Institute for Domestic & International Affairs, Inc.
World Bank Economic Diversification Beyond Oil Director: Michael Pepe
Š 2010 Institute for Domestic & International Affairs, Inc. (IDIA) This document is solely for use in preparation for Philadelphia Model United Nations 2010. Use for other purposes is not permitted without the express written consent of IDIA. For more information, please write us at idiainfo@idia.net
Policy Dilemma ______________________________________________________________ 1 Chronology__________________________________________________________________ 3 Mid-16th Century-Early 20th Century _________________________________________________ 3 Mid-Twentieth Century: The Discovery of Oil and its effects _____________________________ 3 1920s-1960 ____________________________________________________________________________ 3
1960s-1970s ______________________________________________________________________ 4 1970s-1980s ______________________________________________________________________ 4 16 October 1973: Oil Crisis _________________________________________________________ 5 1979: Iranian Revolution and Impact on Oil ___________________________________________ 5 August 1990: Iraq invades Kuwait ___________________________________________________ 5
Possible Causes ______________________________________________________________ 6 Poor Governance__________________________________________________________________ 7 Post Colonial Economic Ideas _______________________________________________________ 8 Corruption _______________________________________________________________________ 9
Actors and Interests __________________________________________________________ 10 Oil Rich Labor Importing Arab States (Libya, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) _____________________________________________________ 10 Libya ________________________________________________________________________________ 10 Kuwait _______________________________________________________________________________ 10 United Arab Emirates ___________________________________________________________________ 11
Oil Rich, Labor Abundant Arab States(Algeria, Iraq, Sudan, and Yemen) _________________ 12 Iraq ____________________________________________________________________________ 12 Yemen _______________________________________________________________________________ 13 Algeria _______________________________________________________________________________ 13
Non-Oil Middle Income, labor-exporting Arab States (Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia)_____________________________________________________________________ 14 Syrian Arab Republic _____________________________________________________________ 14
Projections and Implications ___________________________________________________ 15 Conclusion _________________________________________________________________ 17 Discussion Questions _________________________________________________________ 18 Bibliography________________________________________________________________ 19 For Further Reading______________________________________________________________ 19 Works Cited_____________________________________________________________________ 20
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Policy Dilemma The discovery of oil in Middle Eastern States should have, in theory, created the basis for great prosperity. In reality, however, the economies of most nations that have found resource wealth have historically underperformed in terms of economic and social benefits, compared to those who were not as well endowed. The term “Resource Curse” is widely evoked in economic and development literature to refer to the paradox of nations with an abundance of natural resources having less economic growth then nations without a wealth of natural resources. The term is used to describe situation in which countries with a wide natural resource base are not able to use their wealth to grow their economies, raise the standard of living, or create opportunities for development.
1
The
resource curse is a blanket term to gather individual theories that demonstrate that overdependence on one resource can result in numerous problems, which are caused by both exogenous and endogenous factors. Research shows that economic development is much less successful in primarily resource-based economies than in manufacture-based economies. Due to the rising cost of oil (meaning that oil-producing states gain more revenue from the commodity) the per capita incomes of the oil producing Middle Eastern economies have grown, but in terms of development, nations still lag behind. For example, in 2006, “Qatar, Saudi Arabia and the UAE rank(ed) 9, 46, and 16 in GDP per capita in purchasing power parity terms (IMF 2006). But, the same countries rank(ed) 46, 76, and 49 in the World Bank’s 2006 human development index.”
2
The problem of underdevelopment in states of the Middle East stem partially from dependence on oil exports for a large portion of national income (at times upwards
1
Naim, Moises “The Devil’s Excrement: Can oil rich countries avoid the resource curse?” Foreign Policy Magazine, Sept/Oct 2009 http://www.foreignpolicy.com/articles/2009/08/17/the_devil_s_excrement <accessed: January 5, 2009> 2 Centre de Géopolitique de l’Énergie et des Matières Premières (CGEMP) Université Paris Dauphine “OPEC Middle East Oil Curse” http://www.dauphine.fr/cgemp/masterindustrie/cours%20geopolitics/geopolitics_2007/oil_curse.pdf
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of 50 per cent of GDP). This dependence on a single sector leaves national income vulnerable to the fragility of resource prices. Oil revenues, due to the securitization of the energy market, are often subject to extreme price swings in short periods of time. Another issue created by price swings is the destabilization of exchange rates when resource revenues make up a great portion of GDP. This creates “Dutch Disease” which relates the exploitation of a nation’s natural resources to the deindustrialization of national economies because, when the exchange rate is raised, the manufacturing sector becomes less competitive due to traded goods becoming much less profitable to produce.
