Economy and Economic Institutions

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ECONOMY AND ECONOMIC INSTITUTIONS

The Islamic world and its development have often been examined through its economic development and its relationship with Christian Europe. This has been particularly true of analyses that dealt with the earlier period of Islamic history. The Belgian medievalist, Henri Pirenne, proffered a provocative theory about the end of the Rome Empire in the West and the beginning of the Middle Ages. He asserted that the Middle Ages did not begin in 325, as his contemporaries would have it, but rather that they began after the Arab conquest broke through the perimeter of the Mediterranean, in the seventh and eighth centuries. The Arab incursion destroyed the unity of the Roman Empire, fracturing its political, economic, and cultural cohesiveness. Pirenne hypothesized that this situation, along with the isolationism of much of Europe, eventually led to feudalism in Europe and the rise of Islamic civilization.

Agriculture in the Early Islamic World

Whether or not one agrees with Pirenne's views of the effect of Arab conquest on European society, it is undisputed that the expansion of the Islamic world had a profound impact on Muslim society. Most notable is its effect on agriculture, where new crops and techniques to enhance production were rapidly introduced from places as far east as Southeast Asia and Malaysia. Some of the new crops introduced during the early Islamic period included rice, sorghum, hard wheat, sugar cane, cotton, watermelons, eggplants, spinach, artichokes, sour oranges, lemons, limes, bananas, plantains, mangoes, and coconut palms. These crops, as well as changes in agricultural techniques, were not only significant in their impact on food production, but also in the role they played in fostering the development of industry, cities, and monetary authorities within the Muslim world.

It is believed that after the rise and spread of Islam, many of the new crops were obtained from the fallen Sassanian Empire and the Indian subcontinent, where the new province of the Sind, conquered in 711, gave early Muslims a foothold in a part of India. The crops from India first came to Iraq and Persia, then diffused into the westerly parts of the Islamic world. By the tenth and eleventh century, the western part of the Islamic world had taken on major crop changes that had been introduced from territories to the east.

In time, the new crops were also introduced into Europe by way of Spain, Sicily, and Cyprus. Unlike the Islamic world, where these new crops were quickly adapted to local culture and tastes, they were not rapidly developed in Europe. In a 1981 article on the "Medieval Green Revolution," Andrew M. Watson cites spinach as an example of this differential development. He states that spinach was one of the earliest crops to be received into Europe, but although it was quickly adopted throughout the Islamic world, it spread much more slowly in Europe, along with sorghum, sour oranges, and lemons. One reason given for this slowness to adopt new crops was the European peasantry's lack of skill and technical knowledge about agriculture.

In contrast, the Islamic world saw extensive changes in agricultural techniques. One area of great importance was irrigation. Since many of the new crops came from regions of heavy rainfall, it is significant that they could be grown successfully in the much drier environment of the Middle East. In Persia and the Nile Valley, long underground canals known as qanat were used. These canals connected catchments of ground water to surface canals, but they were inadequate to meet the needs of the new crops. A new and more sophisticated system of irrigation was introduced during the early Islamic period that relied on ground water from wells, aquifers, and springs, augmenting older irrigation systems. Dams and cisterns were also used to store water for later use. Taken together, these systems allowed for the irrigation of land that had never before been used agriculturally, or extended the time that other lands could be kept under cultivation each year.

These changes in agriculture gave rise to other changes in the Islamic world. The increase in food production led to increases in population growth, fostering urbanization and industrialization. These developments fed on each other, for as the population grew new importance was put on agricultural improvements in productivity. As towns increased in size there was continued pressure to expand the cultivation of new lands. As villages grew, they often gave rise to new cities.

