Economics

Don't Count On Gulf Oil Producers to Bail Us Out

Wendy J. Chamberlin and Zubair Iqbal — Mon, 17 Nov 2008 10:08:46 -0500

One of the more alarming characteristics of the global financial meltdown is that –well, it’s global. That makes it very difficult to know where to turn to for help. British Prime Minister Gordon Brown reckoned relief might be found in Riyadh. After returning from Beijing with empty pockets, Pakistani President Asif Zardari has also gone hat-in-hand to the Saudis. There are a number of reasons why troubled economies can’t count on the cash wealthy oil producers in the Gulf for a bailout.

The hard truth is that major oil producing states in the Gulf face liquidity shortages and for the same reasons others do. They are heavily invested in the very Western banks that are in trouble owing, partly, to the sub-prime rate housing collapse in the United States and Europe.

Western economic downturn further negatively impacted the Gulf oil producers because demand for oil is down. The rest of the world simply won’t be buying as much oil as last year. The latest IMF forecasts for the Gulf region show that the combined external current account surplus of the six states in the Gulf Cooperation Council (GCC) is expected to fall by at least 7 percentage points of GDP in 2009. This drop effectively wipes out the large bonus from oil sales in 2008 that helped fund ambitious projects in the Gulf.

There are other reasons for caution. Earlier wise decisions of several GCC countries to diversify their economies by building the tourism, real estate, financial services, transportation and other non-oil sectors will help cushion the sharp decline in fiscal surpluses caused by a fall in demand for oil. But these sectors also took a hit with the global downtown.

The slowdown in GCC countries will reverberate negatively throughout the region. Currently, Gulf oil producers assist the developing economies of their neighbors by providing subsidized oil and access to jobs for expatriate labor. Any slowdown will eliminate jobs for the armies of guest workers who now send billions of dollars home to countries like Pakistan, and the Philippines. Those emerging economies have become dependent on the remittances of overseas workers and the slow-down will compound the global recession.

Outlook for major oil producers is manageable. The oil producers, under current expectations; will have comfortable foreign exchange reserves. But if the exchange rates of Gulf currencies remain tied to the appreciating U.S. dollar, the authorities in the GCC countries will find it difficult to tighten monetary policy and may encounter continued high inflationary pressures. Political pressures may also build to increase government expenditures to stimulate domestic growth, and avoid unemployment pressures.

In any case, the current global crisis will make the path toward the planned monetary union by 2010 in the GCC more challenging. This is a shame because coordination of financial policies that will be called for by the monetary union to support a common exchange rate would also help reduce destabilization of cross border capital flows.

What should be done to address the gathering storm? The GCC States could consider three broad initiatives.

First, at the national level, further improving regulation and prudential supervision could strengthen domestic banking sectors. Countries in the GCC have already taken some steps in that direction and this should be applauded. But the current crisis offers the opportunity to push for further restructuring and consolidation of distressed banks in order to minimize domestic contagion. Of course, these steps should be undertaken in concert with similar initiatives at the global level.

Second, at the regional level, a more organized approach should be taken to aiding those distressed economies in neighboring developing economies that are most negatively impacted because of their dependence on economic support from Gulf States -- like Pakistan. Consideration should be given to establishing a trust fund made up of multilateral and regional lending agencies, selected GCC countries, and the G-7 to pool resources and facilitate their effective use by vulnerable counties under IMF/World bank guidance. Regional stability hinges on the lowest common denominator. It is in everybody’s interest to prevent economic implosion in Pakistan. A rescue plan could have the advantage of presenting an opportunity to force countries like Pakistan to come to grips with entrenched structural distortions in its economy.

Finally, at the global level, the cash surplus oil producing countries of the Gulf, although also weakened, can still help the way out of the global crisis. The GCC States should be encouraged to maintain a degree of fiscal expansion so as to stimulate demand in the world economy. Such a policy is not entirely without self-interest. It would have the positive effect of increasing demand for oil exports.

Decision Time for the GCC

Dr. Hani Findakly — Thu, 28 Aug 2008 11:39:54 -0400

Tying the Persian Gulf countries to the dollar has bought decades of stability and prosperity. The time has come, however, to cut the tie.

The dollar has been a steady friend to the Gulf. In a region of small economies dominated by public sector spending, virtually all revenues have been in the form of dollar-denominated oil sales. As young and often sparsely populated countries in the 1960s and 1970s, they lacked the institutional framework—central banks, capital markets, regulatory agencies, and economic managers—that an effective monetary policy requires. Furthermore, their economic growth was relatively weak for decades. Western impressions notwithstanding, periods of dramatic growth in the Gulf were the exception rather than the rule from the 1970s to 1990s. While there were short periods of exceptional growth, real economic growth only averaged an anemic two percent over three decades.