3
The discovery of oil deposits in the Middle East created large-scale opportunities for development in the countries where fields are located (namely Saudi Arabia, Kuwait, Bahrain, the United Arab Emirates, Qatar, Iraq, Iran, and Algeria.) States that are not rich in oil resources have benefited by sending laborers to work in wealthier states. The remittances that these workers send home help to build the economies of these states (namely the West Bank and Gaza, Egypt, and Jordan) In the Middle East, oil-producing developing states have almost been universally hindered by the resource curse. The Middle East, which is a region that widely depends on one specialization, the natural resource extraction in petroleum, exposes itself to the will of the international m 8arkets and the resulting vulnerability prevents nations from reaching their full potential in terms of development. Economic development is heavily intertwined with social development and they are both being heavily affected by the slow pace at which the competitive diversification process is moving forward in the Middle East. Hydrocarbon resources in the Middle East have promoted their economic structure but with high birth rates, unemployment and a shortage of a skilled workforce, economic diversification must become a priority.
4
Economic diversification has been discussed within the MENA region but it has never 3
Lam, R. and Leonard Wantchekon, “Political Dutch Disease” Published April 10, 2003, www.nyu.edu/gsas/dept/politics/faculty/wantchekon/.../lr-04-10.pdf <accessed January 12, 2010> 4 al-Zedjali, Hamood “Weaning the Middle East off oil” http://www.meed.com/sectors/economy/weaning-themiddle-east-off-oil/1076214.article
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been introduced into concrete policy.
5
Middle Eastern nations need to begin to place a
greater deal of emphasis on economic diversification to reduce natural resource dependence and to create mechanisms to sustain long-term economic growth and employment creation.
Chronology Mid-16th Century-Early 20th Century In 1526, Sultan Suleyman the Magnificent granted the first capitulations to the French. This agreement, later extended to other European powers, gave nations the right to trade within the Ottoman Empire, free of taxes and other concessions (an early 6
example of free-trade agreements). Three hundred years later; the capitulations became quite a problem for the Ottoman Empire, because as Europe gained military and economic strength over centuries, the empire began to lag behind. Eventually, the Ottomans declared bankruptcy in 1875 and Western powers took control over much of 7
the region. Britain and France, under the Sykes-Picot agreement of 1916, subsequently divided the Ottoman Empire between themselves after World War I but pressures forced them to leave and allow Middle Eastern states to begin governing themselves beginning in the 1930s. Nationalist parties came to power after the British and French mandates ended and these regimes tended to exercise tight control over their economies.
8
Mid-Twentieth Century: The Discovery of Oil and its effects 1920s-1960 The 20th Century saw major changes occurring in the Middle East. At the end of World War I a trend towards expanding, strengthening, and Nations of the Middle East 5
“Letter from Suleyman the Magnificent to Francois I” http://www.qantaramed.org/qantara4/public/show_document.php?do_id=1197&lang=en#_ftn2 6 PBS Global Connections, “Economics: Its More Than Oil” http://www.pbs.org/wgbh/globalconnections/mideast/themes/economics/index.html 7 Ibid. 8 Ibid.
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gained independence gradually from the early 1920s through the 1960s. After World War II, Britain and France could no longer afford to hold on to their imperialist ideologies but a new world power, the United States, began to increase it presence in the world with its need for oil. Standard Oil of California first discovered oil in Saudi Arabia in 1936 and in its neighboring states in the Persian Gulf, creating some of the richest nations in the world (the UAE, Bahrain, and Kuwait) and creating both opportunities and problems in the region,
9
1960s-1970s In the 1960s, import-substituting industrialization (ISI) became a common strategy for building national economies. ISI attempted to build local industries to create jobs, use local resources, and give nations the opportunity to stop importing goods from the west. In order to do these governments raised trade barriers and heavily subsidize or privatized infant industries to stimulate rapid economic growth. ISI failed however when they began to drain natural resources and created inefficient industries within nations.
