How Arab Economies Cope With Globalization

At the beginning of 2008, crude prices are at record highs, creating immense wealth for oil-exporting nations in the Middle East. Yet the Arab economies also face what economists call "a demographic bulge of a fast-growing labor force" -- and the challenge of creating enough jobs for the population. This is happening at a time when the arrival of China and India is raising the competitive stakes for other emerging economies that want to make their mark on the global economic stage. How are the Arab economies dealing with these challenges?

Howard Pack, a professor of business and public policy at Wharton, and Marcus Noland, a senior fellow at the Peterson Institute for International Economics, address these issues in a book titled, The Arab Economies in a Changing World. Knowledge@Wharton recently spoke with Pack about his book. An edited transcript of the conversation follows.

Knowledge@Wharton: Economists are predicting that oil could average $85 a barrel in 2008, and the OPEC countries seem to be going strong. Yet creating jobs for young people seems to be a challenge for the Arab economies. What explains this paradox?

Pack: The OPEC countries have large amounts of oil and relatively small populations. Dubai may have a native population of about 400,000 and it has immense oil wealth. On the other hand, countries like Egypt, which have very large populations, around 80 million, have very little oil wealth. Now, part of the wealth from the Gulf countries like Saudi Arabia, Kuwait and Dubai gets repatriated to Egypt because Egypt sends a lot of workers to the Gulf. On the other hand, given the size of Egypt's population, that has a relatively limited impact on Egypt. The same thing is true of Algeria, Morocco and Tunisia. Algeria does have substantial natural resources, but these are diminishing. The populations [in these countries] continue to grow relatively rapidly, although the rates of growth have slowed down. Therefore, for the next 10 to 15 years, there's a very large bulge in the group of people aged 15 to 25 who will be looking for jobs.

Knowledge@Wharton: Do you think the emergence of China and India will affect the Arab economies and their ability to integrate with the global market?

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Pack: The big problem that China and India pose is of a following type: One way in which the Arab economies, at least the ones that have large populations, could deal with this population bulge is to have a significant amount of employment generated by potential exporting industries. They are just across the Mediterranean Sea, in many cases, from the European market. They all have trading agreements with the European market.

The trouble is that while that was a good model to try to pursue 25 to 30 years ago, whatever the Arab countries now try to do, they face these two extraordinary competitors -- China in manufacturing and India in services -- and that represents a very serious problem. To try this in 2007 is very different from what it was when we were trying to get on board the globalization train in 1977.

Knowledge@Wharton: Oil in the Middle East can't last forever. What strategies are these countries adopting to deal with the time when the oil runs out? What do you think of those strategies?

Pack: The countries in the Middle East have learned a lot from their experience in the 1970s and early 1980s, when they again had a huge bulge in earnings from oil. And, in some way those resources were frittered away on wasteful projects, and to some extent -- but much less than often thought -- on corruption.