When you think of ISIS, forget the image of balaclava-clad men, with kalashnikovs screaming “Allahu Akbar”. Think of a carefully managed startup that has, like other successful companies, lured international investors, diversified its income and widened its outreach. Just like any startup runs on equity and investment, this terrorist organisation also obtained funds to organise its structure and plan operations.
If ISIS Inc. was headquartered in Silicon Valley, it would be considered one of the top private companies in America. Based on even conservative estimates, last year the group controlled assets in excess of $2 trillion, with an annual income amounting to $2.9 billion, according to Thomson Reuters. That’s more revenue than the retailer J Crew and the household appliance corporation, Conair, earn a year.
Yet, in defeating ISIS, it’s important to dispel short-term solutions, particularly those that fall under the sway of “retribution” such as mass bombing. Sanctions and intense warfare alone won’t work, because ISIS thrives on the failure of Middle Eastern governments. To beat ISIS, governments must first address President Bashar al-Assad’s government in Syria as part of the problem. This is a mess born of the Iraq war and the Syrian civil war, the brutality and sectarianism of which has become a recruiting tool for the Islamic State. “Assad is not a sideshow,” says Emile Hokayem in this report. “He is at the center of this massive dilemma.”
Take ISIS’s authority over oil, for starters. It is by far the most lucrative commodity for the group. It is the “black gold that funds Isis’ black flag” and not only fuels the war machine, but also provides electricity and gives the jihadis critical leverage against their neighbours. Yet, blindly bombing ISIS’s oil reserves could actually help it more than it could hurt it by disrupting the livelihood of those who relied on oil trade. As Hassan Hassan, Chatham House associate fellow, writes:
Airstrikes disrupted this wartime economy and many families, who continued to buy oil from its new owners, ISIS, increasingly found it difficult to find alternative means to survive. This pushed some families to send their sons to join ISIS as the only way to generate a monthly income, according to several individuals living under ISIS.
The depletion of Syria’s ageing oilfields are, alone, containing ISIS to some degree. The group’s need for fuel for military operations also means there’s less to sell in the market.
It’s too late to expect that freezing the assets and halting the sale of weapons to those countries that have supported ISIS will stunt the organisation’s power. The jihadist group has already become immune to international sanctions.
Not only has it infiltrated every aspect of the economy, including the banking system (for example, more than 20 Syrian financial institutions continue to operate in ISIS-held territory, according to Matthew Levitt, director of the Stein Counterterrorism program), it has also been making millions for years simply through a string of illegal activities (think: extortion through illegal taxes, and kidnap and ransom payments, selling sex slaves and plundering of antiquities excavated from ancient palaces and archaeological sites).
So any optimism that ISIS will have financial oversight is short-lived. In fact, “blocking the assets that fill ISIS’ coffers would mean rethinking the world’s economy,” says Italian journalist Roberto Saviano, an impossible feat considering the group has already exploited the underbelly of the financial system.
So how do we bankrupt ISIS, considering all the above?
Forget the strategy that addresses the symptoms not the disease. Indeed, as Emad Mostaque, strategist at Ecstrat tells Rebel Economy:
Our governments guarantee us safety from political violence, so when political violence is introduced into public life, governments typically over react and expend valuable resources fighting a small, hard-to-hit enemy.
This is why the war on terror has been a resounding failure, spending $2 trillion, killing 2 million civilians and seeing the number of enemy recruits going from under 1,000 to over 100,000 in 14 years.
Instead, there should be more focus on a long-term option that addresses grave unemployment (remember, ISIS thrives on the Arab world’s failures to provide to the people and relies on unemployed youths for new recruits). This means providing people with opportunities to enter competitive, labour intensive jobs, within blue-collar industries and prevent the draw to radicalism. It is a strategy for economic reform that critically channels most of the gains to the bottom 80%. The summary of this five-fold plan, by Middle East analyst Nathan Field, is necessary reading for understanding why ISIS continues to recruit and grow stronger.
