Tue, Feb 10, 2004 page9

• Misfiring on all cylinders: Middle East economies fall behind

  • AP
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  Forget that cliche image of the "oil rich" Arabs. Not only has the Arab world had a sick economy for years despite its fat-cat image, experts say the region's financial environment has hit its lowest point ever amid the war in Iraq and the bitter violence between Israelis and Palestinians.

  Unemployment averages 15 percent -- higher among the young -- and potential foreign investors are scared off by the Middle East's turmoil and bureaucracy. Real income for most Arabs has shrunk, and the generous welfare benefits that oil states adopted to maintain stability can no longer keep pace with burgeoning populations.

  "Things are worse than they've ever been in my memory, and in the memories of others who have studied the region," said Alan Richards, a professor of economics at the University of California, Santa Cruz, who has been a consultant on the Middle East to the US government and UN agencies.

  While those in the West who grouse at high fuel prices may have little sympathy for the troubles of Gulf oil sheiks, the shrinking Arab economy raises a troublesome question: Does the world need growing disaffection and anger in a region that produces terrorists and Islamic radicals along with oil?

  It's young Arabs, those mostly likely to be recruited by radical groups, who suffer most from the Arab states' faltering economies -- and often their government policies.

  Rote education leaves Arab youths unprepared for the modern job market, and in the Gulf oil states, generous benefits and government jobs doled out in better times have left many young men unwilling to do manual work but too ill-trained or unmotivated for jobs in private industry.

  Saudi Arabia lists its unemployment rate as 9.6 percent, but some experts say it may really be as high as 30 percent. War and violence put the jobless rate in Iraq and in the West Bank and Gaza Strip above 50 percent. By one estimate, Yemen's unemployment is 35 percent -- and higher among college graduates.

  bleak prospects

  In Egypt, where a legacy of the 1950s socialist economy is supposed to be a guaranteed civil service job for graduates, the government is so far behind in fulfilling this promise that when it opened up more than 150,000 jobs in December, it said only those who graduated before 2001 need apply.

  The daily Egyptian Gazette reported that 1.25 million young people took out applications. It quoted one 27-year-old job seeker as saying that five years after graduation, he had not yet found work.

  "I still get my pocket money from my father, who is an ordinary civil servant," Ahmed Hussein told the English-language paper, adding: "I hope I'll get a job in order to make a family of my own."

  Putting off marriage and family is just one frustration facing Egypt's young. Another is that in crowded Cairo, the unemployed young need not look far to see their counterparts among the rich and well-connected living the high life.

  One side of the city's broad boulevard along the Nile is taken up with luxury hotels favored by businessmen for computer connections and by the wealthy for holding lavish weddings. On the other side, men sweep the streets with twig brooms and poor couples sit on benches, staring longingly at each other and talking of future marriages that may never happen.

  Ahmed Galal, research director of the Egyptian Center for Economic Studies, recently wrote that in the present decade Egypt needs to generate 638,000 jobs each year for young people entering the job market. In the 1990s -- better economic times -- the Egyptian economy created 435,000 jobs annually, Galal estimated.

  The reasons Arab states can't generate enough jobs to match their high birth rates are regularly explained in editorials and economists' reports: potential investors are put off by the Arab countries' corruption, high taxes and tariffs, vague and shifting government rules, and state-run monopolies.

  A US Commerce Department advisory listed frustrations in doing business in Lebanon -- "red tape and corruption, arbitrary licensing decisions, archaic legislation, an ineffectual judicial system, high taxes and fees, and a lack of protection of intellectual property" -- that could apply to almost every Arab country.

  According to a survey in eight Arab states recently reported by the Egyptian Center for Economic Studies, the average company spends 95 days each year just resolving such problems with government agencies.

  Along with the Arabs' erratic business climate, the instability created by war and terrorism explains why Middle East economies are faltering more than ever.

  In Egypt and Jordan, tourism has been badly hurt by violence in surrounding countries and fears of terrorism. Jordan and Syria have lost trade with Iraq. Foreign direct investment flowing into the Arab world has dropped: investors put US$16 million into Kuwait in 2000, but pulled out nearly US$40 million the following year, while in Egypt annual investment inflow dropped from US$1.2 billion in 2000 to less than half that in 2001.

  higher prices

  Paul Sullivan, an economics professor at Washington's National Defense University who once taught in Cairo, said Egyptians were finding it more difficult to live because prices for food -- 65 percent of which is imported -- have risen drastically as the Egyptian pound sank against Western currencies.

  For years, the pound was held at the false rate of about 3.4 to the US dollar; last year when the government allowed the pound to float, it dropped to around 6.1 to the dollar.

  "Take a look at the prices," Sullivan said in a telephone interview. "How can anyone survive?"

  Sullivan also cited Saudi Arabia as a country with deep economic troubles, noting its GDP had drastically fallen behind the world economy and its own population growth.

  "Saudi per capita GDP was US$27,000 in the 80s. Now it's US$6,000," he said. "Oil revenues have dropped by 60 to 70 percent."

  Reminded of complaints about high oil prices, Sullivan said that if the per-barrel price of oil in the 1980s were measured in current dollars, it would be more than double the around US$30 today.

  The Saudis and other oil producers also have been hurt in recent months because oil is priced in US dollars, and the dollar has fallen drastically against the euro and other currencies.

  Sullivan -- who stressed his opinions were his own and not those of his university or its sponsor, the US Defense Department -- said the producing countries badly needed to diversify their economies.

  He offered a list of political prescriptions to rescue the Arab world from its economic morass -- job advancement should be based on merit, not influence; women, half the population, must be allowed to fulfill their potential; and business has to be conducted on the basis of stable laws.

  "The rule of law is probably the most important thing," he said. "There are laws, some have been on the books for years ... very few follow them."

  diversification

  Sullivan saw hope that some Arab countries were beginning to diversify their economies and introduce more democracy. Among those he cited were Morocco, Jordan and the Gulf states of Bahrain and Qatar -- all of which have young, Western-oriented leaders.

  Motivated by demands from the West, most Arab governments are promising to ditch old state-run economies and democratize. But after decades of broken promises in both areas -- and Arab rulers' usual resistance to surrendering power -- the Arab public is skeptical.

  An Egyptian businessman who discussed his complex dealings with government on the basis of anonymity said corruption and favoritism were so entrenched that change would be difficult. As one example, he said, low-paid government workers would hardly agree to give up the "commissions" that help feed their families, especially in these tough times.

  "Can you ask a man not to be corrupt when his children are hungry?" he asked.

  Richards, the California economist, said Arab rulers have always used subsidies and government jobs "to purchase some modicum of political stability, and it's still true." About corruption, he said: "It's also a kind of glue ... an instrument of governance by those in power."

  He said he doubted Arab leaders would embrace changes that could threaten their hold on power -- no matter how hard the West pushes -- and that significant reforms were likely years, or decades, in the future.

  "It's conceivable that over time, with generational changes, as a new generation of Middle East leaders emerges ... those people might behave differently," he said.
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