More than three years have passed since the Oslo Accords were signed on the White House lawn and acclaimed as the harbingers of peace and prosperity to the Middle East. The prospects for peace have been widely discussed. My focus here is on the promise of Middle East prosperity.
The Declaration of Principles (DOP) was followed by numerous Arab-Israeli meetings and multinational economic conferences (notably in Casablanca and Amman), the purposes of which were to forge and to cement Arab-Israeli economic relations, to attract foreign as well as local investors, and to deliver ever-growing prosperity to the region. Various scenarios were depicted for the future of the Middle East, the essentials of which were as follows:
- The peace agreements would be followed by a significant reduction in military spending in the Arab countries as well as in Israel. The reallocation of substantial resources from the military to the civilian economy would stimulate and finance more investment in infrastructure as well as educational and health services.
- Regional infrastructure projects in transport, communications, water, power, etc would be backed by foreign aid.
- Joint Arab-Israeli economic ventures would be fostered especially in industry, agriculture, and tourism.
- A large and growing inflow of foreign private investment would ensue, which would give a strong boost to the regional economies, raise personal incomes, and steadily reduce the high levels of unemployment prevailing in the Arab states.
Shimon Peres, first as Israel’s Foreign Minister and later as Prime Minister, assured his people that with so important an economic stake in the “peace process” the Arabs surely would favor continuing peaceful relations with the Jewish state. His calls were echoed by other leaders and diplomats, perhaps most recently by US Undersecretary of State Joan Spero, who said in a speech on 11 October 1996: “Ever since the Camp David accords, the peace process has had an economic as well as a political dimension, with the goal of giving all the parties an economic stake in its success.” [Joan Spero, “Remarks on Economy of Peace in the Middle East,” United States Information Service, (15 October 1996).]
Public statements and wishful thinking aside, the Oslo agreements can contribute little or nothing towards the achievement of economic prosperity. Through the following discussion of the Middle East economies, I will demonstrate that economic growth is dependent mainly on the removal of internal social and economic obstacles, and not on international politics. [For an article on the current state of the Israeli economy, see Eliyahu Kanovsky, Jerusalem Post (3 May 1996).]
Israel’s economic history is varied: a series of major achievements accompanied by serious problems. The 1950s, 1960s and early 1970s were highly successful in terms of economic growth, with the exception of the 1966-67 recession. By the early 1960s the economy had successfully absorbed the mass immigration of earlier years and labor shortages had become the norm. However, balance of payments problems soon became more severe and inflationary pressures grew, although Israel’s labor shortages were ameliorated after the 1967 Six Day War. The opening of the pre-war borders brought a growing influx of Arab labor from the areas which came under Israeli control.
The Yom Kippur War of 1973 and the oil shock of 1973-74 greatly aggravated inflationary pressures and balance of payments problems. The second oil shock (1979-80) raised Israel’s oil import bill to over $2 billion per annum, a value that exceeded the grants which Israel received from the United States. The oil shock and the huge revenues acquired by the rich Arab states helped to stimulate the Middle East arms race, further straining the Israeli economy. Hyperinflation, amounting to hundreds of per cent per annum, became the norm, with all of its attendant evils. Economic growth slowed to a crawl, dropping from 9-10% per annum between 1953 and 1973 to 3.2% per annum in the decade from 1975-85, and barely exceeded the population growth rate.
In 1985, a national unity government came to power and adopted important economic measures designed to reduce inflation drastically and to put greater stress on economic efficiency. Increased US aid during a two-year transition period facilitated the implementation of the new program. The results were excellent. Inflation, over 300% per annum in 1984 and 1985, fell to 48% in 1986, and continued at a steady decline to less than 20% per annum from 1987-91 and 10-12% from 1992-95. Initially economic growth rates lagged as is usually the case when drastic anti-inflationary measures are taken but these policies laid the groundwork for the favorable economic performance of the Israeli economy during the first half of the 1990s.
Based on an international comparison, since 1990 Israel has enjoyed a high rate of economic growth, around 6% per annum. This is three years before the signing of the Declaration of Principles. In fact, the growth rate of GDP, 5.7% per annum from 1993-9 5 was somewhat lower than in the previous three years, 6.4% per annum in 1990-92. The business sector GDP (i.e., excluding government and non-profit institutions), shows a more significant drop in the growth rate in the latter period, from an annual aver age 7.8% in 1990-92, to 6.6% in 1993-95.
The high rate of economic growth since 1990 was stimulated, in part, by the large-scale immigration from the former Soviet Union. During the period of mass immigration (200 thousand per annum in 1990 and in 1991) the rate of unemployment rose. But in subsequent years, when immigration was back to a more “normal” 75 thousand per annum, the rate of unemployment steadily declined. The improving state of employment was accompanied by moderating inflation, which by 1995 was down to 10%.
But the good news was accompanied by bad news. In particular, since 1993 Israel experienced a sharp deterioration in the balance on current account of the balance of payments, which worsened in 1994, and even more so in 1995. The balance on current account is defined as exports of goods and services, plus unilateral transfers from abroad (US grants, contributions from world Jewry, German restitution, immigrant and other private transfers) minus imports of goods and services. In 1990-92, as a whole, the balance on current account was positive at $154 million. In the following three years, 1993-95, there was a sharp deterioration with a total deficit of $7.8 billion, of which $4.1 billion was incurred in 1995 alone. [All data regarding the Israeli economy are from the Bank of Israel Annual Report (Israel: Government of Israel, March 1996).] This deficit was not the result of arms imports, which actually declined. Estimates for the first quarter of 1996 show a continued deterioration with the deficit in the balance on current account 25% higher than in the same period a year earlier. [Data for the early months of 1996 are from Economic Developments in Israel and the World (Israel: Bank Leumi, July 1996).] These deficits were covered, for the most part, by loans and a growing external debt.
If the budget submitted to parliament by the new government in mid-1996, which focuses on cutbacks in government expenditures, is implemented, it should reverse the adverse trends in the balance of payments and reverse the recent up-trend in inflation.
The data do not suggest that the Oslo agreements had any perceptible effect on the Israeli economy. Nor can one “blame” the Oslo accords for the problems which arose since 1993/1994. Israel’s recent economic woes are attributable mainly to unwise government economic policies. One example is the unusually large wage increases granted by the governto public sector employees in 1993-96 (soon emulated by other sectors) that stimulated very large increases in private consumption, imports and inflation.
A second example is the provision by the government of unusually large subventions to politically-favored groups, aggravating the budgetary deficit and indirectly the deficit in the balance of payments.
What all this tells us is that Israel’s economic problems can be addressed only by the adoption and implementation of appropriate economic policies. Israel adopted some important new economic policies in the mid-1980s which fostered efficiency, productivity, and profitability, and the favorable results became very visible in the early 1990s. Wise economic policies underlay Israel’s prosperity, and poor economic policies explain the problems that arose in more recent years.
