On the face of it, it’s quite a conundrum. As shown elsewhere in this magazine, the Middle
East, for all intents and purposes, is a mess. Conflicts, insecurity,
seemingly glacial political and economic reforms, rampant unemployment
and rising militancy are the watchwords for the day. Yet for all that,
the Middle East and the Arab world as a whole has never been in better
shape economically. Regional growth last year averaged more than 6
percent; one dollar in every three spent globally on infrastructure
projects was spent in the Middle East, and the Gulf states can now
boast the highest proportion of young people in higher education in the
world.
All this is a far cry from the stagnation seen in
the 1980s and 1990s when, with population growth taken into account,
the region could manage annual growth of a meager 1 percent.
The oil-rich states are riding the wave of a new
oil boom, with the Gulf nations recording region-wide growth of 12
percent. But even the non-oil economies are doing well: despite the
conflicts in Iraq and Afghanistan, tensions over Iran’s nuclear
program and the crisis between Israel and the Palestinians, growth in
the region has in fact outpaced the global average.
The good news looks brightest in the Gulf, and
especially the UAE. The UAE’s ministry of economy predicts that
the country’s nominal GDP will hit $162.6 billion in 2006,
representing an increase of 23 percent over 2005. Investment is set to
grow by 24.9 percent to $31.9 billion. The International Monetary Fund
projects real, non-oil GDP growth of 11.5 percent and puts the total
figure to $176.8 billion for 2006. The outlook seems positive for 2007
as well, with Business Monitor International predicting GDP growth of 8
percent, a figure it says represents a welcome drop that should allow
the economy to cool off.
Oil has, once again, been the crucial factor. For
the fourth year in a row, historically high prices boosted liquidity in
markets, and gave oil rich states the chance to pay back a huge chunk
of their national debts. Official reserves are up in most oil states,
even allowing for substantial debt repayments.
“The fundamental driver of the
region’s growth will be the central importance of the Middle East
to the global energy market,” says David Butter, the Middle East
senior economist and chief energy analyst at the Economist Intelligence
Unit. “The Gulf states have also made significant strides in
diversifying their economies so that a larger portion of oil and gas
surplus revenue is invested in the region.”
Newfound prudence. In a major new report on
infrastructure spending in the Middle East, North Africa and South
Asia, private equity specialist Abraaj Capital says that while oil may
have been the catalyst for the current boom, future economic growth
will be driven by infrastructure spending that is “nothing short
of spectacular.” Perhaps the best news for the region is the
newfound prudence over what to do with the glut of petrodollars. Oil
states have been saving about two-thirds of revenues since 2002, and
are exercising caution over their budgets. Abraaj says: “Unlike
the 1970s and 1980s, governments are investing a significant proportion
of the excess capital locally rather than in external markets, most
notably the United States. One effect of this should be to support the
long-term growth and development of the region.”
The investment bank Merril Lynch, in a report
bearing the somewhat sensational title The Wild Wild Middle East,
agrees that sound investment policies are the key to future growth.
“In line with other emerging markets, we believe the key secular
investment themes in the MENA region are infrastructure spending and
consumer services. Oil revenues are being used to finance another
regional investment boom. The good news is that this time around, there
is more private sector investment and greater public sector restraint,
which should make the spending growth more durable. As in other
emerging markets, the need to improve infrastructure and increase the
supply of housing in the Gulf is huge, as capital expenditures have not
kept up with rapid population growth.”
The region has already seen some of the downsides
of the excess liquidity the oil boom has created. Markets, fueled by a
sea of ready cash, swelled to unprecedented, and unsustainable, levels.
The subsequent “correction” last year wiped 65 percent off
the value of UAE stocks, while the Saudi market – the
region’s biggest – crashed by 48 percent. High growth and
increased liquidity have also stoked inflation in the region. Taking
steep property hikes into account, the Abu Dhabi Chamber of Commerce
reported last month that real inflation had hit 20 percent in the UAE
in 2006, largely as a result of rent increases.
