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Winners and losers in the Middle East: the economics of "peace dividends".

From the Camp David accords and the first handshake between Israelis and the PLO on the White House lawn in September 1993, supporters of the Oslo agreement had predicted a windfall "peace dividend" for Arabs and Israelis. In the grand thinking of the architects of the peace process, economic benefits would replace territorial claims and ambitions as the foundation for, and the driving force of, a "new Middle East." Arabs viewed the peace process as an opportunity to enhance their flagging economies, while the Israelis hoped their economy would prosper through increased international trade.

THE ECONOMICS OF THE PEACE PROCESS

The concept of a Middle East trading bloc is typically seen as a significant component of the economic relations that will be necessary to sustain peace in the region. At the center of this argument is the importance of liberalized trade and integrated markets necessary to establish sustained peace in the region, as well as to maximize allocative efficiencies for the region's productive resources. The mutual benefits of trade and expanding interdependence is thought to create the "vested interests" of peaceful and cooperative relations. (1) The exact form of this increasing economic interaction was left for negotiations. The possibilities ranged from complete economic unification involving no trade barriers to more limited forms of economic interaction.

The potential for the Middle East to become a lucrative market makes a stable economic environment a worthwhile goal, and is attributable to several elements. (2) First, a peace dividend might be derived from a substantial decrease in defense expenditures and the ensuing release of those resources for productive uses. Second, increasing direct investment should reduce the region's cost of capital, a factor that could boost domestic credit. Third, the ensuing development of intra-regional trade specialization and trade based upon comparative advantages would create additional sources of employment and investment opportunities and stimulate economic

Dr. Darrat is the Premier Bank endowed professor of finance and professor of economics, Department of Economics and Finance, at Louisiana Tech University in Ruston, Louisiana. Dr. Hakim is vice president of Energetix LLP in Houston, Texas. growth as the region uses its resources more efficiently. Finally, cooperation in joint economic projects, particularly in the improvement of the region's water and transportation infrastructure, would provide the necessary foundations for sustainable growth. All of these factors would improve the productivity, living standards and growth of the region as a whole, and should translate directly into a higher per capita GDP.

Placing the peace process under scrutiny, we ask three questions. (1) How did it measure up in economic terms? (2) Have peace dividends accrued more to one side at the expense of the other? (3) How significant have the dividends been for the region as a whole and for each country individually?

WINNERS AND LOSERS

With comprehensive peace negotiations on exceedingly shaky ground, economists are revising their predictions of increasing economic cooperation between Israel and its Arab neighbors. Initially, the belief was predicated on the philosophy that direct economic interaction is a necessary criterion to sustain peace between the warring factions in the region. (3) Thus, Israel was not likely to make any territorial concessions to any country without provisions for trade and other economic transactions.

While both Arabs and Israelis might benefit from the economic integration of their markets in the long term, Israel may be the first to take the initiative and set trade conditions. Consequently, there is a concern that Israel will also be the first to benefit from the resulting economic relations. This issue has posed a serious policy concern for Middle East countries when planning future economic relations. Expounding on the liberal view of political economy, Lubetzky argues that it is essential to design and implement measures that will benefit Arabs and Israelis to such an extent that both sides would have vested interests in maintaining peaceful relations. (4)

To be sure, economists have attempted to quantify the potential for growth and development under conditions of peace in the Middle East ever since the Camp David accords. For example, Ben-Shahar estimated that:
 Within ten years of peace, the GNP of Israel could be about 22 percent
 higher than in the absence of peace. Had the peace process begun in 1982
 with accelerated economic growth accompanying it, by 1992 Israel's GNP
 could have been $4.8 billion larger than is forecast with the continuation
 of existing conditions. Similar developments could have taken place in the
 Arab states bordering upon Israel: Egypt, Syria, Jordan and Lebanon. Had
 peaceful relations been established in 1982, the total GNP of these four
 countries could have been 24 percent, or $20 billion, higher after ten
 years. The standard of living and per capita consumption, and of course,
 levels of investment would also have risen by similar percentages. (5)


With the ailing peace process, these numbers necessitate a second hard look. Regardless of how negotiations proceed, one needs to reevaluate these predictions, determine if they were sufficient, and identify who benefited and who did not, and by how much. Using data from the IMF and the World Bank, we examine economic growth trends in Israel and 14 Arab countries for the periods before and after the peace agreements that both parties signed. These are the Camp David agreement between Egypt and Israel signed in 1979, and the Oslo Peace accord between the PLO and Israel signed in 1992. The time series examined spans over 30 years and is sufficiently long to draw reasonable conclusions.

