Much of the ongoing debate focuses more on maximizing the benefits of trade and the equitable distribution of its benefits; what remains incontestable is the positive impact of trade on growth. If free trade is assumed to be generally beneficial, what has been the trade performance of the countries of the Middle East? What factors in particular have played a significant role in trade performance and what can these countries do to improve their trade-related gains? The determinants of trade can be broadly classified as: (1) those that are totally outside of a country’s purview; (2) those that are somewhat outside of its control; and (3) those that are directly under its control. Geographical factors affect trade and encompass a number of dimensions that are totally outside of a country’s purview. The physical attributes of a country are the most obvious. A country with direct access to the sea and a longer coastline is more open to trade than a landlocked country. A country that has physically harsh conditions – that is divided by high mountains, deserts and the like – is more likely to be oriented toward international, as opposed to domestic commerce. The physical size of a country may both encourage and discourage trade. A large country may produce a larger variety of goods and be less dependent on trade; yet because of economies of scale it may be more efficient in the production of certain goods and more open to trade. Geographic proximity to countries with large demand for imports


External sector

151

(or supply of exports), especially of those goods produced by the country in question (or demanded in the case of imports), encourages trade. The endowment of natural resources in high demand, for example oil and natural gas, enhances trade. Factors affecting trade that are to some degree under a country’s control include demographics. On the one hand, a highly populated country may be more self-sufficient than a sparsely populated country that cannot produce a wide range of goods. On the other hand, because of a large domestic market, a country with a large population can more readily take advantage of economies of scale and thus produce goods more efficiently for exports. Political stability promotes investment and enhances trade. A politically stable country is a much more reliable trading partner than an unstable one. Similarly, good political relations with the rest of the world, regional peace and the absence of economic sanctions all promote trade. The history of a country’s trade in turn affects its trading pattern, as countries with a long tradition of trade are more likely to be the traders of today. The policies of a country, which are largely under its control, play a key role in shaping its trade relations. Macroeconomic and supply-side policies affect GDP growth, and in turn GDP and GDP per capita are important determinants of trade. Economic performance, political stability, the rule of law and policies governing capital flows are the most important factors affecting foreign direct investment (FDI). FDI in turn affects growth and increases the presence of multinational corporations (MNCs). MNCs, with operations in a number of countries, promote trade through trade between their subsidiaries located in different countries. More directly, trade policies, tariffs and non-tariff barriers (NTBs) affect the volume of trade and are a key determinant of openness. A country’s membership in a customs union affects its trade relations. Customs unions may promote regional trade but may at the same time deter trade with non-custom union members. All in all, where a country finds itself today in terms of trade is a result of its natural endowments (geographical characteristics and so on), its history (what it did and where it has been) and what it is doing now (policies). The Middle East is no different. If everything else were the same, we would expect more trade with a neighboring country because of lower transportation costs. The demographic factors could also encourage commerce because neighboring countries are more likely to have cultural or religious similarities and preferences, and a common or similar language. In the case of the Middle East, we find most of the Arab countries sharing a common language, a common history, many cultural similarities, a common Arab League and a common Muslim faith. These should be strong reasons for boosting intra-Middle East trade and, at the very least, more regional integration. But are they?


152

Middle east oil exporters

8.3

BROAD PICTURE OF MIDDLE EAST TRADE

A regional comparison of trade patterns (Table 8.2) reveals differences, largely depending on the number of countries in the region, their GDP and their openness to foreign trade. The share of developing countries in world merchandise exports increased by five percentage points between 1990 and 2002 (Figure 8.1). The biggest gainer was East Asia and the Pacific, capturing an additional four percentage points. Europe and Central Asia has also increased its overall merchandise exports by two percentage points. It is apparent that the share of the Middle East and North Africa region (in addition to Sub-Saharan Africa) has actually declined. The traditional measure of trade ‘openness’ is the ratio of total trade to GDP. Surprisingly, the Middle East has the highest export ratio among all the regions. This is explained by the fact that as a region it is the biggest exporter of oil in the world and at the same time has a relatively low GDP. Oil dominates the Middle Eastern economies, accounting often for more than 80 percent of exports (Table 8.3). Does this imply that the Middle East economies are open economies? Unfortunately the answer is no. When oil is excluded from total exports, the ratio of trade to GDP drops significantly (Table 8.2). In the case of Eastern Europe the trade ratio has been increasing since 1990, after the fall of the communist regimes and economic liberalization. As for Western Europe, this ratio has also been increasing since the European Union was formed. North America, a huge economy made up of the US, Mexico and Canada, has a relatively low ratio compared to other regions. The low ratio does not imply closed economies – the low ratio is in part due to the very high aggregate GDP ($10 525 billion in 2000). Moreover, the North American economies are very mature and rely heavily on services as opposed to manufacturing. In order to address the weakness embedded in this ratio for measuring economic openness, the IMF has also developed another measure called the Trade Restrictiveness Index, which we examine in a later section. Trade Structure Broadly speaking, it is advantageous for a country to diversify its exports both in geographic and product diversification. Countries that export a wide range of products are better able to weather exogenous shocks; the dependence on only a few types of exports – in this case, primarily oil – makes them more vulnerable to price fluctuations in one commodity. While export opportunities have increased in the past decade, so has competition and the oil exporters have been ill equipped to respond to the challenge, squeezed out by the rapidly growing skilled labor force and competitive


153

External sector

Table 8.2 Total export by region (billions USD) and as a percentage of GDP

North America Latin America Western Europe Central & Eastern Europe/ Baltic States/CIS Africa Middle East Middle East (excluding oil exports) Asia

1990

1995

1998

1999

2000

522 8.25% 147 13.35% 1637 22.16% 105 10.19% 104 23.76% 134 28.31% n.a

777 9.82% 229 13.67% 2215 23.85% 159 20.74% 107 22.95% 146 29.04% n.a

897 9.61% 280 14.07% 2364 25.66% 216 28.36% 104 20.70% 140 24.49% n.a

941 9.53% 299 16.91% 2370 25.79% 215 33.35% 114 22.70% 180 33.35% 10.97

1058 10.05% 359 18.44% 2441 28.72% 271 38.38% 145 27.97% 263 43.36% 11.71

739 15.59%

1301 16.26%

1295 19.41%

1392 18.59%

1649 20.62%

Sources: World Bank (2002) and WTO, Times Series Statistics Database (2001).

private sectors in the East Asian economies as well as India and China. Most of the Middle East exports are concentrated in a few commodities, agricultural or raw materials and minerals. Qatar exports gas; Jordan, fertilizers; Syria, cotton; and Morocco, vegetables. This dependence on a few products has hampered strong integration with the world economy and has continued to leave domestic economies open and vulnerable to the vagaries of oil markets. Some countries have attempted to diversify their export base by way of re-exports, but competition within the oil-exporting countries for the regional re-export market has also increased. Given the abundance of their hydrocarbon reserves, some oil-exporting countries have made concerted eorts to develop energy-intensive industries (most notably petrochemicals, fertilizers, and iron and steel products) where they may enjoy (depending on the cost of transporting their feedstock to world markets as opposed to domestic sales) a comparative advantage largely because their feedstock costs are the lowest in the world. For the MEOE region, the service sector is the largest contributor to GDP followed by industry and agriculture (see Chapter 6). The Middle East economies rely heavily on services, which include the invariably bloated government sector and ďŹ nancial services. The sole exception in


154

Middle east oil exporters

Europe & Central Asia Latin America & 4% Caribbean East Asia & Pacific 5%

4% Middle East & North Africa 4%

High income 80%

Sub-Saharan Africa 2% South Asia 1%

Merchandise exports – 1990

East Asia & Pacific 9%

Europe & Central Asia 6%

Latin America & Caribbean 5% Middle East & North Africa 3%

High income 75%

Sub-Saharan Africa 1% South Asia 1%

Merchandise exports – 2002 Source: IMF Data, World Development Indicators (2002).

Figure 8.1

Merchandise exports: regional comparison 1990 and 2002


155

External sector

Table 8.3

Oil dominates many Middle Eastern economies

Oil exporters

Trade in fuels as % of total trade

As share of total merchandise exports 2002

1975

1990

2000

MEOE region Iran Iraq Kuwait Qatar Saudi Arabia UAE

97 34 92 97 99 ..

16 .. 93 84 82 5

89 .. 49 91 92 94

86 .. 94 65 89 92

Other exporters Egypt Syria

9 70

29 45

42 76

34 72

Source: WDI, IMF.

terms of a significant, albeit decreasing, contribution to GDP from the agricultural sector is Iran (approximately 24 percent in 1995 and 15 percent in 2000). The small contribution of the agricultural sector can be accounted for by the fact that most of these countries have a desert climate and little available water. The industrial sector is colossal in the oil-exporting countries because the ‘industry’ classification subsumes oil. However, the manufacturing sector is still at a nascent stage. While progress has been made in developing manufacturing activities in many countries, manufactures still represent a small share of exports. This in general does not compare favorably with the robust increase in manufacturing market share achieved by developing countries (whose market share went up from 11 percent in 1980 to 28 percent in 1997) and in particular the East Asian comparators (from 11 percent in 1990 to above 17 percent in 1997). Looking at exports, the top performers in 2000 have been Kuwait and Saudi Arabia (Table 8.4). As for imports in 2000, we have Kuwait, Saudi Arabia and Iran in that order (Table 8.5). Exports Export performance for the oil exporters has essentially mirrored fluctuations in the international oil markets. During the period 1980 to 1998, the price of oil declined by more than 60 percent in nominal terms


156

Middle east oil exporters

Table 8.4

Exports as a percentage of GDP 1975

1980

1985

1990

1995

2000

2002

42.64 57.9* 80.47 44.0** 73.72 74.23

13.31 62.8* 78.35 73.7* 63.55 77.93

7.93 24.4* 53.67 51.4* 30.07 58.74

21.99 18.5* 44.94 53.5* 40.63 65.43

21.07 2.0** 53.6 44.34 37.57 74.42

24.86 15.0** 57.53 67.28* 43.65 68.0**

30.96 14.0** 48.28 63.30*1 40.78 70.0**

20.18 120.0** 22.47 21.88

30.51 39.86 17.39 18.63

19.91 38.68 25.35 12.58

20.05 61.92 26.45 28.34

22.45 51.72 27.42 31.04

16.27 41.77 31.36 37.94

16.15 46.04 32.31 36.74

31.04

40.24

32.1

43.56

44.65

44.16

44.83

Out-of-region countries Chile 25.44 Korea, Rep. 27.23 Malaysia 43.02 Singapore ..

22.82 32.74 56.69 ..

28.15 32.89 54.09 ..

34.62 29.09 74.54 ..

30.55 30.2 94.09 ..

29.75 44.79 124.63 ..

35.88 40.01 114.07 ..

12.63 ..

17.98 ..

17.21 ..

25.08 23.11

31.69 32.15

42.01 43.62

41.33 39.7

46.78

39.31

22.75

30.87

30.05

34.16

34.42

16.62 17.02 14.6

18.77 19.18 16.75

19.4 19.97 16.58

19.08 18.89 19.9

21.15 20.54 23.71

25.1 24 29.72

23.87 22.2 30.64

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income Note:

1

2001 figure.

Source: WDI (2004); ** United Nations Statistical Division, National Accounts Main Aggregates Database.

and by more than 80 percent in real terms. While the composition of imports and exports varies from country to country, oil remains the main export commodity in the Middle East. For the Middle East oil-exporting countries, exports as a percentage of GDP are shown in Figure 8.2. The structure of merchandise exports reveals the change in the composition of exports in the past decade (specifically 1990 and 2002). The main


157

External sector

Table 8.5

Imports as a percentage of GDP

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

1975

1980

1985

1990

1995

2000

2002

33.37 44.6* 26.01 30.0** 21.85 29.01

16.42 31.2* 34.3 26.1* 27.34 34.48

8.03 28.9* 42.74 29.5* 36.64 30.91

23.53 17.83* 58.07 32.1* 31.6 40.38

17.92 2.0** 42.97 43.33 27.88 67.35

13.34 15.0** 30.71 22.33* 24.9 62.0**

29.29 15.0** 39.58 25.2*1 23.03 60.0**

41.28 77.0** 33.35 34.63

42.87 84.19 27.88 36.13

32.04 74.38 34.34 25.41

32.71 92.73 32.43 27.95

27.5 72.86 34.08 37.94

22.91 68.46 37.61 29.87

22.66 66.51 36.65 28.32

32.92

45.6

38.13

50.6

48.73

47.69

49.07

26.98 40.58 54.27 ..

25.71 32.14 49.08 ..

31.35 30.26 72.42 ..

28.73 28.76 31.68 41.74 98.02 104.65 .. ..

32.1 38.58 96.61 ..

13.1

17.02

19.41

24.38

32.22

36.66

36.67

..

..

..

23.99

32.93

39.46

37.59

32.9

30.01

28.73

32.55

29.98

25

28.99

17.07 17.37 15.57

20.01 20.59 17.12

19.28 19.94 16

19.21 19.16 19.4

20.85 19.96 24.58

24.85 24.23 27.45

23.32 22.2 27.85

Out-of-region countries Chile 27.41 Korea, Rep. 35.71 Malaysia 42.54 Singapore .. Comparators East Asia & PaciďŹ c Europe & Central Asia Middle East & North Africa World High income Low & middle income Note:

1

2001 ďŹ gure.

Sources: WDI (2004); * IFS; ** United Nations Statistical Division, National Accounts Main Aggregates Database.

components of merchandise exports are food, agricultural raw materials, fuels, ore and metal and manufactures. The in-region countries have a higher share of manufactures exports, which have steadily gained in importance with the exception of Syria. For Tunisia, for example, the growth in the exports of manufactures is considerable, constituting roughly 82 percent of total merchandise exports in 2002.


158

Middle east oil exporters

90 80 70 60 50 40 30 20 10 0 1975

1980

1985 Iran

Kuwait

1990

1995

Saudi Arabia

2000

2002

UAE

Source: WDI (2004).

Figure 8.2 Exports as a percentage of GDP: MEOE countries 1975–2002 With the exception of Chile, the out-of-region countries also rely heavily on manufactures exports as a significant source of export earnings: for Malaysia in 2002, this was almost 80 percent, for Korea it was 92 percent and for Singapore 85 percent. Natural resource-rich Chile relies on ore and metal (largely copper) exports, which constituted about 55 percent in 1990 and in 2002 had decreased to roughly 41 percent, the decline being made up by an increase in manufactures. For the high-income and low- and middle-income country groupings the structure of merchandise exports is heavily skewed in favor of manufactures. Service exports by contrast constitute a smaller portion of exports than does merchandise for the oil exporters.5 As a share of total service exports, Iran for instance had 74.9 percent in computer, information, communications and other commercial services in 1990; however this had declined astonishingly to about 2.9 percent in 2002. For Kuwait, transport services make up the lion’s share of service exports (over 80 percent). The in-region countries by contrast in 2002 show varying patterns of trade distribution. In 2002 Egypt shifted dramatically to a more service export structure (tourism). Jordan showed no appreciable change in the contribution of service exports but increased its merchandise exports from 1990. Morocco showed a substantial gain in merchandise and service exports in the period 1990 to 2002, with merchandise exports still accounting for the bulk of total exports in 2002 and in 1990. Syria has showed modest gains in the contribution of merchandise exports to total exports, and higher growth in service exports in the same period. Travel services rose significantly in 2002 to account for 73 percent of total service exports in 2002.


External sector

159

By comparison, the out-of-region countries in the same period from 1990 to 2002 have posted almost extraordinary gains in merchandise as well as service exports, doubling or tripling exports in US dollar terms. The structure of these exports is varied across the countries, with transport accounting for a larger share for Chile and Korea and computer, information, communications and other commercial services accounting for a larger share for Malaysia and Singapore. The high-income countries have the same pattern with the share of computer, information, communications and other commercial services having increased in 2002. Imports Imports as a percentage of GDP have been declining for many of the MEOE region (Figure 8.3). For Iran, imports display considerable volatility and for Iraq the impact of multilateral sanctions have had an overriding effect (Table 8.7). As for the structure of imports, for the MEOE region the major imports are manufactures, accounting for more than 80 percent in most countries (Table 8.5). Food is the next most important category, representing the highest percentage as a share of imports (16 percent) for the entire MENA region. This same pattern manifests itself for the in-region countries as well, with some decreases in food imports for many of the countries in 2002. The out-of-region countries also display a very high level of manufactures imports.

8.4 BALANCE OF PAYMENTS (TRADE BALANCE, CURRENT ACCOUNT BALANCE) A natural expectation for the current account position of the major oil exporters would be a surplus during the early years when oil depletion is at a significant rate, unless there are exceptional domestic investment opportunities. Recalling the earlier discussion (see Chapter 2) on the nature of depletable resource-based economies, we saw that such countries should save and invest a significant percentage of their oil revenues to compensate for oil depletion. So why would a country borrow from the rest of the world (namely, incur a current account deficit) during the period it was depleting its resources? This could only be justified if the country could invest the borrowed resources at a higher rate of return at home (note that the rate of return must account for any and all subsidies and is more correctly the social rate of return) than the cost of financing from abroad. This


160

Out-of-region countries Chile Korea, Rep. Malaysia Singapore

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

2002

22 300 190 696 108 261 158 075

9538

5203

10 221 73 295 32 655 67 489

16 438 4283 12 199 8228

9895 2511 6239 5030

19 741 35 554 7088** 2648** 8268 17 015 3935** 11 736** 47 445 76 862 22 106** 40 976**

1990

Exports

9166 76 360 31 765 64 953

6039

14 091 3569 7783 2955

22 292 6839** 7169 2363** 43 939 13 781**

1990

20 744 183 977 91 696 137 122

10 431

19 508 6186 13 314 6341

31 228 2798** 14 037 4336** 49 287 34 799**

2002

Imports

Goods and services millions US$

Table 8.6 Current account balance, 1990–2002

984

455

2536 451 6595 1145

267 111 738 925

1737 87 1872 1006

1990

198 1150 102 421

828

7545 1045 2336 88

1990

2002

Current account balance millions US$ 1990

426 1078 2780 1104

1131

3960 2260 3330 485

485 2003 870 3122

463

2327 227 196 1762

553 6092 7190 18 704

746

622 468 1477 1062

2365

14 076 4116 10 375 ..

6784 15 344 14 916 121 498 10 659 34 623 27 748 82 021

867

3620 1139 2338 ..

16 616* .. 10 078 1502* 22 186 15 355

2002

Total reservesa millions US$

457 327 12 645 5135* .. .. .. .. 2145 3886 4192 2929 1517* 742* 3261* 2074*2 15 975 4152 11 696 13 437 4400* 7942* 3529* 4891

2002

Net current transfers millions US$

217 2500 .. .. 3360 4951 .. .. 96 15 637 800 000* ..

2002

1022 214 988 401

378 .. 7738 .. 7929 ..

1990

Net income millions US$


161

Sources:

Notes:

1

452 206

210 917

..

127 663

4 301 369 7 985 963 3 542 141 6 007 813 752 042 1 976 803

691 152

1 666 647

4 330 919 3 583 425 730 892

134 989

..

165 402

7 986 659 6 113 233 1 871 332

178 885

443 440

620 489

WDI (2004); * IFS and other IMF resources; ** United Nations National Accounts Main Aggregates Database.

2000 figure, 21992 figure.

Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income


162

Middle east oil exporters

80 70 60 50 40 30 20 10 0 1975

1980

1985 Iran

Kuwait

1990

1995

Saudi Arabia

2000

2002

UAE

Source: WDI (2004).

Figure 8.3 Imports as a percentage of GDP: in-region countries, 1975–2002 Table 8.7

Trends in current account balance, BOP (billions current US$) 1975

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

1

1985

7.66*1 2.44 0.48 .. .. 2.50*1 5.93 15.30 4.80 .. 8.36* 3.90* 14.38 41.50 12.93 2.95 10.09* 6.91*

1990

1995

0.33 3.36 .. .. 3.89 5.02 0.74* –2.22* 4.15 5.33 7.94* 2.18*

2000 12.65 .. 14.67 3.21* 14.34 12.16*

2002 3.58* .. 4.19 3.26* 11.70 3.53*

1.20*2 0.44 0.04 0.37 0.5 1.41 0.25 0.17*2

1.82 0.26 0.89 0.96

2.33 0.23 0.2 1.76

0.25 0.26 1.19 0.26

0.97 0.06 0.47 1.06

0.40*1 0.35

0.58

0.46

0.77

0.82 0.75

1.41 0.8 0.6 0

0.48 2 0.87 3.12

1.35 8.51 8.64 14.8

0.77 0.55 12.24 6.09 8.49 7.19 13.28 18.7

Out-of-region countries Chile 0.49 Korea, Rep. 0.31*1 Malaysia 0.49 Singapore 0.58 Notes:

1980

1.97 5.31 0.27 1.56

1976 figure, 2 1977 figure.