As the rest of this discussion will demonstrate, the same is true of the Arab states where the problems are far more deep-rooted. Wise domestic policies hold out the promise of prosperity. Only basic, fundamental economic changes can significantly improve the performance of the Middle Eastern economies, and provide jobs and decent incomes for the vast army of unemployed and underemployed, the poor and downtrodden, not interstate politics.
The Palestinian Economy: One Big Mess
In the past decade the Palestinians suffered from a series of severe setbacks. The sharp decline in oil prices since the early 1980s, and especially since the mid-1980s, reduced the demand for imported manpower to the rich Gulf states. The Palestinians, as well as others, were adversely affected by the curtailment of job opportunities, and by the depressed wages of those who were fortunate enough to retain their jobs.
The Intifada, which started in 1987, had a depressing effect on the Palestinian economy. The frequent closures following terrorist attacks disrupted trade and other economic relations between Israelis and Palestinians, and accelerated Israel’s replacement of Palestinians by laborers from a number of Eastern European, Asian and African countries.
During the Persian Gulf War of 1990-91, Arafat and other Palestinian leaders sided with Saddam Hussein. Following the liberation of Kuwait by the US and allied forces, Kuwait retaliated with a mass expulsion of about 400 thousand Palestinians, including many who had either been born in Kuwait or lived there for decades. The large majority of refugees went to Jordan. Jobs which had previously been open to Palestinians in Saudi Arabia and Kuwait were now closed. Moreover, the large annual financial contributions from these two states to Arafat also came to an end in 1990.
The very sharp curtailment in the number of Palestinian workers given Israeli work permits since the series of suicide bombings in February and March of 1996 has made a bad situation even worse. The estimate of the UN coordinator is that one Palestinian worker in Israel directly and indirectly supports ten people in the Autonomy. Closure had been especially tight since the spate of suicide bombings in late-Winter/early-Spring 1996. Before then Israel had been easing its restrictions and the number of Palestinians working in Israel rose from 30 to 70 thousand, though it still remained far below pre-Intifada levels, when 100-130 thousand Palestinians worked in Israel. But as Fouad Ajami notes “Israel got no gratitude” for the security risks it took. [Fouad Ajami in US News and World Report (18 March 1996), p.51.]
In a recent interview, the US Consul General in Jerusalem [Jerusalem Post Magazine (5 July 1996).] cited World Bank estimates that the Palestinian economy had declined by a severe 8% in 1995 and would probably drop by an even more calamitous 20% in 1996. Helping to rehabilitate the Palestinian economy is, in his view, “the most urgent task.” He urged Israel to rescind or at least ease the closure. [Jerusalem Post (5 July 1996).] The American Undersecretary of Commerce for International Trade, on a visit to the region, said that: “There’s a pressure cooker building up in the territories.” [Jerusalem Post (14 August 1996).] Because of the poor state of the economy, potential Palestinian investors who had come from abroad to examine investment possibilities have left. [The Economist (3 August 1996), p.39.]
There was near-unanimous agreement that the success of the Israel-PLO accords “rested on advancing the economic situation in the Occupied Territories, and doing it quickly.” [The Middle East (December 1994), pp.30-31.] In the spring of 1994 the vice president of the World Bank, the body charged with implementing the international aid program to the Palestinian autonomy, asserted that: “If the peace process is to have any hope of success, the Palestinians need to see improvements in their living standards quickly.” [Financial Times (5 May 1994), p.6.]
Arafat’s promise of turning Gaza and the West Bank into the “Middle East’s Singapore” (other versions spoke of creating the Hong Kong of the Middle East) has left Palestinians feeling cheated. [Al Ahram (29 June 1995), p.5.] Unemployment in Gaza is variously estimated at a depressing 50-60%. The situation in the West Bank (Judea-Samaria) is less depressing “only” 24%. According to more conservative estimates, the unemployment rate in Gaza is “only” 40%, but reaches 60% in the refugee camps, where half of the Gaza Strip’s population of about one million live. Regardless of the precise figures, it is abundantly clear that the Palestinian economy has deteriorated badly since the Oslo agreements. [The Economist (3 August 1996), p.39.] Despite generous international aid, the two million Palestinians under Palestinian Authority control “have yet to see tangible benefits. For many, living standards have declined.”
The Economist [17 June 1995] notes that the underlying problems stem from gross inefficiency and endemic corruption. One unnamed European diplomat recently described Arafat’s administration as, “marked by inefficiency, corruption and cronyism, trying to keep all the power to himself, while juggling various warlords, including half a dozen paramilitary police agencies, the armed Islamic militants, and criminal bands that control their own turf for narcotics and car theft operations [from Israel].” [The New York Times (15 March 1996).]
Because Arafat aims to keep a firm hold on the purse strings, he has set up “three separate economic ministries run competitively by political rivals. [Foreign] donors [of aid to the Palestinians] doubt the PNA’s (Arafat’s Palestinian National Authority) judgment, suspect that contracts will be given to buddies, and fear that the [aid] money will be swallowed up by running costs.” In other words, little of the aid money is available for investment in infrastructure, for developing industry and agriculture, etc. The Oslo B agreement called for a police force of thirty thousand. Recent estimates place the actual figure at least twice that. Here, too, the basic problem stems from very costly duplication and other inefficiencies. According to a report in Al Ahram [Al Ahram (29 June 1995).], “Arafat has more than five separate security bodies …each…led by a member of Arafat’s entourage competing with each other and sometimes clashing.” More recently (August 1996) Arafat established a new security force to contain dissent at Palestinian universities. According to the Jerusalem Post, there are at least ten PA affiliated security forces operating in the Palestinian Autonomy areas. [Jerusalem Post (23 August 1996).]
The highly-inflated security services and the ballooning bureaucracy absorb a large portion of the aid money. The inefficient and often corrupt administration which has emerged in the Palestinian Autonomy often discourages, rather than encourages, productive enterprise and investment.
Jordan: From Prosperity to Crisis
The civil war in Jordan between the Jordanian army and the armed Palestinian groups based in Jordan, which broke in 1970, ended one year later. The expulsion of the Palestinian armed groups was followed by the 1972 lifting of the Syrian-imposed embargo on trade transit, begun as a response to Jordanian support of the PLO. Subsequently, Jordan enjoyed a decade of high-level prosperity. Between 1972 and 1982, real GNP (corrected for inflation) rose by an annual average rate of 9 to 10%, or 5 to 6% per capita, a very noteworthy achievement. Investment was far higher than in earlier decades, and in most sectors production expanded rapidly. However, much of the prosperity was due to temporary external stimuli.