Outside of the oil bonanza countries, there are
indications that the Middle East is, for the most part, riding the back
of a global upsurge in economic strength. Egypt is making progress,
with reforms to banking and a serious attempt to tackle the
country’s notorious bureaucracy helping to drive growth into the
double digits. Abraaj says all this is good news in a region swamped by
excess liquidity. “The continued liberalization of economic
policies in these states provides substantial investment opportunities
for the private sector,” the report says. “Although
growth rates are expected to be sustained in the near to medium term,
these countries are still in the preliminary stages of development and
require considerable capital investment to sustain their recent
economic performance. Furthermore, while these countries have been
indirect beneficiaries of the oil boom, they do not have the benefit of
large levels of sustainable natural resource revenues, making the
governmental funding of infrastructure development an even greater
challenge.”
Beware stagnation. For all the talk of
double-digit growth in the leading economies, there are plenty of
figures for the pessimists to play with. A 2004 report from the IMF
analyzing the factors behind the region’s historic
underperformance warns that the lessons from the stagnation of the
1980s and 1990s have not yet been fully learned. The report states:
“In GCC countries, where oil revenues are significant, large
governments appear to have been a key factor, stifling private sector
growth and impeding diversification. In other MENA countries poor
institutional quality has held back growth. Political instability is
also shown to have played a role.” It wouldn’t take much
backtracking by reform-minded governments for these factors to be as
applicable now as they were in the 1980s.
GDP figures also don’t reveal the
distribution of wealth in Arab countries, a factor that may be giving a
distorted image of rising prosperity. “One in five Arabs still
lives on less than $2 a day,” says the UAE minister for economy
and planning, Sheikha Lubna Al Qasimi. “These figures are more
often associated with Third World countries and yet Arab countries are
rarely put in the same box,” she said. Speaking to Arab business
leaders in November, Sheikha Lubna cited the UN Arab Human Development
Report to hammer home her point that, while the Gulf states may be seen
as rich, nowhere in the Arab world is really seen as developed.
“Literacy has not necessarily been converted into education, a
key to economic development,” she said. “The Arab world has
to shift to become a knowledge region.”
The ever-present security fears aside, most
economists agree that the biggest problem threatening the
region’s growth is the huge disconnect between the labor market
and the region’s rapidly rising population. In the Gulf, for
example, 70 percent of the population is under 30, and nearly 50
percent is under 20. Even conservative estimates put unemployment among
young males at 20 percent. Across the wider region, the population is
growing by 2.5 percent a year; the highest rate in the world. The total
labor force is expected to increase from 104 million in 2000 to 146
million in 2010 and 185 million by 2020. Over the next two decades, the
Arab world must create 100 million new jobs, more than the total number
created in the region over the past 50 years.
Rapidly growing populations are putting pressure
on basic infrastructure and services. Population pressure is draining
water supplies, with demand for fresh water exceeding supply in half
the countries in the region, while much of the region can no longer
afford to provide water for agriculture at market prices, leading many
countries to become permanent food importers, and creating a huge labor
shift away from agriculture, which now employs just 10 percent of the
population compared with 40 percent in the 1960s. The growing
population also puts pressure on housing, healthcare and transport.
“Population optimists,” however, see
this demographic bulge as a huge opportunity: with the right policies
on education and employment, the swelling ranks of young, able-bodied
workers will actually promote economic prosperity by furnishing
abundant human and intellectual capital and increasing market size.
It’s a view that Abraaj agrees with, but with one major caveat:
the will has to be there to face up to growth, and put the necessary
infrastructure in place to ensure populations don’t outstrip the
wealth available. “In the first half of 2006, the Middle East,
for the first time in its history, became the largest source of
infrastructure-related project finance in the world, accounting for $33
billion, or one dollar in every three, that was raised in the industry
globally,” its report says. “Furthermore, the vast
infrastructure requirements of the region going forward suggest that
this situation is likely to remain the case for the foreseeable future.
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