Sources: WDI (2004); * World Economic Outlook and other IMF resources.

0.62 0.47 1.48 1.38*


163

External sector

Table 8.8

Current account balance as a percentage of GDP 1975

1980

1985

1990

1995

2000

2002

MEOE region 2.63 0.26 0.27 3.84 12.45 3.10* Iran, Islamic Rep. 1.11 .. .. .. .. .. .. Iraq 12.901 Kuwait 49.33 53.43 22.37 21.09 18.89 39.63 11.85 Qatar .. 106.80* 62.30* 10.10* 27.30* 18.00* 16.50* Saudi Arabia 30.92 25.26 12.45 3.56 3.74 7.6 6.21 UAE 29.74 34.10* 25.30* 23.60* 5.10* 17.30* 4.90* In-region countries 5.24 5.4 0.42 0.98 0.69 Egypt, Arab Rep. 8.202 1.9 Jordan 3.28 9.44 5.09 5.65 3.84 0.69 5.03 Morocco 5.61 7.47 6.92 0.76 3.6 1.42 4.09 1.92 5.84 14.32 2.31 5.89 6.70* Syrian Arab 2.212 Republic 3.77 4.3 4.22 3.55 Tunisia 8.871 4.04 6.91 Out-of-region countries Chile 6.78 7.15 8.57 1.6 2.07 1.01 0.86 0.79 1.74 2.65 1.28 Korea, Rep. 1.051 8.54 0.85 Malaysia 4.97 1.07 1.89 1.98 9.73 9.41 7.58 Singapore 10.3 13.34 0.02 8.46 17.63 14.52 21.51 Notes:

1

1976 figure, 2 1977 figure.

Source: WDI (2004).

condition of higher domestic return has not been the case from all that the author has seen in the region or from the available data. In the case of the richer oil exporters, those with high oil and gas revenues per capita, limited domestic investment opportunities and the implicit desire to become welfare states relying on investment income, our expectation would be significant current account surpluses as they accumulate foreign investments with their surplus oil revenues. The facts do not support all of these expectations with regard to the oil exporters’ current account positions. During years when their oil revenues fell, they continued to pursue wasteful government programs and finance indiscriminate subsidies, incurring large budget and current account deficits. Current account deficits have been most prominently a feature of the Saudi Arabian economy during the 1980s and early 1990s, a time when oil revenues dropped sharply but the ruling family decided to maintain expenditures in order to assure their own survival. Although data is generally unavailable for Iraq, it has had continuous current account deficits (an assertion clearly supported by Iraq’s rising external debt) because of


164

Middle east oil exporters

conflicts and broad economic mismanagement. Iran incurred large current account deficits after its war with Iraq when it attempted to initiate rapid growth. Most of the borrowed resources were either wasted or stolen by corrupt officials, and instead of rapid growth Iran quickly incurred an external debt of over $30 billion. The small and rich oil exporters have enjoyed continued large current account surpluses, with the exception of Kuwait in the aftermath of Iraqi invasion. In sum, indiscriminate subsidies, waste, corruption, military expenditures and, above all, wars and conflicts (see Chapter 12) have been the source of current account deficits where surpluses would have been expected. A notable feature of the current account position of the GCC countries is the large outflow of workers’ remittances, because all of these countries have a sizeable expatriate labor force. The in-region countries’ current account positions fit the normal (low- to average-performing) developing country pattern. The out-of-region countries, as to be expected, incurred large deficits during their earlier years, when they were poorer and were attempting to jump-start their investment and growth; today the out-of-region countries (with the exception of Chile) mostly have surpluses.

8.5

EXTERNAL DEBT

If the oil exporters had persistent current account surpluses over the years, then our expectation would be that they would have a net external surplus position. On the other hand, for the non-oil countries we would have no strong assumption regarding their net external debt position. Table 8.9, Table 8.10 and Table 8.11 provide a picture of the external debt position of the oil exporters and comparator countries. As can be seen, the oil exporters have incurred some external debt, but generally speaking and as to be expected, their debt position is much less serious than that of the other countries.

8.6

DEGREE OF TRADE PROTECTION

Trade reform requires dismantling protection, along with liberalizing exchange controls and rationalizing resource allocation by correcting price distortions. Countries justify the adoption of protective trade policies for reasons including generating government revenues, preserving the market position of domestic firms, supporting domestic employment, promoting domestic savings and maintaining an overvalued exchange rate. In the Middle East, trade policy has evolved differently in the intra-regional groupings of the oil exporting and non oil-exporting countries based on


165

External sector

Table 8.9

External debt2 (billions current US$)

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia Out-of-region countries Chile Korea, Rep. Malaysia Singapore Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income Notes: Sources:

1

1975

1980

1985

1990

1995

2000

2002

0.00 .. .. .. .. ..

4.50 .. .. .. .. ..

6.06 17.00*1 9.76*1 0.64*1 14.43*1 9.14*1

9.02 22.57* 8.28* 1.37* 17.39* 10.87*

21.88 22.53* 10.00* 6.52* 19.95* 9.50

7.98 .. 8.86* 10.47* 38.88* 14.95*

9.15 .. 13.05* 9.35* 30.50* 16.98*

4.84 0.34 2.66 0.79

19.13 1.87 9.72 3.55

36.14 3.94 16.06 10.88

33.02 8.33 25.02 17.26

33.50 7.66 23.82 21.41

29.19 7.35 20.72 21.66

30.75 8.09 18.60 21.50

1.11

3.53

4.88

7.69

10.82

10.63

12.62

5.52 .. 2.10 ..

12.08 .. 6.61 ..

20.38 54.35*1 20.27 3.58*1

19.23 46.50* 15.33 38.08*

22.04 11.53* 34.34 84.22*

37.05 41.95 122.36* 123.27* 41.94 48.56 220.12* 234.01*

20.61

60.73 124.35

234.09

455.63

497.27

497.35

12.59

75.60 141.79

217.22

349.01

503.94

545.84

25.61

77.37 117.08

155.13

186.44

180.71

189.01

.. .. .. .. .. .. .. .. .. .. 181.10 553.64 942.91 1351.90 1990.31

.. .. .. .. 2304.96 2338.85

1986 figure; 2 Total debt outstanding. WDI (2004); * OECD.

resource endowments and pressures to address external imbalances. For example, average tariff rates in GCC countries were below corresponding rates of the Association of South East Asian Nations (ASEAN) throughout the decade of the 1990s. Trade control measures classified by UNCTAD (United Nations Conference on Trade and Development) include tariffs, para-tariffs, price


166

Table 8.10

Middle east oil exporters

External debt as a percentage of GDP 1975

1980

1985

1990

1995

2000

2002

0 .. .. .. .. ..

4.86 .. .. .. .. ..

3.37 38.461 54.531 12.671 16.591 42.181

7.49 46.38 44.93 18.61 14.89 31.85

25.04 .. 33.83 80.10 14.00 23.72

7.86 .. 23.93 59.0 20.61 21.28

8.06 .. 37.09 53.52 16.15 23.93

39.61 25.00 29.62 11.57

83.50 46.22 51.65 27.18

104.2 76.95 124.8 66.34

76.56 207.2 96.90 140.2

55.68 113.8 72.20 187.8

29.36 86.78 62.17 120.0

34.22 86.25 51.54 107.8

25.64

40.39

58.03

62.57

60.14

54.60

60.04

Out-of-region countries Chile 76.35 Korea, Rep. .. Malaysia 21.23 Singapore ..

43.82 .. 26.50 ..

123.59 48.831 63.80 19.931

63.42 18.41 34.83 103.2

33.79 2.36 38.66 100.3

49.06 26.51 46.52 240.6

62.27 22.55 51.03 265.1

8.25

15.88

23.51

34.72

35.02

31.00

27.40

..

..

..

19.75

34.64

53.54

47.86

16.50

19.20

26.45

36.58

36.44

26.63

28.42

.. .. 12.49

.. .. 19.70

.. .. 31.54

.. .. 33.87

.. .. 37.59

.. .. 37.73

.. .. 7.20

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income

Source: Author’s calculations based on IMF data and WDI (2004).

controls, finance, automatic licensing, quality control and technical measures. Middle Eastern countries use tariffs, non-tariff barriers and tariff dispersion as substitute protection instruments with tariff levels and tariff dispersion acting as complements. Excluding Tunisia, the cross-country correlation between tariff and non-tariff barriers is –0.5, whereas the correlation between tariff dispersion and non-tariff barriers is –0.8. Oliva6 finds that tariff levels, their dispersion and non-tariff barriers account respectively for 30 percent, 20 percent and 50 percent of overall protection.


167

External sector

Table 8.11 Total external debt as a percentage of exports of goods and services 1990

1995

2000

2002

24 2881 2961 321 621 891

28 318 543 35 37 49

136 12 379 238 181 37 32

37 .. 112 88 47 41

26 .. 218 80 39 41

274 118 297 146

523 198 493 528

382 335 366 495

248 220 263 605

181 21 198 32

212 189 152 250

83

100

181

144

135

12

134

Out-of-region countries Chile 300 Korea, Rep. .. Malaysia 49 Singapore ..

192 .. 47 ..

439 1371 118 ..

183 63 47 ..

111 8 41 ..

165 59 37 ..

188 64 44 ..

77 ..

76 ..

143 ..

133 83

110 107

82 129

73 121

38

49

145

129

134

89

92

.. .. 65

.. .. 82

.. .. 170

.. .. 160

.. .. 153

.. .. 127

.. .. 119

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

Comparators East Asia & PaciďŹ c Europe & Central Asia Middle East & North Africa World High income Low & middle income

1975

1980

0.00 .. .. .. .. ..

39 .. .. .. .. ..

210 .. 132 53

1985

Source: Calculations based on WDI, OECD and UN data.

The extent and the impact of trade protection is diďŹƒcult to quantify and thus to compare across countries and regions. Actual protection may often rely on a number of NTBs and administrative hurdles that render a trade regime more restrictive than it appears. However, on balance it appears that the in-region countries have actually liberalized their trade regimes during the past decade. In Table 8.12 we compare the extent of trade restrictiveness of the Middle East countries with those in East Asia. As we saw in an earlier


168

Table 8.12

Middle east oil exporters

Middle East trade restrictiveness index2 1998

1999

2000

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabiaa UAE Average

10 .. 4 1 5 1 4.2

10 .. 4 1 5 1 4.2

10 .. 4 1 5 1 4.2

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia Average

8 7 81 10 81 8.3

8 7 .. 10 .. ..

8 6 .. 10 .. ..

Comparators World Developing countries Eastern Europe Western Hemisphere Asia Sub-Saharan Africa

4.6 4.7 3.7 4.3 4.7 5.2

.. .. .. .. .. ..

.. .. .. .. .. ..

Notes: 2 The index ranges from 1 (most liberal) to 10 (most restrictive); a In 2001, Saudi Arabia was considered an open economy with a score of 2 for trade restrictiveness. Sources: IMF calculation; 1 Sharer and others (1998).

section, this alternative measure overcomes the weakness embedded in the export-to-GDP ratio and in other conventional measures of trade restrictiveness. As defined by the IMF, this index measures restrictiveness on a tenpoint scale. It incorporates two elements: first, it considers the tariff on imports. Five ranges are designed for import tariffs with the lowest being from 0 to 10 percent and the highest being 25 percent and above. Second, this composite measure incorporates NTBs, and three categories are specified for NTBs ranging from open to moderate and restrictive. This classification depends on the number of economic sectors that are covered by the NTBs. From the index, it can be seen that of the 11 Middle East countries under consideration, there are three countries with restrictive economies (between


169

External sector

Table 8.13

Summary of customs tariffs for select Middle East countries

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabiaa UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

Minimum

Maximum

Simple average (1998)

Average effective rate 4

Standard deviation2

Index of protection1

..

..

..

..

..

..

.. 4 4 0 4

.. .. ..3 20 4

.. 7 .. 12.3 4

.. 2.3 1 5.9 2.1

.. .. .. 3.3(1995) ..

.. 1 1 2 1

5

40

26.8

15.5

28.9(1993)

5

0 0 1

35 35 200

16.6 25.7 35

5.4 15.6 11.2

.. 13.1(1997) ..

3 5 5

0

43

27.7

8.4

12.8(1998)

5

Notes: 1 Index ranges from 1(for most liberal tariff regime) to 5 (for most restrictive tariff regime) based on average tariff as follows (in %): 1 for 0t10; 2 for 10t15; 3 for 15t20; 4 for 20t25; and 5 for t25; 2 Data refers to average for 1990–93; 3 Duties are 20, 75 and 100 percent on steel, tobacco and alcohol respectively; 4 Computed as ratio of taxes on international trade over total imports (data refers to 1998). Sources: World Bank and UNCTAD data; reproduced in part from Nashashibi, Karim, Ward Brown and Annalisa Fedelino , ‘Export Performance’, in Zubair Iqbal (ed.), Macroeconomic and Policy Issues in the MENA Region, Washington, DC: IMF.

seven and ten), namely, Egypt, Iran and Syria; two countries with moderate economies (between five and six), these are Jordan and Saudi Arabia; and three countries with open trade economies (between one and four), Kuwait, Qatar and the UAE. Not surprisingly, those countries that are considered less trade restrictive are the same countries with comparatively betterdeveloped economies. Table 8.13 details a summary of customs tariffs for select Middle East countries and Table 8.14 lists simple average tariff rates.

8.7

MEMBERSHIP STATUS IN THE WTO

As for membership status in the World Trade Organization (WTO), almost all of the countries have joined or have observer status (Saudi Arabia


170

Middle east oil exporters

Table 8.14

Simple average tariff rates (in percentage) UNCTAD mean rates 1988–90 1

MEOE region Iran, Islamic Rep.1 Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia Out-of-region countries Korea, Rep. Malaysia Singapore Average total (GCC) Average total (non-GCC) Average total (East Asia) Note:

1

World Bank mean rates 1991–94

IMF rate most recent year

Author’s index

rate

year

23

1998

23

20.7

..

3.5 .. 12.2 4.5

.. .. 12.1 ..

4.2 5 12.3 4

1986 1990 1997 1998

3.5 5 12.1 4

33.5 13.8 23.5 14.8

42.2 17.6 22.8 ..

15.9 23.7 25.7 19.9–35

1998 1997 1999 1996

38.9 16.8 27.2 19.9–35

27.5

27.6

29.9

1999

40.6

12.9 13 0.4

10.1 13.4 0.4

7.9 9.3 0

1998 1998 1998

7.7 6.4 0.1

6.5

12.1

5.7

5.2

28

32.4

19.3–21.3

24.7–26.4

14.5

15

8.4

5.1–5.5

1984–87.

Source: Reproduced in part from Oliva, Maria-Angels, ‘Estimating Trade Protection in Middle Eastern and North African Countries’.

became a member in December 2005), with the exception of Iran and Syria (Table 8.15). In the case of Iran, the US in 2005 removed its objection regarding eventual Iranian membership. Here again, the countries that were considered to have high trade restrictiveness were either an observer or not a member of the WTO. However the general trend in the Middle East is toward more open trade regimes.


171

External sector

Table 8.15

Membership status in WTO Member

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia Out-of-region countries Chile Korea, Rep. Malaysia Singapore

Observer

None

X X X X X X X X X X X X X X X

Source: WTO.

8.8

TRADE AGREEMENTS

Other major factors shaping the Middle East trade picture are the free trade area known as the Gulf Cooperation Council (GCC), the Organization of Petroleum Exporting Countries (OPEC) and a number of sanctions imposed on countries in the Middle East. The members of the GCC are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. The GCC is essentially a free trade area where the ow of goods and services from one country to another is not subject to trade restrictions, but the members of the GCC do not have a common trade regime. All Arab countries (and Iran), with the exception of Jordan and Egypt, boycott trade with Israel, while Lebanon and Syria are considered to be in a state of war with Israel. As for sanctions, the UN imposed sanctions on Iraq for a number of years, severely restricting its external trade. There are currently comprehensive US sanctions on Iran. The European Union’s Association Agreements with countries of the Southern and Eastern Mediterranean to establish free trade in industrial products has played a catalytic role in facilitating much-needed structural reform in a number of countries.


172

Middle east oil exporters

Some tentative regional trade agreements have been established, but their impact was not enough to increase the poor intra-regional trade ratio of 7 percent. Eight of the Arab League’s 22 members did not belong to the WTO in 2002. The main regional agreements were mainly Arab agreements. Some of them have failed, such as the agreement of Economic Unity in 1957 or the formation of the Arab common market in 1964. The most promising may be the Greater Arab Free Trade Area (GAFTA) in 1997, whose legal framework was inspired and based on the once forgotten 1981 Facilitation and Promotion of Inter-Arab Trade Agreement. The GAFTA agreement, signed by 14 of the 22 members of the Arab League in 1997, is to be fully implemented by roughly 2008 after a one-year transition period. Learning from past errors, an effort has been made to include an action plan and a predefined implementation schedule. The main objectives of the GAFTA are to reduce tariff barriers among member countries, encourage intra-regional trade and establish common customs classification and standardized rules of origin; 18 countries had adhered to GAFTA by 2002. The goal of the Gulf Cooperation Council (GCC), although initially political, is also to promote trade between its members. At the end of 2001, it agreed in line with WTO requirements to unify regional customs tariffs at 5 percent in 2003 and to create a single market and currency before 2010. While tariffs between members have been removed, significant and differential production subsidies insulate national industries from foreign competition. The main drawbacks of such agreements for intra-regional traders were the lack of information from public agencies of the benefits of such trade accords and the lack of reciprocal respect of many clauses of the arrangement. Many clauses are often left to the interpretation of customs officials who lack knowledge about these arrangements. The creation of free zones has been significant in the region under the auspices of the WTO. More than 25 free zones have been created or are under construction in the Arab countries, the most successful one being in Dubai at Jebel Ali. But on the whole, the results have not been promising. The main problems faced by investors in Middle East free zones include excessive bureaucracy, lack of infrastructure, uncertainty about sudden changes in laws or regulations, overlap of procedures and legal framework policies within the free zone and a lack of autonomy. To state the obvious, we should note that non-oil exports of the oil exporters will increase significantly if and when they adopt policies to diversify their economies.

8.9

SUMMARY

Our expectation that the major oil exporters would have current account surpluses during their resource extraction phase is not borne out by the


External sector

173

data. Iran, Iraq and Saudi Arabia have had significant and persistent current account deficits at various times since 1975. Unfortunately, these deficits were not caused by heavy domestic investment motivated by high domestic social rates of return. Instead the deficits were incurred because of excessive consumption, indiscriminate subsidies and general waste, including corruption and heavy military expenditures. The export performance for the oil exporters has been lackluster and has been characterized by low diversification and heavy dependence on the vagaries of the oil market. The in-region countries have fared somewhat better in terms of product diversification, but have not kept pace with the surge in world trade. Some loss of competitiveness is suggested by the appreciation of real exchange rates, which may have contributed to slower export volume growth in recent years. Competitiveness and trade performance have also not been helped by macroeconomic policies. For the inregion countries, the adoption of fixed exchange rate regimes in the early 1990s (Tunisia is an exception), although having contributed to financial stability, has resulted in an appreciation of their real effective exchange rates. However, for the oil exporters the real appreciation, while not affecting oil exports, has discouraged non-oil exports. The MEOE region need to adopt managed floating exchange rate systems (see Table 8.16), convincingly liberalize trade, and introduce trade reform by lowering import tariffs and NTBs and by addressing the issue of indiscriminate subsidies. Privatization needs to be accelerated to send a clear message of government disengagement from commercial activities and to encourage private sector non-oil exports. Increased productivity gains, flexible labor markets and production subsidies can mitigate the impact of real exchange rate appreciation on non-oil exports. Among the in-region countries, Morocco and especially Tunisia have made great strides in promoting their export sector. At the same time, the Middle East countries need to do more to promote an environment conducive to foreign direct investment, especially in the non-energy area. Attracting foreign direct investment (see Chapter 10) and indeed even spurring vibrant private sector growth, hinges on adopting a comprehensive program that includes reducing the role of the public sector, adopting consistent policies, simplifying the regulatory system, ushering in more transparency, and reforming the financial system. FDI will bring not only capital but also the much-needed technology, know-how, management, marketing, and access to markets required to infuse life into largely uncompetitive private sectors.


174

Table 8.16

Middle east oil exporters

Exchange rate arrangement in the Middle East countries Market vs. official

Multiple exchange rates

Type of exchange rate

Fixed to

official official official

yes yes no

Fixed Fixed Fixed

official official official

no no no

Fixed Fixed Floating

NA US$ Basket of currencies US$ US$

market/ official

no

Jordan Morocco

official official

no no

Fixed until mid2000 managed float from mid 2000 to January 2001, managed peg from January ’01 Fixed Fixed

Syrian Arab Republic Tunisia

official

yes

Fixed

market

no

Monetary targeting

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep.

US$

US$ Basket of currencies NA

Source: IMF.

