Don't you love it when people start a blog post/speech/op-ed/paper with a leading question? You can almost always guess what their answer will be. My answer, perhaps to the dismay of other more conventional thinkers on the Middle East, is no, of course it's not always bad.
Generally, I detest the topic of corruption since it always gets wrapped around the shallow axis of naughty behavior (without much thought into why), but often it's hard to avoid, especially the past few days. Corruption seems to be the topic du jour in Iraq, for example, after Prime Minister Maliki canned his trade minister two days ago. Business Middle East is reporting that Baghdad plans to arrest up to 1,000 government officials on corruption charges and a committee (presumably appointed by Maliki?) will take over government purchases of grains and foodstuffs from the trade ministry. It was the purchases of food supplies that led to the minister's downfall after his family was accused of making millions of dollars in kickbacks from the purchases.
US policymakers, at least in previous administrations, loved to salivate over corruption in the Middle East, largely I think because of its ridiculous proportions. Think of former Saudi Ambassador to the US Prince Bandar's relationship with BAE. The now deceased King Fahd's vacation to Marbella, Spain, when he was pretty much a vegetable. Sultan Qaboos' perfume line (corruption or legitimate business?); the now deceased Moroccan King Hassan V's pantheon, I mean mosque, to his own piety in Casablanca, the building of which was quite Eva Peronish since he taxed all citizens to pay for his heated marble floors. Corruption exists, with or without oil, with or without monarchy.
From one economic point of view, corruption is always bad because it causes inefficiencies in the system. Money meant for one purpose is diverted to another purpose, largely for personal gains. Therefore losses occur. It takes twice, three times more money, for example, to get a project done if there wasn't corruption, all things being equal, because of the bribes and/or kick backs that need to be factored in when project planning. Of course, corruption is never just viewed from an economic perspective and more often than not in the US, it is viewed from a moral point of view. It's wrong to take things that aren't yours or so the argument goes. The US is especially good at this when formulating foreign policy and now has itself tied up in knots over Iraqi corruption (as if this should even be on our radar screens at this point with all the other problems plaguing the country.)
But here, I'd like to counter with Ted Stevens. Yes, that's right, the esteemed and almost convicted former senior senator from Alaska. Stevens was always pretty much shameless in arranging deals and promoting earmarks for Alaskan projects. From his perspective, there was no way that remote, politically unimportant Alaska would ever get funds for development if not for Stevens' hook and crook style. And he was probably right. You might argue that maybe county xx in Alaska should never have been developed to the extent it was, but that's kind of beyond the point. Steven's argument was essentially that even in our institutionally strong, fairly transparent democracy a little bit of corruption is needed to ensure that everyone gets a fair share of the pie. Few of us outside Alaska thought the argument had merit, but to the people of Alaska, Stevens was a hero.
I've always felt that, in line with how Stevens felt about Alaska, there was and is something to be said for the importance that corruption plays in wealth redistribution in institutionally-poor countries. It certainly isn't perfect and god knows that the wealthy or politically connected may benefit first and foremost from corrupt systems. But, at the end of the day, they are not the only ones who do. Take, for example, corruption in Saudi Arabia. Sure, the Al Saud benefit greatly from their opaque control over government and the oil resources. It's pretty well accepted that most of the princes receive generous stipends from the state by sole virtue of their family connection. Some of them may get a bit greedier and set up side deals for themselves, ala Bandar's alleged relationship with BAE. But the Al Saud don't actually keep all the money for themselves. Under them are large patronage networks that depend on the royal family for income or some measure of financial support. If not for these patronage networks, these people would go without. Same goes with the border guards who demand extra payment, etc. Corruption usually kicks in because the institutions that are meant to support societies are not strong enough to do so. Whether you call it filial loyalty, patronage, or survival of the fittest, corruption exists largely as a wealth transfer mechanism, providing the assets of the state to those who would otherwise not have access to them.