10
1970s-1980s By the 1970s, Egypt, under President Anwar Sadat, began a strategy known as infitah, which was focused on opening the economy to foreign investment. Many nations followed suit. Infitah was also a disappointment because, rather than investment in local industry, most investments were in western consumer goods such as McDonald’s and brand name clothing.
11
The importation of Western culture did little to help the standard
of living in the region; rather, it emphasized the growing gap between wealthy classes who adopted western lifestyle and the poorer masses; the haves and the have-not’s. 9
Simmons, Matthew R. Twilight in the Desert The Coming Saudi Oil Shock and the World Economy. New York: Wiley, 2005. 10 Beinin, Joel. Workers and Peasants in the Modern Middle East (The Contemporary Middle East). New York: Cambridge UP, 2001. 11 Weinbaum, Marvin G. “Egypt’s ‘Infitah” and the Politics of US Economic Assistance” Middle Eastern Studies, Vol. 21, No. 2 (April 1985) pp. 206-202, Taylor & Francis, Ltd. http://www.jstor.org/stable/4283061
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16 October 1973: Oil Crisis On of the first issues surrounding oil appeared during the energy crisis following an oil embargo imposed by the Organization of Arab Petroleum Exporting Countries on all western nations supporting Israel during the1973/74 Yom Kippur War. The embargo banned the exportation of petroleum and cut oil production in the region.
12
1973 has
become a pivotal year in energy history as it highlighted to nations around the world the importance of becoming self-sufficient in terms of not only gaining energy but also in diversifying economies beyond oil.13
1979: Iranian Revolution and Impact on Oil The 1979, or second, energy crisis occurred in response to the Iranian Revolution. When the Shah of Iran, Mohammed Reza Palavi fled his country in 1979 and Ayatollah Khomeini came to power, protesting caused the Iranian oil sector to come to a standstill.
14
Although Khomeini’s regime resumed oil exportation it was highly
inconsistent and at a much lower volume meaning that prices rose exponentially traumatizing oil markets that had only just begun to recover from the 1973 Oil Embargo shocks.
15
August 1990: Iraq invades Kuwait In 1990, Iraq was facing heavy war debts from its nearly decade long war with Iran and when raising the price of oil through production cuts in the Organization of Petroleum Exporting Countries failed to help their economy, as a result of Kuwait raising its oil production in order to counterbalance Iraq’s production cuts.
16
Kuwait’s refusal to
raise oil prices, which only further hurt Iraq’s war-crippled economy, was seen as an act of aggression by many Iraqis. In 1990, Iraq, under the rule of Saddam Hussein, accused 12
US Department of State, “ Second Arab Oil Embargo, 1973-1974” http://www.state.gov/r/pa/ho/time/dr/96057.htm 13 Ibid. 14 Venn, Fiona. The Oil Crisis. New York: Longman, 2002 15 Ibid. 16 Simon, G. Harak, “Why DID Iraq invade Kuwait? A Brief History” http://mcadams.posc.mu.edu/blog/harak.html
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Kuwait of slant drilling into the Iraqi oil field, Rumaila. Kuwait believed that the accusations were only made in order for Iraq to justify invading them and in August 1990, in an act of retaliation, Saddam Hussein sent around 100,000 troops to invade the tiny nation, which lies on the northwest portion of the Arabian Peninsula.
17
Oil is often used as a weapon for aggression and retaliation by nations who control its production. The case of Iraq invading Kuwait only serves to highlight the necessity for nations to diversify their economies beyond oil. Iraq saw oil production as a quick means to gain revenue to bolster its fledgling economy and when Kuwait prevented them from doing this, they invaded the nation in order to gain their oil fields and the nations revenue from oil. If countries do not diversify beyond oil, it could turn the region into a powder keg, in which nations who have oil will be vulnerable to more powerful nations once oil begins to decline.
18
Possible Causes A strong, stable economy is the goal of every nation around the world. Sustainable economies help to increase standards of living in nation by enhancing the ability to find jobs and create wealth while building and developing technology and knowledge. Stable economies are most often found in stable political climates. 19
Diversified economies, based on many broad, profitable sectors, have long been though
to play significant roles in stable economies. Nations in the Middle East face particular, often daunting, challenges when it comes to diversifying their economies.
