Statement by HRH Prince El Hassan bin Talal, October 18, 2008, Amman, Jordan
The global financial crisis started with the bursting of the subprime mortgage and credit bubbles in the United States. But it is quickly spreading across the world and beginning to have an impact on the Middle East, even in areas that are not directly tied in to the global marketplace.
At this stage, the economic outlook for the region is still relatively positive. Until the financial crisis of 2007-2008, the Middle East had generally been on a path of economic growth and opportunity. In many states in the region, markets have become liberalized through reduced regulations on foreign ownership, investment and taxes, providing major incentives for foreign and private sector business.
The risks of doing business have been declining and many nations in the region are now members of the World Trade Organization. While the Arab region accounts for just 2.5% of world economic growth, except for the oil industry it is not fully integrated into global financial and capital markets -- yet this relative isolation could help shield the region from the impact of the global financial crisis.Still the main economic problems in the region remain infrastructure and absorptive capacity.
Since the economic boom of the 1970s, the region's oil-producing countries have spent large amounts of revenue on selected development projects. Yet their reliance on oil and gas exports and foreign labor has prevented them from developing a fully integrated production base. At the same time, Middle Eastern states which do not produce oil have not derived full regional benefit from the oil boom to invest adequately in social services and infrastructure within their own nations.
Generally speaking, Middle Eastern economic growth has been coming more from oil revenue, real estate investment, housing, tourism and foreign assistance rather than from productive activity. Because these wealth surpluses have not been channeled into building a widespread industrial base and infrastructure, the region's relative incapacity to absorb income and investment on a diversified basis could lead to economic instability if the global financial downturn grows worse.
Although the region is not as dependent on the international economy as are other areas of the world, Middle Eastern agriculture and manufacturing – the main providers of job opportunities – have still become less competitive because of the increasing pressure to export goods to the global markets at lower prices. At the same time, inflation is running above 10% in much of the area due to rises in commodity prices. Inflation is also being driven upward because the currencies of many of the countries in the Arab region are pegged to the US dollar. Before the financial downturn, the large inflow of foreign exchange into the nations of the region, whether from oil or aid, resulted in a sharp appreciation of domestic currencies.
Now, with the US dollar depreciating, the region's Central Banks are forced to keep interest rates below the rate of inflation. With a prolonged global financial downturn, consumer price inflation in food and oil will not be offset through higher revenues from food and oil production. Although price increases in commodities would benefit some producers and investors, wages are not increasing fast enough to match the rising costs of food, fuel and rents, and this will have a continuing impact on poor areas.
These combined factors are increasing the social and economic disparity in the region between a super-rich sector, a lower middle class and an impoverished sector. With the recent drop in the price of oil to below $100 a barrel, along with the loss of Arab investments in world stock markets, the level of revenue coming into the region from trade and foreign direct investment is dropping. A prolonged slowdown in the international economy will also cause remittances, job creation, tourism and foreign aid to decline and unemployment to increase, particularly among the youth. The economic downturn will also slow the flow of educated Arab workers into jobs in the oil sector.
Before the global financial crisis, the region benefited whether oil prices were high or low, since the region has both oil producers and consumers. But Middle East producers and consumers are now likely to suffer from either higher or lower oil prices as the financial crisis spreads -- because of the sustained drop in foreign investment coming into the region, as well as the volatility of regional currency values due to the region's monetary pegs to the American dollar which is gradually deflating.
Even if oil prices were to rise to their previous high levels of July 2008, this would place a heavy burden on the unemployed and poor as well as the wealthier social sectors because of their reduced purchasing power.The potential of greater instability and conflict is growing. Poverty is increasing in some areas of the region. A new Oxfam study indicates that the people of Iraq are in dire need of emergency assistance, even though the Iraqi government has substantial oil revenues. There are other familiar areas of political volatility in the region. Without jobs and steady income, there is the possibility of social unrest. Uncertainties about further conflict in the region are a disincentive to foreign investment.
The Middle East cannot afford continued political inertia and an underutilization of technology, regional skills and human resources during this critical period. But the global financial slowdown can be seen as a unique opportunity for regional investment and reform, encouraging the states of the Middle East to embark on a transborder process for cooperation and security. Middle Eastern nations could expand their regional collaboration in the fields of water, energy and the environment through intra-regional agreements focused on building trust, cooperation and security.
This can be supplemented with intra-regional cooperation in other sectors, including agriculture, industry, information and education. In addition, intra-regional cooperation on these projects should be tied to a Social Charter – a legal covenant for the just distribution of resources and coordinated financial investments in human security.
A Citizens’ Charter for the region has been proposed by the Voices for West Asia group, together with the Middle East Citizens’ Assembly, the Helsinki Process on Globalization and Democracy and colleagues from South Asia. More work needs to be done to organize and to create education and awareness about this process. Leaders should begin to focus on the benefits of regional and intra-regional cooperation involving civil society, governments, businesses and investors.
Regional investment would be a good opportunity for sovereign funds, investment banks and rich investors who have grown cautious since the economic downturn. According to several estimates, the worth of Sovereign Wealth Funds in the Gulf region during the summer of 2008 stood at about $1.5 trillion, although this figure may have decreased significantly as a result of the global financial shocks and losses in some investments during the September-October financial crash.
But the Sovereign Wealth Funds of the oil states and other cash-rich Asian countries may find that investing in Middle Eastern projects for regional and intra-regional cooperation is a good alternative to present investments in stocks and real estate.The challenge in the Arab world is to develop a framework that moves from consumption to production, reintegrates work and wealth, replaces politics with policies and focuses on human development. A transboundary process that builds trust and cooperation through collective decision-making can lead to a comprehensive approach toward other political tensions in the Middle East region, including the relations between Israel and Palestine, Iraq and Iran, and Lebanon and Syria.
Above all, an intra-regional agreement for cooperation and security should aim at achieving peace, prosperity, democracy and human security in the area. This would protect the region from the global financial crisis and strengthen its infrastructure and absorptive capacity, creating a stable base for recovery once the economic turbulence has run its course.