The resumption of talks between
Israel, Syria, and Lebanon is generating
hopes that a peace agreement
could be reached this year. Such a
development would enhance regional stability,
reduce the degree of risk perceived by
foreign investors and eventually lead to
the improvement of economic growth
conditions for the countries of the region.
The anticipated boost to regional economic
growth is expected to come from an
increased domestic business and consumer
confidence, upswing in tourism
activity, higher domestic and foreign
investment, reduced military spending,
and various forms of international support.
Because of the removal of adversarial
threats at the borders, the long-awaited
domestic economic reforms in Syria will
soon take off and will be put on a faster
track in Lebanon, Egypt and Jordan.
External factors and the reduction in
regional instability can jumpstart a development
process, but such a process can be
sustained only by a real domestic effort to
modernize the economy, liberalize the
trade regime, create a stable, supportive and
transparent legal environment, strengthen
the financial sector, and change the role of
the government from that of a “player”, or
a dominant actor in the economy, towards
that of a “referee” or a regulator in competitive
private markets.
Prospects of regional peace would
reflect favorably on the region’s overall
investment climate. It should help trigger an
investment boom in all productive sectors.
Foreign investment will be on the rise
especially in those countries of the region
that have put in place a low-cost structure
and an investment-friendly environment.
Local as well as international investors
may reconsider their stance towards the
attractively priced equity markets of
Lebanon, Jordan, Egypt, and Palestine.
Middle East stock markets have emerged at
a time of low investors’ interest and have
low correlation to other emerging markets.
Investing in these markets will provide
immediate risk diversification benefits.
Regional stability should also help
materialize strong tourism potential in the
region as a whole, a sector that is particularly
sensitive to geo-political stability.
The Middle East is uniquely endowed
with historical, religious, and natural
tourist attractions and is potentially one of
the most attractive tourist areas worldwide
assuming political stability, cooperation
between the countries in the region,
and effective regulatory measures to facilitate
mobility. Although there have been
talks of such a regional cooperative
tourism effort between Israel, Jordan,
Egypt and Palestine, real developments
have failed to materialize on the ground and
tourism activity has suffered across the
Levant. With regards to Lebanon, an
Israeli withdrawal from the South will
give the rapidly recovering tourism sector
a strong push and help it recapture its pre-
war
share in the national economy.
With a regional peace agreement in
place, Jordan, Lebanon, Egypt and Syria
would be able to capture part of the $2 billion
import market of the Palestinian territories,
so far monopolized by Israel.
Cross-border air and land transport costs in
the region will also be reduced, and this
will enhance transit trade between the
Levant and the Gulf.
The Middle East continues to be the
world’s leading arms market, both in
absolute terms and as a proportion of
GDP. The conflict between Israel and the
Arab states has been a significant factor in
the diversion of resources that might otherwise
have been channeled to foster economic
development. Normally, peace
would result in the commonality of interests
to seek security at lower levels of
armaments and find ways of reducing
spending. An anticipated reduction in military
expenditures would release substantial
resources for economic and social
development. This would be reflected in
growth rates markedly higher than those
that would have been achieved under an
animosity scenario.
It is hoped that the drive for peace in the
region would inspire the international community
to provide substantial economic
support to countries of the region. This
could take the form of increased financial
assistance during the transitional period,
debt reduction and relief that would help
countries modernize their economies.
Assuming that a favorable peace scenario
will unfold this year, growth
prospects for the Levant economies are set
to improve. Egypt benefited from the
recovery in oil prices last year which, with
higher revenues from tourism and Suez
Canal activity, led to a rise in real GDP
growth rising to 5.7% in 1999 from 5.3% in
1998; with growth forecast at above 6% this
year. Syria, suffering from drought, saw its
real GDP growing at 0.5% last year with
higher growth of 2% anticipated in 2000 due
to the reduction in risk premium. Drought
conditions and weaker domestic demand
narrowed down growth to 1% in Jordan last
year; however activity is expected to pick
up
this year with growth rising to 2.0%.
Lebanon was in recession in 1999 with
negative real GDP growth of 1% due to a
sharp contraction in private consumption
and higher taxes. However, prospects for
peace in the region are likely to stimulate
capital inflows and investments, bringing
forth higher growth of 2.5% this year.
Growth is forecast to rise in the Palestinian
territories as well to an average of 4% in
2000, up from 3.5% in 1999.
Peace in the region is likely to create
challenges for businesses in the Arab countries
of West Asia who have to be prepared
to face new cross-border competition.
