Oil-Rich Mideast Must Invest in Itself

As Americans watch U.S. warships, planes and troops in the Middle East, one of the most interesting questions they can ask about the troubled region is “where did all the money go?”

Over the last six decades, oil has brought billions to the region. And still the area is unsettled and Iraqi ruler Saddam Hussein can strike a responsive chord with rhetoric about the rich Arab kingdoms and the poor Arab masses--and that’s despite the fact that Iraq itself is oil rich. Why hasn’t the Middle East, where the total population approaches 200 million, gained more economic development from the bonanza of oil?

The simple, if surprising, answer is that the Middle East doesn’t invest in itself. Sure, the words Arab investment have resounded through Western securities and real estate markets for almost 20 years now. But that kind of Arab investment is part of the problem, not the solution.

And if we can understand why that is so, we’ll gain insights into not only the current crisis but the meaning of wealth itself--and a foreshadowing of the outcome and aftermath of this crisis.

For we have to think about the aftermath. Once an objective is achieved--at least Iraqi withdrawal from Kuwait--do U.S. troops simply come home until the next crisis? Or can the region change?

The answers begin with Iraq and its riches. Iraq holds the world’s second-largest oil reserves after Saudi Arabia, and its annual income from oil--even at the pre-crisis price--approaches $20 billion. With a relatively small population of 17 million, and national income per head of $3,000-plus, Iraq ranks among the upper-middle-income countries, according to the World Bank, along with South Africa, Venezuela and South Korea. It is richer than Egypt, Jordan, Turkey, and the Philippines, not to mention such poor countries as Indonesia and China.

Furthermore, thanks to modernization programs extending back to the 1950s, Iraq has an educated population and is known throughout the Middle East for having talented managers.

So why is Iraq industrially backward compared to, say, South Korea? The easy answer is that Saddam Hussein, who took full power in 1979, has spent so much on military equipment and war.

Iraq has spent $5 billion a year on armaments, according to U.S. government estimates, and more than that in the long war with Iran that Hussein started.

Concentrating its development spending on petrochemical plants and steel mills--related to a growing weapons industry--Iraq has neglected its enormous potential in agriculture. Occupying the valley of the Tigris and Euphrates rivers--an area some Biblical scholars call the site of the Garden of Eden--Iraq is potentially one of the most fertile places on Earth. But Iraq chose instead to rely on imports--for 70% of its food--and is now threatened by an embargo.

The point about agriculture is that it’s a clue to the region’s approach to economic development. Enriched by oil, countries such as Iraq found farming too slow.

But other nations, even oil rich ones, have found it nation-building. The World Bank, the great financier of developing economies in the postwar period, recently singled out Indonesia and Malaysia as countries that kept their societies advancing through agriculture, despite falling energy prices.

Indonesia, a vast, ethnically diverse nation of 180 million people--with per-capita income lower than most Middle East nations, responded to reduced national revenue in the 1980s by raising the price of agricultural goods to protect farmers and keep farm output up. Then, with food potentially available for its people, it worked on rural roads and market mechanisms to lower food costs, while cutting back on other government spending.

Now with energy prices rising and its oil and natural gas in demand from Japan and other nations anxious to reduce dependence on the Middle East, Indonesia is set to grow rapidly in the ‘90s.

Meanwhile, Iraq’s military spending, which has landed it in trouble, reflects its larger problem. It thinks of its neighbors only in terms of domination or threat, of what it can take with a gun, rather than what can be produced by cooperation and investment.

Iraq is not alone in its lack of vision. The Arab Middle East is a region of almost 200 million people, some rich, many poor. But the trouble is not so much that the rich don’t “share” with the poor--in fact they hand out charity regularly--but that they don’t invest in them.

Kuwait, for example, a country of fewer than 2 million people, has more than $100 billion in government and private money invested in such industrialized countries as Britain, the United States and Japan, says Sharif Ghalib, an Egyptian-born banker and analyst at Washington’s Institute of International Finance.

But it has comparatively little invested in the Middle East, except what benefits Kuwaiti citizens--who comprise less than half its population, the rest being Palestinians, Iranians, Indians and Pakistanis who do the sheikdom’s work but are denied citizenship.

Similarly, Saudi Arabia, which takes in $34 billion a year from oil, is reluctant to invest much in the Middle East. It is said that Saudi Arabia, a country of 12 million people, lacks the capacity to “absorb” investment. Which may be true, but nearby Egypt, with a population of 60 million, or Syria, Algeria, Tunisia, Morocco and other countries could absorb investment and perhaps make a beginning on a sizable home market among the Arab nations.

But the Saudis, while offering loans and charity to countries in the region, prefer the safety of investing in bonds and big companies overseas or in grandiose petrochemical projects in their own kingdom.

The rationale is that because the Middle East is unstable the Saudis, and other oil-rich sheikdoms, fear to lose their money. But without cross-border investment to build up the potential home market, the region only becomes more unstable.

And that gives you a clue as to what needs to happen when the current crisis is settled. The Middle East needs to have enough confidence to invest in itself. And encouraging that confidence is a greater challenge than getting Iraq out of Kuwait.