Can the Middle East Build a Global Middle Class?

Djavad Salehi Isfahani and
Djavad Salehi Isfahani
Djavad Salehi Isfahani Professor of Economics - Virginia Tech
Navtej Dhillon
Navtej Dhillon Former Brookings Expert

May 19, 2008

Surging crude oil prices are making the Middle East flush with cash, bringing back memories of the boom and bust of the 1970s.

After the 1973 oil price increase, the West’s attention was focused on recycling the petrodollars rather than how countries used the new inflow of wealth to diversify and expand their economies. Today, as the U.S. focuses on stabilizing Iraq and increasing oil production, the Middle East is struggling to turn its new wealth into lasting economic development. From protests over the price of cooking-oil to bread riots in Egypt, discontent is growing as inflation rises.

But behind the long lines for government food subsidies, lies another hunger more difficult to fulfill: for better jobs and upward mobility. This hunger has been satisfied in other developing regions by a vibrant and productive middle class, which can compete in the global economy. To midwife a new middle class, the Middle East must build on and undo the inheritance of the last oil boom.

The 1970s boom created a social middle class but not an economic one. Infused with billions of dollars, sheikhs and emirs lifted millions of people out of poverty. Development centered on pills and pens – reducing fertility and increasing education. As a result, today an average family has fewer children and spends more on the education of their children. Average enrollment in secondary education stands at more than 60% and in some countries women are outnumbering men in universities.

However, in a globalized world these social gains are no longer sufficient for lasting economic advancement, especially for younger generations. Public sector employment – which for decades buttressed an expanding middle class – is fast running out of steam. This has given way to a workforce which seeks the comforts of a middle class but doesn’t share the skills and working habits of their peers in East Asia and Europe.

As state payrolls retrench in the face of a youth bulge, waiting times for public sector jobs are getting longer. Amidst soaring oil revenues for the region, youth in the larger populated countries are losing hope and lack a clear direction.

While the young queue for state patrimony, the Middle East is losing the global race for skills and talent. In the quest for stable desk jobs for their children, parents invest hard earned money on private tutors to prep their kids for rote memorization and standardized tests. All the years of hard work end in dashed hopes of a secure job and little learning. In international tests on Mathematics and Science, Middle Eastern countries like Jordan, Iran and Tunisia rank below the worldwide average.

Sensitive to the growing discord, Middle Eastern leaders are adopting a wide range of strategies. Iran is turning to populism by focusing on redistribution and hand-outs to the poor and unemployed. President Ahmadenejad calls this policy bringing oil money to people’s dinner table. Qatar and Saudi Arabia have adopted elitism by importing the best of U.S. university education to the Middle East to attract talent from across the region. Jordan and Egypt are resorting to subsidies to tackle the immediate food crisis.

This is a regressive course as it risks marginalizing the private sector –– the very engine for expanding the middle class. Historically, populism and Arabism, especially at a time of crisis, have made private industry the scapegoat. Elitism only perpetuates the notion that wealth remains in the hands of the few, emboldening anti-private sector sentiments.

But this time around, a reckoning might emerge: parents are asking not only for shorter bread lines but also shorter job queues for their children. More of them can be made to realize that their children’s future is more in the hands of the private sector than the state. They might be willing to support reforms that give the private sector greater influence, not just in investment and production, but also in what students learn. Reformers inside and outside the government would do well to enlist the large number of parents who have the greatest stake in bringing about this transformation.

The positive legacy of the 1970s windfall resulted in a more educated and a healthier population – a genesis for a modern middle class. The latest boom can complete this modernization by building a confident and globalized middle class. By taking advantage of the confluence of two historic opportunities, the gifts of oil and demography, Middle East can achieve lasting prosperity.