NOTES 1. WDI (2004) and WTO statistics. 2. Dollar, David and Aart Kraay, ‘Growth is Good for the Poor’. 3. Dollar (1992) ‘Outward-Oriented Developing Countries Really do Grow More Rapidly: Evidence from 95 LDCs, 1976–1985’. 4. Lundberg, Mattias and Lyn Squire, ‘The Simultaneous Evolution of Growth and Inequality’. 5. Service exports include transport, travel, insurance and financial services and computer, information, communication and other commercial services. Oliva, Maria-Angels, ‘Estimating Trade Protection in Middle Eastern and North African Countries’. 6. Oliva, Maria-Angels, ‘Estimation of Trade Protection in Middle East and North African Countries’.


9. 9.1

Labor and employment INTRODUCTION

In the initial aftermath of the significant oil price increases of 1973–74 and the resulting large inflow of oil revenues, most major Middle East oil exporters experienced significant labor shortages as they tried rapidly to build up their infrastructure and provide badly needed services to their people. Shortly thereafter, labor force growth in the Middle East oilexporting countries became either higher than or on the high side of comparable regional averages. While population growth has also been high in the past 25 years, averaging roughly 2.9 percent for the oil exporters, labor force growth has been on average even higher at about 3.2 percent. This has resulted in an increasing percentage of young people in the population seeking employment. This phenomenon is expected to continue, with the Middle East having the fastest growth in working-age population of any region in the world through 2015. The percentage of the population between the ages of 15 and 24 has increased in almost all countries in the region. The rise in working-age population, of course, could also be seen as a national resource, capable of having a salutary effect on economic growth. But this is not assured. To absorb the growing labor force, what is needed is a rapidly growing economy, a labor force with the demanded skills and flexible labor markets. The Middle East region’s stringent labor laws (see Chapter 11) make firing of indigenous labor particularly difficult. The absence of sound economic and social policies and supportive institutions has not been conducive to rapid private sector growth. At the same time, a rapidly growing labor force requires housing and other necessities of life, which invariably place pressure on existing infrastructure. Slow economic growth (see Chapter 6) has not provided adequate demand for labor; in turn, the inability to employ the rapidly growing labor force has kept economic growth well below its potential. Another significant factor that has contributed to the lackluster performance of the MEOE region is the low or often negative growth in total factor productivity (TFP), the efficiency with which it converts factors of production – physical and human capital – into economic growth (Table 9.1). Growth is the result of increase in the inputs of factors of production but even more significantly from gains in efficiency. Total factor 175


176

Table 9.1

Middle east oil exporters

Total factor productivity comparison

Region

1960s

1970s

1980s

1990s

Sub-Saharan Africa East Asia & the Pacific Latin America & the Caribbean South Asia High income/OECD Middle East & North Africa Early reformers Later reformers GCC

0.1 1.2 1.3 0 1.7 2.4 2.5 1.9 4.7

1.3 0.7 0.8 0.7 0.4 1.4 0.9 4 3.8

1.3 2.3 2.4 2 0.7 1.3 1 0.9 4.5

0 4 0.1 1.6 0.1 0 0 0.4 1.4

World average

1.1

0

1.2

2

Note: in the 1960s, GCC figures reflect only Saudi Arabia. Regional averages are weighted by population. Source: World Bank staff estimates.

productivity growth is a prerequisite if wages, and subsequently living standards, are not to erode while the economy absorbs the high growth in physical capital and labor. Studies show that total factor productivity growth accounts for nearly 60 percent of cross-country variations in output growth.1 These studies also indicate that TFP growth increases further if allowance is made for the contribution of human capital – job experience and level of schooling – to output growth. In the MENA region in particular, many of these studies show that those countries that have achieved positive TFP growth since 1960, for example, Egypt, Tunisia and Morocco, have also shown relatively higher economic growth rates. MENA countries on the other hand with negative TFP growth (many of which are oil-producing) have tended to have relatively poor growth performance. The policies to reverse negative TFP growth include improving governance and the quality and effectiveness of institutions, investing in human capital, and establishing an inviting business climate with a market-friendly and peaceful political environment. These policies, when coupled with thoughtful and orderly privatization and financial liberalization, will also attract foreign direct investment, further fueling growth and providing desperately needed employment. A third area of concern in the Middle Eastern labor market is the extent of female participation. Female participation in the labor force has been historically low in the Middle East as compared to the rest of the world; this is due to historical, cultural and social factors, levels of education and


Labor and employment

177

areas of skill, and is sometimes justified by those in power through opportunistic and self-serving religious interpretations (see Chapter 3). Both Middle Eastern sub-groups under study – the MEOE region as well as the in-region countries – lag behind their counterparts elsewhere in the world by almost 50 percent, even at 2000 levels, with regard to female participation in the labor force. A fourth area of labor-related issues is unsupportive labor laws and inflexible labor markets as discussed later in this chapter, and stringent labor hiring and firing regulations (Chapter 11). Finally, a very difficult employment challenge faces the MEOE region: given high unemployment rates in the oil-exporting countries of the Persian Gulf, especially in the more populated countries of Iran, Iraq and Saudi Arabia, and in view of the expected growth in the labor force in the next decade, high economic growth rates must be achieved in order even simply to maintain the current high levels of unemployment. Labor employment will be made more feasible if it is accompanied by better education and measures to increase flexibility in the labor markets. Some estimates place the required new job creation in the MENA countries at 5 to 6 million or more jobs a year if there is to be any chance to reduce prevailing unemployment rates.

9.2

TOTAL LABOR FORCE

In the MEOE region, the labor force has more than doubled in a span of 20 years and has even tripled in some countries (Table 9.2). The reason for the more than tripling in the size of the labor force in Kuwait, Qatar, Saudi Arabia and the UAE is due to the combination of a rapid increase in population and the influx of expatriate labor (Table 9.3). In the in-region countries and in the out-of-region countries there has been roughly a doubling of the labor force, except in Jordan, where there has been a larger increase due to the inflow of Palestinians. The increase for the world as a whole has been significantly less and the high-income countries have seen the least rapid increase of all country groupings. The impact on the labor force of the rapid population growth rates in the Middle East of the 1980s will be felt for at least another decade, if not more.

9.3

STRUCTURE OF THE LABOR FORCE

Female participation rates in the labor force have increased over time in the MEOE region but they are still the lowest in the world. Iran and Kuwait


178

Table 9.2

Middle east oil exporters

Total labor force

In Millions

1975

1980

1985

1990

1995

2000

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

10.078 3.070 0.349 0.076 2.072 0.243

11.725 3.530 0.498 0.104 2.766 0.561

13.885 4.034 0.669 0.183 3.911 0.720

15.765 4.617 0.890 0.275 5.319 0.935

17.556 5.545 0.661 0.286 5.936 1.172

19.678 6.440 0.887 0.314 6.813 1.388

12.734 0.464 5.981 2.127

14.318 0.519 6.968 2.475

16.270 0.665 7.938 2.931

18.313 0.841 8.987 3.384

21.090 1.189 10.161 4.214

24.400 1.454 11.471 5.164

1.802

2.187

2.519

2.865

3.340

3.784

Out-of-region countries Chile 3.390 Korea, Rep. 13.495 Malaysia 4.468 Singapore 0.920

3.826 15.540 5.295 1.18

4.363 17.661 6.087 1.333

4.992 19.634 7.132 1.558

5.621 22.100 8.230 1.788

6.211 24.026 9.620 1.996

633.375

704.101

789.249

889.131

963.552 1026.365

201.193

214.098

220.492

225.773

231.222

238.473

46.519

53.946

63.560

73.515

85.760

98.611

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

Comparators East Asia & PaciďŹ c Europe & Central Asia Middle East & North Africa World High income Low & middle income

1839.347 2036.604 2246.655 2480.541 2709.944 2940.999 349.444 374.338 396.453 420.485 443.273 464.881 1489.902 1662.267 1850.203 2060.056 2266.671 2476.119

Source: WDI (2004).

have the highest female participation rates among these countries and almost double those of Qatar, Saudi Arabia and the UAE (Tables 9.4 and 9.5). For the in-region countries, while the increase in female participation has been much more modest (because of their higher initial level) than for the MEOE region since 1975, the level of female participation in the labor force was still on average higher than that of the oil-exporting group in 2000 (Figures 9.1, 9.2, 9.3).


179

1980–85

1985–90

1990–95

1995–2000

3.1 2.8 7.4 6.6 5.9 18.2

2.4 2.3 3.1 3.1 4.0

2.5 2.9 3.5 4.0

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

Out-of-region countries Chile Korea, Rep. Malaysia Singapore 1.5 1.6 2.3 1.3

2.4 3.8 2.3 3.2 2.6

3.3 3.4 6.4 6.0 5.3 15.6

2.7 2.6 2.8 3.6

2.6 5.1 2.6 3.4 2.9

3.4 2.7 6.1 11.9 7.2 5.1

1.6 1.4 2.6 2.5

2.6 3.9 2.2 3.6 2.6

3.8 3.3 4.5 9.3 5.7 5.7

2.7 2.1 3.2 3.2

2.4 4.8 2.5 2.9 2.6

2.6 2.7 5.9 8.5 6.3 5.4

1.7 1.0 3.0 2.2

2.4 3.7 2.1 3.1 2.3

2.9 3.4 4.4 6.3 5.0 6.0

2.4 2.4 2.9 2.8

2.9 7.2 2.5 4.5 3.1

2.2 3.7 5.8 0.8 2.2 4.6

1.6 1.0 2.5 3.0

2.1 5.8 1.9 3.3 1.9

1.6 2.8 3.2 0.8 2.9 4.9

2.0 1.7 3.2 2.2

3.0 4.1 2.5 4.2 2.5

2.3 3.0 6.0 1.8 2.8 3.4

1.4 0.8 2.5 2.6

1.9 3.1 1.7 2.6 1.3

1.5 2.2 4.0 3.0 2.6 3.7

Labor Population Labor Population Labor Population Labor Population Labor Population force (%) (%) force (%) (%) force (%) (%) force (%) (%) force (%) (%)

1975–80

Growth in labor force vs. growth in population

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

Table 9.3


180

(continued)

Source:

Note:

1980–85

1985–90

1990–95

1995–2000

2.1 1.3 3.0 2.1 1.4 2.2

1.6 1.0 3.1 1.8 0.8 2.0

2.3 0.6 3.3 2.0 1.2 2.2

1.6 1.0 3.3 1.7 0.7 1.9

WDI (2004); Growth rates are author’s computations.

2.4 0.5 3.0 2.0 1.2 2.2

1.7 0.9 3.1 1.7 0.7 1.9

1.6 0.5 3.1 1.8 1.1 1.9

1.4 0.3 2.4 1.5 0.7 1.6

1.3 0.6 2.8 1.6 1.0 1.8

1.1 0.1 2.0 1.4 0.7 1.5

Labor Population Labor Population Labor Population Labor Population Labor Population force (%) (%) force (%) (%) force (%) (%) force (%) (%) force (%) (%)

1975–80

Growth rates used here are computed using a geometric method.

Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income

Table 9.3


181

Labor and employment

Table 9.4

Structure of the labor force Population (millions)

Total labor force (millions)

Labor force female % of labor force

1975

2000

1975

2000

1975

2000

1995–2000

1998–2010a

33.2 11.0 1.0 0.2 7.3 0.5

63.7 23.2 2.2 0.6 20.7 2.8

10.1 3.1 0.3 0.1 2.1 0.2

19.7 6.4 0.9 0.3 6.8 1.4

20.0 17.0 11.0 5.0 6.0 5.0

27.0 20.0 31.0 15.0 16.0 15.0

2.3 3.0 5.9 1.8 2.8 3.4

3.4 2.9 4.4 .. 3.2 1.8

36.3 1.8 17.3 7.4

64.0 4.9 28.7 16.2

12.7 0.5 6.0 2.1

24.4 1.5 11.5 5.2

26 14 32 23

30 25 35 27

2.9 4.0 2.4 4.1

2.8 3.6 2.5 3.7

5.6

9.6

1.8

3.8

26

32

2.5

2.2

Out-of-region countries Chile 10.3 Korea, Rep. 35.3 Malaysia 12.3 Singapore 2.3

15.2 47.0 23.3 4.0

3.4 13.5 4.5 0.9

6.2 24.0 9.6 2.0

24 35 32 30

34 41 38 39

2.0 1.7 3.1 2.2

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

Average annual growth rate (%)

Note: a Estimates of labor force growth are from Economic Research Forum for the Arab Countries, Iran and Turkey, Economic Trends in the MENA region, 2002. Source: WDI (2004).

9.4

LABOR LAWS

Regulation related to labor and employment usually encompasses four important bodies of law – employment, industrial relations, occupational health and safety, and social security. Empirical evidence suggests that a regulatory climate can strongly influence job creation and the employment conditions as well as the level of social protection workers enjoy.2 Striking an optimal balance between policies that nurture private sector growth while protecting the rights of workers is crucial to overall economic development. However, labor market policies in much of the Middle East have failed to achieve this symmetry, because they have focused more on job protection, rather than fostering an enabling environment for growth.


182

Table 9.5

Middle east oil exporters

Female participation in labor force 1975

1980

1985

1990

1995

2000

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE Average

20 17 11 5 6 5 11

20 17 13 7 8 5 12

21 17 18 9 9 8 14

21 16 23 11 10 12 16

24 18 31 13 13 13 19

27 20 31 15 16 15 21

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia Average

26 14 32 23 26 24.2

27 15 34 24 29 25.8

27 16 34 24 29 26

27 18 35 24 29 26.6

29 21 35 26 30 28.2

30 25 35 27 32 29.8

Out-of-region countries Chile Korea, Rep. Malaysia Singapore Average

24 35 32 30 30.25

26 39 34 35 33.5

28 39 35 37 34.75

30 39 36 39 36

32 40 37 39 37

34 41 38 39 38

Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income

42 47 23 38 37 39

43 47 24 39 38 39

43 46 24 39 40 39

44 46 24 40 41 40

44 46 26 40 42 40

45 46 28 41 43 40

Source: WDI (2004).

Heavier labor market regulation is often associated with lower labor force participation and higher unemployment rates, especially among firsttime job seekers and women. According to business environment surveys conducted by the World Bank, stringent labor laws are among the primary challenges to business growth in many countries. Rigid labor market policies in the areas of hiring and firing workers, minimum wage requirements and administrative arrangements often result in a higher cost of labor, thus providing a disincentive for business growth in the formal


183

Labor and employment

40 35 30 25 20 15 10 5 0 1975

1980

MEOE

1985

In-region

1990

1995

2000

Out-of-region

Note: Growth rates are average rates for the regions.

Figure 9.1

Growth in female labor force

sector. For instance, while established rules limiting a firm’s prerogative for restructuring and retrenchment can protect workers from losing jobs in times of economic instability, regulations such as these also limit a firm’s ability to adopt innovative technologies. Over the long run, such policies not only promote inefficiencies in the labor market, but also hinder job creation in high-skill, high-technology industries. More specifically, when government regulation is not linked to wages or higher productivity, the cost of labor increases, thus placing pressure on firms to exploit informal labor markets, resulting in minimum statutory protection. When an appropriate balance is not struck between the incentives for firms to create greater employment opportunities and workers’ preference for job and income stability, the very mechanism that seeks to protect workers can leave them vulnerable over the long term. While the level of flexibility of labor laws throughout the region is a mixed bag, there are a number of broad trends that characterize much of the employment landscape in the Middle East oil exporting countries, including: 1. 2.

highly segmented labor force, with public–private sector and foreign– national employee divisions; rigid employment laws with regard to firing of employees in some countries;


184

UAE S. Korea

Saudi Arabia

World

1980 Iraq

1975

Iran

0

5

10

15

20

25

30

35

40

45

50

1985

1995

East Asia & Pacific

Kuwait

1990

Female participation in labor force: MEOE countries

WDI (2004); HDR (2004).

Figure 9.2

Sources:

% of total labor force

Europe & Central Asia

Qatar

2000


185

Labor and employment 50

% of total labor force

45 40 35 30 25 20 15 10 5 0 1975

1980

1985

1990

1995

2000

Egypt Syria

Jordan Tunisia

Morocco East Asia & Pacific

Europe & Central Asia

MENA

World

Sources: WDI (2004); HDR (2004).

Figure 9.3 3. 4.

Female participation in labor force: in-region countries

relatively flexible provisions for hiring workers and minimum wage requirements; and moderate benefits from social safety nets.

With the exception of Iran and Iraq, liberal market policies in the other oil-exporting (and the labor-importing) countries of the Persian Gulf have allowed for the emergence of a private non-oil sector that is largely reliant on a relatively less expensive, well-trained and more flexible expatriate workforce. The dynamics of this workforce and the policies applied to them provide an interesting lens with which to view the virtues of flexible labor laws. Foreigners in Saudi Arabia currently account for nearly 50 percent of employed workers, while in the UAE they make up almost 90 percent of the workforce.3 Expatriate workers throughout the region have typically enjoyed relatively flexible labor arrangements, making them more attractive to private sector enterprises. Additionally, in the past much of the national labor force was absorbed by a relatively obtuse public sector that offered workers higher wages, job security and generous retirement benefits. For instance in the UAE, while average nominal wages in the private sector declined by nearly 8 percent from 1997 to 2001, wages in the public sector increased by nearly 11 percent.4 Such employment policies resulted in a low elasticity for the substitution of foreign workers over nationals, in addition


186

Middle east oil exporters

to a segmented labor market and much queuing for public sector jobs. This dynamic deterred nationals from seeking employment in the private sector, while immigrant populations entered many of the GCC countries in droves to take advantage of the need for low-skill workers. Governments of many of the affected oil-exporting countries in the Persian Gulf have sought to improve market segmentation by imposing greater rigidity within their labor market regimes. These include quantitative targets or quotas on the number of nationals that must be employed by private companies in specific professions and sectors. Other countries in the region have set up barriers to limit the access of expatriates to their labor markets by creating a complex web of administrative procedures, such as work permits and sponsorship requirements. In a perhaps more positive trend, a number of countries in the region have adopted market-based strategies, such as improving training and education in line with the needs of the private sector. The development of laws and strategies to promote the nationalization of labor markets has varied from country to country throughout the region. Kuwait, Saudi Arabia and the UAE have all imposed restrictions on the number of approved work visas available to foreign workers. According to the 2000 Labor Market Law, the proportion of Kuwaitis that private sector enterprises must employ varies from industry to industry, and varies depending on the size of the company’s operations. Saudi Arabia imposes perhaps the most stringent laws with regard to national quotas, requiring that nationals employed in private enterprises account for at least 75 percent of employees with their wages set at no less than 51 percent of the total wage bill. The UAE only uses quotas to limit the number of expatriates employed in the banking sector. Iranian labor laws forbid the employment of foreign nationals without appropriate work permits.5 Additionally, permits are only issued if there is a lack of expertise among Iranian nationals, the foreign national qualifies for the position, and if the expatriate provides training to an Iranian in the same position. Malaysia, a laborimporting out-of-region country, has relaxed labor laws for foreign workers over the years. In 2003 the government allowed for the recruitment of highly skilled workers where no local expertise is available. Malaysian labor laws also require that foreign enterprises provide training to Malaysian personnel in preparation for the gradual replacement of expatriates by Malaysians. There are profound limitations to what such stringent labor laws can actually achieve. As private enterprises turn to an informal workforce to avoid the high administrative costs of applying for work permits or the added cost of providing training to unskilled nationals, the practical difficulties in terms of monitoring and enforcing such targets and


187

Labor and employment

quotas emerge. Moreover, such rigidity could compromise the competitiveness of the non-oil private sector, resulting in limited job creation where it is most needed. We can see signs of this trend in the fact that growth in the non-oil private sector in countries such as Kuwait and Saudi Arabia has remained weak relative to the growth rate of the domestic labor force. Besides labor laws, hiring and firing regulations are critical for the functioning of labor markets and for employment outlook (see Chapter 11).

9.5

EMPLOYMENT BY ECONOMIC ACTIVITY

Employment in the agriculture sector in the oil-exporting countries is quite insignificant, with the exception of Iran. This is largely due to the inhospitable climate. Similarly, employment in industry is low and is only significant for sparsely populated countries because a relatively large number of people are employed in the oil sector. The lion’s share of employment is in the government sector; that classified as military employment is also significant and this sector is covered in Chapter 12. See Tables 9.6 to 9.8. Table 9.6 Employment in agriculture as a percentage of total labor force 1980

1990

2000

MEOE region Iran Iraq Kuwait Qatar Saudi Arabia UAE

36.4 30.4 1.9 2.8 48.4 4.6

38.8 16.1 1.2 2.7 19.2 7.8

26.5 10.1 1.73 1.3 9.8 4.9

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

45.7 10.2 45.6 32.3 35

40.5 15.8 44.7 33.2 28.1

33.3 11.4 36.1 32 24.6

Out-of-region countries Malaysia

41.6

27.3

18.7

Source: Organization Of Islamic Conference (OIC).


