Until last month, the BRICS, a diplomatic club that brings together Brazil, Russia, India, China and South Africa, had members from all corners of the developing world except the Middle East. This is no longer the case: of the six countries invited to join the bloc at the annual summit held on August 22, four (Egypt, Iran, Saudi Arabia and the United Arab Emirates) belong to the region. If all of them accept, the Middle East will represent more than a third of the members of the expanded bloc. The invitations are one more sign, among many others, that the Middle East is changing. The rich Gulf states are trying to establish themselves as non-aligned middle powers. Saudi Arabia has offered to act as an intermediary between Russia and Ukraine. The United Arab Emirates (UAE), hosting this year's global climate summit (COP28), wants to play a dual role as an oil exporter and as a source of green energy. The six members of the Gulf Cooperation Council (GCC) are one of the focuses of the world economy; They attract talent and mega-wealth from East and West, and deploy vast reserves of capital abroad.
Even more surprising is the new (and relative) calm in the Middle East. A ceasefire has eased the eight-year war in Yemen. Iran and Saudi Arabia agreed in March to end their 40-year feud. Qatar has restored relations with its neighbors. The region has even reconciled with the bloody Syrian dictator Bashar al Assad. The United States, for its part, urges Saudi Arabia to join the Abraham Accords, under which four Arab countries have already established ties with Israel since 2020.
Five years ago, Mohamed bin Salman, crown prince and de facto ruler of Saudi Arabia, offered a hopeful vision of where things could go. “I think the new Europe is the Middle East,” he said. “The next global renaissance will be in the Middle East.” His comments fit with a narrative that has a growing number of followers in the Gulf, according to which a “new” Middle East will focus on the economy and not on democratization, Islamization or other ideologies that distract. attention. Diplomacy will bring stability, which in turn will foster investment and growth that will help everyone overcome the upheavals of past decades. The Gulf States have long been applying this model internally; now they want to export it.
The Middle East has enormous potential. First, and most obviously, the region is full of hydrocarbons. 36% of global oil production, 46% of oil exports, 22% of natural gas production and 30% of liquefied natural gas (LNG) exports come from it. Those numbers will only increase. The region has enormous reserves (52% of the world's total oil and 43% of gas) and low production costs. At a time when Western oil majors are reluctant to invest, Gulf companies are increasing capacity.
Location is also important: the region connects Europe, Africa and Asia. 30% of the world's maritime containers pass through the Suez Canal in Egypt, and 16% of air freight stops at airports in the Gulf. The youth of the population is another asset: 55% of the inhabitants of the Middle East are under 30 years old, compared to 36% of the population of the OECD, a club made up mostly of rich countries.
However, the story of the last two decades has been a story of conflict and despair. First came the disastrous US invasion of Iraq in 2003. Then came the fury of the Arab Spring, which brought unrest but no democracy: all affected countries ended up returning to dictatorship or mired in civil war. Islamist violence and sectarian strife aggravated the region's woes.
The Middle East represents 6% of the world's population, but only 4% of economic output. If a few large oil producers are excluded, the figure falls below 2%. In much of the region, GDP per capita is stagnant or declining (see chart 1). Poverty rates have skyrocketed in Egypt and Lebanon, not to mention war-torn Sudan, Syria and Yemen.
However, three big changes are occurring that could alter the Middle East's place in the world. The first is the growing rift between the Gulf States and the United States. Three successive presidents have proposed reducing the US military presence in the Middle East. Joe Biden, the current one, is not trying to impose democracy in the region; He doesn't even seem too interested in curbing Iran's nuclear program. The United States has other priorities: competition with China, the war in Ukraine, internal political instability.
It also diminishes the economic role of the United States. Over the past 30 years, the share of Middle East exports going to China and India has skyrocketed from 5% to 26%, according to the IMF; the percentage sent to Europe and the United States has fallen from 34% to 16%. In large part, this situation reflects Asia's growing appetite for oil, the region's main export product. In the 1990s, China took less than 1% of Saudi Arabia's crude oil exports, and India less than 3%; In 2021, those numbers were 28% and 12%, respectively.
Oil is at the center of the second change, in the energy markets. As contradictory as it may seem, the region is trying to become an even greater force in oil and gas to finance a transition away from hydrocarbons. Recent high oil prices have provided a windfall. Aramco, the Saudi state giant, made a record profit of $161 billion last year, up from $110 billion in 2021. The company plans to expand its capacity by one million barrels a day (approximately 10%) in the next three years. The UAE has a similar goal. They have also become a transit point for Iranian and Russian oil, which are subject to Western sanctions. Qatar, already the world's largest exporter of LNG, plans to increase its production by 63% between now and 2027.
The income is invested in new sectors. Instead of putting its petrodollars into US Treasuries, as it once did, Saudi Arabia is now buying everything from European soccer players to stakes in electric car companies. The Saudi kingdom closed a $2.6 billion deal this summer with Brazil's largest mining company as part of a plan to invest $170 billion in the sector by 2030.