Jordan’s participation in the Yom Kippur War of 1973 was peripheral. But the oil shock of 1973-74 and the second oil shock of 1979-80 had powerful indirect effects on Jordan’s economy. Financial aid from the oil-rich Arab countries assumed much larger dimensions. More important, the booming Arab economies in the Gulf attracted many millions of foreign workers, including hundreds of thousands of Jordanians-Palestinians. [The large majority of Jordanian workers in the Gulf countries were Palestinians with Jordanian passports. The official Jordanian policy forbids distinguishing between Jordanian citizens of Palestinian origin and other citizens. See Middle East Economic Digest (15 March 1996), pp. 7-15. Unofficial estimates state that Palestinians account for 60 to 70% of Jordan’s population, and a much higher ratio of Jordanians working in the Gulf states.] The remittances they sent home to their families in Jordan stimulated rising prosperity.
In addition to substantial aid and workers’ remittances, the boom in the neighboring Arab oil states opened up markets for Jordanian products, and also benefitted Jordan in other ways while it lasted. Both because of the exodus of hundreds of thousands of Jordanians to work abroad, and the increasing domestic demand for workers, Jordan reached full employment in the mid-1970s and became a labor importer, mainly of unskilled manual laborers from Egypt and from other poorer Arab countries. The Jordanians-Palestinians working in the Gulf countries were, on average, more educated and more skilled, and hence better paid, than those coming to the Gulf from other Arab countries.
But in 1981 oil profits peaked and in the following years Saudi oil revenues, as well as those of the other Arab oil states, declined rapidly. Saudi Arabia and some other oil states began to incur deficits (both budgetary and in the current account of the balance of payments) in 1983, and these deficits persisted in the following years until today. One of the first items curtailed was foreign aid from the rich to the poor Arab countries. Budgetary cutbacks in Saudi Arabia and in other rich Arab states, coupled with an overall curtailment of economic activity in the Gulf countries, led to a reduced demand for foreign labor. Those foreign workers who did retain their jobs, including hundreds of thousands of Jordanians-Palestinians, suffered cutbacks in salaries. But even if relatively few Jordanians-Palestinians were fired, few additional ones were hired.
The result of these developments was a deepening recession in Jordan. Between 1982 and 1987 GNP was stagnant as compared with a very rapid growth of 10% per annum in the previous five years. As a result of the recession within Jordan and in the Arab labor-importing countries, rising unemployment took hold in Jordan, in sharp contrast with the labor shortages which had prevailed between the mid-1970s and mid-1980s.
The plethora of foreign aid, as well as income from other sources, had made the government lax in its spending habits and large budgetary deficits emerged during the 1970s and even more so during the 1980s. The subsequent decline in foreign aid after 1982 was not matched by substantial budgetary cutbacks. But while in the 1970s Jordan was able to cover its deficits mainly by concessional (long term low interest) loans, during the 1980s more and more of the deficits were covered by high-interest commercial loans mainly from external sources. The result of these policies was a growing balance of payments deficit, declining foreign exchange reserves and a much larger and more onerous burden of foreign debt. [Eliyahu Kanovsky “Jordan’s Economy: From Prosperity to Crisis” in Ami Ayalon and Haim Shaked, eds. Middle East Contemporary Survey Volume XII, (Boulder: Westview Press, 1990), pp. 333-369.]
The crisis came to a head in 1988. Amman began to default on its external loans. This was soon followed by a sharp devaluation of the Jordanian dinar, in order to reduce imports and stimulate exports. The so-called Paris Club of lenders to Jordan rescheduled the debts. An agreement with the International Monetary Fund was concluded which called for an austerity program, including sharp cutbacks in food subsidies. Eleven people were killed in rioting triggered by the steep rise in food prices.
Things were going from bad to worse. Living standards which had risen strongly in 1972-1982 dropped sharply during most of the 1980s. But possibly the most severe problem was rising unemployment, especially among the more educated, in particular university graduates. Until the mid-1980s Jordanian university graduates, in growing numbers, had no problem finding lucrative jobs in the Arab Gulf countries. But when oil incomes declined sharply in the neighboring Arab states during the 1980s, and budgetary cutbacks were imposed, the demand for Jordanian university graduates fell drastically. What emerged was an incongruous situation in which educated Jordanians looked for work at home, while large numbers of foreigners were working in Jordan. They viewed jobs involving manual labor as demeaning. In 1989 and in early 1990 there were an estimated 100-120 thousand unemployed Jordanians about 20% of the labor force and some 175-200 thousand foreigners working in Jordan. The latter were mainly manual laborers in agriculture, industry, construction and some services. The number of Jordanians working in the Gulf states in 1989 was estimated to be 328,000, aside from accompanying family members.
A British economic journal summarized the situation in Jordan in early 1990 (before the Iraqi invasion of Kuwait) as follows: “The economic situation is so bad…that renewed and spontaneous outbreaks of popular unrest cannot be ruled out…Jordanians are…faced by rising unemployment, high inflation and frozen salaries. There is still bread to eat (due to subsidies), but a few other comforts…for the majority there is little prospect of a change…for the next five or probably ten years. With popular resentment over past corruption still acute, and with little prospect of a substantive economic improvement, the political situation remains explosive.” [Economist Intelligence Unit, Country Report – Jordan No. 1, (1990), p. 4.]
The Gulf War and the Jordanian Economy
The immediate aftermath of the Gulf War of 1990-91 was an even more depressed Jordanian economy. Jordan made the costly mistake of siding with Iraq. The consequences were dire: Saudi Arabia and Kuwait cut off all aid to Jordan, which, although reduced to $500 million in 1989 from its early 1980s high of $1.2 billion, was still substantial. The US also suspended its aid program to Jordan, while UN-imposed sanctions on Iraq had an adverse effect on Jordan’s economy as well. Jordan had been an important route for the transit of goods to and from Iraq, and Iraq was also a major buyer of Jordanian products. The UN sanctions sharply reduced Iraqi oil revenues, forcing the latter to cut back drastically on all imports, including those from Jordan. Tourism was also adversely affected. But possibly the most difficult blow, in the short run, was the mass expulsion of Palestinians from Kuwait and to, a smaller extent, from Saudi Arabia. [For details and sources see Eliyahu Kanovsky, The Economic Consequences of the Persian Gulf War: Accelerating OPEC’s Demise (Washington, DC: The Washington Institute for Near East Policy, 1992): pp.64-70.]
As to the number of refugees who settled or resettled in Jordan there are differing estimates. One source states that about 300 thousand Palestinians-Jordanians expelled from Kuwait settled in Jordan. [Gulf States Newsletter (20 May 1996), p.2.] Anothsource gives an estimate of 350 thousand Palestinians-Jordanians, noting that this added about 10% to Jordan’s population. [Omar Razzaz, “Urban Settlement Around Amman,” Middle East Report (March-April 1993), p.14.]
