Gareth Smyth
The gap between rich and poor in the Middle East is turning into an abyss. But the social and political consequences remain uncertain
Over a century after the Norwegian-American sociologist Thorstein Veblen coined the phrase ‘conspicuous consumption’ in his book, The Theory of the Leisure Class, the 21st-century looks like an age indicative of the term.
“Outsize clean diamonds, top-end real estate and the most expensive works of art are all heading upward in price very quickly,” says Karim Salameh, a Lebanese financier. “Try buying an S-class Mercedes without a television and a drinks cooler – the dealer will tell you there’s no demand. This is the mehn (show-off) century, and it’s a worldwide phenomenon.”
But while the very rich are spending more and more on luxuries – accumulating everything from jewellery to football clubs – the mass of people have faced rising commodity prices, especially on their food and means of travel.If this has been a worldwide trend, it is at its most acute where high energy prices have sharpened the fault lines between haves and have nots, and it appears starkly in the Middle East.
“The items that have gone up most are dairy products,” says Talal, a shopkeeper in Karakul Druze, a socially mixed area of west Beirut. “For instance, yoghurt has gone up in my shop from 4,000 Lebanese lira ($2.66) to 5,500 ($3.66) in three months. Cheese has gone up from L£17,500 a kilogram to 20,000 in the same period. Lentils, the food of the poor, have increased from L£2,500 to L£6,500.”
Those benefiting from historically high oil prices have never had it so good: the first half of 2008 Opec countries netted $645 billion, not far below the record $671 billion they earned in the whole of last year.
HSBC forecasts that the six states of the Gulf Cooperation Council should earn more in 2008 in oil revenue than in the entire 1980s, with their resources pouring into everything from European villas to Manchester City football club.
The IMF puts annual GDP growth in the region at more than 5%, but its data also shows the Middle East last year experienced the highest average inflation rate of all regions, at 10.4%, and the Fund forecasts it will be over 11% this year. Monthly data show all GCC countries except Bahrain have double-digit inflation this year.
Hitting the poor
Across the region, rising prices hit hardest at those on fixed and low incomes.
Inflation in Egypt reached 23.1% in July, driven by a 32.5% year-on-year increase in food prices, especially wheat. In the most populous Arab nation, a fifth of the 80 million people live under the international poverty line of $2 a day. Wary of social unrest, President Mubarak announced a 30% increase in civil servants’ salaries in May.
In Iran, the central bank reported in early August that 14 million Iranians are below the poverty line, albeit on a higher criterion than used internationally. Yet imports from Europe to Iran have risen, despite banking sanctions, as the better off import luxury items. The government subsidizes bread, even as it imports wheat from the US for the first time since the 1979 Islamic Revolution.
Inflation in Iran has topped 27%, and the price of food dominates many newspaper pages. Arguments over the proper use of oil revenues are never far from public debate, with the government’s opponents arguing it is raiding the ring-fenced Oil Stabilization Fund for pet projects and current spending.
“Iran is one of the countries where inflows from oil revenues have not been ‘saved’ in a sovereign wealth funds or an oil stabilization account,” says Heydar Pourian, editor of the business monthly, Iran Economics.
In Lebanon, the government of Fouad Siniora, despite a widening budget deficit and an accumulated debt of $44.5 billion, announced in September an increase in government employee wages of L£200,000 ($133) a month. While the rise will barely keep its recipients ahead of rising prices, it will add nearly $500 million to the government’s annual deficit.The social, and political, consequences of a widening gap between the rich and the rest are uncertain, but they have in the past driven in radical directions. Gamal Abdul Nasser ignited the Arab world with the argument that its wealth, including oil, should be used for the benefit of the Arab people as a whole. A similar cry came from Saddam Hussein in 1990 as he sought to exploit the unpopularity of the Kuwait monarchy, seen as excessively rich and selfish by many Arabs.
In recent times, such sentiments have been more muted, especially in countries where political opposition is suppressed. But the potential of simple egalitarianism was shown by Mahmoud Ahmadinejad in winning the 2005 Iranian presidential election with a simple slogan of “bringing the oil wealth to the people’s sofreh (dining cloth)”.
Even the richest countries may be vulnerable to such populist appeals. A recent report from the London-based Economist Intelligence Unit (EIU) suggested that in Saudi Arabia, which has inflation of 11% in 2008–9, “some resentment of Al Saud family rule will persist, mainly over the cost of living, high youth unemployment, corruption and the ruling family’s close relationship with the US.”
Relaxed
Yet western governments, who have their own economic worries, and international bodies seem fairly relaxed about the effects of the oil boom on social cohesion.
The World Bank said last year that the Middle East and North Africa (MENA) region would see poverty cut in half by 2015, although the bank conceded there had been “slow” progress in reducing the number of Middle Easterners living on under $2 a day, which it counted at 59 million, or 19.7% of the population in 2004.
The Bank suggested that global poverty was increasingly concentrated in “fragile states ... defined as countries with particularly weak governance and policies”. In the Middle East, it cited Djibouti, the West Bank and Gaza but noted that because of their “relatively small populations they constitute just a small, but disproportional, share of the region’s poverty”.
“No recent studies”
Asked for comments from the Bank on the consequences of the oil price boom on the gap between rich and poor, Dina El Naggar, senior external affairs officer for the region, said the Bank had done “no recent studies” on the matter.One economist with 30 years’ experience in the developing world says the Bank underestimates the corrupting influence of oil wealth and the resentment it can cause.
“The World Bank has done a bunch of stuff on income distribution, but oil in many countries is a curse that turns governments into kleptocracies, whose sole function is to gain control over revenues,” he notes. “Without a shadow of a doubt, most Nigerians, for example, are worse off than if the country never discovered oil. When the oil price goes up, governance probably gets worse, and poor people get more miserable, irrespective of the price of kerosene.”
The remit of the IMF is more focused than the World Bank on fiscal and monetary policy than social cohesion, but the waves of global price rises are washing up in strange places.
In his visit to Jeddah last month to meet GCC finance ministers, the IMF managing director Dominique Strauss-Kahn, acknowledged that high oil prices were “a mixed blessing” for exporters in that they had added to inflationary pressures.
Strauss-Kahn said that signs of easing in food prices and a strengthening of the dollar – to which post GCC currencies are pegged – against the euro should ease inflation. But he warned that persisting inflationary pressures “for an extended period” could require “alternative exchange rate arrangements that allow monetary policy to be utilized in fighting inflation”.
In Egypt, Strauss-Kahn praised the government for an “impressive economic performance... underpinned by an ambitious structural reform programme”, but he warned that Egypt faced “the challenges of surging food and fuel prices, which have put strain on the budget through the rising cost of subsidies”.
Strauss-Khan reiterated the Fund’s preference for direct targeting of the poor in order to curb the rising cost of subsidies and channel more resources into education and debt reduction.
An Arab economist based in the Levant argues that removing subsidies could be dangerous if governments do not recognize the “fundamental shift” taking place in the regional economy and develop their policies accordingly.
“Influxes [from high oil prices] are having a major, and complicated, effect, especially in countries with no oil or low oil production,” he says. “Think not just of remittances but of Lebanese or Jordanian engineering firms doing successful business in the Gulf: at the same time, people with no access to the oil wealth channel being hit by the effect on prices. Far, far more research is needed.”