Arab Revolutions and the World Economy: Consequences With Unknown Prospects

As long as the Gulf countries and especially the top oil producers – Saudi Arabia, the UAE, Kuwait, and Qatar – are spared the upheavals rocking the rest of the Arab world, there is no reason to think that the world economy will suffer significantly from the turmoil in Tunisia, Egypt, Libya, Syria, Bahrain, or for that matter Yemen, the poorest of the lot. Interview with Mustapha Tlili, Research Scholar at New York University and Founder and Director of NYU Center for Dialogues: Islamic World-U.S.-The West

The Middle East and North Africa are major oil supplies to the world markets. To what extent may the current changes in the region challenge and threaten the well-being of the world economy in general and Europe in particular?

The Middle East and North Africa (MENA) oil-producing countries provide about 20 per cent (14,000,000 b/d) of world oil production (70,000,000 b/d). So far, these numbers have remained fairly unchanged, despite the ongoing turmoil in the region. The total loss of the Libyan share (2%), has been compensated for by an increase in production by Saudi Arabia.

It was also feared that the uprisings in MENA states would hike energy prices to a damaging level – halting recovery, reigniting inflation and undermining consumer confidence. The world economy was just starting to recover from a three-year downturn sparked by the grave subprime crisis in the United States, which spread in various forms to other regions, Europe in particular. However, according to The Economist (March, 3 2011), both the rise in energy prices and the likely damage appear to be modest, at least thus far. Many forecasters had expected an increase this year anyway. The IMF, which projected global economic growth at 4.4%, now foresees growth of about 4.2%, the difference representing the impact on the world economy of a 10% increase in the price of crude. Saudi Arabia stands ready to pump up as much crude into the market as necessary to keep energy prices in check.

As long as the Gulf countries and especially the top oil producers – Saudi Arabia, the UAE, Kuwait, and Qatar – are spared the upheavals rocking the rest of the Arab world, there is no reason to think that the world economy will suffer significantly from the turmoil in Tunisia, Egypt, Libya, Syria, Bahrain, or for that matter Yemen, the poorest of the lot.

European economies, in particular, face different risks, above all the sovereign debt of EU member countries: Spain, Portugal and Greece. If anything could derail the unfolding Euro-zone recovery, it would not be the MENA uprisings, but the potential default of peripheral states of the zone. In fact, Europe stands to reap handsome gains from the chaos in the Arab world, especially Libya, when it finally comes time to rebuild.

Experts note low interest among international investors in the countries of North Africa and Middle East due to the political unrest in the region. What will be the economic consequences for the Arab world, especially if the situation doesn't stabilize within a short period of time?

Before the recent revolutions shook the Arab world, the region was suffering from two major deficits – a deficit of freedom, and a deficit of knowledge – and most experts, whether from academia or international organizations such as UNDP (see its Arab Human Development Reports series), tended to agree that these two deficits were correlated with another debilitating condition: poverty. It is an undeniable fact that the majority of Arab states either live off oil proceeds (the Gulf countries) or tourism proceeds (Egypt, Morocco), and manufacture little of significance to the world economy; their citizens lead lives of poverty, ignorance and in some cases, extremism.

Given its particular history, Tunisia was endowed with a good measure of knowledge, was spared poverty to a large extent, but lacked freedom. It was not surprising, therefore, that the wind of revolution started blowing in the land of jasmine: its large, educated and relatively well-off middle class aspired to the democratic, free life enjoyed by “civilized” nations of the 21st century. But Tunisia, while certainly an inspiring example, matters very little from an economic perspective, and its insignificance is shared by other non-oil producing Arab countries: Egypt, clearly, as well as Morocco and Syria.

It should also be noted that foreign investments in the Arab world have traditionally gone primarily to the Gulf States, Libya, and Algeria, and have been related principally to arms sales, energy equipment, and infrastructure and urban projects. Both the USSR and its successor state, the Russian Federation, shared in this tremendous bonanza – a precarious one, no doubt, linked to the fate of vulnerable authoritarian regimes. It’s a winning game so long as the ruler with whom the deal is struck remains in command, but billions can vanish down the drain if your friendly dictator is suddenly thrown out of power by his people, or if his country is devastated by civil war or outside intervention. These are the risks investors in non-democratic countries take – they sometimes win big, but they also lose big.