In the end, there’s many things to be done:
Focus on resolving the Syria crisis as a whole and life after the Assad regime
Get the region to think differently about jobs for youths to help stem the flow of disenfranchised young people to ISIS
Targeted attacks against ISIS to limit their growth, and other sanctions
Cyber war on the ISIS propaganda machine to mitigate their message
There’s also a radical option, more in line with the rebel fighters of Libya. Train Syrian refugees in Turkey and other parts of Europe in the art of sabotage and send them back in as the Resistance. The most embarrassing problem for ISIS is their own “people” striking back at them. Bankrupting ISIS, a terror group which has further reach than any group before it, can only happen if the entire structure collapses, and that starts from within.
News that Washington will suspend a sizeable chunk of military aid to Egypt was met with little more than a shrug from Egypt watchers and analysts who said the decision was unsurprising.
The move to trim part of the $1.3 billion in military aid to Egypt had been in question since the US issued a warning in July when the military ousted Islamist president Mohammed Morsi.
For many, it was all talk not action.
“I don’t see it as any more than a symbolic slap on the wrist,” H. A. Hellyer, an associate fellow at the Royal United Services Institute, told Global Post.
In the short run, as this Associated Press editorial argues, “the suspension of hundreds of millions of dollars in aid will have little effect on Egypt’s military and its ability to defend itself. The cutoff probably will not do much damage to most of the companies with contracts to build such weapons.”
Indeed, a report by Al Jazeera revealed that US military aid has flowed as normal to the Egyptian cities of Damietta and Alexandria since the coup began, despite warnings.
Some also said the slap on the wrist decision avoids the real debate at the heart of the aid. Jonathan Guyer of the Cairo Review explains:
If we agree that American assistance doesn’t do much, then why continue it? The basis of this gargantuan military aid package is the 1979 peace accord between Egypt and Israel; that should be the topic under discussion rather than the idea of “leverage” in the abstract.
If Washington is going to cut aid, it must carry out the policy change with a bang, not a whimper.
On the flip side, for supporters of the military-backed overthrow, the announcement inflamed tempers. Naguib Sawiris, the politician and billionaire who has never been short on opinions, started a Twitter row:
Cutting military aid to Egypt is an arrogant counterproductive action! Do not underestimate the pride of the Egyptian people!
— Naguib Sawiris (@NaguibSawiris) October 11, 2013
But a healthy dose of realism from a few Egypt commentators doused Sawiris’ outburst:
— arabist (@arabist) October 11, 2013
How is US cutting its military aid to #Egypt arrogant? It seems that expecting aid without conditions is far more arrogant.
— Matt Bradley (@MattMcBradley) October 12, 2013
For all the discussion of symbolism and how much impact the aid cuts will make on Egypt, the US undeniably has a significant amount of fire power in the Middle East. The decision to suspend some aid, in and of itself, is a big deal that will influence other major donors in their attitude toward Egypt.
Aside from Gulf aid (and I’ve been clear about why that’s not a great idea in the long-run here and here) Cairo has pretty much lost the confidence of every major donor. Washington’s announcement is a nail in the coffin for the European Union, the World Bank and the African Development Bank who have been closely monitoring developments.
Of course, the US is just one of many countries and institutions that provide military and financial assistance to Egypt, as the chart compiled by the Center for Global Development shows below. Even though, taken as a whole, European bilateral aid plus EU assistance is double that of the United States, the US is still the single largest contributor and has huge voting power at other international organisations such as the International Monetary Fund, where the country’s quota on the board is the largest. The US can stop Egypt getting the help it needs when it undoubtedly asks for it in a few years, if not earlier.
Whether Egypt likes it or not, even a symbolic decision is damaging to Cairo’s ever-withering reputation in the eyes of the international community.
The only saving grace is that those in Egypt’s government realise how detrimental the US decision is to its chances of securing other aid and make moves to speed up the election process and be rid of the the military’s undemocratic rule.
But somehow, with condemnations of the US coming fast and steady from all parts of the administration, that looks very unlikely.
Instead, as Cairo isolates itself more and more it further drives itself into the power-hungry hands of the Gulf.
It was bound to happen sooner or later.
