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In Egypt, merchant ships sit tied up along the shore as they wait to complete their transit of the Suez Canal.
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Economics: It's More Than Oil

National economies throughout the Middle East struggled in the 19th and 20th centuries to develop their natural and human resources, to modernize their societies, and to raise their standards of living. They have made significant, hard-won progress on many fronts (like broad-based education), and some countries are blessed with abundant natural resources (oil, natural gas, phosphates, and other minerals, for example). In general, however, Middle Eastern economies have faced significant obstacles to successful development.

One major obstacle has been Western efforts to control the region's resources. Other challenges include rapidly increasing populations, uneven distribution of resources like water and oil, protracted armed conflicts and the resultant high military spending, rapid urbanization, and incorporation into a global economy. How has the Middle East tried to deal with these challenges?


Capitulations lead to European influence

In 1526, Sultan Suleyman the Magnificent (known as the "Lawgiver" to the Ottomans) granted the first of what came to be called the "capitulations" to the French. The agreements gave France, and later other European powers, the right to trade within the Ottoman Empire without paying taxes and other economic concessions -- a sort of pre-modern free-trade agreement.

A painting of Sultan Suleyman the Magnificent, who ruled the Ottoman Empire from 1520 until his death in 1566 [ enlarge ]

The Ottomans granted the capitulations from a position of strength. They were eager to encourage imports to supply their population with goods and could afford to do so without heavy import duties. The Europeans wanted markets in which to sell their exports. In the beginning, it was a win-win situation.

Three hundred years later, however, the capitulations gave Europeans an enormous advantage over local merchants in the Ottoman market. Not only were Europeans (and any local protégés they hired, especially local Christians) still exempt from taxation, but they were also now mass-producing cheap manufactured goods that were displacing local products. The Ottomans no longer had the political power to rescind the capitulations which had helped the European powers gain control over the economy of the Empire, and thus control over its political and economic decisions.


Borrowing and bankruptcy

As Egypt and the Ottoman Empire watched themselves fall behind Europe's military power, they tried to copy Europe's sources of strength. They began to borrow heavily from European banks, on bad terms, in order to finance the modernization of their armies, social institutions, infrastructure, and industry. The Ottomans took out the first major loan in 1854 at the outset of the Crimean War.

As time went on, expensive efforts at reform continued, and the Ottomans were unable to repay the loans on schedule. When they declared bankruptcy in 1875, the Western powers took direct control over parts of the economy.

A similar situation had developed in Egypt. Enormous efforts had been made to modernize the military and infrastructure and to begin industrialization throughout the 19th century.

Opened in 1869, Egypt's 100-mile-long Suez Canal connects the Red Sea with the eastern Mediterranean. [ enlarge ]

Egypt had two advantages: First, the American Civil War meant that cotton from the South was no longer available on the world market. Cotton prices rose, and Egyptian cotton became an extremely valuable export. Second, the Suez Canal opened in 1869.

Despite the potential represented by these developments, Egypt's expensive reform program, lavish royal spending, and European pressure led to bankruptcy. Partly to ensure economic stability and repayment of debt, and partly to squelch a nationalist uprising, Britain colonized the country in 1882.


Economic challenges of independence

British soldiers in formation before the ancient Sphinx and pyramids on Egypt's Giza Plateau, c. 1893 [ enlarge ]

Local forces resisted the imposition of European colonial rule across the Middle East. Even as Britain and France carved up what was left of the Ottoman Empire between themselves after World War I, pressure was growing for them to leave and allow the states of the Middle East to govern themselves.

The process of achieving independence was uneven: Egypt, for example, achieved nominal independence from Britain in 1922, but Britain retained enormous influence until the Free Officers' Coup under Gamal Abd al-Nasser deposed King Faruq in 1952. Syria achieved independence from France in 1946, while Britain unilaterally left Palestine in 1948, leading to the creation of a political division between Israel and the Palestinians in the West Bank and Gaza.

Nationalist regimes that came to power upon independence from the Western mandates tended to maintain significant control over their economies. Using a socialist economic model, countries like Egypt, Iraq, Algeria, and Syria wished to pool national resources and spend them centrally to spur economic development.

One common strategy in the 1960s was import-substituting industrialization (ISI). This was an attempt to build local industries that would create jobs, use local resources, and allow countries to stop importing Western goods. Governments raised trade barriers and heavily subsidized infant industries (often owning them outright) to stimulate rapid economic development.

ISI failed when these industries became bloated, inefficient enterprises riddled with bureaucracy and corruption. They couldn't meet local demands and were a drain on national resources.

By the late 1970s, Egypt, under President Anwar Sadat, abandoned the strategy of ISI in favor of infitah, opening up the economy to foreign investment. More and more countries decided to encourage foreign investment in order to stimulate their economies this way.