188

Middle east oil exporters

Table 9.7 Employment in industry and service as a percentage of total labor force 1980

1990

2000

MEOE region Iran Iraq Kuwait Qatar Saudi Arabia UAE

63.6 69.6 98.1 97.2 51.6 95.4

61.2 83.9 98.8 97.3 80.8 92.2

73.5 89.9 98.27 98.7 90.2 95.1

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

54.3 89.8 54.4 67.7 65

59.5 84.2 55.3 66.8 71.9

66.7 88.6 63.9 68 75.4

Out-of-region countries Malaysia

58.4

72.7

81.3

Source: Organization Of Islamic Conference (OIC).

Table 9.8 Employment in manufacturing as a percentage of total labor force

MEOE region Iran Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia Out-of-region countries Malaysia

1980

1990

2000

4 5 8.6 .. 3 ..

4 2.9 6.3 6.4 2.4 7.1

4.1 .. 7.4 10.8 5.5 10.4

10 2.5 .. 7.9 5.7

5.9 5.5 4.7 3 ..

4.8 7.4 .. 2.1 9.7

8.7

11.2

15.8

Note: Manufacturing represents a sub-sector of industry. Source: Calculations based on OIC and WDI data.


189

Labor and employment

9.6 UNEMPLOYMENT RATES, LABOR FORCE AND EMPLOYMENT PROJECTIONS Although official unemployment rates are already high for the MEOE region and for the in-region countries, the real figures are in almost all cases significantly higher (Table 9.9). With a 2.9 percent increase in population over the past 25 years, the MEOE region has one of the highest rates of population growth in the world, close only to that of sub-Saharan Africa. Population growth is expected to decline in the coming years; nevertheless, the disconcerting consequence of this explosion in population and also in labor force is the considerable challenge of employment and job creation. Given the high population growth rates of the 1980s, job creation has become the single biggest priority for many of the oil-exporting countries of the Persian Gulf. And, given the already high real rates of unemployment (Table 9.9 and Table 9.10) in these countries, economic growth must be rapid and it will have to persist well into the future if social unrest is to be avoided. The magnitude and extent of the labor market challenge confronting the Middle East can be better understood by the estimation of the number of Table 9.9 Unemployment rates: MEOE and in-region countries as a percentage of total labor force

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia MENA GCC Notes:

1990

1995

2000

2002

2003

14.2 .. .. .. ..

10

15.8 50a 7.1b .. 10d 2

16.3 30 .. .. 9.1 ..

15.7 40 .. .. 9.1 ..

8.8 16.8 12.1 8.9 18.2

11.3 15.3 16 .. 16.2

9 13.7 13.7 6.5b 16.9

9 14.3 12.5 .. 14.9

9.9 13.9 12.5 .. 14.3

12.4 0.5

13.4 5.8

12.9 7.1

12.5 7.8

12.6 7.9

.. 1.3 5.1c .. 2.6

c 1997; d 1998.

Sources: Various IMF and author’s estimates for Iraq; a Various World Bank; b 1999, Arab Human Development Report (2002).


190

Middle east oil exporters

Table 9.10 Unemployment rates: comparators as a percentage of total labor force

Out-of-region countries Chile Korea, Rep. Malaysia Singapore Comparators East Asia & Pacific High income

1980

1985

1990

1995

2000

2002

10 5 .. 3

12 4 7 4

6 3 5 2

5 2 3 3

8 4 3 4

8 3 .. ..

5 6

2 8

3 6

3 8

4 6

.. ..

Source: WDI (2004).

required new jobs as shown in Table 9.11. In Table 9.12 we calculate the required job growth in the Middle East sub-groups – the MEOE and in-region countries – using a simple approach. We project the labor force through the year 2012 using the labor force growth rate projections of the International Labor Organization (ILO), which differ from country to country. For the MEOE region we assumed the following labor force growth rates respectively for the six countries (for order of countries see Table 9.11): 3.6 percent, 3.52 percent, 3.55 percent, 3.31 percent and 1.37 percent (excluding Qatar). The implied overall labor force growth rate for the MEOE region was roughly 3.57 percent. For the in-region countries again, the labor force growth rate projections were as follows for each country respectively: 2.7 percent, 3.8 percent, 2.4 percent, 3.9 percent and 2.6 percent. The implied overall labor force growth rate for the in-region countries was about 2.8 percent. The new job additions were estimated as the increase in the labor force between 2002 and 2012 as well as the decrease in the number of unemployed. This decrease was computed for different possible potential reductions in unemployment rates of 10 to 50 percent in Table 9.10. The regional unemployment average by country sub-group is a simple weighted average (weighted by labor force). It must be noted that reductions in the regional averages are very sensitive to reductions in unemployment in the more labor-populous regions (Iran, Egypt and Morocco). Our results show that if the MEOE region maintained the same level of unemployment, the required job addition there would be about 12 million jobs. Every 10 percent reduction in the overall regional unemployment rate added roughly 1.1 million jobs. Similarly, for the in-region countries, in a status quo scenario, with unemployment levels remaining unchanged,


191

12.33

In-region

Source:

2002 2002 2002 1999 2002

7.242 1.583

2002 2000

Author’s computations; WDI (2004); ILO projections.

49.123

25.905 1.570 12.094 5.595 3.958

37.695

21.084 6.810 0.975

Labor force 2002

2002 1999 1997

Year

Qatar; b Labor force/population.

9.00 14.30 12.50 25.00 14.90

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Rep. Tunisia

a Excluding

19.96

MEOE regiona

Notes:

16.20 50.00 1.30 – 9.10 2.00

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatara Saudi Arabia UAE

Unemployment rate (latest year available)

6.056

2.331 0.225 1.512 1.399 0.590

7.524

3.416 3.405 0.013 – 0.659 0.032

Of whom unemployed (actual)

65.064

33.935 2.312 15.441 8.261 5.114

53.194

10.084 1.816

30.221 9.683 1.391

Projected Labor force 2012

13.976

7.307 0.636 2.929 1.999 0.984

12.406

2.583 0.228

7.656 1.437 0.410

0%

17.926

8.834 0.801 3.894 3.032 1.365

17.669

3.042 0.246

10.104 3.857 0.419

50%

Table 9.11 Necessary job growth between 2000 and 2012 for MEOE and in-region countries

38.39

39.03 30.37 40.80 32.94 40.47

32.01

33.09 49.20

32.17 28.17 41.90

Labor force participation 2002

43.50 33.40 45.10 38.20 45.00

38.60 30.40 49.00 – 34.20 48.10

Labor force participation 2012b


192

Table 9.12

Middle east oil exporters

Estimating required job growth by country

Country in millions

Reductions in unemployment rate 0%

10%

20%

30%

40%

50%

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

7.656 1.437 0.410

8.146 1.921 0.412

8.635 2.405 0.412

9.125 2.889 0.416

9.615 3.373 0.416

10.104 3.857 0.419

2.583 0.228

2.675 0.231

2.766 0.235

2.858 0.239

2.950 0.242

3.042 0.246

Total MEOE region

12.406

13.467

14.529

15.591

16.656

17.669

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Rep. Tunisia

7.307 0.636 2.929 1.999 0.984

7.612 0.669 3.122 2.206 1.060

7.918 0.702 3.315 2.413 1.136

8.223 0.735 3.508 2.619 1.212

8.529 0.669 3.701 2.826 1.289

8.834 0.801 3.894 3.032 1.365

Total in-region

13.976

14.778

15.580

16.382

17.184

17.926

Total

26.381

28.245

30.109

31.973

33.837

35.595

Source: Author’s calculations.

the required number of new jobs was almost 14 million. Each 10 percent decrease in the unemployment rate required an additional 802 000 jobs. The overall job requirement for the region (MEOE and in-region) in the year 2012, with unemployment unchanged, was roughly 26 million jobs and about 35.5 million jobs assuming a 50 percent reduction in unemployment. Such a massive increase in employment will only be achieved if labor market flexibility is increased, labor laws made less stringent, education and labor training are enhanced, and economic growth is dramatically improved (see Chapter 11).

9.7 SOCIAL EXPENDITURES, RETIREMENT BENEFITS (PENSIONS) The Middle East region’s labor laws are generally rigid (see Chapter 11). However, in reality, many enterprises have been able to circumvent numerous restrictions because of poor enforcement, collusion and corruption among enforcing authorities. Government is the largest employer


Labor and employment

193

in most of these countries; its wage structure is often used as a reference point by private enterprise. Government salaries are high in the rich oil countries of the UAE, Kuwait and Saudi Arabia, and low in Iran. As a result, in the richer countries government employment policies have a twofold negative effect on private sector employment – siphoning labor away and raising wages. The GCC countries also have an exceptional feature, namely, extensive employment of foreign workers by private enterprises. For instance, only 5.9 percent of the Kuwaiti workforce and only 8.7 percent of the UAE workforce worked in the private industry in 1995. In many cases bad compensation structures and lackluster administration facilitates corruption and induces employees to take on second jobs. In terms of social protection, while there is considerable awareness of the necessity of welfare services, demand far exceeds supply. Many of the existing programs in these countries were developed in the 1970s and 1980s when there was robust economic growth on the back of oil revenues. Governments created a wide range of social protection mechanisms including health and education (Table 9.13). Infrastructure was expanded, and employment programs and guaranteed employment schemes were created to provide jobs for the working population. Food subsidies, cash assistance and pension schemes were also expanded. Currently however, the labor and social insurance situation is far from healthy. Pension fund reserves are underfunded and some are in deficit. As a percentage of GDP, pension spending for the whole MENA region is roughly 3 percent compared to about 8.5 to 9 percent for the OECD, 2 percent for Latin America and the Caribbean, 2 percent for Asia and about 0.5 percent for Africa. Pension schemes in the region are compulsory.6 They are based on partially funded systems and operate on the pay-as-you-go (PAYG) principle with defined benefit plans. The payment of contributions is frequently avoided and schemes are inflexible, offering little or no choice. While in theory benefits appear to be generous, often offering 70 to 80 percent of a worker’s salary at retirement, none of the schemes is indexed to inflation and benefits ultimately depend on discretionary adjustments by government. Hence this has led to workers often viewing contributions as a tax. Payroll taxes, namely, total payroll tax rates as a share of gross wage plus employer payroll contributions, are high compared to international standards. In Morocco and Tunisia, they account for about 8 to 14 percent of total labor costs and account for more than 23 percent of total labor costs in Iran and Egypt. When health, family allowances and other social insurance contributions are included they can account for 13 to 40 percent of labor costs.


194 0.3 1.5 0.1 1

1.2

Cash & in-kind transfers

0.3 – 0.7 0.4

Public works

2.5 4.2 1.8 2.6

1.5

Public pension

4.8 5.7 4.3 5.7

5.6

Total (1234)

2 0.7 0.1 1.7

1.5

Housing

1.6 3.7 1.3 3

2.4

Health

5.4 6 5.5 6.5

4

Education

9 10.4 6.9 11.2

7.9

Total (678)

13.8 16.1 11.2 16.9

13.5

Total (59)

Sources: Economic Research Forum for the Arab Countries, Iran and Turkey, Economic Trends in the MENA region, 2002; Various World Bank reports and recent Social Safety Net Updates, 1995–2000.

Social assistance includes cash and transfers but excludes public works.

1.7 0 1.7 1.7

Note:

2.9

In-region countries Egypt Jordan Morocco Tunisia

Food subsidies

MEOE region Iran

Country

Table 9.13 Social sector expenditures for selected Middle East countries as a percentage of GDP, 1995


Labor and employment

195

There is tremendous scope for improvement in efficiency of pension funds. Local capital markets are often dominated by substantial reserves but their risk-adjusted return on investment is lower than that of comparable private investments. In some systems pension funds are actually earning a negative return, for instance in Egypt and Tunisia, mainly because of the use of these funds to subsidize other state programs. Pension funds have also been weakened because the reinvestment of proceeds is often determined by political compulsions. The projected burgeoning of labor force growth, slow economic growth and rising unemployment all mean an urgent need for the Middle East countries to rationalize pension systems and embark on intensive pension reform. Pension reform is an area with far-reaching social, cultural and financial implications. More generally, the oil-exporting countries need to start eliminating their indiscriminate subsidies and focus on developing an efficient and equitable social safety net that truly reflects the oil dependence of their economies as well as Islamic teachings and values.7 Apart from the substantial technicalities involved, this is also an effort requiring immense political will.

9.8

SUMMARY

In the aftermath of the oil price increases of 1973–74, population growth rates in the Persian Gulf region spiked to become the highest of any region in the world. The rapid growth in population, requiring added social expenditures, has taxed government finances. More recently, and for a number of years to come, the rapid population growth of 1975 through 1990 has translated into a rapidly growing labor force. Governments have attempted to provide employment in the public sector to satisfy their population. Since roughly 2000, this policy of generous public employment has become impractical and unaffordable in Iran, Iraq and Saudi Arabia, resulting in significant growth in unemployment rates. These countries have experienced high unemployment rates even though (with the exception of Iran) they have very low female participation rates; if women were allowed to work the unemployment rates would be much higher. Islamic teachings would require that governments and rulers create an economic environment where anyone who wants a job (and is able to work) is able to find one. To avoid ever-increasing jobless rates and popular discontent, these countries urgently need economic, educational and labor market reform, and attendant policies both to absorb their burgeoning unemployment and to foster economic growth.


196

Middle east oil exporters

NOTES 1. For instance, Bosworth, Berry P., Susan M. Collins and Y. Chen, ‘Accounting for Difference in Economic Growth’. This paper uses a combination of growth accounting and regression analysis to examine economic growth experiences of 88 developing and industrial economies over the period 1960–92. The decomposition shows that increases in total factor productivity (TFP) have been surprisingly small in developing countries, and that accumulation of physical and human capital account for most of the growth per worker. This reinforces a finding of some previous authors, but for a much larger sample of countries. Further, the fact that countries with high rates of factor accumulation do not have unusually high rates of TFP growth provides little support for the new endogenous growth theories. The analysis also uncovers significant difficulties with the use of investment rates and school enrollment rates as proxies for capital accumulation, highlighting a reason why some previous studies have understated the importance of accumulation. The regression results strongly support the growing consensus that stable, orthodox macroeconomic policy, combined with outward-oriented trade policies, foster economic growth. Other channels are explored through which determinants of growth operate. Among other findings, the authors show that larger budget deficits slow growth through reducing capital accumulation, while real exchange rate volatility operates mainly through slowing TFP growth. Outward orientation appears to work through both channels. 2. World Bank, Unlocking the Employment Potential in the Middle East and North Africa: Towards a New Social Contract. 3. Fasano, Ugo and Rishi Goyal, ‘Emerging Strains in GCC Labor Markets’. 4. Fasano, Ugo and Rishi Goyal, ‘Emerging Strains in GCC Labor Markets’. 5. International Labour Organization, ‘NATLEX’. 6. Börsch-Supan, A., R. Palacios and P. Tumbarello, ‘Pension Systems in the Middle East and North Africa: A Window of Opportunity’. 7. The development of such a social safety net is to be the focus of the author’s major research efforts over the coming years.


10. 10.1

Capital flows INTRODUCTION

In a climate of soaring FDI flows during the 1990s, the Middle East scarcely improved on its already meager inflows of FDI. As for portfolio capital inflows, the Middle East also fared poorly because developed financial and equity markets as well as economic and political stability are a precondition for portfolio investments. In the Middle East, the poor state of local capital markets, the dominance of the public sector and the considerable geopolitical tension in the region have also precluded any significant financial integration. At least for the major oil exporters, a direct corollary of oil depletion (see Chapter 2) would be that in the years when oil is being depleted, these countries would have, if anything, surplus capital, resulting in net portfolio capital outflows; of course if these economies presented attractive investment opportunities and had liberalized financial markets, there would also be significant inflow of portfolio capital. Still, the expectation would remain that there would be a net outflow as oil is being depleted, especially for the countries that rely heavily on oil for a significant portion of their national output. The case of FDI is different. While it can be argued that the oil exporters should have high savings during the phase of oil depletion (see Chapter 2) and thus should not need capital inflows, FDI flows represent much more than mere flows of capital. FDI invariably embodies a number of other beneficial elements, namely, transfer of technology and management skills, upgrading to international best practices, improved market access and the like. Thus FDI can benefit a developing economy in a number of ways besides contributing capital. FDI also serves as an indirect bellwether of the rest of the world’s confidence in an economy. Both these aspects of capital flows – FDI and portfolio – are considered in the ensuing sections.

10.2

FOREIGN DIRECT INVESTMENT

Global FDI grew by about 600 percent during the 1990s, amounting to almost $1.4 trillion in 2000, when there was an especially marked increase, 197


198

Middle east oil exporters

1 600000 1 400000 1 200000 1 000000 800000 600000 400000 200000 0 Y1970 Y1975 Y1980 Y1985 Y1990 Y1995 Y2000 Y2001 Y2002 Y2003 World

Developed countries

Developing countries

Asia & the Pacific

Source: UNCTAD (2004).

Figure 10.1

FDI inflows by host region (millions US$)

largely due to very high cross-border mergers and acquisitions (M&A) activity. In 1990, only 20 percent of FDI flowed to developing countries; by 1999, this had increased to more than 30 percent. Significantly, investments in the East Asia and Pacific region represented about 51 percent of all inflows to developing countries and 60 percent of the total FDI stock in developing countries. Middle East countries participated in a very insignificant share of this global FDI activity (Figures 10.1, 10.2). Since 2000, the global FDI trend has been decreasing yearly, prompted mostly by a decrease in FDI inflows to developed countries. In 2003, inflows of FDI to developed countries decreased to $367 billion, an almost 25 percent decrease from 2002 levels. The fall in inflows to the United States was particularly dramatic, decreasing by 53 percent to $30 billion – the lowest level in the past 12 years. FDI inflows to Central and Eastern Europe (CEE) also slumped, from $31 billion to $21 billion. It was only developing countries as a group that experienced a recovery, with FDI inflows rising by 9 percent to $172 billion overall. But in this group, the picture was mixed: Africa, Asia and the Pacific saw an increase, while Latin America and the Caribbean experienced a continuing decline. The group of 50 leastdeveloped countries continued to receive very little FDI ($7 billion).


199

East Asia & Pacific

North America

FDI by geographic region

World Bank (2002).

0

1

2

3

4

5

6

7

8

Figure 10.2

Source:

Net inflows (% of GDP)

Region

European Latin America & Monetary Union Caribbean

Middle East & North Africa

South Asia

World

1984 1989 1994 1999


200

Middle east oil exporters

FDI flows need to be supplemented with domestic investment. For countries to maintain high levels of income and employment and to grow, the total amount of investment, regardless of its foreign and domestic mix, is of paramount importance. During the period 1990–2003, world FDI flows accounted for 8 percent of world domestic investment1 (gross fixed capital formation). Various FDI measures illustrate the Middle East oil exporters’ relatively weak integration within the global economy (Figure 10.2). Compared to a world average FDI per capita of $109.5, it is apparent that many countries among the Middle East oil exporters and in the group of in-region countries lag significantly behind. Much of this is also very disparate, with Qatar, the UAE and Saudi Arabia commanding the lion’s share of FDI inflows (largely in the oil, gas and petrochemicals sectors) in the MEOE region. During the 1990s, when FDI soared to spectacular levels, inflows to the Middle East and North Africa region scarcely increased. FDI Performance and Indices The UNCTAD statistics on the comparison of inward FDI performance and potential are shown in Figure 10.3. The FDI Performance Index is the ratio of a country’s share in global FDI flows to its share in global GDP. The Inward FDI Potential Index is based on 12 economic and policy variables. Figure 10.3 shows the inward performance index of the top ten and bottom ten performers. It is significant that all three larger countries in the MEOE region fall in the bottom category. In the UNCTAD FDI matrix of performance and potential (Figure 10.4), many of the countries in the MEOE region fall under the low performance, high potential quadrant, indicating that while these countries are currently having a hard time attracting FDI, the future holds promise – there are potential gains to be had from the trade and investment opportunities available. However, this necessitates the dismantling of restrictive trade regimes as well as the encouragement of a culture of growth through improvement of the investment and business climate. Undoubtedly, persistent instability in the region has taken a toll on its investment prospects. Nevertheless, it should be noted that even the relatively stable countries were unable to attract FDI despite their lower production costs. The region’s reputation for instability and conflict would appear to have inflicted a heavy toll even on countries not directly involved in conflicts. Broadly speaking, countries were able to attract investments only in the oil, gas and petrochemical sectors.