Industrialization, Trade, and Coinage

Industrialization, too, was an outgrowth of agricultural surplus in many parts of the Islamic world. The cities became the place where much of the processing of the new crops occurred. This refining of agricultural goods involved drying, cooking, pickling, and milling of many crops. Watson states that this refining often led to further processing, as in the case of sugar, which gave rise to the confectionery industry, and cotton, from which the textiles industry evolved. The cities also became the marketplace, where people from the rural areas would come to trade crops for processed goods. It has thus even been argued that agricultural change was at the heart of local and, eventually, long distance trade. As the Islamic world spread, the demand for its raw materials as well as finished goods increased. Consequently, trade between the Islamic world and many parts of Europe grew. As ports and waterways became more important for transporting goods, the cities that lay along waterways grew. There was also the birth of a new class of urban intermediaries—merchants, transporters, financiers, and warehouse owners.

This expansion in trade and commerce also led to a more sophisticated monetary system. At the onset of the rise of Islam, the use of various coins in different parts of the Islamic world was not uncommon. In fact, the Muslims inherited the circulation of metallic money from the Byzantines and Sassanids who preceded them. The Byzantine state had used gold coinage, which constituted an imperial monopoly, whereas the Sassanid empire used silver coinage. As the Islamic world continued to expand, the need to secure an adequate supply of coinage grew more pressing. Initially, the Byzantine and Sassanid coins were used, but eventually a new, Islamic, coinage was introduced. There were two new coins: silver (dirham) and gold (dinar). The introduction of these coins is referred to as the monetary reform of ˓Abd al-Malik.

Professor of Islamic history Andrew S. Ehrenkreutz has stated that the monetary reforms of the early Muslim world go beyond these new coins. The caliphate assumed responsibility for the supply of currency, taking upon itself the problems of finding precious metals for minting and the distribution of coinage. Muslim coins have been found as far away as Scandinavia and Russia, suggesting that at least some parts of the West had a favorable balance of trade with the Muslims. A number of scholars believe that the Varangians (Vikings) were the middlemen, moving goods from the Muslim world to Scandinavia and Russia. This theory is supported by evidence that, beginning sometime between the late seventh or early eighth century c.e., the Varangians migrated from Scandinavia south to the Black Sea, establishing many trading towns and stations along the way.

Growth of Cities and Guilds

As this system of commerce expanded, the Islamic city grew in importance as well. These cities were multiethnic, and their citizens practiced a variety of religions. Different ethnic or religious groups resided in separate, usually exclusive, quarters of the cities, and these residential divisions were associated with occupational specialization as well. Z.Y. Hershlag points out that ethnic Turks were officials and soldiers, the Greeks as well as the Jews were engaged in trade and finance, and the Armenians were artisans. There were certain cities where the main activities of the town were associated with their dominant ethnic or religious groups. Even the marketplace was organized along ethnic and religious lines, as various kinds of goods and services were associated with particular groups and were made available in separate parts of the bazaar.

In addition, most residents of cities were organized into corporations, termed asnaf, naqabat, or tawa˒if in Arabic. These corporations were mainly professional guilds, but while their social functions were on the whole broader than those of the European guilds, their economic power and their control over their professions were less absolute than in their Western counterparts, nor did the Muslim guilds encompass all urban craftsmen or merchants. The case of the Damascus guilds offers insights into how these institutions worked. The Damascus guilds were rigidly organized and exclusive. They had a hierarchy of officers, the head of which was the shaykh, who either inherited his position or was elected. In other Middle Eastern countries, however, the autonomy of the shaykh was not the case. For example, in Egypt guilds were an important mechanism for the government to collect taxes, and the shaykhs became accountable to the government for the actions of guild members as well as for their members' payment of taxes. In Turkey, guilds were very restrictive and mandated that the number of people participating in a given trade be kept at a certain number.

There has been much debate by scholars as to the significance of guilds as well as their links to Islamic syndicates and trade unions; however, there is little evidence that the craftsmen's guilds had any influence on these later organizations. Furthermore, there has been much speculation as to why the guilds dissolved. Some writers assert that the decline of the guilds had to do with the rigid structure of the organizations. However, evidence seems to indicate that the dissolution of the guilds is more likely tied to the introduction of European finished goods into the Muslim markets, which disrupted the local handicrafts industry as a whole.