Egypt has returned to Qatar the $2 billion the Gulf state deposited in Egypt’s central bank after negotiations to convert the money into three-year bonds failed.
Though this represents only a quarter of the total funds Qatar has lent or given to Egypt, the decision to return the money symbolises the increasingly strained ties between Cairo and Doha following the ouster of Islamist president Mohammed Morsi in July.
Qatar had been a strong supporter of the Muslim Brotherhood’s Morsi and his departure raised questions of whether Egypt would have to repay any of the total $8 billion in Qatar deposits and loans. Official reports suggest Egypt couldn’t reach a deal with Qatar and decided to repay the deposit rather than convert the $2 billion into bonds.
But in reality, perhaps Qatar was asking for a higher interest rate than Egypt was prepared to pay. Or maybe Qatar simply wanted its money back.
Either way, Egypt has been left in a vulnerable position.
Despite the $12 billion in support from Saudi Arabia, Kuwait and the United Arab Emirates that the government keeps boasting about, the breakdown of this bond deal shows that Egypt cannot rely on the Gulf to solve its problems.
The truth is that multi billion dollar support came because the Brotherhood were eradicated from the political scene, not because Gulf states are particularly bothered about seeing an economic recovery. But here’s the dilemma: the international community have openly stated they want an “inclusive political solution” that does not abandon the Islamists.
So how will Egypt reconcile the needs of international donors (such as the International Monetary Fund, African Development Bank and World Bank who can help implement essential reforms but need the Muslim Brotherhood on board), along with requirements of the Gulf states (who have provided a helpful but unsustainable safety net)?
Egypt has so far taken the easy road by refusing to make any real budget cuts and instead announced an unrealistic stimulus package that it can’t afford.
The Qatari deal breaker signals that the government is weak and its backers are dwindling. Now is the time for Egypt to reconsider how to make the most of the Gulf while the support lasts.
We may not like it, but Egypt desperately needs Gulf money.
So why not change the way the Gulf lends money to Egypt to make it count. It won’t be just about wasting away cash to address a symptom without resolving the underlying problem.
Indeed, without Gulf aid, the government would have struggled to pay for vital imports and would have fallen far behind on its supply of fuel, prompting nationwide riots and unrest. The pound would have depreciated rapidly in the absence of sufficient central bank deposits and would have been worth closer to LE7.5 or LE8 to a dollar instead of LE6.89.
Egypt had no-one else to turn to.
International donors, including the likes of the International Monetary Fund, the World Bank and the African Development Fund, had too many strings attached for far less money to make it worth while for Egypt. These organisations also promised a whole lot of interference (or as they call it “technical expertise) into economic policy-making – another unpopular prospect for the foreign-wary Egyptians.
Meanwhile the Gulf was a perfect lender to Egypt. It has acted more like a generous Uncle, pouring money (and petroleum products) into Egypt’s coffers whenever needed and with few questions asked. As long as the Muslim Brotherhood are out, the Saudis are in.
But beyond throwing money at the problem, the Gulf has done little in the way of long-term restructuring in Egypt. They’re not interested in reforms and overhauling the tax system, but wielding control in the most populous Arab country and leverage over the Brotherhood.
Though the Gulf can afford to keep playing this game, Egypt can’t.
The government has been given too much free rein with more than $12 billion in cash and oil. None of that has gone towards supporting the budget deficit, or towards reforms that will benefit the lives of millions of Egyptians.
Adly Mansour’s government, or more likely the government that follows after elections, should consider making the most of connections with the Gulf by striking deals in infrastructure and energy.
Rather than just taking money to plug holes that will reappear in a few months time, Egypt would do well to get the same money siphoned off into long-term investment projects.
There are many avenues for joint ventures: Egypt’s factories, the bread and butter of the industrial sector, are shutting down because of difficulty securing loans in the credit market.
Low-income residential projects to house thousands of Egyptians living on-top of one another in Cairo has stalled as contractors struggle to find the funds to keep working.
Labour-intensive infrastructure projects, on roads, railways, water and sewage treatment plants, are in desperate need of investment.