Another source states that before the Iraqi invasion there were an estimated 450 thousand Palestinians-Jordanians in Kuwait. Following the expulsion only 32 thousand were allowed to remain. Despite the post-liberation policy of Kuwait’s rulers of holding down the number of foreigners, by 1994 there were more foreign workers in Kuwait than Kuwaiti nationals. The Palestinians had been replaced mainly by workers from Asian countries and Egyptians. [Economist Intelligence Unit, Country Profile-Kuwait (1994-95) p.9; Financial Times Survey-Kuwait (23 May 1995), p.iii, states that 400 thousand Palestinians-Jordanians were expelled from Kuwait.]
Regardless of the precise numbers of expelled workers, clearly Jordan had to cope with difficult problems. The outlook was grim before the Iraqi invasion of Kuwait, and the massive influx of refugees (officially called returnees), concurrent with a cessation of aid from the richer Arab countries and from the US, only made matters worse. However, by 1991 the US announced a resumption of aid to Jordan. Moreover, aid from Japan and from a number of European countries, amounting to over $1 billion came to the rescue at a critical time. [Financial Times (31 May 1991), p.4.]
The immediate impact of the austerity program adopted in the later 1980s was recessionary. Between 1987 and 1991 GDP (corrected for inflation) fell to a disastrous 13%, and on a per capita basis by 21%. But this was followed by four years of rapid growth, with GDP increasing by 38% between 1991 and 1995, or 13% per capita, over the four-year period. [International Financial Statistics-Yearbook 1996 (Washington, DC: International Monetary Fund, 1996), p.465.] An IMF report (1996) states that Jordan had begun to move in the right direction in terms of economic policies. The report notes that budgetary deficits had been cut back very sharply, mostly through curtailing spending rather than by imposing higher taxes. The report also notes that economic policies have been adopted which foster investment and growth. The finance minister was particularly optimistic, asserting (in January 1996) “Jordan has reached a stage of sustained growth.” [Middle East Economic Digest (26 January 1996), p.19.]
Paradoxically, one of the important reasons for the sharp turnaround in the Jordanian economy since 1991 was the large influx of Palestinians-Jordanians expelled from Kuwait. In many cases the new refugees came with their savings, skills and entrepreneurship, giving a powerful boost to Jordan’s small economy, both through massive expansion of housing construction and investment in new or existing businesses. According to one report, the refugees brought about $1.5 billion, largely for housing construction. This was a massive infusion into an economy with a GNP of $5 billion in 1992.
But while the above-mentioned IMF report gave very good grades, overall, to the new economic policies, it also noted that between 1991 and 1994 there was a major increase (15%) in public sector employment and a 40% rise in the real (inflation-adjusted) wage bill. Padding the public payroll can only be detrimental to longer term economic growth.
Despite the relatively strong rate of economic growth since 1992, unemployment is still inordinately high, ranging between 15-20% according to various official estimates, and far higher according to unofficial sources. [Economist Intelligence Unit, Quarterly Economic Review-Jordan Third Quarter (1996), p.13.] Another source of concern is the “growing social disparity, with a tiny rich elite living in enormous new mansions, surrounded by increasing poverty.” [New York Times (30 June 1996 ), pp.1E,3E.]
The very wide, growing gap between the few rich and the many poor may foster revolutionary unrest and political instability. IMF pressures on Jordan’s government to cut back sharply on food subsidies, in order to curtail budgetary deficits, raised the prices of basic foods and especially of bread. The reaction was severe rioting in southern Jordan in August 1996, which was suppressed by the regime. In many respects it was a repetition of the riots in 1988 and for similar reasons. The widening gap between rich and poor, high rates of unemployment, inflation, and other socioeconomic ills may well be exploited by the Islamists and others who oppose the regime and the peace agreement with Israel. In the fall of 1996 the prime minister stated in parliament that there had been thirty-six attempted terrorists incidents in Jordan in the past six months, and King Hussein accused Syria of trying to destabilize the country. [Economist Intelligence Unit, Quarterly Economic Review-Jordan Third Quarter (1996), p.10.] Rising unemployment and inflation, and falling living standards for the large majority, while a small minority engages in conspicuous consumption, can only add fuel to the terrorist fire.
Israel-Jordan Peace Agreement of 1994: The Economic Dimension
It was widely believed that after the Jordan-Israel peace agreement was concluded in 1994, there would be economic cooperation yielding substantial economic benefits to all participants. It is well to recall that the Israel-Egypt agreement of 1979 was also expected to be followed by economic cooperation in many fields, to the benefit of both sides. In reality economic cooperation between Israel and Egypt was, and is, hardly significant. But, in 1994, many believed that with Jordan things would be different.
Three international conferences have taken place, designed to foster economic cooperation and investment in the Middle East, in Casablanca in 1994, Amman in 1995 and Cairo in 1996. However, as The Economist noted, the conferences “produced a rash of high-minded proposals…which did not happen.” The article is entitled, “Middle East Economic Integration? You Have to be Joking.” [The Economist (16 November 1996), pp.57-58.] The Cairo conference was hardly different in this respect from its predecessors.
What economic gains did Jordan obtain from its peace agreement with Israel? Mainly the cancellation of the $705 million debt to the US which was followed by the UK’s cancellation of debts totaling $90 million, Germany $53 million and France $4.5 million. [Report of the US Embassy in Amman (October 1994).] Jordan also gained from an influx of Israeli tourists, and there are some joint Israeli-Jordanian projects related to tourism which may be implemented. Insofar as the main goal of the conference is concerned, namely attracting substantial foreign private investment, there are very few results. [Middle East Economic Digest (5 January 1996), p.10; (25 October 1992), p.2.] The feeling of many in Jordan seems to be that “they are no better off to day because of peace and may even be worse off.” [The Middle East (October 1996), p.20-21.]
Why has there been so little in the way of Arab-Israel economic cooperation, including with Jordan, which normally has a much better relationship with Israel than other neighboring Arab state? There seems to be a fear that Israel’s larger and far more developed economy will give Israel all the advantages. An Egyptian economist, Mahmoud Abdel Fadil, speaks of the “hegemonic dominance” of Israel’s economy. [The Middle East (September 1994), pp.22-24.] Taher Masri, a former prime minister of Jordan stated: “Israel has a huge economy, compared to Jordan’s, and it (Israel) does not have to bargain so hard.” [Financial Times (4 April 1995), p.7.] In other words, Israel should make all of the concessions.
What about the disarmament which some envisioned would follow the conclusion of Arab-Israel peace treaties? As one military analyst has phrased it, “No sooner had Jordan signed a peace treaty with Israel in 1994 that its wish list of US military equipment was dispatched to Washington.” [Middle East Economic Digest-Special Report: Defense, (12 April 1996), pp.6-10.] This was the pattern set by Egypt following its peace with Israel in 1979. Actually, there had been a De Facto peace between Israel and Jordan for at least twenty years prior to the conclusion of the formal peace agreement in 1994. The king candidly explained his country’s request for US arms: “Our problem is not one of particular frontier …but all of them.” [The Wall Street Journal (24 March 1995), p.A10.] In other words, Jordan fears Syria, Iraq and the new Palestinian entity.