20
These
countries are rich in hydrocarbons and heavily invested in oil and gas but building wealth beyond oil is becoming increasingly harder. Specialization in any single economic sector leaves nations open to volatile shocks. In sectors involving the extraction of natural 17
Ibid. Ibid. 19 Shediac, Richard â&#x20AC;&#x153;Economic Diversification: The Road to Sustainable Developmentâ&#x20AC;? Booz & Co. http://www.ideationcenter.com/media/file/Economic_diversification2.pdf 20 Ibid. 18
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resources especially, these shocks stem from being over-exposed to the irregularities of the international market and vulnerabilities involving external factors. Economic diversification has often been discussed with the Middle East region but, because of the wealth generate from oil, few concrete government initiatives have been proposed and no real political willpower has emerged to move Middle East away from oil as its main resource.
21
Oil is a finite resource –there is only a limited amount of it in the world. As oil becomes more and more difficult to extract, its price will rise. Today, the Middle East holds nearly 70 per cent of the world’s known extractable oil reserves and over the next few decades, it will remain the key source of oil for entire world but as oil begins to run out, nations of the Middle East must begin to think of an economic future beyond oil. 22
Poor governance practices, post-colonial economic policies, government corruption and
efficiency, struggles between oil producing nations and social inequality within the region have all contributed to the economic dependence that Middle Eastern nations have on oil.
Poor Governance Governance is a term that is often used in development literature to describe the process of decision-making and how such decisions are implemented. Governments are the main actors who practice governance.
23
Good governance is characterized by eight
major ideas: it is consensus oriented, allows for participation from its citizens, adheres to the rule of law, is effective and efficient, subscribes to a high level of accountability, it is
21
Smith, James L “World Oil: Market or Mayhem?” Journal of Economic Perspectives, Volume 23, Number 3, Summer 2009 pp 145-164, pubs.aeaweb.org/doi/pdfplus/10.1257/jep.23.3.145 22 Ibid. 23 United Nations Economic and Social Commission for Asia and the Pacific, “What is Good Governance?” http://www.unescap.org/pdd/prs/ProjectActivities/Ongoing/gg/governance.asp
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responsible and transparent, and fairly distributes public goods to its citizens, it is also inclusive. 24 Very few nations in the Middle East have achieved good governance, but in order to ensure sustainable development, these nations must begin to move toward these ideas. Weak governance in the Middle East has translated to the provision of poor public 25
services and limited participation by citizens.
The weak growth in the Middle East is
also attributed to poor governance because it has cultivated a poor climate for investment and good business practices. Improving governance is not simple process but if nations of the region could begin to formulate national programs to enhance inclusiveness of citizens and accountability of governments then the region could begin to simultaneously encourage growth and development in economic sectors beyond oil.
26
Post Colonial Economic Ideas Beginning in the 1950s and extending through a large portion of the 1970s, postcolonial nations of the Middle East adopted a similar development paradigm that included strong direction by the state in terms of the development product and control of the means of production effectively making private sectors highly undeveloped or completely non-existent in some nations.
27
They also put protectionist trade practices
into place to secure national sovereignty by minimizing external interference.
28
In the
late 1970s, this development paradigm was change to adopt economic liberalization policies that embraced free trade and privatization
24
29
Ibid. Ibid. 26 Ibid. 27 Economic transition in the Middle East global challenges and adjustment strategies. Cairo: American University in Cairo, 1997. 28 Ibid. 29 Ibid. 25
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Corruption Corruption in the Middle East is currently threatening the future economy and stability of the entire region. Corruption in the oil and gas industry is rampant and because of their significant size, oil revenues have made large scale and widespread corruption operation possible: a few cents on a couple of million barrels of oil a day or a small percentage of a large oil contract are sometimes to much temptation for government officials to avoid.
30
Governments in the Middle East do not have to tax citizens in order to receive oil revenues so, at times, it may appear that there is no direct impact on citizens, however the money that is gained through corruption often take their toll on the public services that are provided to citizens and also affect their ability to generate wealth. In the interest of protecting the status quo, rulers and politicians have tries to buy citizens off by giving indiscriminate subsidies for food, electricity and fuels. Oil in these nations has allowed for financing from oil revenues, with little regard for economic development and growth or for the future and for future generations.
31
Oil may not be the only cause for the state
of affairs in the Middle East, but it has certainly contributed to problems surrounding economic dependence on oil: Rulers and governments have been unwilling or unable to provide a foundation for sustained growth in the private sector or to promote an effective tax system, economic inequality has widened and there is a lack of an adequate social safety net.
