Economics -- Middle Eastern and North African Regional Trends

Figure 1.--This Arab scene was photographed in the 1950s. It shows a scene that could have been taken in the 12th century AD, if not the 12th century BC. Economists need to answer how a region that was once more advanced than Europe remained essentially unchanged for more than a millennium. What we find even more interesting is that Arabs when discussing economic development focus on a few decades of European rule (when steps toward modernization actually began) and not on the millennium of abject econnomic failure that preceeded the European colonia era.

For an economist, the Middle East is a fascinating subject. It was in the Middle East that covilization was born. It was a happy marriage of climate, river valley, and natural flora that made possible the development of low-technology agriculture. And it was the increased production from agriculture that made possible civilization. This was a stunning economic and cultural schievement. Many important civilizations developed in the Middle East, including the Sumerians who in addition to agriculture invented writing. They were followed by the Babylonians, Egyptians, Assyrians, Hittites, Phonecians, Persians, and many others. The Indus River culture was influenced by the achievemrnts in the Middle East. Arab culture rose in the Middle East in the Middle Ages. The Caliphate was a culture with stunning cultural achievements far beyond that of contemprary medieval Europe. The Ottoman Empire achieved considerable economic success. The important question which many economists fail to address, however, is why there was no significant economic achievements in the Arab World since the 12th century. For an area of such stunning economic and cultural achievements, how could time in economic terms virtually stood still for nearly a millenium. Certainly the Mongol Invasion was part of the equation, but wide aereas of Europe were also devestated by the Mongols. And even the Ottoman Empire was eclised by the Europeans beginning in the 17th century. In discussions with Arabs, Iranians, and Pakistanis there is a tendency amounting to virtually a cultural imperative to blame European colonialsim. The only problem here is that Eurooean colonialism was a relatively recent phenomenon. Many Middle Eastern countries until World War II had societies that were vurtually unchanged since the 12th century. And much of the progress that was achieved at the time of decolonialization came during the European colonial experience. Many Arab countries after the War, embarked on socialist planned economic policies which proved to be disasters. Even today, few countries in the area have modern, productive economies. Most people in region live in poverty. Those countries where people do lead prosperous lives, do so primarily by exploiting oil resources. Economists need to answer the question as to why economic success has eluded the Middle East.

Individual Countries



The Egyptian economy has been based on agriculture and centered on the Nile. Agriculture generated on civilization in the Mile Valley and was based on grain. In modren times cotton became an agricultural mainstay. Land is very expensive because of the large population and limited area of arable land outside the Nile Valley. The country had a very high population growth rate--over 2 percent annually (2003). As a result, Egypt which used to be a major grain exporter, mow has to import food. The government has developed the petroleum, services, and construction sectors, but for the most part Egyptian industry is unproductive. The basic problenm is that most industries are government-owned are controlled. This is in part the consequences of Egypt's experiment with Arab socialism on which Nasser embarked. There have been efforts to liberalize the economy, but it has made only limited progress. Despite resources committed to indusry, at the expense of agriculture, the country indusrial sector is inefficent and uncompetive. Another major problem is the country's huge beaureacracy which consumes a large share of available resources. Egypt has obtained foreign aid from both the Soviet Union nd the United States. The Gulf states which and the United States rewarded Egypt for helping to form the First Gulf War coalition. There are also foreign exchange earnings from Suez Canal traffic, tourism, and the remittances of Egyptians working abroad. Despite this Egypt has made little progress in developing a modern economy. Despite bering the largest Arab nstion and a substantial educational system, Egypt produces few scientific papers and achieves no medical advancment. Nor is their an industrial sector capable of competing on the international market.