A fixed exchange rate link to the dollar helped. It provided an anchor of stability as the Gulf economies got on their feet. It also created stable currencies and relatively predictable levels of government income and expenditure.

But in the last decade, everything has changed, and things are unlikely to go back to how they once were. Emerging markets around the world have blossomed, as good economic policies, enhanced governance, and rapidly rising global trade have combined to create some of the most auspicious conditions for growth that the world has ever known. In addition, and in part because of these conditions, persistently strong demand has boosted real commodity prices in a more sustained way than they have been in almost a century.

For the countries of the Gulf, the windfall is nothing short of remarkable. At roughly $140 per barrel, the region is amassing capital at an unprecedented rate, with projected surpluses approaching $400 billion per year, or an average $20,000 per citizen. In smaller, energy-rich countries such as Qatar and the United Arab Emirates, the per capita surpluses are several times higher. In addition, regional governments have learned their lessons from the 1970s and 1980s. Unlike past oil booms, in which governments spent with enthusiastic abandon, the governments of the region have become far more strategic. Now they seek to diversify their economies, to invest in their deficient physical, financial, and social infrastructures, and most importantly in the education of their people.

Even so, economies are overheating. Inflation is in double digits, growth is exploding, consumer loans are at precarious levels of personal income, and speculative bubbles in housing and the stock market threaten medium-term stability. These conditions will undermine the region’s capacity to recruit and retain their workforce—still 40 percent foreign overall and with a much higher percentage in the private sector. These workers, who are paid in Gulf currencies linked to the dollar, have seen the value of their repatriated wages shrink, while high inflation severely limits their capacity to save. Labor unrest is a growing problem, and one with no simple solution.

This decade’s prosperity presents Gulf policymakers with a serious dilemma. They have little control over the oil windfalls flooding into their economies, and the virtual absence of taxation in these countries means that governments lack an important tool of economic governance. The fixed link to the dollar compels central banks to mirror the Fed’s low interest rate policy needed to stimulate the U.S. economy, leaving their own economies woefully over-stimulated. Indeed, the governments have precious few tools to shape their local economies.

Of the few tools at their disposal is a currency float. Doing so now would be especially timely. Foreign exchange reserves are at an all-time high. The managerial talent pool is there. And while it will take time to fully develop the money markets necessary to conduct effective monetary policy, all of the elements are in place to begin that process.

Cutting historic ties to the dollar would be both courageous and controversial. Some would see it as a political act rather than an economic one, as if any close U.S. ally with a major economy ties its own currency to the dollar. In fact, none do.

Others fear that the Gulf nations will lose the security of the greenback. In reality, the opposite is true. A float would grant these countries greater stability, not only to stem inflation now, but even more so were the U.S. economy to grow and interest rates to rise at a time when Gulf economies were in an economic reversal.

The economic security of the move could be enhanced if the Gulf countries coordinated their actions, paving the way for greater regional coordination and integration. Doing so would smooth out speculative portfolio flows, help synchronize economic cycles, fight inflation, and ensure competitive access to both skilled and unskilled labor.

The question is no longer why the Gulf states should depart from their dollar peg. Instead, it is why they should remain tied to the dollar despite the very obvious costs. To their credit, Gulf states are managing their wealth far more prudently now than in past oil booms. Rigidly remaining tied to a dollar peg that distorts their economies is no longer prudence, it is folly.

We Want Your Help and Your Business - Unless Its Arab

David Mack — Tue, 14 Mar 2006 12:00:00 -0500

The decision by the United Arab Emirates' Dubai Ports World to transfer its US operation to a US entity should not come as a surprise. As the company statement reads, it was done in the interest of preserving the ''strong relationship between the UAE and the United States.'' That's what allies do.

Some people are comfortable with the notion that we can rely upon our traditional allies in NATO and elsewhere around the world — ''people more like us'' — to deal with a terrorist problem that threatens all civilized countries. The reality is we are far more likely to find the critical help we need in Dubai or Jakarta than Stockholm or Paris.

The recent visit of Secretary of State Condoleezza Rice to the UAE reinforced the Bush administration's understanding of the richness of US-UAE cooperation in a variety of security-related fields. The list is long -- from port and airfield support for US Navy warships and Air Force assets covering the Afghanistan and Iraq theaters to assistance in combating money laundering. Rice called the UAE a ``good partner in the war on terrorism, a stalwart partner.''

Before 9/11, regulations for the Dubai money markets had many holes. During my tenure as US ambassador to the UAE in the late 1980s, there was potential for strategic cooperation, but much still needed to be done to make it a reality. That has changed.

Today, the US Treasury Department holds up the UAE as a model for other countries to emulate. As for customs enforcement, the authorities in Dubai host US customs agents, providing us an unparalleled ability to inspect suspicious containers before they arrive in US ports. This is another model we hope other countries will adopt, since all the efforts we make at US ports of entry may be too late.