30
32
Jain, Arvind K. Economics of corruption. Boston: Kluwer Academic, 1998 Fischer, Stanley â&#x20AC;&#x153;Promoting Good Policies: The Role of the International Monetary Fundâ&#x20AC;? Indian Council for Reasearch on International Economic Relations www.piie.com/fischer/pdf/Fischer075.pdf 32 Ibid. 31
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Actors and Interests Oil Rich Labor Importing Arab States (Libya, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) Libya After the Pan American World Airways Flight 103 bombing in 1988, the United States imposed strict embargos against Libya heavily affecting foreign investment in the nation, while also reducing its ability to expand its export markets. The oil sector also suffered from the embargo because it did not permit the purchase of vital exploration and maintenance equipment. In addition to facing heavy embargos, the de facto leader of the state of Libya, Colonel Muammar al-Gaddafi’s socialist economic system has decreased the size of the private sector while increasing the control of the state subsequently reducing the growth of new industries.
33
Today, corruption remains a major problem and
Libya’s economy is ranked as oppressed in the Heritage Foundation and Wall Street Journal Index of Economic Freedom.
34
Currently, foreign direct investment is located primarily in the hydrocarbons sector because past issues with sanctions and economic policy have given outside governments little faith in investing in other sectors.
35
Kuwait Kuwait’s economy is based on oil exports and their total ownership of the world’s proven oil reserves range from 8-10 per cent. Over the years the Kuwaiti government has tried to develop numerous sectors of its economy. Kuwait’s non-oil exports are mainly in agriculture, light manufacturing and fishing as well as Petrochemical related products but due to the lack of resources such as water for agriculture and land for building larger
33
“Beyond Oil: Libya” http://www.beyondoil.net/libya.htm Ibid. 35 Ibid. 34
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industrial facilities, these industries are small compared to the amount of income received from oil.
36
Unlike other gulf nations, the Kuwaiti government has taken the necessary steps to begin to diversify away from oil. The creation of the Kuwait Fund for Future Generations began a state reserve fund, which places 10 per cent of Kuwait’s oil income directly into the fund for investment in other sectors of the nation. Important economic sectors such as tourism, banking, transportation, and telecommunication are also being grown in the nation. Kuwait’s banks and its telecommunication companies are some of the regions best and strongest.
37
Kuwait was one of the first nations in the Mid-East to being planning for a future beyond oil. They do have shortfalls such as the limited range of national industries, which could mean that after oil runs out, Kuwait may be dependent on the economies of foreign nations instead of their own industries.
38
United Arab Emirates The United Arab Emirates controls around 10 per cent of the world’s oil supply and nearly 5 percent of its natural gas reserves. Oil and gas production account for about 30 per cent of the nation’s Gross Domestic Product. Due to the high income provided from oil, the United Arab Emirates real GDP has been growing steadily by a minimum of 4 per cent per year since 2004. The UAE government has also been highly successful at reducing inflation through adhering to strict micro and macroeconomic practices such as controlling nationwide interest rates.
39
Although the economy of the United Arab Emirates is driven substantially by oil, the nation’s economy is also enhanced by several important industries such as construction, retail, telecommunications and tourism. Foreign investment in non-oil 36
“Beyond Oil: Kuwait” http://www.beyondoil.net/kuwait.htm Ibid. 38 Ibid. 39 “Beyond Oil: United Arab Emirates” http://www.beyondoil.net/uae.htm 37
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sectors has increased over the last decade and with the encouragement of the government, UAE companies are also investing more heavily both at home and abroad.
40
Only 20 years ago, over 65 percent of the Gross Domestic Product of the United Arab Emirates was based on oil. Today, that number has dropped to only 30 per cent, indicating that the UAE is prepared to continue economic diversification beyond oil into the future. Investments, both foreign and domestic, will allow income to be produced steadily for the United Arab Emirates to possess a stable economy in the future. In fact, projections show that the UAE is becoming one of the best and most prepared nations to deal with a world without oil.
41
Oil Rich, Labor Abundant Arab States(Algeria, Iraq, Sudan, and Yemen) Iraq During the late 1980s through the 1990s, Iraq experienced years of war against Iran and Kuwait and dealt with sanctions imposed by the UN, followed by the allied invasion and the US invasion in 2003 causing billions of dollars of damage to the economy of Iraq. This has mean that Iraq has not had the necessary resources to build infrastructure beyond oil and a lack of effective planning by the regime of Saddam Hussein has created a void in the non oil sector of the Iraqi economy.
