Institute for Domestic & International Affairs, Inc.

World Bank

Impact of the Economic Crisis

Director: Michael Pepe

© 2010 Institute for Domestic & International Affairs, Inc. (IDIA)

This document is solely for use in preparation for Philadelphia Model United Nations 2010. Use for other purposes is not

permitted without the express written consent of IDIA. For more information, please write us at idiainfo@idia.net

Introduction _________________________________________________________________ 1

Factors in Decline in the Middle East and Abroad ______________________________________ 1

Chronology__________________________________________________________________ 2

Financial Crisis in the United States: 2008 – Present ____________________________________ 2

The Food, Fuel, and Finance Crisis: 2007-2008 _________________________________________ 3

Deposit Guarantees: 2008 – Present __________________________________________________ 6

Actors and Interests ___________________________________________________________ 7

The Gulf Cooperation Council_______________________________________________________ 7 Saudi Arabia ____________________________________________________________________________ 9 Bahrain ________________________________________________________________________________ 9 Kuwait _______________________________________________________________________________ 10 Oman ________________________________________________________________________________ 10 Qatar _________________________________________________________________________________ 11 United Arab Emirates ____________________________________________________________________ 11

Low Revenue Oil Exporters ________________________________________________________ 12 Syria _________________________________________________________________________________ 12 Yemen________________________________________________________________________________ 13 Iran __________________________________________________________________________________ 14 Iraq __________________________________________________________________________________ 14

Non-Oil Exporters ________________________________________________________________ 15 Jordan ________________________________________________________________________________ 15 Lebanon ______________________________________________________________________________ 16 Palestinian Territories____________________________________________________________________ 17

Islamic Banking __________________________________________________________________ 17

Discussion Questions _________________________________________________________ 20

Bibliography________________________________________________________________ 21

For Further Reading______________________________________________________________ 21

Works Cited _____________________________________________________________________ 23

PhilMUN 2009 1

Introduction

In 2007, the nations of the world encountered significant economic decline.

Global in scale, the downturn marked the first worldwide recession since the Second

World War. While there is not a single, universally accepted cause of the recession, its

impact on the peoples of the world has been pronounced. The forces of globalization

assure that events – economic or otherwise – in one corner of the Earth redound across

the globe. Such is the case in the financial crisis. What was the result of some

combination of interest rate fluctuation in the United States, the collapse of strong

economic bubbles, and changing demand in emerging markets has markedly affected the

states and inhabitants of the Middle East. Everywhere, markets that had been sky high

sharply declined, sending prices plummeting, placing individual investors, corporations,

and governments under heavy strain.

In 2007 and 2008, the Middle East was struggling primarily with the rising price

of food and other commodities which subjected the lower classes to significant hardship.

The sensitive economic climate generated by the financial collapse in America, however,

left the Middle East relatively untouched. While the troubled economy did indeed have

some effect, this impact was less pronounced here than in other regions. Steadily high oil

prices formed the bulk of the shield from the spiraling global economy. Moving into

2010, economic indicators portend trouble, as more and more signs of slowdown have

been manifesting in nearly every state and market in the Middle East. Many financial

experts and investors experts feel the global economy has already “bottomed out” and

that recovery looms nearer and nearer on the horizon every day.

Factors in Decline in the Middle East and Abroad Slowly, the world is emerging from one of the worst financial crises since the

Second World War. Driven largely by government intervention and short-term reforms,

the worldwide economy was expected to expand by roughly three per cent by the end

PhilMUN 2009 2

2009, bouncing back from a one per cent contraction in 2008.1 This increase in

economic activity shows signs of recovery, yet remains decidedly low when compared

with global growth of previous years. Major economies, hit the hardest, are still reeling

from stagnation engendered by tightened availability of credit. The United States and the

United Kingdom have been the hardest hit of these advanced economies, with the

European Union close behind. Output, a measure of the total value of goods and services

among large entities such as states, declined by more than three and one-half per cent in

2009.2 While emerging economies have fared slightly better – growing one and one-half

per cent in 2009 – these governments are less able to mount effective responses to the

crisis, exposing its people, many already impoverished, to particularly harsh fiscal

climates, resulting in direct reductions in the quality of life in many states. The United

Nations notes that continued decline has impaired numerous development goals and

threatens its ability to pursue attainment of its Millennium Development goals, designed

to significantly reduce human suffering and secure basic necessities to the world’s

population by 2015.3

Chronology Financial Crisis in the United States: 2008 – Present The worldwide recession stems from an ongoing financial crisis in the United

States. Between 2001 and 2005, the United States experienced a housing bubble. An

economic bubble occurs when investors make exaggerated predictions as to an asset’s

future value. During this period, a number of factors combined to spur Americans to

purchase homes in record numbers.4 As a result of another American recession in the

early 2000s (itself caused largely by overinvestment in Internet-related ventures during

1 International Monetary Fund, World Economic Output, April 2009. 2 Ibid 3 United Nations, World Economic Situation and Prospects 2009: Mid-2009 Update, United Nations Publications, <http://www.un.org/esa/policy/wess/wesp2009files/wesp09update.pdf>. 4Veena, Trevor, “The Mortgage Market: What Happened?” NPR.org, April 26, 2007, <http://www.npr.org/templates/story/story.php?storyId=9855669#9855669>.