Agriculture and Trade in the Modern Era

Like the earlier period of Islamic history, the modern economic history of the Middle East has been shaped by its relationship and interaction with Europe and Western civilization. Most economic historians of the region trace the origin of this new relationship to the early 1800s and the expansion by many European countries into other regions of the world in search of natural resources and markets for their finished goods. In spite of its earlier economic advances, the Middle East eventually lagged behind Western society in terms of modernization.

As the Europeans expanded their control into other parts of the world, the Middle East itself was galvanized into the formation of a broad network of international trade and finance. The region had witnessed much social upheaval throughout the Middle Ages, much of it attributable to an unstable food supply that had been devastated by famine, plagues, and wars. To safeguard their local populations from disruptions in the food supply, governments of the region, in particular the Ottoman Empire, turned to the importation of European consumer goods. This approach to trade fit well with the mercantilist mentality of the Europeans, who were looking for export markets but did not care to reciprocate the trade with equal imports. In fact, this lack of trade reciprocity gave rise to the belief, in many parts of the Middle East and North Africa, that exports impoverished a country and that sales to foreigners should be discouraged. Nonetheless, the Middle East became one of the lowest-duty (import tariff) areas in the world, ultimately providing a large market for European goods. It should be mentioned, however, that during both the First and Second World Wars, the Middle East became a net exporter to Europe, as supply chains were disrupted and Europe needed to provision its troops in the region.

The exception to this trade arrangement was found in Egypt. Under Muhammad ˓Ali (r. 1805–1849), Egypt used foreign trade to raise revenue, while taking steps to allocate local resources and protect its domestic industries. In fact, Egypt in the early 1800s was careful not only to minimize imports but also to maximize exports, thus protecting domestic industries from being supplanted by foreign-made products. Muhammad ˓Ali's most successful venture was the development of the cotton trade. Egypt was able to produce a much higher quality cotton crop than Europeans. Consequently, beginning in 1821, Egyptian cotton exports rose from 100,000 to 50 million pounds by 1850. Cotton exports continued to surge into the 1860s, as the American Civil War significantly halted production in the United States.

The focus on cotton in Egypt should not be surprising, as agricultural production has played an important role throughout the Middle East. Yet, most of the land in the region is less than well suited to agricultural development. There is a lack of rain throughout the region and the few existing waterways are heavily drawn upon, a scarcity that continues to be a source of great tension throughout the area. Consequently, the crops that have dominated agricultural production have been those that are less irrigation intensive, such as cereals, with the limited introduction of silk production in the late nineteenth century in Lebanon, coffee production in Yemen, and cash crops such as dates, nuts, and fruits in the betterwatered parts of Arabia and North Africa.

Turkey under the Ottoman Empire began producing tobacco in the seventeenth century. As with cotton, the American Civil War was a factor in the growth of the Turkish tobacco industry, as the plantations of the American South ceased production and demand for the commodity from other sources increased significantly. Turkey's tobacco production rose from an estimated 10,000–13,000 tons in the 1870s to 31,000 tons in 1900, and 64,000 tons in 1911. Tobacco remains an important export for Turkey today.

Land Ownership and Reform

In addition to the problems of attempting to cultivate marginal land for agricultural use, many scholars have cited land tenure as a major deterrent to productive agricultural development in the Middle East. Land is normally classified into three types in the Middle East: raqaba, which means ownership by the state or ruler; milk, which refers to private ownership; or waqf, which is land whose revenues are intended for religious or charitable purposes. Of course, there was a complex system of land-holding arrangements in the region, but in general, during the period prior to the nineteenth century, much of the land was held by the state. The land was often worked by peasants who were heavily taxed. Later, as agricultural production became more profitable, much of the land was transferred to private ownership, held in large estates and, again, worked by peasant farmers.