Egypt’s interim government boasted about launching a $3.2 billion “economic stimulus plan” yet very little has been said about reinforcing ties with the Gulf, which is surely the easiest way to implement such a “stimulus plan”. The only mention of Gulf investment is a possible agreement with the United Arab Emirates to finance medical projects and 10 wheat silos.
But that is not enough. There should be a full-scale collaboration with Gulf countries, not only to benefit Egypt, but to show the international community that the money is working hard for the nation.
After several months hiatus (and readers saying they are having sleepless nights without it) the daily wrap is back!
I’ll be linking to a handful of the most important economic stories from the transitioning countries of the Arab world, namely Egypt, Syria and Libya, and to a lesser extent Tunisia, Yemen, Jordan and Morocco. (The Gulf is there in the background too, but only because of its connections to these countries).
1) Energy groups rethink commitment to Egypt – Financial Times
This story has become evergreen for Egypt and it seems like every couple of months a new story crops up to remind us that debts to oil companies are not going to disappear anytime soon.
The story repeats much of what has already been reported, mentioning companies owed millions of dollars including BG group, ENI and the Dana Gas. However the premise of the story may be unfounded. Although oil companies may be acting cautiously at the moment, and holding off any expansion plans, it’s very unlikely that these companies will pull out of Egypt altogether. Not only would this prove costly for these companies to pull out their equipment and human resources, but those firms would miss out on costs they are making at the moment. Because, as the FT story says:
Egypt’s oil and gasfields continued to produce as if nothing had happened.
Reading this story made my blood boil.
The government has already introduced some stimulus measures including lowering interest rates (and more controversially printing money, though that’s more rumour than fact). But increasing spending at a time when the budget is reeling from over-expenditure on wasteful subsidies (for both energy and food) masks a difficult truth: the government doesn’t actually want to make any cuts, or raise taxes to keep its own reputation in tact and avoid any public backlash. Essentially, it’s a cowardly move that will mostly benefit the current interim government who has so far been completely ineffective after the killings of hundreds of Egyptians.
And that perception that $12 billion of Gulf money will save Egypt is very naive. That money is not being targeted at the budget. At best it may be used for some investments, but really it will be used to keep the pound afloat and the country’s imports flowing.
Capital Economics, the London-based consultancy elaborates. This is their bottom line:
Egypt’s newly-announced stimulus package stands a chance of boosting the beleaguered economy in the near-term. But with the package being funded by Gulf aid, over the longer-term, it could actually take the country further away from making much-needed reforms to improve the business environment.
3) Energy stocks rise over Syria – Reuters
I will be writing on the economic impacts of US intervention in Syria later but for now, there are some gems hidden in this stock market story. Capital markets have been responding wildly to this. Gulf stock markets suffered record losses. Though it’s not clear that any escalation of the Syrian civil war would have a pronounced effect on Gulf economies, these same countries have been supporting Syrian rebels for some time.
As a result, investor rushed to the safest commodity around (well it was safe until a few months ago when the gold price plunged…). Gold prices rose to three and a half month highs above $1,430 per ounce as Syria tensions raised its appeal as a safe-haven asset.
Take a look at this chart, which the Central Bank has been proudly parading this month:[caption id="attachment_1917" align="aligncenter" width="552"] Bloomberg[/caption]
It shows how the pound’s official price, controlled by the central bank, has been appreciating slowly since the overthrow of Islamist president Mohammed Morsi.
If we were to take this graph at face value, we might conclude that the pound has strengthened as the interim government (and military) took over, and billions of dollars worth of Gulf aid is helping the country’s currency stabilise.
However, traders on the black market tell a very different story, and say the Central Bank is ensuring the pound strengthens just to give the impression that the economy is stable and improving despite the turmoil.
Here, where the pound is traded illegally, the domestic currency has actually weakened to LE7.20 (from LE7.10 a few days earlier, according to Reuters) reflecting Egypt’s volatile economic and political situation.
