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James Flanigan / WAR WITH IRAQ

Long, Rough Road for Mideast Development

March 26, 2003|James Flanigan

Any day now, the U.S. government is expected to hand out the first in a series of construction contracts for the rebuilding of a pummeled, postwar Iraq. A far messier issue, though, is who is going to step up and rebuild the shattered economy of the whole Middle East.

That the region is in desperate need of help is beyond question.

The Arab countries of the Middle East contain 200 million people but not a single automobile assembly plant. Indeed, there is very little industry of any kind other than the oil-related complexes of the Persian Gulf area.

In many ways, the real story of the Middle East during the last three decades -- or since the price of oil quadrupled in 1973 -- is that energy riches have not translated into any kind of true economic development.

Saudi Arabia is seen as a nation of wealth in many eyes, but its gross domestic product per citizen is only $6,900. Israel -- with a far more modern, diverse economy -- boasts a GDP per citizen of $16,300.

Trade among Middle East nations is practically stagnant -- a strange fact of economic life in a place where haggling at the local souk is an art form.

"Africa has more cross-border trade among countries than does the Middle East," notes economist Glenn Yago, director of capital studies at the Milken Institute in Santa Monica.

But who will help to turn things around?

For starters, don't count on those living there. The richest families in Saudi Arabia, far from being enthused at the prospect of increased U.S. influence in the region, are looking to invest more money in Europe, not on their home turf. Similarly, investors in Lebanon and Kuwait are questioning "whether there will be stability and rule of law" across the Middle East after the war ends, according to an investment manager who has wealthy clients in those countries.

It is a pattern that is all too familiar. As of the end of last year, the oil-producing countries -- including Saudi Arabia, Kuwait, the United Arab Emirates, Oman and Qatar -- had piled about $70 billion into U.S. stocks and bonds.

That's $70 billion not looking for genuine business opportunities in the needy nations of Jordan, Lebanon, Syria, Egypt and the West Bank and Gaza areas of the Palestinian Authority.

Meanwhile, outsiders aren't likely to step up and make big, long-term investments in the Middle East, either -- at least not anytime soon.

Sidney Harman, executive chairman of speaker manufacturer Harman International

Industries Inc., plans to help

finance a factory in Jordan. But the only reason the company is pouring money into the plant, located at Aqaba on the Red Sea, is out of a sense of obligation -- an altruistic impulse few other capitalists are likely to match.

It will be a "social investment," says Harman, the husband of Rep. Jane Harman (D-Venice). By and large, he adds, "the Middle East is not a region we are drawn to."

Not that the economies of the Mideast won't manage to find some development money, especially from Uncle Sam. One U.S. government program, the Middle East Partnership Initiative, hopes to secure $200 million in this year's federal budget, up from $29 million last year, to fund political, educational and economic reform efforts in the region.

Among other things, the partnership will work "at the micro level to give loans and support to small businesses as part of an effort to expand trade," explains Deputy Assistant Secretary of State Elizabeth Cheney, who heads the program and is the daughter of Vice President Dick Cheney.

As for private investment, some see potential in Iraq. As recently as the 1980s, the country boasted annual economic output of more than $50 billion, the majority of which stemmed from agricultural and industrial goods -- not petroleum. Since then, the GDP of Iraq's 22 million people has been reduced to about $10 billion a year, almost all from oil.

But squeezing the economic potential out of Iraq -- or any of its neighbors -- isn't going to be quick or easy.

For now, perhaps the biggest stumbling block to more investment is that most Middle Eastern countries mix commercial law with Islamic religious law.

"Until you're sure of a predictable rule of law, money won't come in," says Sanford Millar, a Los Angeles-based international attorney with clients in Egypt, Lebanon and Saudi Arabia.

President Bush talks with great hope that a military victory in Iraq will help democracy flower across the whole of the Middle East. That won't happen, though, without economic development taking root. And right now, the saplings are barely in the ground.

*

James Flanigan can be reached at jim.flanigan@

latimes.com.

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