The last change occurs in attitudes. Polls show that Arabs consider the economy their top concern. Around a third of young Arabs say the cost of living is the region's biggest problem and another third cite unemployment; Almost half say that it is difficult to find work in their country. When asked if stability or democracy is more important, 82% opt for the former. More and more people believe that democracy is bad for economic growth.
On the other hand, citizens have lost interest in political Islam. Islamist parties have been driven out of government by Tunisian voters and the Egyptian military. Armed Islamists have failed to take control of Iraq, Libya and Syria. In Iran, widespread protests last year are an example of popular frustration sparked by ruling clerics.
And the leaders of the Gulf countries also seem to have a new perspective. Over the past decade, they have attempted to use force to change the region. They tried to impose a friendly government in Yemen; Saudi Arabia sent weapons to Syrian rebels; The UAE attempted to install Khalifa Haftar, a warlord, as Libya's top leader. All those attempts failed.
The era of aggressive foreign policy is over, at least for now. The most unexpected diplomatic change has been the agreement between Saudi Arabia and Iran. The two countries had been at odds since the Iranian Islamic revolution of 1979 and had fought a proxy war that eventually spread to Iraq, Lebanon, Syria and Yemen. However, with a little help from China, they agreed in March to reopen their embassies (which had been closed since 2016), soften mutual criticism in state-backed media, and boost economic ties. They cannot be said to be friends, but the agreement has reduced the chances of conflict in the Gulf.
The most unpleasant change is the reintegration of Assad. He has done nothing to earn her: after destroying his country to retain power, he has made no gesture toward reform or reconciliation. However, in May, the Saudis allowed him to regain Syria's seat in the Arab League.
Despite everything, the easing of tensions has brought with it a certain calm, which may help explain the improved economic outlook. The IMF expects that the non-oil part of the economies of the Gulf countries will grow 4.2% this year (the same as last year), while the oil part will only grow 1.9% (compared to 10.3 % of 2022). The region attracted 6% of global foreign direct investment flows last year, up from 3% in 2019.
Capital markets are booming. Companies from Abu Dhabi, the capital of the UAE, accounted for 14% of the world's IPOs in the first quarter of 2023. Goldman Sachs bank estimates that foreign participation in Middle East equities has grown from 2% in 2017 to 10% last year. And he expects the region's weight in emerging market indices to increase to 10% in the coming years, from 7% currently.
Major internal reforms are making their way: 31% of Saudi women worked in the first quarter of this year, compared to 16% in the same period of 2017. The Gulf States are also trying to be more demanding when it comes to distributing aid . Some continue to arrive with few conditions: Tunisia, for example, unexpectedly obtained a $500 million bailout (most of it in the form of loans) from Saudi Arabia in July. However, Egypt is having to raise money by selling stakes in state-owned companies to sovereign wealth funds in Qatar and the UAE.
Optimists speculate about the possible direction of the region. A calmer Middle East would mean fewer risks to global trade and energy flows, and fewer refugees (the region hosts more than 8 million of the world's 35 million refugees). At a time when Western companies are trying to diversify their supply chains, a younger Middle East could become a new manufacturing base. Morocco's thriving automobile industry, which produces some 700,000 vehicles a year and supports 220,000 jobs, is an example of what is possible.
The region could also do more business with itself. Trade within the Middle East is equivalent to only 2.9% of the region's GDP, compared to 22% within the European Union. Researchers at Majid Al Futtaim, an Emirati retail giant, and consulting firm McKinsey estimate that removing trade barriers would increase the region's GDP by $230 billion (5%). If Saudi Arabia and Israel buried the hatchet, it would be possible to establish commercial ties with the most dynamic economy in the Middle East.
Infrastructures could also be joined. The GCC countries have long been debating the integration of their railways, which could easily connect with those of Iraq, Israel and Jordan. Pipelines could transport low-cost Saudi hydrogen across the Mediterranean to European consumers; Upgrading power lines could allow a sun-drenched region to export solar energy.
It is a seductive vision, but it faces multiple obstacles. The first is that economic progress in recent years has been uneven. The Middle East has long been divided by political schisms: between revolutionaries and monarchists, nationalists and Islamists, Sunnis and Shiites. However, today the most important difference is the economic one, between prosperous States and poor ones.
Unfortunately, most of the Middle East is poor. Even in a time of regional calm, the disastrous state of the economies threatens the stability of those countries. In the past five years alone, since Prince Mohammed began talking about a regional revival, there have been major protests in Algeria, Iran, Iraq, Jordan, Lebanon and Sudan.
Egypt, the most populous country in the Arab world, is a cause for particular alarm. Abdel Fattá el Sisi, the military man who has led the country since the coup d'état in 2013, has systematically spent less on health and education than the Constitution requires. However, he has found the money to undertake grandiose projects such as building a new capital in the desert and to make large arms purchases (Egypt is the sixth largest arms importer in the world).
Egypt's debt-to-GDP ratio has risen to 93%, with 36% of loans denominated in foreign currencies. Its non-oil economy has been in contraction for 33 consecutive months and for 81 of the last 90 months. The currency has lost half its value in the last two years and will surely devalue again soon. Annual inflation reached a record 38% in July. This summer, citizens have suffered blackouts in sweltering heat because the government could not afford to import enough fuel for power plants.