What is now modern Iraq has at times been an important economic center. Iraq encompses ancient Mesopotmia. It was here along the Tygrus and Euraptes Rivers that civilization first began. It ws based on the development of agricukture. Expanded agricultural harvests financed handicrafts and artisanal activities in the cities. Severl different civillizatiins develoopment in esopotamia (Summer, Babylon, and Assyria were the most important). Agriculture was the base of theseeconomies, bolstered by trade and cmmerce. Military conquest also generated great wealth. The Caliphate centered at Baghdad was an even larger empire. The economy continued to be based on agriculture, but the huge expanse of the Caliphate opened up a vast trading empire from Spain east to Persia. An important part of the economy in the early years was the dhimma system. Christians were taxed at high levels with the jizya which helped finance the state. This was an important factor in promoting conversion. Since the collapse of the Caliphate, Iraq has been an economic backwater. During the extended period of Ottoman rule, it was one of the poorer [arts of the Empire. Photographs taken in the early-20th century show a society little changed for a millenium. The country is, however, blessed with enormous oil reserves which the British began to develop after driving out the Ottomans during World War I. Indepedent Iraq with the oil income began to develop modern infrastructure. The Bath Party built alarge state sector. Sadam Hussein after seizing power (1979) allowed the country's developing infrastructure to deteriorate as he squandered the country's oil ernings on military equipment and ruionous foreign adventures. Improving security and exopanding oil production is now helping Iraq to repairthe dme left in Sadam's wake. Economic activity is concentrated in the energy, construction, and retail sectors. The Broader economic development remains in doubt. While oil revenue is increasing, the country still has a large, inefficent state sector. There is little meaningful ecomonomic activiy outside the oil sector which generates more than 90 percent of government revenue and 80 percent of foreign exchange earnings. Iraqis produce very little that is of interest to other countries. The country is depedent of foreign technolgy for virtually all of its modern life and like other Arab countries makes no meaningful cotribution to the worldeconomy other than exporting oil.



Modern Kuwait located just south of Iraq and thus on the fringe of ancient Mesopotamia. was located very close to ancient Sumer, the craddle of civilzation. What is now Kuwaut was located south of the Tigris-Eurphrates and the important Sumerian cities, although Ur and Eridu were located very close to the borders of modern Kuwait. This must have affected to locl economy, but we are not sure just how. There seem to have been trade links. This continued to be the case during the Islamic era. Kuwait provided a conecting point for caravans headed east toward the Levant and Egypy and west toward the Caliphate cities abd Persia. It was also a port fot trade with areas to the south, including India and East Africa. Kuwait was a trade port and resting place for both desert caravans and Haj pilgrims on their way from Iraq and Persia to Hejaz. The area around Kuwait City seems to have been more fertile than is the case today. This trade began to decline with theEuropean maritime expansion and the establishment of sea route links with the East. Along with the rest of the arab world, the Kuwait economy declined. This did not change until the modern era and the discovery of oil in Kuwait. The Emir of Kuwait granted an oil concession to the Kuwait Oil Company (KOC) (1934). KOC was jointly owned by the Anglo-Persian Oil Company (the future British Petroleum Company--BP) and the american Gulf Oil Corporation. The Kuwaiti Government nationalized KOC (1976). Kuwait then seized control over onshore production in the Divided Zone between Kuwait and Saudi Arabia (1977). KOC produces in the Divuded Zone jointly with Texaco. And by the purchase of Getty Oil Company, acquired the Saudi Arabian onshore concession in the Divided Zone (1984). Kuwait is believe to have some 10 percent of the world's oil reserves which explains why Saddam Hussein wanted it and invaded Kuwait (1990). among other natters, the Iraqi invasion adversely affected the country's oil diversification efforts. Oil and gas dominates the country's economy, accounting for nearly half of Kuwait's GDP and nerly all (95 percent of both export revenues and government income). The oil resource is so great and the population so small that here has been little incentive or need to diversify the economy. And a deadlock between parliament and governmenthas prevented any consensus on economic reforms. Kuwait inagurated a free-trade zone (1999). As a result of the oil income, Kuwait has a well-developed banking system. The National Bank of Kuwait is the most important bank in the country and one of the largest in the Arab world. It is not clear how permanent the 2014-15 drop in oil prices is going to be and just how it will affect Kuwait. A substantial revision of peal oil calculations, however, must inevitably affect a country so dependent on oil. High oil revenues have until now made it possible to excuse policymakers from making the tough choices needed to liberalize the economy, such as privatizing inefficent state-owned enterprises. There is also a problem with rising protectionism.







