Policy options for modernising the Middle East’s industrial base

The countries of West Asia and North Africa – WANA as Jordan’s Prince El Hassan bin Talal likes to term them – have an opportunity to emerge from the global economic crisis and shape a regional industrial base, and he suggests a policy agenda
Rather than write of the Middle East or the Arab world, I increasingly prefer to use the term WANA, meaning West Asia-North Africa. But whatever we choose to call it, the danger is that the global economic crisis provides an almost perfect alibi for governments and others within WANA to continue with “business as usual”, when what really is needed is a loud wake-up call. Such a wake-up call needs leadership from within WANA, working in close partnership with Europe and the new administration in America. With an almost daily flourish of trumpets, the headlines in the WANA region are about reform, democratisation, and the eradication of poverty. Yet as a recent study by the Stockholm-based International Institute for Democracy and Electoral Assistance (IDEA) has clearly shown, the approach to democracy-building of the Bush Administration did more harm than good. It made the democracy goal adopted by many leaders in WANA an empty shell. So what, then, for the French-inspired and EU-backed Union for the Mediterranean, and its role in democracy building? How the EU will be perceived within WANA both as a partner and an actor will be crucial. History tells us that Europe’s industrialisation in the 19th and 20th centuries not only provided more jobs and better welfare, but created the conditions for greater social and political mobility throughout society. This is the stuff of democracy-building in the real world, and it is what is missing in WANA. It should form the basis of an effective policy agenda of the Union for the Mediterranean.

A brief word about the concept of WANA. The definition of West Asia originates from the UN Economic and Social Commission for West Asia, an entity which has been ineffective in promoting development within the region. The WANA region presents a paradox: on the one hand there is tremendous wealth; on the other there is continuing conflict and the distribution of wealth is diminishing. WANA is home to some of the earliest and most advanced civilisations, yet today WANA seldom makes news headlines except in the context of destruction and violent conflict and the suffering and destitution of millions. There are no effective region-wide cooperation frameworks in WANA, no systemic representation and no civil society cooperation. There is an overwhelming concentration on security politics that should be replaced by focusing on the human dignity deficit. There can, after all, be no national security if there is no human security. Relations between WANA states are primarily driven by national rather than regional agendas. The area’s continued inability to discuss, let alone create, a regional process for security and cooperation must be seen as one of the major destabilising forces in WANA today. Yet only such a multilateral process can provide real security for future generations. There is an urgent need for a non-threatening framework for dialogue in the region. The people of WANA have for many years been deprived of effective solutions to their problems, with the result being that a wide range of pressing political, social, economic and environmental issues have been ignored because of the lack of multilateral mechanisms for dealing with them. The upshot is that WANA governments’ policies are confined to their own national interests. The problems, though, are regional and the challenges that stem from security and developmental deficits are shared. State policies and bilateral relations must therefore be augmented by multilateral dialogue. The lack of regional coherence in responding to shared challenges has led to inaction, making these challenges seem insurmountable. On the other hand, external parties who have attempted to address these problems lack the know-how and presence to bring about real change. A more accurate analysis of WANA’s problems and the development of practical mechanisms to address them must come with a sense of common ownership by neighbouring populations that share the same future. The multilateral track of the Madrid Middle East Peace Process that was launched back in 1991 foundered precisely because it was Arab-Israeli centric. A number of dividing lines exist within the region and with the outside world, but the major fault line is within WANA and between the different states. This, too, has been the sad story of the Barcelona Process, because it ignored this reality. It is to be hoped that the Union for the Mediterranean will take this into consideration. A multilateral process involving the Arab states as well as Iran, Turkey, Afghanistan and Pakistan can later on include Israel once the appropriate threshold is achieved with the Palestinians. The core idea is to create a platform for a truly regional