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Financial crisis

We are currently living in an era of globalization where every nation in the world regards each other as a neighbor; anything that happens in one state will affect the other. Before the current financial crisis, the economies of a number of countries were stagnant. There has also been a consensus that the global economic powers, mainly from western Europe and the United States, have now focused their attention towards Asia, as a number of economies of Asia have risen extensively like China, India, South Korea and Hong Kong.

The Middle East region has also accomplished a lot to be able to compete in the competitive environment brought about by globalization. Some Middle Eastern (Islamic) states are allies of the United States, not just politically, but economically as well. Because of this partnership, we have seen an extensive growth in Middle East during last few decades (Helleiner, 2000). A dramatic transformation of the global system is taking place as the distribution of power shifts from West to East.

The ongoing crises over Iraq, Afghanistan, Iran, and North Korea and the sharp rise of oil and food prices as a result of the swift upsurge in demand for primary commodities in the emerging

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econo¬mies have thrown systemic problems in the current global system. These developments, together with the recent decline in US global leadership due to their own problems domestically and internationally, have cast doubt on the fu¬ture sustainability of the existing network of inter¬national institutions.

Global challenges are quite important for an economy to be contemplated prudently. Currently, the Middle East has a number of challenges of its own, which predominantly are the rise of other Asian economies like India and China that would provide it with stiff competition. The economy of Middle East mainly depends on the oil reserves, and the escalating issue of global warming and the shrinking of oil reserves are also some issues which made the leaders of the Middle East very anxious, if not worried.

The aim of this study is to identify both the prominent as well as the potential global challenges faced by the Middle East. Background: The Middle East, and probably including and North Africa , is an economically diverse region that includes countries with a common heritage or culture despite differences in (political) nationality, at various stages of economic development, depending on the socio-political climate, and gifted with vast natural resources which will depend mainly on the geographic location.

Despite undertaking economic reforms in many countries, and having considerable success in avoiding crises and achieving macroeconomic stability, the region’s economic performance in the past 30 years has yet to see true progress emerge. From a social and cultural perspective, the Middle East, or West Asia to the politically correct, is often misunderstood by the west and often stereotyped with images of wealthy oil sheiks, “Arabian Nights” in the mold of Aladdin and Ali Baba and most recently, terrorists, thanks to Osama bin Laden and his Al-Qaeda group.

The people in the region endure a myriad of problems that somewhat slows their economic growth and these are mainly attributed to a combination of the following factors – their complex socio-political structure, the apparent lack of security despite the wealth from oil, Arab nationalism (and to a certain extent militancy), the strong influence of Islam, particularly in this region, a male-dominated social and political hierarchy, to the point of chauvinism; political repression, as they have yet to exercise true democracy, the need for further technological research and sufficient social services; they also experience alienation from, not towards westerners, but among each other on a national level. These issues partly contribute to the slow progress of the region (Al Ahmad, 2007). To the religious or superstitious, they believed that if a certain region is poor, God compensates by providing it with a lot of natural resources that would help it prosper. In the case of the Middle East, it would be vast deposits of petroleum. Oil was discovered in the region in the years following the end of the First World War. Before the discovery of oil, some regions, especially Saudi Arabia generated income mainly from the yearly haj (pilgrimage) to Mecca.

In addition, its first ruler, King Ibn Saud received a yearly pension from the British government for the services he had rendered in the war in expelling the Ottoman Turks from the region. But things began to change when oil was discovered in the region, beginning in Bahrain in 1932. Western geologists suspected that vast deposits of petroleum could be lying beneath the barren sands on the Middle East and finally struck oil in 1935. Realizing this discovery, the King Ibn Saud capitalized on this discovery to assure the economic stability of the kingdom and the American oil companies he invited formed to become the Arabian American Oil Company or Aramcom the first of the many companies that would draw oil for the region.

Soon, the neighboring states would follow suit and as the years went by their coffers began to swell with the money coming in from the “black gold. ” (Robinson, 1988, 70-71). in 1960, motivated by stirrings of nationalism, the leaders of the oil-producing nations of the Middle East, along with Venezuela, banded together to form the Organization of Petroleum Exporting Countries (OPEC) as a way of asserting their right to the resources of their lands and to ensure they are in complete control of it and not the westerners who have discovered and refined the oil for them. In addition, their unity gave them the power to use the oil any way they see fit to utilize it in meeting whatever ends they had in mind.