Capital flows

201 13.5

Top 10

Belgium and Luxembourg Hong Kong, China Ireland Brunei Darussalam Angola Singapore Netherlands Slovakia Bolivia Czech Republic

–5.0

Bottom 10

Japan Kyrgyzstan Zimbabwe Nepal Iran, Islamic Republic of Kuwait Libyan Arab Jamahiriya Saudi Arabia Indonesia Suriname 0.0

5.0

10.0

Figure 10.3 The UNCTAD Inward FDI Performance Index by host economy: the top ten and bottom ten, 2000–2002

10.3

INWARD FDI

New FDI inflows to the MEOE region as a share of GDP were consistently lower than for comparable country groups.2 In terms of absolute flows, FDI to the Middle East rose from $3.6 billion in 2002 to $4.1 billion in 2003.3 The main reason was higher investment in the oil and gas sector. In 2002, the net inflows of FDI to the MEOE and to the in-region countries (excluding Iraq and Qatar), in sharp contrast, were less than half those to the out-of-region group. In the case of the oil exporters, Qatar and the UAE followed by Saudi Arabia have been star performers in terms of attracting FDI. Because much of the investment in the oil-exporting countries is in the oil and gas industry, these countries have made some efforts to streamline their regulatory and financial sector environment in order to diversify investment potential. Egypt (without the significant oil and gas deposits of the Persian Gulf countries) has done reasonably well in recent years with about $1.18 billion


202

Under-performers Algeria, Argentina, Bangladesh, Benin, Burkina Faso, Cameroon, Cote d’lvoire, Democratic Republic of Congo, El Salvador, Ethiopia, Gabon, Ghana, Guatemala, Guinea, Haiti, India, Indonesia, Kenya, Kyrgyzstan, Madagascar, Malawi, Myanmar, Nepal, Niger, Nigeria, Pakistan, Papua New Guinea, Paraguay, Peru, Romania, Rwanda, Senegal, Sierra Leone, Sri Lanka, Suriname, Syrian Arab Republic, Tajikistan, Turkey, Ukraine, Uruguay, Uzbekistan, Venezuela, Yemen, Zambia and Zimbabwe.

Above potential

Albania, Angola, Armenia, Azerbaijan, Bolivia, Colombia, Ecuador, Gambia, Georgia, Honduras, Jamaica, Kazakhstan, Mali, Morocco, Mozambique, Namibia, Nicaragua, Republic of Congo, Republic of Moldova, Sudan, TFYR Macedoia, Togo, Tunisia, Uganda and United Republic of Tanzania.

Matrix of inward FDI performance and potential, 2000–2002

UNCTAD.

Figure 10.4

Source:

Low FDI potential

High FDI potential

Below potential Australia, Austria, Bahrain, Belarus, Egypt, Greece, Iceland, Islamic Republic of Iran, Italy, Japan, Kuwait, Lebanon, Libyan Arab Jamahiriya, Norway, Oman, Philippines, Qatar, Republic of Korea, Russian Federation, Saudi Arabia, South Africa, Taiwan Province of China, Thailand, United Arab Emirates and United States.

Front-runners

Low FDI performance

Bahamas, Belgium and Luxembourg, Botswana, Brazil, Brunei, Darussalam, Bulgaria, Canada, Chile, China, Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Dominican Republic, Estonia, Finland, France, Germany, Guyana, Hong Kong (China), Hungary, Ireland, Israel, Jordan, Latvia, Lithuania, Malaysia, Malta, Mexico, Mongolia, Netherlands, New Zealand, Panama, Poland, Portugal, Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, Trinidad and Tobago, United Kingdom and Viet Nam.

High FDI performance


203

Y1990

Y1995 Y2000

Saudi Arabia

Y1985

Qatar

Y1980

Iraq

Y1975

Iran, Islamic Republic of

Y1970

FDI inflows: MEOE countries (millions US$)

UNCTAD/FDI/TNC database.

Figure 10.5

Source:

–4000.0

–3000.0

–2000.0

–1000.0

0.0

1000.0

2000.0

Y2002

Y2003

United Arab Emirates

Kuwait

Y2001


204

Middle east oil exporters 3000.0 2500.0 2000.0 1500.0 1000.0 500.0 0.0 Y1970 Y1975 Y1980 Y1985 Y1990 Y1995 Y2000 Y2001 Y2002 Y2003 –500.0 Egypt

Jordan

Morocco

Tunisia

Syrian Arab Republic

Source: UNCTAD/FDI/TNC database.

Figure 10.6

FDI inflows: in-region countries (millions US$)

in FDI inflows in 2000, but the level has decreased dramatically since then. In 2000, Saudi Arabia and Egypt attracted the highest levels of FDI in the region. FDI inflows to Tunisia also increased rapidly in the late 1990s by more than three times their 1995 level. Since then, however, there has been a slowing of growth. Net foreign investment – both portfolio and direct – has increased in textiles, energy-related industries and privatized public sector companies. FDI into Morocco was only 1.2 percent of GDP compared with a low- and middle-income average of 2.5 percent in 2002; inflows dropped sharply in 2000 as a consequence of the drought that afflicted the country. If GDP were used as a consensus market determinant, the average inward FDI stock for the world was 22.9 percent of GDP in 2003 (Figure 10.8). By comparison, corresponding numbers for the Middle East oil exporters were a dismal 2.2 percent for Iran, –0.2 percent for Iraq, 1.2 percent for Kuwait, 16 percent for Qatar, 12 percent for Saudi Arabia and 4 percent for the UAE. The stock of FDI flows into developing countries was 31.4 percent of GDP (2003), while that of the MENA region was only 9.2 percent of GDP. This latter figure is so low as to be almost unbelievable given the region’s abundance of oil and gas.


Capital flows

205

20 000.0 18 000.0 16 000.0 14 000.0 12 000.0 10 000.0 8000.0 6000.0 4000.0 2000.0 0.0 Y1970 Y1975 Y1980 Y1985 Y1990 Y1995 Y2000 Y2001 Y2002 Y2003 Chile

Korea, Republic of

Malaysia

Singapore

Source: UNCTAD/FDI/TNC database.

Figure 10.7

10.4

FDI inflows: out-of-region countries (millions US$)

OUTWARD FDI

Outward FDI continues to originate largely from developed countries, but has become more evenly distributed. Developing countries’ outward FDI began to grow significantly starting in the 1990s. Reported FDI outflows from developing countries surged dramatically, reaching an estimated $40 billion in 2004, up from only $3 billion in 1991. The bulk of FDI outflows from developing countries originated in countries that had themselves been major recipients of inflows in recent years. Their share, especially in the global outward FDI services stock, climbed from 1 percent in 1990 to 10 percent in 2002, faster than in other sectors. Few Middle Eastern countries have made significant direct investments abroad. Egypt invested around $271 million and Kuwait around $254 million in 2000.4 In 2000, the total outward stock for the entire MENA region stood at $10 billion.

10.5

PORTFOLIO CAPITAL

The inflow of portfolio investment has also been virtually non-existent into the MEOE countries because of the poor state of financial and equity markets (Table 10.5) and because these countries would be expected to be running capital account surpluses (allowing capital inflows and outflows but expecting net outflows). Consequently, global financial integration also


206

Y1990

Y1995

Y2001

Y2003 Developing countries

Y2002

Latin America and the Caribbean

Western Europe

Y2000

Inward FDI stock as a percentage of GDP by host region

West Asia

Developed countries

Y1985

Asia and the Pacific

World

Y1980

WDI (2004).

Figure 10.8

Source:

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0


207

0.68 0.00 20 16 0.10

In-region countries Egypt Jordan Morocco Tunisia Syrian Arab Republic

1980

8 25.64 0.20 45 0.14

548.29 33.83 89.42 246.48 0.04

494.40 80.91 44.92 1.53 0.25 0.83 9.12 10.84 1 864.90 3 192.31 15.95 97.64

1975

1177.57 24.95 19.98 142.02 36.92

38.15 0.39 7.25 7.97 491.42 220.96

1985

1995

595.20 13.31 332 322.60 100

1235.40 786.60 215.37 778.80 270

39 3.14 16.30 251.60 1 883.58 514.56

2000

509.90 100.28 2 824.55 486.40 110

54.76 6.45 147 295.52 19.67 1184.32

2001

646.90 55.85 480.69 821.30 115

276.04 1.59 7 631.42 614.95 834.07

2002

237.40 378.60 2279.27 583.90 150

120 0.00 67 400 207.89 480.22

2003

208 646.45 335 734.23 1 387 953.23 817 573.94 678 750.92 559 575.54 171 109.47 204 425.68 1 107 986.50 571 482.57 489 907.11 366 572.60 36 896.67 115 952.83 252 459.06 219 720.65 157 611.85 172 032.50 24 853.87 80 280.82 146 194.79 111 966.14 94 474.24 107 277.61 24 309.82 79 588.66 146 066.72 111 853.58 94 383.29 107 119.59 2 151.78 125.84 1 493.88 6 098.55 3553.85 4131.87

734 37.65 165 90.45 71.46

361.95 17 0.42 2.40 5.60 7 4.88 93.56 1 863.82 1 877.17 115.82 399.85

1990

Source:

UNCTAD (2004).

Notes: a Comprises Bahrain, Cyprus, Islamic Republic of Iran, Iraq, Jordan, Kuwait, Lebanon, Oman, the occupied Palestinian territory, Qatar, Saudi Arabia, Syrian Arab Republic, Turkey, United Arab Emirates and Yemen.

13 032.04 26 614.51 54 985.56 58 101.57 9476.92 16 971.25 46 529.72 42 884.82 3555.12 9 643.26 8 421.25 15 186.75 947.49 4491.17 526.52 5468.83 811.42 4467.77 407.30 5391.78 167.64 2 609.98 –3 161.63 739.51

28 0.91 25.99 5.69 7.36 7.78

MEOE region Iran, Islamic Republic of Iraq Kuwait Qatar Saudi Arabia UAE

Comparators World Developed countries Developing countries Asia and the Pacific Asia West Asiaa

1970

FDI inflows by host region and economy, 1970–2003 (millions US$)

Region/economy

Table 10.1


208

Middle east oil exporters

Table 10.2 Inward FDI stock as a percentage of GDP, by host region/economy 1980–2003 Region/economy

1980

1985

MEOE region Iran, Islamic Republic of Iraq Kuwait Qatar Saudi Arabia UAE

3.2 3.7 0.1 0.1 0.1 0.2 1.1 1.5 3.9 25.2 1.4 1.8

1990

1995

2000

2001

2002

2003

2.2 2.5 0.1 0.1 0.2 0.3 1.0 5.5 21.5 17.5 2.2 4.1

2.5 0.2 1.6 10.8 13.8 1.5

2.1 0.2 1.3 12.9 14.2 3.2

2.5 0.2 1.3 16.3 13.5 4.3

2.2 0.2 1.2 16.0 12.1 4.4

0.0 26.7 0.0 9.0 59.3

0.0 26.5 0.0 9.1 58.4

0.0 25.7 0.0 9.5 66.9

0.0 28.3 0.0 9.5 66.0

In-region countries Egypt Jordan Morocco Syrian Arab Republic Tunisia

0.0 3.9 0.0 0.0 38.2

0.0 9.6 0.0 0.2 58.5

0.0 15.3 0.0 3.0 62.0

0.0 9.3 0.0 5.5 60.8

Out-of-region countries Chile Korea, Republic of Malaysia Singapore

3.2 2.1 20.7 52.9

14.1 2.3 23.3 73.6

33.2 2.1 23.4 83.1

21.6 60.7 1.8 7.3 32.3 58.5 78.2 121.5

6.6 4.9 6.2 12.4 17.6 1.5 6.5

8.3 6.2 9.3 16.3 20.7 10.0 11.0

9.3 8.2 11.0 14.7 17.8 8.2 10.4

10.2 8.9 13.3 16.3 18.7 9.1 11.7

Comparators World Developed countries Western Europe Developing countries Asia and the Pacific West Asia Latin America and the Caribbean

19.3 16.6 28.5 29.3 31.7 9.7 25.6

65.9 65.1 65.0 8.5 8.0 7.8 60.6 59.5 57.2 141.0 153.9 161.6 20.9 18.0 30.7 31.7 32.8 10.7 31.3

23.0 20.5 34.6 31.9 31.5 10.2 34.4

22.9 20.7 33.0 31.4 30.3 9.2 36.8

Source: UNCTAD (2004).

lags behind other regions of the world. The 1990s were also a time of significant foreign portfolio investment – both debt and equity flows – to developing countries. This was mainly in response to growing local capital markets, well-developed market infrastructure and attractive investment, tax and regulatory regimes. In a later section we will examine the reasons for this state of affairs in light of what investors look for when considering a potential investment opportunity. Net private (debt and equity) capital flows to the Middle East region totaled $6.8 billion in 2004, virtually unchanged from 2003 and below the $8.2 billion level recorded in 2002.5 The region received only 2.3 percent of


Capital flows

Table 10.3

209

FDI per capita comparison (US$) 1975

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

1980

14.9 2.1 4.1 0.1 0.2 0.6 53.3 47.3 257.2340.6 31.6 93.6 0.2 14.2 0.0 6.1 0.0

13.4 15.5 4.6 28.3 0.0

Out-of-region countries Chile 3.6 25.7 Korea, Rep. 0.2 0.4 Malaysia 28.6 67.9 Singapore 129.0 511.9 Comparators East Asia & Pacific World

3.6 6.6

0.4 12.4

1985

1990

1995

0.8 6.7 0.3 0.0 0.0 0.1 4.2 2.6 3.9 22.3 10.1 185.3 39.7 117.9103.1 160.2 62.8 170.8 25.3 9.4 0.9 13.7 5.1

14.0 11.9 6.9 7.5 8.8

10.2 3.2 12.6 22.7 11.2

13.7 50.5 208.0 5.3 17.7 27.7 44.3 143.4 282.1 382.6 1829.6 3287.3 3.7 12.1

15.6 39.7

47.0 59.3

2000

2002

0.6 4.2 0.1 0.1 7.4 3.0 430.1 1035.1 90.9 28.1 183.2 259.2 19.3 161.0 7.5 48.1 28.2

9.7 10.8 16.2 48.4 11.8

319.5 121.1 182.4 61.7 162.8 131.8 4284.9 1376.1 81.0 229.4

51.4 109.5

Source: Author’s calculations; FDI inflows/population.

all private capital flows to developing countries in 2004, well below all other regions including Sub-Saharan Africa (5.7 percent share). Portfolio equity flows to the region remained negligible at less than $0.2 billion in 2003/04, compared to $3.5 billion in Sub-Saharan Africa and $26.8 billion for all developing countries. Net private debt flows into the region increased somewhat from $1.8 billion in 2003 to $2.6 in 2004, but remains insignificant, because it accounts for only 2.4 percent of private debt flows to all developing countries. This can be partly explained by the fact that the region is able to generate large foreign exchange earnings through oil and gas exports. In addition, domestic banks in the region have ample funds to lend. Foreign exchange has not been a binding constraint to higher investment and more rapid growth. From the mid-1970s the MENA region has attempted to make significant improvements in the development of its financial markets. However, many attempts have been thwarted by the political instability in


210

.. .. .. ..

14 157.3 14 110.2 47.2 1.0 1.0 0.0

Out-of-region countries Chile Korea, Republic of Malaysia Singapore

Comparators World Developed countries Developing countries Asia and the Pacific Asia West Asia

UNCTAD (2004).

.. .. .. .. ..

In-region countries Egypt Jordan Morocco Syrian Arab Republic Tunisia

Source:

.. .. .. .. .. ..

MEOE region Iran, Islamic Republic of Iraq Kuwait Qatar Saudi Arabia UAE

Y1970

4

6.25 ..

28 611.5 27 969.3 642.1 249.8 249.8 99.3

.. 37.9

..

.. ..

..

.. .. 93.1 .. .. ..

Y1975

53 683.1 50 343.4 3318.8 1062.0 1044.1 586.0

43.5 26.1 201.1 97.6

7 3.06 38.7 .. ..

.. .. 407.0 .. 178.0 2.0

Y1980

62 178.2 57 907.0 4270.3 2860.8 2846.8 79.6

1.7 591.0 209.8 237.7

3 0.8 35.7 .. 1.19

.. .. 69.8 .. 9.1 10.1

Y1985

242 056.9 225 755.8 16 247.4 10 939.6 10 935.4 974.3

7.5 1 051.6 129.0 2 033.8

12 31.5 13 .. 0.3

.. .. 239.2 .. 642.3 59.1

Y1990

358 235.4 304 773.9 52 719.3 42 250.2 42 266.3 675.1

751.5 3552.0 2488.0 4467.3

34.2 27.3 12 .. 3.4

1.9 .. 1022.0 30.0 63.5 7.4

Y1995

1.7 3 986.6 4 998.9 2 026.1 5 298.4

..

51.2 4.7 58.4

347.7 .. 303.1 41.0 154.9 2 094.0

Y2000

1 186 838.3 1 083 884.9 98 929.4 83 872.4 83 805.3 3 757.1

FDI outflows by home region and economy, 1970–2003 (millions US$)

Region/economy

Table 10.4

721 501.3 658 094.4 59 861.1 50 425.1 50 308.9 5096.4

1609.7 2420.1 266.8 17 062.6

12.4 9.3 97.1 .. 0.3

2812.3 .. 365.0 111.5 43.6 441.1

Y2001

0.5

596 487.4 547 603.0 44 008.8 37 885.2 37 884.3 2460.0

293.8 2616.5 1904.0 3699.4

..

27.8 25.0 28.4

1299.2 .. 155.0 60.8 50.0 441.8

Y2002

612 201.2 569 576.5 35 591.0 23 636.9 23 608.4 701.4

1395.2 3429.2 1369.5 5536.2

20.7 2.6 11.6 .. 1.4

1486.4 .. 4 989.0 71.1 53.8 992.3

Y2003


Capital flows

Table 10.5

211

Portfolio investment* (millions current US$) 1975

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

1980

1985

1995

2000

2002

.. 0 0 0 0 0 .. .. .. .. .. .. .. .. 90 329 346 381 2064 12 668 3264 .. .. .. .. .. .. .. 9923 22 007 8415 3342 4057 9394 7558 .. .. .. .. .. .. ..

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

.. 0 0 .. ..

5 0 0 0 15

Out-of-region countries Chile Korea, Rep. Malaysia Singapore

6 .. 268 2

43 134 11 13

Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income

1990

.. .. .. .. .. 22 101 .. .. ..

20 0 0 0 30

15 0 0 0 2

20 0 20 0 25

266 141 18 0 20

678 52 8 .. 6

0 361 34 639 1876 1737 162 11 712 12 177 96 1942 255 436 2532 1399 175 1037 7525 13 51812 647 .. .. .. .. 8520 3439

.. 2703 4122

.. 5740 9362

.. 791 ..

.. 44 385 70 624 182 051 .. .. .. .. .. 13 754 7697 23 359

.. .. ..

.. .. ..

Note: * excludes LCFAR. Source: WDI (2004).

the region, including the Iranian Revolution in 1979–80, the protracted Iran–Iraq War in 1980–88, the annexation of Kuwait in 1991 and the subsequent instability in Saudi Arabia, Iraq and elsewhere in the region. Continuing US sanctions against Iran, the long period of UN economic sanctions against Iraq, the subsequent military conflict in that country and the intensification of the crisis in the Palestinian territory have all had a negative impact on the performance of almost all the economies in the region, especially the MEOE region, although many today have reasonably developed banking sectors, including the GCC, Lebanon and Jordan. Financial markets in the region have remained largely dominated by


212

Middle east oil exporters

traditional banking activity. They are also fragmented. The critical role of intermediation, which serves as a strong underpinning for growth and investment, has been inadequate. The region has been a net exporter of capital for the past 30 years; but the financial sector has not had the capacity to channel these savings into productive investment. With minor exceptions, equity and debt markets, insurance, leasing and long-term financing remain weak and/or underdeveloped. The banking sector in many countries remains dominated by public ownership (especially in Iran) or control, with considerable exposure to government debt (Saudi Arabia). Regulatory and enforcement ability continues to be weak; technology, management and operations skills need to be significantly upgraded in order to match international best practices. In a world of increased connectivity, there needs to be more integration with international capital markets. The heavy reliance on real estate collateral in some countries has led to poor provisioning policies. While a certain level of infrastructure is admittedly necessary to accommodate growing populations and expanding private sector activity, investment in the construction sector is disproportionate to other, more productive investments. It is thought that the high growth rates in real estate and in construction may have been a factor in the negative TFP growth recorded in some MENA countries.6 The number of listed domestic companies, a normal magnet for portfolio capital flows, is much lower than in other comparator regions (Table 10.6 and Figure 10.9). The MENA region as a whole has a lower number of domestic listed companies than do Europe and Central Asia, and East Asia and the Pacific. Iran leads the tally among the MEOE region with 304 domestic listed companies in 2000. Among the in-region countries, Egypt is the leader with roughly 1076 listed companies; in the out-of-region group, Korea has the largest total with 1308. Robust stock market activity implies healthy and liquid financial markets with well-developed mechanisms for firms to access capital through strong intermediation. Only a few Middle East countries have formal capital markets at varying stages of maturity and development. In terms of market capitalization of listed companies, Saudi Arabia has the highest share in the MEOE region with about $67 billion (in 2000, although much higher in 2005 as a result of higher oil prices). Egypt ($28.7 billion) commands the highest market share capitalization in the in-region countries and Korea ($172 billion) has the highest for the out-of-region group. Total market capitalization of equity markets for the entire MENA region in 2000 stood at about 31 percent of GDP, whereas correspondingly, the East Asia and Pacific region was about 53 percent (Table 10.7). Compared to their counterparts in East Asia and the Pacific, the Middle East countries lag behind significantly in financial integration; this is because of the relatively poor state of development of


Capital flows

213

Table 10.6 Market capitalization of listed companies (billions current US$) 1975

1980

1985

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

.. .. .. .. .. ..