At this point we should start thinking about what we would lose if we were perceived as treating their cooperation with patronizing contempt. The UAE government and private sector leaders I talked to were too polite to hint at retaliation, but we cannot ignore the possibility.

Furor Over Prospective Deal

During my recent visits to Dubai and Abu Dhabi, both US and senior Emiri officials briefed me on the ways the UAE is helping us combat terrorism. There is nothing we have asked of the UAE government since September 2001, and we have asked for a lot, that they have not delivered.

The controversy over the ports deal landed with the thud of a misdirected bomb. The impression was that we had hung out a sign saying, ''Help wanted in the war on terrorism. Arabs need not apply.'' Reluctantly, I had to tell the Emiris that in the current Washington environment, if you put three words together — money, Arabs, and Bush — you guarantee a political firestorm.

They are amazed that US domestic politics could have such a powerful effect on responsible members of Congress. And, they wonder if the facts would make any difference. The furor over the prospective deal with Dubai Ports World also provides some lessons on the reality of US reliance on foreign capital and our double standards on foreign investments. At a time when the Bush administration is pursuing a free trade agreement with the UAE and other Arab markets to open the door for US companies, we are shutting the door to foreign investors at home, using national security as a smoke screen.

Foreign investment in our ports should not be confused with security. Our government, not the terminal managers, always will have the chief responsibility to guarantee port terminal security.

Dispel the Myths

On recent trips to the region, I found much interest in investing in this country. But nervousness over the potential political backlash is causing businessmen to explore other options.

We can use all the foreign capital we can get to help reduce our $700 billion global trade deficit. And we can certainly benefit from the international security support and political goodwill that comes with increasing international commercial cooperation.

It is time to dispel the myths about Arab investment that stir up anxieties and negative attitudes toward our trade partners. Increasing our international commercial cooperation not only provides economic benefits but also strengthens support in the Global War on Terror. The UAE government has acted more quickly and firmly than most in the region. Regardless of how the DP World affair plays out, now is not the time to turn our backs on our friends.

A Roadmap for North Africa

Jacques Roussellier — Thu, 15 Dec 2005 12:00:00 -0500

What was intended as a meeting of European and Arab leaders in Spain recently turned out to be mostly empty seats. It is a potent reminder of how wide the gap remains between the two sides of the Mediterranean.

As the still simmering French riots and Dutch uneasiness remind us, even the most secularized countries in Europe are struggling to make sense of their own national identity in the face of mounting Islamism and the threat of terrorism among their own citizens of Muslim and Arab origin.

Though heralded as one of the finest hours of European foreign policy, the Brussels approach to the Maghreb and the Middle East is nonetheless the pursuit of narrow continental interests. Beyond a difference in tone between its soft stand, largely driven by economic development, migration, and rule of law, and Washington’s hard line efforts in the region, which are mainly driven by military and counter-terrorism concerns, the Brussels approach crucially misses the opportunity to foster economic development and long-term stability in North Africa.

There is much to gain from a joint effort to spur investment and create a common market in the region. According to a study by the International Monetary Fund, a regional market in North Africa will increase foreign direct investment by 62% in Algeria, 85% in Morocco and 165% in Tunisia.

But the North African countries’ failure to establish a regional free trade area — due to long-standing disputes, such as the status of Western Sahara, and hegemonic ambitions, particularly Morocco versus Algeria — is an issue that should have been addressed squarely and jointly by the European Union (EU) and the US. Besides fostering economic growth to help secure strategic objectives, the US and EU’s respective free trade accords reveal a striking lack of transatlantic convergence. The United States and European Union could have more effectively encouraged the resolution of regional problems by linking progress to economic incentives. Joint US-EU pressure could have been used to make the removal of regional obstacles a pre-condition for signing trade agreements with North Africa. Normalization of relations with Libya is also a case in point.

Morocco, for example, is the biggest recipient of EU aid and is a favorite of US support. The government signed separate trade agreements recently with the US and the EU, which could have been used as strategic leverage to pressure Morocco to seek more actively a resolution of the Western Sahara dispute.

Efforts to set up a regional free trade area would also exclude Algeria and Libya. Yet both states are strong candidates for future growth in oil production. Keeping them within a regional free trade area would enhance energy security for both Europe and the United States, especially their international oil firms.

Without North Africans doing their homework and the correct and coherent signals coming from across the Mediterranean and the Atlantic, the old asymmetric game continues: North African states wishing for bilateral security guarantees get soft security piecemeal handouts, which is unlikely to create a stable Mediterranean basin. Without economic growth based on regional and international trade, there is still the twin curse of a failed economic and political model that renders conservative regimes from Morocco to Jordan more prone to terrorist recruits and suicide attacks.