It wasn't until after the Second World War that major land reforms took place that favored small farmers. The Egyptian Land Reform Law of 1952 served as a model for the region. The act redistributed land held by absentee landlords, transferring ownership to those who actually worked it. The large estates were broken up into small plots and parceled out to farmers who belonged to cooperatives. Although in most cases land reform was hailed as a needed change, it has proven over time to have been less than successful, for it established a system of small and inefficient farms that has hampered productivity and hindered the use of mechanization in the modern period.

Industrialization

Industrialization also experienced a number of ups and downs in the region. Before the late nineteenth century, the Middle East boasted of a thriving handicraft industry. However, the production of local handicrafts declined with the introduction of European and Indian goods on the Middle Eastern market. There was also a perception, particularly among the middle and upper classes, that local goods were inferior to European goods, and this attitude helped seal the fate of handicrafts in the region. Meanwhile, the development of industrialization in the region was slowed by unfavorable commercial treaties, which did not support export markets. There was also a lack of capital for industrial development, as well as governments that lacked the foresight to foster local entrepreneurs.

Yet, again, the First World War was important for setting the stage for industrialization. The rise of nationalism, coupled with the realization that European instability could interfere with its ability to provide necessary imports for export to the Middle East, led to widespread industrialization projects. With the abolition of trade agreements that favored Europe, a further incentive for industrialization was created. Industrialization continued to be important through the Second World War, for now the countries of the Middle East not only had to provide for themselves, but some of them also had taken on commitments to supply the Allies.

Because of Egypt's ambitious development initiatives in the 1800s, foreign investment came to play a significant role. The first half of the nineteenth century saw the dissolution of the old trading companies and the emergence of private traders, and the second half saw the emergence of private and incorporated banks. Along with these banks came large accumulation of debt by many governments in the region. Moreover, much of the money that was borrowed was poorly invested, and thus did not create much economic growth. In the cases of Egypt, Tunisia, Morocco, and Turkey, this debt eventually led to foreign occupation. By 1914, the countries of the Middle East had a total debt of about $2 billion, or nearly one-twentieth of the total world debt, of which a little over half was public and the rest private. North Africa had a public debt of about $250 million and a much larger amount of foreign investment in the private sector. Although foreign occupation ultimately led to much political turmoil in the region, it has been attributed initially to better debt management and investment strategies.

The First World War through the Cold War

The two world wars were important events in terms of their impact on the Middle East. The First World War destroyed the old colonial trading system and allowed the region to regain both political and economic independence. This took the form of new trade treaties that were aimed at creating fairer and more appropriate commercial arrangements. The special agreements that had given foreigners extraterritorial rights and sheltered them from local laws and taxation were abolished. Subsequently, the period between the two world wars found the Europeans preoccupied with domestic problems and postwar reconstruction, minimizing their influence and interference in the region. The Second World War was even more significant, for it enabled the creation of a new agenda for the Middle East as political and economic power continued to move from the hands of foreigners to the hands of the endogenous class.

As foreign nationals lost economic and political control in many of the countries of the Middle East, a massive exodus of Europeans took place. This exodus created a vacuum in the upper tiers of the labor market as many of the foreigners had positioned themselves not only in roles as traders and financiers, but as entrepreneurs and managers as well. This vacuum caused the endogenous governments of these states to take on increasingly active roles within their own economies. In spite of the fact that many of these states began espousing socialism, the period of the 1950s was really marked as the period of state capitalism, in which the various governments began to take on the economic roles that are normally associated with the private sector. While the Soviet Union and the West, led by the United States, attempted to win allies in the region through the distribution of foreign aid and loans, governments within the region began experimenting with many alternative economic paradigms.

The cold war policies of the West concentrated on modernizing the Third World through economic development. In Europe, the Marshall Plan provided the capital it needed to rapidly rebuild and develop; consequently, it was believed that an equally big push, in the form of capital infusion, would be similarly effective if applied to the Third World. Foreign aid with an emphasis on industrialization began to pour into the region. Egypt under Jamal ˓Abd al-Nasser (1918–1970, president from 1954 to 1970) was very successful at playing the United States and its allies off against the Soviet Union, winning capital and investment from both sources.