Following the conclusion of the Israel-Jordan peace agreement in 1994, an unnamed “economist based in Amman” commented as follows: “Jordan will have a couple of good years (due to foreign) aid. Then it will have to depend more on its own resources. They are busy trying to milk the cow of peace, but they also have to streamline their own economy.” [Middle East Economic Digest (30 September 1994), p.3.] Jordan must take more drastic measures internally to improve its economy. The peace agreement can contribute marginally to economic improvement. However, the crucial economic issues and problems facing Jordan are largely of domestic origin and therefore require, more than anything else, far-reaching changes in domestic economic policies.
Egypt’s Economy: Perpetually in Ruins?
Egypt is a prime example of an economy ruined largely by its own self-destructive policies. As alluded to above, back in 1979 with the conclusion of the Israel-Egypt peace treaty, there were predictions and expectations of large scale Middle East trade, multinational infrastructure projects, joint ventures involving Egyptian, Israeli and American or European investors, technology transfers, and a reallocation of resources from the military to civilian pursuits. But the reality was entirely different and for various reasons unrelated to Camp David, the Egyptian economy has stagnated.
One New York Times correspondent gives the following dismal description: “Egypt’s [economy under Mubarak] remains perpetually in ruins, and a breeding ground for fundamentalism. Its attempts to industrialize are a shambles, its government bureaucracy legendary for sloth and inefficiency. Its schools spew out…poorly educated, into a non-existent job market…Its Islamic fundamentalists periodically shoot up tourists, the police, Coptic Christians, or government officials, and are shot up in return.” [The New York Times (3 June 1996).] An economist who has studied the Egyptian economy over many years concluded that since the mid-1980s “the Egyptian economy has essentially stagnated.” The growth rate of GDP per capita has been approximately zero. [Alan Richards, “Economic Roots of Instability in the Middle East,” Middle East Policy (September 1995), pp.175-187.] Estimates for 1990-95 indicate that the average annual growth rate of the economy was a miserable 1.6%, while population grew by 2.4% per annum. In short, GDP per capita was declining. [Economist Intelligence Unit, Quarterly Economic Review-Egypt First Quarter (1996), p.3.] This implies fewer job openings and even higher rates of unemployment, and lower incomes for the large majority.
The poor performance of the economy, especially in the first half of the 1990s, is particularly disconcerting in view of the massive financial aid which Egypt has received in recent years. Since the 1970s Egypt has been a recipient of large-scale aid from the US and from other industrialized countries. Aid rose to higher levels following the peace agreement with Israel in 1979, despite the cutoff of Arab aid, in retribution for Egypt’s signing a peace agreement with Israel. However, the assistance Egypt received following the Persian Gulf war has few, if any, parallels.
President Bush was anxious to obtain Arab support for the war against Saddam Hussein and rewarded Mubarak handsomely for joining the coalition by canceling Egypt’s $7 billion debt to the US. Bush also urged other creditors, Arab and European, to follow suit as well as offer substantial additional aid. US influence was also brought to bear on the World Bank and the IMF to help improve Egypt’s economic performance and to offer financial aid and guidance. All in all, a major part of the $50 billion debt owed by Egypt was canceled. Interest rates were lowered and payments were stretched out on the remaining debt. In addition, “Official Development Assistance” from various industrialized countries was raised from $1.8 billion in 1989 before the Gulf War to $5.7 billion in 1990 and $10 billion in 1992. These figures exclude the annual $1.3 billion military grant from the US. [Economist Intelligence Unit, Country Profile-Egypt (1993-94).]
Egypt’s current economic problems stem largely from the legacy of “Arab Socialism,” instituted by President Nasser in the 1960s. The state-owned industries, especially in manufacturing, suffer from gross inefficiency, over-manning and very low productivity and profitability. The loss-making state-owned firms are a serious drain on the treasury. Nasser guaranteed jobs to all university graduates, as well as demobilized soldiers, in the civil service or state-owned enterprises a policy continued by Sadat, and by Mubarak during the 1980s. Subsidies were expanded under Sadat and maintained, for the most part, by Mubarak. Price controls, foreign exchange regulations, including multiple-exchange rates, wage policies, and other measures added more distortions to the economy. Egyptian corruption did not begin with Arab socialism, but Nasser’s policies multiplied the opportunities and inducements. And, the wide gap between the few rich and the many poor widened to dangerous dimensions, fueled by widespread corruption.
Since 1991, under IMF and World Bank guidance, Egypt has made some important monetary and fiscal changes in addition to alterations in its foreign exchange controls for example eliminating multiple exchange rates. But the recommendations to embark on a large scale privatization program in order to get rid of the unwieldy and very costly public sector enterprises, have been strongly resisted. Well-connected individuals who gain enormously, often illegally, from “milking” the public sector oppose the privatization plans. The public sector workers and managers are fearful that privatization would be followed by massive dismissals. As a result, about two thirds of industrial production remain in hands of the public sector, as are oil extraction and refining. As a result, Egyptian efforts to privatize the economy have been of very minor dimensions.
This was a phenomenon in the Soviet Union as well in other formerly socialist countries. Another problem which seems to be intractable is the massive public payroll, literally millions of employees with little or nothing to do. Egypt has four million public servants, 23% of the labor force according to official estimates. Another 8% of the labor force is employed by public sector enterprises. These figures do not include the armed and other security forces. In the public sector it is “virtually impossible to sack anybody” and labor laws also make it very difficult to dismiss private sector employees. [Jerusalem Post (15 July 1996).] Low productivity, financial losses, and depressed incomes are the inevitable result.
In the seventeen years that have passed since the conclusion of the peace agreements between Israel and Egypt, it is hard to discern economic progress. Nor is there any indication of any cutback in Egyptian military expenditures. As one analyst has phrased it: “It might be assumed that peace treaties will neutralize external threats to security and lead inevitably to a reduction in defense outlays. However, the experience of the peace between Israel and Egypt suggests greater spending on defense rather than less.” [Middle East Economic Digest-Special Report: Defense (12 April 1996), pp.6-10.] According to the US Arms Control and Disarmament Agency, Egypt’s armed forces numbered about 450,000 in 1978-79. They number about the same today. An additional 250,000 serve in the National Guard. Given the job market in Egypt, the government is wary of demobilizing large numbers. Unemployed army veterans could pose a serious danger to the regime whalready has enough troubles. Insofar as military equipment is concerned, the American arms which have replaced inferior Soviet equipment are far more expensive than their Soviet-made predecessors.
