Arab Economic Reform Beckons

Rami Khouri, Daily Star May 28, 2009

The first place you feel the impact of the global economic recession in Dubai is in taxi rides and car journeys that take much less time than they used to, due to reduced traffic congestion.

This and other superficial measures of economic conditions offer insights into the current state of affairs in the United Arab Emirates and the Gulf region, but the more interesting issues remain largely unexplored in public. These longer-term issues that will determine the fate of the Arab world in the decades ahead relate less to material conditions - how crowded are the malls, how much have real estate prices declined - and more to whether the Arab world will use the current crisis to make some fundamental changes in how it manages its human and mineral wealth.

The most interesting discussions in the Gulf region these days are not about the present situation, but rather about the past and the future. The most frequent question one hears discussed here in private is: Can Dubai realistically continue to grow on the basis of the same strategy that fuelled its meteoric expansion in the past two decades? The most common answer is, "yes and no."

Yes, Dubai can continue to play the role of a regional service center that thrives off delivering quality services to the wider Gulf region, in areas like consulting, transport, advertising, distribution, and media services. It can even maintain a buoyant tourism and leisure travel industry that attracts sun-starved visitors from abroad and shopping maniacs from the Middle East and parts of Africa.

No, it cannot maintain the rate of construction expansion that fuelled its real estate sector in recent decades, mostly on the basis of speculative buying rather than purchases of properties that buyers actually wanted to live or work in.

How much the authorities in the Arab world have learned from the current economic crisis is really the big issue that must be addressed, and in private at least it is being discussed in Dubai and other Gulf emirates. The full consequences of the global economic crisis have not been felt in the Arab world, due to a lag of around 6-9 months in absorbing the impact of global trends. This is partly due to the low level of Arab integration with the global economy - though the Arab world has taken a big hit in the drop in value of its investments abroad. Most credible estimates of the losses suffered by Arab sovereign wealth funds in the past year suggest that these funds' value has declined from around $1.6 trillion to $1.2 trillion, due to the drop in the value of financial investments abroad.

A new report by the International Labor Organization (ILO) regional office in Beirut (by Christina Behrendt, Tariq Haq and Noura Kamel) suggests that hard days remain ahead, as the Arab world's economic growth rate is expected to decline from 6 to 4 percent this year (other reports suggest that a 2-3 percent growth rate is more likely). Many countries will suffer from the combined impact of rising unemployment, lower remittances and investments, high inflation and soaring national debt, the ILO predicts.

Because the wealth surpluses of recent decades in the Arab region have not been channeled into building up strong industrial, infrastructural and human skills bases, our region remains very vulnerable to shocks in real estate and financial markets. Declining living standards and rising inequality will become even more problematic for the region in the years ahead, the ILO says, especially because of the broad lack of well developed social security policies.

This and many other recent reports on the Arab economy suggest that the current crisis should be grasped as an opportunity, in the ILO's words, for "regional investment and socio-economic reform, which countries in the region should use to establish mechanisms to promote employment, encourage pro-poor growth, strengthen social protection mechanisms, promote gender equality and non-discrimination, and focus on human development and decent work."

This is an ambitious agenda for any country in any period, and a particularly difficult one for the Arab world today. The loss of $400 billion or more by Arab sovereign wealth funds, and perhaps three or four times that amount due to other consequences of the current crisis, may be partly recuperated when the global economy resumes sustained growth.

When that happens, though, will the Arab world also resume its old economic management policies that have made sustained vulnerability and widening disparities the hallmarks of the modern Arab economy? Or will someone in the Arab world change course, and aim to really develop the region's vast human talent, free the minds and spirits of our youth, and move us toward a path of sustainable economic growth that is based on producing goods and services rather than mainly exporting energy and importing consumer goods?

Rami G. Khouri is published twice-weekly by THE DAILY STAR.

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Arab Economic Reform Beckons

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