Saudi Arabia

Much of Saudi Arabia is covered by a desolate arid landscape which did not support agricultural. In a world that agriculture was the primnary genrator of wealth, this left the Arabian Peninsula and the people libing there poor with little cultural development. Nor was there much mineral resources. The primary resource that the prople of the arabian Penoinsula had was geography--the location of the Peninsula. The Arabian Peninsula is situated between the Arabian Sea (Indian Ocean) and the Mediterrnen Sea. As there was no sea connection, trade routes criss crossed the Peninsula and imporant trding ports sprang up all along the perifery. This was the primary economic activity for centuries, involvement in trade or raiding those involved in trade. With the Islamic outburst, Arabs seized control of a vast empire (7th century). Important economic activity developed in this empire, but not in Arabia itself. Arabia's one economic assett (geography) was suddenly undercut with first the European maritime outreach (15th century). The Europeans were able to reach th East without relying on trade routhes through the Arabian Peninsula or ports on the perifery. The Suez Canal undermined the trading position of Arabia even further (1860s). As a result, the people of Arabia were among the poorest people in the world. Saudi Arabia when established as a nation state after World War I was very poor without a modern economy or education system. The region in general was desperately poor. Saudi Arabia was, however, poor and backward even by Middle Eastern standards. Most of the population lived a life virtually unchanged for centuries. This chanbged after World War II when oil discoverine began to be developed. The discovery of oil has brought vast wealth to the country, financing a rapid modernization campaign, at least in infrastructure and living standards if not in outlook. Saudi Arabia has an almost exclusively oil-based economy with strong government control, meaning the Saudi royal family, over the oil industry. Saudi Arabia at one time was believed to possess some 20 percent of the world's proven petroleum reserves. There was considrable difference of opinion on this issue as the saudi's are very secrtive about such matters. And now new innovative techniques developed in America have suceeded in finding substantial new resources. This has changed the calculation of proven reserves and peak oil. Now the cost of production have to enter into the calculation. Saudi Arabia can produce oil very inexpenbsively. The new oil being found is often much more expemsive to produce. Some of it may not be economic to recover, but it doies place a limit on what the sudis and other oil exporters can charge. The Saudis have been the largest oil exporter. They have played a major rolein the Organizatioin of Petroleum Exporters (OPEC), an international cartel that raised oil prices to very high levels, orcestrating a massive transfer of wealth from America and Europe to the Saudis and other major exporters. The petroleum sector accounts for almost all of Saudi government revenues as well as export earnings. The Government provides generous welfare benefits to Saudi citizens and employs much of the work force in Goverment agencies or corportions. The country has a rapidly growing populationand these welfare progrms are becoming increasingly expensie. Most workers in the country's private sector are foreigners. The Saudi Government promotes ecomnomic development to diversify the economy. They have made little progress in this area. There are non oil projects, but many of these projects are premised on inexpensive oil.