Saudi Arabia: A Giant on Clay Feet
A recent report in The New York Times [The New York Times (14 July 1996).] describes the Saudi economy as being “near collapse.” There is probably an element of journalistic hyperbole in the description, but it is abundantly clear that disruptive forces, economic and other, are becoming stronger in Saudi Arabia. Amongst other things, the report notes the high rate of unemployment and other problems which make the situation “ripe for unrest.” A Reuters dispatch [Jerusalem Post (10 July 1996).] asserts that the challenge faced by the Saudi leaders is to find more jobs and maintain the generous welfare system. The Saudi princes, estimated to number between five and ten thousand, “are immune to the hardships faced by others.” A report in The Financial Times [Financial Times (11 July 1996).] states that the annual allocation from the treasury to five thousand Saudi princes is $8 billion, absorbing about one fifth of Saudi Arabia’s annual oil export revenues. In other words, the extended royal family and others close to it, continue to enjoy very high incomes, while many or most Saudis are suffering from declining living standards. The report quotes an unnamed “senior government official” to the effect that “most of the extremists…now come from poor families.” Presumably they are recruited by organizations opposing the regime, including those responsible for the bombing of the American bases in Saudi Arabia in November 1995 and in June 1996.
Between 1982 and 1989, and again since 1992, the population has grown faster than the economy, i.e., the growth rate of GDP per capita has been zero or negative. The almost inevitable result is increased unemployment and depressed incomes. The authorities are encouraging the private sector to hire more Saudis since the government cannot afford to continue financing more make-work jobs in the bureaucracy. However, university graduates and other Saudi youth expect the government to continue with its long-time policy of providing them with white collar office jobs as it has done for the past twenty years, if not longer.
Few Saudis have the necessary skills to replace foreign technicians, mechanics, and other skilled workers. There are also many millions of unskilled workers in Saudi Arabia from various poor Arab and Asian countries. But menial jobs for Saudi university graduates, and even for high school graduates, are considered demeaning. The result is rising unemployment for Saudis, especially for youngsters just entering the job market. According to some estimates, unemployment among Saudis has reached 20% and is climbing as the economy stagnates. [Jerusalem Post (10 July 1996).] These high unemployment levels stand in sharp contrast to the three million foreigners employed in Saudi Arabia, many skilled and professional, but about half unskilled. [There are six million foreigners in Saudi Arabia. I estimate that half of them are workers and the remainder accompanying family members.] These expatriates are employed overwhelmingly by the private sector, and despite strong official pressure to hire Saudis, only 7% of private sector employees are Saudi nationals. [Jerusalem Post (10 July 1996); Economist Intelligence Unit, Country Report-Saudi Arabia No. 2 (1996), p.21; Middle East Economic Digest (5 April 1996), p.56.]
In order to understand the current state of the Saudi Arabian economy, it is first necessary to review quickly its status since the late 1960s. Saudi Arabia incurred deficits (both budgetary and in the current account of the balance of payments) in the later 1960s and, again, in the later 1970s. But these were relatively short term, each period lasting about two years. The deficits were readily covered by the utilization of previously accumulated reserves; no debts were incurred. Each time exogenous events extricated the Saudis from their financial embarrassment. Both in the early 1970s and again between 1979-81, a sharp rise in the demand for Saudi oil combined with far higher world oil prices. As a result, Saudi oil export revenues skyrocketed from a “mere” $4 billion in 1972 to $111 billion in 1981. As a result factors, Saudi deficits were soon forgotten, viewed as a temporary aberration. As revenues went up, the authorities sharply increased public expenditure, inevitably raising imports of both goods and services. In the Saudi case, imports of services means primarily payments to foreign workers and foreign contractors operating in Saudi Arabia.
OPEC surpluses disappeared almost as quickly as they appeared. Oil prices peaked in 1981, eroded and then fell sharply, especially when measured in constant (inflation-corrected) dollars. Oil discoveries outside the Middle East raised non-OPEC oil supplies almost steadily, helping to depress oil prices. In 1983, Saudi Arabia incurred a deficit (both budgetary and balance of payments). In response, however, the authorities did little to cut public spending, seeing the deficit as a temporary aberration. They believed that they could easily cover the anticipated deficits by utilizing part of the financial reserves accumulated during the “Years of Plenty”. But contrary to expectations, deficits persist to this day, and by 1987 most of the financial reserves had been exhausted in order to cover the deficiencies.
Subsequently there were sharper cutbacks in the “projects” budget, basically investment in infrastructure, as well as for housing, health and educational facilities. Since construction was mainly done by foreign contractors with a labor force that was al most completely foreign, the authorities felt that cutbacks in the projects budget would have only a minor effect on Saudi nationals. They also severely cut back aid to the poorer Arab states from seven to less than one billion dollars per annum by the later 1980s, and even less by the mid-1990s. But military outlays and various current expenditures, including a wide range of free health and educational services, and numerous other subsidies, as well as the burgeoning and bloated civil service, were hardly touched for fear of public reaction. The authorities were politically unable to impose more drastic cutbacks, especially in view of the large allocations to the royal family (as noted above). Further tying the hands of the regime were a host of “commissions” collected by the royals and those close to them, for their services in obtaining government contracts, especially on behalf of foreign companies.
The Gulf War and its aftermath made a bad financial situation even worse. Budgetary as well as balance of payments (current account) deficit,s which had persisted in every year since 1983, rose sharply during 1990-91. Thus the cumulative budgetary deficits for the years 1983 through 1994 were $165 billion, of which $38 billion was incurred during the Gulf War. The cumulative deficits since 1983 greatly exceed the cumulative budgetary surpluses between 1971 and 1982: about $100 billion. The trends in balance of payments are similar. Since 1987, Saudi Arabia has been borrowing heavily, mainly domestically, in order to cover the deficits.
The projected budgets for 1995 and 1996 indicate that the authorities are trying to muddle through without taking any drastic measures to cope with the deficits. According to an IMF report, the domestic debt as of the end of 1994 was almost $100 billion, the equivalent of 77% of the Saudi GDP. The IMF mission projects that by the year 2000 the deficit will rise to the equivalent of 110% of GDP. This would crimp the ability of private commercial banks to lend to the private sector. [The New York Times (30 June 1996).]
The Saudis appear to be praying for higher oil prices and increased demand for Saudi oil in order to extricate themselves from their financial dilemma. However, longer term trends indicate lower oil prices, especially when measured in constant dollars. [See Kanovsky, above]. This does norule out temporary fluctuations due to weather, as in the winter of 1995-96 or current uncertainty regarding the resumption of Iraqi oil shipments. Indeed, although there may be digressions from the trend due to wars, revolutions, weather, etc., the underlying trend of real oil prices is constant at most, and more probably downward.