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the “Dot-Com” era) the Federal Reserve, led by Chairman Alan Greenspan, continually

lowered interest rates. Lower interest rates made it cheaper for investment firms to do

business, allowing them to award more loans to businesses and individuals. In this way,

the Federal Reserve sought to jumpstart the nation’s economic engine. The newly loaned

funds could be used to spur purchasing and increase capital until the economy returned to

a more solid footing. Increasingly, Americans took advantage of the ample availability

of loans to finance the purchase of real estate.

This widespread access to loans set into motion a process that would see a sharp

spike in homeownership, but also the creation building blocks of the eventual economic

collapse. At first, there was a tremendous amount of money to be made by a number of

entities. This earning unique potential led many brokerage firms and banks to unveil

innovative loan programs attractive to borrowers looking to capitalize on new homes.

Many appeared gimmicky, almost “too-good-to be true,” yet the appeal of the housing

bubble attracted many borrowers sure that the future value of their homes would more

than offset any potential risk. Increasingly, the economic climate motivated lenders to

issue loans to individuals who clearly lacked the resources to pay them off.5

The Food, Fuel, and Finance Crisis: 2007-2008 Leading up to the near economic collapse of 2008, another serious strain loomed

worldwide. The problems surrounding food, fuel, and finance combined in particularly

troublesome ways to make life more difficult for people around the world. These

elements created an economic phenomenon that highlighted the interconnectedness of the

world’s finances. What is often referred to as the Triple-F Crisis began with the rising

cost of oil. Surpluses in Arab and other states allowed oil exporting countries to increase

5Wiles, Russ, “The Housing Crisis: How We Got There,” The Arizona Republic, September 16, 2008, < http://www.azcentral.com/business/articles/2008/09/16/20080916biz-CreditCrisisEvolution0724.html>.

PhilMUN 2009 4

the price of fuel. These rising costs encouraged governments to turn to less conventional

methods to fuel their nations’ cars, homes, and businesses.6

Many states have turned their research efforts to biofules, which derived from

living things such as plants, wood, and treated waste. Most notably, crops can be

converted into ethanol, which can be used to power automobiles. Western states have

been turning increasingly to this power source. Many factors dictated this shift.

Traditional fossil fuels pose environmental threats, and the international community

viewed biofuels as a means to stave off climate change and prevent global warming.

Countries eye biofuels as a means to divest themselves of foreign entanglements. The

United States, in particular, has long been keen on reducing its reliance on foreign oil,

particularly from Arab nations due to the instability prevalent in the region and the

presence of hostile terrorist elements. “Economics, national security, and greenhouse

gases have created a perfect storm of interest [in biofuels],” noted John Pierce, vice

president at American chemical giant DuPont.7

While biofuels possess a tremendous upside, they pose a serious, attendant threat,

most notably for the poor. As more and more crops are harvested for use in creating fuel,

fewer and fewer go towards their principal purpose – food.8 This phenomenon

diminishes supply at a time when demand is growing. As corn and other crops are used

as livestock feed, the prices of meat and poultry are also sure to rise. As the population

grows across the globe, particularly in poverty-stricken regions, the rising cost of food

can yield disastrous effects. In April, the United Nations Economic and Social Council

forewarned that these trends could increase poverty “dramatically.”9

6“The F-words - Editorial,” The Guardian, July 7, 2008, < http://www.guardian.co.uk/commentisfree/2008/jul/07/g8.globaleconomy>. 7“Food vs. Fuel,” Cempaka Nature, Agriculture, and Environment, January 27, 2007, < http://cempaka-nature.blogspot.com/2007/01/food-vs-fuel.html>. 8John Carey and Adrienne Carter, with Assif Shameen, “Food vs. Fuel,” BusinessWeek, February 5, 2007, < http://www.businessweek.com/magazine/content/07_06/b4020093.htm>. 9 Special Body on Least Developed and Landlocked Developing Countries, “The Food-Fuel-Financial Crisis and Climate Change: Addressing Threats to Development,” United Nations Economic and Social Council,” March 6, 2009, < http://www.unescap.org/EDC/English/Commissions/E65/E65_15EA1.pdf>.

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The crisis has had a definitive impact on the Middle East, where the most pressing

issue has been the price and availability of food. A growing population challenges

Middle Eastern resources, and the region has become more and more reliant on importing

foodstuffs from other parts of the world.10 The Middle East relies on imports to attain

half of its food, exposing it more directly to the Triple-F Crisis, especially when the price

of food has doubled worldwide between 2006 and 2008. To make matters worse, a

majority of the acceleration occurred rapidly toward the end of that period. In 2008 food

price inflation rose by 11 per cent, 6 percentage points higher than the average over the

previous decade.11 Inflation tends to impact the poor the greatest, and the lowest class’s

food budgets have become worrisomely stretched.

