Despite Middle Eastern countries attempting to move towards a sustainable peace the region starts the twenty-first century still economically and politically lagging behind many parts of the world. The challenge facing the region's political rulers, who have to balance much-needed economic reform and troubled political landscapes, is to accelerate economic growth and create enough jobs for their young populations. About 50% of the region's population is under 20 and youth unemployment is a growing problem.
Gross domestic product (GDP) per capita shrank by 2% a year between 1975 and 1990, and only grew by 0.6% a year between 1990 and 1998. And even though the ongoing peace process means the region is closer to being able to give its citizens a better economic future, it will still have to navigate its way through profound and far-reaching transitions as the years draw on. These will include succession crises, economic realignment, demographic shifts, resource scarcity, ecological threats, new technologies and a changing geo-strategic balance.
With the rise of political Islam and the fall of the USSR in the final years of the twentieth century, the region is increasingly being drawn into the European and Central Asian political and economic orbits. The post-WWII era Middle Eastern borders are, and will continue, subtly shifting. Economically, the region is also becoming increasingly marginalised and dependent upon imports and external aid, which usually comes with troublesome political conditions attached. Despite serious socioeconomic problems in many countries, and the fact that peace is finally taking hold, state spending on armaments continues to skyrocket.
Many states also face severe water shortages, which can only heighten interstate tensions and conflicts while hindering government efforts in the fields of social and economic development. Even the most successful part of the Middle East, the Gulf Cooperation Council (GCC) countries – made up of Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman – are having trouble attracting foreign investment.
During the nineties, emerging market investors overlooked the Gulf region, even though it is made up of some of the world's richest countries and holds 53% of the world's proven oil reserves, and accounts for 24% of the production and 40% of global oil exports. They also hold 14% the world's proven natural gas reserves.
With their oil revenues, they have upgraded their physical infrastructure and substantially raised the standard of living of the population. They are also using these to invest heavily in diversifying their economies and to expand their oil and gas production facilities.
They have also established a good track record of stable exchange rates and low inflation, and although the process of political reform is slowly taking shape, a stable political environment is created by the fact that these countries are ruled by powerful royal families.
Despite these characteristics, which would seem to create an attractive investment climate for foreigners, investment in the Gulf region during the nineties remained low. Estimates are that the region attracted some 1–2% of total private capital flows to all developing countries.
Why is this?
Firstly, in the early nineties, development of the GCC countries was thrown back by the conflict following the Iraqi invasion of Kuwait. Economic growth fell to an average of 2% in 1992–1994, fiscal and current account balances turned negative and debt service payments increased sharply. From 1995 on, most GCC countries intensified their adjustment efforts, introducing initiatives to balance the budget and promote private sector growth.
Secondly, the severe decline in oil prices in 1998 pushed the GCC countries even further back. Problems with the balance of payments and fiscal balance, also a feature of 1986-1989, returned with a vengeance, especially in Oman, Qatar and Saudi Arabia. And thirdly, state control of the economies of the region remained abundant.