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DEVELOPMENT: Conflict Threatens Mideast Economies – Report

Thalif Deen

UNITED NATIONS, Apr 16 2004 (IPS) - The U.S.-led occupation of Iraq and the three-year-old Israeli-Palestinian confrontation in the West Bank and Gaza are threatening to de-stabilise the economies of most Middle Eastern nations, according to a U.N. report released Thursday.

Economic growth in the politically volatile region is expected to remain stagnant at about 3.5 percent in 2004 – the same rate as in 2003 – while unemployment is projected to rise.

The study, which reflects the collective voice of about 100 economists from 60 countries, says economic prospects for the Middle East ”are still critically conditioned by geo-political developments in the region – particularly the situation in Iraq and relations between Israel and Palestine.”

Speaking to reporters Thursday, Nobel Prize laureate Lawrence Klein said the uncertainty caused by military conflicts is having a ”disturbing effect” on people’s minds, and spending.

The terrorist bombings in Spain in March and the threat of terrorist attacks on the United States and other western nations have caused a lot of insecurity and uncertainty, he said.

”This is affecting people’s spending decisions. And it is not healthy for the world economy,” added Klein, a professor of economics at the University of Pennsylvania and lead author of the study.

The report is the product of Project LINK, a research venture organised by the United Nations and the University of Toronto.

Klein, who won the Nobel Prize for economics in 1980, is the founder of Project LINK, a group of 100 international economists who meet at the United Nations every year to take stock of the successes and failures of the global economy.

He told reporters the world situation remains ”turbulent” in the political, military, diplomatic and economic fields.

Current political and military uncertainties in the Middle East, he said, also affect business decisions and investor confidence. ”It also diverts a great deal of expenditure to the military sector, a sector which does not generate high productivity.”

The U.S. military budget alone is now approaching the 400 billion dollar a year mark, rising from 379 billion dollars in 2003 to 390 billion dollars in 2004 and a projected 400 billion dollars in 2005.

Overall military spending for the Middle East is projected at about 55 billion dollars annually through 2007, rising from about 52 billion dollars in 2003. The region’s big spenders are Saudi Arabia, Israel, Iran, the United Arab Emirates and Egypt.

Klein said the hike in military spending contrasts with the end of the Cold War in the late 1980s, when a ”peace dividend” resulted from the temporary diversion of resources from the military to development needs.

”That was good for the world economy,” he added, pointing out that the current world conflict ”is not a situation friendly to a peace dividend.”

The study, ‘Global Economic Outlook 2004’, predicts the world economy will grow 3.7 percent this year, compared with 2.6 percent in 2003, although expansion will slow in the second half of 2004. The projection for 2005 is a decline in growth, to 3.4 percent.

Since mid-2003, it adds, economic improvement in Iraq has been dilatory, with oil production and exports rising gradually but remaining below their pre-invasion levels last March.

A plethora of difficulties and uncertainties remain, and attaining economic and political normalcy in Iraq is likely to require both more time than anticipated and more resources for reconstruction.

Rebuilding the occupied nation is going to ”take a very long time and is going to be very expensive,” Klein added.

The United States says it plans to spend about 87 billion dollars in the military occupation and reconstruction of Iraq and Afghanistan, the bulk of the funds going to Iraq.

According to the Institute for Policy Studies in Washington, the final figures for Iraq could be as high as 1.6 trillion dollars. But the biggest beneficiaries of the war on Iraq, it added, would be U.S. oil companies and civilian and defence contractors.

The U.N study adds that the conflict between Israel and Palestine ”has had negative spill over effects on the region, as both tourism receipts and transit-trade revenues continue to decline.”

The only propitious sign – specifically for oil-exporting economies – is the higher price of petroleum, which has risen from an average of about 25 dollars per barrel in 2003 to over 30 dollars this year.

”But even this benefit has to be discounted because of the depreciation of the U.S. dollar – in which international prices of petroleum are quoted – and the reduction in oil production in these economies to support a firm petroleum price in the future,” the study said.

Despite the higher petroleum price, growth in oil-exporting countries, already dampened by concerns about security, ”will likely be dragged down by fiscal consolidation, which will reduce both public consumption and investment spending in 2004,” added the report.

The study singles out Jordan and Lebanon as two Middle East nations expected to achieve only ”modest improvements”.

A World Bank report released last year said the Iraq war has already jolted Middle East economies, pushing Jordan to the bring of recession. It identified four countries – Jordan, Egypt, Morocco and Tunisia – as those worst hit by the conflict.