As outlined at its 2009 Middle East and North Africa session in Turkey, the World

Bank has thus far taken numerous steps to combat the impact of the Food, Fuel, and

Finance Crisis in the Middle East. As of October 2009, the World Bank has issued USD

$1.8 billion worth of loans in the region, and intends to lend out as much $3 billion

during the current fiscal year.12 The group plans on directing its future loans in the

region to programs that alter and improve financial structures respond more quickly and

adequately to crisis situations. A special emphasis has been placed on improving the

quality of and access to social safety nets necessitated by increasing poverty and

unemployment. On the macroeconomic level, attempts have been made to improve the

technical problems facing Middle Eastern economics. At the same time, the World Bank

has worked on the ground level to reopen banking institutions, thus generating private

business ventures.

Fortunately, the Middle East has not yet been crushed by the Food, Fuel, and

Finance Crisis. In fact, compared to many other regions, it has fared rather well. Oil

10 Shamshad Akhtar, “Remarks for Press Conference - MENA 2009 Economic Developments and Prospects Navigating through the Global Recession,” Middle East and North Africa Region – World Bank, October 3, 2009, <http://siteresources.worldbank.org/INTMENA/Resources/FinalDocumentofEDPPressPresentationSAOct32009.pdf>. 11 Ibid 12 Ibid

PhilMUN 2009 6

prices remained high and construction projects – an important element of the

contemporary Middle Eastern economy – continued. These factors helped to insulate the

region somewhat from the Triple-F Crisis, and its economy even grew by some 6.2 per

cent in 2008. This figure placed the Middle East, as a whole, above-average among

developing countries for the year.

Deposit Guarantees: 2008 – Present In 1933, The United States became the first nation to guarantee bank deposits.

Prior to the establishment of the Federal Deposit Insurance Commission (FDIC),

numerous American banks closed, and their depositors were simply out of luck. Since

the dawn of the New Deal, the FDIC has used the full faith and credit of the United States

Government to insure every deposit – presently up to USD $250,000 – at a member

institution. Since its inception, no American has lost any money due to the failure of an

FDIC insured bank.13

Obviously, guaranteeing that customers’ funds are not at risk is a strong

motivating factor for individuals to entrust their money to the banks, and the American

case restored trust to an industry that proved vital to getting the nation back on its feet. In

the wake of the present economic crisis, the FDIC more than doubled the maximum

deposit it would insure, raising the total from USD $100,000 to USD $250,000. The

move was designed to shore up confidence and assure that banks would have the funds to

award loans – a vital aspect of plans for economic recovery.

While the American system has been mimicked across the globe, the concept is

fairly new in Middle Eastern states, and has recently been adopted as a tool to combat

financial stagnation.14 In October 2008, the United Arab Emirates pledged, among other

economic initiatives, three-year’s worth of deposit security.15 The Jordanian government

13 “Who is the FDIC” Federal Deposit Insurance Corporation. 29 September 2009. <http://www.fdic.gov/about/learn/symbol/index.html> 14 http://investing.curiouscatblog.net/2008/10/05/fdic-limit-raised-to-250000/ 15 Noueihed, Lin. “UAE’s bank deposit guarantee will last three years”. Arabian Business. 13 October 2008.

PhilMUN 2009 7

followed suit, insuring deposits. Unlike most systems, Jordan did not place an upper-cap

on insured deposits, opting to drive more investment while assuming greater risk.

Originally intended to last through 2009, last November saw government officials extend

the program through the end of 2010.16 Egypt has also strengthened its deposit insurance

program, while Kuwait, Libya, and Saudi Arabia have also implemented insurance plans.

Like in the American system, these nations are temporarily using their central banks to

offer credit to the private banking systems.

Actors and Interests For the purposes of analyzing the economies of the Middle East more broadly, the

World Bank divides states in the region into three groupings. The classifications include

the oil-producing giants which are members of the Gulf Cooperation Council (GCC), oil-

exporting states with low per capita oil revenues, and non-oil exporting nations. The

World Bank designates this last group as being largely “reliant on financial flows from

the GCC or official development assistance from [groups like] the Organization for

Economic Co-operation and Development (OECD).” The region includes, for the

purposes of the World Bank, the states of northern Africa, and statistics given also

represent economic data from these states.

The Gulf Cooperation Council In 1981 Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab

Emirates formed the Gulf Cooperation Council (GCC), stemming from their proximity

and common border with the Persian Gulf. The council was intended to further the

commonly-held value of free trade and to provide security to its members. Initially, the

principle intention was to safeguard their interests against the Iran-Iraq War and to shield

< http://www.arabianbusiness.com/534012-uaes-bank-deposit-guarantee-will-last-for-3-years> 16 “Jordan extends guarantee of bank deposits until end of 2010” DPA. Earth Times. http://www.earthtimes.org/articles/show/293254,jordan-extends-guarantee-of-bank-deposits-until-end-of-2010.html

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against any deleterious effects generated by the steady rise of fundamentalist Islam.17 For

instance, it put forward attempts to help secure GCC member Kuwait after the failed Iraqi

invasion of the Persian Gulf War. Additionally, the Council seeks to work in the realm of

political affairs, legal and judicial cooperation, and in regards to human and

environmental affairs.18

Forecasters predict only two nations in the Middle East and North Africa – Saudi

Arabia and Kuwait – to near entering into a recession resulting from the economic crisis.