With this in mind, I would argue that the answer is not always mass arrests or the integrity commissions that the Maliki government has established (probably largely as a sop to the US) but in fact institution building to ensure that wealth transfer happens within government channels. Even then, though, strong institutions don't always ensure that the people who need the money get it. Just ask Ted Stevens.
Thursday, May 28, 2009
Tuesday, May 26, 2009
Sour Grapes
AFP reported on 20 May that UAE has decided to pull out of the planned GCC monetary union. Although UAE officials did not explicitly cite a reason for their withdrawal, observers strongly suspect the government made the decision after the GCC secretariat decided that Riyadh would host the monetary council that governs a unified currency. Not that a monetary union would have ever been achievable in the next year, but pulling out because you were not selected to host the council seems childish at best.
If the GCC as a whole is to achieve any kind of economic stature on the global stage, setting aside petty differences would seem to be goal number one.
If the GCC as a whole is to achieve any kind of economic stature on the global stage, setting aside petty differences would seem to be goal number one.
Thursday, May 14, 2009
Bashar's weird timing
Leave it to Syria to decide to undertake a more expansive approach to financial sector liberalization in the middle of the worst economic downturn in sixty years. In March, the Syrian government launched the Damascus Securities Exchange, and according to an article in today's Journal, they are preparing to grant new private banking licenses to foreign investors. The hope (on the government's part, that is)is that Syria will attract enough foreign investment to begin to offset its declining oil output.
Don't get me wrong- Syria has been working slowly towards this in recent years. It's been quietly allowing Arab foreign investors (usually from the Gulf) to open JVs with local partners in an array of financial services. It's also welcomed investment in oil and gas exploration and real estate. But presumably the little dog and pony show the government put on recently for the Journal is designed to attract a wider audience beyond the usual cast of characters- namely Kuwait, Iran, sometimes Russia, and UAE. I guess Damascus didn't get the memo, though, that foreign investment, like trade, has slipped sharply as most companies hunker down to outlast the crisis. In fact, I've seen more reports recently of companies selling off assets rather than buying new ones. Even China, once the hands down global leader in attracting FDI, saw a 23 percent drop in FDI in the month of April, compared with April 2008 numbers. And 2008 was a drop off from 2007.
Even with all of this in mind, Syria's best hope for further FDI remains with its neighbors. Taking UAE out of the equation, since they are largely a region onto themselves in their ability to attract FDI, few countries were able to attract non-Arab investment during the booms years. Saudi Arabia managed to attract interest in its financial service sector and in downstream oil industries, like petrochems, from US and European firms. Egypt saw some early interest for Europeans and Asians in its privatization program but even that was quickly superseded by Arab FDI. At the end of the day, the FDI boom which swept across the Middle East and North Africa between 2003-2008 was largely driven by a handful of companies coming out of an even smaller number of countries. Much of the FDI was sourced in either UAE or Kuwait. The nice thing about Arab FDI is that it doesn't give a whit about political stability or authoritarian governments. If there is money to be made, they'll go- whether or not going means dealing with governments as far afield as Sudan and North Korea, or, in this case, Syria.
But the rub for the Syrians now is that their biggest patrons in recent years are the two countries who have endured the biggest fallout from the crisis. Which may be why they are raising the flag of interest more broadly now. The thing is, though, that there are few people with cash left these days and even they are a little less willing to hold their nose than they used to be. Look at some of China's recent decisions in Africa.
So if Bashar is thinking he can get his cake and eat it too, he is in for a rude awakening. Best to go back to plan A, I think, and wait for oil prices to rise again. After that, I am sure Dubai's emir would love a visit.
