In the Middle East, Arbitrary Government Feeds Rage
by Robert L. Pollock
heritage.org
In 1996, Mahmoud el Farra returned to the Gaza Strip. He had lived 30 years in Los Angeles, where he raised a family and built a construction business. He was precisely the sort of entrepreneur the emerging Palestinian Authority (PA) sorely needed, and in those heady days he built its first technologically modern flour mill. But the business struggled against competition from Israeli imports, and PA officials began pressuring Mr. Farra to sell them shares. Led by Mohammed Rashid, Yasser Arafat's moneyman, they soon gained control of the company. Two days later, they closed the market to Israeli flour.
Meanwhile, in Ramallah, Mohamed Masrouji of Jerusalem Pharmaceuticals struggled with the large cuts Israeli importers took on the drugs he bought for his distribution company. Then one of Arafat's ministers formed a pharmaceutical distribution company of his own. In one day, the official registered dozens of drugs with the Palestinian Ministry of Health, a process that often took Masrouji a year, and began importing drugs from Egypt.
But those two maneuvers were finesse jobs compared to what happened to Mahmoud Hamdouni. Also hoping to cash in on the peace divided, he bought 30 acres near Jericho, built a gas a station, and planned a housing development. He was then charged with the capital crime of treason and freed only after signing over his land to the PA. The Oasis Casino now sits on the property. "We got rid of the Israeli occupation," Mr. Hamdouni told Newsweek in June 2000. "Now we are under Palestinian economic occupation."
At a time like this, with violence a daily reality and the peace process all but forgotten, it might seem that a lack of economic freedom is the least of the Palestinians' problems. But with bread riots becoming almost as common in the Palestinian territories as anti-Israel demonstrations, many Palestinians see the lawlessness and economic misery inflicted by Arafat & Company as a major factor in a generalized rage.
Moreover, many see their plight as emblematic of a larger regional problem that, especially in the wake of the September 11 terrorist attacks on the United States, threatens to exacerbate tensions between East and West. "If this continues," Palestinian legislator Hanan Ashrawi has said bluntly of the corruption, "we will be repeating the mistakes of the Arab world." "We want to be a democracy," echoes Khalil Shikaki, a Palestinian scholar and pollster. "We don't want to be a corrupt, mismanaged entityjust another Arab country."
"We want to be a democracy," [says] Khalil Shikaki, a Palestinian scholar and pollster. "We don't want to be a corrupt, mismanaged entity just another Arab country."
In its crudest form, of course, the poverty-causes-terrorism argument has little going for it. If it did, sub-Saharan Africa would be its greatest exporter. Fifteen of the 19 September 11 hijackers, moreover, came from oil-rich and relatively prosperous Saudi Arabia, while two more were middle class boys from Lebanon and Egypt.
ECONOMIC HARDSHIP AND LAWLESSNESS
That said, it is likely that, mixed with an aggressive quasi-religious ideology and/or an abiding sense of historical grievance and humiliation, economic hardship plays a role in spurring people to commit or support heinous acts. The shocking scenes of jubilation in the West Bank as the World Trade Center collapsed likely had something to do with this desperate combination. People were cheering the destruction of symbols of a world they could not share.
Cliched as talk of "root causes" and "hopelessness" and "despair" has come to sound, there is something to it. If the war on terrorism is not to become a long-running clash of civilizations, America must combine military victory over terrorism's sponsors with an effort to bring progress to the Islamic world.
If the war on terrorism is not to become a long-running clash of civilizations, America must combine military victory over terrorism's sponsors with an effort to bring progress to the Islamic world.
Sadly, economic freedom has become something of a joke among Palestinians and other Arabs. "It's a free trade zone," Hussam Khader, a reform-minded member of Arafat's Fatah movement, tells a journalist, pointing to a neighborhood in the Balata refugee camp where stolen Israeli cars are stripped for parts and both Israeli and Palestinian security forces fear to tread.
This has not gone unnoticed by would-be investors and entrepreneurs. Like Mahmoud el Farra, many PalestinianAmericans who returned to contribute to their fledgling state have complained to the U.S. consulate in Jerusalem about PA officials demanding stakes in their companies. Abdel Muhsen Qattan, a London-based Palestinian millionaire, has refused to invest in anything but charitable projects. And when Yasser Arafat, citing the famous financier of early Zionism, said to billionaire Palestinian expatriate Hasib Sabaagh that "Palestine needs a Rothschild," he got a rather terse reply. "You will have a Rothschild," Sabbagh said, "when Palestine gets a Ben-Gurion."