In 1952, Jamal ˓Abd al-Nasser had led a military coup, seizing power of Egypt. Under his leadership, monopolistic capitalism came to the forefront as the institutional structure of the economy. He nationalized a number of industries, including the Suez Canal Company, and carried out radical land reforms. Much of the logic for restructuring the economy was not only to create an equitable distribution of resources within Egypt, but also to offset the damage done by decades of colonial policies, which left Egypt with little to no indigenous business community. Moreover, Nasser saw the need to generate resources to fuel his hopes of economic expansion. Such resources were unavailable in the private sector, but the government was receiving much foreign aid during the 1950s and 1960s. Nasser adopted a foreign policy of nonalignment, courting both the United States and Soviet Union without offering full allegiance to either.

The dilemma for many of the countries in the Middle East, however, was that they were essentially rural, agrarian societies, ill equipped in terms of human capital to absorb the foreign aid that was being given to them. This situation led to economic policies that favored the development of urban centers at the expense of the countryside. This phenomenon, known in development literature as "urban bias," led to much migration of laborers from rural areas to the urban centers, and this influx of prospective workers often outpaced industrialization. Consequently, many countries in the region saw the rapid growth of urban poverty, as the cities attracted vast numbers of underemployed or unemployed citizens for whom no jobs could be found.

Oil and Labor

Although the region boasted some of the world's largest known oil reserves even during the middle of the twentieth century, it wasn't until the 1970s that the governments of the Middle Eastern states came to appreciate the power of this resource. In fact, oil was relatively insignificant to the foreign aid and development policies of the region throughout the 1950s and 1960s. When the 1973 Arab-Israeli War broke out, however, Arab petroleum-producing countries took measures to pressure Western powers in favor of the Arab cause. First they introduced restrictions on the sale of oil to certain states that supported Israel. Second, they cut back on oil production. By the end of December 1973, they had reduced the production of oil by 25 percent of its earlier levels. The price of oil increased as a result. On 16 October 1973, the ministerial committee representing the six Gulf countries, which are members of the Organization of Petroleum Exporting Countries (OPEC), decided to further increase the price of oil by 70 percent. Coupled with the oil embargo, the price was later pushed up to $11.56 per barrel. These events, although politically motivated, substantially fueled the economies of the states in the Gulf region.

The initiation and implementation of development plans in the Gulf States required large numbers of migrant workers of many nationalities. Much of Saudi Arabia's initial needs were in construction, where high levels of unskilled and semiskilled workers were needed. Many of its neighbor states had large numbers of unskilled or semiskilled workers in need of jobs. They constituted a large available labor force with easy access to the Saudi Arabian labor markets, and they flooded into the country.

This situation, coupled with higher wage rates in Saudi Arabia relative to labor–rich states, led to a massive labor migration from Egypt, Yemen, and Jordan (mainly Palestinians) to Saudi Arabia and other, similarly well-off Gulf States. This migration would climax and then halt abruptly with the Gulf War of 1990. It has been estimated that, in 1975, the Gulf region had a labor requirement of 9,728,000. Saudi Arabia alone had a labor requirement of 1,968,000 in 1975, but its national work force numbered only 1,300,000. Although it is difficult to know how reliable these figures are, they do illustrate the great need for laborers in the Gulf region.

Middle Eastern oil reserves and the revenues they generate have divided the region into two groups of countries: oil rich/labor scarce and oil poor/labor abundant. Although these countries have not integrated into one system, they have benefited greatly from their proximity to each other. The oil-rich countries have relied heavily since the early 1970s on the labor from the labor abundant states. The labor-abundant states have used capital inflows from migrant remittances, along with financial aid from the Gulf and the world's superpowers, to build growth economies through state-owned enterprises. From 1960 to 1985, the Middle East outperformed all other regions of the world except East Asia in income growth.