Don't get me wrong- Syria has been working slowly towards this in recent years. It's been quietly allowing Arab foreign investors (usually from the Gulf) to open JVs with local partners in an array of financial services. It's also welcomed investment in oil and gas exploration and real estate. But presumably the little dog and pony show the government put on recently for the Journal is designed to attract a wider audience beyond the usual cast of characters- namely Kuwait, Iran, sometimes Russia, and UAE. I guess Damascus didn't get the memo, though, that foreign investment, like trade, has slipped sharply as most companies hunker down to outlast the crisis. In fact, I've seen more reports recently of companies selling off assets rather than buying new ones. Even China, once the hands down global leader in attracting FDI, saw a 23 percent drop in FDI in the month of April, compared with April 2008 numbers. And 2008 was a drop off from 2007.
Even with all of this in mind, Syria's best hope for further FDI remains with its neighbors. Taking UAE out of the equation, since they are largely a region onto themselves in their ability to attract FDI, few countries were able to attract non-Arab investment during the booms years. Saudi Arabia managed to attract interest in its financial service sector and in downstream oil industries, like petrochems, from US and European firms. Egypt saw some early interest for Europeans and Asians in its privatization program but even that was quickly superseded by Arab FDI. At the end of the day, the FDI boom which swept across the Middle East and North Africa between 2003-2008 was largely driven by a handful of companies coming out of an even smaller number of countries. Much of the FDI was sourced in either UAE or Kuwait. The nice thing about Arab FDI is that it doesn't give a whit about political stability or authoritarian governments. If there is money to be made, they'll go- whether or not going means dealing with governments as far afield as Sudan and North Korea, or, in this case, Syria.
But the rub for the Syrians now is that their biggest patrons in recent years are the two countries who have endured the biggest fallout from the crisis. Which may be why they are raising the flag of interest more broadly now. The thing is, though, that there are few people with cash left these days and even they are a little less willing to hold their nose than they used to be. Look at some of China's recent decisions in Africa.
So if Bashar is thinking he can get his cake and eat it too, he is in for a rude awakening. Best to go back to plan A, I think, and wait for oil prices to rise again. After that, I am sure Dubai's emir would love a visit.
Tuesday, May 12, 2009
What Lessons Are We Sending?
Yesterday I came across a surprisingly upbeat article on Lebanon in the Wall Street Journal. I say surprising since I have not been actively following Lebanon recently. The article recaps an interview with the country's central bank governor who is now forecasting a possible 6 percent growth rate in 2009 based largely on an anticipated strong growth in consumption in the second half of the year after the parliamentary elections next month. Continuing in this happy vein, Moodys upgraded the country's sovereign credit rating last month (around the same time it was issuing a warning for a downgrade in Kuwait), and according to a report in the Daily Star, the Lebanese benchmark outperformed the MSCI Arab market index, making it the best performing index in the Arab world second only to Qatar.
With all of this optimism, I had to stop myself and think- this is Lebanon, people. Political instability is only a stone throw (or an election) away. Debt to GDP ratios still exceed 150 percent and finance continues to be the one thriving industry in a country that has witnessed enough destruction of its infrastructure to last a lifetime. Coupled with that a decline in remittance payments from the Gulf as those economies slow and almost sure decline in tourism receipts on the back of the global slowdown, I still have a hard time seeing the sunshine.
But more troubling is the general message that this crisis might be sending to countries in the region. A colleague of mine asked several months ago whether or not I thought the global economic crisis would create a general distrust of capitalism in the Middle East as countries that were at best reluctant to accept Washington consensus style reforms watched as Anglo-Saxon capitalism collapsed in a big ugly heap. I thought at the time (and said as much) that I didn't think it would make that much of a difference since most regimes in the region saw their fortunes tied to a limited but specific plan of reform- privatization and some liberalization in order to create jobs. Most Arab governments were not, in fact, modeling their efforts on western models but on a hybrid Arab-Asian model- that is, some economic reform with continued authoritarian control over governments.
