The Middle East and Economic Development

On the Middle Eastern Economic Stagnation¹

The general trends in the economic environment of the Middle East can be seen in a cursory glance in Cairo. The city has now approximately 18 million inhabitants, up from 6 million in the early 70s and 3 million in the mid 60s. Beggars and informal workers fill the streets, the air is polluted and the urban sprawl has almost reached the pyramids. At the same time, even though the higher education system produces a vast number of qualified highly knowledgeable graduates, the number of job positions is exceptionally scarce- thus highly qualified individuals often take up low paying, low-skilled jobs such as cleaners, taxi and bus drivers, and trinket craftsmen, with little hope of ever finding a position suitable for their education.

It is misleading to say that the Middle East suffers from overpopulation- it, in fact, does not. The Middle East and North Africa have a combined population roughly equal to that of the United States, but spread over a much wider geographic area (in 1830, rough census figures for the entire region give a population of 34 million- risen to 68 million by the start of WWI- risen to 300 million near the year 2000). In terms of population density, the cities and nations of the Middle East are roughly comparable to many Western European examples, even in Egypt where the majority of the population lives in a very small minority of the land.

What the Middle East does suffer from is a population boom. The median age is roughly around 16 years. This is a result not of low life expectancy, but instead of extremely high birth rates, coupled with very low death rates.

There are thus two questions to examine- why do such large discrepancies exist between birth rates and death rates and why is there a lack of available work positions and economic growth?

Let’s examine birth and death rates first. Traditionally both figures had been high. Birth rates have been high due to cultural reasons, emphasizing a patriarchal society where fertility was valued. At the same time, high birth rates were also needed to compensate for high rates of infant mortality. Yet death rates began to decline steadily since the early 20^th century, whereas birthrates stayed immobile. This trend accelerated in the years since the 1970s, which saw a dramatic drop in infant mortality, and a rise in average life expectancy. By 1990 death rates per 1000 of population in many countries matched those of the United States (Iran, Morocco- 9 per 1000) while in many other countries, they were even lower (Saudi Arabia, Turkey- 7 per 1000)². The causes for this can be traced to successful government policies which improved health care, nutrition, clean water provision and education. In many richer countries like Saudi Arabia for example, very high quality healthcare facilities were created that matched and even surpassed those available in the developed West. Yet even in poorer countries like Egypt, the development of smaller, rural clinics serving the entire population, proved highly successful in providing essential health care services. Public education also helped in spreading issues of hygiene and health care among the overall populace.

The success of such policies has proved a double-edged sword. Though obviously positive in the effects it had on life expectancy and infant mortality, the rapid drop in death rates, coupled with the still high birth rates created a population boom. Though as mentioned, in absolute numbers the Middle East does not suffer from overpopulation, it will in a few decades if current trends persist. More importantly in the short term, economic stagnation has come from the inability of the economy to cope with the rapid influx of new workers in the economy. This large influx costs the economy much more than it gives to it. Most young people will be unable to work anywhere but at the most basic and low-paying of jobs, and will be incapable of generating enough value to make up for the costs of their public schooling and health provision.

Thus many Middle Eastern countries are trapped in a form of a growth trap. Traditionally any amount of capital investment per unit labor will produce some return, which will stimulate further investment, an increase in capital per unit labor, which will in turn create more return and so forth, resulting in the growth of the economy³. Yet if population growth is too high, investment returns will be dwarfed by the increase in labor, and thus capital per unit labor will shrink. Though Middle Eastern economies do not shrink, their growth rates are exceptionally low, resulting in the minimal provision of new jobs. Why has investment been insufficient to keep the economy growing enough to match population growth rates, or if it has been sufficient, why has it produced such low returns?

The reasons can be found in an assortment of government policy errors since the mid 50s, but also in the legacies remaining by the colonial years, and the mismanagement of many Middle Eastern nations by their colonial overlords.

Essentially government policy has been shaped by the need to create legitimacy for the governments of the Middle Eastern states, many of which gained their power through undemocratic means, and their attempts to forge policy that would ensure their stay in power. First amongst the most damaging policies of the Middle Eastern states was the race for military buildup and vast weapons expenditures. Until the 1990s, military spend as a percentage of total GDP of many Middle Eastern nations dwarfed even that of the United States. Worse still, unlike the United States, that expenditure was directed towards foreign weapons manufacturers, and not a domestic industry. For the nations of the Middle East, the arms buildup was money wasted on consumption of military goods, offering no long term prospects or opportunities for growth or creating economic value. Only in Israel was this expenditure mostly funded through aid by an outside power, and a respectable domestic industry for weapons manufacture formed. Even when military spending subsided in the 1990s, long term damage was done, as many states were heavily indebted to outside powers from which they had purchased their weapons.

