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.

Mohamed A. El-Erian is Chief Economic Adviser at Allianz and a member of its International Executive Committee. He is Chairman of President Barack Obama’s Global Development Council and the author, most recently, of When Markets Collide.

Copyright: ProjectSyndicate, 2014.
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