Both are members of the GCC, highlighting the hit oil-producing nations have seen the

world over. Indeed, the GCC has collectively seen the largest drop in economic growth

in the Middle East. As global demand for oil slowed from record highs over previous

years, collective growth in the GCC nations has tumbled. While growing at an average

rate of 5.5 per cent between 2004 and 2008, economic growth sputtered to a mere 1.1 per

cent in 2009.19 Nonetheless, renewed economic growth is expected to feature in a

moderate comeback beginning in 2010.20 The region’s GCC members have an important

advantage, however. Resulting from years of peak oil prices, these nations generally hold

significant reserves that have allowed them to counter the slowdown. Their fiscal

balance, denoting surpluses and deficits, decreased from 26.6 per cent of the states’ GDP

in 2008 to merely 5.3 percent in 2009. Slight improvement – to 7.2 per cent – is

prognosticated for 2010, and inflation is expected to continue its decline. Still, these

figures underscore these nations have taken, and the critical importance that the economic

environment improve in the coming years.

17“Gulf Cooperation Council [GCC],” GlobalSecurity.org, April 27, 2005, <http://www.globalsecurity.org/military/world/gulf/gcc.htm>. 18The Secretariat, “Areas of Cooperation Achievements,” Gulf Cooperation Council, <http://www.gcc-sg.org/eng/index.php?action=Sec-Show&ID=47>. 19 WB 32 20 “GCC Countries to See Modest Growth in 2010, Emirates NDB Says,” Economic Insights November 2009, Emirates NBD, <http://www.zawya.com/story.cfm/sidv52n46-3NC16>.

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Saudi Arabia Saudi Arabia’s economy is largest in the Middle East and has been greatly

impacted by the worldwide financial crisis. Generally, the country avoided collapses in

the banking and financial sectors as well as in construction ventures. Still, Saudi

Arabia’s status as a leading oil-producing nation meant that tumbling oil prices would

have a sharp effect on all aspects of its economy. Indeed, the Saudis stand as the leading

producer of petroleum, relying on its exportation for some 80 per cent of its budget

revenues and 45 per cent of its gross domestic product (GDP).21 In 2009 alone, the

International Monetary Fund predicted that losses in oil production comprised nearly 27

per cent of the Saudi national GDP.22 Its huge oil reserves, combined with sky-high

prices earlier in the decade afford Saudi Arabia substantial leverage in confronting the

crisis. The government announced a massive stimulus scheme whereby it would inject

funds totaling somewhere between nine and ten per cent of its GDP – an amount larger

than any other G20 nation.23 The Saudi finances allow it to work to keep private

investment flowing to assure long-term growth. The government – which still retains a

large hand in the Saudi economy – has turned to public financing in cases were

international banks have closed their lines of credit.

Bahrain Although oil accounts for 75 per cent of Bahrain’s revenue, the small island nation

lacks the resource in the abundance of many of its GCC neighbors. Although its

economy has been a steady performer, the nation did not benefit as markedly as others in

the region when oil prices spiked in 2007. Still, the nation did enjoy a healthy budget

21“Saudi Arabia,” World Factbook, United States Central Intelligence Agency, 2009, <https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html>. 22 Regional Economic Outlook, Middle East and Central Asia, International Monetary Fund, 2009, <http://www.imf.org/external/pubs/ft/reo/2009/MCD/eng/mreo1009.pdf>. 23 The Group of Twenty includes the nations with the nineteen largest economies, in addition to the European Union.

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surplus – a surplus that has been reversed and nearly negated by the financial crisis.24 As

a result, the government has been forced to consider new taxes, fees, and tariffs. The

state is actively seeking an increase in investment from the private sectors in activities

currently performed by the government. Correcting inefficiencies in the government

arena has also been a prime objective. In spite of troubles, Bahrain remains an

international banking center. Along with a strong financial services and construction

industries, its proximity to Saudi Arabia’s durable financial investments gives Bahrain

ample hope that it can weather the crisis.

Kuwait Kuwait, like many states in the region, has ridden the roller coaster of shifting oil

prices. High prices led the small state to accumulate significant wealth over the previous

five years, while low prices – ushered in with the worldwide economic slowdown – have

persisted in recent times. However, budget surpluses (Kuwait posted its tenth

consecutive surplus in 2008) have aided the country in weathering the crisis.25 The

Kuwaiti government has passed relief measures, largely focusing on helping to relieve

domestic and foreign debt holding up private investment and cutting credit restrictions.26

Oman Oman is highly dependent on oil to drive its economy. As its oil reserves are

precariously low, however, it has aims to reduce oil’s contribution to its GDP to 9 per

cent by the year 2020. In the meantime, however, low oil prices have turned its surpluses

(accrued when oil priced peaked around 2008) into significant deficits. Previous saving

should help shield the nation somewhat, though dwindling reserves will place strains

heightened by the higher cost of oil extraction due to geological obstacles. Proactively,

Oman has entered into partnerships with the private sector and foreign investors, 24 “Middle East: Bahrain,” The World Factbook, The United States Central Intelligence Agency, <https://www.cia.gov/library/publications/the-world-factbook/geos/ba.html#Econ>. 25“Kuwait,” World Factbook, United States Central Intelligence Agency, 2009, <https://www.cia.gov/library/publications/the-world-factbook/geos/ku.html>. 26Nisreen Zahreddine, “Kuwaiti Economy to Shrink,” Zawya, November 2, 2009, <http://www.zawya.com/Story.cfm/sidZAWYA20091103042003/Kuwait's%20Economy%20To%20Shrink>.