The Middle East witnessed much change in the 1980s and 1990s. Political instability, coupled with too much government control and regulation, caused much of the international financial and business community to shun this region and to invest their capital in the emerging superstars of Southeast Asia. Fund managers estimated that out of a total of $65 billion of capital that floated into emerging markets in the peak year of 1993, only 0.3 percent trickled to Arab markets. Yet, this region continues to be rich in both human and natural resources. It is the home of 6 percent of the world's population, with a wealth of highly-skilled workers and a GDP of over $600 billion.

The late 1980s, however, was a sobering period for the Middle East. An increase in the world supply of oil caused prices to plummet at the same time as financial aid from the Gulf and abroad came to a halt. Since 1986, real per-capita incomes have fallen by 2 percent per year. The oil producers were hit even harder with the per-capita fall in oil output of 4 percent per year between 1980 and 1991. These events caused the Arab world to rethink its stance on two major fronts: the structure of their economies and the state of war with Israel. These have not been mutually exclusive acts. It can be argued that much of the government control and lack of liberalization in the region was in response to the continuous uncertainty caused by the state of war.

Arab–Israel Conflict

The end of violence between Arabs and Israelis has been seen as paramount to the economic stability and liberalization of the region, beginning in the 1990s. This confrontation had first erupted with the proclamation of the State of Israel on 14 May 1948 on land that had hitherto been occupied by Palestinians. The ensuing hostilities between Arab states and Israel have cost the region much in terms of human and capital resources. In the late 1980s and early 1990s, however, there appeared to be a consensus in the Arab world that Israel was there to stay and that stagnating economies and poverty in the region were more pressing concerns. For the Israelis, the need for security was tempered with the realization that the threat of hostilities could only be diminished by compromising with its neighbors. The Arabs, on the other hand, sought justice from an unjust colonial legacy, which is how they perceived the creation of a state for the Jews on land already occupied by Palestinians. What these aspirations initially translated into was a land-for-peace settlement.

In March of 1979, Israel and Egypt signed a peace agreement that included the return of the Sinai to Egypt. On 13 September 1993, Israel and the Palestine Liberation Organization signed a Declaration of Principles. It set the ground rules for the transfer of authority of the Gaza Strip and West Bank Palestinian areas to a Palestinian authority. On 26 October 1994, Jordan and Israel also signed a peace accord.

During the mid 1990s there was much discussion of what was to be the peace dividend: the reallocation of resources away from military expenditures and toward other sectors of the region's economies. Peace was also associated with an opening of political and economic systems that had been overcontrolled by governments, a situation that initially had been due to the lack of an endogenous entrepreneurial class and then later continued in response to the region's chronic state of war. There was also a realization that small states such as Jordan, Lebanon, Israel, and the Palestinian territories had much to gain from regional coordination.

Emerging Markets

As the mid-1990s ushered in an era of tremendous economic growth in the West, many investors were looking to the Middle East as an emerging financial market for investments. The first important variable for identifying an emerging high-growth market is a government that is willing to change financial and economic policies to suit the needs of the international market. The opening of stock exchanges in the region, coupled with the rapid pace in which legislation for privatization and liberalization were being passed in the Middle East, augured well for this first factor of emergence.

Israel, Egypt, Morocco, Tunisia, Bahrain, and Jordan were developing active stock exchanges. Lebanon's stock exchange reopened in September 1995 after having been closed during its civil war. However, even during the war years, the lack of a stock exchange had not kept Lebanon from issuing foreign currency debt as a means of tapping international markets. Moreover, the drive to encourage foreign investment had led many Middle East nations to seek independent credit ratings by recognized agencies. Moody's Investors Service set up an office in Cyprus in March of 1995 to keep an eye on this region, and the European rating agency IBCA was involved in a joint venture to set up a rating agency in the Arab world.

Privatization in the form of government assets being sold to other actors, such as individuals or corporations, was also taking place throughout the region. Economic policies were liberalized in order to expand the economic freedom of the private sector as well as encourage foreign investment. For most of these countries, and particularly Egypt and Jordan, the International Monetary Fund (IMF) and World Bank were active in assisting them to meet their goals.