But here's the thing- the crisis is teaching the countries in the region a potentially scary lesson- the more integrated your banking and financial system is with the global system, the more you will suffer. Look at the two countries that so far have taken the biggest hit- UAE and Kuwait. It was precisely their reliance on, links to the global financial system that have lead to their current weakness. They are essentially getting it at both ends- seeing their export markets shrink (in both cases, export earnings have declined with the price of oil) and their credit markets, which in the case of the UAE, was perhaps the most robust in the region, have dried up. North Africa, specifically Egypt, Morocco, and Tunisia, have proven remarkably resilient in the face of the crisis. Why? Well, their export markets have shrunk, for sure, but their closed banking systems have prevented any contagion effect. So what's the lesson? Don't lend and don't invest internationally.
I would argue, though, that the single biggest issue holding these economies back is their closed financial systems. Credit is largely unavailable to both individual consumers as well as private businesses. Financial systems in these countries, despite the limited reform being carried out, remain largely patronage systems. If you have ties to elite families, you get the loan. One of the most important "innovations" in the Gulf in recent years was to break the back of this system and open credit markets to the masses. Huge windfall oil profits somewhat masked the fact that the private sector in many of the Gulf countries was growing at an even faster rate than oil receipts.
Opening credit markets does have long term beneficial consequences for growth and diversification, even if that's hard to see now. My biggest fear is that this is a lesson that might get lost in the hullabaloo of the current crisis. In the meantime, all other ridiculous bad behavior ala Lebanon will be tolerated.
With all of this optimism, I had to stop myself and think- this is Lebanon, people. Political instability is only a stone throw (or an election) away. Debt to GDP ratios still exceed 150 percent and finance continues to be the one thriving industry in a country that has witnessed enough destruction of its infrastructure to last a lifetime. Coupled with that a decline in remittance payments from the Gulf as those economies slow and almost sure decline in tourism receipts on the back of the global slowdown, I still have a hard time seeing the sunshine.
But more troubling is the general message that this crisis might be sending to countries in the region. A colleague of mine asked several months ago whether or not I thought the global economic crisis would create a general distrust of capitalism in the Middle East as countries that were at best reluctant to accept Washington consensus style reforms watched as Anglo-Saxon capitalism collapsed in a big ugly heap. I thought at the time (and said as much) that I didn't think it would make that much of a difference since most regimes in the region saw their fortunes tied to a limited but specific plan of reform- privatization and some liberalization in order to create jobs. Most Arab governments were not, in fact, modeling their efforts on western models but on a hybrid Arab-Asian model- that is, some economic reform with continued authoritarian control over governments.
But here's the thing- the crisis is teaching the countries in the region a potentially scary lesson- the more integrated your banking and financial system is with the global system, the more you will suffer. Look at the two countries that so far have taken the biggest hit- UAE and Kuwait. It was precisely their reliance on, links to the global financial system that have lead to their current weakness. They are essentially getting it at both ends- seeing their export markets shrink (in both cases, export earnings have declined with the price of oil) and their credit markets, which in the case of the UAE, was perhaps the most robust in the region, have dried up. North Africa, specifically Egypt, Morocco, and Tunisia, have proven remarkably resilient in the face of the crisis. Why? Well, their export markets have shrunk, for sure, but their closed banking systems have prevented any contagion effect. So what's the lesson? Don't lend and don't invest internationally.
I would argue, though, that the single biggest issue holding these economies back is their closed financial systems. Credit is largely unavailable to both individual consumers as well as private businesses. Financial systems in these countries, despite the limited reform being carried out, remain largely patronage systems. If you have ties to elite families, you get the loan. One of the most important "innovations" in the Gulf in recent years was to break the back of this system and open credit markets to the masses. Huge windfall oil profits somewhat masked the fact that the private sector in many of the Gulf countries was growing at an even faster rate than oil receipts.
Opening credit markets does have long term beneficial consequences for growth and diversification, even if that's hard to see now. My biggest fear is that this is a lesson that might get lost in the hullabaloo of the current crisis. In the meantime, all other ridiculous bad behavior ala Lebanon will be tolerated.