PhilMUN 2009 11

particularly in the energy sector, where it sees future potential. It is also looking into

joint ventures in telecommunications, tourism, and higher education.27 It has been

hampered somewhat by an overestimation in its ability to produce natural gas, as well as

a general drying up of credit throughout the region.

Qatar Qatar has been among the strongest performing Middle Eastern nations throughout

the economic downturn. The economy rests predominantly on oil and natural gas,

resources which propelled the nation to nearly a decade of sustained growth. While oil

has proved a consistent moneymaker, natural gas production has driven recent economic

success. Qatar’s eight hundred thousand residents profit handsomely off the oil and gas

profits – it has the second highest per capita income in the world and aspirations to

become one of the leading financial centers in the region. The government has long-term

plans to craft its capital city of Doha into a key cultural and economic center. Still, the

effects of the downturn have touched Qatar, and some of these plans may need to be held

back. A drop in prices could cut into the nation’s budget surplus. In late 2008, the

government stepped in and procured a five to 10 per cent of all local banks – some USD

$1.9 billion overall - reflecting stress throughout the financial system.28 Also, Qatar’s

inflation rate – roughly 10 per cent - stands among the highest of the region’s oil

producing states, though this number is down from 15.1 per cent in 2008 and is predicted

to fall to 6 per cent by 2010.

United Arab Emirates The World Bank projects that the United Arab Emirates (UAE) will experience the

sharpest decrease in growth of any nation in the Middle East and North Africa region

going into 2010.29 Its budget surplus is also expected to fall precipitously. A great deal

27 “Oman,” World Factbook, United States Central Intelligence Agency, 2009, <https://www.cia.gov/library/publications/the-world-factbook/geos/mu.html>. 28“Qatar Says to Buy 5% of Banks’ Capital in December,” October 5, 2009, Reuters, accessed through ArabFinance Brokerage Company, <https://www.arabfinance.com/news/newsdetails.aspx?id=151012>. 29 World Bank, p.48

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of the UAE’s economic activity is centered around its capital city of Dubai, where

numerous ventures are slowly grinding to a halt. Construction and real estate throughout

the Emirates, vital industries in the UAE, have seen dramatic drop-offs.

Low Revenue Oil Exporters Middle Eastern stats outside the Gulf Cooperation Council that export oil face

many of the same challenges as the GCC neighbors. However, their lesser reliance on oil

means that falling prices have not presented nearly as much of a shock as in GCC states.

Growth will fall from 5.6 per cent to roughly 2.7 per cent in 2009 and rise again to 3.5

per cent in 2010 – numbers less dramatic than in the GCC.30 Of course, without an

exclusively oil-based economy, these states are not as wealthy and do not have as many

resources and reserves to usher them through the worldwide decline. More diversified

economically, each of these states has an array of unique problems and advantages in

hard times. One common theme is the necessity of maintaining government funding of

social programs that seek to mitigate higher levels of poverty and unemployment in these

somewhat less developed nations. The decline in the GCC affects these states directly,

as numerous flows of capital have decreased, trending with a region wide and worldwide

decline in foreign investment.

Syria Apart from the financial realm, Syria is undergoing its own crisis. Drought has

ravaged the country for some three years, affecting some 1.3 million people and crippling

its agricultural output.31 The drought has driven many from their rural homes and into

major cities. This migration poses a threat to the cities’ unreliable infrastructure, and the

growing population living without any source of income places enormous strains on the

Syrian government.32 Projections that Syria’s oil resources will be depleted by 2030

30 WB 33 31“Information Bulletin - Syria: Drought,” International Federation of Red Cross and Red Crescent Societies, July 27, 2009, <http://www.ifrc.org/docs/appeals/rpts09/MIBSY001.pdf>. 32 Doron Peskin, “Syria: 160 Villages Abandoned Due to Famine,” Info-Prod Research (Middle East) Ltd., June 23, 2009, <http://www.infoprod.co.il/article/2/266>.

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highlight the need for diversification. Syria suffers from rising unemployment and high –

but recently stabilizing – inflation. The global credit crunch is predicted to cause a

roughly 30 per cent decline in foreign investment in Syria.33 The nation also remains

under sanctions imposed by the United States.34 The government plays a heavy hand in

running the economy, and many of the businesses it owns consistently lose money and

consume public funds.35 Recent reforms have liberalized economic affairs somewhat, as

exemplified by the opening of the Damascus Securities Exchange – the first of its kind in

Syria.

