For further information: Gail D. Fosler
The Conference Board
(212) 339-0300
For Immediate Release Release #4525A
LACK OF TRADE AND STRONG INDUSTRIES -- AND OIL DEPENDENCY -- STIFLE ECONOMIC GROWTH IN THE MIDDLE EAST
Trade barriers are a major drag on the Middle East's economy, which is falling behind other emerging regions, according to an analysis released today by The Conference Board.
"One of the noteworthy characteristics of the Middle East in contrast to other global regions is the almost complete absence of intra-regional trade," says Gail D. Fosler, Senior Vice President and Chief Economist of The Conference Board in the latest issue of StraightTalk, her newsletter prepared exclusively for Conference Board Associates. "Trade within the Middle East accounts for only about 7% of total trade. These countries simply don't trade with one another."
The Middle East's lack of economic diversification and development is bringing down living standards (measured in terms of real per capita income) relative to other emerging market regions. While the newly industrialized economies in Asia began with per capita incomes below the Middle East in the '70s, they now approach industrialized countries. Although the Middle East advanced significantly during the '70s, its per capita incomes today are only half their late '70s peaks.
The absence of trade within the region reflects both the absence of region-wide investment and the failure to develop economically diverse industries and companies capable of achieving economies of scale and sophistication by taking advantage of the regional market.
The lack of cross-border trade in the Middle East is largely due to the enormous dependence of the region's economy on oil. Oil exports account for 70% to 90% of the export earnings of most Middle Eastern countries. Manufactured exports are significant only in Israel, where they account for 80% of total exports and, to a lesser extent, in Egypt and the United Arab Emirates, whose manufactured export shares run around 40%.
ADDICTED TO OIL
While the Middle East benefited from the extraordinary growth in Asia during much of the early '90s, the increase in Asian exports was almost entirely oil-related. It did little for economic diversification in the region. One result: the Middle East was hard hit by the Asian financial crisis and the corresponding decline in oil consumption. The Middle East is also heavily exposed to economic cycles in the U.S. and Europe over which it has no control, Fosler notes.
The Middle East's tremendous dependence on oil contrasts sharply with the emphasis on manufactured exports in other rapidly developing economies. Many East Asian countries have dramatically reduced their reliance on commodities. Their export mix was more than 30% agricultural raw materials and food exports in 1988, whereas today it is over two-thirds manufactures.
BEHIND THE OIL SLOWDOWN
Unlike much of the rest of the industrialized world, the Middle East has not developed a large, globally competitive manufacturing base. Although 1995 and 1996 were good years, Middle East export growth has lagged other regions. Export growth has averaged less than 1% per year since 1990. Because worldwide, industrial markets are conserving their use of oil, total world growth in oil demand has averaged one percent a year or less for the past decade. Most of this incremental demand has come from Asia. Oil production in industrialized countries has also slowed, so Middle Eastern oil exports have had a few good years. But overall oil export growth and oil prices have been trending downward.
Fosler says this is especially painful in the Middle East, since foreign direct investment in the area is also declining. Economic growth is closely tied to investment, and growth in domestic investment is closely associated with foreign investment.
Many Middle Eastern countries have begun to reform their labor, products, and banking markets. Egypt and Saudi Arabia are also trying to develop their capital markets. But it is clear that the economic structure of many of the Middle Eastern countries is falling further and further behind.
"Opportunities for Middle Eastern industrialization and market development are significant," concludes Foster. "Should oil prices remain reasonably high, the next two years will be an important opportunity for initiating substantial changes aimed at reviving the Middle East's growth and relative economic progress."
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Source: StraightTalk, Volume 10, Number 9, The Conference Board
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