.. .. .. .. .. ..

.. .. .. .. .. ..

.. .. .. .. .. ..

6.6 .. 14.4 .. 40.9 ..

34.0 .. 20.8 5.2 67.2 5.7

.. .. .. .. 74.9 ..

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

.. .. .. .. ..

.. .. .. .. ..

.. .. .. .. ..

1.8 2.0 1.0 .. 0.5

8.1 4.7 6.0 .. 3.9

28.7 4.9 10.9 .. 2.8

26.1 7.1 8.6 .. 2.1

Out-of-region countries Chile Korea, Rep. Malaysia Singapore

.. .. .. ..

.. .. .. ..

.. .. .. ..

13.6 111.0 48.6 34.3

73.9 182.0 223.0 148.0

60.4 172.0 117.0 152.8

47.6 249.0 124.0 101.9

.. .. ..

.. .. ..

.. .. ..

86.5 19.1 5.3

532.7 61.5 72.5

805.9 175.4 154.4

702.1 234.6 124.2

.. .. ..

.. .. ..

.. .. ..

9 403.5 17 789.6 32 241.7 9028.7 16 300.8 30 111.2 374.8 1488.8 2 130.5

23 359.5 21 522.7 1836.7

Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income

1990

1995

2000

2002

Source: WDI (2004).

their financial markets, their comparatively restrictive investment and regulatory regimes, their considerable political and economic instability, disparity in accounting and auditing standards and the lack of adequate international legal frameworks.

10.6 COMPARISON OF FDI RULES AND REGULATIONS Among the countries in the Middle East, the degree of policy liberalization to attract foreign direct investment has been anything but uniform. While


214

Iran, Islamic Rep. United Arab Emirates Tunisia Singapore

Kuwait Egypt, Arab Rep. Chile East Asia & Pacific

Listed domestic companies: 2000

WDI (2004).

Figure 10.9

Source:

0

500

1000

1500

2000

2500

3000

Qatar Jordan Korea, Rep. Europe & Central Asia

Saudi Arabia Morocco Malaysia Middle East & North Africa


Capital flows

215

Table 10.7 Market capitalization of listed companies as a percentage of GDP 1975

1980

1985

1990

1995

2000

2002

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

.. .. .. .. .. ..

.. .. .. .. .. ..

.. .. .. .. .. ..

.. .. .. .. .. ..

7.5 .. 54.0 .. 28.7 ..

33.5 .. 56.1 29.0 35.6 8.2

.. .. .. .. 39.7 ..

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

.. .. .. .. ..

.. .. .. .. ..

.. .. .. .. ..

4.1 49.7 3.7 .. 4.3

13.4 69.4 18.0 .. 21.8

28.9 58.4 32.7 .. 14.5

29.0 76.2 23.8 .. 10.1

Out-of-region countries Chile Korea, Rep. Malaysia Singapore

.. .. .. ..

.. .. .. ..

.. .. .. ..

44.9 43.9 110.4 92.9

113.3 37.2 251.0 176.3

80.0 37.3 129.8 167.1

74.2 52.2 130.7 117.2

Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income

.. .. .. .. .. ..

.. .. .. .. .. ..

.. .. .. .. .. ..

.. .. .. 48.0 51.6 ..

43.1 7.0 19.5 62.0 68.3 30.9

53.0 19.4 31.4 104.3 119.1 38.0

40.4 22.7 .. 74.6 83.4 33.3

Source: WDI (2004).

some countries have made concerted efforts to liberalize certain sectors of their economy to allow for greater competition and to attract FDI, others have moved very little in the direction of liberalization. Reform efforts among the Middle East oil exporters encompass measures that include significant changes in legal, tax and regulatory structures, designed to make investment more desirable. Yet despite these policy reforms, there continue to be insufficient inflows of FDI into the region. In the past, one of the greatest limitations to the investment climate in the region was the absence of comprehensive regulations for attracting FDI in each country’s legislative framework. Such a piecemeal approach has only added to the complexity of the legal and regulatory modalities for investment. However, in recent years, a number of countries throughout the region, including Morocco, Egypt,


216

Table 10.8

Middle east oil exporters

Listed domestic companies (total) 1975

1980

1985

1990

1995

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

.. .. .. .. .. ..

.. .. .. .. .. ..

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

.. .. .. .. ..

Out-of-region countries Chile Korea, Rep. Malaysia Singapore Comparators East Asia & Pacific Europe & Central Asia Middle East & North Africa World High income Low & middle income

.. .. .. .. .. ..

.. .. .. .. .. ..

169 .. 52 .. 69 ..

304 .. 77 22 75 54

.. .. .. .. 68 ..

.. .. .. .. ..

.. .. .. .. ..

573 105 71 .. 13

746 97 44 .. 26

1 076 163 53 .. 44

1 148 158 55 .. 47

.. .. .. ..

.. .. .. ..

.. .. .. ..

215 669 282 150

284 721 529 212

258 1308 795 418

254 1518 865 434

.. .. .. .. .. ..

.. .. .. .. .. ..

.. .. .. .. .. ..

774 2 176 110 2 608 817 1 234 25 424 36 612 17 747 20 791 7 677 15 821

2000

2002

2 782 3 132 2 808 6 781 1 882 1 585 41 928 47 576 24 366 26 947 17 562 20 629

Source: WDI (2004).

Jordan, Saudi Arabia, Kuwait, Syria, Tunisia and Iran, have sought to mitigate this problem by adopting a single framework on foreign investment regulation. As highlighted below, these policy frameworks continue to impose high barriers to foreign investment throughout the region. While broad regulatory reform is a critical measure of a country’s political will to create a business environment conducive to investment, the implementation of such reforms is an even more decisive factor. Based on a number of investment climate surveys, investors throughout the region continue to report inefficiencies in various aspects of the business environment and overall barriers to investment. A number of broad trends, which characterize much of the investment policy framework among Middle East oil exporters, have led to an overall poor investment climate. These include discriminatory policies, barriers to entry, establishment requirements and


Capital flows

217

prohibitive operational conditions. The Middle East oil exporters seem to impose greater restrictions on FDI than do some other countries in the MENA. Chile is the least restrictive of the out-of-region group, and Malaysia generally imposes fewer regulations on FDI than the MEOE region. Despite positive trends toward liberalization, the dissolution of entry controls remains a critical issue in the treatment of foreign investment. Barriers to entry imposed on potential foreign investors in the Middle East include restrictions to entry in certain sectors and industries, the requirement to apply to authorities in host countries for permission to invest, and domestic ownership requirements. There is a wide variation between countries in the region in both the scope and transparency of sectoral restrictions imposed on foreign investment. Some operate with a somewhat liberalized policy, permitting foreign investment in any sector outside the ‘negative list’. However, negative lists generally include key strategic sectors such as oil and telecommunications, leaving few viable opportunities for foreign investors. Other regulatory regimes may purport to be open to investment in a wide range of sectors of the economy, but in practice such openness depends on the nature of the project and on government discretion. Malaysia, Lebanon and Morocco have opened virtually all industries to foreign capital. Foreigners may invest freely in most sectors in Tunisia as well. In the past few years, after the Iraqi invasion, the Kuwaiti government has adopted a new regulatory regime aimed at attracting foreign direct investment, called the Direct Foreign Investment Capital Law. This new law authorizes foreign-majority ownership and 100 percent foreign ownership in a broad range of industries including: investment and exchange companies, insurance companies, information technology and software development, hospitals and pharmaceuticals, some infrastructure projects, tourism and entertainment. Authorization for investment in such industries may go beyond the scope of those included in other regulatory regimes in the region. However, like most of the Middle East oil exporters, FDI policy in Kuwait continues to preclude foreign investment in projects involving oil discovery or oil and gas production. Despite advances in Iran’s foreign investment framework, the country continues to take one of the most conservative stances toward foreign investment in the region, placing restrictions on investment in key sectors such as banking, transportation, telecommunications and oil. Saudi Arabia’s negative list of economic sectors barred from foreign investment also includes oil exploration, drilling and production, real estate brokerage, and land and air transportation. While some restriction in the oil industry could be readily justified on a number of grounds, the same is not true in the non-oil sectors.


218

Middle east oil exporters

The screening procedures for proposed foreign investment projects in numerous countries in the region remain excessively complex and timeconsuming. The UAE maintains non-tariff barriers to investment in the form of restrictive agency, sponsorship and distributorship requirements. In order to operate outside of the UAE’s free trade zones, foreign businesses must have a national sponsor, agent or distributor. Once chosen, sponsors, agents and distributors have exclusive rights and cannot be replaced without their agreement. While the Direct Foreign Capital Investment Law is a positive step toward reform in Kuwait’s investment climate, foreign companies continue to report numerous delays in being granted approval to operate, some citing an 18-month approval period. In contrast, while Chile also enforces comprehensive foreign investment establishment requirements, such procedures have been streamlined over the years and it takes less then one month for a firm to be granted approval. Foreign firms seeking to operate in Qatar also continue to be required to use a local agent for the purposes of immigration (sponsorship and residence of employees). When a non-Qatari party wholly owns the invested foreign capital, that party must appoint a Qatari agent. Domestic ownership controls constitute one of the most critical aspects of FDI regulations and restrictions among the oil-exporting countries of the Middle East. Governments throughout the region have developed regulatory regimes in support of joint ventures based on the assumption that the contrived relationship between foreign and domestically owned firms will result in a transfer of technology, management skills and other benefits to the host country and local economy. Companies seeking to establish themselves in the UAE are required to have a minimum of 51 percent UAE national ownership. Since UAE tariffs are low and not levied against many imports, the primary attraction of the free zones is the waiver of the requirement for majority local ownership. Qatar’s foreign investment laws allow for 100 percent ownership by foreign investors in certain sectors. However, for the most part, foreign investment is limited to 49 percent, with the Qatari partner(s) holding at least 51 percent. In Iran, foreigners seeking to own more than 49 percent of a joint stock company must first register and seek approval from the authorities. Businesses in Jordan are also subject to the 49:51 percent foreign:domestically owned formula, but this only applies to a limited number of sectors. Firms functioning outside of those sectors bear no restrictions on the percentage of foreign ownership or shareholding. Even after a company meets all entry requirements it can frequently face a wide range of prohibitive barriers to its operational activities. Operational constraints among the Middle East oil exporters include performance requirements, provisions of technology transfer, employment of


Capital flows

219

nationals, minimum levels of exports and corporate taxes. Governments establish such rules (akin to a tax on FDI) in an effort (invariably failed) to garner the broadest range of economic benefits from investments. Overall, barriers to operational activities seem to be higher among the MEOE region than the out-of-region countries. Among the Middle East oilexporting countries, the most common example of discriminatory treatment after FDI admission is granted are requirements for employment of nationals and corporate taxes levied on non-GCC investors (as already discussed). Local content requirements are also pervasive throughout the region. Regulations on government procurement give preference to GCC products over competing foreign products. In countries that have a bloated public sector and relatively little privatization, for example, Saudi Arabia, such favoritism can pose a formidable obstacle against foreign investment. In a region with increasing FDI liberalization, Iran has created greater restrictions, increasing the level of local content required in all industries from 30 to 51 percent. In contrast, as of 1999, Chile imposes no local content requirements on foreign investors. Foreign firms operating in Malaysia were previously required to meet local content requirements; however, in accordance with World Trade Organization regulations, these restrictions have been phased out. In a positive trend, a number of countries in the region have begun to liberalize their real estate sector, providing non-nationals with limited landownership rights. However, the liberalization of the real estate market has not been far-reaching enough to attract foreign investors. In recent years, both the UAE and Saudi Arabia have reduced restrictions on real estate, allowing foreigners to own in select areas and under select conditions. Ambiguities still remain with regard to foreign property ownership in Iran. While the Foreign Investment Promotion and Protection Act (FIPPA) does not allow for any type of foreign ownership of land, the FIPPA’s implementing regulations state: ‘In cases where the foreign investment results in the establishment of an Iranian company, the ownership of land appropriate to the investment project, as determined by the Organization for Investment, Economic and Technical Assistance of Iran (OIETAI), in the name of the company is permitted.’ In Malaysia the state exercises formidable control of land acquisition transactions by non-nationals. In contrast, Chilean authorities have not imposed regulations on the acquisition of real estate by a foreign entity. In sum, Middle Eastern oil exporters have not adopted regulations that attract FDI. At the same time, their sub-par economic performance has been a further deterrent in attracting FDI. Moreover, as we will see in Chapter 11, the broad business and legal climate has also dissuaded wouldbe foreign investors.


220

Middle east oil exporters

10.7 COMPARISON OF CAPITAL ACCOUNT RESTRICTIONS As countries face increasing pressure to conform to the trends of globalization and capital market integration, the level of financial liberalization and openness becomes a crucial variable in financial and economic growth. Although all the oil-exporting countries in the Middle East, as well as the in-region and out-of-region group, imposed some type of control on capital market transactions, there is significant variation between countries in terms of financial openness. Reflecting the complexity of capital controls, each country has developed a unique framework, regulating the flow of short- and long-term capital transactions. Such distinctions in each approach include direct controls restricting capital transactions and the transfer of funds through outright prohibitions and quantitative restrictions, as well as provisions requiring prior approval and licensing for specific financial activities. Over the past decade, the countries in the MENA region have gradually liberalized their capital accounts in an attempt to create a favorable environment for capital flows. However, some countries continue to maintain controls on foreign ownership of financial assets and repatriation of earnings.7 As a result of such restrictions, the region as a whole is still unable to attract a significant portion of the world’s share of private capital flows. The share of the MENA region in international capital flows averaged less than 2 percent per year during the first half of the 1990s, and only increased to 3 percent during the second half of that decade;8 this meager share represents the lowest among any region (as defined by the World Bank) of the world. To a large extent, the in-region countries account for many of the tight controls on capital markets in the region. Based on an IMF index measuring financial openness among MENA countries (characterized by openness of exchange regimes, freedom for foreigners to sell or purchase financial assets, freedom from restrictions on the purchase of foreign currency by residents, freedom to repatriate capital and compliance with other IMF articles) the MEOE region on average (with the exception of Iran) scored higher in terms of financial openness than the in-region group. Nearly all the Middle East oil exporters and Jordan scored ‘very high’ (8) in the financial openness index; Egypt and Lebanon have a ‘high’ level of financial openness (6 and 7 respectively); Tunisia, Iran and Morocco scored a ‘low–medium’ level of openness (5 and 4 respectively); and Syria’s score reflects the most restrictive financial markets (0).9 Additionally, of the out-of-region group, although Singapore enforces few capital restrictions, both Chile and Malaysia seem to have imposed greater controls on capital transactions than the MEOE region


Capital flows

221

(Table 10.9). However, regulations in both these countries have been noted for their innovation. It must also be said that an unregulated capital account does not always produce the optimal outcome. Restrictions on capital account transactions may be appropriate where adequate institutional arrangements, such as prudential regulations, do not exist. Broadly speaking, regulations on the inflow and outflow of foreign capital – in the form of restrictions on nonresidents or foreign investors – is the most significant trend for both the MEOE and comparator countries. This may partly explain the capital exporting nature of the oil exporting countries in the Middle East and the absence of capital inflows into the region. While nearly all countries place some sort of control on the purchase, sale or issuance of capital and money market instruments by nonresidents, the activities of resident investors are subject to such barriers mainly in the comparator countries. Capital and money market instruments can be divided into three distinct groups: shares or other securities of a participating nature, bond or other debt securities that tend to have long-term tenure, and money market instruments that reflect short-term capital flows. With a view to fostering macroeconomic stability, the longer-term and more stable inflows of capital tend to be the most attractive.10 Flows from long-term investments, such as FDI, bonds and other debt securities, are likely to be less susceptible to short-term volatility. While new incentives to attract foreign investment have recently been adopted in all the oil exporters, the vast majority of these and the comparator countries maintain modest restrictions on foreign investors’ access to capital markets, including local stock markets. For the region as a whole, Qatar and Jordan have developed the most liberal capital transaction arrangements, with virtually no controls on both capital and money market instruments. In Tunisia, perhaps one of the most restricted capital markets, there are controls on all transactions in capital and money market instruments and in Malaysia there are restrictions on most of these activities. The majority of the oil exporters (Iran, Saudi Arabia, Kuwait and the UAE) impose restrictions on the purchase and/or sale of securities of a ‘participating nature’ to non-residents. Regulations in Iran require prior approval for the purchase of such securities by non-residents; in Saudi Arabia and Malaysia foreign investors must also seek approval to sell or issue stock locally. Additionally, Saudi law imposes even greater restrictions, stipulating that portfolio investment in shares of listed Saudi joint stock companies be restricted to Saudi nationals, corporations and institutions and to nationals of GCC countries. At least 51 percent of the shares of UAE corporations must be held by a UAE national or organization. However, companies located in free zones may be up to 100 percent foreign owned.


222

Controls on capital transactions Controls on capital and money market instruments On capital market securities Shares or other securities of a participating nature Purchased locally by nonresidents Sales or issue locally by nonresidents Sale or issues abroad by residents Bonds or other debt securities Purchased locally by nonresidents Sales or issue locally by nonresidents Sale or issues abroad by residents Purchased abroad by residents Money market instruments Purchased locally by nonresidents Sales or issue locally by nonresidents Sale or issues abroad by residents Purchased abroad by residents Provisions specific to commercial banks and other credit institutions – – – Yes Yes Yes Yes Yes

Yes Yes – –

Yes Yes – –

Yes Yes

Yes

Yes

Iraq

Yes

Iran

Capital account restrictions

Capital transactions

Table 10.9

– –

– Yes

Yes –

– Yes

Yes

Yes

Kuwait

No No

No No

No –

No No

No

No

No

Yes

Qatar

– –

– Yes

– –

– Yes

Yes

Yes

Yes

Yes

Saudi

Middle East oil exporters

– –

– –

– –

– Yes

Yes

Yes

Yes

UAE

No No

No No

No No

No No

No

No

No

Yes

Jordan

Yes Yes

Yes Yes

Yes Yes

Yes Yes

Yes

Yes

Yes

Yes

Tunisia

In-region

– –

– Yes

– –

– Yes

Yes

Yes

Yes

Chile

Yes Yes

– Yes

Yes Yes

Yes Yes

Yes

Yes

Yes

Malaysia

– –

– –

– –

– Yes

Yes

Yes

Singapore

Out-of-region


223 No

n.a.

– –

Yes Yes – –

– – – –

Yes Yes Yes Yes

Yes Yes

– – – – –

Yes Yes Yes Yes –

No

– Yes

– –

– Yes Yes –

Yes – Yes – –

No

No No

No No

No No No No

No No No No No

No

– –

Yes Yes

Yes – – –

– – Yes

No

– –

Yes Yes

– – – –

– – Yes – –

No

Yes Yes

No –

– – – –

– – Yes – –

– Yes

Yes

Yes Yes

Yes Yes

– Yes Yes –

– Yes Yes Yes Yes

Yes

Yes –

Yes Yes

No No Yes –

Yes No Yes Yes Yes

Yes

– –

Yes Yes

– – – –

Yes Yes Yes Yes Yes

Yes

Yes

– –

– –

No No – –

– – – –

Source:

International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions 2004.

Notes: ‘n.a.’ indicates an unavailability of information; ‘yes’ indicates that controls do apply; ‘no’ indicates that transactions are not restricted; and ‘–’ indicates that no reference was made to that transaction for that specific country.

