The Economies of the Middle East
The Middle East is home to some of the wealthiest countries in the world, but these economies are also highly dependent on oil revenues and prone to turmoil. The region's diversity--including countries as varied as Algeria, Bahrain, Egypt, Iran, Iraq and Saudi Arabia--makes generalizations hazardous. In this post we'll outline just a few of the major trends affecting regional economies.
The Middle East has experienced large-scale economic growth in recent years. From 1980 to 2005, per capita GDP increased by an average of 2.2% a year. But growth has slowed, and the region's per capita income will likely rise only 1.5% this year and 1 percent in 2006 (it grew at an annual rate of 3% from 1981 to 2000).
With oil revenues the bedrock of the region's economy, oil producers such as Saudi Arabia have bolstered their currencies to maintain competitiveness in international trade. In response, non-oil-exporting countries have been forced to devalue their currencies so that they can attract investment by matching lower petroleum prices with lower monetary values. But the shift in exchange rates can be a double-edged sword, causing the non-oil sector to suffer. For example, Saudi Arabia and the United Arab Emirates both lowered their currencies in recent months, but this only worsened the problems of their tourism or real estate sectors. Lower non-oil currency values also hurt exporters such as Algeria and Iraq by suppressing export earnings.
In other economies, the oil boom boosted production and employment growth during the 1990s. But high oil prices have eased since then, leading to a slowdown in all Middle Eastern economies except Saudi Arabia. Meanwhile, numerous political and social disruptions have limited economic growth. The most devastating were those associated with Iraq's invasion of Kuwait in 1991 and its subsequent occupation by U.S. and British forces. But economic disruptions have also come from Iran's crackdown on pro-democracy demonstrations in the summer of 2009 and the Arab Spring protests sweeping across Egypt in 2011.
In light of such disruptions, a number of observers are calling for a reassessment of the strategic importance of Middle Eastern oil to the United States. Yet U.S. dependence on Middle East oil imports is unlikely to ease significantly, and as long as that continues there are few alternatives for the United States to secure energy supplies without having to get politically entangled with other countries in the region.
The region's diverse economies confront different challenges. Oil exporters, like Saudi Arabia and Kuwait, are working to build non-oil sectors while maintaining the competitiveness of their oil exports. Algeria and Iraq have had to cope with the political instability associated with their violent conflicts. And Iran has had to contend with domestic unrest stemming from its poor human rights record and its controversial nuclear program.
The most pressing economic problem for oil exporters is rising unemployment, which has resulted from the slumping world demand for crude oil that began in mid-2008. From 2003 to 2008, Middle East oil exports grew at an annual rate of 3.2%, and unemployment fell from 7% to 4.6%. But since early 2009, oil exporters' economies have been contracting at an annual rate of about 1.7%, according to the United Nations Economic and Social Commission for Western Asia. With few exceptions, those that contributed the most to global demand for crude oil during this period--Saudi Arabia, Kuwait, Qatar and the UAE--have experienced negative growth; only Saudi Arabia's economy has grown since early 2009 (see chart).
The economic turmoil of oil exporters has also increased their dependence on foreign laborers. Saudi Arabia, for example, employs more than 10 million foreign workers from India, Pakistan and the Philippines. In 2009 it granted citizenship to more than 200,000 foreigners--the largest number ever in a single year--and it is considering offering rewards to encourage even more of its workers to apply for citizenship. But the country still relies on foreign labor because Saudis are unwilling or unable to find work. Unemployment among Saudi men between ages 20 and 24 rose from roughly 20% in 2005 to 30% in 2008. And the numbers may actually be higher, because many Saudis are underemployed or forced to accept low-paid jobs.
Economic diversity also characterizes non-oil exporters. The economies of Iraq, Iran and Algeria--as well as those of Lebanon, Syria and Yemen--rely on oil exports for more than 90% of their export earnings. But countries such as Libya and Egypt also produce petroleum, while others, including Jordan and Israel, rely more heavily on tourism.
The rise in the value of the U.S. dollar against many other currencies has undercut growth in those countries whose currencies have not strengthened along with it: Saudi Arabia and Venezuela are two prominent examples (see chart). These countries have been especially hard hit by the downturn in oil prices, and they experienced double-digit annual declines in GDP in 2009 and 2010.
Meanwhile, countries that have strengthened their currencies to gain competitive access to foreign markets--including China, India, Indonesia, Malaysia, Philippines and Thailand--have done so with the help of growth in U.S. import demand for those products. Egypt's economy grew at an annual rate of 6% during the 2000s despite slow growth in tourism; it expanded at a 3% annual rate from 2001 to 2008 despite much slower growth of 2% for tourism and 5% for oil exports.
But since the start of 2009, Egypt's economy has contracted at an annual rate of 1.3%, and tourism fell at an annual rate of 11.8%. Indeed, from 2003 to 2008 Egypt's oil exports rose at double the pace of tourism (see chart below).
What makes Egypt's drop in oil exports even more worrisome is that the value of its petroleum products fell off considerably during the same period--nearly 50% from 2004 to 2008--and is not likely to rebound in the near future. Meanwhile, tourism receipts have fallen despite a slight rise in visitors: The average expenditure per person has declined by more than 25% since 2005 and is unlikely to show much improvement until the economic situation stabilizes.
In all, the political and economic turmoil of the past three years has hurt tourism and travel throughout the region. Saudi Arabia, for example, reported a 30% drop in spending by foreigners there in all of 2010 because of concerns about contagion from the Arab Spring. The United States alone reported a 15% decline in spending by its citizens on overseas travel during January through March 2011.
This is especially worrisome for countries like Egypt with large populations but whose economies are dependent on foreign-spending tourists. According to UNWTO data, tourism accounts for 14% of employment and 5% of GDP in Egypt and 18% of employment and 9% of GDP in Tunisia--figures that have already begun to deteriorate.
Conclusion
Middle East countries will continue to depend on oil exports for some time, but the global recession has increased their vulnerability. Middle East oil exporters have been hit hard by the downturn in world demand. These countries, therefore, will have to increase non-oil growth to protect jobs and maintain social stability. This is particularly important for those that have relied excessively on oil exports and where resource rents are well below export levels--like Egypt and Tunisia-- potentially boosting the ratio of total GDP to that earned from tourism.
Most Middle Eastern countries target 12% growth in non-oil GDP over the next five years, but only Egypt offers a realistic chance of achieving this goal because of its strategic location and relatively high income per capita.