Conflict and Development in the Middle East

09/02/2014 11:13 am ET | Updated Nov 02, 2014

If the Arab Spring represented a desire to create political commons, the current wave of conflict in the Arab world seeks to achieve precisely the opposite. It is predicated at the destruction of existing commons, whether civic, economic or political. While the Arab world needs regionally connected markets for shared prosperity, what it is currently witnessing, instead, is the regionalization of violence. Ongoing violence is destroying not only the social fabric of Arab societies but also threatens to set back the region's economy by several decades. While the social and political cost of this conflict is well-understood, the economic repercussions are neither widely recognized nor adequately discussed. Recent estimates indicate colossal economic losses, reaching up to the tune of U.S. $800 billion. The seven countries most severely affected by this turmoil are Egypt, Tunisia, Libya, Syria, Bahrain, Lebanon, and Jordan.

The economic impact is visible in aggregate statistics. Economic growth in Arab countries dropped from 5.9 percent during the period, 2005-2010, to 4 percent during 2011-2013. The decline is more precipitous in Syria, where GDP growth rate fell from 5.1 to 0 percent. In neighbouring Lebanon the rate of economic growth fell from 7.7 to 1.5 percent, whereas Yemen saw its growth halved over the period (falling from 4.6 to 2 percent). Investment as a ratio of GDP has also fallen by half, declining from 15 to 7 percent of GDP in the Arab region. Part of this is driven by reduced investment flows from abroad (FDI dropped by 30 percent). There is a wider economic spill-over, leading to soaring levels of debt and inflation. Since 2010 Egypt's ranking on the Global Competitiveness Index has dropped 48 places; Tunisia has slipped by 43 points.

This is a depressing economic profile. If poverty and unemployment were the rallying calls for the Arab uprisings in 2011, they have actually worsened in the last two years. In Syria 45 percent of the population is currently living under poverty line; the estimated unemployment rate has shot up to 39.4 percent. Even in Tunis -- arguably a more hopeful child of the Arab spring -- the unemployment rate has increased from 13.3 percent in 2010 to 17 percent in 2013. A deteriorating economy provides the ideal breeding ground of conflict, threatening to trap the region in a continuing cycle of violence.

This economics of conflict has multiple dimensions. Widespread damage to physical infrastructure is one of them. The scale of destruction is phenomenal, and includes roads, bridges, schools, power generation, and water supply. Whereas the Arab region required an investment in infrastructure of US$450 billion prior to the Arab Spring, this amount has increased to US$700 billion. The reconstruction cost in Libya alone carries an annual price tag of US$24 billion. With the destruction of more than 4,000 schools in Syria, ESCWA estimates that the cost of reconstruction could reach as high as US$200 billion.

Violence has also resulted in large-scale human displacement. Millions of Arabs have been displaced as a result of conflict. More than 5.4 million Iraqis have been displaced since 2003. Roughly 4.25 million people have been internally displaced since the start of Syrian conflict. Millions have crossed over to neighbouring states as refugees: the UNHCR has registered 1.5 million Syrian refugees in Lebanon and another 1.1 in Jordan. Such human spill-over has profound economic implications for neighbouring states. Jordan epitomizes the political economy challenges that regional conflict can impose on the host country. Syrian refugees constitute 10 percent of Jordan's total population. This has strained the already fragile systems of public service delivery. More than 120,000 Syrian children are enrolled in Jordanian public schools that are already crowded. During the last three years, housing costs in the north of Jordan have risen by a staggering 300 percent. With the arrival of nearly 160,000 Syrian labourers who are willing to work at below market wages, there are mounting pressures on Jordanian labour markets.

The flight of people is not just a physical, but also an economic, dislocation. Relationships of market exchange are built on networks of trust and social capital. Such relationships are difficult to replace, since they are formed and cultivated over long periods of time. Such displacement can lead to a systematic break-down of markets, which are already weak and fragmented. Arab economies are divided domains, governed more by the imperatives of power rather than markets. Continuing violence is severing the already weak linkages between regional Arab markets. Jordan's exports to Syria have more than halved, while transit trade has nosedived from 70,000 tonnes in 2009 to 23,000 tonnes in 2013. This is an economic cataclysm, the true scale of which can only be fathomed in years to come.

Recent happenings in the region have prompted many observers to invoke the parallels with the 1916 Sykes-Picot agreement that divided British and French domains of influence. Analysts are asking whether another redrawing of geographic boundaries is on the cards. It is probably too early to judge whether borders that divide the Arab world will change once again, what we can say with confidence, however, is that existing borders are getting thicker, and new internal boundaries are being defined across religious and ethnic lines. These will further fragment Arab markets.
A change of Arab world's geography will not change its economic compulsions, however. A thousand lines can be drawn in the sand to define one national unit or the other but this will not alter the fundamental economic reality of the region. The paramount challenge of job creation for the young will still remain. So will the need to create a new social contract based on education, a vibrant private sector and regionally connected markets. The chaos only buys back time. Rather than resolving the region's chronic economic challenges, it is simply exchanging one set of problems with another.

Adeel Malik is Globe Fellow in the Economies of Muslim Societies at the University of Oxford. Bassem Awadallah is a former Jordanian Minister of Finance, and Minister of Planning and International cooperation, and currently the CEO of Tomoh Advisory.