Yemen Yemen ranks among the poorest nations in the Arab world, and its economy relies

predominantly on oil. Its revenues derived from oil, however, are largely insufficient to

place the nation and its 23.8 million citizens on solid economic footing. The worldwide

dip in oil prices took a toll – after seven years of modest growth, 2008 saw a decline.36

Yemeni oil deposits are slowly beginning to diminish. As this vital resource dwindles,

the government has looked to expand the economy beyond oil by growing its real estate,

tourism, and manufacturing industries. While the imminent opening of a major liquefied

natural gas plant should spur short-term growth, international aid and private investment

has fallen as the economy continues to falter. These troubles are exacerbated by

Yemen’s proximity to unrest across Northeastern Africa, notably in Sudan. Fewer

economic ventures and reduced imports into the state reduce the government’s ability to

raise the funds to spur much-needed economic infrastructure and implement social

programs.

Recent implications of terrorist connections within the state will likely cause

further economic concern. While the government has not been accused of supporting or 33 “Syria Launches First Stock Exchange,” AFP, March 10, 2009, <http://www.google.com/hostednews/afp/article/ALeqM5gPsB6CSsyXUgWdxEsC0B_O-jqV-w>. 34 Ibid 35 Ibid 36“Middle East: Yemen,” The World Factbook, The United States Central Intelligence Agency, <https://www.cia.gov/library/publications/the-world-factbook/geos/ym.html>.

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sponsoring terrorists, connections with extremist groups does not make Yemen an

attractive opportunity for foreign investment.

Iran Oil and natural gas hold a central role in Iran’s economy. Like many nations in

the region, oil revenues comprise somewhere between fifty and seventy per cent of the

government’s revenues and account for some eighty per cent of the state’s total export

earnings.37 The drop in oil prices has reduced the government’s income and reduced its

tax base. Its response has generally been to cut spending and reduce public

expenditures.38 Iran administers expansive subsidies in the agriculture and energy

sectors. The parliament’s refusal to decrease these subsidies in light of budget shortfalls

exacerbates the problem, giving the government little room to spend and invest in its

people’s social needs and economic future. The government essentially runs the

economy, imposing inflexible regulations that stifle any genuine chance of a private

sector emerging. Corruption throughout the government lends heavily to economic

backwardness prevalent throughout the Iranian system. Iran suffers under lofty inflation

rate of over 23 per cent and consistently high unemployment. Even before the dawn of

the worldwide economic crisis, Iran saw many of its educated citizenry fleeing the

country and seeking opportunity abroad, a phenomenon commonly known as “brain

drain.”39 This trend damages attempts at revitalization and underscores the economic and

political difficulties within Iran, trouble compounded by the nation’s ongoing political

unrest.

Iraq As the situation in Iraq has increasingly stabilized following the 2002 United

States-led invasion, the nation’s oil output has risen steadily. World Bank projections 37 “Living and Traveling Abroad,” Foreign and Commonwealth Office, March 19, 2009, <http://www.fco.gov.uk/en/travel-and-living-abroad/travel-advice-by-country/country-profile/middle-east-north-africa/iran?profile=economy&pg=2>. 38 World Bank, p.49 39 Frances Harrison, “Huge Cost of the Iranian Brain Drain,” BBC News, January 8, 2008, <http://news.bbc.co.uk/2/hi/middle_east/6240287.stm>.

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have Iraq exporting 4.5 million more barrels of oil in 2010 than in 2008.40 Still, as the

global economic downturn sends oil prices lower, Iraq has seen a 25 per cent drop in

revenues from oil – particularly harmful, as years of political upheaval leave the nation

with little savings. Serious drought has set in recent years, wreaking havoc on agriculture

and reducing the nation’s wheat output by 27 per cent.41 Still, the economy is growing

and Iraq’s fiscal policies and banking industry have successfully kept inflation at a

tolerable 6 per cent. Iraq is currently involved in a number of pacts to reduce its

indebtedness to foreign nations, plans that could help the nation more easily navigate the

crisis and overcome a decade of turmoil. The government has been debating legislation

to strengthen Iraq’s economic infrastructure and ultimately woo foreign investors. The

government’s ability to spur revitalization, particularly in the non-oil sectors, is critical

for the stabilization of Iraq and the well-being of its people.

Non-Oil Exporters States in this category are highly dependent on the Gulf Cooperation Council

nations. GCC countries provide foreign investment, employ workers who send their

wages back as remittances to their home countries, and spur increased interest and direct

tourism into the states. Many of the nations’ economies suffer under high levels of debt,

and deficits severely limit governmental ability to spend on its own to spur growth and

provide social services to their people, experiencing increasing poverty and

unemployment. Without any significant resources or private sector of their own, these

nations are largely at the whim of the regional economy and possess few means to

proactively thwart stagnation and encourage economic expansion.