Monday, May 4, 2009
Forgetting Some Important Lessons
Way back in the day when I was an undergrad, a professor of mine had my class read "The Republic of Cousins" by French anthropologist Germaine Tillion. Although the book was focused on oppression of females throughout the Mediterranean region, what struck me most about the book was Tillion's argument for a basic cultural affinity in the Mediterranean basin that transcended religion and nationality. The basic framework around which societies organized themselves and ultimately conducted themselves was no different if you were talking about southern Spain or Morocco, etc. It's an argument that has stuck with me for at least a decade and a half and one which I have admittedly done nothing with.
I was reminded of Tillion again today after reading this story about Spain in the Wall Street Journal. The parallels between Spain and much of the Middle East, at least according to information in this article, are numerous. A quote: "During the good times, its economy is held back by low productivity, an extensive underground economy and scant labor mobility. Studies show that Spaniards are unusually reluctant to move away from their home region -- a trait that acts as a drag on the economy. Today, however, being close to one's extended family is a lifeline. Members of Spanish families help one another pay the mortgage, so there are fewer foreclosures. Even when they lose their homes, Spaniards rarely end up on the street. For the most part, they move in together." "The family represents kind of a social-welfare network that allows the country to withstand a much higher rate of unemployment," says Rafael Doménech, chief economist for Spain and Europe at BBVA bank. Another interesting nugget from the article- Given the rigidities of its labor market, the country's "natural" rate of unemployment is far higher than that of other countries. Economists at Spain's BBVA bank put the country's so-called Nairu -- the sustainable rate of unemployment that can be reached without the economy overheating -- as high as 14%.
I have to admit to being a bit surprised by all of this. Many, many economists tend to focus on a small handful of things when looking at the Middle East- population growth rates, high unemployment, GDP and GDP per capita. Shockingly, few focus on issues like labor productivity, labor mobility, and social networks. I am not above saying that I've not delved all that deeply into these issues myself although I did recently present a paper at a conference that discussed low labor productivity in passing. And I am almost embarrassed to admit that I've never even heard of the concept of a "natural" rate of unemployment.
I think Tillion's time has come in my own research. I am rather excited to discover what else might be out there to give us a more solid understanding of the Middle East and where it might be going.
I was reminded of Tillion again today after reading this story about Spain in the Wall Street Journal. The parallels between Spain and much of the Middle East, at least according to information in this article, are numerous. A quote: "During the good times, its economy is held back by low productivity, an extensive underground economy and scant labor mobility. Studies show that Spaniards are unusually reluctant to move away from their home region -- a trait that acts as a drag on the economy. Today, however, being close to one's extended family is a lifeline. Members of Spanish families help one another pay the mortgage, so there are fewer foreclosures. Even when they lose their homes, Spaniards rarely end up on the street. For the most part, they move in together." "The family represents kind of a social-welfare network that allows the country to withstand a much higher rate of unemployment," says Rafael Doménech, chief economist for Spain and Europe at BBVA bank. Another interesting nugget from the article- Given the rigidities of its labor market, the country's "natural" rate of unemployment is far higher than that of other countries. Economists at Spain's BBVA bank put the country's so-called Nairu -- the sustainable rate of unemployment that can be reached without the economy overheating -- as high as 14%.
I have to admit to being a bit surprised by all of this. Many, many economists tend to focus on a small handful of things when looking at the Middle East- population growth rates, high unemployment, GDP and GDP per capita. Shockingly, few focus on issues like labor productivity, labor mobility, and social networks. I am not above saying that I've not delved all that deeply into these issues myself although I did recently present a paper at a conference that discussed low labor productivity in passing. And I am almost embarrassed to admit that I've never even heard of the concept of a "natural" rate of unemployment.
I think Tillion's time has come in my own research. I am rather excited to discover what else might be out there to give us a more solid understanding of the Middle East and where it might be going.
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