While the world is facing a general recession that directly impacts the economies in the region, many leaders in the Arab world contented themselves by reassuring their citizens that the world financial crisis would not affect their countries. However, there were two more important issues that encouraged Arab countries to behave seriously in addressing the global financial crisis. First, the enormous losses suffered by the Arab stock markets, in particular the countries in the Gulf region after a nightmarish two weeks. The press reported that during October 2008 the Gulf’s seven stock markets lost a total of over 160 billion dollars in one week. These losses, added to the other enormous losses suffered by Arab investments abroad, resulted in panic concerning the negative repercussions of this immense “lost earnings” from large recent investments in the region and from activities linked to these markets.

The spectacular fall of oil prices was the second aspect that caused panic in Arab countries. After the historical record of $ 147.50 per barrel on July 11th 2008, in three months the price of black gold lost more than 65% of its value, hence almost $ 100 a barrel. In October a barrel of oil $ 50. This is a serious financial earthquake, especially if one considers that the economies of the various Arab countries depend on hydrocarbons. It seems therefore, that this new situation has caused the end of financial improvements resulting from the high price of oil over a continuous period lasting more than 7 years and one that allowed many Arab countries to start investing, and start large development projects as well as accumulating significant exchange reserves. It is obvious that with oil at $50 or $60 a barrel, those countries will be unable to sustain dynamics similar to those reported when the price of oil was at $147.50. Worse still, many experts forecast an oil market with prices tending to drop even further during the next two or three years, especially considering the significant reduction in world demand for hydrocarbons. This will result in a significant fall and in some cases a cash shortage in the countries involved.

The Algerian case

For example, after 1999 Algeria organised a public investment programme worth over 200 billion dollars. Due to the extent of the current global economic crisis, many economists believe there is a “risk of compromising the realisation of the investment programme launched by the government”. A fear that has led other experts to “suggest that some of the infrastructural programmes planned by the main economic state institutions should be postponed” and even “not to plan new investments.” However, Prime Minister Ahmed Ouyahia does not intend to listen to the advice of these experts, and in November stated that the government will continue its investment programme. “There is word of a global slowdown and in Algeria the government intends to continue with its investments even if the experts will not agree with me,” Ouyahia told the press. He then added that “Good deals are rare nowadays but we must succeed in achieving a turnover of 200 billion (in Algeria).”

It is difficult to consider Ouyahia’s words as a sign of optimism founded on reliable economic data. In a country that depends for 97% of income from oil exports, the significant fall in prices can only worsen things in an economy that produces little, and only one kind of commodity. It is true that Algeria holds significant amounts of exchange reserves, amounting at the end to October 2008 to 136 billion dollars (according to data provided by the Bank of Algeria) guaranteeing about three years of imports. However, a significant reduction in hydrocarbon prices could challenge this investment programme and cause a reduction of those reserves. Furthermore, this period, characterised by a dollar that is strong compared to the Euro, can only help Algeria, a country that imports large quantities of food and industrial products and will cause the cost of its imports to fall slightly.

Morocco too has not been spared, although the economic situation there differs from that in Algeria. This country in fact risks being ‘infected’ with the disease currently affecting the global economy, in spite of the optimism expressed by a number of its leaders. The Moroccan Minister for the Economy, Salaheddine Mazouar, stated recently that “Morocco has immense potential that allows the country to maintain its growth and wealth creating rhythms.” A number of experts however have already started to report the first negative effects, among them weak demand from European partners for Moroccan products, which will affect the sectors involved as well as employment and growth. Like other Arab countries importing energy, in the near future Morocco will benefit from a reduction in oil prices, but will of course have to address other issues linked to the global economic crisis, and more specifically the fall in demand for these products and a reduction in direct foreign investments. Tunisia too will have to deal with a fall in income deriving from its flourishing tourist industry, due to an inevitable fall in demand, mainly from Europe.

Other Arab countries, such as the kingdoms in the Gulf region which rely on over 80% of revenue from hydrocarbons, will have to address cash flow problems slowing down the great investment projects launched in recent years. These countries, however, continue to see a surplus in their trade budgets thanks to demographic situations very different to those of Algeria, Morocco or Egypt. Should the crisis continue, these countries would run the risk of having problems in satisfying the needs of their citizens. This leads us to emphasise how the Arab economies differ one from the other, and are not one single economic block as is the case in the European Union. The economies in the region however are characterised by increasing dependence on imports, in particular food, agricultural, industrial and technological products, by a higher level of unemployment and by low numbers of women who have jobs, still below 30%, the lowest in the world, according to data provided by the World Bank, without forgetting the vulnerability of the economies in the region, some of which are not greatly integrated in the world economy (a number of countries have not yet joined the World Trade Organisation (WTO).

