Rebuilding Devastated Economies in the Middle East

Although it may seem that the profound changes that have transformed the Middle East occurred in response to the attacks of 9/11/2001, we can, with the aid of hindsight, discern the beginnings of a global and regional transformation in the coincidence of the eruption of the Kuwait War in 1990 and the winding down of the cold war. During the cold war, regional politics were dominated and equilibrated, if not frozen, by the coordination of American and Soviet policies. Major political transformations, such as the rise and fall of bureaucratic-authoritarian regimes (or Nasserist regimes), even when they occasioned economic crises, were not permitted to upset the status quo. Even the transformation of the petroleum industry, despite the sudden enrichment of some countries, was not permitted to alter the regional balance of power. There was a similar bilateral-bipolar coordination to prevent the frequent episodic recurrences of the Arab-Israeli War (1956, 1967, 1969, 1973, 1982, plus the 1987 Intifada) from spreading in space or extending in time. The Iranian Revolution of 1979 reaffirmed the defects of the Kemalist-Nasserist model and at the same time offered a premonitory indication of the political weaknesses of rentierism, but the full ideological and geopolitical consequences of that revolution were contained throughout the prolonged Iran-Iraq War. Both the prolongation of that war and its failure to produce any immediate change in the regional balance of power were products of the influence of the cold war.

Violence has devastated the economies of Iraq, the Palestinian Territories, and Algeria since 1992. Although Algeria’s Islamist insurgency has tapered off in recent years, reconstruction is hampered by continuing civil conflict. National elites face the daunting challenge of reestablishing security, strengthening state institutions, enforcing the rule of law, expanding social services, and providing productive employment for large numbers of youth entering the workforce. This chapter examines the impact that illicit international transactions have on economic recovery efforts. Understanding the importance of actors in illicit transnational networks allows us to better assess the roadblocks in front of different policy options. Illicit international transactions are defined as activities that result in a transfer of goods, services, and money across borders by actors who contravene domestic laws or violate international norms of good governance. These transactions typically involve the misuse of public resources, evasion of economic regulations, and undermining of competition. Some of the most important examples of transnational shadow activities are smuggling, money laundering, illegal capital flight, commission taking on international contracts, monopolization of importing through coercion, sanctions busting, and misappropriation of external rents such as aid and oil revenues. The central thesis of this chapter is that cross-border “shadow” networks imperil reconstruction in conflict-ridden countries.

Few of the world’s poorest countries better exemplify American interests in government performance than Yemen. Long overshadowed by its oil-rich Persian Gulf neighbors, Yemen gained attention as both an occasional target and a natural haven for militant regional paramilitary groups (including but not limited to al-Qaeda). Headlines were made at a time when development analysts were already worried about ecological and economic stresses exacerbated by the strains of structural adjustment and critical water scarcity. In view of these circumstances, analysts began wondering whether Yemen is an example of the combustible mix of poor governance and economic stagnation that could blow up or melt down. Realizing that the stability, safety, and welfare of the most populous and poverty-stricken country on the Arabian Peninsula matter, the Bush administration promised substantial U.S. assistance for the first time in Yemeni history. The question is, can American aid fix Yemen’s problems?

It is almost an article of faith that the U.S. administration lacked a postwar plan for Iraq. This chapter poses a challenge to this view, as it will be argued that, at least in the economic realm, the United States did have a plan, and the plan centered on the sweeping and simultaneous liberalization of labor and capital markets, reforms in taxation and foreign trade, and the privatization of state assets. The reforms were intended to open up Iraq’s relatively closed state-directed economy and, therefore, improve efficiency in the allocation of resources domestically, as well as to align Iraqi relative prices with international prices in order to expand the country’s consumption possibilities. In an immediate sense, the reforms have succeeded, for Iraq’s economy has now become one of the most open and unregulated in the world. Yet, sustainable gains in output remain elusive, as incoherent reforms have aggravated structural difficulties and cultivated the conditions for their own failure.