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Middle East: U.S. Hopes to Pry Open Region's Economies

US Can't wait to get greedy hands on new markets - equates economic liberalization with democracy

by James SterngoldSan Francisco Chronicle
April 16th, 2003

Bush administration officials have been clear in saying that as the war winds down and they begin their campaign to bring political reform to Iraq and the Middle East, a critical step will be opening the region's markets to trade and investment.

Free markets and prosperity, they contend, will create a foundation for democratic change.

But a number of international experts say no region in the world has imposed higher economic barriers or put up greater resistance to tearing them down than the Arab countries of the Middle East.

The region, by nearly every measure, is one of the most insular and economically backward in the world, even with the vast oil reserves of a few countries. That presents enormous potential hurdles to the administration's plans.

"Economically, this is the most isolated region of the world, and that includes sub-Saharan Africa," said Charlene Barshefsky, the U.S. trade representative during the Clinton administration and now an international attorney. "And you have to keep in mind that Muslim nations do not even trade with each other. There is a degree of economic fragmentation you do not see in any other part of the world. There is a fear of opening in general. But this will be critical to anything else you want to do."

According to the International Monetary Fund, the economies of the Middle East have greater centralized state control than most of the old Soviet-bloc nations and among the largest state bureaucracies in the world. Because of the dependence on oil in most of these countries, they generally have the least economic diversity.

Worse, their economies have been losing ground badly over several decades to those of Asia, Latin America and even parts of Africa, in large part because of the decline in oil prices and a failure to create jobs through other kinds of economic activities.

Edward Walker, president of the Middle East Institute and a former U.S. ambassador to Israel, Egypt and the United Arab Emirates, said that until recently, U.S. policy barely even considered economic liberalization in the region -- in large part because of concerns over the Arab-Israeli conflict and the single-minded focus on keeping oil exports flowing.

"Our policy has been skewed, because so much of the emphasis was on the wealthy oil states," Walker said. "The bulk of the American enterprise was on things like engineering and construction contracts or military products. The broader economic problem was ignored for so long."

However, he stressed, "Opening the economies is absolutely essential to the political opening."

This reality has not been lost on the Bush administration, although it has not yet charted a clear course for economic liberalization.

"The long-term success of this effort is building economic openness, growth, prosperity, hope in the Middle East and the (Persian) Gulf," U.S. Trade Representative Robert Zoellick said last week.

There have been some encouraging signs. The Clinton administration completed a free trade agreement with Jordan, signed by the Bush administration, and another with Morocco is under negotiation. Such agreements require, among other things, that the countries open their economies to foreign investment and that in return, the United States will open its market to their exports.

In addition, the United States has concluded preliminary trade and investment framework agreements with Egypt and Bahrain, which basically create a forum for trade liberalization talks in the future.

Long Way to Go on Trade

Studies of the region make clear that economic liberalization in the Middle East will be a formidable challenge.

"The rest of the world has passed them by," said Barshefsky. "The Middle East is the only region that has become more dependent over the years on one export, oil. This is not a sustainable situation."

According to Barshefsky, the United States imports slightly more than $5 billion worth of manufactured goods and farm products from the 22 members of the Arab League, plus Afghanistan and Iran -- an amount equal to about half of America's imports from Hong Kong.

Together, the Arab states, which have the highest trade barriers in the world, conduct less trade even with each other than do African, Asian, Latin American or European countries. Tariffs in Egypt, Syria, Algeria and other major Arab states are all multiples of world averages, according to George Abed, director of the IMF's Middle Eastern department.

"In 1980," Barshefsky wrote in a recent article, "Muslim countries in the Middle East controlled 13 percent of world exports and received almost 5 percent of direct investment; today the figures are barely 3 percent of world exports and 1.5 percent of investment. Last year, the entire Muslim world received barely more foreign investment than Sweden."

Weak Private Sector

And the region is still falling behind. It has among the highest rates of population growth in the world, but job growth lags. According to the IMF, real per capita gross domestic product was greater in the Middle Eastern countries than Asian countries as recently as 1983. Today, it is less than half their levels of GDP.

Foreign investment in stock markets and securities in the region is all but nonexistent. Overall private investment is a fraction of what it is in other developing countries.

Wages paid by the central governments of the region, the IMF says, averaged around 11 percent of GDP during the second half of the 1990s, about double that of developing countries generally. In addition, military spending by most Middle Eastern countries is about twice the average of developing countries, badly distorting the growth of the private sector.

Because of these hurdles, few companies -- other than oil firms and large engineering contractors -- have seriously considered investing in enterprises in the Middle East. And only in the past few years have American business leaders urged the liberalization of Middle Eastern economies to create more opportunities.

Willard Workman, senior vice president for international affairs for the U. S. Chamber of Commerce, expressed pride in the Arabic-language section on the trade group's Web site.

Until a few years ago, he said, the chamber had put almost no time into the region. "But people are starting to believe there's some opportunity there."

Keith Brackpool, chief executive of Cadiz Inc., a water and agricultural company based in Santa Monica, has a contract to manage a huge farming project in Egypt. The project is expected to involve perhaps $300 million of foreign investment over the next decade and to produce huge volumes of fruit and vegetables, largely for export to Europe.

But Brackpool said that even with an investment that had the government's blessing and participation, negotiations were arduous.

"The laws are not yet designed to attract foreign investment," he said. "These countries have an enormous cost advantage, and that is a big plus. But nothing you learn in one country can be applied in another. Everyone has their own rules."





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