The primary step in securing growth and countering the spread of terrorism needs to be coordinated policies between Washington and Brussels. Common long-term interests in security and development in the region are far more important than short-term gains in strengthening ties with key regional allies that only play into the hands of hegemonic agendas.

Furthermore, a common declaration on stability and security in the Maghreb should clarify what would be required from both sides in terms of settling regional disputes and promoting cooperation.

Finally, a regional security dialogue — a permanent organization for North Africa with perhaps the Sahel countries — should assist the implementation of regional and bilateral accords and provide a forum to resolve disputes and organize security cooperation in counter-terrorism efforts.

Free trade and economic growth in North Africa would not only provide stability in a strategically significant and volatile region, but would also contribute to a much needed security and economic buffer, as well act as a bridge between a desperately poor sub-Saharan Africa and an inward-looking Europe.

US-Saudi Bond Grew Under Fahd

Wyche Fowler — Wed, 3 Aug 2005 12:00:00 -0400

The death of Saudi Arabia's King Fahd is another step in the leadership transition taking place throughout the Middle East, as one long-serving monarch after another, from Morocco to Jordan to Syria to the United Arab Emirates, has passed from the scene.

Like his counterparts in other Arab countries, Fahd played a pivotal role as a nation-builder and in regional and global politics.

As US ambassador to Saudi Arabia from l996 until March 2001, I had a unique opportunity to observe firsthand and appreciate Fahd's leadership before his declining health incapacitated him. The sad occasion of his death allows us to reflect anew on how much the strong US-Saudi relationship and Saudi political stability grew out of his initiatives and policies.

From the US perspective, the late king should be remembered gratefully as a steadfast ally who played an important role against communism, for Arab-Israeli peace and for stability in the Gulf. Fahd should be remembered as a modernizer who pushed his subjects to abandon their insularity and join the modern world — and as an institution builder.

From the late l970s until the fall of the Soviet Union, under his guidance Saudi Arabia was a staunch ally against the spread of communism, witnessed most clearly in the Saudi-US cooperation with the Mujahiddin fighting the Soviet invasion and occupation of Afghanistan.

The support that Saudi Arabia now extends to the Middle East peace process relies on initiatives that Fahd proposed almost 25 years ago. Although the hard-line Arab consensus at the Baghdad conference in l979 pushed the Saudis to reject the Camp David accords between Egypt and Israel, the king persuaded the conference not to apply economic sanctions against Egypt in retaliation. In l981, he proposed a settlement for the conflict with Israel (known as the "Fahd plan," it was presented to the Arab Summit in Morocco in l982) that provided at least a psychological basis for the Arabs to support the current peace process.

More recently, Abdullah, as crown prince, building on the king's earlier initiatives, delivered a peace plan to President Bush that recognized Israel and promised normal relations in return for Israel's withdrawal from Palestinian territories.

After the Iraqi invasion of Kuwait, in what must stand as one of his most courageous decisions, Fahd invited US forces into Saudi Arabia to help defend the kingdom and liberate Kuwait — against the advice of members of senior leadership and in the face of vehement opposition from many religious leaders.

The war effort cost the Saudi government $60 billion and served as a catalyst to unleash an Islamic opposition movement, murdering Americans and Saudi soldiers and civilians in both our countries and around the world.

The Kingdom's battle against terrorists on its own soil, aided by strong cooperation between US and Saudi intelligence services, has reinvigorated the historic cooperation between our countries.

Looking back over the nearly 30 years during which Fahd ruled Saudi Arabia, first as regent, then as king, perhaps his most important achievement has been the seamless transition of power to Abdullah when his health declined, ensuring that the kingdom would have its new king experienced and prepared to govern the country at Fahd's death. With his passing the United States loses a friend but gains in Abdullah a leader of integrity, experience, and wisdom — and a king committed to continued reforms in his country and expanded friendship with the United States.

Follow the Money

Edward S. Walker, Jr. — Mon, 15 Nov 2004 12:00:00 -0500

The death of Yasser Arafat puts new pressure on the Palestinian leadership to quickly sort out the transition and distribute power among the various claimants to Arafat's chair. The debate has been going on for months now as various factions and individuals have sought leverage in the struggle for power. But this public struggle has another, relatively hidden, aspect that may play an important role in determining the winners and losers. What has only been hinted at behind the scenes is another transition battle -- to control the reported billions of dollars that Arafat had stashed away in his private accounts.

Arafat ran the finances of his main political faction, Fatah, as a personal bank account. With funds donated by Arab governments, payroll taxes, and individuals, Arafat rewarded his allies and bought the loyalty of his opponents.

In the early days of the Palestinian movement, Arafat sought to protect PLO and Fatah resources from the eyes of countries and opponents that might freeze or capture the assets and call into question the future of the organization. It was a covert operation working in a dangerous environment, and it was on this basis that he was able to gain personal control and maintain secrecy.