The pound actually fell as low as around LE8 per dollar at one point earlier this year on the black market, prompting the central bank to turn to a few different measures to reduce pressure on the currency and revive the economy:
But none of that is working. This graph puts the currency’s performance in context, showing how the pound has rapidly fallen in value this year:
And as the pound depreciates further, the more foreign currency reserves are drained and the less the central bank can support the official rate for the currency. This is why the country is spending foreign currency at a rate of about $1.5 billion a month.
Add to that, the few foreign investors left are moving to withdrawals but currency controls are making it difficult to convert Egyptian pounds to dollars. Earlier this month, Emad Mostaque, a strategist at Noah Capital Markets in London told me around half a billion dollars worth of investment is trying to leave Egypt at the moment.
So the picture isn’t as rosy as the interim government may want you to think.
In fact, the volatility we see on Egypt’s currency cycle will be another black mark to add to the nation’s problematic currency history, marked by the Central Bank’s repeated efforts to keep the pound’s value elevated, sometimes at the expense of the country’s precious foreign reserves.
The people at Dcode, an Egyptian business consultancy, put together a comprehensive graph detailing just how volatile the Egyptian pound has fared in the last three decades:[caption id="attachment_1907" align="aligncenter" width="650"] Dcode[/caption]
As long as the central bank and government refuse to accept that massive political turmoil and violence on the streets alarmed investors and traders, the pound will continue to fall, foreign reserves will bleed faster and the Gulf will have even more power over Cairo as it comes to the rescue once more with billions of cash.
The license to run an embattled Dubai-based carbon trader Advanced Global Trading is about to expire, Rebel Economy has discovered, casting more doubt over this company’s plans to continue operating.
AGT, which Rebel Economy wrote about last week, has attracted suspicion for being an alleged boiler-room operation, where high pressure tactics such as cold-calling are used to sell a product that is often of little value.
The company, headed by British businessman Charles Stephenson, claims to sell claim to sell carbon credits to individuals with the promise of high returns, even though experts say there is no economic reason to invest in such a product other than to offset your carbon footprint.
Further suspicion was aroused earlier last month, when investors were contacted by AGT and informed that the voluntary credit market which they had invested in was about to crash, but the exit strategy would involve paying an extra $15,000.
But records from Dubai’s Department of Economic Development show that AGT’s license in Dubai will expire on June 4th 2013, which is tomorrow.
When asked whether the company will renew its license, AGT responded by re-sending this statement, which it produced last week, and is available online for Rebel Economy readers.
Instead, in the statement, AGT says it “has never changed its corporate name” and “has no plans to close operations.”
However, according to the last story Rebel Economy wrote, corporate records show the company has shut down affiliated companies including AGT “UK & Ireland”, AGT “Europe” and two offices in Abu Dhabi and Zurich in the last two years.
Former employees at the company also say the management, which includes Mr Stephenson and two main directors, Chris Middleton and Danny McGowan, are planning to open an office in the Dubai International Financial Centre under a new name.
According to one former employee who was fired last month but does not want to be identified, around 15 other employees were laid off last month, including the executive director, a Bahraini businessman called Ebrahim AlShaibeh. The company told its employees it was cutting costs and gave no other reason.
AGT is one of a wave of boiler-room scams that legal authorities and regulators are facing around the world. But in Dubai, which has become a hub for these type of scams, companies are harder to pin down in the absence of tougher rules and regulations.
There are few Egypt’s president can rely on more in these economic hard times than his band of Islamist brothers.
Key financial supporters from Islamist-led governments have come through with cash injections at times of extreme economic hardship, when Mohammed Morsi faced a spike in inflation and subsequent social unrest.
Egypt’s Islamist groupies, including Qatar, Turkey, Saudi Arabia and Libya have all together offered the country $10 billion, partly to boost the Central Bank’s coffers, partly to help with energy imports.
The Gulf state has doubled financial aid to the Egyptian government with an additional $2.5 billion, on top of a previous $2.5 billion in deposits. While the Qatari finance minister has dampened any prospects of further aid in the short-term, this should not be mistaken for the Gulf state backing away from assistance to Egypt. Qatar has put its money where its mouth is, and to shift its focus away from Cairo now after pouring billions of dollars into the country would undermine the Gulf state’s investment decision.
