Geithner and the New Middle East Economic Agenda

During his first visit to the Middle East, U.S. Treasury Secretary Timothy Geithner has set out a hopeful vision for U.S-Middle East relations: one which supports a larger role in the global economy for Arab countries by reducing their dependence on oil and harnessing their human capital.

Secretary Geithner’s engagement with leaders in Saudi Arabia and Abu Dhabi is likely to be dominated by a series of concerns and fears occupying Arab leaders, such as the state of economic recovery in the U.S. and the global economy – as oil prices are invariably linked to resumption in demand and trade – and the evolving U.S. policy toward Iran.

These concerns arise from deeper undercurrents which reveal the Middle East’s special vulnerabilities: it is a region that has yet to develop a broad-based economy beyond oil exports and, as exemplified by the ongoing dissension in Iran, it faces the perils of managing a large youth population which is economically and politically alienated. Together these issues add up to a profound tension between development and demography.

For the U.S. and the Middle East, a new agenda is in the making: one that links U.S. efforts to reduce its dependency on foreign oil with an explicit recognition that Middle Eastern countries must, with the support of the U.S. and other developed economies, also build broad-based economies so they can provide a better future for their citizens. Just as in the U.S. the green agenda is a pro-growth agenda, economic diversification in the Middle East should be a pro-development agenda.

U.S. – Middle East Ties: Changing the Status Quo

While speaking at the Jeddah Chamber of Commerce in Saudi Arabia, Secretary Geithner acknowledged efforts among some Middle Eastern countries to diversify their economies in order to build a future less dependent on oil and natural gas. However in reality, not only are most Gulf countries heavily reliant on hydrocarbon exports (see Figure 1), but U.S.-Middle East trade ties continue to be dominated by oil.

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While U.S. exports to the region grew from 2007 to 2008 – both absolutely and as a share of world exports – exports to the Middle East still only accounted for 4 percent of the United States’ total exports in 2008.[1] Oil and oil-related products make up the vast majority of U.S. imports from the region, comprising 88 percent of all imports from the region in 2007 and 92 percent in 2008. U.S. non-oil imports from the Middle East stood around $10.0 billion in 2008, less than 1 percent of the United States’ global non-oil imports that year. These statistics demonstrate a continued reliance on oil as the almost exclusive basis for U.S.-Middle East trade ties. These deeply entrenched economic relationships serve to postpone difficult decisions on both sides: a move toward energy diversification in the U.S. and a search for sustainable sources of growth in the Middle East that capitalize on the region’s human wealth.

A New Agenda: A Greener U.S Economy and a Less Oil-Dependent Middle East

The current political movement for a green economy in the U.S. is often expressed too narrowly as a way of breaking our oil addiction and support for oppressive regimes. Instead of a zero sum game, a transition beyond oil both in the U.S. and the Middle East can be based on a common vision and shared interests. For U.S. policymakers, it is critical to acknowledge that the most important impetus for economic diversification among Arab countries originates within their own societies, given the region’s profound changes in demography. It is time that the U.S. green economy agenda and economic reform in the Middle East be seen not as separate and conflicting goals but instead as interlinked and mutually reinforcing.

Faced with a youth bulge, where a majority of the population is below the age of thirty, oil-exporting countries are struggling to provide a world-class education and decent employment to their growing pool of young citizens. In fact, despite their oil wealth, when it comes to education and employment, these countries lag behind East Asian and Latin American economies.

Average levels of education among Middle Eastern countries have been improving, yet remain relatively low compared to countries in East Asia and Latin America, especially at the tertiary level. While most countries in the region have attained universal primary enrollment rates, there remain some exceptions such as Saudi Arabia, and secondary and higher education enrollment rates continue to lag behind those of East Asian and Latin American countries.

The Middle East still has the highest youth unemployment rates and lowest youth labor force participation rates in the world, with no major improvements despite the recent oil boom. In 2007, the rate of youth unemployment in North Africa stood at 23.8 percent and in the Middle East at 20.4 percent. This compares to a global average of 11.9 percent.[2]

New Mechanisms for Cooperation

Secretary Geithner has affirmed to countries in the Middle East that a partnership based on sustainable economic engagement is indeed a priority for the United States. To build on this vision, it is important to reassess how aid, capital and knowledge can be strengthened and reformed as the main pillars of U.S.-Middle East economic relations.

Many of the challenges of better education and job creation cannot be adequately resolved through traditional aid instruments, which often channel funds on a project-to-project basis. Furthermore, in the past these efforts have been highly politicized and associated with other goals such as promoting democracy and counter-terrorism. There is a need for new public-private mechanisms to support small- and medium-size enterprises, private sector development, and trade and investment. These models of cooperation should have a long-term focus, be more financially sustainable and less burdened by explicit political objectives. They should focus on issues of importance to all countries such as economic growth, human capital development, and environmental protection. Models such as the projects of the Euro-Med partnership or focused bilateral funds, such as the U.S.-Israel Science and Technology Foundation (USISTF), could be considered.[3]

Aside from aid and capital, which exists in abundance in several oil exporting countries, the U.S. can export knowledge and soft technology in the areas of human capital development, entrepreneurship, environmental issues, civic participation and volunteerism. As the new administration pushes the limits of traditional institutions to unleash the potential of the American workforce, public and private sector leaders in the Middle East are again looking for ideas and inspiration on developing their economies’ human capital. The role of the Obama administration should be to create incentives for learning and partnerships across borders which help forge a new generation of ties between the Middle East and the United States.

Amina Fahmy and Diana Greenwald contributed to this commentary.

[1] UN Comtrade database, SITC Rev.4, 2007-2008. http://comtrade.un.org. Accessed: July 13, 2009.

[2] International Labor Organization, Global Employment Trends for Youth, 2008.

[3] The U.S.-Israel Science and Technology Foundation (USISTF) was established to fund and administer projects mandated by the U.S.-Israel Science and Technology Commission (USISTC), a bilateral entity jointly established by the United States Department of Commerce and the Israel Ministry of Industry, Trade, and Labor to foster scientific, technological, and economic cooperation between the United States and Israel. For more information, see: http://www.usistf.org/.