Effects Of Democratization Of Middle East On World Business

Three waves of democratization have swept the globe in modern history but each has bypassed entirely the Arab world which has 90% Islamic population. There were four major obstacles to democracy in the region Oil, Imperial Legacy, Arab – Israel conflict and Backward looking Islam. Now the populist political revolution sparked in Tunisia turned Egypt around as it comes out of a self-imposed ordinariness and marginalization of the past decades and regains its role as the dynamic center of Arab ideology, politics and culture. With more than 80 million people – as many as Iraq, Saudi Arabia and Syria combined – it has a large and vigorous civil society, feisty, independent media, a broad array of political forces, and a well-respected judiciary. The path and time of democratization of the Middle East will shape and change world economy in deeper sense as most of net oil exporters to world and few of the biggest sources of remittance money to many developing countries lies in this region. Political and civil instability for long time in these countries will hit hard to world economy. During the 18 days of rioting, business in Egypt slowed to a crawl. Food became scarce, looters pillaged shops, and tourists fled the country known for its Nile River and Great Pyramids. Many businesses shut their operations entirely during the riots. Banks in Egypt remained closed today as workers from state-owned businesses and the tourism sector refused to return to work. They are demanding better pay and working conditions.
Country
Egypt
Saudi
Libya
Yemen
Kuwait
Inflation Rate
13%
5%
NA
18%
11.7%
Unemployment Rate
9.7%
12%
10%
35%
NA
Foreign workers in million
1.2
5
1.3
NA
1.2
Till now major oil exporters countries have spent their major oil earnings by investing in foreign exchanges, real estates and by storing in Swiss bank accounts. This did nothing to develop (let alone diversify) their economies, and so when the boom turned to bust in the 1990s, economic problems mushroomed. With them came political discontent, terrorism and rebellion. After 90s countries became smarter and started investing money in the regional welfare and Middle East started booming. But the investments were made in automating oil refineries, military and real estate projects. With no long term view in mind even if GDP and FDI started increasing substantially, unemployment rate and inflation kept gaining. With little invested in reforming education systems all major sectors like Agriculture, Tourism and Real estate started hiring works from Asia rather than locally. Oil is money is not cascaded down till grass roots causing huge economical gap between rich and poor. World wants stable oil sources which makes them to stay neutral rather than provoking political reform.  In absence of good leadership political reform will lead to unstable governance which will corrupt trade practices and break ties with important international allies. If similar things happen with Middle East them major commodity prices will rise by alarming rate (e.g. Gold at record high, oil at $100 at barrel). Unrest will also stop expansion of FDI and multinationals in Middle East for indefinite time. (E.g. PT Expan Petrogas Intranusa stops expansion). Violence in Libya has cut output in the North African country by as much as 1 million barrels a day, according to the International Energy Agency. Crude oil inventory levels in US impact market instantly. OPEC is trying their best to keep the Oil supply intact and stable. As oil is priced in dollar the dollar will fall compared to other currencies. Current demand for oil is about 90 million barrels per day. Out of which North America and Asia pacific comprise of most of the demand. Sustained increase in oil price will hit countries in this region hard.
We also need to see the outlook of foreign workers in Middle East and remittance money send to their home country. Around 40 – 60% of skilled workers in Middle East are foreigners. For some economies like Philippines and Bangladesh around 10% of population works overseas and remittance money comprises 10-15% of GDP. Some of the Middle East countries like Egypt, Jordan and Yemen totally depend on remittance money coming from Middle East oil rich countries.  Saudi Arabia is second largest source of remittances after US. In case of political unrest continues for long time in the region developing economies will suffer as remittance money will go down drastically. Without no political backing foreign workers will be first to hit. On paper, remittances sent home look good for the economy, but two thirds of the money goes to buy land and consumer goods; rarely is it invested productively. When foreign workers return home, remittances will drop. Unemployment will soar, and serious financial hardship will result. On the other hand if the democracy is established and leadership is stable in the region then the foreigner workers demand will shoot up. Huge money coming from oil exports will be utilized and divided properly to make real socio economical advances. This will be very long process and many developing and immerging democracies will find huge business opportunities in laying democratic infrastructure in the region. Current environment for foreign workers is not alluring. Some foreigners – Westerners and East Asians, especially – take jobs in the sheikhdoms just to make quick money, and stay for only short periods. Disdainful of their hosts’ culture, irritated by civic and religious restrictions, and unused to the blistering heat, about a third of them leave before their contracts expire. With rare exceptions, however, foreign workers cannot become citizens (in Saudi Arabia that requires a special royal decree) and do not enjoy the easy life of the native-born. They earn lower wages, lack full legal rights, and are excluded from the political process. On one occasion, the Saudi government gave its Saudi employees a 50 percent raise but left the non-Saudis’ salaries unchanged.
Now we will see few Islamic democracies and their impact on economy. Economic improvements are largely seen In Hamas led democracy in Gaza strip and Abbas led democracy in West Bank. Israel and West bank relations and cooling down and last year economy grew by 9 % and on west bank 16%. Main causes are openness caused by democracy in west bank. Dependence on western aid has been reduced by $600 million in Gaza strip. In Turkey, democratic institutions were neither imposed by the victors, as happened in the defeated Axis countries, nor bequeathed by departing imperialists, as happened in the former British and French dependencies, but were introduced by the free choice of the Turks themselves. This surely gave these institutions a much better chance of survival. Successive governments of Turkey wisely introduced democracy in many small waves laying the foundation for further development, and, at the same time, encouraging the rise of civil society. Turkey is quite successful in democracy because of separation of religion and state. But it took time because no one party was in majority till 2002. During the last five years real GDP growth has been impressive, with an annual average growth rate of 7.4%; inflation has moved from an average of 77.5% in the 1990s to single-digits on a sustainable basis.
Now we will take a look at effect of $5 increase in crude oil on world economy. It will shift about ¼ percent of GDP from global oil importers to oil exporters, relative to the WEO baseline. The magnitude of the direct effect of a given price increase depends on the share of the cost of oil in national income, the degree of dependence on imported oil and the ability of end-users to reduce their consumption and switch away from oil. It also depends on the extent to which gas prices rise in response to an oil-price increase, the gas-intensity of the economy and the impact of higher prices on other forms of energy that compete with or, in the case of electricity, are generated from oil and gas. For oil exporters first there will be huge increase in national income followed by losses due to decrease in demand. Higher oil prices lead to inflation increased input costs, reduced non-oil demand and lower investment in net oil importing countries. Tax revenues fall and the budget deficit increases, due to rigidities in government expenditure, which drives interest rates up. Because of resistance to real declines in wages, an oil price increase typically leads to upward pressure on nominal wage levels. Wage pressures together with reduced demand tend to lead to higher unemployment, at least in the short term. These effects are greater the more sudden and the more pronounced the price increase and are magnified by the impact of higher prices on consumer and business confidence. An oil-price increase also changes the balance of trade between countries and exchange rates.  Net oil-importing countries normally experience deterioration in their balance of payments, putting downward pressure on exchange rates.  As a result, imports become more expensive and exports less valuable, leading to a drop in real national income. Without a change in central bank and government monetary policies, the dollar may tend to rise as oil-producing countries’ demand for dollar-denominated international reserve assets grow.
Business world will watch closely as the biggest democratic changes in Middle East take shape and gathers pace. The outcome depends on people of Arab Street and their capability to provide, sustain and govern democratic leadership in coming years. On the other hand if condition remains unstable Islamic extremists can immerge quickly to power and then world should intervene to guide Arabs to successful democracy. This shift will be test for world economy as it is rising from one of the deepest recession in the history.

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