42
Although the allied forces have attempted to rebuild the oil infrastructure of Iraq to, in theory, allow the nation to branch out economically, when Iraq’s infrastructure is finally complete, the Iraqi economy will only be more dependent on oil as its main economic resource.
43
Additionally problems faced by Iraq in terms of economic
diversification include corruption, internal disputes between Shiites, Sunnis and Kurds have damaged political consensus. Iraq highlights that although nations may have high 40
Ibid. Ibid. 42 “Beyond Oil: Iran” http://www.beyondoil.net/uae.htm 43 Ibid. 41
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oil reserves their future beyond oil still has the potential to be jeopardized in the absence of effective political strategies.
44
Yemen Yemen is one of the poorest countries in the Middle East and oil provides nearly three quarters of government revenues while making up nearly 90 per cent of the total goods and services exports. It is estimated that the oil resources of the nation will be depleted by the 2015.
45
There are no other industries planned within the region that will
be able to generate the same amount of income that oil does for Yemen. This means that, although the nation has begun to develop its gas industry, gas income will be no where near sufficient enough to make up for losing oil income.
46
Tourism is a fledgling industry
in Yemen due to the issues with controlling the rule of law as well as numerous internal uprising. Due to poor water management, it is estimated that by 2011 Yemen’s water resources will have hit all time low levels.
47
Transparency International ranks Yemen as the 113th least corrupt country, placing Yemen in the league of the most corrupt countries in the world. Population growth has also outpaced economic growth.
48
The Yemeni government must begin to plan the
country’s infrastructure and economy to prepare for the future beyond oil. Restructuring the economy would go a long way to stabilizing Yemen’s economic future in order to 49
attract necessary investments and diversify the economy for the long run.
Algeria Due to high oil prices, the Algerian economy has experienced an upsurge in its income. Since 19999, Algeria’s economy has grown around 4 per cent annually. The International Monetary Fund has stated that Algeria’s real gross domestic product grew 44
Ibid. “Beyond Oil: Yemen” http://www.beyondoil.net/yemen.htm 46 Ibid. 47 Ibid. 48 Ibid, 49 Ibid. 45
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by 4.8 per cent in 2005. In 2006, this number increased to 5.3 percent. Algeria’s foreign exchange reserves have also increased because the high price of oil is supplemented by increased gas exports from Algeria to Europe.
50
Despite recent growth, the Algerian economy is not ready for a future beyond oil. Lack of investment in the non oil sector, corruption, a centralized economy, government power being in the hands of the military elite since war began in Algeria in 1992, and the power of unions all stand in the way to ensure that Algerians will have a secure future.
51
Algeria has seen signs of growth in the banking and telecommunication sector, because of private investment, but more market reforms and a settlement to the civil war would go a long way to securing the economy in the long-term.
52
Non-Oil Middle Income, labor-exporting Arab States (Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia) Syrian Arab Republic Syrian oil production is expected to decline over the next decade, while consumption rises, causing a reduction in Syrian net oil exports. Syria’s economy is characterized by centralization as the government plays a large role in planning and running the economy. The oil sector is the biggest income generator for the economy as it provides around 75 per cent of export receipts. Oil exports also provide half of government revenue. Service based-industries and the Agriculture sector provide the Syrian government with the rest of its income.
53
Currently, Syrian oil resources are dwindling and while the Syrian government has stated that they do not expect to become a net importer of oil until 2020, many foreign analysts have placed their estimates at seven or eight years earlier than that. Without new resources, the Syrian government will suffer a 50 per cent fall in revenue when oil in no 50
“Beyond Oil: Algeria” http://www.beyondoil.net/algeria.htm Ibid. 52 Ibid. 53 Ibid. 51
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longer exported. In order to combat this the Syrian government has embarked on a 54
program to diversify the economy away from oil.
Syria faces a number of serious challenges if it does not find methods of diversifying it’s economy beyond oil. Lack of investment in the non-oil sector is the number one problem because Syria has been unable to find alternative industries that will supply equal amounts of income that are found in the oil industry. Continued US Sanctions, plus high levels of corruption also contribute to the lack of growth and investment by foreign countries in order to build Syria’s non-oil sectors.