Borrowing abroad Maintenance of accounts abroad Lending to nonresidents Lending locally in FX Purchase of locally issued securities in FX Differential treatment of deposit accounts in FX Reserve requirements Liquid Asset Requirements Interest Rate Controls Credit Controls Investment Regulations –Abroad by banks –In banks by nonresidents Open FX position limits –On resident assets and liabilities –On nonresident assets and liabilities Provisions specific to institutional investors Limits on securities issued by nonresidents Limits on investment portfolios abroad


224

Middle east oil exporters

Similarly, foreign investors in Chile may buy and sell securities only through the Bolsa offshore mechanism. Throughout the region, controls on the sale, purchase and issuance of bonds and other debt securities to residents are quite liberal, with the exception of minimal restrictions on such transactions imposed on residents by the Kuwaiti and Iranian authorities. Kuwaiti law stipulates that banks and financial institutions be subject to Central Bank of Kuwait (CBK) supervision on the sale or issuance of bonds abroad by foreigners. However, nearly all oil exporters (with the exception of Qatar) place barriers limiting the ability of non-residents to sell or issue bonds locally. In the UAE, for example, a non-resident issuer must appoint a representative in the UAE to handle all matters related to the registration of bonds, distribution of interest, submission of required reports to regulatory authorities and any other relevant matter. Malaysia imposes restrictions on both resident and nonresident investors for bond and other debt securities transactions; for example, if interest on bonds is paid to non-resident investors, the issuer is required to withhold interest. In Tunisia non-residents are required to seek approval from the appropriate authorities and the country imposes a ceiling. Because of the short-term nature of money market instruments, governments tend to impose restrictions on the inflow and outflow of these transactions in order to reduce market volatility and reduce speculation. As with other capital transactions, the MEOE region as a whole has the propensity primarily to manage non-resident activities relating to money markets. For instance, in Saudi Arabia, non-nationals must have permission to issue money market instruments, while Iran imposes restrictions on their sale, issuance and purchase by non-residents, and Iraq and Tunisia apply controls on all transactions relating to money markets. Among the oil-exporting countries, authorities maintain significant capital restrictions such as monetary, prudential and foreign exchange controls specific to commercial banks and other credit institutions. Again, Qatar is the only county among the MEOE countries that does not impose capital controls on the commercial banking sector. Iran, with perhaps the most stringent regulatory arrangements, imposes barriers on a range of bank operations abroad, as well as on lending to non-residents and foreign exchange. Saudi Arabia, Kuwait and the UAE manage capital flight by imposing restrictions on activities particular to non-residents in the banking sector. For example, Saudi banks require permission to lend to non-residents except in the case of inter-bank transactions and commercial credit, and non-residents in the UAE may not acquire more than 20 percent of the share capital of any national bank. The in-region and out-of-region countries have also designed banking policies with the view to regulating investment in the banking sector by non-residents and to control lending to


Capital flows

225

non-residents. In Chile, for example, banks are allowed to deal in debt instruments and sovereign bonds issued abroad, but must obtain authorization to acquire stocks of foreign banks or to establish branches abroad. The country also maintains open foreign exchange position limits on nonresident assets and liabilities. While there are distinct variations in how each country treats capital account transactions, such disparity does not exist in the handling of exchange restrictions among the oil-exporting countries of the GCC. With the exception of Iran, most of the MEOE region has maintained some form of a pegged exchange rate arrangement, with the vast majority of these countries pegging their currency to the dollar (Table 10.10). Throughout the Table 10.10

Exchange arrangements Exchange rate regime

MEOE region Iran Iraq Kuwait Qatar Saudi UAE

Manage floating N/A Peg to the US$ Peg to the US$ Peg to the US$ Peg to the US$

In-region countries Egypt Pegged exchange rate within horizontal bands Jordan Dinar is officially pegged to the SDR, but in practice it has been pegged to the dollar Morocco Peg to a currency basket Syria Peg to the US$ Tunisia Conventional peg arrangement following a fixed CPI-based real exchange rate rule Out-of-region countries Chile Independently floating Malaysia Conventional pegged arrangement Singapore Managed floating

Free from Free from Forward multiple parallel exchange exchange rates exchange market market Yes N/A Yes Yes Yes Yes

No N/A Yes Yes Yes Yes

No N/A Yes Yes Yes Yes

No

Yes

No

Yes

Yes

Yes

Yes No Yes

Yes No Yes

No No Yes

N/A N/A

N/A N/A

Yes Yes

N/A

N/A

Yes

Source: Creane, Susan et al., ‘Financial Sector Development in the Middle East and North Africa’. Source (for out-of-region group): International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions 2004.


226

Middle east oil exporters

MEOE region and among the comparator countries investors are largely free from restrictions on foreign exchange transactions. Additionally, the MEOE region is largely free from multiple exchange rates and parallel exchange markets. Among the in-region group, both Syria and Egypt maintain multiple exchange rates, while Syria also has a parallel exchange market. Additionally, Tunisia’s exchange regulations are restrictive; it is illegal to take dinars in or out of the country and central bank authorization is needed for some foreign exchange operations, but non-residents are exempt from most exchange regulations.11

10.8

FDI PROSPECTS

In a survey conducted by AT Kearney,12 a fundamental shift in investor outlook and risk perception was apparent over the period 2000 to 2004, with a significant majority (69 percent) of leading executives expressing more optimism about the global economy. Investors were most optimistic about India, China, Russia, Brazil and Mexico as attractive FDI destinations. The AT Kearney survey also lists the chief global developments that are most likely to influence FDI decisions. Leading the list was the recovery of the US economy (60 percent) and dollar volatility (41 percent). These can be termed ‘originating’ factors. But leading the list of ‘destination’ factors – namely, those pertaining to the destination of FDI – were increased government regulation (34 percent), corporate governance issues (28 percent), security concerns and terrorism (26 percent) and military conflict in the Middle East (22 percent); given the last factor on the list as a determinant of overall FDI flows, it is hardly surprising that the Middle East fares so badly in attracting FDI inflows. Investment follows the simple path of the best available risk-return opportunity; by the same reasoning those sectors, countries and regions that offer excellent investment potential and pose low investment risk attract the most investments. This is a fairly simple paradigm. The obstacles to attracting investment can be assessed in light of oft-cited investor concerns about investing in the Middle East region. These include: ● ● ● ●

Lack of a stable political environment. Lack of healthy and sound macroeconomic environments with welldeveloped and liberalized capital markets and private sector activity. Absence of rationalized tax frameworks. Lack of transparency and disclosure with internationally recognized reporting, auditing and accounting standards.


Capital flows ●

227

Underdeveloped market infrastructure including clearing and payment mechanisms, back office support, technology and settlement systems, and so on. Absence of sound corporate governance and strong institutions (including legal systems) for enforcing contract and property rights, corporate governance practices and shareholder rights embodied in corporate statutes, and rules regulating the structure of industrial and financial ownership, including competition policies and controls over self-dealing. The dominant and overpowering role of the public sector.

Correcting these obstacles must also be seen in the context of the current global climate with regard to FDI and portfolio flows. The structure of FDI in recent years has shifted toward services. In the early 1970s, this sector accounted for only one-quarter of the world FDI stock; in 1990 this share was less than one-half; and by 2002, it had risen to about 60 percent or an estimated $4 trillion. Over the same period, the share of the primary sector in world FDI stock declined from 9 to 6 percent, and that of manufacturing fell even more from 42 to 34 percent. On average, services accounted for two-thirds of total FDI inflows during 2001–2002, valued at some $500 billion.13 Moreover, as the trans-nationalization of the services sector in home and host countries has lagged behind that of manufacturing, there is room for a further shift toward services. The composition of services FDI is also changing. Until recently, it was concentrated in trade and finance, which together still accounted for 47 percent of the inward stock of services FDI and 35 percent of flows in 2002 (compared to 65 percent and 59 percent respectively in 1990). However, such industries as electricity, water, telecommunications and business services (including IT-enabled corporate services) are becoming more prominent. Between 1990 and 2002, for example, the value of the FDI stock in electric power generation and distribution rose 14-fold; in telecoms, storage and transport it rose 16-fold; and in business services ninefold. As the latest UNCTAD World Investment Report indicates, developing countries need to strengthen their capabilities for the supply of competitive services in order to benefit from an increasingly integrated world economy. Under the right conditions, FDI can help to achieve this. While the level of FDI inflows may not always be a gauge of healthy investment prospects, a number of studies have shown the strong negative correlation between risk and instability and business investment. The most important contribution of FDI is in bringing capital, best practices and technological skills that developing countries especially need to create competitive services industries. This dictum applies not only to the new IT-enabled services, but also


228

Middle east oil exporters

to traditional services such as infrastructure and tourism. Further, as services become more tradeable, FDI can help developing countries access international markets by linking them to global value chains in services and production networks. In this sense, FDI may be more critical than portfolio flows. While it appears that an internationally competitive services sector is essential for development in today’s world economy, at the same time caution is necessary when attracting FDI. Some services are of considerable social and cultural significance and the whole fabric of a society can be affected by FDI in those industries. Other services may be natural monopolies and hence susceptible to abuses of market power. Countries need to strike a balance between economic efficiency, sound regulatory framework and broader development objectives. Especially in light of regional currency crises around the world and the shift toward FDI in services, developing countries face a double challenge: to create the necessary conditions – domestic and international – to attract capital flows and, at the same time, to minimize their potential negative effects. In either case, the key is to pursue the right policies within a broader development strategy. Critical to achieving these objectives is the upgrading of regulatory frameworks, human capital resources and physical infrastructure (especially in information and communication technology) required by most modern services.14 When the reasons for poor investment flows – whether FDI or portfolio – are analyzed, it is apparent that the Middle East and especially the oilexporting region remains an area of high potential that is as yet, however, untapped. Still, a complicated mix of operational risks exist that could thwart investor optimism in the region. The overriding concern is that of investment risk; until governments actively begin to calm investor fears, pursue growth-oriented policies and court investment, the region will remain an unattractive destination for capital.

10.9

SUMMARY

While the major oil exporters should have been net capital exporters because of the relative importance of oil in their economies and the implications of oil depletion for economic policy, this has been the case only for Kuwait, Saudi Arabia (not the public but the private sector) and the UAE, with Iran and especially Iraq as net capital importers, and Qatar on the margin because it started its gas development and exports more recently. As for inflows of FDI and portfolio capital, the oil exporters and the in-region countries have both showed significant sub-par performance. FDI has been


Capital flows

229

largely limited to the oil, gas and petrochemical sectors, and even in these sectors it has not been as high as it might have been. This is due to restrictive FDI rules and regulations, especially those in the energy sector, to slow economic growth, inconsistent economic policies, ineffective institutions, and conflicts and instability in the region. In fact, conflicts and instability have been the greatest impediment to FDI and portfolio capital inflows. Simply said, capital avoids significant risk unless it expects to be rewarded with commensurately high returns. Again, we must stress the obvious. For a true turnaround in the region, there is a need for peace and stability, accompanied by better policies, more effective institutions and political and social freedom within a broad Islamic framework of economic and social justice.

NOTES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

United Nations Trade and Development Conference, World Investment Report 2004: The Shift Towards Services. FDI flows include equity capital, reinvestment of earnings, other long-term capital and short-term capital as shown in the balance of payments. United Nations Trade and Development Conference, World Investment Report 2004: The Shift Towards Services. Economic Research Forum for the Arab Countries, Iran and Turkey, the World Bank. World Bank, Global Development Finance 2005: Mobilizing Finance and Managing Vulnerability. Various reports and sources, the World Bank. Creane, Susan et al., ‘Financial Sector Development in the Middle East and North Africa’. Agenor, Pierre-Richard et al., ‘Non-Debt Financing for Development in MENA’. Creane, Susan et al., ‘Financial Sector Development in the Middle East and North Africa’. Helleiner, G.H., ‘Capital Account Regimes and the Developing Countries’. US State Department. AT Kearney, ‘FDI Confidence Index Survey’. United Nations Trade and Development Conference (UNCTAD), World Investment Report 2004: The Shift Towards Services. Adapted from United Nations Trade and Development Conference (UNCTAD), World Investment Report 2004: The Shift Towards Services.


11. Law and order, business climate, economic freedom and country risk 11.1

BACKGROUND

In recent years, professional economists and policymakers have increasingly appreciated the links between governance and economic growth. Good governance encompasses effective rule of law, adequate protection of property rights, control of corruption and consistent and beneficial policy making that aims at serving the needs of society and the economy. A direct consequence of good governance is an attractive investment climate. An economic climate that encourages investment provides opportunities for firms to grow, create jobs and expand operations, thereby setting in motion a virtuous cycle of growth. The recent World Development Report 20051 (WDR) stresses the fact that the investment climate is central to a sustainable development agenda. Abbreviating from the recent WDR definition, the investment climate is generally described as ‘the set of factors for firms to productively invest, employ and expand’. It is usually a natural by-product of good and effective governance. Recent academic research has also focused extensively on the contribution of the investment climate and good governance to economic growth and poverty reduction. As an illustration of the importance that the measurement of the quality of governance and the investment climate, aid programs are now being linked to the recipient country’s score on a set of governance indicators. For example, the US Government’s Millennium Challenge Account (MCA)2 aid program requires recipient countries to score above the median of a group of 70 potentially eligible countries on the Control of Corruption Indicator3 published by the World Bank. As a result, improvements in the opportunities and incentives for firms of all types and sizes to grow should be a top priority for governments and policymakers. Governance

Investment climate

Economic growth

The question that follows immediately upon such a premise is: How do we measure the quality of governance and/or the investment climate? What 230


Law and order

231

determines the assessment of an investment climate? What are the implications of any system of scoring we could choose to use in our assessment? Traditional analysis has usually focused on financial and legal regulations but has generally eschewed the political dimensions of governance. However, the importance of good governance as a key parameter in the promotion of economic development derives not only from its direct impact on the extant economic and regulatory framework but also, and more importantly perhaps, from its pervasive influence in the social, political, economic and cultural spheres. In preceding chapters I have discussed the ramifications of the different characteristics of the economies of the Middle East oil exporters. Here, I examine some of the issues pertaining to governance and investment climate and their nexus with economic development. In the first section, I examine some of the indicators of investment climate including business and labor laws. These essentially answer the question: ‘How easy is it to do business in these countries? Additionally, from the perspective of the domestic investor, they show the costs of moving from the informal to the formal sector. Many of these measures are descriptive in that they gauge objective data. In the second section, I consider evaluative measures that have more normative content and analyze the social and political aspects of governance by examining economic freedoms, civil liberties, perceptions of corruption and overall country risk. In earlier chapters I addressed many of the impediments and restrictions to FDI and portfolio capital, with a view toward understanding the reasons for the Middle East’s relatively low engagement with the world economy. The focus there was mostly the foreign investor. The focus here is on issues that also concern the domestic investor, namely, the set of factors that promote the growth of a vibrant private sector – both domestic and foreign. Given the extent of recent research, a wealth of cross-country indicators exist that can be used in a variety of ways to determine the consequences of the quality of governance and the investment climate. One of the bestknown sets of indicators is the Doing Business Indicators published by the World Bank. In addition, the World Bank publishes a composite set of indicators known as the World Bank Governance Indicators that cover 209 countries over the period 1996–2004. These indicators capture six key dimensions of institutional quality and governance, including:4 ● ● ●

Voice and accountability – measuring political, civil and human rights; Political instability and violence – measuring the likelihood of violent threats to or changes in government, including terrorism; Government effectiveness – measuring the competence of the bureaucracy and the quality of public service delivery;


232 ● ● ●

Middle east oil exporters

Regulatory burden – measuring the incidence of market-unfriendly policies; Rule of law – measuring the quality of contract enforcement, the police and the courts, as well as the likelihood of crime and violence; Control of corruption – measuring the exercise of public power for private gain, including both petty and grand corruption and state capture.

For my purposes in this chapter, I have chosen to examine two sets of metrics. At the level of the firm, we have chosen investment climate indicators (the World Bank Doing Business Indicators, 2004). At the level of the economy, we have used broad governance indicators, including control of corruption or graft (Transparency International’s Corruption Perceptions Index, or CPI), economic and political freedoms (Fraser Institute Index, Heritage Foundation’s Index of Economic Freedom and Freedom House’s State of Freedom Rankings) and overall country risk (World Bank Country Risk Rating, or ICRG).

11.2

INVESTMENT CLIMATE INDICATORS

While there is a broad range of regulations imposed on firms in the Middle East region, we limit ourselves to the elements of the World Bank Doing Business Indicators: ● ●

Setting up a business; operating a business (employment regulation, ease of registering property, access to credit, contract enforcement, taxation, closing a business).

Specific areas of contract enforcement and taxation also deal with the closure of businesses but as their scope circumscribes business operations and transactions, we have chosen to treat them under ‘operating a business’. Creating an economic environment conducive to private sector growth undoubtedly requires sound macroeconomic policies and stability, but also an effective legal and regulatory framework. Business regulations that are not cumbersome and costly are also crucial elements to attract investment and to ensure compliance. In nearly every country in the Middle East and North Africa, the primary barriers to conducting business include both outdated bureaucratic regulatory environments and unpredictable and inadequate enforcement mechanisms. As evidenced by various surveys on the business climate, the primary constraints to enterprise development in


Law and order

233

the region consist of unpredictable business and tax administration and policy, entry regulations, property rights and land titling, and contract and accounts-receivable enforcement.5 While such bureaucratic constraints force companies to incur costs merely for compliance, navigating through cumbersome and opaque laws also imposes an added cost of time. In countries where it takes excessive time and cost to complete regulatory procedures, potential investors see diminished earnings and may choose to locate elsewhere or to cancel investment projects.6 These costs often have the greatest impact on small business development. Perhaps more importantly, weak and unreliable judiciary systems, particularly with regard to property rights and contract enforcement, result in a sense of insecurity among investors, thereby reducing business development and capital flows. Based on data from a composite index, developed from the World Bank Doing Business Indicators, regulatory reforms in the region that have been identified as having the greatest impact on business development – namely, regulations on business entry and exit, contract enforcement, access to credit and labor – have lagged behind those in the rest of the world. Indicators suggest that MENA countries ranked, on average, in the middle in a worldwide ordering of countries.7 Overall, the region has made relatively little progress in reducing procedural barriers and cost to private investment – making in fact less progress than any other region in the world. Setting up a Business As a result of exorbitant regulatory barriers, the costs associated with starting a business can be excessively high in many countries; a disincentive for foreign investment and new business formation. Broadly speaking, regulations of entry vary enormously from country to country. Such regulations impose differing compliance procedures prior to an enterprise’s initiation into the formal market, including screening procedures, labor and tax requirements, and environmental, health and safety regulations. Even a cursory analysis of the Doing Business Indicators reveals a number of distinct patterns.8 Higher-income countries tend to have fewer regulatory barriers to entry than do lower-income countries. The data also suggests that countries may be impoverished, in part, as a result of burdensome regulations that limit the development of new businesses. While an increased incidence of market failures in developing countries may explain the need for a rigid legal framework, without appropriate targeted regulations such failures will continue to persist. Additionally, countries with heavier commercial regulation tend to have higher levels of corruption and larger informal economies. Countries characterized as having representative forms of governance with limited intervention also tend to have lighter entry


234

Middle east oil exporters

regulation. While there have been modest improvements in the past decade,9 the average number of regulatory procedures to start a business, the time and cost associated with compliance to such procedures, and the paid-in minimum capital required to start a business (reflected as the amount that the entrepreneur must deposit in a bank before registration starts) in MENA countries far exceed the OECD country averages. Overall, the data (Table 11.1) indicates that both Iran and Tunisia place the least restrictive regulatory barriers to business formation, while Saudi Arabia imposes the most conservative regulations in the MENA region and, more specifically, of all MEOE countries. In terms of minimum capital requirements to register a business in Saudi Arabia, it costs 1549 percent of per capita income, it takes 64 days to complete registration and it takes 12 procedures. In contrast, it takes nine procedures, 48 days, and costs about 7 percent of the country’s per capita income to register a Table 11.1

Ease of starting a business Number of procedures

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

Avg. days Official cost of Paid-in spent during each procedure minimum each procedure capital

9

48

7.3

2.1

13

35

2.4

148.5

12 12

64 54

69.7 26.5

1549.5 416.9

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

13 11 5 12 9

43 36 11 47 14

63 52 12.3 34.2 11

815.6 1147.7 718.6 5053.9 327.3

Out-of-region countries Chile Korea, Rep. Malaysia Singapore

9 12 9 7

27 22 30 8

10 17.7 25.1 1.2

0 332 0 0

Note: Average time in days, official cost and paid-in minimum capital as a percentage of per capita income. Source: World Bank Doing Business Indicators.