The figure above sheds some light on the per capita growth rate in GDP since 1970 over the several phases of the recent Arab-Israeli conflict. For the pre-Camp David period (1970-78), the 14 Arab countries enjoyed an economic boom fueled in part by a rapid growth of the oil producing economies. In the Arab countries, GDP (per capita) grew on average by a remarkable 27.3 percent compared with 9.5-percent annual growth for Israel. Within the Arab countries, trickle-down economics was very effective, because the oil boom in the Gulf spilled over to other Arab countries. In particular, during the period 1970-78, Egypt's per-capita GDP almost tripled, while Syria's quadrupled. Although Israel's economy also grew sharply in the pre-Camp David period, the growth was comparatively more modest.

During the post-Camp David period (1979-92), the side leading the growth trend was reversed, with Israel's GDP growing four times faster than that of the Arab countries (8.2 percent versus 2.1 percent). This indicates that the peace dividends from the Camp David agreement by far favored Israel over its Arab neighbors and outpaced whatever economic growth was experienced in Arab countries prior to the Camp David accord.

The post-Oslo period (1993-2000) witnessed a more balanced growth trend between the two sides of the conflict, with Israel and the Arab countries' GDPs growing on average by an annual rate of 4.5 percent and 4.1 percent, respectively. During the same period, however, foreign direct investment grew throughout the Middle East. While this growth was remarkable for some countries (it tripled in Lebanon and Jordan), Israel succeeded in attracting most of the capital inflows. At $4.4 billion in 2000, Israeli foreign direct investment dwarfed the total for the entire Arab region, about $2 billion (Table 1).

These statistics are better understood when we examine exports for the region as a percentage of GDP (Table 2). On this score as well, Israel led the Arab region with an annual average growth rate of 32 percent between 1996 and 2000, followed by 20 percent for Syria, 19 percent for Lebanon, and even negative growth rates (declines) for Egypt and Jordan. In the period that followed the Oslo accord, capital flows responded positively to the peace atmosphere in the region and helped create more export-oriented economies. However, Israel appears to have been the major economic beneficiary of the reduction in hostility. This argument is strengthened by the figures available following the second Palestinian uprising in September 2000, which suggest that Israel was hurt the most by the resumption of hostility in the region. For example, in 2001, Israel's economy fared significantly worse in the region with a 3.9-percent decline in GDP, which was twice (-1.8 percent) as large as the decline of the Arab economies.

The conclusion that economic benefits from the Middle East peace process may be disproportionately one-sided is not new. In a recent study on the peace dividends in the Middle East, the Sharijah Chamber of Commerce and Industry of the United Arab Emirates (6) argues that the superior quality of Israel's industries could dominate Arab economies. The study suggests, for example, that Israel has governmental, institutional, legal and administrative structures that are far superior to those in all Arab countries. These arguments may be further compounded by the fact that the Israeli economy is essentially a market-oriented capitalist economy that is well suited to interact with foreign markets, while most Arab countries are still lagging behind. Frenkel (7) provides a similar point and contends that Israel's market-oriented economy is "incompatible" with those of Arab nations in the region.

More evidence of the uneven gain from the peace environment can also be gleaned from inspecting trends of the region's stock markets shown in Table 3. Between 1995 and 2000, Israel emerged as the dominant market in the region, a factor reflected in an almost 250 percent increase in its stock prices. The stock markets in the Arab countries also experienced some increases, though not nearly close to Israel's and with significant variability. For example, equity prices in Egypt and Morocco rose about 100 percent, while Jordan's dropped 27 percent as the Palestinian territories were diverting capital away from Jordan. Following the uprising in September 2000, this direction was reversed. As the Palestinian economy became devastated, capital flew back to Jordan, fueling a relative rally in Jordanian stock prices, which registered a 15-percent increase in 2000. Meanwhile, with the return of hostilities, all other regional stock markets suffered huge losses. The most significant drop was, once again, in Israel, where prices fell 37 percent compared with a 28-percent decline in Egypt and a 20-percent fall in Morocco.