If significant growth in oil export revenues is not in the cards, what about the chances for significant cutbacks in expenditures in order to balance the budget? The constraints the Saudis face are formidable, including their fear of their two powerful neighbors, Iraq and Iran; it is this security concern which underlies the drive to acquire more and more sophisticated and expensive military equipment. The fear of internal revolution possibly aided by external enemies explains why Saudi Arabia maintains what amounts to two parallel armies, the regular armed forces, under the command of one prince, and the National Guard, under the command of another. Such duplication is highly costly. The Persian Gulf War of 1990-91, and the imminent threat to the Saudi regime, provided an additional stimulus to the Saudi drive to expand and modernize its armed forces. But there are other factors accounting for the huge orders of military equipment mainly from the US and also from the UK. The New York Times [ The New York Times (30 June 1996).] reported that “Prince Abdullah has been struggling to rein in military spending … [but] his efforts have alienated family members aligned with [Prince] Sultan, who have much to lose financially if new projects do not go forward.” The commissions and kickbacks earned by those near the seat of power are a powerful deterrent to cutbacks in military spending. And this is also true of civilian expenditures.
Thus, Saudi ability to cope with the financial crisis is greatly inhibited by: (1) the drive to increase military spending; (2) the opposition to sharper cutbacks in subsidies (which entail higher prices for water, fuel, electricity, etc., and fewer government handouts such as free health care and educational services); (3) the pressure to create more make-work jobs for Saudi graduates and reduce their high level of unemployment; and (4) the voracious financial demands of the royal family.
Will Arab-Israeli peace agreements attract foreign investors to Saudi Arabia? Hardly. Other than the oil sector, including petrochemicals, there has been little foreign private investment in Saudi Arabia. In fact, total foreign private investment in Saudi Arabia fell sharply from $1.9 billion in 1990, to only $106 million in 1994. Trends were similar in other Arab oil states. [The International Herald Tribune (8 April 1996).] Unofficial estimates of Saudi private wealth held abroad are about $100 billion not including the royal family. [Jerusalem Post (29 May 1996).] This probably indicates a lack of faith in the stability of the regime. Given the magnitude and nature of their problems and the political, social, and economic constraints, one can understand the skepticism of the potential Saudi and foreign private investors with respect to investment in Saudi Arabia.
While Arab-Israeli peace is desirable in its own right even without economic benefits such an eventuality will hardly affect the Saudi economy. What the financial crisis in Saudi Arabia has done is cause the state sharply to reduce its aid to poor Arab countries as well as reduce the job opportunities available to the nationals of the poor Arab states. What the financial crisis has also done is compel the Saudi authorities to stretch out payments to American and British arms suppliers. No new arms orders of significance have been placed in the US in the last few years. [The New York Times (30 June 1996).] Three cheers for lower oil prices.
How Well (or How Poorly) is the Syrian Economy Doing?
Syrian merchants and entrepreneurs have a reputation for astuteness and diligence. And, indeed, for about twenty years before 1958, i.e., before Egypt united with Syria under the “United Arab Republic” and imposed Arab Socialism, the Syrian economy was doing very well, led by agriculture and light industry. GDP rose by an annual average rate of 7-8%, or about 4-5% per capita, respectable by any standards. Private enterprise was dominant with the government confining itself to basic infrastructure investment, education, tariff protection for industry, and other aid to the private sector.
In 1961, after the Egyptians left, there was a short-term reversal of some socialist measures, but this was soon followed by a takeover of the regime by the leftist Ba`ath Party in 1963, and a more intensive and extensive imposition of socialist measures.
The results have been, and continue to be, catastrophic despite some “corrective measures” taken by Assad after his rise to power in 1970. Assad’s modifications made few changes to the basic socialist structure he inherited, however his regime did give greater leeway to private enterprise in some sectors of the economy. [For sources and details, the reader is referred to Eliyahu Kanovsky “What’s Behind Syria’s Current Economic Problems?” in H. Shaked and D. Dishon (eds.), Middle East Contemporary Survey 8, The Dayan Center, Tel Aviv University, (Boulder: Westview Press, 1986), pp.230-347.]
A bright spot on the horizon surfaced in the mid and late 1980s as foreign oil companies discovered large deposits of better quality oil. For the past 40 years, oil has been a major factor in the gyrations of the Syrian economy. Output rose strongly from a low of 160 thousand barrels per day in 1985 (about the lowest level in the 1980s), to 610 thousand barrels per day in 1995. [BP Statistical Review of World Energy (1996), p.7.] Oil exports rose, even after the cutoff of Iranian oil shipments when the Iran-Iraq war ended in 1988. Oil was of key importance to the balance of payments. In 1995 oil export revenues were $2.4 billion, 60% of Syria’s total export earnings, while all other exports, industrial plus agricultural, amounted to $1.6 billion. [Economist Intelligence Unit, Country Report-Syria No. 2 (1986), p.8.]
What does the future look like? In summer 1996 the Syrian oil minister was dismissed after being blamed for the “mass exodus” of international oil companies, which had ceased or sharply reduced their exploration activities in Syria. According to Shell, “If no significant oil discoveries are made in the next few years, Syria could become a net oil importer by the year 2005.” [MEED (19 July 1996), p.26.] No one can be certain regarding future oil discoveries, but less exploration reduces the chances of new discoveries, without which production inevitably falls.
Another major factor, temporary but important, was Syria’s “reward” for joining the anti-Saddam Hussein coalition. The magnitude of Assad’s reward is not clear from official sources. According to one unofficial source, Syria received some $4 billion in concessional loans. [F. Zallio, “Structural Economic Adjustment in the Middle East,” The International Spectator (July-September 1995), pp.92-96.] Another unofficial source states that Syria received “almost” five billion dollars in grants from the Gulf states, the West, and Japan, [Forbes (31 July 1995), p.83.] much of which was spent on arms purchases mainly from Russia.
Between 1981 and 1988, there were persistent current account deficits. The authorities cracked down strongly on imports, although illegal imports inevitably rose. The severe compression of imports affected the whole economy, which is dependent on imports of machinery and equipment, spare parts, and raw materials for industry, agriculture, transportation, construction, and other sectors. Soon thereafter, large oil export revenues and very generous foreign aid changed the whole economic situation. In 19 89 the current account balance was a positive $1.2 billion, rising to $1.8 billion in 1990. However, by 1993 the current account balance was again negative (over $600 million), and the deficit was even higher in 1994. [International Monetary Fund, International Financial Statistics (July 1996); also see earlier iss.] Unofficial estimates for 1995 and projections for 1996 and 1997 point to even larger deficits. [Economist Intelligence Unit, Country Report-Syria No. 2 (1996), p.8.] The record of the past tells us that persistent, growing balance of payments deficits are a harbinger of future trouble. This might not be the case if there were large-scale foreign private investment. However, whatever foreign private investment has taken place has been almost solely by expatriates and other Arab investors, mainly in short-term commercial ventures rather than long-term investment in industry.
Unlike other countries in trouble (usually meaning falling behind in debt payments and other balance of payments problems), who call upon the International Monetary Fund and the World Bank to help straighten out their economies, the Syrians have steadfastly refused to take such steps. It may be a matter of pride, or that some of the decision-makers may find the current situation to their liking. These international institutions usually prescribe privatization, something resisted by highly-placed public officials who find it is easier to corrupt the public sector. Privatization usually means large-scale dismissals and a host of other problems. In short there are no real prospects of basic economic reforms.