Outside an Iranian McDonald's restaurant [ enlarge ]

The strategy of infitah, however, has also been a disappointment. Much of the sought-after foreign investment has been in Western consumer goods and luxuries, like McDonald's and name-brand clothing, rather than in local industry. This importation of Western culture does little to raise the general standard of living in the region. Instead, it tends to increase the cultural and economic gap between a wealthy class that has benefited from Western investment and adopted a more Western lifestyle, and a much larger population of the poor.

Many feel that the importation of Western goods and cultural values challenges important social traditions. This is one factor in the rise of resentment against the West and the increasing popularity of Islamic opposition groups that promise to restore cultural and economic independence to the region.


The economy of oil

An Iraqi oil refinery from the air [ enlarge ]

The discovery of enormous oil deposits in the Middle East coincided with increasing dependence upon oil in the West in the early 20th century. Money from oil has created enormous opportunities for development in those countries where it is concentrated, such as Saudi Arabia, Kuwait, Bahrain, the United Arab Emirates, Qatar, Iraq, Iran, and Algeria.

States without significant oil resources have benefited by sending laborers to work in the richer states. The money these workers send home has contributed to the economies of places like the West Bank and Gaza, Egypt, and Jordan.

The financial benefits from oil, however, have been offset by other problems associated with the economy of a rentier state. A rentier state is one that gets most of its income from selling its natural resources to outside buyers.

Because the government gets its income directly from selling this resource, there is no need to tax its citizens. Nor is there a need to give them a voice in running the country. Rentier states in the Middle East usually have strong, autocratic governments that buy off political dissent by distributing the wealth derived from oil through extensive social programs.

In some ways, money comes in too easily in rentier economies. There is little incentive to increase efficiency in resource production or to diversify the sources of wealth. The state bureaucracy and public industries become bloated. The population may develop unrealistic social expectations, but at the same time has no way to express opposition to those in power. Connections to the source of wealth come to count for more than individual ability.


The consequences of unequal distribution of wealth

In addition, the gap between rich and poor countries can be a source of tension. While guest workers earn good money working in oil-rich nations, they are often treated as second-class members of society.

Another major source of tension in the region is foreign aid. People on the street may be suspicious of the motives behind foreign aid, whether it comes from the U.S. to Egypt and Israel or from Saudi Arabia and Kuwait to poorer Arab countries in the region.

U.S. aid to Israel is an especially great bone of contention in the Middle East. Many in the region believe that the current state of Israel is simply an extension of earlier Western colonialism: After all, the original Zionists came from Europe, and Israel's economy and military receive financial support from the U.S. Many Arabs believe that the U.S. cannot be a fair broker of the peace process while it is tied so closely to Israel by massive aid.


The economic effect of political crisis

Kuwaiti buildings bomb-damaged during Iraq's 1990 occupation, under skies darkened by the smoke of burning oil wells [ enlarge ]

Political turmoil has had a devastating effect on economies in the Middle East. Iraq, for example, had been using its oil wealth to provide a high level of education and health care to its population, among other benefits. But military expenditures during the Iran-Iraq War (1980-88) put a significant strain on Iraq's resources, reducing social spending. Saddam Hussein's decision to invade Kuwait in 1990, the U.S.-led bombing and U.N. embargo on Iraqi oil that ensued, and the continued use by the government of oil revenues for military purposes have reversed many of the social gains that had been made earlier.

The Palestinians of the West Bank and Gaza have faced extraordinarily difficult economic conditions since Israel has occupied these regions as a result of the 1967 Six-Day War. Some families have lived in crowded refugee camps since they fled or were expelled from Israel in 1948 during Israel's war of independence. Gaza has one of the highest population densities in the world. Unemployment is extremely high, particularly since many Palestinians have been unable to get to their jobs in Israel after Israel closed its borders to Palestinians for security reasons during the first intifada.


Other economic challenges

A crowded street in Cairo, Egypt [ enlarge ]

A further strain on Middle Eastern economies is a rapidly rising population. The introduction of modern medicine and public health and sanitation in the 19th century caused the population of the Middle East to double in only a century (the previous population doubling had taken thousands of years). Now it takes only about 25 years for the region's population to double.

Unfortunately, most of the countries with the highest population growth rates do not enjoy significant oil revenue -- only Iraq, Iran, and Algeria are exceptions. How the region's governments will provide jobs, education, and health care to a fast-growing population is a matter of global concern.


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The World Factbook 2001:
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Country Briefings:
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Six Billion and Beyond Web Site:
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Geography: An Ancient and Modern Crossroads

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Related maps

Historic Political Borders of the Middle East

Jump To:


Capitulations lead to European influence

Borrowing and bankruptcy

Economic challenges of independence

The economy of oil

The consequences of unequal distribution of wealth

The economic effect of political crisis

Other economic challenges





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