Jordan Jordan has been hit particularly hard since the economic crisis began, largely due

to the economic problems that have been plaguing the state for decades. Poverty and

unemployment have long been high, although the reforms of recent years have edged the 40 World Bank, p.50. 41 Ibid

PhilMUN 2009 16

nation toward greater stability. Namely, the International Monetary Fund (IMF) has

sponsored efforts at privatization and effectively managing the nation’s macroeconomic

policies. Successful adherence to IMF directives has helped promote growth and

establish trade links to the United States and the European Union.42 Nonetheless, the

Jordanian economy remains hampered by a lack of resources: water and oil are scarce,

while the land does not support abundant agriculture. Jordan’s lack of energy resources

forces a reliance on grants from foreign nations and institutions. Unemployment has long

plagued Jordan, rising from 12.1 to 13 per cent in the second quarter of 2009. Slowdown

sin real estate and tourism – hallmarks of Jordan’s predominantly services-based

economy – have figured largely in the losses. Job losses among Jordanian nationals

employed abroad should exacerbate this trend.43 A bright spot has been the traditionally

conservative approach of Jordan’s banking system, which avoided much of the over-

speculation leading to the collapse around the globe.44

Lebanon Like many Middle Eastern states outside the Gulf Cooperation Council (GCC),

Lebanon’s economy depends to a great extent on the performance of its oil-rich

neighbors. As less money flows into Lebanon as regional activity slows, economic

growth in Lebanon has slowed some four per cent over the last year, though projections

suggest a slight uptick into 2010.45 Inflation, however, has fallen during this period, and

should reach as low as 5 per cent by next year. A significant issue facing the Lebanese

government is indebtedness – interest payments alone on public debt consume a

staggering 45 per cent of government revenues.46 The USD $47 billion debt represents

162 per cent of the gross national product (GNP), a clear hindrance to economic

42 Federal Research Division, “Country Profile: Jordan,” Library of Congress, September 2006, <http://lcweb2.loc.gov/frd/cs/profiles/Jordan.pdf> . 43 2009 MENA, p. 52 44“Middle East: Jordan,” The World Factbook, The United States Central Intelligence Agency, < https://www.cia.gov/library/publications/the-world-factbook/geos/jo.html#Econ>. 45 World Bank, p.53. 46 Ibid

PhilMUN 2009 17

growth.47 Recent political stability in Lebanon has helped spur economic activity,

particularly in the dominant service-based arenas of banking and tourism. Although the

Lebanese economy is notably laissez-faire compared to many other Middle Eastern

states, corruption and poor management render it more difficult for foreign investors to

do business in the Lebanon, particularly in light of the financial crisis.

Palestinian Territories The Palestinian Territories, comprised of the noncontiguous regions of the West

Bank and Gaza, suffers from numerous economic woes aside from the pressures of the

worldwide decline. While the West Bank has led the region to modest growth over the

past year, the Gaza Strip has seen little positive economic improvement in some time. It

suffers from a large population with little land resources to draw from. Tight security

controls from without retard Gaza’s ability to maintain a consistently functioning flow of

imports and exports. Constant strife and the threat of military and terrorist action counter

efforts at development and discourage any serious investment. In 2009, the territories

received some USD $1.65 billion in foreign aid, but have been forced to direct much of

this to reducing debt and paying the growing number of public employees, rather than

spurring private sector economic activity.48

Islamic Banking Islamic banking is a trillion dollar industry in the Middle East and its model has

been eyed by many seeking an alternative to traditional Western banking methods.49

Islamic banking is grounded in the principle that collecting interesting – a form a usury –

violates Muslim scriptures and constitutes a sin. The Christian West once observed this

standard in medieval, but interest has been a hallmark of Western capitalism for centuries

47 Doron Peskin, “New Lebanese Government to Face Economic Reality,” Info Prod Research (Middle East) Ltd., June 9, 2009, <http://infoprod.co.il/main/siteNew/index.php?langId=1&mod=article&action=article&Admin=qwas&stId=263>. 48 “Gaza Strip,” The World Factbook, United States Central Intelligence Agency, 2009, <https://www.cia.gov/library/publications/the-world-factbook/geos/gz.html>. 49 Faiza Saleh Ambah, “Islamic Banking: Steady in Shaky Times,” Washington Post Foreign Service, October 31, 2008, <http://www.washingtonpost.com/wp-dyn/content/article/2008/10/30/AR2008103004434.html>.

PhilMUN 2009 18

and has been used to generate great wealth through bold financial ventures. In this

system, simply letting money sit in a bank does not yield profits; instead, it must be

actively invested. Amr al-Faisa, a prominent Islamic banker, puts it this way: “In Islamic

finance you cannot make money out of thin air. Our dealings have to be tied to actual

economic activity, like an asset or a service. You cannot make money off of money. You

have to have a building that was actually purchased, a service actually rendered, or a

good that was actually sold."50 The common function of banks in home ownership

highlights the differences between the two systems. While Western banks give award

loans – on which they collect interest – for customers to purchase a property, Islamic

banks purchase the home outright. The properties are then leased to customers, who

obtain full ownership once the property is paid off, with a modest profit for the bank

factored in. Religious conformity is an important underpinning of Islamic banking, and

most institutions cannot invest in gambling, alcohol, pork, pornography and weapons –

commodities prohibited under Shariah law.51

Islamic banks have grown considerably in recent years, and their combined assets

are estimated at approximately USD $850 billion. Like all major banks, Islamic banks

took a hit during the financial crisis. Like regular banks, their business model involves

extending credit, and the preceding year has proven a poor time to take a risk.

Nonetheless, excessive risk taking is explicitly forbidden in Islamic banking. This

conservative safeguard has shielded the industry from excessive losses experienced in

other models. It is this security that many believe may propel Islamic banking to a

prominent role in the economic world.