approach to developing solutions and to promote supra-nationalism, with a continuing respect for states’ sovereignty. The Obama Administration‘s new foreign policy team has publicly stated that interconnections exist between the different trouble spots in the Middle East, ranging from Afghanistan to Iraq, Palestine and South Lebanon. In the wake of the recent Gaza crisis, I myself called for both the Organisation of the Islamic Conference and the League of Arab States to present clear statements of their positions if the apparently growing disconnect in the region is to be halted. And this represents a challenge at the political level. Two other socio-economic challenges also need urgent attention. The global economic crisis conceals chronic structural imbalances within the region. Over-dependence on aid and oil revenues affect almost all the economies of the WANA region, and it is no exaggeration to say that they represent a form of life-support system. The problem of how to wean them off this addiction and deal with the fallout of the global economic crisis seems to be insurmountable. Japan’s “lost decade” in the 1990s has shown that once artificial life support is introduced to shore up ailing sectors in a post-bubble economy, it becomes particularly difficult to withdraw them successfully. The world economy is now facing a similar challenge. In the advanced industrial economies, the coordination of economic rescue packages is a top priority for decisionmakers. Many leaders recognize that national stimulus plans will not be effective without synchronisation across national boundaries. Otherwise, nations can easily slide into beggar-thy- neighbour policies. This need for multilateral economic cooperation applies just as much to WANA. For the “Dutch disease” and a rentier spirit prevail in WANA, and have affected both oil and non-oil producing countries. Quite apart from oil revenues, they span remittances from migrant labour, financial investment flows from the oil countries mainly into real estate, stock exchange bubbles and, lastly, foreign aid. A side-effect of this has been the widening of income gaps, both within countries and between the different WANA states. The absence of a modern industrial base has meant that profitable investment opportunities are limited, so the gains from trade liberalisation are extremely small. This means that an effective regional industrial policy to develop a modern industrial base in the next generation is a top priority for WANA. The virtual absence of these sectors has some advantages though; it means that the region can leapfrog into the future without the burden of ailing industries that at present has to be shouldered by industrial countries. Political scientists often tell us that rentier economies, or economies that depend on oil and foreign aid, stimulate greed and grievances. These scholars also tell us that oil rents eventually weaken state institutions, and this hollowing out of the state often gives rise to growing discontent. In a non-oil economy, labour is the main engine of wealth. But in a rentier economy, huge revenues from oil or external financial transfers actually create a disincentive to work. A de-linking occurs between wealth and work, and this de-linking applies to most industrial and agricultural activities. Social and political mobility become extremely limited, and societies turn from production to consumption. This helps to explain the high level of unemployment in the Arab world. According to World Bank figures, the Middle East North Africa (MENA) region suffered a 25% fall in per capita incomes during the last 25 years of the 20th century, when oil prices were low. In this decade, thanks to record oil prices, GDP growth rates shot up. A recent study by India’s Strategic Foresight Group entitled “The cost of conflict in the Middle East” suggested that the past 20 years of conflict have cost WANA countries some $12 trillion. Rent-seeking tends to lead to policy failure in the form of an intense political competition aimed at gaining short-term access to revenues and benefits, as opposed to political competition over what policies might be in the long-term public interest. The politics of greed and grievance replace more far-sighted policymakers. So what, then, are the possible policy options for the region? The absence of a modern industrial base diminishes the absorptive capacity of regional economies for the surplus generated by oil revenues. Many countries have as a result set up sovereign wealth funds to invest their surpluses in international markets. The managers of these funds quite rightly complain that insufficient investment opportunities exist in the region in agriculture and manufacturing. The question is how to increase the absorptive capacity of the region and build a modern industrial base. It is possible to devise effective policies to counter these economic and political problems, but this is particularly difficult. It requires, in the first place, a much greater