United Arab Emirates

The location of the Arabian Peninsula between Europe and the Far East conveyed great importance in terms of trade. Goods coveted by the Europeans from China, the Spice Island and India until the European maitime outburst passed throufg Arabia. This gave the Arabs a huge trading advantage. With the decline of the Caliphate, the Turks exerted increasing influence, eventially seizing the Arab Lands. At the same time, the Europeans rounded the cape of Good Hope and defeated Arab sea power in the Indian Ocean (16th century). The Bedouin remained in control of the sandy desert interior, but the change in trade flows made the Arab lands a cultural and economic backwater. The bedouin seized control of Abu Dhabi and Dubai, but without the previous lucrative trade flows they were poor centers compared to the days when trade fom the East flowed through them. The Emirates were some of the poorest communities in the world. Technology was virtually unchanged from medieval times. The pearling industry was a rare economic success, but hurt by the Great Depression (1930s) and the Japanese developmnt of a culture pearl industry. The economic situation began to change when Western oil companies initiated geological surveys. Crude oil exports began (1962). As a result of the oil, the UAE economy is the second largest Arab economies after Saudi Arabia, The UAE like Saudi Arabia has been sattempting to diversifying the economy. The UAE has made some success, but the diversified sectors are almost all dependent on the huge oil resenue. Sectors like agriculture, construction, finance, manufacturing, and others are all financed by the oil income. More than 85 percent (2009). The situation is today little changed. While Abu Dhabi and other UAE emirates have remained relatively conservative in their cultural outlook. Dubai, which has few oil reserves of their own, has been more aggresive in its diversification efforts. Tourism is the only inportant economic sector not linked to the oil revenue.


Despite being located on important world trade routes, Yemen is a very conservative part of the Arab world with few modern influences. Yemnis played an important role in the Arab trading that pre-dated the European outreach (15th century). Many Indonesians are of Arab (especially Yemeni) origins. The economy is largely agricultural, although the climate is arid. There are fertile regiions in Yemen, in cotrast to the mire arid areas to the north. Major crops are fruits, grains, coffe, and qat. Incomes levels are very low. Yemen has attracted the interest of Western tourists interested in exotic locations. Tourism in Yemen can be an adventure. Foreigners especially Westeners in Yemen's tribal society can become targets. Groups have kidnapped Westerners in an effort to gain concessions from the Government.


Muslim readers have question just how we measure prosperoty and economic success. That is certainly a fair question. The easiest way is percapita income. This is the quickest and easiest method of assessing economic prosperity. But currencies can be over and undervalued, so such measures need to be confirmed with other measures. Here good indicators are wage levels, dietary levels, home ownership, home square footage, and other measures. Educational achievement and literacy are other factors. Scientific progress measured in Nobel prizes, scientific papers published, and patons granted are important. Infrastructure such as miles of paved road and rail lines as well as electricity generation are other important indicators. There are a range of other measures that can be applied. Unfortunately by virtually all such measures, most of the the countries of the Middle East and North Africa all do poorly. Yhe primary exceotion are the countries with small populations and large oil resources. With the exception of the oil states, the one specuacularly successful country is Israel--a country without important natural resources but which has exploited its human resources to the fullest. Another relatively succesful country is Turkey--notably the most secular country in the region.

Economic Developmnt

The countries of the Middle East and North Africa have experimented with different ecomomic approaches. And the various countries have changed those approaches over time. The largest group of Middle Eastern countries are the Arabs. And for a time many of these countries experimented with Arab Socialism with no success. We no longer here the term because it was such a filure. Many Arabs Governments continue to follow statists economic programs. Israel was fonded as a Jewish state, but along secular lines. The discovery of oil and gas has enabled several countries to finance prosperous life styles, but none of the countries have suceeded in developing modern economies. The oil ciuntry that has come cloest has been Iran, in part because of the economic and development projects of the Shah. The founders of Israel included many devoted socialists. Experience revealed, however, that Jewish socialism worked no better that Soviet, Arab or other forms of socialist. Market reforms turned tiny Israel into a regional economic powerhouse. Other than Israel, Turkey has the strongest economy in the region, in large part because after World War I, Kemal Attaturk led the country in a secular direction. The current tremd in Turkey as in the Arab countries is toward Islaminization. Despite the fact that no Muslim country developed a modern economy on Islamic principles over Islams 13th century history, an increasing number of Muslims have reached the conclusion that Islam can lead them toward propspeity amd modernity.


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Created: 7:01 PM 12/3/2009
Last updated: 12:25 AM 6/17/2017