Rich Arabs Versus Poor

After the war, wealthy Gulf states should spearhead cooperative efforts to bring about economic reform and development in the Middle East

IRAQ's invasion of Kuwait is six months old now, and the sequence of events it has triggered has again plunged the Mideast into a destructive war. This time, the scale and intensity of the war, as well as its potentially disastrous consequences, dwarf past conflicts in the region. This explosion has exposed deep divisions in the Arab and Islamic world, including the tensions between poor and rich countries. But the Iraqi takeover of Kuwait had nothing to do with the redress of these grievances. If anything, its purpose was to redistribute Kuwait's wealth (and possibly that of Saudi Arabia) to Iraq's advantage. Nevertheless, the wealth of oil sheiks has always been a source of envy and resentment for other Arabs, feelings which Saddam Hussein has skillfully exploited.

Two main factors have determined the disparity in wealth of the Arab world: oil and population. The nations of the Arabian peninsula control 46 percent of world oil resources. Within the Arab world, per capita income varies from $600 in overpopulated Egypt to $17,000 in the United Arab Emirates.

Moreover, the richest group of countries controls about $220 billion in external assets with virtually no debt, while the rest of the Arab countries are burdened by an external debt of about $112 billion with few assets.

In the 1950s, the populations of the Arabian peninsula generally lived in poverty, while those in Egypt, the Maghreb, and the Levant enjoyed higher living standards. The development of Persian Gulf oil resources allowed tribal societies to rise out of their poverty. Not until the 1970s, however, did the soaring price of oil allow the oil-rich states to become fabulously wealthy in a short period of time. Hundreds of billions of this bonanza were used to endow the states' citizens with a magnificent infrastructure, the world's most comprehensive welfare state, and unprecedented standards of living.

Undoubtedly, petrodollars also enriched the ruling families and resulted in waste. The rapidly accumulating financial surpluses were invested abroad, mostly in the West and Japan. This aligned the oil-rich states' economic and financial interests more closely with those of the developed world.

In all fairness, oil-rich Arab states have significantly aided the economies of other Arab countries: as providers of financial aid, as a market for surplus labor, and as an export market for their goods and services. Between 1975 and 1989, recorded official development aid from the Gulf states to the Arab and Islamic world totaled $75 billion (a substantially higher portion of their GNP than for industrialized countries). Unrecorded aid represented tens of billions more. Remittances by workers of other Arab countries and direct investment in these countries also represented substantial amounts, running into several billions of dollars per year.

OVERALL, the 1970s were a period of relatively rapid economic growth for the Arab countries. But the favorable trends began reversing themselves by the late 1970s. Falling oil and commodity prices, rising external debt burdens, and a lack of structural economic reforms put an end to the boom and resulted in economic crisis during the 1980s. The middle- and low-income countries were particularly hard hit as they lurched from crisis to crisis.

Would a better redistribution of wealth have made a major difference in the well-being of the recipients? Probably not. Throughout the 1970s and most of the 1980s, most Arab economies were badly mismanaged. Economic policies generally created significant economic inefficiencies, channeling resources away from productive investments into unsustainable consumption or prestige projects, and the building of vast military machines. A greater transfer of wealth might just have encouraged the continuation of economically ruinous policies.

The Arabian peninsula states (with the exception of occupied Kuwait) have enjoyed in the past few months substantial windfall profits as a result of higher oil prices. However, much of this bonanza has been absorbed by commitments to the allied war effort (totaling to date $30 billion), as well as financial compensation to the hard-hit frontline states ($8-$10 billion). It is likely that in the postwar era these revenues will disappear and, at least in the case of Kuwait, reconstruction costs will be staggering.

It is important for the United States, Europe, and the Arab members of the anti-Iraqi coalition to win the peace after winning the war by addressing the complex of issues raised by the war. The Gulf crisis and war will have exacerbated regional economic inequalities. A key component of regional security, therefore, must be economic cooperation and integration. It is in the interest of oil-rich Arab states to contribute to this, not only financially, but also by reopening their markets to Arab workers, goods, and services.

Throwing vast sums of money at development problems is not the solution. Financial aid from the oil-rich Arab states should occur in a framework of structural economic reform and increased economic integration.

This process could be managed either by special facilities in the existing multilateral institutions (the World Bank, IMF, Arab Monetary Fund), or by creating a new regional development bank modeled on the European Bank for Reconstruction and Development (EBRD). Such an effort would be funded jointly by the oil-rich Arab states, the US, Europe, and Japan. This framework would promote, along the lines of the EBRD, economic development policies based upon private-sector investment, trade, and economic liberalization.

Thus the shock brought about by the Gulf war could be strong enough to bring badly needed, fundamental economic change.

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