Turkey has deposited $1 billion of the $2 billion aid package it pledged last September. It is aimed at helping Egypt finance infrastructure projects and increase its dwindling foreign currency reserves.
Last year, the Kingdom deposited $1 billion into Egypt’s central bank at a time when Egypt’s reserves plunged 60% from pre-revolution levels. The deposit included $500 million to finance high-priority development projects, $250 million for buying petroleum products and a $200 million grant for small and medium-sized projects and industries. Since then, Saudi Arabia has remained on the sidelines. Tensions are running high between the two countries after the arrest and sentencing of an Egyptian human rights lawyer to 5 years in prison and 300 lashes caused an outcry in Cairo.
Libyan officials this week said they were completing an agreement to deposit $2 billion in Egypt’s Central Bank. The transaction, which has since been denied, is being seen as a quid pro quo agreement involving Egypt’s arrest of several Gaddafi loyalists. What has been confirmed and is worth a similar amount is a transaction that will see Egypt import 900,000 barrels of oil a month from Libya starting in April.
But this generosity, however unwavering, is unsustainable.
As the FT’s Middle East editor Roula Khalaf puts it:
This unconditional assistance has no chance of boosting confidence or putting the economy on a more sustainable track unless accompanied by political commitments.
In fact, propping up the budget this way only serves to artificially cushion the Muslim Brotherhood and allows them to delay an economic reform plan.
Because after all, what’s the point of importing Libyan oil to feed an addiction to energy subsidies? Why support the Central Bank’s reserve pot when the country has struggled to put forward an economic plan that will safeguard future reserves?
This is why other countries have been wary of pouring money into Egypt, and in so doing, unfairly legitimising the Morsi administration at a time of political divisiveness.
Without such budgetary support, the Brotherhood would be forced to be more conciliatory toward opposition groups and find compromises. Otherwise, they risk being voted out of office for failing to stop an economic backslide.
It’s important to differentiate between aid to Egypt and budgetary support for Mohammed Morsi and his government. These are not mutually exclusive.
While Islamist governments such as Qatar and Libya may believe unconditional support will allow the Brotherhood to hold onto power, international donors should not withhold aid to Egypt’s people who are facing the very real possibility of chronic food and fuel shortages. It is possible for donors to provide support toEgypt (for example by investing in key youth programmes and infrastructure projects) without propping up the Brotherhood.
What is clear is that instability in Egypt will not bode well for the region, not for donor countries who need economic and political stability in Cairo.
The chief executives of Egypt’s biggest investment bank, EFG Hermes, have been quietly replaced as the bank attempts to clean up its image ahead of a potential takeover from Qatari firm Qinvest, three sources close to the matter have said.
Hassan Heikal and Yasser El Mallawany, who were last year charged with alleged insider trading alongside the sons of the former Egyptian President Hosni Mubarak, are still “technically on board but have been removed from the executive function,” said one investment banker close to the bank. Mr Heikal and Mr El Mallawany are still getting a paycheck but remain in their positions only on paper, the banker said.
EFG Hermes denied any changes were made. The changes have not yet been officially announced and Mr Heikal and Mr El Mallawany are still employed as CEOs at EFG Hermes.[caption id="attachment_1329" align="alignright" width="144"] Yasser El Mallawany[/caption]
Karim Awad and Kashif Siddiqi, who were last year announced as the new co-CEOs as part of the Qinvest takeover, are now running the bank, a second banker said. They were head of Investment Banking and head of Asset Management respectively.
Under Qinvest deal, Mr El Mallawany and Mr Heikal were to leave on completion of the transaction that would see Qinvest take control of the bank. But the deal has stalled because of delays in getting government approval in some Arab countries, according to a statement from EFG in January.
Mr Heikal, who has been living in London for at least a year, is now “pursuing other opportunities” and is “definitely not involved in the running of EFG,” a third source said.