By the 1970’s ,OPEC demonstrated its assertiveness when the region reaped a considerable amount of wealth which stemmed from the sharp increase in oil prices in the 1970s as they used oil as a political weapon to leverage the western nations who supported Israel. The unusual boom of investment and growth in the Arab OPEC states resonated in other countries of the region through a sharp rise in worker remittances, trade, and capital flows. Gross capital formation, although somewhat unstable, was kept at very high rates, which saw an increase in growth rates of GDP as well as improvement of living standards (Abed & Davoodi, 2003; Robinson, 1988, 126-127).

This boom proved to be short-lived as the region’s economic performance during the next 20 years weakened as economic growth rates declined and failed to generate the employment opportunities sought by a growing labor force. This deterioration in economic conditions brought about pressures for economic reforms, which were undertaken by a number of countries during the mid-to-late 1980s and early 1990s. Such reforms batted for the introduction of the value-added tax (VAT), phasing out subsidies, and improving management of public expenditure. In subsequent years, the countries that pursued reforms, such as Egypt and Jordan, enjoyed rapid growth rates, and one has yet to see the neighboring Arab states follow suit. Although the momentum for reform has somewhat let up more recently, the outlook has still remained positive in much of the region.

In addition, for a large number of countries in the region, external and domestic debts are not high by international standards, and debt service is low which is a big plus for the region (Abed & Davoodi, 2003). It can be inferred that the last 50 years that developing countries, on average, have found it much easier to start (economic) growth than to sustain it. Even as the economy showed signs of improvement in the 1990s, the region achieved an annual average growth rate of only 1. 3 percent, compared with an annual average of 4 percent for all developing countries outside the region which is rather small. Analysis – Factors Affecting the Region’s Performance: The challenges facing the region are daunting.

The economic performance of the region remains below its potential, giving rise to chronic unemployment and poor living conditions in large parts of the region, not to mention that majority of the population are illiterate. These conditions make it ripe for political instability and is what spawns the problem of terrorism and makes it difficult, if not impossible for it to integrate globally or keep up with the world economy. The challenge now is for these countries to achieve higher rates of sustainable growth and by doing so, it will be able to integrate into the global economy and this will result in creating meaningful employment for a rapidly rising labor force and, more generally, reduce poverty and improve living conditions, thereby creating stability. If these conditions were to happen, the very root of terrorism would be eliminated.

Viewing the region as a whole, one may attribute the region’s weak economic performance to the following possible reasons which are social, economic and political in nature, which are interrelated or overlapping in varying degrees: High population growth. The Middle East has had one of the highest rates of population growth in the world. Although population growth in the region is projected to decline to 1. 5 percent over the period 2000–15, this rate is still considered high, and would no doubt remain a factor in the slow growth prospects for real per capita GDP. In the 1970s and 1980s, annual population growth rates in the oil economies exceeded those of non-oil economies by 2 percentage points.

The poverty experienced by the majority contributes to the lack of education and this lack of education in turn has led to the high population growth (Abed & Davoodi, 2003). Statistically speaking, over two-thirds of the population in the Middle East is under 30 years of age. For the last 20 years, the labor force has exceeded the projected growth rate and is projected to grow at an annual rate of 3 percent running. Despite the seemingly “alarming” population growth, the ensuing high and rising share of working age population could, under the appropriate circumstances, be seen as a blessing rather than a curse in the sense that it is capable of contributing positively to growth rate in the region.

However, the challenge here is that this is not automatic because it has to be applied in the purview of employment growth as well as taking into consideration the various labor skills that is demanded in the global economy. What this means is that the higher population growth can be helpful if these masses of workers have the skills essential to the job market and can contribute to the development of their country and bring it up to par with world-class standards. Moreover, the governments of these countries need to implement relevant other policies and institutions essential to support the growing working age population (Abed & Davoodi, 2003). Low productivity.

Another reason for the low performance is the region’s low or often negative growth of total factor productivity (TFP), that is, “the efficiency with which factors of production such as physical capital and labor are employed to generate growth. ” (Abed & Davoodi, 2003) Most of the increase in output in the region has stemmed from the increases in capital and labor rather than in TFP, particularly in non-oil industries. A sustained increase in the cost of living is difficult if higher rates of accumulation of physical capital and labor are not followed or supplemented by positive TFP growth, which is often seen as a prerequisite for employing the largely young labor force in the region while avoiding a real wage erosion.

