The Middle East economies catch the Dutch Disease

This article appeared originally in Gulf News: link to original article

Was there ever adequate economic growth in the Mena region? Did we miss out on the Mena’s economic century?

Tracing economic history back to the 19th and early 20th century, England was the undisputed world’s naval power. That naturally granted it the status of the world’s economic power, supplemented by its colonies that illustrated an almost perfect vertical integration in a global market far from integration.

For instance, cotton from the Indian subcontinent, America’s South, Egypt, and Sudan provided supply for English Midlands’ textile factories. End products were then shipped and sold in the same markets, making profits along the way that further strengthened control of the supply chain and import markets.

At the turn of the century, two world wars and a global economic activity expansion ushered the US’s ascent to the world’s economic scene, with the dollar making it central for all future economic activities. The rest of the 1900s witnessed German, Japanese, and South Korean economic miracles, before witnessing exponential economic growth in China towards the end of the 20th century and the turn to the 21st century.

It has already been predicted that this century is going to be an Asian one.

The Mena remains mostly absent from past economic miracles, which I partly attribute to a Mena “Dutch Disease”.

The term Dutch Disease was coined by “The Economist” 20 years after large gas reserves were discovered in the Netherlands. The discovery made the Netherlands over-reliant on its gas for export revenues, sacrificing in the process other sectors of the economy that could have been equally fundamental to its long-term growth. Also, gas exports brought in foreign currencies, which meant one of two scenarios for the country.

The first scenario would be that the Netherlands resist a temptation to print more of its own currency — the guilder — backed by the increased foreign reserves, and hence result in an expensive currency that will further damage exports from its other sectors. Additionally, such a scenario will also involve an over-reliance on imports, as a stronger currency would warrant better access to those, further aggravating the situation for the country’s export sectors whilst distorting the net trade balance.

The second scenario would be for the Netherlands to print more of its currency, which will dilute its value and lead to the exact opposite outcome described in the first scenario. The Netherlands’ Dutch Disease ultimatum was to keep interest rates low, which sped up the exit of foreign investors from the country.

With regard to the Mena region, over-reliance on a single export earner — similar to the Dutch Disease bonanza — is especially intriguing. A crude, though precise generalisation, would be that countries in Mena have always relied on one export earner or another from independence onwards, even from pre-independence. While a few depended on agriculture exports, tourism, and services, others have depended on different natural resources that were discovered and later exported.

Regardless of the source of revenue for any of the Mena countries, it is this over-reliance that undermined economic diversification and kept countries exposed to global market prices and international events.

To illustrate, between the 20th and 21st centuries, Egypt and Sudan moved from exporting cotton, besides other agricultural commodities. Egypt diversified into tourism and other services while Sudan depended on oil exports for revenues and financing government expenses. In the latter’s case, its Dutch Disease was short-lived and is mostly reflected in a development plan that remained confined to within Khartoum’s boundaries.

Egypt, on the contrary, moved from food self-sufficiency before having the substantial cotton plantations to being totally vulnerable to spikes in international food prices, with tourism being a major foreign currency earner. Though economically stable compared to a few years back, its economic transformation into well-diversified sources of income is far from complete.

Today, Mena countries are at an economic juncture. Foreign currencies mostly come from one of the following: oil, gas, remittances, tourism, and agricultural exports. Though a few countries have developed different manufacturing industries, those have seen ebbs and flows based on what happens in the main export earner, with economic reforms being half-heartedly taken and postponed when ramifications could be direr.

Moreover, revenue-earning sectors for Mena countries are predominantly capital-intensive. In other words, they require huge investments without necessarily creating enough jobs with every dollar spent.

Even jobs created in agriculture and manufacturing have not risen to par with other export earners, with the number of jobs created in agriculture dwindling further as urbanisation rates increase. When reviewing the income status for most Mena countries, a few have been stuck in the lower middle-income status for as far as anyone could remember.

With economic development and diversification planned but never fully executed, the same countries have kept their status quo, with a couple making it to upper middle-income because of their exports of oil and gas, such as Algeria.

In conclusion, whether or not a Mena country possess natural resources, Mena’s Dutch Disease has always been its over-reliance on one or limited export earners. The limited revenues were channelled unenthusiastically to economic reforms that were not followed persistently to fruition. The net result was for different countries to stay stuck in different development stages, reflected on their stubborn middle-income status.

This is in comparison to countries that started at a similar or lower economic base around Mena’s independence era, yet surpassed them by significant economic strides without natural resources.

Such countries include Germany, Japan, and South Korea, all classified as high-income countries. The last thought that I want to leave you with: what happens when new Mena gas discoveries find their way to international markets?