50 Ibid 51 James Walton, “Understanding Islamic Banking,” Business Day, December 21, 2009, <http://www.businessdayonline.com/index.php?option=com_content&view=article&id=7162:-understanding-islamic-banking-&catid=117:news&Itemid=349>.

PhilMUN 2009 19

Conclusion The beginning of a new decade serves as a decisive economic pivot-point.

Worldwide, the economy is expected to advance. After contracting for the first time in

recent memory by 1 per cent in 2009, projections foresee a 3 per cent expansion in 2010.

This figure remains markedly lower than before the crisis struck, yet belies a decidedly

positive trend. In spite of this growth, serious challenges remain. Aggressive public

policy initiatives have generally worked to mitigate the crisis, yet, at the household level,

unemployment and a lack of savings are keeping many individuals, families, and small

businesses reeling. These issues are as prevalent throughout the nations, impacting

people both within and outside of the Middle East and across advanced and developing

economies.

The principal challenge facing the economy is achieving graceful exits of

government interventionism in the economy. Shoring up the financial infrastructure and

rendering it able to stand on its own once again in continuing to rebuild confidence in

financial systems, banks, and markets. Timing is critical if an optimum solution is to be

realized. The International Monetary Fund in its World Economic Outlook for October

2009 frames the difficult situation: “The challenge is to map a middle course between

unwinding public interventions too early, which would jeopardize progress made in

securing financial stability and recovery, and leaving these measures in place too long,

which carries the risk of distorting incentives and damaging public balance sheets.”52

While steadily improving, many fear the Middle East’s economy is but a disaster away

from receding into crisis-level stagnancy, or worse. The potential for significant

fluctuations in the price of oil highlights the risk, as the devastating January 2010

earthquake exhibited how unforeseen turmoil can decimate a nation’s infrastructure and

economy. In a region plagued by incessant political unrest, the potential for disaster to

trigger an economic shock looms ever-present.

52 http://www.imf.org/external/pubs/ft/reo/2009/MCD/eng/mreo1009.pdf

PhilMUN 2009 20

Discussion Questions

• Investigate the economy of the nation you are representing. In what ways is it most susceptible to the economy crisis experienced over recent years?

• How have the people of your nation been most directly affected by the economic

downturn? How does this compare with the people of nations around the Middle East? Around the world?

• What factors led to the Middle East not feeling the brunt of the economic collapse

until some time after most of the rest of the world? • What is your impression of the United States’ response to the economic crisis?

What criticism has the government, both under Presidents George W. Bush and Barack Obama, received from the public and the economic sectors? What has it been credited with doing well?

• How do you view and apply elements of the American response through the prism

of the Middle East? • What is the political landscape in your nation and more broadly throughout the

region? Are decisions made democratically, demagogically, or otherwise? How does the system of government and its degree of responsiveness to “the people” and to the economic sector dictate the policies it can and does pursue?

• What role does religion play in the economic landscape in the Middle East? What

is the role of religion in the nation you are representing? To what extent does it bear on the makeup and policymaking of the government?

• To what degree does oil factor into your nation’s economy? Is it a major exporter,

a minor exporter, or an importer? What effects can rapid fluctuations in the price of oil have on your nation and its economy? What non-oil industries are – or could be -- important to your state’ economy.

PhilMUN 2009 21

Bibliography For Further Reading "Countries." Middle East & North Africa. The World Bank, 2009. Web. 15 Nov. 2009.

<http://go.worldbank.org/7UEP77ZCB0>.

The World Bank’s Web site provides a wealth of information on the global economy and on its work. This particular Web page includes a drop-down listing of the nations in the Middle East and North Africa region. These links direct to individualized statistics regarding each nation and its economy, as well as relevant news stories and World Bank reports.

The Chief Economist’s Office of the Middle East and North Africa Region of the World Bank. Economic Prospects and Developments 2009: Navigating Through Global Recession. Washington, D.C.: The International Bank for Reconstruction and Development/ The World Bank, 2009. This World Bank report gives a most thorough and detailed analysis of the economic situation in the Middle East. The theme of the financial crisis and its impact on the region and individual states and their people is weaved throughout. At times, the language becomes somewhat precise and academic and the amount of data can appear overwhelming. A basic familiarization with basic economic terms will assist the reader to a great degree. Each section includes overviews and summaries – these are good sections to begin with. An annex gives a quality depiction of the economic climate in each nation in the region. Published early in 2009, some of the information is slightly out of date, and many of the data provided for late-2009 and 2010 are admittedly projections. The report is also available free of charge on the World Bank’s Web site, at <http://go.worldbank.org/EC22T97E90>.

Regional Economic Outlook: Middle East and Central Asia, Oct. 2009. Washington,

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Similar in scope to the World Bank report, this International Monetary Fund production benefits from being slightly more up-to-date. This work contains a slightly greater emphasis on the impact on the oil industry, but still does an excellent job presenting the basic issues at play and exactly how and why economies might be expected to recover or not. The report is

PhilMUN 2009 22

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PhilMUN 2009 23

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