In the mid 1980s Arafat was estimated to control some $7 billion in numerous secret bank accounts and in widespread commercial investments. By 2003 the estimate had been lowered to about $1.3 billion. Even at that level, the funds could feed the Palestinian population for over a year and leave a considerable amount left over for social welfare projects.

There is no doubt that in the last three years, under combined pressure from donor Arab countries, the EU, and the United States, Palestinian Authority finances have been brought under greater control by the Authority Finance Minister Salam Fayyad. But that control has not been extended to Fatah, PLO finances, or Arafat's private accounts. It is certain that the flow of cash to Arafat has been constricted over the past few years by his isolation, growing demands for reform and his weakening position of authority. But the truth is that no one except Arafat himself knew the full extent or the whereabouts of all the money he personally controlled. It is not unreasonable to conclude that up until his death, Arafat continued to hold well in excess of a billion dollars -- and perhaps even more -- that had been donated for the good of the Palestinian people and that he had diverted to his personal accounts to cement his authority.

This is the money that helped finance the Al Aqsa Martyrs organization and its terrorist activities. It is also, no doubt, the money that Arafat used from time to time to buy off other hostile organizations like Hamas. His wife, Suha, profited. His family profited, and his financial advisers and close allies profited.

While Arafat bought stability and shored up his own position of leadership, he also bought terrorism, corruption, and a continuing struggle against Israel. According to Palestinians who sat in on decisive meetings with Arafat, it was Arafat's design and money that triggered and sustained the intifada after the Camp David failure, not the visit of Ariel Sharon to the Temple Mount. The money that was used by Arafat to corrupt and bypass the system and to sustain the conflict is now up for grabs.

In the wrong hands, these secret funds will continue to support terrorism and will be used to undercut any effort to moderate the Palestinian position, isolate the rejectionists, or begin to restore the Palestinian economy. Even in the hands of moderate leaders, this money, insofar as it is uncontrolled, will continue to corrupt the system and prevent the transparency and democratic process that most Palestinians crave.

The Palestinian people are suffering greatly and the gap between the rich leadership and poor refugees is growing amid continuing charges of corruption. This is a situation that threatens stability and works to the advantage of radical elements and against a peaceful transition to a moderate leadership.

Therefore, it is in our interest and, indeed, imperative for the US administration, to take leadership of an international effort through our combined intelligence and financial resources, working with responsible Palestinians, to trace this money, identify it, freeze it, and safeguard it for the Palestinian people.

Israeli-Turkish Relations: New Directions

Paul Scham — Fri, 20 Aug 2004 12:00:00 -0400

Israeli-Turkish relations can be compared to a late-life love affair. Two parties who have known each other for years suddenly develop a near-passionate relationship, to the astonishment of their friends – and their enemies. However, after a while, passion cools and one party may be playing the field. Will they get back together or become “just friends?” Watch for the next episode.

Having just returned from six weeks in Turkey and Israel, where I delved into this relationship and heard a variety of points of view in the process, I believe that the passion may have subsided, but mutual interest will prevent the relationship from deteriorating too far. A lot has changed, however, since the 1990s, when the Turkish-Israeli romance thrived.

Turkey and Israel have had diplomatic relations since 1950. As non-Arab Middle Eastern nations, their mutual interests in a difficult neighborhood were clear. Israel would have liked closer relations, but there was little in it for Turkey, though the secular leadership admired aspects of Israel and certainly used it as a counterweight to Arab pressures.

Turkey, having been continually rebuffed by the European Union, facing increased violence with its Kurdish problem, losing its status as a Cold War battleground for NATO’s confrontation with the Soviet Union, and suffering economic hardships resulting from the 1991 Gulf War, began to feel somewhat isolated in the early 1990s. Given the circumstances, military, economic, and political relations with Israel grew rapidly. By 1996, Israel was in the midst of the Oslo peace process and in the good graces of much of the world, and had become a high tech, economic, and military powerhouse. As the military relationship flourished, there was talk of a Turkish-Israeli alliance. Economic relations burgeoned and the two countries supported each other diplomatically. This continued through several changes of governments in both countries—most notably, the installation of an Islamist government in Turkey, the end of the Oslo process and three years of Intifada, and the Iraq War.

