Arab economies: the IMF verdict

THE recent 2003 IMF report on the economic performance of the Arab world makes for dismal reading.

By Gulf Money By Matein Khalid

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Published: Sun 10 Aug 2003, 11:53 AM

Last updated: Wed 1 Apr 2015, 7:47 PM

In essence the IMF's top Middle East economists conclude that after the petrodollar boom of the late 1970's, Arab economic performance has been stagnant and far below the indices and bench marks of developing countries in Central Europe, India, Southeast Asia or even Russia in the past two decades. The reason for the economic performance in the Arab world as anywhere else in the world, are rooted in history, business culture, trade flows, geopolitics, the existence (or lack of!) a private sector, the nature, size and competence of governments, degree of ethnic fragmentation and the lack of access to the international capital markets. The "Arab Economy" is a metaphor, the states of the Arab League range from sophisticated rich petro-emirates like Kuwait, Qatar and the UAE to populous, impoverished, oil importers such as Sudan and Somalia, a spectrum of economies that range from some of the highest to the lowest GDP per capita income levels in the world.

The impact of colonial history has played a major role in economic development. Take Libya, for instance. After a brutal invasion by Italian Fascists under Mussolini in the 1920's that slaughtered one in five Libyan's, the vast desert was a battlefield between Rmmel and Montgomery in the World War II. There were only ten Libyan university graduates in the 1940's because the Italians simply did not create the academic infrastructure bequeathed by the British Raj to, say India or the West Indies. So when Colonel Gaddafi overthrew the Sanussi monarchy in 1969, there was no Libyan private sector or merchant class the state derived its revenue not from taxation but from its control of oil wealth The result? A command and control socialist state where the free market and the private sector had no role, a classic recipe for economic disaster as proven everywhere from the Warsaw Pact, Cuba, China or Vietnam.

Kuwait's history was totally different, even though the emirates also happen to be one of the Middle East's leading oil exporters. The Al Sabah family and the leading merchants created a social contract as long ago as the 1780's so that a vibrant private sector, with trade links from Beirut to Mumbai in the colonial era, existed and prospered even after the 1973 Opec oil hikes vast has vastly boosted the financial resources of the Kuwaiti state. In a similar pattern, Dubai high growth and entrepot trade culture is the result of shrewd government strategies that encourage entrepreneurial risk taking by the private sector despite the emirates lack of significant oil reserves.

Even though the petrodollar boom of the 1970's created a financial bonanza for the Arab world, it did not lead to sustainable growth except in the smaller Gulf emirates. Saudi Arabia's GDP per capita has plunged from $20,000 in the early 1980's to $7000 now and Riyadh's public debt is a colossal 100 per cent of GDP. Saddam Hussein's wars, UN sanctions and Baathist command economy turned Iraq into an economic basket case even though Baghdad boasts the world's second largest proven reserves of crude oil.

The Arab world's economic growth metrics, despite oil are much lower than five per cent GDP average for the developing world. The Arab economies also have some of the highest population growth rates and youngest demographics in the world, making high GDP growth a strategic imperative for governments that are besieged by the social and political risks of high unemployment. Big government and bloated public sector pay rolls is also an economic albatross in the Arab world. In Egypt, wages and salaries of government servants consume 80 per cent of the states budget deficit and the bureaucratic state has been the ultimate model in Cairo from ancient Pharonic times to the government of President Hasni Mubarak now. Low growth, governments awash in debt and public sector deficits, armies of jobless, high tariffs primitive capital market that mean the Arab world attracts a mere $1 out of every $100 in portfolio investments from Western fund managers, dependence on oil exports, a legacy subsidies and archaic regulation, poor governance, corruption, UN sanctions, the historical burden of weak banking systems, the economic malaise in the Arab world has deep rooted structural and historical roots. Take the Arab-Israeli conflict, for instance. Not only has it meant economic disaster for the economies of Palestine and Lebanon but it also forced Egypt to depend on US military aid that inhibited reform and Syria's cold war alliance with the Soviet Union led to Damascus being trapped for decades in the economic rigor motives of socialist ideologies.

Structural reform, privatisation, the opening of capital markets was a popular theme in Arab finance in the mid-1990's Jordan, Egypt, Tunisia, Lebanon and Morocco all made significant progress in structural economic trade and capital markets reform. However, the reform momentum has decelerated significantly since the 1990's. Egypt was hailed as the "Arab Tiger on the Nile" in the mid 1990's after the spectacular success of Mobi Nilis flotation and a major bull market on the Cairo and Alexandria Stock Exchange.

However, a terrible international environment (the Luxor massacre in 1997, the emerging markets melt down and oil crash in 1998 September 11, the Palestinian intifida) did not just hurt Egypts tourism/Suez Canal/remittance revenues but also the collapse of Egyptian pound peg created a nuclear winter in the Cairo capital markets. In this context, the IMF economists are right when they note that inflexible currency regimes such as the Egyptian or Lebanese Pounds FX pegs both cripple exports and distort local money and capital markets. For instance, before the latest devaluation of the Egyptian Pound, 90 per cent of all FX transactions were routed in the Cairo black market.

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