Taken together, the preceding discussion suggests that Israel is economically better positioned to benefit disproportionately more than the Arab countries from any peace agreement.

CONCLUSION

Using data from the IMF, the World Bank and Morgan Stanley, this paper has examined the economic performance of 14 Arab countries and Israel between 1970 and 2001, a period marked by several conflicts, two peace agreements and volatile expectations from the peace process. The results reveal that Israel's economy grew significantly faster following each peace accord, while the Arab economies performed better during the period prior to an agreement. These observations remain true between 1970 and 1992. In the 1990s, following the Oslo peace accord, Israel's economy emerged as the leading market in the Middle East and succeeded in attracting much more foreign investment than all Arab countries combined. These factors also helped fuel a remarkable increase in Israeli exports, which in turn translated into a significant boost in its equity prices. Meanwhile, during the same period (1993-2000), the Arab economies experienced a more modest GDP growth but were far less successful in attracting foreign capital. These developments led to a relatively mild improvement in Arab stock markets. In the period following the second Palestinian uprising (which began in September 2000), the Israeli economy was the most sensitive to the region's conflict and seemed to perform the worst, both in terms of GDP and in stock-market trends. These observations suggest that the Israeli economy has been the primary beneficiary of the peace process and, at the same time, it is the most adversely affected by the return of hostilities to the region.
Figure: Growth Rate in Gross Domestic Product
(per capita)

 Arab States Israel

Pre Camp David 27.30% 9.50%
Post Camp David 2.10% 8.20%
Post Oslo 4.10% 4.50%
Post Intifada -1.80% -3.90%

Notes: Table made from bar graph.
Table 1
Foreign Direct Investment
Net Inflows in Reporting Country (current US$)

 1996 1999 2000

Egypt 636.0 million 1.1 billion 1.2 billion
Jordan 15.5 million 158.0 million 558.2 million
Israel 1.4 billion 2.9 billion 4.4 billion
Lebanon 80.0 million 250.0 million 297.8 million
Syria 89.0 million 91.0 million 111.2 million

Source: World Development Indicators database, April 2002, The IMF
Table 2
Exports of Good and Services (% of GDP)

 1996 1999 2000 Growth rate `96-00

Egypt 20.2 15.5 16.1 -20%
Jordan 52.1 43.8 42.4 -19%
Israel 30.2 35.7 40 32%
Lebanon 10.9 11.6 13 10%
Syria 31.8 32.2 38.1 20%

Source: World Development Indicators database, April 2002, The IMF
Table 3
Stock Market Perfomance in Middle East

 Post Oslo Post lntifada
 Jan 95-Sept 00 Sept 00-Jul 01

Egypt 99% -28%
Israel 245% -37%
Jordan -27% 15%
Morocco 102% -20%

Source: Morgan Stanley


(1) Calls for Regional Bodies to Achieve Security, and Free Trade, King Hussein of Jordan, Address at the opening ceremony of UNESCO's International Symposium on the Future of the Mediterranean After the Peace Process (1995).

(2) New Era Dawns for Markets on the Move, Middle East Business Weekly, MEED, April 14, 1995.

(3) See A. Azrieli, "Improving Arbitration Under the U.S.-Israel Free Trade Agreement: A Framework For A Middle-East Free Trade Zone," St. Johns' Law Review, Vol. 67, No. 187, 1993, pp. 190-91.

(4) D. Lubetzky, "Incentives for Peace and Profits: Federal Legislation to Encourage U. S. Enterprises to Invest in Arab-Israeli Joint Ventures," Michigan Journal of International Law, Vol. 15, No. 405, 1994, pp. 409-10.

(5) H. Ben-Shahar, 1989: Introduction, Economic Cooperation In the Middle East--From Dream to Reality, in Economic Cooperation in the Middle East.

(6) Sharjah Chamber of Commerce and Industry, United Arab Emirates, "Arabs have nothing to fear from Israel in Common Market," Arab Press Service, April 30, 1994.

(7) Jacob Frenkel, "Israel's Economy Sticks Out," The Wall Street Journal, September 14, 1994. Frenkel was governor of Israel's Central Bank 1990-99.
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Article Details
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Author:Darrat, Ali F.; Hakim, Sam R.
Publication:Middle East Policy
Article Type:Statistical Data Included
Geographic Code:7ISRA
Date:Sep 1, 2002
Words:2356
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