55
Projections and Implications Diversification beyond oil is necessary for nations of the Middle East to successfully manage the 21st century in terms of economic strength. Governments must identify and combat several challenges in order to diversify their economies including the challenges of security, in terms of keeping the production of oil safe in a world where these facilities are often the targets of terrorism, as well as balancing regional integration and the environment. After analyzing the economic challenges that they will face governments must begin to identify key sectors that are prime for diversification such as energy, agriculture, tourism, and the like.
56
The history of the Middle East reflects its struggle to compete on an international level. Under the rule of the Ottoman Empire, trade with European nations grew steadily through the 19th Century into the first half of the 20th Century as seen in the exportation 57
of agriculture, natural resources, and fabrics and the influx of capital.
The discovery of
oil in the 1930s shifted the approach of the region’s economies because the high price of oil meant that wealth could be build quickly and efficiently in many nations. Oil helped 54
Ibid. Ibid. 56 Birol, Fatih, “World Energy Prospects and Challenges” International Energy Agency 57 PBS Global Connections, “Economics: Its More Than Oil” http://www.pbs.org/wgbh/globalconnections/mideast/themes/economics/index.html 55
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to create the disproportionately wealth welfare states that are still seen today. In states without large oil reserves, the presence of this commodity in neighboring states has helped them build revenue through labor migration and subsequently remittances, directing the aid from wealth states to create partial welfare states.
58
Low productivity and an over reliance on oil only serve to hinder the future prospects of economic expansion in Gulf States. Institutional barriers and inconsistencies in the labor market must be addressed in order for the Middle East to move beyond oil as their prime economic driver. High economic concentration in one sector only leads to volatile growth and fluctuating economic cycles within a nation, which can create and engender unemployment issues and numerous risks.
59
Economic diversification is a
critical factor in any sustainable economy and diversification must become a foremost goal when creating development agendas in order to create measurable, strong, long-term growth in order to promote stability and create a high standard of living for citizens of the Middle East.
58
Naim, Moises â&#x20AC;&#x153;The Devilâ&#x20AC;&#x2122;s Excrement: Can oil rich countries avoid the resource curse?â&#x20AC;? Foreign Policy Magazine, Sept/Oct 2009 59 Ibid.
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Conclusion Economic diversification is the process through which a growing spectrum of economic outputs is produced. It can refer to both the diversification of markets for exports or the diversification of income sources to promote investment within nations. In the Middle East economic diversification, or the lack there of, has a prominent effect on the economies of developing states. Nations in the region have traditionally relied on the production of one main commodity: oil. This reliance has made nations vulnerable to a wide range of issues, most notably the inability to generate wide spread wealth in order to increase standards of living, encourage the spread of technology or ensure a stable political climate across nations. Improving the production capabilities of the private sector will go a long way toward diversifying economies that are primarily focused on oil. Through using the private sector as a tool, governments could potentially stimulate productive investment and greater non-petroleum output, contribute to the expansion of export markets beyond petroleum products and stave off long term unemployment scenarios through promoting more labor intensive industries.
60
In order to enhance the
situation of development in the Middle East, whether social, political, or economic, much work must be accomplish to complete the diversification process across nations of the region.
60
â&#x20AC;&#x153; Looking Beyond Petroleum: A Stronger Case For Economic Diversification In MENA Regionâ&#x20AC;? Middle East Economic Survey, April 9, 2007 < http://www.mees.com/postedarticles/oped/v50n15-5OD01.htm>
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Discussion Questions • What is economic diversification? Why is it especially important in regard to the Middle East? • What role has corruption played in stopping economic diversification from occurring? • How important is economic diversification in the creation of sustainable economies? • What types of industries are viable in the Middle East to help nations begin to diversify their economies? • What links are there between economic diversification and social, political and economic development?
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Bibliography For Further Reading The Middle East in the World Economy, 1800-191 by Roger Owen The book looks at the economy of the Middle East from the 19th century through the early 20th century. The book looks at the states that formed after the collapse of the Ottoman Empire and their attempts to become less dependent on certain development paradigms. The book shows that the problems and issues faced by the Middle East in that time period are still highly relevant today.
