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Additionally, this region has been plagued in recent history by instability, which has led to poverty. Impoverishment has opened the door way for the region's main economically powerfully neighbor, the European Union (EU) to outsource employment and manufacturing at lower competitive rates than continuing domestic production. Additionally, the MENA region is rich in natural resources, particularly energy resources, such as natural gas and petroleum. In fact, eight of the twelve member states of the Organization of the Petroleum Exporting Countries (OPEC) are Middle Eastern countries. In the Persian Gulf, these states are: Saudi Arabia, Iran, Iraq, Kuwait, Qatar, and the United Arab Emirates; in addition to the North African countries of Algeria and Libya. (Organization of the Petroleum Exporting Countries, 2010)
The EU's economic interests in the region has caused it to focus on improving and stabilizing MENA governments, especially in terms of institutional quality so as to develop an environment that is more ripe for foreign direct investment (FDI). This involves mass-funding via governmental aid, so as to improve good governance within the recipient state at all levels, including reducing corruption, improving the capacity of governmental institutions to deliver services to relative parties and to develop industrial regulations and guidelines that would improve safety & quality.
Most importantly regional economic stakeholders, such as EU member states are concerned with MENA states' abilities to reform economic policy framework that would result in stimulating dynamic investment and corresponding development. Such reforms include reducing tariffs on importing and exporting goods and services, even creating free trade zones that are tariff free, and enforcing intellectual property rights. Moreover, many donor countries encourage the establishment of preferential trade agreements with recipient states as collateral for foreign aid, which would give the donor country economic advantages over competing markets. According to the Office of the United States Trade Representative, Executive Office of the President, "In May 2003, the U.S. proposed the Middle East Free Trade Area Initiative (MEFTA) initiative, a plan of graduated steps for Middle Eastern nations to increase trade and investment with the United States and with others in the world economy, with the eventual goal of a regional free trade agreement. The first step is for the U.S. to work closely with peaceful nations that want to become members of the World Trade Organization (WTO), in order to facilitate their accession to that body. As these countries implement domestic reform agendas, institute the rule of law, protect property rights (including intellectual property), and create a foundation for openness and economic growth, the United States will pursue specific strategies to enhance trade and investment relations with them, each strategy tailored to the relevant country's level of development." (Office of the United States Trade Representative, 2009)
Moreover, government reform of education is vital because capacity building is proven to provoke accelerated economic growth. This comes in the form of funding to establish schools, vocational training centers, technical training programs, all aimed at establishing as skilled labor force that is able to produce quality product and services for the outsourcing trader partners. This is especially important in regards to information technology, which is ever-changing, and bringing trade partner's closer and closer each day, which is also rapidly accelerating the globalization of international markets. According to the Organization for Economic Co-operation and Development (OECD), "For the countries of the Middle East and North Africa (MENA), private investment, both domestic and foreign, is needed to provide new engines of growth and dynamism. The biggest challenge for MENA countries lies in strengthening the process of change, maintaining, supporting and tracking the progress of policy implementation as well as providing capacity-building assistance." (Organization for Economic Co-operation and Development)
The Palestinian state building process has take into concern the importance of institutional quality, policy framework, and state capacity building when developing its Palestinian Reform and Development Plan (PRDP). This plan is an economically geared program for the period of 2009-2011 that will hopefully result in the economic recovery and development of the Palestinian market, while simultaneously establishing the infrastructure and institutions to have a state. The plan focuses on strengthening the four main sectors: economy, good governance, social services, and infrastructure. Each of these sectors is cross-linked to one another and will result in raising foreign stakes in the establishment of a viable Palestinian state. For example, good governance, or a government free of corruption and efficient in delivering services, will likely receive more aid so as to create vital infrastructure that will improve the free movement of people and goods creating economic growth and a better social standard of living. However, there are fundamental causes for differences in growth between countries, particularly in the case of Palestine, which is subject to occupation - a direct threat to the PRDP's aims and goals.
The main differences between countries in the region are the alliances they forge through their politics and special interests. The United States and Europe are most influential in controlling the growth of nations. In the Middle East, Israel's special relationship with the United States and other world nations has allowed it to acquire the resources needed to develop at a much greater pace than its neighboring countries. As the youngest nation in the MENA region (62 years old), it has now reached a level of growth that places it among nations such as the United States, Great Britain, France and Germany. The Israeli infrastructure relies heavily on the acquisition of liquid assets and procured resources via funding from its supporting nations. Due to its complex support system, Israel has been able to leverage its capacity building efforts in all areas including government, medical science, technology and military, among others to place it at ahead of neighboring Middle Eastern Countries and many European nations as well. For a relatively young nation, this is quite an achievement.