The reasons for the military buildup were many. The regimes of many states wished to have military power to secure their rule against both inside and outside enemies. But also the instability of the region, seen in such conflicts as the Israeli-Palestinian one and the wars of Israel with Egypt, the Iran-Iraq war, and the subsequent war in Kuwait, served as a driving factor for the expansion of military spending. In that respect, the West is also guilty for all too often it served a primary role in the escalation and origin of those conflicts.

The second dimension of policy has been the spending in social services and welfare. In a way, this has also been a source of security for the governments of the Middle Eastern states, from their own citizens, in an attempt to legitimize their seizing of power. Even so, many of the leaders of those nations genuinely thought it their duty to expand social welfare and provide for their people. Such policies have proven to have both positive and negative effects. As already noted, they drove down death rates while birth rates remained high, creating a population boom and thus adding to the unemployment problem. And they have all too often been spending which was kept from more productive investment. Yet who can blame the governments of the Middle East for aiding their people when all too often many of them face starvation and homelessness. And had investment and job prospects been properly managed, then the positive externalities this social welfare spending has created – a well educated and healthy labor force and good infrastructure- would surely have aided in the further development and growth of the Middle Eastern economies.

We thus turn to the third dimension of policy, concerning investment and the industrial direction the governments of the Middle East wished to take their nations to. The goal was to attempt to escape the fate of being pure commodity exporters, focusing on a single, commodity (either oil or an agricultural good- e.g. cotton in the example of Egypt) whose price was controlled by outside market forces, and thus a future of exporting at low prices and importing at expensive ones. The historic experience they had with colonialism ever promoted this attitude. It was colonial powers which enforced an economy of monoculture (the growing and reliance on a single commodity), and it was Western firms which had the right to managing the commodity wealth of these states and derived much of the profits from them (the example of Iran’s Anglo-Iranian Oil Company, AIOC, and the condescending way with which it exploited that nations oil wealth is a prime one).

The aim of escaping a fate of pure commodity production was a sound one, but the direction in which governments sought to take their economies was not. What they sought was to create an economy of autarky. To manufacture imported consumer goods at home, and build heavy industry to base that manufacturing on. They saw the examples of the US and Germany up to the 50s as an example of the success of such a strategy. Yet they were faced with two problems- they had neither the mineral and commodity resources, nor the machinery and tools needed for manufacture, which meant those would still have to be imported rather than produced at domestic industries. More importantly, their domestic markets were too small to justify such an economic outlook, and goods produced for their domestic markets were not competitive for international consumption. The post WWII model for success for developing countries was instead an export oriented economy focusing on producing value-adding manufactured goods, as seen in Japan, the Asian tigers, and more recently, China and India. As an example, how could manufacturers in Egypt producing goods meant to replace consumer imports in the domestic market be successful when their domestic markets were so small, and when their products, designed for the Egyptian market, could not compete in foreign markets with goods made from Japan or Korea? The authoritarian governments in the Middle East sought to control the direction of the economy completely and could not limit themselves with merely providing welfare services and public goods, to which they proved very successful. This limited the role of the free market far too much, and thus removed the disciplined plurality which would have identified the inefficiency of an autarky economy and moved the countries to more efficient routes. As it is, many Middle Eastern nations still rely on being primarily commodity exporters to sustain their economies.

Thus the economic stagnation in the Middle East can be seen as a result of several factors- historical factors derived from the memories of the colonial era, cultural factors which promoted high birth rates in the first place, geo-political ones, which aided in the rise of authoritarian regimes and justified their race for weapons buildup, and the failed economic policies of the regimes just mentioned.

There are some potential positive trends: the arms race has slowed down, many states have been left with a highly efficient infrastructure, and attitudes towards private investment are getting more reasonable. But the problems of the Middle East are far too complex, and all too often the governments in the region are incapable of making wide ranging reforms. Reforms in social welfare would likely produce too much discontent amongst the general populace- and righteously so. And neither are birth rates likely to fall, nor enough new job opportunities created to tackle unemployment in the short run, whatever the current positive trends. It is unlikely thus that the economic stagnation in the Middle East will end any time soon.

NOTES:

1- This analysis is highly based and highly reliant on the excellent work of Professor R.Stephen Humphreys from (Humphreys, 2005), ‘Hard Realities: Population Growth and Economic Stagnation’, Between Memory and Desire: The Middle East in a Troubled Age, University of California Press, Los Angeles, 2005 edition.

I am currently reading and highly recommend Dr. Humphreys’ book, and hope that it will aid me in further analysis of Middle Eastern topics in the near future.

2- Figures come from World Bank, Social Indicators of Development 1994, (Baltimore, John Hopkins Press for the World Bank 1994), World Bank, World Tables 1994, (Baltimore, John Hopkins Press for the World Bank 1994), World Bank, World Development Report 1992 (Oxford: Oxford University Press, 1992).

3- The economic growth analysis at this point is of course a huge oversimplification. I’m sure economists could find any number of troubles and practical nuisances with its theory, but I feel it shows the problem of a booming population in a developing economy with low current investment and capital.