The Syrian economy, as it has evolved in recent years, is described by one account as “strongly centralized, characterized by public sector predominance, administered prices, import compression, foreign exchange rationing [and] a system of multiple and generally overvalued exchange rates.” This same analysis also quotes an estimate of the amount of Syrian capital which has fled to safer havens: a “massive” $25 billion. [See Zalio, above.] In the absence of basic economic reforms, the Syrian economy will continue to be dependent on exogenous factors, as it has since the 1960s, most importantly oil. The possibility of foreign aid, as in the past, is a second important factor. A third factor is Syria’s effective control of Lebanon.
Syria sent its army to Lebanon one year after the eruption of the civil war in 1975. Intuitively one might assume that this is a negative factor for the Syrian economy. One would assume that keeping an occupation army of 35,000 in Lebanon exacerbates Syria’s already heavy military burden. But as things have developed, the occupation appears to benefit the Syrian economy in various ways, and may, in fact, be a net gain rather than a loss. There are no reliable figures, but the following description from The Wall Street Journal [The Wall Street Journal (19 July 1995).] should give us some clues:
Three years after Syria was supposed to withdraw its troops from Lebanon [according to an inter-Arab agreement], it was still tightening its grip….The army that came in to make peace [among the various Lebanese factions] has dug in to make money…. Lebanese rich and poor, Muslim and Christian, resent heavy handed Syrians, whose 35,000 troops and pervasive secret police control everything….Syrian companies are building roads, renovating buildings, trucking freight and supplying much of Lebanon’s cement and electricity. An estimated one half million to one million Syrians…work in Lebanon, sending home annually between one and three billion dollars. For Syrian workers Beirut is heaven, salaries are about double [those prevailing in Syria]. Before the civil war [which began in 1975] Syrians did manual labor in Lebanon. Now with the Lebanese government powerless, Syrians are working in factories, ports, farms, and construction…Lebanese Shiites and Palestinian refugees are especially hard hit by the influx of Syrian workers….Lebanese merchants say that ‘rackets run by officers in Syria’s army and secret police control thriving trades in vegetables, cigarettes, clothing and others. There is large scale smuggling from Lebanon to Syria…’
Lebanese merchants complain that their costs have increased due to the “Syrian component”, payments to various Syrian army officers.
One of Syria’s economic benefits, direct and indirect, from its occupation of Lebanon is employment for a half million to one million Syrians. Even the lower estimate implies jobs for about one seventh of the Syrian labor force. This is a far greater number than before the civil war and Syrian occupation. These jobs reduce unemployment in Syria and the remittances of these workers to their families back home, estimated at one to three billion dollars per annum, also bring in foreign exchange earnings.
In addition, there are the profits of Syrian businessmen operating in Lebanon and the substantial payments Lebanese businessmen make to Syrian army officers. The foreign exchange earnings help to finance the large-scale illegal imports smuggled into Syria with the connivance of the Syrian armed forces. Officially, annual trade between Syria and Lebanon has been about $90 million in recent years. But it is estimated that unofficially including smuggling it is ten times that figure. Lebanon is the source of many of the consumer and other goods sold in Syria. [The Wall Street Journal (17 April 1996).] One can well understand the desire of Syrian army personnel to be stationed in Lebanon; it can be quite lucrative. The Syrian forces do not meet with any physical resistance to their occupation of Lebanon and the tribute they collect is substantial, why move?
Of possibly greater importance in terms of financial rewards is the army’s involvement in the flourishing, lucrative drug trade in Lebanon. The Economist [The Economist (30 September 1989) ,p.38.] quotes an unpublished report of the US Drug Enforcement Agency which details the close liaison between the Syrian forces in Lebanon and drug dealers. The Baka Valley, the center of the drug trade, is under control of the Syrian army, as are most of the ports from which the narcotics are shipped to Europe and the US. The report states that Syrian forces have escorted drug convoys to the ports. [See also Forbes (31 July 1995), p.83.]
The failure to implement basic reforms means that the outlook for the Syrian economy is poor, especially if, as expected, oil revenues fall. Syria has moved into a deficit position in its balance of payments (current account) since 1993 and the outlook is for more and probably larger, deficits in coming years. The large-scale payments Syria received for its stance in the Gulf War are not likely to be repeated. This means continued or intensified balance of payments problems, with a consequent compression of imports, with adverse effects on the economy, as was the case during most of the 1980s. Barring the unforeseen, oil will probably not come to the rescue again, nor will the various aid givers.
Will Syria significantly reduce its military outlays? Not very likely. Syrian relations with Turkey are aggravated by the issue of water supplies and the Kurdish rebellion which affects both countries as well as Iran and Iraq. Relations with Jordan have, at times, been bitter. In any event, Assad requires a large army to quell internal dissension. Even a full-fledged peace treaty with Israel will not bring about any significant reduction in the armed forces of either side. The examples of Egypt and Jordan discussed above are instructive. With the signing of peace treaties, each demanded and received more sophisticated military equipment from the US as a reward. This was in addition to large or larger-scale economic aid and the cancellation, or at least the easing, of the burden of all kinds of debts.
Economic history teaches that countries which adopt and efficiently implement wise economic policies prosper. Those that do not, more often than not, are failures, including those with an abundance of natural resources, such as the former Soviet Union or the oil-rich Arab countries.
This has been true irrespective of the significant costs of a heavy military burden. For example, in two of the East Asian “tigers,” South Korea and Taiwan, military expenditures rose sharply over the past decades, however, their economies grew so rapidly that the relative burden (military eas a ratio of GNP) fell, despite the high absolute level of military spending. South Korean military expenditures rose very sharply from $4.6 to $10.6 billion between 1981 and 1991, while the military burden fell from 6.2% to 3.8%. [All the figures are from World Military Expenditures and Arms Transfers 1991-1992, (Washington, DC: U.S. Arms Control and Disarmament Agency, 1994). The figures for military expenditures are in current dollars.] During the same period, Taiwan sharply escalated its military outlays from $3.7 to $9.7 billion, however, the relative burden fell from 6.4% to 5.2%. In the case of Israel, military expenditures fell from $6.5 billion in 1981 to $5 billion in 1991, while the ratio of military expenditures to GNP fell far more rapidly: from 22.5% to 8.1%.
Achieving prosperity in the Middle East is dependent primarily on the removal of internal social and economic obstacles. The Oslo agreements can contribute little or nothing towards the removal of the impediments to economic growth and prosperity. They may have engendered false expectations and dangerous disappointments.
Eliyahu Kanovsky is Professor of Economics at Bar-Ilan University, Senior Research Associate at the Begin-Sadat Center for Strategic Studies, and Ludwig Jesselson Visiting Professor of Economics at Yeshiva University.