The comparison is an interesting one, since neither David Ben-Gurion nor any of the other Zionist pioneers could be considered advocates of markets or capitalism. Israel was founded as a quasi-socialist state, with powerful labor unions and government monopolies controlling much of the economy. To this day, as this 2003 Index of Economic Freedom notes, it retains one of the world's most crushing tax burdens.
One thing it had and has, however, is a rule of law. Any property that could be amassed despite the burden of government could be considered relatively safe from arbitrary expropriation, while business disputes could be settled swiftly in uncorrupt courts. It is surely the rule of law that explains Israel's astonishing relative prosperity in a benighted region. According to the World Bank's World Development Indicators 2001, Israel's per capita (nominal) GDP in 1999 was $16, 518. By contrast, the U.N. Development Program's Arab Human Development Report for 2002 calculates an average per capita (nominal) GDP of $1,897 for the Arab League countries in 1999.
For a time, this benefited Israelis and Palestinians alike. Israel's seizure of Gaza and the West Bank from Egypt and Jordan in 1967 did not bring dignity or political freedom, but it at least brought some respite from arbitrary government, and with it rising Palestinian standards of living. But since Arafat & Company returned in 1994 to monopolize the economy, fortunes have reversed dramatically. Based on World Bank and International Monetary Fund data, Professor Ephraim Kleiman of the Hebrew University of Jerusalem estimates that Palestinian GNP was about one-third lower in 2001 than in 1993. Groups like Hamas, which provide social welfare services along with their radical teachings, have been quick to take advantage.
THE RULE OF LAW: "MORE BASIC THAN PRIVATIZATION"
Appreciation of the rule of law as a central element of economic freedom has increased greatly over the past 10 years as economists have watched the countries of the former Soviet Union struggle to emerge from communism. A decade ago, Milton Friedman had three words for countries struggling to make the transition: privatize, privatize, privatize. "But I was wrong," he said last year. "It turns out that the rule of law is probably more basic than privatization. Privatization is meaningless if you don't have the rule of law."
Economist Robert Lawson agrees, saying that 10 years ago he would have cited taxes as the central element of economic freedom. Today, he says, "Giving people property rights and the ability to settle disputes peacefully and fairlythat's the number one thing that matters."
That makes a lot of intuitive sense. After all, a good chance that you will be "taxed" at 100 percent is probably more of a disincentive to productive activity than the certainty that you will be taxed at 50 percent. It certainly would explain how heavily taxed and regulated Western Europe remains prosperous while lawless countries that collect little or no taxes continue to suffer. It is also the central problem identified by Palestinian economist Hisham Awartani of An Najah University in Nablus: "Multinationals and big firms, even local firms, are appalled at the level of lawlessness in Palestine. If you've got a problem with a client, a customer, you fool yourself to think it can be settled in the courts."
Palestinian dissident Omar Karsou agrees and has included "the rule of law" along with democratic reform as priorities in the platform of his nascent opposition movement. (The fate of Karsou's own banking business in the Palestinian territories has been uncertain since he launched his challenge; but he is already well familiar with the economic arbitrariness of neighboring Jordan, which froze his assets there in the late 1980s.) Even Palestinian Information Minister Yasser Abed Rabbo has given the PA a grade of "F" for the judicial system.
Perhaps the most unlikely reform advocate has been Jihad Wazir, son of legendary Palestinian commando and Arafat-number-two Abu Jihad, who was assassinated by Israel in 1988. Two years ago, as managing director of the Palestine World Trade Center in Gaza, he was quick to blame the tight grip Israel holds over the territories for Palestinian economic problems.
But the fundamental problem, he conceded, was that "the normal business practices of any other country are not practiced here." Sitting in his unfilled office complex just prior to the outbreak of the second intifada in September 2000, he told the Los Angeles Times: "The fear is that we will end up with a Syrian constitution: beautiful, but it can be changed in 15 minutes…. We'd rather have Israeli occupation than a banana republic. And we are at the crossroads."
Indeed they were. Two years of guerrilla war have led Israel to reoccupy much of the West Bank and close out the hundreds of thousands of Palestinian laborers who once commuted to jobs in Israel, in addition to all but killing hopes for the establishment of a Palestinian state anytime soon. Yasser Arafat has grudgingly agreed to hold elections and finally adopt a Palestinian constitution, but odds are that he will do his best to see that neither ever happens.