A registry form at the Dubai International Finance Centre in the United Arab Emirates, where EFG Hermes is also registered, lists Mr Awad and Mr Siddiqi as the new directors. Mr Heikal and Mr El Mallawany are listed as former directors, ending their position in June 06 2013, just 7 days after the case of alleged insider trading was brought against them in Cairo.
In addition, EFG Hermes main website also suggests changes at the helm. As of February 16, the website title Karim Awad as Co-chief executive of the investment bank, and lists him first in the ranking on the profiles page. But this change was made only a week ago, when the website had described him under the old title of head of investment banking.[caption id="attachment_1330" align="alignleft" width="210"] Hassan Heikal[/caption]
The change is subtle, but indicates a significant shift in the bank’s executive management.
EFG has seen a sharp drop in its market value since the turmoil of the 2011 uprising in Egypt, partly because of its association with Gamal Mubarak, son of the former Egyptian president who owned a stake in its private equity business.
A further shadow was cast over EFG when its two co-chief executives, Mr Heikal and Mr El Mallawany, were among the nine alleged to have made an illegal profit of more than 2 billion Egyptian pounds ($331 million) through corrupt stock exchange transactions last May. The case is ongoing.
Arab economies have become addicted to “unearned income streams” including fuel exports, foreign aid, and remittances. This fragile social contract has led countries across the Middle East and North Africa to increase subsidies on fuel and food at times of social unrest.
This is their “original sin” and is fast becoming a liability, say economists Adeel Malik and Bassem Awadallah in this important paper for the World Development journal recently made available to the public.
“External revenues—whether derived from oil, aid, or remittances—profoundly shape the region’s political economy” which only serves to “stiﬂe economic and political incentives, turning economies away from production to patronage”.
So as a result, on a per capita basis, the Middle East and North Africa received the highest overseas development assistance in 2008 ($73 compared to $49 in sub-Saharan Africa), the paper says. North Africa has consistently been the largest recipient of net aid per capita since 1960s (see table). These aid ﬂows are largely driven by geo-political considerations.
The authors point out that despite the differences in cultures, economies and geographies across the Middle East and North Africa (Algeria to Syria for example), there are “at least ﬁve common denominators that cut across commonly recognized conceptual boundaries—for example, whether an Arab state is a monarchy or a republic, labor-scarce or labor abundant, resource-rich or resource-poor”. One of these is the dependance on exports and aid. They spell out the other connecting factors:
First, all across the Arab world both economic and political power is concentrated in the hands of a few.
Second, the typical Arab state can be characterized as a security state; its coercive apparatus is both ﬁerce and extensive.
Third, the broad contours of demographic change and the resulting youth bulges are fairly common across the region.
Fourth, Arab countries are mostly centralized states with a dominant public sector and, with few exceptions, weak private enterprise.
So what went wrong?
Malik and Awadallah go back to the Ottoman empire where centralized bureaucratic rule worked hard to prevent the emergence of autonomous social groups, and therefore valuable and profitable connections across the region and a strong private sector:
The Arab world has inherited an unfavorable and divisive legacy. The roots of a weak private sector run deep in history. Merchants were politically weak under the Ottomans.
A robust private sector was more feared than favored. When business thrived, it remained eﬀectively in the hands of foreign merchants and local minorities. This was politically expedient: foreign merchants beneﬁted from the economic privileges granted by rulers, but
seldom challenged their authority.
The break-up of the Ottoman Empire into a multitude of independent states created new political boundaries, but, over time, these became permanent economic boundaries.
The consequence of this divide meant that when globalisation was unavoidable, Arab economies did not integrate with one another but only with global structures of trade and finance. It’s no surprise then that trade agreements in the Mena region are well below the global average.
The key concluding questions is: can the region harness its natural geographic strengths to build a future based on trade and production, or does it fall back on the geography of rents and patronage? Access to the coast, Europe and a large labour force are attractive opportunities that emerging markets would jump at. So why has the Arab world failed to integrate?
Revolutions across the region are an “apt reminder that the prevailing model has reach its expiry date”, they say.
“This model built on oil and aid fortunes—and a leviathan state—is fast becoming a liability.”