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Arab nations lag behind rest of world economically, despite oil and natural gas

23 February 2011

Tarik Yousef analyzes the current economic challenges facing the Middle East. This article was originally published by The Washington Post and is reposted here. The views expressed in this article are those of the published author.

Amid a massive shift in the politics of the Arab world, the countries of the region are now confronting an economic challenge that is just as steep: how to engage with a global economy that in many ways has passed them by.

The nations of the Arab Middle East sit atop perhaps half of the planet's oil and a third of its natural gas reserves, yet the economies of the region are among the most stagnant.

Hundreds of billions of dollars in hydrocarbon wealth and other receipts - for instance, in the case of Egypt, revenue from the Suez Canal and U.S. foreign aid - have propped up undemocratic governments and subsidized swollen public sectors. But little has been done to create globally competitive economies or employment for a burgeoning number of young adults.

The reasons for this poor record are varied, including repeated wars with Israel and each other, widespread corruption and the overwhelming presence of ruling cliques in the economy.

"We are at a crossroads in terms of governance, but also at a crossroads in terms of the economic agenda," said Tarik Yousef, head of the Dubai School of Government and a senior fellow at the Brookings Institution. Like other scholars, he noted that many other parts of the developing world have sped ahead of the Middle East.

Economists cite a long list of statistics that point to chronic under-performance, sometimes masked by the flow of oil and other wealth but corrosive in the long run.

Growth in per capita income among the Arab countries lagged behind Asia, Latin America and Africa as a whole during the past 30 years, according to data from the International Monetary Fund. Even major oil powers such as Saudi Arabia have fallen behind. The country ranked fifth in the world in income in 1980 but has fallen to 40th, with income in 2010 slightly lower than 30 years ago on an inflation-adjusted basis, according to the IMF. Only one Arab state, tiny Oman, ranked among the "take-off" economies described in a 2008 World Bank report.

Unemployment, particularly among young people, remains high, and the size of government is staggering. IMF officials estimate that government agencies or state-run enterprises account for upward of 77 percent of the non-agricultural employment in Egypt. Public-sector wages, which are kept artificially high, encourage workers to seek government jobs.

As a result, growth rates are consistently too slow to keep pace with the population, and little space remains for private entrepreneurship. In its 2009 Arab Human Development Report, the United Nations found that, as of 2007, the Arab states as a whole were less industrialized than they were in 1970, with governments using revenue from oil, gas and other outside receipts to maintain the large public workforce and cheap goods.

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Middle East