Commentary

Economic Freedom in the Arab World

This article appeared on Washingtontimes.com on December 22, 2005.
MUSCAT, Oman. — At a gala dinner here attended by hundreds of Arab diplomats and other prominent guests, a new Omani organization, the International Research Foundation, released an “Economic Freedom of the Arab World” report showing how big differences in policies in the region can produce big differences in economic outcomes.

The report looks at 39 variables in 16 countries, ranging from size of government to monetary policy, trade openness, regulation and the rule of law. Published in conjunction with the Fraser Institute, whose global index on economic freedom is well known, the report suggests what is true of the world is also true in the Arab region: Economically free countries tend to be more prosperous and faster growing.

“The Arab world is a patchwork quilt of economic regimes,” says the study. Thus, the extent of voluntary exchange, the security of property rights, the freedom to compete and freedom of choice vary widely. Lebanon and Oman tie for first place in economic freedom, while the United Arab Emirates and Kuwait tie for second. Syria and Algeria rank at the bottom.

Some observers may not be surprised that the economically freer countries, dominated by the oil states, tend to have higher incomes. Oman and Kuwait have per capita incomes of $13,032 and $17,073 respectively, while Syria’s per capita income is only $3,651, for example.

But oil is not always a blessing. Many countries are rich in oil but, because their governments have easy access to oil wealth, little is done to improve their overall economies and the material conditions of their citizens. Oil wealth becomes an impediment to economic freedom. The “oil curse” has afflicted such countries as Venezuela, Nigeria, Mexico and Russia.

The oil curse isn’t quite as severe in the Gulf. Oil states in general perform better than other Arab states. The reason for this may be related to trade. It is notable that the oil states included in the report (Iraq was not because of lack of data) have long maintained relatively high freedom to trade. A liberal trade regime is important because it creates a domestic political dynamic that encourages people to be productive rather than seek favoritism from government.

In short, freer trade reduces special interests’ ability to reduce economic freedom, and it may even help increase economic freedom in other areas.

United Arab Emirates has played an especially positive role in promoting trade and economic freedom. Salem al Ismaily, co-author of the Arab economic freedom index, points to the UAE — the Gulf country with the longest-maintained liberal trade regime — as providing a demonstration for neighboring states. As its trade remained relatively free during the last 20 years, the UAE steadily increased freedom in other areas of its economy, attracting investment and producing growth. Other countries emulated the example. Policy competition among countries is as important as competition in the market.

Still, the report notes that, in the Arab world, “most types of economic interaction… remain remarkably limited and inconsequential.” Trade among Middle Eastern countries represents only about 8 percent of the region’s trade. The lack of economic freedom in many Arab countries limits commerce so richer states “find better and cheaper products outside the region rather than in the region’s labor-endowed states, where economic freedom tends to be relatively low.”

Other problems still remain even in the more economically free Arab countries. Unemployment is a high 15 percent in Oman, for example, and its government, which employs about half the Omani labor force, is large. Fortunately, the country seems aware its oil reserves will not last forever and so has continued increasing its economic freedom.

Such progress in Oman, other Gulf countries, and Lebanon offers hope that all Arab nations can achieve and sustain prosperity.

Ian Vásquez is director of the Project on Global Economic Liberty at the Cato Institute