Gulf War’s Hard Economic Lesson for the Middle East

In the Gulf War’s aftermath, Egypt--the most populous and powerful Arabic-speaking nation--will suffer thousands of lost jobs and undergo a complete overhaul of its economy. And Egypt was one of the war’s big winners.

But the economic strains the war imposed, shutting off tourism and stopping work for half a million Egyptians in Iraq, were the final straw for Egypt’s chronically ill economy. Now this country of 54 million people, nearly half under age 16, has to cut back government subsidies and reform its economy if it is to get help from the International Monetary Fund and qualify for credit from global bankers.

Egypt is not alone. Other Middle Eastern countries, from the oil-rich Persian Gulf to Algeria in North Africa, are having to rethink economic policies as they realize that the recent war was the culmination of an era. It marked the end of a time when these nations could think of themselves as strategically special and able to ignore the trends of the global economy.

They have spent almost four decades living directly or indirectly off the flow of oil or engaged in local battles--and enormous arms spending--while the world economy has moved on.

Thirty years ago, Egypt had greater economic output than South Korea. Now Egypt’s gross national product is less than one-fourth that of South Korea, and it is looking to tiny Singapore to make an investment that would employ Egyptian young people.

In battered Kuwait, many are having second thoughts. At a Kuwait City dewaniyah , a place where men of a large merchant family meet to discuss business and politics, one elder says bluntly: “Our young people face dark years ahead because we did not develop our resources correctly.”

He means that Kuwait did not develop oil and gas in concert with its neighbors, fostering industrial development throughout the Middle East. Instead, it invested the proceeds from oil in the industrial economies of Europe, the United States and Japan. In one sense that paid off. Today, even as its oil fields burn, Kuwait has annual income of $10 billion-plus to support its small population.

But its neighbors have turned on it and its young people, not used to hard work, are not prepared to take over operation of the country’s institutions. “We have cash, but cash is not the same as training our young people for real work,” remarks a Kuwait official.

Egypt is a case of noble hopes long gone sour. Egypt threw off its colonial past in 1956 when it took control of the Suez Canal and set out with definite ideas about nation-building. By the early 1960s, its constitution guaranteed every college graduate a government job. But it couldn’t keep that promise. Today there are 3 million graduates without jobs--a seven-year waiting list.

It’s not the pay that attracts them--civil servants are lucky to make $100 to $200 a month--but the job is for life and has pension benefits. Government workers don’t live on such a salary, of course, but drive taxis or do other jobs after their short workday.

Or they take money for helping tax evaders, a national industry in Egypt where all income above $40,000 a year is taxed at a 76% rate. Despite official statistics showing Egypt to be a low-income country, there is a lot of money in Cairo, a city whose population has exploded to 12 million as farmers have left the land.

In the 1970s and ‘80s, Egyptians working in the Gulf states and Iraq sent home earnings to buy apartments, setting off building booms and inflation. Officially, rents are low at $15 a month, but there is no rental market. Instead, young people must pony up $50,000 cash to buy an apartment.

There is a lot of work done “off the books” in Egypt, some of it highly efficient. Prof. Heba Handoussa, associate dean of American University Cairo, estimates that manufacturing and service businesses with fewer than 10 workers employ 43% of the labor force. This “off the books” sector may amount to $18 billion in revenue, half or more of the official GNP.

The Egyptian economy, in short, resembles that of an East European country, a Poland with Pyramids--and with a similar need for economic reform. But where Poles and other East Europeans are rejoicing at economic freedom, Egyptians are fearful.

They know that when state companies are privatized they will shrink employment. “We need investment and joint ventures to provide jobs,” says Gamil George, editor of the newspaper Al Akhbar. He is encouraged that General Motors, which produces a truck in Egypt, is considering producing a passenger car, rather than only assembling shipped in parts as it does now.

Others hope for more intelligent use of resources for the whole Middle East on the model of the United States in the late 1940s, when natural gas piped from Texas spurred industry and raised living standards in the Midwest, Northeast and South.

Fact is, after the initial hardship of reform, Egypt could blossom. It is a great and complex nation with bright and energetic people. This is no sand-blown emirate, but the oldest nation in the Western world.

The comparisons with Korea come up repeatedly among Egyptian economists and business people. Both traditionally poor textile-producing countries, they took separate roads in the early ‘60s. When Egypt raised taxes to pay benefits for all its people, Korea raised interest rates on bank deposits to encourage savings, which it used to fund industry. Where Egypt protected home industry to hold down imports, Korea encouraged exporters. “It was meeting the global competition instead of sheltering from it,” says Hazem Beblawi, chairman of the Export Development Bank of Egypt.

“Egypt always thought that because it was powerful and strategic, for the Middle East and in the Cold War, it could afford to be inefficient,” explains Beblawi. “Now it is finding that to have influence politically it must be efficient economically.”

Americans may note that Egypt’s main ally, the United States, is finding out the same thing. The Gulf War and the Cold War are over; now the real work begins.