Palestine, on the other hand, is still very much in the first stages of its development. Highly dependent on foreign aid, Palestine's many governmental agencies and institutions are developed under the framework of currently implemented foreign schematics, moving it closer to the realization of fully functional sovereign nation. While there is a sharp contrast between the development between Palestine and Israel on the ground level, through foreign aid assistance and the creation of an uncorrupted moderate leadership consisting of a fair and balanced system of legislature, Palestine has the potential to be accelerate its development however it's infrastructure is very fragile and the slightest aggression from Israel, can cause catastrophic damage to its development. In this regard, it is important for Palestine to continue forging international relationships with assistance from foreign governments, supportive of creating a moderate nation in West Bank and Gaza (Rand Palestinian State Study Team, 2005, pp. 108-114). The MENA region, while showing a wide range of development across the spectrum, has the potential for growth, despite the counter-active obstacles that often face this region. The role of developing nations should the establishment of a clear policy structure and subsequent implementation process, which will enable them to be more capable of withstanding economic downturn and emerge stronger and more consistent in their capacity building efforts. By partnering with supportive more mature nations, these developing countries will also be able to realize growth through international investments and foreign trade. In this regard the MENA region has an advantage as it is centrally located and capable of forging new trade.
Organization of the Petroleum Exporting Countries
Office of the United States Trade Representative
Organization for Economic Co-operation and Development http://www.oecd.org/pages/0,3417,en_34645207_34645590_1_1_1_1_1,00.html
Rand Palestinian State Study Team. 2005. Building a Successful Palestinian State. http://books.google.ca/books?id=QM9exG9dg-EC&pg=PA112&dq=Palestine+economic+growth&cd=2#v=onepage&q=Palestine%20economic%20growth&f=false
Section 1 - Question 2:
"The global economic crisis reflects a crisis at the heart of mainstream economic thought". Discuss this statement and evaluate whether the lessons of the crisis are evident enough to provoke major shifts in economic policies in the MENA region and what sort of changes, if any, may be expected.
The global economic crisis can be attributed to many factors including unchecked spending and the system of national and international debts, corruption in the financial sector such as the within the Stock Markets and Corporate Worlds. While the economy of most countries often reach high and low points on a less volatile level, this most recent economic crisis global crisis has greatly impacted the world, proving that the systems in place are still very fragile. While it started on a smaller level in 2007, during the year it was anticipated by economic and financial advisors who warned about the dangers that would result from a lack of re-examination to course correct. As it continued through 2008, more companies filed for bankruptcy, the housing markets crashed and many corporations downsized, drastically increasing the rate of unemployed people. Other corporations were revealed to have played with their financial records.
During the past eight years, we have seen a shift in attention from strengthening the core of world economics, to the marching drums and mobilization for an increase in war and military spending, due to the effects of the so-called "war on terror". For example, while then-president of the United States, George W. Bush rallied for the wars in Iraq and Afghanistan, all of his attention and policy-making decisions were made in regard to the increase for military spending and funding of the two simultaneous wars. Meanwhile, he failed to pay attention to the internal struggles of his own country, the failing stock markets, the deterioration of the banking system, the increasing debts owed to international countries, etc. While these were American problems, their effects can be felt world-wide as many nations rely on trade and finance agreements with the United States to stabilize their own economies. Many countries are the recipients of foreign aid from the United States. In the MENA region, most of the countries are receiving support from the United States, such as Israel, Palestine, Egypt, Jordan and now war-torn Iraq. (Grant and Nijman, 1998)
While the U.S. continued its support at the expense of its own economy, (the increasing difficulty of allocating funds to secure its own economic institutions while spending billions on international aid and military expenditures), the MENA countries relied heavily on these allocated support systems to help strengthen their own institutions, stabilize their economic growth, and increase their ability to build the capacity and effectiveness of their governments. This delicate balancing act proved fatal to economic growth on a global level.
As important corporations and industries struggle to remain alive through the global economic crisis, their inability to function has affected international trade and investments between foreign countries. Quite simply, if there isn't money to be made, then there isn't money to be spent. The banking, trading and financing systems that were believed to have worked so well together, for so many years were now unable to properly function together. Unchecked and excessive monetary spending, most notably from indebted countries, has pushed a global economic recession deep into the category of global economic crisis.