However, in the spring of 2004, the relationship seemed to founder. Recep Tayyip Erdogan, Turkey’s highly popular Prime Minister, denounced Israeli “state terrorism” in the wake of Israel’s assassination of Palestinian Islamist leaders Sheikh Ahmed Yassin and Abdul Aziz Rantisi, and highly publicized house demolitions in Rafah, in the Gaza Strip. During this period, the Turkish Ambassador in Israel was withdrawn “for consultations.” In June 2004, an article by Seymour Hersh alleging that Israel’s Mossad was training Kurdish separatist fighters in Northern Iraq appeared in The New Yorker, and Turkish displeasure became quickly evident. Israel has vehemently denied this, and no additional evidence has substantiated the charge. Many, however, feel this was deliberate Turkish disinformation warning Israel to be careful. In July, Israel’s Deputy Prime Minister, Ehud Olmert, visited Turkey and the Turkish press insisted he had been snubbed by Erdogan, though both blandly proclaimed relations were fine.

In fact, there is probably less than meets the eye. In the wake of the recent Iraq War and the decrease in the perceived Kurdish danger, Turkey has more options among its neighbors. Turkish statesmen insist they are under internal pressure to denounce Israeli treatment of Palestinians, which probably has some truth to it. Neither the U.S., perceived as Israel’s patron, nor Israel itself, are seen as favorably as they were in the ‘90s. Turkey is almost certain to begin the EU accession process in December, which is the primary national goal at this moment, and it may be harmonizing with Europe’s coolness to Israel. Israel is now engaged in the fourth year of Intifada, and most Israelis believe that its course is existentially dictated, and there is simply no Palestinian partner with whom to pursue a peace process. Turkey is rather insistently offering its services as an intermediary in the peace process, and is annoyed at Israel’s continual refusals.

All of this does not add up to enmity. There are no serious bilateral disagreements between the two countries and both are happy with their growing economic relationship. However, some Israelis feel there is a darker side. They contend that Erdogan’s Islamist party has a hidden anti-Israel agenda that is becoming more apparent. Turks, and many Israelis as well, disagree vehemently.

Clearly, Turkey is at a transition point. Based on my meetings in the last two months, I feel it is unlikely that its relations with Israel will attain the warmth of the late 1990s, but equally unlikely that they will go into the deep freeze that now characterizes Israel’s relations with, for example, Jordan and Egypt. And the next few years clearly promise, as they say, to be “interesting.”

Debt and Dollars in Iraq

David Chambers — Thu, 17 Jun 2004 12:00:00 -0400

Last Thursday's BBC story entitled "Iraqi debt write-off divides G8" hovers over the heart of many inter-related problems concerning Iraq. The Group of Eight or "G8" remain unable to agree on how much of Iraq's tens of billions of dollars in foreign debt should be written off by G8 members. Continued failure to reach agreements means that members of the Paris Club will be left to make decisions.

Proponents of debt forgiveness start with the world's No. 1 expert Dr. Sinan Al-Shabibi, a long-time UNCTAD economic advisor and currently Governor of Iraq's Central Bank, who recently told finance ministers at a G-7 meeting in Boca Raton, FL, in February 2004 (see remarks), that Saddam Hussein had "depleted the nation's assets and plunged the country into a hopeless debt burden," which must be relieved.

And of course he is right, dead right – insofar as Iraq is concerned, were it alone, in a vacuum.

Iraq's debt cancellation, however, does not lie in a vacuum, and a neo-Conservative Bush II Administration does not call upon the likes of a Reagan Conservative like Jim Baker to deal with Iraq's debt unless the need is extreme – like bailing Bush II out of the 2000 election situation. Baker is the top Republican fireman: follow him to find out where the most serious political fires need to be quenched. And when someone like Baker proves unable to solve Iraq's foreign debt problem, then it's time to worry, indeed.

In fact, how could Baker solve this Bush II-created problem? While the US has been pushing for most debt to be written off, it has complete control over Iraqi reconstruction; European nations hold most of the debt notes yet have at best a weak shot at contracts being awarded by the US government or its primary contractors. More simply, the US has been asking Europeans to cancel billions of dollars in debt for no guaranteed reconstruction contracts. Such a background reduces American gains at the UN last week to a slight of hand. Nothing has really improved between the US and its European NATO allies, so how can anything improve in Iraq, still held by Coalition forces?

American Economic Assistance Program to Egypt

Ambassador Edward S. Walker, Jr., President, Middle East Institute — Thu, 17 Jun 2004 12:00:00 -0400

Mr. Chairman, Members of the Committee, Ladies and Gentlemen, I welcome the Committee’s efforts to review our economic assistance program, as administered by the Agency for International Development (AID) in Egypt and to consider its objectives and effectiveness.

Overall, the United States has invested about $25.5 billion in Egypt’s economy. Since 2000, by agreement with Egypt, the program has been reduced by about $40 million each year so that in FY 2003 funding was at $615 million. It will level off at $407.5 million by 2009. The figures, however, do not tell the whole story. For our assistance program was already declining significantly over the years due to inflation. If we wanted to maintain our program at the level of the 1979 outlay of $1.1 billion, adjusting for inflation over the years, our outlay today would be around $4.5 billion.