The second factor for determining whether a regional or national economy is about to take off is the local willingness to remove the maladaptive conditions that had caused that country or region to be uncompetitive in the past. The political instability caused by the state of war with Israel since the 1950s has been the principal inhibiting factor for economic development for this region. The confrontational relationship that the Arab world has had with Israel since the latter's creation not only cost much human capital, but also much time and resources that could have been used to build their economies. Consequently, peace with Israel was seen as a step in allowing a very well endowed region to start operating more efficiently.

Privitazation and liberalization policies. Most of the North African and Levantine countries now embarked on ambitious economic reforms. Egyptian president Hosni Mubarak (b. 1928) delivered a May Day 1990 speech calling for economic privatization and liberalization. He also signed a standby credit agreement with the International Monetary Fund in 1991. These events were intended to signal to Egyptians as well as the international business community that Egypt was serious about reforming and restructuring its economy. There are many groups that have vested interests in the reform process in Egypt, including local labor unions, business groups, nongovernmental organizations, international donors, and government officials.

The countries of North Africa, particularly Morocco and Tunisia, also embarked on ambitious privatization and liberalization schemes. Much of the reform in Egypt as well as in other countries in the region centered around trimming the public sector by cutting price subsidies on energy, food, and transportation, along with ending government control of certain sectors of the economy as a means of encouraging private investment. The IMF had been the primary force in calling for reforms in most of these countries. In May 1987, a standby agreement was reached between the IMF and the government of Egypt. The IMF provided $342 million. Egypt was then able to reschedule its debt payments with the Paris Club (a group of creditor countries that treat in a coordinated way the debt due to them by developing countries). This IMF agreement, however, was never fully implemented, due to concerns about the slow pace with which the Egyptians were conducting reforms.

Reducing deficits. Many of these countries were also taking steps to reduce their budget deficits. Egypt, Jordan, Morocco, and Tunisia were all seen as initial success stories in reducing their deficits. Most of the reduction was achieved by eliminating food subsidies, raising energy prices to market rates, instituting sales taxes, financing the deficit through Treasury bill auctions, and reducing the ranks of government workers. One of the biggest problems Egypt and its neighbors faced was undoing the excessive level of bureaucratic control over the economy that had been put in place during past regimes. Although they had begun to liberalize many of the investment laws, change was slow. They were also slow selling off government enterprises. The public sector represented 70 percent of industrial production in the early 1990s in Egypt. In 1993, the 314 public sector enterprises were organized into seventeen holding companies, which are permitted to sell, lease, or liquidate company assets and sell governmentowned shares.

Jordan. Jordan has been one of the most promising emerging markets in the Middle East. It vigorously implemented a structural adjustment plan in the late 1980s, even in spite of a geographical location that has made it very vulnerable to regional political instability. Jordan is estimated to have a population of 4.2 million, of which an estimated 60 percent is Palestinian. The Palestinians first came to Jordan in 1948, when the creation of Israel triggered their subsequent exodus from Palestine. Each time the Israelis and Arabs had a military confrontation, Jordan experienced an echo effect from Palestine, the most notable of which occurred in 1967. Jordan also served as the gateway for hundreds of thousands of refugees fleeing Iraq and Kuwait during the Gulf crisis of 1990. In fact, it is estimated that as many as 300,000 returnees from Kuwait emerged on the Jordanian labor market in 1990. All these events have taken their toll on the Jordanian economy.

Unlike Egypt, Jordan has always been viewed as being a free market economy. Yet, it has a substantial public sector, with the government actively controlling 62 percent of the economy and being the largest employer. This is mainly because Jordan has long been a rentier economy, one that collects rents rather than generating its income from domestic production. The rents that Jordan has survived on have been in the form of foreign aid and remittances from Jordanians/Palestinians working abroad. Much of this revenue was generated in the oil-producing countries of the Middle East. In fact, Jordan has been termed an oil economy without oil. This situation was acceptable during the 1970s and early 1980s, when the oil industry was booming. However, as oil prices plummeted so did the Jordanian economy. This situation has led to a restructuring of the Jordanian economy and a peace settlement with Israel.