The crisis continued as the framework of policies intended to maintain the efficiency of the economic system, were no longer relevant to the needs for advanced development and growth. The same policies have been under implementation for many years and need to be enhanced to better address the potential risks and determine the potential successes. Implementing the same policies that have been institutionalized decades ago is a risky maneuver as the policies no longer reflect the times. A clear set of standards needed to be defined, implemented and enforced for countries involved in international trade, finance, investments and banking. Through standardizing such a set of policies, the effects of potential economic risks would be greatly lessened as outcomes would be weighed prior to implementation and would allow for the continued development of international markets.
Furthermore, the decrease in the stock market strengthened the effects of the global crisis as did the weakly regulated credit and foreign exchange systems. Foreign exchange in particular, suffered greatly as currency trade has weakened. The most widely used currency, the U.S. Dollar, decreased in value as did the euro and other currencies. This places a stress on the global market increasing the cost of goods. This component of the economic crisis directly affected the millions of unemployed and laid off work forces. Each component of the economic global crisis: the financial institutions, international trade and development are all directly related to each other in a complex web of causes and effects. Without the support of the financial institutions, businesses are not able to continue to grow and maintain their trades and services. A result of this inability is the liquidation of government sponsored institutions and subsequent wounding of work forces which then directly affects the market when the exchange of currency between supplier and consumer is lessened.
The global economic crisis reflects a crisis at the heart of mainstream economic thought because the system currently in place relies heavily on the use of credit. The inability to repay credit caused an increase in debt. Government-sponsored institutions which are vital to the core of the economic system were being too liberal with their policies and engaged in risky procedures that crippled them. For example: Fannie Mar and Freddie Mac, two American institutions that owned controlled billions in mortgage contracts, filed for bankruptcy. The effects of their dissolution created shockwaves across the United States as the housing bubble began to burst. (Greenspan and Kennedy, 2007)
According to the Federal Deposit Insurance Corporation (FDIC), a U.S. agency that insured the financial assets of banks, "the Federal Reserve announced it would initiate a program to purchase from primary dealers up to $100 billion in direct obligations of GSEs (Fannie Mae, Freddie Mac, and the Federal Home Loan Banks), and up to $500 billion of mortgage-backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae." (Supervisory Insights, 2009, p. 7-13)
However, these loans were in addition to the FDIC's list of already burdened financial institutions and banks that were balancing on the edge of failure bankruptcy. "The list grew from 76 institutions with $22 billion in assets at the beginning of the year to 252 institutions with $159 billion in assets at the end of the year. Twenty-five banks failed during the year with assets of $372 billion" according to the FDIC's insights report. (Supervisory Insights, 2009, p. 12)
The fragility of this aspect of the financial system was partly attributed to the inability of leaders to identify the importance of the financial institutions for stabilization of the national and international markets. These institutions supported the U.S. economic system, for example, through their own fragile credit systems. However, when they dissolved, partners could no longer receive the investments needed for the survival of their own enterprises. Without the regulation of their procedures, they were able to play recklessly with their investments.
The lessons to be learned, having faced this most recent global economic crisis, believed by some to be as catastrophic as the Great Depression, are two-fold. The first is that all financial and trade institutions should be regulated. There has to be a method of checklist implementation to prevent such an immense crisis so that for future development and economic stabilization, these volatile situations can be prevented. Furthermore, the need for a clearly defined fail-safe recovery system of preventative measures should be drafted and investigative measures should be taken to prevent corruption at the institutional level.
Part of an economic recovery plan should include further measure to allocate funding from one source to stabilize another without relying on credit which creates further debt. Perhaps the development of a methodized structure of comprehensive support-reserve, which can only be used for financial economic deficiencies, should be considered. The second part should take place on the ground-level. The method of savings versus spending should be closely examined and reformed to avoid unnecessary credit debt. Without a safety-net, expenditures can prove unstable and would ultimately lead to risks that could have otherwise been avoided.
Nations of the MENA region, rely heavily on the use of foreign assistance to stabilize their own economic growth. If however, an economic crisis were to severely affect the supportive nations, the MENA region would be realize instability in its ability to acquire the necessary assistance. Due to the complex network of nations and trade relationships, what affects one nation will surely affect another. The countries of the Middle East and North Africa need to take the initiative to develop and sustain their own economies so that in the event of a global economic crisis, they will be able to continue to function efficiently without suffering the loss of international support.