Globalization and Economic Performance in the Middle East

Marcus Noland and Howard Pack

The Middle East is a demographic time bomb. According to the United Nations, the population of the Arab region is expected to increase by around 25% between 2000 and 2010 and by 50 to 60% by 2020--or by perhaps 150 million people, a figure equivalent to two more Egypts.

These figures imply that the region as a whole will experience labor force growth of more than 3% for the next 15 years or so – even without increases in female labor force participation. To absorb this labor, the economies of the region will have to maintain investment rates on the order of 30% of GDP and income growth of 5 to 6% a year, roughly double recent growth rates.

The implications of not achieving rapid growth to absorb these new entrants to the labor force could be dire. In the 2002 Zogby poll of Arab attitudes, Saudi males stand out as uniquely dissatisfied and pessimistic about their children’s future. Presumably these feelings are rooted in the reality of dwindling employment prospects, the 40% decline in per capita income from its peak in 1982 and the lack of political voice. The data reveal that the youngest, most advantaged sections of society have the bleakest appraisal of the future. It goes without saying that 15 of the 19 September 11 hijackers were Saudi males.

Although it is theoretically the case that the authorities could successfully manage a domestic-driven growth strategy for a decade or more, past experience suggest that this is unlikely in practice, and it is almost impossible to imagine the generation of employment opportunities required without a successful process of cross-border economic integration. Yet a litany of indicators relating to trade investment and technology transfer document the weakness of the region’s linkages to the world economy. Even tiny Costa Rica, with a population roughly 5% of Egypt, exports more than twice as many manufactured goods as Egypt or Jordan. And Egypt and the other countries of the region will not be able to pick and choose their competitors. It is unlikely that the Middle East will be able to compete successfully against China or India on the basis of low wages, as wage rates in most countries in the region are already multiples of the Asian giants. 

The possible competitive advantage of the Middle East instead lies in its proximity to Europe and its potential to service the European market in a timely fashion. This means integrating into cross-border supply chains in which a premium is put on reliability, flexibility, fast delivery, management and worker qualities that have been stifled by decades of reliance on state owned enterprises in manufacturing and a regulatory and tax environment that ensures security to the beneficiaries of the current economic system but discourages entrepreneurial effort.

This close integration requires cross-border investment and frequent physical contact, which immediately raises issues relating to security risk. Beyond dramatic incidents such as recent attacks by militants in Yanbu and Khobar, Saudi Arabia, the pattern of responses elicited in last year’s Pew survey reveal broadly held reservations about globalization – yet this is precisely the sort of cross-border economic integration that the region needs to rapidly increase labor absorption.  If Egyptian or Jordanian attitudes toward foreign influence reached the mean level of those in the least xenophobic countries surveyed from Latin America, Eastern Europe, sub-Saharan Africa and East Asia – an ambitious but attainable standard--one would expect foreign investment inflows to nearly double.

This immediately raises difficult issues of sovereignty and cultural identity. Insecurity in both economic and cultural dimensions presumably relates to actual economic performance, embodying possibilities of both virtuous and vicious circles. In this regard, the recent experiences of Saudi Arabia could be read as a cautionary tale: weak economic performance leading to pessimism about the future, possibly counterproductive ‘Saudi-ization’ policy interventions and bouts of political extremism.

The good news is that Saudi Arabia is the extreme case. And with fertility now dropping, as the size of the cohorts entering adulthood begins to shrink, there will be a concomitant diminution in the problems that all societies face in socializing young adult males. Indeed, if the region can successfully surmount its admittedly tall challenges, the future could yield a “demographic dividend” as this generation enters its most productive working years.

Marcus Noland and Howard Pack are Senior Fellow and Visiting Fellow respectively at the Institute for International Economics (http://www.iie.com)