What Economic Future for the Mideast?

WHILE ARMED CONFLICTS escalate, the Middle East is in the midst of an oil boom reminiscent of the 1970s and 80s, but this time, instead of spending most of their profits, oil producing countries are managing the windfall with restraint, according to a new World Bank report on the Middle East and North Africa region.

MENA Economic Developments and Prospects 2006: Financial Markets in a New Age of Oil finds that oil producers are increasingly turning finite oil wealth into longer-term revenue streams.

They’re also showing fiscal restraint by building up savings, paying down debt, and setting up oil stabilization funds, says the report, the second in a new series of annual reports on economic developments in the Middle East region.

The oil producers’ behavior differs from that of previous oil booms, when they built up debt and banked on continued high oil prices to fuel their expansion. When the oil price declined, many were caught with large debts.

This time, “there’s a realization that they can’t do things as before,” says Jennifer Keller, Senior Economist in the World Bank’s Office of the Chief Economist for the Middle East and North Africa Region and principal author of the report.
Saudi Arabia, for instance, has reduced domestic debt from 97 percent of GDP in 2002 to 41 percent by the end of 2005. Over the same period, it turned a fiscal deficit of almost 6 percent of GDP to a fiscal surplus of 8.4 percent of GDP by 2005, according to the report.

The report notes increasingly close tics between the price of oil and the growth outcomes among the oil-rich, labor importing countries, a fact that was not always the case in prior oil booms. Because countries are adopting largely similar development strategies, they are now experiencing a “common growth effect.”

Oil exports of oil-rich, labor-importing nations – Saudi Arabia, United Arab Emirates (UAE), Kuwait, Qatar, Libya, Oman, and Bahrain – more than doubled in the last three years, growing from $186 billion in 2002 to $440 billion by 2005. At the same time, their economies grew by an average 7 percent in 2005, boosting the region’s growth rate to 6 percent, up from 5.6 percent in 2004, and 3.5 percent in the late 1 990s, says the report. The economies of oil-rich, labor abundant countries – Algeria, Iran, Syria and Yemen – also had healthy growth rates of between 5 and 6 percent.

But the boon to oil producers did not fully translate to resource-poor economies in the region, says the report Egypt, Djibouti, Jordan, Lebanon, Morocco, and Tunisia averaged 4 percent growth, with Morocco’s growth rate falling from 6.3 percent in 2004 to 1.5 percent in 2005, and Lebanon’s economic growth collapsing to 1 percent from 6 percent in 2004.

Compared with past oil booms, the resource-poor economies are not enjoying as many spillover effects from the high price of oil. In fact, the report finds that the relationship between economic growth of these countries and the price of oil has weakened substantially. The reasons include less aid from oil-rich countries, fewer job opportunities for Arab laborers in the Gulf, and less money flowing from oil rich countries to resource-poor countries.

In addition, the resource-poor countries are using more energy than they did 20 or 30 years ago, and must import greater amounts of more costly oil. And like all countries in the region, they maintain oil subsidies that keep the price of gas and diesel well below market prices.

The cost of oil subsidies in Jordan, for example, doubled between 2004 and 2005 – from 3. 1 percent of GDP and 1 1 .3 percent of total expenditures, to 5.8 percent of GDP and 19 percent of current expenditures, according to the report.

“Oil subsidies are a drain on all the economies of the Middle East region, but are often politically difficult to abandon,” says Mustapha Nabli, Chief Economist for the Middle East and North Africa Region. “And rising oil revenues seem to be delaying plans to reform subsidy systems in several countries,” he notes, including Saudi Arabia, which recently cut the price of gas and diesel by 30 percent to offset the effect of equity market declines.

Reform in other areas, however, is progressing throughout the region, the report says.

The resource-poor countries reformed their business and regulatory environments and now rank in the 63rd percentile in those areas worldwide. These countries also took steps to liberalize trade, notes the report.

The region as a whole is making progress in reforming governance structures to be more accountable and inclusive. In fact, over the 2000-2005 period, it ranked in the 64th percentile in terms of progress, though the region remains at the bottom internationally in this area, the report says.

Bahrain, Oman and Qatar, in particular, have taken steps to allow greater participation in public policy, notes the report.

Progress on the governance front is important, says Keller, “because it has implications for the overall reform effort.”

“Reforms that are implemented through top-down management may work initially, but it is difficult to enact reforms at a deep level, unless you have the compliance and participation of those groups whose well-being is affected by reforms.”