The point here is that the impact of our AID dollars has been substantially reduced and our leverage to encourage economic, political and social reforms equally reduced. I raise this because there is a danger of expecting too much of our AID program. I also raise it because our resources have declined, so if influence and reform are our objectives, then logic would indicate that the scope of our programs should have contracted as well – in short, we should have narrowed our focus so that our remaining programs would be larger and have greater impact.

In fact, until the most recent USAID/Egypt program review called for by the House Committee on Appropriations, which stressed greater focus of our program, AID was continuing to cover seven strategic objectives relating to major sectors of the Egyptian economy and society. Since our program incorporates a five-year strategic planning cycle, by the end of the five years in 2008, we would be stretching a program of $415 million to cover the seven strategic objectives.

We need to have a better concept of what we are trying to do and what we can possibly do with the resources at hand. Frankly, I don’t know what the US objective is. Are we trying to alleviate poverty? Are we trying to build the middle class? Are we fostering upward mobility? When I look at the AID program I see a Chinese Menu – a little of this and a little of that. I don’t see a focused program and I surely don’t see priorities that could make a substantial difference.

Today, we need to see our AID program in a broader policy context. No matter how much money the AID Director can conceivably have available in today’s budget climate, he or she cannot change the pace or direction of reform except at the margins. What set aside the period of the mid nineties, when I was Ambassador in Egypt, and when reform, by all accounts, was in its heyday in Egypt, was the commitment at the very top of the Administration to reform. If we are serious about reform and if we really mean it when we call for democracy and economic and social change, then we cannot leave the problem to our AID Directors or our Ambassadors or Assistant Secretaries. It will take genuine commitment and persistence from the President and the Vice President, as well as from the Congress.

There are two other aspects of the AID program in Egypt that deserve close scrutiny. The program as it is structured devotes about 30% of its funds, or $200 million to the Development Support Program (DSP) which is a cash grant in return for meeting negotiated reform targets. A second $200 million is directed to the Commodity Import Program. That leaves about $200 million for all other programs combined. The DSP grants, although a good idea, have some inherent weaknesses. One weakness was pointed out by the Program Review – that the reforms negotiated with the Egyptians covered a wide gamut of issues and thus lost focus. The Review recommended focus on “one or two key economic reform areas.” A second proposal by the Review suggests that if outcomes agreed with Egypt for negotiated reforms are not met, then the funds should be reprogrammed to fund other USAID projects in Egypt.

Both of these proposals have met resistance by the Government of Egypt. And that raises an important question as to whether or not Egypt is operating under a US entitlement, or should the program be linked to US interests and objectives. If the cash transfer is earmarked and obligated, as currently is the case, and cannot be reprogrammed then our Ambassador and AID Director have limited leverage in both program design and implementation. In short, whose money is it? The AID Review proposal to permit reprogramming such funds to other AID projects in Egypt would go part of the way toward resolving this problem, but AID might also want to look at authority to reprogram such funds to other AID programs in the Middle East as well.

While I was in Egypt, I was a strong advocate of the Commodity Import Program. It is a seductive program in that it supports US business sales to Egypt, establishes supplier relationship with US companies, and then lets us use the money twice – once for Egyptian firms to buy the products using low cost short term loans from AID funds and then again by the Government of Egypt once those loans are paid back. It is a popular program in Egypt and in the United States with its beneficiaries. The Program Review suggests downsizing it to $150 million by 2009 and this makes sense. However, AID needs to take a hard look at the program, whom it benefits, and the controls over the Government of Egypt’s use of the proceeds.

In this case the money does already belong to the Egyptian Government. One problem with this is that US objectives are no longer the guiding principal in the allocation process. In addition, the loans provided to Egyptian businessmen tend to be driven more by sales of American products than by AID’s reform agenda, not a bad thing, but not a recognized purpose of the AID program. AID needs to take a hard look at how this program might be restructured to direct it more closely to AID’s objectives.

In conclusion, I believe that the AID Review has moved the program in the right direction but there is further work to do. And part of this work will have to be driven by Congress. Our objective should be a tighter more tailored program which takes account of limited resources. It should not be considered an entitlement, nor should it be seen as a mechanism for enforcing reform. Egypt has to take ownership of its own reform program, but we need to continue to stimulate that process.

...And Saudi Votes That May Count

Thomas Lippman — Sun, 16 Nov 2003 12:00:00 -0500

It was entirely predictable that the Arab world would respond with skepticism and derision to President Bush's appeal for democratic reform in the Middle East. In the culture of cynicism that has crippled political development in Arab countries for decades, the president's vision was easy to dismiss as meddlesome or naive, especially coming from a leader who sent troops to occupy an Arab country and -- as every Arab knows -- has described Ariel Sharon as a "man of peace."

