Costs of Middle East Turmoil

An article in Slate argues that turmoil in the Middle East could lead to spikes in oil prices that could lead to worldwide stagflation. No argument there. The solution:

So a bold new assistance program should be designed for the region, modeled on the Marshall Plan in Western Europe after World War II, or on the support offered to Eastern Europe afterthe collapse of the Berlin Wall. Financing should come from the International Monetary Fund, the World Bank, the European Bank for Reconstruction and Development, as well as from the United States, the European Union, China, and the Gulf states. The goal should be to stabilize these countries' economies as they undertake their delicate political transitions.

The Washington Post’s David Ignatius makes a similar argument with a bit more detail:

How to avoid a post-democratic crackup? What's needed is a multilateral version of the Marshall Plan - that is, a framework of loans and other assistance that can steady the Arab countries as they make their transition to democracy and prosperity. America isn't really an option; we don't have the money, and our politicians wouldn't want to give it to foreigners, anyway.

But I'm happy to report that there's an answer to this Middle East puzzle. The institution that was created 20 years ago to oversee Eastern Europe's transition, known as the European Bank for Reconstruction and Development (EBRD), is ready to take on this new mission. I talked Tuesday withThomas Mirow, its president, who said his organization is ready to act as a "bank for economic and political transition" in Egypt and neighboring countries.

The Europeans have the expertise. As Mirow notes, the new Arab democracies have the same problems that Eastern European countries did: weak private sectors; feeble small and medium-sized business; and poor infrastructure. The EBRD has the money, too, with about $17 billion in capital and the ability to raise far more from lenders. Mirow foresees providing about $1.4 billion to Egypt over the next several years, and up to twice that amount to neighboring countries. He's already thinking about opening an office in Cairo, so that Arabs will see this "bank for transition" as their own.

White House officials like Mirow's idea for assisting the new democracies of the Middle East. This approach avoids the stigma of assistance from the International Monetary Fund or the basket-case aura of aid from the World Bank. It puts Egypt and its neighbors in the same category as Poland or Bulgaria - countries whose economic and political systems were shattered by authoritarian rulers. Perhaps the European bank could partner with the Inter-American Development Bank, which has expertise in transition from "Peronist," military-led systems.

One hates to be cynical, but…

The Marshall Plan was a unique situation. But besides the Marshall Plan, has the record of international development been terribly good? Are the great economic success stories successful because of aid? True, Japan and Europe benefitted heavily from American aid after WWII. But if those countries hadn’t destroyed themselves in the WWII, they would have been prosperous without American help. Since the fall of the Berlin Wall, many Eastern European countries have done well, but overall the record is a mixed-bag. Despite American aid, Russia’s wealth has primarily stemmed from energy exports – not reforming its economy and producing goods and services that are competitive in the world market.

The United States and the international community have sent billions in non-military aid to Pakistan (along with even more military aid). In particular, IMF aid to Pakistan is linked to reforms. But Pakistan resists these reforms because they would impinge on the prerogatives of key elements of Pakistan’s elites. The US, with varying degrees of intensity, has pushed similar reforms on the Egyptians. Is there any reason to believe the European Regional Development Bank will do better?

Another issue is scale. Ignatius mentions the ERDB has $1.4 billion to potentially lend to Egypt. That comes to less than $20 per Egyptian. Can funds on that level make a difference. The Marshall Plan, by comparison, dispensed $13 billion in 1948 dollars (roughly $100 billion in current dollars.)

It comes down to institutions. Eastern Europe looked west and preserved its institutions as much as it was able under the Communists. The Arab world still does not have these institutions. It is wonderful to believe that carefully targeted aid packages, but history does is not encouraging.

This is not to say that nothing can be done. The brutal reality is that aid will probably be dispensed in order to ameliorate the disorder. That may be necessary and useful in giving Egypt a chance to develop the institutions it needs to survive – or at least avoid collapsing into chaos.