Law and order

235

limited-liability company in Iran. To illuminate the barriers to entry in the MEOE countries even further, in Singapore it takes seven procedures, eight days, and approximately 1 percent of annual income per capita to start a business. While it only takes 25 days on average to comply with all business entry procedures in the OECD countries, the average is 39 days in the MENA region. Saudi Arabia again imposes the greatest bureaucratic barriers to business entry in this regard. Figures 11.1 and 11.2 provide a graphic presentation of a comparison between the MEOE region and the out-of-region countries. It only takes businesses in Kuwait 35 days to complete 13 entry procedures. However, in Saudi Arabia it takes 64 days on average to complete 12 procedures, signaling inefficiencies in the Saudi system. The bottleneck in the Saudi regulatory regime seems to arise when filing a firm’s articles of association with the appropriate regulatory body, namely, the Ministry of Commerce and Industry. Where it takes Tunisian and Jordanian businesses one day to file such papers, in Saudi Arabia this process can take nearly 22 days. High capital requirements are the norm throughout the Middle East and this is an area where the greatest distinction between the OECD and MENA emerges. On average, the paid-in minimum capital required in the Middle East is 856 percent of per capita income, surpassing the OECD average of 44 percent and the East Asia and Pacific regional average of 100 percent of per capita income. Syria has the highest minimum capital requirements by far, followed by Saudi Arabia. It is easily evident from Figure 11.3 that the out-of-region group has a far lower minimum capital requirement. Operating a Business The operating regime for firms consists of the system of laws designed to protect the interests of workers (see Chapter 9), the nature and effectiveness of the rule of law, contract enforcement and taxation. These are the major areas where government policy can directly influence and shape the behaviors of firms. Governments can also affect other factors that impact firm growth such as macroeconomic stability and control of crime and corruption. A restrictive set of policies will engender inefficiency and noncompliance, forcing firms either to operate outside of the rule of law, or to resort to rent-seeking behavior while also curtailing their possibilities for growth. Hiring and Firing Employees The largely stringent labor laws and rigid labor markets have not been supportive of business formation and business operations (see Chapter 9). In


236

Kuwait

Egypt

35 30 25 20 15 10 5 0

Number of procedures

Jordan

Chile

Starting a business: out-of-region countries

S. Korea

Malaysia

Singapore

Tunisia

Official cost of each procedure

Syria

Official cost of each procedure

Morocco

Avg time spent during each procedure

Starting a business: MEOE and in-region comparison

UAE

Avg time spent during each procedure

Saudi Arabia

World Bank, Doing Business Indicators, 2004.

Figure 11.2

Source:

Iran

Number of procedures

World Bank, Doing Business Indicators, 2004.

Figure 11.1

Source:

80 70 60 50 40 30 20 10 0


237

Law and order

Singapore

Malaysia

Korea, Rep.

Chile

Tunisia

Syrian Arab Republic

Morocco

Jordan

Egypt, Arab Rep.

United Arab Emirates

Saudi Arabia

Kuwait

Iran, Islamic Rep.

6000 5500 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0

Source: World Bank, Doing Business Indicators (2004).

Figure 11.3 Starting a business: paid-in minimum capital comparison (percent of per capita income) addition to a highly segmented labor market landscape, labor laws in the MEOE region are characterized as being relatively rigid (to varying degrees depending on the country) with regard to the firing of employees, contractual arrangements and minimum wage requirements. In Table 11.2 we show the indicators for the ease of hiring and firing workers. Abbreviating from the methodology of the Doing Business Indicators, the Rigidity of Employment Index10 is the average of three sub-indices: a Difficulty of Hiring Index,11 a Rigidity of Hours Index12 and a Difficulty of Firing Index.13 All sub-indices have several components and take values between 0 and 100, with higher values indicating more rigid regulation. It is readily apparent that the MEOE region all report higher scores on the Rigidity of Employment Index than their out-of-region counterparts. The sole exception is Saudi Arabia with a score of 13, which rivals even that of the out-of-region group. The Cost of Firing indicator measures the cost of advance notice requirements, severance payments and penalties due when firing a worker, expressed in terms of weekly wages. Iran leads the MEOE region and Egypt leads the in-region groups with comparatively high costs of retrenching workers. Singapore has the lowest costs for firing, namely, four weeks’ wages. Tunisia’s efforts at labor reforms are evident in a significantly lower cost for firing workers at 29 weeks of wages. Figures 11.4 and 11.5 compare employment regulations across the Middle East countries and their East Asian comparators.


238

Table 11.2

Middle east oil exporters

Ease of hiring and firing workers Difficulty Rigidity Difficulty of Firing of Hours of Firing Index Index Index

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

Rigidity of Cost of Employment Firing Index (avg of Indicator previous three sub-indices)

0

60

60

40

122

0

60

0

20

42

0 0

40 80

0 20

13 33

79 96

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

0 11 100 0 61

80 40 40 60 0

80 50 70 50 100

53 34 70 37 54

162 90 101 79 29

Out-of-region countries Chile Korea, Rep. Malaysia Singapore

17 11 0 0

20 60 0 0

20 30 10 0

19 34 3 0

51 90 74 4

Source: World Bank Doing Business Indicators.

The MEOE countries provide an excellent example of the limitations of stringent retrenchment and firing laws. Minimum standards for firing procedures can benefit both employees and firms by fostering employee loyalty through job security, which in turn results in enhanced productivity, but such policies are often unmanageable and ambiguous. Most countries in the region allow for the termination of employment contracts, but such termination is based only on a narrow set of ‘just’ causes. Additionally, the right to dismiss workers is often contingent on advance notification and a heavy severance package. High firing costs, including a long and complex appeal and investigation process, raise the relative cost of employment, and thus diminish demand for labor. Regulating retrenchment interferes with efficient resource allocation and enterprise restructuring. According to a World Bank report, given the relatively high degree of protection afforded to employees in the formal sector in many developing countries, managers often consider such regulations a key barrier to the growth of their business.14


239

Kuwait

Saudi Arabia

Rigidity of Hours Index

UAE

Egypt

Difficulty of Firing Index

Morocco

Tunisia

Cost of Firing Indicator

Syria

Rigidity of Employment Index (avg of previous three sub-indices) Jordan

Hiring and ďŹ ring workers: MEOE and in-region comparison

World Bank Doing Business Indicators.

Iran

Difficulty of Hiring Index

Figure 11.4

Source:

0

100

200


240

Middle east oil exporters

100

50

0 Cost of Firing Difficulty of Hiring Rigidity of Hours Difficulty of Firing Rigidity of Indicator Index Index Index Employment Index (avg of previous three sub-indices) Chile

South Korea

Malaysia

Singapore

Source: World Bank Doing Business Indicators.

Figure 11.5

Hiring and firing workers: out-of-region countries

While labor-importing countries in the region have favorable and flexible labor laws, restrictions on hiring under contractual arrangements are more stringent in the labor-exporting countries such as Tunisia and Jordan. According to the World Bank Doing Business Indicators on the difficulty of hiring, the MENA overall average is less then the OECD average. A firm’s eagerness to hire new employees is inextricably linked to the ease with which it can restructure its workforce. Overall, firms are reluctant to hire employees when they face inordinate encumbrances when it comes to terminating workers. In countries with rigid firing laws such as Iran and Tunisia, firms must rely on flexible hiring and contractual arrangements to meet their staffing needs. Where laws regarding hiring and firing are inflexible, firms often resort to recruitment from the informal sector labor pool, which is beyond the reach of regulation. A defining characteristic in Iran’s labor laws is the protection it affords employees against retrenchment and termination of employment contracts. The country’s labor laws are equally restrictive with regard to provisions for part-time and temporary contractual arrangements. Of the MEOE countries, Iran ranks highest on the World Bank’s index for difficulty of firing, while Kuwait and Saudi Arabia rank well below the MENA regional and OECD country averages (Table 11.2). In accordance with Iran’s labor code, an employee’s contract may be terminated if they are negligent in carrying out their duties or are in violation of the disciplinary rules of the employer. The employer must navigate through a set of complex administrative procedures, providing written notice to


Law and order

241

employees informing them of violations and seeking the approval of the Islamic Labor Council or the Labor Discretionary Board prior to termination. Upon approval a severance package must be paid to the employee in the sum of their last monthly wage for each year of service, in addition to any deferred entitlements.15 Additionally, if an employee is made redundant or retired, the employer is under legal obligation to provide 30 days’ salary for every year of service. Saudi Arabia, on the other hand, has less stringent firing laws as well as laws that allow for relatively flexible hiring arrangements. Accordingly, an unspecified-term contract may be terminated with 15 to 30 days’ notice, depending on the terms of the contract. Terminated employees are entitled to a severance package, which includes repatriation to their place of recruitment. Although temporary labor is not clearly sanctioned in Saudi Arabia’s labor code, firms often take advantage of this strategy to offset more rigid termination policies. Much like Saudi Arabia, Qatar’s labor laws are less rigid in terms of the termination of employment contracts. Employees who receive wages on an annual or monthly basis are entitled to one to four weeks’ notice prior to termination, depending on their length of service. The dismissed employee is also entitled to wages for the entire notice period. According to Qatar’s Labor Act, fixed-term contracts are allowed as well as unlimited duration employment.16 Although the stated duration cannot exceed five years, it may be renewed for an equal or lesser period. Additionally, a work contract for an unlimited duration may contain provisions giving both sides the option to terminate the contract without due recourse, another step toward more flexible firing laws. Relative to the OECD countries, Tunisian labor regulations impose greater-than-average employment protection within firms. Of the inregion group and MEOE region measured by the World Bank’s indices on employment rigidity, Tunisia ranks the highest, providing workers with the maximum protection against termination. Despite reforms to the labor code, firms seeking to augment their personnel structure for technological or economic reasons must negotiate a set of heavy administrative procedures, where government and bargaining mechanisms have considerable authority to intervene. A firm wanting to downsize must notify the Inspection du Travail (IT), with at least one month’s advance notice. The IT has 15 days to review the request. If a request is not approved there is another set of cumbersome procedures a firm may endure to gain final approval. Recently, Tunisian hiring rules have begun to allow for greater flexibility in contracting short-term or fixed-term non-permanent employees; 1996 employment regulation reforms created two distinct categories of fixed-term contracts. The first applies to work for a definite term or fixed


242

Middle east oil exporters

in duration, arising from a temporary increase in activity, replacement of an employee or seasonal activities. The second distinction is characterized by work for an indeterminate length of time. Additionally, the 1996 reforms introduced contracting provisions for part-time employment. Despite these changes, Tunisia continues to ban the operation of temporary help agencies, which would add a level of flexibility to the labor market.17 Malaysia has fared well in terms of labor market performance over the past few years, with a drop in the unemployment rate from 3.5 percent in 2002 to 3.2 percent at the end of 2003, while the total size of the labor market increased from 9.9 million to 10.3 million in those same years.18 Much of the country’s positive performance can be attributed to flexible labor market policies. Much like the countries in the GCC, Malaysia continues to face a shortage of skilled workers. However, the country’s approach to addressing the shortage is very different from that of many countries in the Middle East. Malaysia offers little statutory protection to its labor force, with a difficulty-of-firing index well below other countries in its region as well as the OECD average. Malaysia’s laws regulating the hiring of workers provide an added level of flexibility to its labor market. Employment contracts in Malaysia often include provisions stating the procedure for termination by either party. However, where such provisions are not clearly articulated in a contract, the Malaysian labor laws stipulate that four to eight weeks’ notice (depending on the length of service) must be given prior to termination of the contract. Additionally, in the event of lay-offs, no fixed period of notice is required. The country’s labor code makes no distinction between part-time, temporary or permanent staff, thus all rules apply equally to all staff. Governments typically facilitate the wage-setting process by setting wage floors, and by establishing rules for bargaining and industrial relations. While these interventions may reduce negotiation costs incurred by firms, they also limit flexibility in wages. Wage floors are often set with a view to reducing the number of working poor. Firms respond to setting salaries too high by reducing their recruitment of lower-skilled workers. In countries with legitimate and active labor and business associations, collective bargaining mechanisms can negotiate wages, replacing cumbersome government regulations. Studies seem to suggest that unions can facilitate high wage mark-up in less industrialized countries and collective bargaining mechanisms tend to reduce wage inequalities.19 In many of the labor-importing countries of the Persian Gulf, wage bargaining through labor unions is virtually an inoperative practice in the private non-oil sector.20 These countries are characterized by an absence of labor unions and a large supply of foreign workers willing to work for


Law and order

243

competitive wages. Consequently, both national and foreign employees have little bargaining power. In Iraq, while provisions for trade unions and collective bargaining mechanisms exist, under Saddam Hussein they were traditionally used as a political tool for the Baa’th Party, and were therefore largely ineffective in wage bargaining.21 Although minimum wage laws have been legislated in Tunisia and Iran, they are absent in the rest of the Persian Gulf states. Malaysia has created market-based incentives and active labor market programs (ALMP) and policies to counter the skilled labor shortage and to offer workers social protection. For instance, Malaysia’s 2001 budget included provisions to reverse the effects of the ‘brain drain’ by offering income tax exemptions to ‘experts’ who return to the country. Additionally, the government has provided training incentives with a view to improving the situation within firms. Under the auspices of the Human Resource Development Fund, the 2001 budget provided funds to reimburse up to 100 percent of the cost of training in higher learning institutions in the areas of medicine, engineering and computer science. A number of the MEOE countries have begun to enact similar active labor market policies. Qatar assists new job seekers by maintaining information about recruitment opportunities and by offering counseling and training. The National Human Resource Development and Employment Authority provides similar opportunities to UAE nationals by offering them skill training and establishing a national labor market database. Under the auspices of the Human Resource Development Fund, the Saudi government provides training to the labor force in skills demanded by the private sector. Ease of Registering Property Metrics for measuring the ease of registering property in the Doing Business Indicators include the number of procedures, the time taken in calendar days and official costs of registration as a percentage of property value (Table 11.3). The MEOE region compares favorably in terms of number of procedures and also in terms of official costs. The UAE has the easiest regime with respect to property registration – it takes three procedures, an average of nine days and costs about 2.1 percent of property value to register a property. Egypt is by far the laggard with seven procedures, an extraordinary 193 days and registration costs of about 7 percent of property value. Syria ranks highest in terms of official costs of registering at 30.4 percent of property value. Among the out-of-region group, in Malaysia it takes a comparably (to Egypt) lengthy time of 143 days to register property.


244

Table 11.3

Middle east oil exporters

Ease of registering property Number of procedures

Time (in calendar days)

OďŹƒcial costs (as a % of property value)

9

36

5

8

75

1

4 3

4 9

0 2.1

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

7 8 3 4 5

193 22 82 23 57

7 10 6.1 30.4 6.1

Out-of-region countries Chile Korea, Rep. Malaysia Singapore

6 7 4 3

31 11 143 9

1.4 6.3 2.2 1.5

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

Source: World Bank, Doing Business Indicators (2004).

Ease of Getting Credit Along with political and economic uncertainty, access to credit is often cited as a major stumbling block in the growth of ďŹ rms. The ability to access credit easily is one of the primary attributes of developed economies, where strong credit-based mechanisms have spurred higher consumption and have improved standards of living in a short time. The data used here (Table 11.4) is based on research of collateral and insolvency laws and responses to a survey on secured transactions laws, developed with input and comments from experts. It costs about 0.1 percent of income per capita in Kuwait to create collateral and about 9.4 percent in the UAE. By contrast, in Singapore it costs 0.3 percent, and 3.2 percent in Malaysia. The in-region countries are the exceptions here with very high costs of creating collateral. The index of the legal rights of borrowers and lenders ranges from 0 to 10, with higher scores indicating that collateral and bankruptcy laws are better designed to expand access to credit. Singapore and Malaysia score


245

Law and order

Table 11.4

Ease of getting credit Cost to Index of Index of Coverage Coverage create and legal rights credit of public of private register of borrowers information registries bureaus collateral and lenders availability

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

.. .. 0.1 .. 0 9.4

5

2

4

2 2

.. .. 0 .. 1 18

0 .. 166 .. 0 0

.. 5

.. 4

.. ..

..

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

52.7 56.3 62.2 6.4 22.4

0 6 2 5 4

3 3 2 0 2

102 5 6 0 93

0 0 0 0 0

Out-of-region countries Chile Korea, Rep. Malaysia Singapore

5.3 8.1 3.2 0.3

4 6 8 10

6 5 6 4

290 0 339 0

220 1000 .. 335

Source: World Bank Doing Business Indicators.

very high and the MEOE region by comparison scores poorly. The other indices measure the scope, quality and access of credit information available through public and private bureaus. On the Index of Credit Information, the index ranges from 0 to 6, with higher values indicating that more credit information is available from either a public registry or a private bureau to facilitate lending decisions. The coverage indicators report the number of individuals and/or firms listed in the private or public credit bureau with current information on repayment history, unpaid debts, or credit outstanding. The number is scaled to the country’s adult population (per 1000 adult population). If a private bureau does not operate, the coverage value is 0. In much of the Middle East, credit information quality is poor, and coverage and access are highly restricted. Contract Enforcement The existence of institutions with the appropriate legal arrangements – generally courts – to enforce commercial contracts and to settle disputes is


246

Middle east oil exporters

essential for investment, trade and economic growth. Without efficient and effective courts, the ability for business transactions to take place diminishes significantly. Without an active efficient court system, firms often resort to adopting conservative and often inefficient business practices such as, for example, dealing only with repeat customers and requiring that goods be paid for up front. The administration of justice must ensure timely, just and predictable outcomes in the resolution of contractual disputes. However the judicial system in many countries in the Middle East does not conform to these attributes. In most cases courts are weighed down by excessive delays as well as by a general lack of understanding of commercial transactions.22 Assessing a judicial system’s ability to address contact enforcement disputes provides a proxy for assessing the system’s competence in settling other types of commercial disputes, such as the illegal use of intellectual property, breach of confidentiality agreements and failure to make deliveries on schedule. The World Bank Doing Business project has developed three indicators to measure the efficiency of contract enforcement. Much like the indicators constructed for starting a business, the first indictor is based on the number of procedures required to file a claim as mandated by law or court rules. The second indicator measures the estimated time to resolve a dispute, based on the number of days from the time a suit is filed until it is finally settled. The estimated cost of completing all relevant court procedures is also assessed as a percentage of debt value. Throughout the region, judiciary systems are slow and cumbersome.23 While some reforms have been made in Tunisia and Morocco, much of the region still lags behind. In the area of contract enforcement, the countries in the Middle East on average rank below other low- or middle-income economies. Still, an attempt at modest reform has been initiated. Overall, the MENA region’s average for all three indicators is nearly double that of the OECD, indicating a relatively high level of inefficiency and the need for court reform in many of the countries. For the region, the average number of procedures mandated by law is 38; it generally takes 437 days to conclude a proceeding; and the cost for a settlement is nearly 18 percent of the disputed debt. In contrast, as a result of significant regulatory reform in Tunisia, the country’s indicators for contract enforcement fare better even than the OECD average. In Tunisia, it takes only 14 procedures and 27 days to take a debt recovery case from initial filing to final settlement (Table 11.5). Additionally, the country’s laws impose no requirements for appointing a lawyer or to initiate a protest procedure before a public notary. Such requirements generally place an added financial and administrative burden on firms to redress their claim. Of the MEOE countries, the regulatory environment in the UAE ranks least favorably with regard to contract enforcement, with an average of


247

Law and order

Table 11.5

Ease of contract enforcement Number of procedures

Time (in calendar days)

Official costs (as a percentage of the debt value)

MEOE region Iran, Islamic Rep. Iraq Kuwait Qatar Saudi Arabia UAE

23 .. 52 .. 44 53

545 .. 390 .. 360 614

12

In-region countries Egypt, Arab Rep. Jordan Morocco Syrian Arab Republic Tunisia

55 43 17 48 14

410 342 240 672 27

18.4 8.8 17.7 34.3 12

Out-of-region countries Chile Korea, Rep. Malaysia Singapore

28 29 31 23

305 75 300 69

10.4 5.4 20.2 9

.. 13.3 .. 20 16

Source: World Bank, Doing Business Indicators (2004).

53 procedures and 614 days required to settle a dispute, and an estimated cost of 16 percent of the disputed debt. Much of the bottleneck seems to arise in the average 420-day judgment period, which takes on average 270 days for the courts in Iran to complete and 90 days in Saudi Arabia. The UAE law also requires the appointment of a lawyer to file a complaint, imposing an additional burden on businesses. Iran ranks most favorably with the least number of procedures, shorter time to closure and lower official costs. Taxation Effective and rational taxation will garner the revenues needed for the public provision of goods and services that improve the investment climate, while also meeting other social needs; however, a restrictive tax framework will create distortions and change the nature of competition. A common feature in many of the oil-exporting countries is that a significant chunk of government revenues are derived from non-tax revenue, namely in the form


248

Middle east oil exporters

of oil receipts. The development of the non-oil private sector (with its attendant tax revenues) and also a sound tax framework is crucial to the region’s ability to broaden and stabilize its wealth base. Although there are special tax-free business zones to attract foreign investment in many of the MEOE countries, the corporate tax rate levied on foreign entities is significantly higher than that applied to domestic firms. In fact, in most countries domestic firms are not subject to corporate taxes. The extra cost incurred by foreign companies often acts as a deterrent to investors. While there is substantial variation in the corporate tax rate levied on foreign firms in the different MEOE countries, nearly all of them have incrementally reduced these rates in an effort to attract foreign investment. For example, like many other countries in the MEOE region, Saudi Arabia’s corporate income tax applies only to foreign firms and not to local firms. In 2000, the country first reformed its tax code to reduce the maximum income tax rate for foreign firms from 45 to 30 percent. Then, less then four years later, the government adopted a new tax code further reducing the rate to its current level of 20 percent for non-GCC firms and for foreign shares of joint ventures, with the exception of those enterprises functioning in