Wednesday, March 16, 2011

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.


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Philip Henika said...

O.k. - I'll say it. I would like to see Hosni Mubarak give back a substantial portion of his personal wealth (at least 40 billion) to the Egyptian people and I want the new Egyptian government, in a new relationship with its people and as a matter of good governance, to spend the money on peacebuilding initiative in Egypt.

Aaron Mannes said...

I don't disagree in principle. But re-distribution doesn't tend to work in practice because the wealthiest don't have enough money.

There is a classic story of the anarchist and Andrew Carnegie. The anarchist meets Carnegie and criticizes him for all the wealth he possesses. Carnegie hands him a quarter. The anarchist says, what's this and Carnegie answers - "Your share."

Mubarak doesn't have $40 billion socked away -

Probably less then $10 billion. If you stripped Mubarak of his wealth, you could make a one time payment of $1000 to the poorest 10% of the Egyptians. While that would be nice, it wouldn't really solve the country's problems.

Countries like Egypt have inefficient economic institutions (not just organizations, it can also refer to customs and practices) that allow elites to profit heavily while impoverishing the majority. The key is changing these practices. But it isn't easy to do.

Philip Henika said...


Common folk are being asked to live within their means and their means are well defined by the increasing number of common folk approaching the poverty line. In other words, the wants of the common folk become needs during recession. The disparity between the wealthy and common folk also grows i.e. if 2 percent of the population owns 70% of the nation's wealth and this ratio is growing then where is the point of a people's rebellion? Conservation appears to be the solution both in terms of energy use and money spent. The precedents and practices of conservation dictates efficiency and the redistribution of excess. I am not bleeding the wealthy with this suggestion. I am asking them to look at their lifestyle and reexamine their means. I asking them to consider directing excess in terms of investment into self-sustainance efforts because this is the future. I take a look at my daily life and it has totally changed in terms of increased energy efficiency in i.e. home cooling/heating, a diet based more on plants than animals, less time for my commute because I telework one day a week etc. So what will daily life be like fifty years from now? My guess is that many of us will be living in self-sustaining homes and towns and the technology for this is R & D now but, as you may have noticed, problems in these times of globalization develope far more rapidly than their counterpart solution. The wealthy could help by accelerating the solutions to the world's problems.