The role played by oil

Generally speaking, the Arab economies are not very competitive, not very productive, and continue to depend on imports. Some countries, such as Jordan, Yemen, Morocco and Egypt depend on foreign aid and on the “generosity” of some Arab countries. Attempts to form an economy not based on oil, as Saudi Arabia did and to a lesser extent Algeria, are far from achieving established objectives. Hence we are still dealing with fragile economies, based on revenue, and countries that export less and are more exposed to the many risks of a world recession. Faced with such a situation, well known to experts, it is of the utmost importance that the weak points of this permanent economic vulnerability should be correctly identified. It is important to understand that the main problem in the economies of Arab countries consists of an inability to create a productive economy with the objective of replacing the current “revenue based economy.” Most Arab countries distribute oil revenue instead of investing it in projects for creating wealth. Accumulating exchange reserves, placed in foreign banks has been of no use at all. On the contrary, even with exceptional financial wealth, Arab countries seem unable to create a productive economy with solid foundations; one that does not rely on hydrocarbons and is capable of lessening dependence on importing food products and raw materials for a number of industrial sectors. As time goes by, money is evaporating from American and European banks and these countries continue to remain within the category of countries that are perpetual consumers.

Within this same framework, the most important problem consists in the lack of economic policies with a main objective of mobilising these resources, in particular financial resources that are “suitable” for creating wealth and employment. Many local experts deplore the lack of a national strategy for long-term economic development with specific objectives. They continue to criticise regimes for using oil revenue money to buy social peace or to encourage large-scale imports, financing make-work jobs instead of encouraging the creation of small and medium-sized companies that other countries consider the engine of an economy, as well as investments in productive sectors. Every time the price of oil crashes – and this is now a cyclical event – these countries are obliged to confront the same problems, more specifically a reduction in cash flow, a slowdown or lack of investments creating wealth, a form of reticence in foreign partners, dismissals or low employment figures, dependence on foreign countries as far as production is concerned and an unstable social situation. In spite of this, politicians continue to repeat to their citizens that “we need to prepare for the post-oil era”, but they never manage to then turn this into facts.

The State as a “regulator and facilitator”

This is not however fatal, seeing that many Arab countries have the potential to provide themselves with a secure exit strategy from this vicious circle. In addition to emergency measures taken to address the current crisis, there can be no delay in revisiting many aspects of state and economy management. Firstly it is necessary to re-examine the role the state plays in the economy. It must once again assume its role as a “regulator and facilitator” instead of restricting itself to being a “distributor of revenue” or a producer. In most Arab countries the state’s presence in the economy continues to be dominant through state investments. Many countries experience problems in privatising a company working within the state economic sector. This process (privatisation of public companies) did not provide the expected results for various reasons. First of all, there are structural inefficiencies in public companies. Second, there is a social front that is fiercely hostile to the liberalisation of the economy and third, there is ferocious foreign competition after opening up to foreign trade in some economic sectors such as telecommunications and transport.

One should also add that these companies have not managed to remain adequately competitive. The correct solution lies in courageous policies for the productive sectors, so that state banks can finance new investment projects instead of continuing to inject significant funds into financial reconstruction or reorganising public companies showing a deficit and having mediocre results. Furthermore, it is necessary to acknowledge the problems when speaking of economic development without democracy and a constitutional state, since there is interaction and a kind of concurrent relationship between democracy and development. The implementation of reforms that interest first of all the region’s political systems therefore become an unavoidable necessity; reforms addressed at greater transparency in the management of public businesses, in creating a constitutional state and in exploiting intelligence and knowledge instead of making do with practices founded on clans and subjection to power. An open system would have a greater chance of overcoming those deficits, by encouraging a debate involving the various economic and social players.

Since June 2002 Mahmoud Belhimer has been Deputy Editor-in-Chief of Algerian newspaper Elkhabar.

Translated by Francesca Simmons