This would lead into the unequal distribution of wealth and create further disparity. Given this situation, TFP growth is something that cannot be taken for granted. Research shows that TFP growth has contributed about 60 percent of region-wide variations in output growth among their economies. This research also shows that the importance of TFP growth increases further if allowance is made for the contribution of human capital—job experience and level of schooling—to output growth. Thus, it is important that the governments of the Middle East states give stronger emphasis on education, both academic and vocational which are essential in the global job market.

Similarly, recent research on sources of TFP growth in the Middle East shows that to reverse the region’s low and negative TFP growth, key government figures and policymakers need to focus on improving governance and quality of institutions, that is eradicating graft and corruption; investing and putting a lot of emphasis on human capital – the work force for they are considered more valuable assets than material resources, and establishing market-friendly and peaceful political environments, especially in this region which is (notoriously) wary or “hostile” to westerners and culturally sensitive, if not protective. Fortunately, these are the same factors that promote investment and GDP growth, which in turn help boost employment growth. Lack of Political and Institutional Reforms

Despite its economic and (geographic) strategic importance, the influence of the Middle East in the global economic system is weak, contrary to what many may think owing to the petrodollars coming in from the oil. Political fragmentation, recurring (ethnic) conflicts, and authoritarian rule have stunted the establishment and development of democratic institutions and remain major stumbling blocks to economic reform. Because democracy is wanting, the region performs poorly in the areas of civil and political freedoms, gender equality, and, more generally, opportunities for the full development of human capabilities and knowledge, essentially the hallmarks of a democratic society which entails empowering the individual.

To overcome these impediments to development, modern institutions, such as freely elected legislatures and competent and independent judiciaries, and institutions that safeguard civil and human rights need to be strengthened (Al Ahmad, 2007). Yet, this would appear to be a very tall order in the region where absolute, if not despotic, monarchies still exist as well as transactional practices that may be considered “undemocratic” such as patronage system and “nepotism,” things that could turn off foreign investors and prevent democracy from taking root. The demarcation line between the public and private sectors in many Middle Eastern countries is often ambiguous owing to the complexities that still perplex scholars and experts on the region, encouraging conflicts of interest, rent seeking (another word for patronage politics), and widespread corruption.

Civil society organizations such as professional associations, the nonofficial media, and “autonomous” nongovernmental entities tend to be non-existent or weak and are often “assimilated” by governments. They merely exist to give some semblance of democracy. While there are exceptions, transparency in government is poor and accountability remains a problem; being absolute monarchies, these rulers rule by birthright, not by any mandate from their people. Recent studies conducted, show that quality of political institutions and governance are significant not only for stimulating growth over time but also for explaining differences in the levels of per capita incomes and TFP among countries.

On most measures of good governance and institutions, especially voice and accountability, regulatory quality, and control of corruption, the Middle East countries fared poorly compared to nations further east in Asia (Ah Ahmad, 2007; Abed & Davoodi, 2003). Conclusion: The challenge for the Middle East to keep up with globalization is to be willing to shed off its xenophobia or suspicion towards modernization. The “fear” they have to overcome is that by modernizing means having to westernize as well and this would lead (in effect) to the gradual extinction, if not corruption of their culture. The population of the region is growing and this can either become and advantage or disadvantage, depending on how the governments of the region would harness or treat them.

By keeping them ignorant and illiterate and keeping the wealth and education to themselves, they are doing a great disservice to their nations. It is hoped that western-educated leaders can stand in the gap and be the bridge to modernization for they are the ones who know the strengths and weaknesses of democracy and know what is best for their people. References Abed, G. T. & Davoodi, H. R. (2003). Challenges of Growth and Globalization in the Middle East and North Africa. Retrieved 31 May 2010 http://www. imf. org/external/pubs/ft/med/2003/eng/abed. htm. Al Ahmad, H. (2007). Globalization and the Third World Communities: Is it a Negative Cultural/Economic Force?

[conference paper]. International Communication and Culture Forum. Royal Melbourne Institute of Technology. Melbourne, Australia. Bard, M. G. (2003). The Complete Idiot’s Guide to Middle East Conflict. Indianapolis: Alpha Books. Hajjar, S. G. (Ed. ) (1985). The Middle East: From Transition to Development.. Leiden, The Netherlands: E. J. Brill. Helleiner, G. (2000, December 11). “Markets, Politics and Globalization: Can the Global Economy be Civilized? ” The Tenth Paul Prebisch Lecture. Geneva, Switzerland. Kemp, G. (2003). Europe’s Middle East Challenges. The Washington Quarterly 27 (1), 163-177. Robinson, J. (1988). Yamani. London: Fontana Paperbacks.

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