awareness of the causes of the challenges, and in the second place it means genuine regional cooperation. A precondition is a change of policy orientation from the national to the regional. To foster new thinking, new instruments are needed like a Regional Stabilisation Fund, a Water and Energy Community, regional social cohesion and a regional industrial policy. Without this sort of regional focus, WANA countries risk sleepwalking into a new phase of conflict and economic decline. A number of examples for cooperative initiatives exist: social entrepreneurship that is beyond microcredit and sustained vulnerability; cultural affinity with economic systems such as istikhlaaf guardianship and zakat ; moving from patronage to partnership and the responsible division of ECOSOC into an economic council and a social council and regional human and social policy structures to close the human dignity divide. Funds for ‘needy countries’ may never reach the neediest of individuals, such as internally displaced or stateless persons, because no one takes responsibility for them. Yet social unrest can be avoided by a more dynamic approach to the carrying capacity of WANA countries that would enhance their absorptive capacity. How can this be done? The lessons learnt, or rather not learnt, are many in our region. Three years ago, with such distinguished members as Gordon Brown, just before he became UK’s Prime Minister, the Commission on Legal Empowerment of the Poor (CLEP) considered ways of empowering the “bottom billion” by expanding and deepening the tools for pulling themselves out of poverty. Our 2008 report "Making the law work for everyone" says that legal empowerment is not about aid but about policy and institutional reforms that expand the legal opportunities and protection of the poor. It is an example of the methodology urgently needed to initiate a paradigm shift in our region. When the Union for the Mediterranean unveils its action plan, this should include the often impressive projects that were discussed within their preparatory consultations, such as water, renewable energy, environment, cleaning the Mediterranean Sea, maritime routes, education, scientific research and industrial parks. But more cohesion with Europe will not be achieved without cohesion within WANA. If Europe and the industrial world are facing a once-in-a-century economic crisis, WANA has been enduring a two-century crisis caused by the inability of the Arab and Muslim renaissance movements of the 19th and 20th centuries to modernise sufficiently to catch up with their former colonial masters. WANA missed the first industrial revolution based on coal and the steam engine, and then the second industrial revolution based on oil and the internal combustion engine. The silver lining now is that the absence of a modern industrial base means that WANA has no ailing industries to rescue. Can the Union for the Mediterranean provide a vision for WANA to leapfrog into the third industrial revolution of the post carbon economy of renewable energy and the electric and fuel-cell plug-in car?



Policy options for modernising the Middle East’s industrial base



THE ARAB WORLD



by Prince El Hassan bin Talal









The countries of West Asia and North Africa – WANA as Jordan’s Prince El Hassan bin Talal likes to term them – have an opportunity to emerge from the global economic crisis and shape a regional industrial base, and he suggests a policy agenda












Rather than write of the Middle East or the Arab world, I increasingly prefer to use the term WANA, meaning West Asia-North Africa. But whatever we choose to call it, the danger is that the global economic crisis provides an almost perfect alibi for governments and others within WANA to continue with “business as usual”, when what really is needed is a loud wake-up call. Such a wake-up call needs leadership from within WANA, working in close partnership with Europe and the new administration in America. With an almost daily flourish of trumpets, the headlines in the WANA region are about reform, democratisation, and the eradication of poverty. Yet as a recent study by the Stockholm-based International Institute for Democracy and Electoral Assistance (IDEA) has clearly shown, the approach to democracy-building of the Bush Administration did more harm than good. It made the democracy goal adopted by many leaders in WANA an empty shell. So what, then, for the French-inspired and EU-backed Union for the Mediterranean, and its role in democracy building? How the EU will be perceived within WANA both as a partner and an actor will be crucial. History tells us that Europe’s industrialisation in the 19th and 20th centuries not only provided more jobs and better welfare, but created the conditions for greater social and political mobility throughout society. This is the stuff of democracy-building in the real world, and it is what is missing in WANA. It should form the basis of an effective policy agenda of the Union for the Mediterranean.
