An Economic Opening

"If the trend toward economic opening continues, it should encourage more tolerance of political freedom and democracy in the Muslim world."

President Bush constantly makes speeches about the need to promote democracy and freedom in the Arab world. He should also mention that his administration has already achieved a few key victories in the battle for economic reform throughout the region. The Bush administration launched an initiative a year ago to promote both democracy and free trade in the region through bilateral trade agreements. Bahrain announced a new free-trade agreement with the U.S. in May. Congress then approved a new free-trade agreement with Morocco by a large majority. If the Bush administration can follow up with several more countries, it could set the stage for the most far-reaching economic reforms in the Middle East since the dissolution of the Ottoman Empire.

The administration’s proposals are ambitious, but based on the experience of East Asia and Latin America, they make sense. The Muslim countries of the Middle East and North Africa were the world’s dominant trading nations during the Middle Ages. As recently as 1914, Egypt made 50% of its gross domestic product through foreign trade. The Arab countries became isolated during the modern era because they had authoritarian political regimes that restricted trade and investment. If the Bush administration can move them to liberalize their economic policies, it wouldn’t be hard to imagine pressure developing for political reform as well.

The Muslim countries of the Middle East and North Africa are reminiscent of the state-dominated economies of Eastern Europe before the end of the Cold War. They have large public sectors and weak private sectors. Governments employ 17% of the population — three times higher than in other developing countries. Military spending is equal to 8.2% of GDP — four times the norm in most NATO countries. The growth rate of foreign trade in the region during the 1990s was only 3%, compared with 8% for the world. Between 1980 and 2001, real per-capita income growth in the region was zero, versus 6.3% for East Asia and 1.3% for other developing countries. The entire Arab world translates only 330 books annually, compared with 1,500 for Greece alone. Despite great oil wealth, the 300 million people in the Middle East and North Africa have a gross domestic product less than Spain’s 39 million people ($700 billion). Economic isolation has been one of the primary factors inhibiting the region’s economic development.

The recent uptick in oil prices will boost the economy of the Middle East. The export income of the Gulf countries will increase by $40 billion to $50 billion this year. The region’s stock-market capitalization has jumped from $360 billion to $470 billion. But as the oil booms of the 1970s and 1980s testify, oil can produce income windfalls without economic development.

There are 49 countries with populations that are predominantly Muslim and four that are half-Muslim. A few Muslim countries, such as Malaysia, are highly integrated into the global economy, but the great majority has long pursued policies restricting foreign trade and investment.

The result is a very large imbalance between Muslims’ share of world population and of global trade and investment. The 49 predominately Muslim countries have around 1.12 billion people, about 18% of the world total. There are 186 million Muslims in Africa, 310 million in the Middle East, and 625 million in central and East Asia. There are another 90 million Muslims in African countries with majority non-Muslim populations. There are also 35 million Muslims in China, 20 million in Russia and 150 million in India.

The exports of the 49 Muslim countries are about $515.7 billion per annum, or 8% of the world total. But the exports of one ethnically diverse country, Malaysia, account for about $99 billion of the total. All the oil-exporting countries of the Middle East and North Africa account for only about twice as much exporting — $212 billion — as little Malaysia alone. Excluding oil, the Muslim countries of North Africa and the Middle East have exports worth only $30 billion.

The export share of GDP in the Muslim countries is very modest, compared to those of the countries of East Asia or even Latin America. Egypt’s ratio of exports to GDP is only 2.9%. Morocco’s is 7%. Saudi Arabia and Libya have export/GDP ratios of 30% to 35% but practically all of the exports are oil. Malaysia is again the standout with an export/GDP ratio of 105%.

Governments have restrained trade. Half of the 22 members of the Arab league, including Saudi Arabia, Syria, Lebanon, and Algeria, do not yet belong to the World Trade Organization. As a result of a decline in oil prices and lack of other export industries, the Middle East’s share of world trade fell from 13.5% in 1980 to less than 3.4% in 2000.

The Muslim share of global foreign direct investment is also very modest, compared with other developing countries’. The aggregate is $238 billion, or 4.9% of the global total ($4.9 trillion). Flows of foreign direct investment to the Arab world have been declining steadily during the modern period. The Arab share averaged 2.6% during 1975-1980, 1.3% in 1980-1990 and 0.7% in 1990-1998.

That countries representing about 18% of the world’s people account for such a modest share of global trade and foreign direct investment isn’t an accident. Many Muslim countries have been suspicious of global economic integration and have pursued policies to isolate themselves. Except for Turkey, Malaysia, Senegal, Mali and Indonesia, there are no democracies in the Muslim world. Anti-globalization economic policies have been associated with regimes hostile to political competition and open elections.

Despite the oil boom of the 1970s and early 1980s, the growth rate of countries in the Middle East and North Africa has averaged only 3.5% over the past three decades, versus 5% for a broad cross- section of developing countries. The average unemployment rate of the seven largest diversified economies — Algeria, Egypt, Iran, Jordan, Morocco, Pakistan and Tunisia — rose from 12.7% in 1990 to 15% in 2000. Joblessness is a major problem because the region still has high population growth. The population of the Middle East and North Africa has quadrupled since 1950 and is expected to double again by 2050.

There are signs of change in the Muslim countries’ attitude to global trade. Jordan has signed a free-trade agreement with the U.S. Its exports to the U.S. have grown from $31 million in 1999 to $674 million last year while its imports from the U.S. have increased from $276 million to $492 million. Morocco has just completed a free-trade agreement with America. Bahrain announced its deal in May. The U.S. disclosed last week that it intends to negotiate a new free-trade agreement with Oman and the United Arab Emirates. The U.S. has also established Trade and Investment Framework Agreements with Algeria, Egypt, Kuwait, Qatar, Saudi Arabia, Tunisia, the United Arab Emirates and Yemen.

If the trend toward economic opening continues, it should encourage more tolerance of political freedom and democracy in the Muslim world. Anti-globalization activists refuse to accept the link between trade and democracy. But the history of Latin America and East Asia since the 1970s demonstrates the strong link between political and economic liberalization. The Bush administration should broaden the war against terrorism by pushing ahead with its proposals to end the Muslim world’s economic isolation.

The writer is chairman of David Hale Global Economics.

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