Thursday, November 27, 2014

The Three-Track Middle East

LAGUNA BEACH – During a recent trip to the Middle East, I was struck by the growing gap between countries – so much so that, more than ever, I came away convinced that it makes no sense today to talk of the region as a coherent whole. Rather than pursuing internal convergence, this important part of the world is now following at least three paths, characterized by large divergences that will persist – and likely grow – for years to come.

On one path are countries like Iraq, Libya, and Syria, which are struggling to avoid the awful trap of becoming failed states. All of them share the unfortunate likelihood that their situation will become worse before it improves.

This group of countries is being dragged down further every day by a terrible combination of violence, political fragmentation, social disintegration, and economic implosion. Their ability to sort themselves out is weak and, in some cases, almost non-existent. Tragically, tremendous human suffering will likely persist, and the waves of human migration that this induces will place significant pressure on adjacent countries, particularly Jordan and Lebanon.

At the opposite extreme are countries that are going from strength to strength. Helped by higher oil revenues, countries like the United Arab Emirates are forging ahead with multi-faceted programs to diversify their growth engines, further strengthen their human and physical capital, and set aside even more substantial financial resources for future generations.

This group of countries is recording one achievement after another, most of which outside observers would have deemed elusive, if not unrealistic, only a short time ago. In the process, they are building even greater developmental momentum, which makes the next set of accomplishments both likelier and even more significant.

The benefits of these countries’ progress extend well beyond their borders. As major importers of regional labor, their success results in higher remittances to non-oil economies; and, as major regional investors, their achievements are fueling larger capital flows, as well as substantial bilateral aid.

The course set by these two sets of countries is well established and is unlikely to change much in the near term. As such, the already-wide gap between them will continue to grow.

More uncertain is what will happen to those Middle Eastern countries that lie between these two extremes. In seeking to realize their untapped potential, countries like Algeria, Morocco, and Tunisia, must overcome many challenges, most of them long-standing and some new.

Perhaps no example illustrates these challenges as well as Egypt, a country whose experience highlights what is at stake for the region. Egypt is currently weighed down by an unfavorable combination of slow economic growth, high unemployment, fiscal imbalances, institutional weaknesses, and poor social services – problems that are compounded by rapid population growth and poverty.

Moreover, Egypt’s external environment is less than accommodating, and the country has been on a very bumpy political journey since the popular uprising in 2011 overthrew former President Hosni Mubarak’s government, which had ruled with an iron fist for three decades. Not surprisingly, the economy is operating well below potential. Tourism has suffered dramatically, with hotels experiencing high vacancy rates and famous historical sights standing half empty. In agriculture and industry, bureaucracy and corruption have stifled the country’s comparative advantages, compounded by disruptions in energy supplies.

Meanwhile, millions of Egypt’s talented citizens have operated in a system that, for decades, has been better at hindering than facilitating productive endeavors. That system has also failed to meet the population’s legitimate demands for justice, democracy, human rights, and social services, particularly in education and health care.

And yet, after so many years of frustrating under-performance, there is recognition in Cairo of what is needed to turn things around – namely a combination of vision, leadership, commitment, and a more conducive environment. Notwithstanding political disagreements, progress is being made in designing a program of economic reform that can unleash the country’s tremendous capabilities. Steps are being taken to revamp a costly and inefficient subsidy system, improve infrastructure, and deal with its energy-supply problems. Implementation is being aided by the substantial support that Egypt receives from other countries – particularly Saudi Arabia and the UAE – as well as the re-engagement, albeit still tentative, of domestic and foreign private capital.

A lot is riding on whether countries like Egypt embrace durable economic, financial, institutional, political, and social reforms – and whether they do so in the context of progress toward greater democratization, social justice, and respect for human rights. Their populations are among the largest in the region. They can play an important role in anchoring regional stability. And they are gateways to Europe, Africa, and Asia. The path that this group of countries ultimately takes will influence prospects for the region as a whole.

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    1. CommentedJephtah Lorch

      Mr. El-Arian is surely well acquainted with a UN study on Arab Moslem illiteracy led by western educated, Arab Moslem PhD's. The conclusion is that illiteracy is a result keeping mothers to be at home without education. These are the mothers that spend the most time educating the next generation. Education exposes children and youngsters to options, responsibility, independent thinking and the eventual acceptance of social responsibility. Current education indoctrinates people to follow, not to think nor initiate.

    2. CommentedÖmer Aytaç

      there is a fourth track here it seams. Although arabs don't like to be competing with them (is UAE a country - really?) two big powers in the region are Turkey and Iran. Turkish gov't set a goal for 2025 to be a 2 trillion dollar economy (france today is 2.5 trillion).. It's also harnessing ties with almost all of the countries around the world. Its private and gov't sector is working together to invest in Africa and Asia. Through its ngo's, it has 700 schools around the world that teach local bright kids in Turkish and English curriculum. On the other hand, Iran today is about 20% behind Turkey on GDP, even with all the sanctions and isolation from the world.. But given the dynamics, that gap will only grow, even if all sanctions were lifted. Iran is oil rich but not necessarily an oil based economy. Gulf states are satellites of Saudi Arabia, which is trying ever hard to be not oil based economy, but its workforce lack disciple and society is too backward to have any competitive advantage. Egypt would be the only place where Arab "competitiveness" should / could flourish, but it seems now that there is a good 20 years for that. 20 yrs to just start.

    3. CommentedCam Jennings

      ALPHA TANGO makes a good point in exposing the frail attempts of the writer Mohamed A El-Erian in this article. "At the opposite extreme are countries..." has but one country noted. What are the other countries ?

    4. CommentedPaul A. Myers

      " ... there is recognition in Cairo of what is needed to turn things around -- "

      El-Arian is arguing that successful economic reform can be accomplished under the iron fist of the Sissi regime. There's some room for skepticism here.

      " ... embrace durable economic, financial, institutional, political, and social reforms ...greater democratization, social justice ... "

      Possibly El-Arian underestimates the tremendous power of fundamentalism that operates across the region. I am skeptical of a better future that requires authoritarianism to be the facilitator of progress. On the other hand, it probably will take an iron fist to keep fundamentalism at bay.

      If a significant insurgency against the Sissi regime takes hold, Egypt will have a troubled future.

    5. Commentedalpha tango

      Unfortunately, Mr El Erian, who is supposed to be a specialist of Emerging Market, offers a weak paper full of half truth and inconsistencies.
      I would start with his "success cases", countries like UAE, Kuwait, or the other GCC countries are all bombs waiting to explode. This is due to an exponential demographics that was not supported by a decent education system able to train professionals adding value to the country. Most young nationals want only to work as civil servant, which makes the public sector plethoric and inefficient. Although these countries are rich, their economy remains dependent on oil revenue and on a very high price for oil due to this excessively large public sector. The deeper one looks to the case of these countries, the less sustainable their situation appears to be. Mr El Erian must have been impressed by their buildings but if he had done a bit of research he would have concluded that these countries are not viable have a model that is not sustainable. The recent crisis in Saudi Arabia around foreign workers is a good example of what to expect.

      As per Egypt, I can understand he puts his home country in the intermediary path but any independent observer would see clearly that Egypt is already a failed state where there is no rule. Saudi Arabia is paying a ransom to avoid a flood of illegal immigrants but it is not sustainable neither.
      For the rest, he puts together countries that have nothing in common: Algeria is an oil based economy while Tunisia, Morocco, Jordan have to be diversified.
      At the end of the day, and whether Mr El Erian accepts it or not, his home country Egypt has failed back in the 60s and the poison of failure is too deep into the system to ever change. Too many groups take advantage of the corrupt system to let it change.