A more hopeful note is struck by the World Bank in its May 2011 Regional Economic Update on the challenges and opportunities MENA is facing. The report states: “While political change will bring short-run challenges, the transition has the potential to significantly boost economic growth and raise living standards in the medium run. If the political changes lead to greater accountability and transparency in governance, countries could relax a key constraint to growth and steer resources more effectively to productive uses while reducing unproductive rent-seeking behavior. Better rule of law will promote competition and political stability will attract investment, facilitating more rapid growth in a sustainable way. More voice for civil society will prevent the unequal application of regulations, and can lead to more inclusive growth. It will also bring dignity and raise wellbeing. While the challenges are many, the opportunities are more.”

If the MENA countries can seize this opportunity to increase knowledge and freedom, and in the long run reduce or eradicate poverty, the region may have a real chance of joining the “civilized” life of the 21st century – a life of tolerance, freedom of expression, freedom of religion, gender equality, artistic and cultural production, scientific invention and technological advancement.

With an infusion of 40 billion U.S. dollars into the newly-democratic Tunisian and Egyptian economies, the recent G8 summit in Deauville, France seems to have appreciated the historic choice now facing the international community, particularly the affluent West and Russia. Both the background material leading up to the summit and its final communiqué made clear that the alternative to a successful transition is more poverty and its inescapable consequence, extremism, which threatens the security of us all. Hope and freedom come at a price – the successful transition of Eastern Europe, including Russia, from communism to democracy proves that that price is well worth paying.

Perhaps, taking into consideration the current situation in the Middle East and North Africa, Arab countries will want to diversify their external economic relations in order to reduce economic dependence on the West. Will it be a possibility for Russia to gain back its presence in the Arab world?

In contemporary history, Arab countries have mattered in world economy only as energy producers. Trade arrangements between the West and these countries have continued almost unchanged for more than seventy years, with the U.S. dominating the picture as both the major military protector of the energy-producing lands and defender of their ruling families. The U.S. also reaps a greater profit than other Western countries that have been historically active in the region, the United Kingdom in particular. The three main oil-producing states – Saudi Arabia, the U.A.E, Qatar, and Kuwait – are the economic domain of the U.S. and experts agree that Washington would not stand idle if this arrangement were put at risk.

The former Soviet Union had to content itself with what was left over, seizing on the nationalist and revolutionary fervor of other Arab leaders to sell them arms and heavy industrial equipment. Several of these leaders, such as Algeria’s Boumediene and Libya’s Ghaddafi, controlled some energy resources, while others like Gamal Abd Nasser and Hafed al Assad did not. Even today, democratic Russia continues in this pursuit, at least in the cases of Libya and Syria – Sadat’s Egypt having changed camps in 1973 and post-Boumediene Algeria having looked more favorably at cooperation with the West, particularly France.

At the time of this writing, despite recent revolutions in the Arab world, Russia appears to be facing roughly the same geopolitical equation as before, plus the certain loss of billions of dollars owed by the doomed Ghaddafi regime. Bashar Al Assad may have better chances at surviving the turmoil, and Russia should fare well in preserving its position in Syria once the situation has stabilized.

Assuming the geopolitical and economic order does not fundamentally change from its decades-old structure, Russia might find new, if modest opportunities in a post-Ghaddafi Libya, at least at the beginning. This depends largely on Russian leadership succeeding in the mediation mission outlined by President Medvedev at the G8 summit, and more aggressively wooing the rebels. Nevertheless, Russia will likely face tough competition from France, the U.K., and Italy for construction contracts in the new Libya, and given that the country’s needs will be overwhelmingly civilian in nature, Russian industry in its present stage of development might not provide the best solutions.

Russia should, however, explore academic, scientific, and cultural opportunities, offer generous scholarship and training programs, and seek deals with Libyan business partners to develop and exploit the impressive and yet unspoiled resort potential of Libya’s sea coast.

If pursued with vigor and steadfastness, such initiatives will transform Russia’s role in the emerging Arab world from a supplier of arms to corrupt dictatorships, to a provider of civilian products and services to free and enlightened peoples. This is the deal of the future, and if Russia succeeds in building civilian industries in Libya, Tunisia, Egypt, Syria, and Algeria, it stands a far better chance of winning influence in the Gulf countries, too.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.