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A brief word about the concept of WANA. The definition of West Asia originates from the UN Economic and Social Commission for West Asia, an entity which has been ineffective in promoting development within the region. The WANA region presents a paradox: on the one hand there is tremendous wealth; on the other there is continuing conflict and the distribution of wealth is diminishing. WANA is home to some of the earliest and most advanced civilisations, yet today WANA seldom makes news headlines except in the context of destruction and violent conflict and the suffering and destitution of millions. There are no effective region-wide cooperation frameworks in WANA, no systemic representation and no civil society cooperation. There is an overwhelming concentration on security politics that should be replaced by focusing on the human dignity deficit. There can, after all, be no national security if there is no human security. Relations between WANA states are primarily driven by national rather than regional agendas. The area’s continued inability to discuss, let alone create, a regional process for security and cooperation must be seen as one of the major destabilising forces in WANA today. Yet only such a multilateral process can provide real security for future generations. There is an urgent need for a non-threatening framework for dialogue in the region. The people of WANA have for many years been deprived of effective solutions to their problems, with the result being that a wide range of pressing political, social, economic and environmental issues have been ignored because of the lack of multilateral mechanisms for dealing with them. The upshot is that WANA governments’ policies are confined to their own national interests. The problems, though, are regional and the challenges that stem from security and developmental deficits are shared. State policies and bilateral relations must therefore be augmented by multilateral dialogue. The lack of regional coherence in responding to shared challenges has led to inaction, making these challenges seem insurmountable. On the other hand, external parties who have attempted to address these problems lack the know-how and presence to bring about real change. A more accurate analysis of WANA’s problems and the development of practical mechanisms to address them must come with a sense of common ownership by neighbouring populations that share the same future. The multilateral track of the Madrid Middle East Peace Process that was launched back in 1991 foundered precisely because it was Arab-Israeli centric. A number of dividing lines exist within the region and with the outside world, but the major fault line is within WANA and between the different states. This, too, has been the sad story of the Barcelona Process, because it ignored this reality. It is to be hoped that the Union for the Mediterranean will take this into consideration. A multilateral process involving the Arab states as well as Iran, Turkey, Afghanistan and Pakistan can later on include Israel once the appropriate threshold is achieved with the Palestinians. The core idea is to create a platform for a truly regional approach to developing solutions and to promote supra-nationalism, with a continuing respect for states’ sovereignty. The Obama Administration‘s new foreign policy team has publicly stated that interconnections exist between the different trouble spots in the Middle East, ranging from Afghanistan to Iraq, Palestine and South Lebanon. In the wake of the recent Gaza crisis, I myself called for both the Organisation of the Islamic Conference and the League of Arab States to present clear statements of their positions if the apparently growing disconnect in the region is to be halted. And this represents a challenge at the political level. Two other socio-economic challenges also need urgent attention. The global economic crisis conceals chronic structural imbalances within the region. Over-dependence on aid and oil revenues affect almost all the economies of the WANA region, and it is no exaggeration to say that they represent a form of life-support system. The problem of how to wean them off this addiction and deal with the fallout of the global economic crisis seems to be insurmountable. Japan’s “lost decade” in the 1990s has shown that once artificial life support is introduced to shore up ailing sectors in a post-bubble economy, it becomes particularly difficult to withdraw them successfully. The world economy is now facing a similar challenge. In the advanced industrial economies, the coordination of economic rescue packages is a top priority for decisionmakers. Many leaders recognize that national stimulus plans will not be effective without synchronisation across national boundaries. Otherwise, nations can easily slide into beggar-thy- neighbour policies. This need for multilateral economic cooperation applies just as much to WANA. For the “Dutch disease” and a rentier spirit prevail in WANA, and have affected both oil and non-oil producing countries. Quite apart from oil revenues, they span remittances from migrant labour, financial investment flows from the oil countries mainly into real estate, stock exchange bubbles and, lastly, foreign aid. A side-effect of this has been the widening of income gaps, both within countries and between the different WANA states. The absence of a modern industrial base has meant that profitable investment opportunities are limited, so the gains from trade liberalisation are extremely small. This means that an effective regional industrial policy to develop a modern industrial