The outbreak of a severe balance of payments crisis seems likely. And even if the government manages to pull through, it will be difficult to reinvent the region when its largest country is moribund. On the other hand, if unrest breaks out on a sufficient scale, the economic prospects of the Gulf countries could be damaged.
Another risk is that even the region's prosperous countries will fail to create the jobs and growth they have promised. To date they have done undeniably better than their counterparts elsewhere in the Middle East. In 1975, Saudis and Libyans had more or less the same GDP per capita; Today, the Saudi figure is 353% higher. The Gulf and Israel (the other prosperous point in the region) represent only 14% of the Middle East's population, but 60% of its GDP, 73% of its product exports and 75% of its foreign direct investment (see graph 2).
Now, Saudi Arabia, like its neighbors, is battling serious structural problems. Citizens continue to consider that a comfortable job in the public sector is a birthright. The government employs 53% of working Saudis, although that is down from 66% in 2019. Schools do not teach business skills. Wages are too high for the country to become a manufacturing hub, at least without costly state subsidies.
Prince Mohammed expects annual foreign direct investment to be $100 billion by 2030. Last year it was just $8 billion. This leaves the public sector as the main agent of economic transformation, which is worrying in two aspects. First, their finances are hostage to the oil markets. Analysts estimate that the Saudi kingdom registers a deficit when the price of a barrel falls below $100, if extra-budgetary spending by its sovereign wealth funds is included. It is currently around $90, its highest price in almost a year.
Second, it is far from clear that diversification-oriented public investments will bear fruit. Vision 2030, the national economic plan, foresees tourism accounting for 10% of Saudi GDP by the end of the decade. Authorities say the sector will generate one million jobs, enough to hire one in 20 Saudis, a higher proportion than in France or Spain. However, there is little evidence of the expected flood of 100 million annual visitors. Last year there were only 16 million, according to UN estimates, about 1.5 million fewer than in 2016, the year the plan was approved.
Another concern is that at some point the ideological disputes that the leaders try very hard to conceal will resurface. Saudi Arabia seeks a detente with Iran without that country having stopped producing highly enriched uranium for its rebel nuclear program. If the Iranian regime goes ahead and succeeds in making a bomb, it will trigger a regional arms race or even war.
The Israeli-Palestinian conflict has been relatively calm for the past two decades, but it is unlikely to remain that way forever. A serious conflict in the Holy Land could shake the Arab agreements with Israel. Violence has decreased in Libya, Syria and Yemen, but underlying disputes remain unresolved. Last month, Assad faced a wave of protests in Sweida, a troubled southern province. And Saudi Arabia and the UAE, although the main champions of the new Middle East, often disagree on both foreign policy and economic issues.
The ultimate risk is that the region gets its geopolitical balance wrong. The United States remains the only country willing and able to project military power throughout the region; Furthermore, its dominance of the global financial system gives it unparalleled economic influence. The Gulf States cannot risk losing it as a partner. However, dalliances with Russia and China are causing growing anger in Washington. The United States has imposed sanctions on some UAE companies; among them, one that has been accused of supplying drones to Russia. It has also delayed a deal to sell F35 fighter jets to the country over allegations of a Chinese military presence at an Abu Dhabi port.
The Gulf states “partly plan their future prosperity on the assumption that China's economic rise will continue,” says Emile Hokayem of the International Institute for Strategic Studies, a British think tank. However, alarm lights are going on for the Chinese economy: slow growth, an aging population, a languishing real estate market. A big bet on China that alienates the United States could leave the Gulf in a difficult situation.
The truth is that Prince Mohammed is not the first regional leader to wax lyrical about the renaissance of the Middle East. There are many parallels between the current era and the 1990s, another era in which the region attempted to leave its violent past behind. It seemed then that the Oslo agreements announced the end of the Israeli-Palestinian conflict. The long Lebanese civil war had stopped. The autocrats of Egypt, Jordan and Syria talked about opening their constrained economies. So did Abdullah bin Abdulaziz, the Saudi crown prince at the time, who promised bold reforms and sought better relations with Iran.
In 1993, Shimon Peres, then Israel's foreign minister, wrote a book called The New Middle East in which he argued that trade would pacify the region. “Ultimately, the Middle East will come together in a common market,” he said. “And the very existence of this common market will advance vital interests in maintaining long-term peace.”
History, unfortunately, had other plans. The Palestinian-Israeli peace process gradually came to a halt. The United States invaded Iraq in 2003, and Israel sent its army into southern Lebanon in 2006. The region's supposedly modernizing autocrats proved to be pretty bad at modernizing, triggering the Arab Spring. The Gulf economies remained tied to oil, except for Dubai, which never really had much oil.
A time of peace and development is a tantalizing vision; But to achieve it, the region's autocrats must be serious about keeping the peace and smart about fixing their economies. Current circumstances provide them with an opportunity for change, and technological and geopolitical forces provide an incentive. The rest depends on them.