Yet Bush was right to say that the people of the Middle East harbor democratic aspirations and that democracy is compatible with Islam. "Religion rejects government by one individual," the Egyptian liberal Khaled Muhammad Khaled proclaimed as long ago as 1962, "and the world is even firmer in its rejection. The same applies to the one-party state, another form of evil and despotism." Such views are widely held, even if individuals often fear to express them publicly.

In his Nov. 6 speech, the president cited encouraging developments in several Arab countries, including Yemen, Kuwait and Jordan. Even Saudi Arabia, he said, "is taking first steps toward reform, including a plan for gradual introduction of elections." He was referring to the Saudis' recent announcement that some municipal councils will be elected rather than appointed, beginning in a year or two.

Americans tend to equate democracy with elections, and thus Riyadh's announcement about municipal elections was welcomed here as a progressive innovation. But as is often true in the Arab world, reality is murkier than official statements. It won't be the first time that Saudi Arabia, a monarchy in which all major public offices are filled by royal appointment, will have let people vote. It conducted elections for municipal councils in several cities and towns in the 1950s and early '60s, but then abandoned that flirtation with democracy. Little has been written about these elections in English and many Saudis have never heard about them.

Saudi officials say that this time the elections are part of a broader reform in response to the country's exploding population, declining oil wealth and growing terrorist problem. Revulsion over the lethal car bombing of a Riyadh housing compound two weekends ago has stimulated rather than stifled popular support for change, Saudi officials say.

But it remains to be seen whether this experiment with democracy proves more enduring than the last, which apparently ended when a new royal took power. Most of the available information in English about those earlier contests comes from the archives of the Arabian American Oil Co., or Aramco, the consortium of four U.S. companies that developed the Saudi Arabian oil industry. Aramco -- now nationalized and known as Saudi Aramco -- has not made its files public, but copies of thousands of its documents are at Georgetown University's library among papers donated by William E. Mulligan, a longtime Aramco official.

Aramco was more than an oil company. In the backward Saudi Arabia of the 1940s and '50s , it was the principal provider of public services in the kingdom's vast Eastern Province where the oil fields lie. Aramco built schools and roads, operated medical clinics, constructed housing and supplied electricity to Arab communities.

Aramco made it its business to know as much as possible about the inner workings of the Saudi government -- no easy task when all important decisions were made by the king and a handful of senior princes and advisers. The oil company created an entire department of Arabic-speaking scholars and political reporters. One of them was Phebe Marr, now a renowned authority on Iraq. She monitored several elections and copies of her typed reports -- on yellow onionskin paper -- are included in the Mulligan papers.

According to her accounts and other documents in the Aramco files, the practice of choosing municipal councils by vote instead of by appointment of the king's regional governor, or emir, began as early as 1954 and continued at least into the early 1960s. The time frame coincides roughly with the reign of King Saud ibn Abdul Aziz, suggesting that the elections may have been instituted as part of Saud's response to criticism from Egypt's populist leader, Gamal Abdel Nasser.

Real political power in Saudi Arabia derived from the king and from royal connections, just as it does today, but the municipal councils did have some authority. The councils allocated road-building money supplied by the central government and could acquire routes by eminent domain. In some towns they also controlled electricity hookups that could make or break a local business.

Election issues varied from town to town. In one contest a slate of young, educated businessmen challenged an incumbent council of conservative landowners. (The old-timers won.) Another election pitted candidates of the Sunni Muslim majority against minority Shiites. The Shiites, political and social outcasts, protested that the election rules were stacked against them; the local emir canceled the voting and scheduled a new election. But the Shiites boycotted it, demanding that seats be allocated by percentage of the population.

The protest was not surprising. That election, unlike others recounted in the Aramco files, was conducted under a system in which the only voters were "electors" chosen by the emir as representative of the community. This was as if the members of the U.S. electoral college were appointed by the White House chief of staff. In a district of some 20,000 inhabitants, only 50 or so were designated as electors, "all known and respected figures," meaning they were not Shiites.

In other communities, the elections seem to have been relatively open, and the results accepted as legitimate. All candidates and all voters were male. (The Saudis have not said whether women will be permitted to vote in the new elections.) The minimum voting age was 21 in some districts, 18 in others. Candidates were required to be literate but voters were not. In some districts candidates nominated themselves; in others, candidate lists were issued by the emir. Campaigning was done face to face, in markets and coffee houses. Voting was by secret ballot.

So new Saudi elections would not be unprecedented. The Saudis of the 1950s and early '60s had no trouble understanding the electoral process and the power of citizen participation. In fact, Saudi understanding of the power of the ballot box is the reason many Saudis caution against U.S. pressure to institute elections for a national government. In the current climate of Arab rage against the United States, if the people of Saudi Arabia were given the freedom to choose their own leaders, we Americans might not like the outcome.