base in the next generation is a top priority for WANA. The virtual absence of these sectors has some advantages though; it means that the region can leapfrog into the future without the burden of ailing industries that at present has to be shouldered by industrial countries. Political scientists often tell us that rentier economies, or economies that depend on oil and foreign aid, stimulate greed and grievances. These scholars also tell us that oil rents eventually weaken state institutions, and this hollowing out of the state often gives rise to growing discontent. In a non-oil economy, labour is the main engine of wealth. But in a rentier economy, huge revenues from oil or external financial transfers actually create a disincentive to work. A de-linking occurs between wealth and work, and this de-linking applies to most industrial and agricultural activities. Social and political mobility become extremely limited, and societies turn from production to consumption. This helps to explain the high level of unemployment in the Arab world. According to World Bank figures, the Middle East North Africa (MENA) region suffered a 25% fall in per capita incomes during the last 25 years of the 20th century, when oil prices were low. In this decade, thanks to record oil prices, GDP growth rates shot up. A recent study by India’s Strategic Foresight Group entitled “The cost of conflict in the Middle East” suggested that the past 20 years of conflict have cost WANA countries some $12 trillion. Rent-seeking tends to lead to policy failure in the form of an intense political competition aimed at gaining short-term access to revenues and benefits, as opposed to political competition over what policies might be in the long-term public interest. The politics of greed and grievance replace more far-sighted policymakers. So what, then, are the possible policy options for the region? The absence of a modern industrial base diminishes the absorptive capacity of regional economies for the surplus generated by oil revenues. Many countries have as a result set up sovereign wealth funds to invest their surpluses in international markets. The managers of these funds quite rightly complain that insufficient investment opportunities exist in the region in agriculture and manufacturing. The question is how to increase the absorptive capacity of the region and build a modern industrial base. It is possible to devise effective policies to counter these economic and political problems, but this is particularly difficult. It requires, in the first place, a much greater awareness of the causes of the challenges, and in the second place it means genuine regional cooperation. A precondition is a change of policy orientation from the national to the regional. To foster new thinking, new instruments are needed like a Regional Stabilisation Fund, a Water and Energy Community, regional social cohesion and a regional industrial policy. Without this sort of regional focus, WANA countries risk sleepwalking into a new phase of conflict and economic decline. A number of examples for cooperative initiatives exist: social entrepreneurship that is beyond microcredit and sustained vulnerability; cultural affinity with economic systems such as istikhlaaf guardianship and zakat ; moving from patronage to partnership and the responsible division of ECOSOC into an economic council and a social council and regional human and social policy structures to close the human dignity divide. Funds for ‘needy countries’ may never reach the neediest of individuals, such as internally displaced or stateless persons, because no one takes responsibility for them. Yet social unrest can be avoided by a more dynamic approach to the carrying capacity of WANA countries that would enhance their absorptive capacity. How can this be done? The lessons learnt, or rather not learnt, are many in our region. Three years ago, with such distinguished members as Gordon Brown, just before he became UK’s Prime Minister, the Commission on Legal Empowerment of the Poor (CLEP) considered ways of empowering the “bottom billion” by expanding and deepening the tools for pulling themselves out of poverty. Our 2008 report "Making the law work for everyone" says that legal empowerment is not about aid but about policy and institutional reforms that expand the legal opportunities and protection of the poor. It is an example of the methodology urgently needed to initiate a paradigm shift in our region. When the Union for the Mediterranean unveils its action plan, this should include the often impressive projects that were discussed within their preparatory consultations, such as water, renewable energy, environment, cleaning the Mediterranean Sea, maritime routes, education, scientific research and industrial parks. But more cohesion with Europe will not be achieved without cohesion within WANA. If Europe and the industrial world are facing a once-in-a-century economic crisis, WANA has been enduring a two-century crisis caused by the inability of the Arab and Muslim renaissance movements of the 19th and 20th centuries to modernise sufficiently to catch up with their former colonial masters. WANA missed the first industrial revolution based on coal and the steam engine, and then the second industrial revolution based on oil and the internal combustion engine. The silver lining now is that the absence of a modern industrial base means that WANA has no ailing industries to rescue. Can the Union for the Mediterranean provide a vision for WANA to leapfrog into the third industrial revolution of the post carbon economy of renewable energy and the electric and fuel-cell plug-in car?