Syria. Syrian economic policies since the late 1980s represent an attempt to liberalize and privatize the economy while still maintaining government control. In 1988, Syria began deregulating its economy and coming to terms with the fact that its diversified economy was faltering as a result of excessive government control. A currency that had been ridiculously overvalued was devalued by 70 percent. Land that had been held by the ministry of agriculture was now freed up for private sector use. A group of twelve Syrian entrepreneurs formed an agricultural investment company to work 5,000 hectares of farmland in the Euphrates valley. There were also changes in the law to promote private sector growth; however, the state has continued to play a significant role in overseeing and conducting much of what are supposed to be private sector initiatives.

Syria's economy has improved since 1990. From 1990 to 1993, its GDP grew at 8 percent annually. Much of this has been due to the quadrupling of oil production, record harvests for the agricultural sector, and significant foreign aid from the Gulf as a reward for Syrian support and participation in the Gulf war coalition. This aid has been used largely to rebuild and repair Syria's infrastructure. The private sector is also expanding in an environment of liberal investment laws, particularly in the area of agriculture and industry. Yet, there has been a general reluctance by many foreign investors to get involved in Syria, for the government is still in control of many of the major sectors such as oil, electricity, and banking. Consequently, most business opportunities in Syria presently are for exporting to the private sector in areas such as agricultural equipment and inputs as well as capital goods for industrial projects, food processing, and textiles.

Privatization and liberalization have been slow in Syria for a number of reasons. First, this is a regime that has long had a socialist orientation and favors central control. Second, the labor movement is very powerful in Syria and opposes privatization. Although the regime realizes that it must restructure its economy if it wants to survive in an era of globalization, there is a general reluctance to disturb the present balance of power.

Oil Dependency

Despite the wealth accumulated by the Gulf States, the oil dependency of the region's economies and exports had become alarming by the late 1980s, when the fluctuation of oil prices made for a very unpredictable revenue base. Of course, the 1970s and 1980s saw some improvements, as all the Gulf States built modern infrastructures, increased their standards of living, and enhanced their regional and world power during these decades. With the collapse of oil prices in the 1980s, however, the Gulf Cooperation Council (GCC) states fell on comparatively hard times. Several of the countries, notably Saudi Arabia, had ratcheted up government spending and import purchases so that, when oil revenues fell sharply, the country began running chronic balance-of-payments deficits. Government budgets also began to run into the red. These events have caused many of these states to attempt to diversify their economies, with Bahrain endeavoring to become the financial capital of the Middle East. However, these states remain driven by oil markets, and there is little evidence that their attempts to diversify have been successful.

By the late 1990s and early part of the twenty-first century, the Middle East again entered into a new era. The economic pragmatism of the 1990s has given way to politics. The lack of real changes in the underlying factors affecting economic development has bred despair. Many of the countries that were liberalizing and privatizing their economies have fallen victim to a world financial bubble that rose and then burst. Financial markets around the world suffered; however, those in less stable regions such as the Middle East, are hardest pressed. The peace dividend with Israel, too, did not materialize. Meanwhile, foreign aid in the post–cold war era has not been forthcoming.

Although oil prices have risen, the Gulf countries are more cynical about sharing with their neighbors in the post–Gulf War era. As many of these countries reach out to the World Bank and the IMF for financing, the economic austerity measures demanded by these institutions seem unbearable, given the rise of poverty throughout the region. The lack of stability, coupled with a post–11 September 2001 realization by the West of the impact that radical Islamic groups can have has left the citizens and economies of these regions feeling abandoned. Consequently, the economies of this region remain heavily guided by the state, with a private sector attempting to operate in a state of uncertainty.

See alsoCapitalism ; Coinage ; Riba ; Waqf .

BIBLIOGRAPHY

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Nora Ann Colton