Twilight in the Desert The Coming Saudi Oil Shock and the World Economy by Matthew R. Simmons Saudi Arabia is the worldâ&#x20AC;&#x2122;s largest producer of oil and the Saudi Arabian government has repeatedly reassured the world that its oil fields can maintain and eventually increase output of oil to meet global demand but until this book, there were few independent resources about Saudi petroleum and production of oil. The book looks at over 70 years of history in modern Saudi Arabia.
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Works Cited al-Zedjali, Hamood “Weaning the Middle East off oil” http://www.meed.com/sectors/economy/weaning-the-middle-east-offoil/1076214.article Beinin, Joel. Workers and Peasants in the Modern Middle East (The Contemporary Middle East). New York: Cambridge UP, 2001. “Beyond Oil: Algeria” http://www.beyondoil.net/algeria.htm “Beyond Oil: Iran” http://www.beyondoil.net/uae.htm “Beyond Oil: Kuwait” http://www.beyondoil.net/kuwait.htm “Beyond Oil: Libya” http://www.beyondoil.net/libya.htm “Beyond Oil: Syria” http://www.beyondoil.net/syria.htm “Beyond Oil: United Arab Emirates” http://www.beyondoil.net/uae.htm “Beyond Oil: Yemen” http://www.beyondoil.net/yemen.htm Birol, Fatih, “World Energy Prospects and Challenges” International Energy Agency Centre de Géopolitique de l’Énergie et des Matières Premières (CGEMP) Université Paris Dauphine Economic transition in the Middle East global challenges and adjustment strategies. Cairo: American University in Cairo, 1997. Fischer, Stanley “Promoting Good Policies: The Role of the International Monetary Fund” Indian Council for Reasearch on International Economic Relations www.piie.com/fischer/pdf/Fischer075.pdf Jain, Arvind K. Economics of corruption. Boston: Kluwer Academic, 1998 Lam, R. and Leonard Wantchekon, “Political Dutch Disease” Published April 10, 2003, www.nyu.edu/gsas/dept/politics/faculty/wantchekon/.../lr-04-10.pdf <accessed January 12, 2010>
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“Letter from Suleyman the Magnificent to Francois I” http://www.qantaramed.org/qantara4/public/show_document.php?do_id=1197&lang=en#_ftn2 “Looking Beyond Petroleum: A Stronger Case For Economic Diversification In MENA Region” Middle East Economic Survey, April 9, 2007 < http://www.mees.com/postedarticles/oped/v50n15-5OD01.htm> Naim, Moises “The Devil’s Excrement: Can oil rich countries avoid the resource curse?” Foreign Policy Magazine, Sept/Oct 2009 http://www.foreignpolicy.com/articles/2009/08/17/the_devil_s_excrement <accessed: January 5, 2009> “OPEC Middle East Oil Curse” http://www.dauphine.fr/cgemp/masterindustrie/cours%20geopolitics/geopolitics_2 007/oil_curse.pdf PBS Global Connections, “Economics: Its More Than Oil” http://www.pbs.org/wgbh/globalconnections/mideast/themes/economics/index.htm l Shediac, Richard “Economic Diversification: The Road to Sustainable Development” Booz & Co. http://www.ideationcenter.com/media/file/Economic_diversification2.pdf Simmons, Matthew R. Twilight in the Desert The Coming Saudi Oil Shock and the World Economy. New York: Wiley, 2005. Simon, G. Harak, “Why DID Iraq invade Kuwait? A Brief History” http://mcadams.posc.mu.edu/blog/harak.html Smith, James L “World Oil: Market or Mayhem?” Journal of Economic Perspectives, Volume 23, Number 3, Summer 2009 pp 145-164, pubs.aeaweb.org/doi/pdfplus/10.1257/jep.23.3.145 US Department of State, “ Second Arab Oil Embargo, 1973-1974” http://www.state.gov/r/pa/ho/time/dr/96057.htm Venn, Fiona. The Oil Crisis. New York: Longman, 2002
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Weinbaum, Marvin G. “Egypt’s ‘Infitah” and the Politics of US Economic Assistance” Middle Eastern Studies, Vol. 21, No. 2 (April 1985) pp. 206-202, Taylor & Francis, Ltd. United Nations Economic and Social Commission for Asia and the Pacific, “What is Good Governance?” http://www.unescap.org/pdd/prs/ProjectActivities/Ongoing/gg/governance.asp