BEYOND PALESTINE IN THE ARAB WORLD
Palestinian problems with the rule of law may be extreme, but in virtually every Arab state, the whim of an unelected ruler reigns supreme and the constitution if one exists remains mere words. Arabs have too often been content to blame their consequent economic decline on others, be it a Zionist conspiracy or mere lack of First World aid. And where concerted efforts at economic progress have been made, they have too often been influenced by misguided Western notions of protectionism, self-sufficiency, and socialism. The fact that many fell within the Soviet ambit during the Cold War did not help either.
Arabs have too often been content to blame their economic decline on others…. And where concerted efforts at economic progress have been made, they have too often been influenced by misguided Western notions of protectionism, self-sufficiency, and socialism.
Egypt's Gamal Abdel Nasser, for example, sought economic salvation in big government projects like the Aswan Dam. Meanwhile, the effects of regulation and bureaucracy on the general business climate were neglected. In recent years, efforts have been made to train workers displaced from state industries that were privatized to start small businesses, but they have met with little success. "Ninety percent of your time is wasted obtaining a license, in paying social insurance, going to the tax authority, faxing your orders and so on," says one Egyptian. "We don't even have the start-up atmosphere that would help [small] projects survive and become medium-sized in the future." The result is that Egypt's standard of living, which was roughly the same as South Korea's in 1950, is now little over 20 percent of South Korea's.
Fortunately, Arabs themselves are starting to recognize the "root causes" of their problems. This year, the United Nations Development Program (UNDP) released its first-ever Arab Human Development Report, and it could not be more damning. Specifically:
• With a GDP of $531 billion in 1999, the report's Arab authors note, the 280 million citizens and 22 nations of the Arab League produced less than Spain.
• Adjusted for purchasing power parity, the income of the average Arab citizen was just 14 percent of the average citizen of an Organisation for Economic Co-operation and Development (OECD) country.
• If the Arab world's per capita growth rate of 0.5 percent annually over the past two decades continues, it will take the average Arab citizen 140 years to double his income, while citizens of other regions are on track to achieve that in less than 10 years.
Meanwhile, Arabs lack access to the knowledge that might enable them to compete in the modern economy. They lag behind sub-Saharan Africa even in the number of Internet connections per capita, while fewer books have been translated into Arabic over the past millennium than Spain translates in an average year.
Even more shocking are the report's policy conclusions. Rather than blame a lack of aid from the First World, as both the Arabs and the UNDP have been wont to do in the past, the report identifies the lack of democratic and efficient governance as a major obstacle to economic growth. The Arab Region needs to abandon the vestiges of the old dirigiste approach and foster private enterprise with "beneficial regulation" to curb both public and private monopolies. To do so, the Arab states need a transparent rule of law, a fair and fast legal system with a professional judiciary.
LESSONS LEARNED
President Bush, too, is charting a new course for American policy in the region based on democracy and the rule of law. For too long, the U.S. tolerated even supported corrupt and unrepresentative governments as agents of "stability." But the lessons of the Iranian revolutiona friendly dictator can quickly become a major liability if his people come to view you as agents of their oppressionmay have finally sunk in.
The President seems to understand that even if Yasser Arafat had any intention of making peace with Israel, the economic misery there would make it a fragile one at best. In a historic speech in July, he promised American support for the creation of a Palestinian state, but only if it could show itself to be a democraticand, yes, economically freestate capable of living in peace with Israel:
The Palestinian people are gifted and capable, and I am confident they can achieve a new birth for their nation. A Palestinian state will never be created by terrorit will be built through reform. And reform must be more than cosmetic change, or veiled attempt to preserve the status quo. True reform will require entirely new political and economic institutions, based on democracy, market economics and action against terrorism….
Today, the Palestinian people live in economic stagnation made worse by official corruption. A Palestinian state will require a vibrant economy in which honest enterprise is encouraged by honest government.
Today, the Palestinian people live in economic stagnation made worse by official corruption. A Palestinian state will require a vibrant economy in which honest enterprise is encouraged by honest government.
In Iraq, too, the President and his advisers seem determined to avoid past mistakes. The talk is of replacing the regime of Saddam Hussein with an economically free constitutional democracy, not just a friendlier thug. American success in Palestine and Iraq could be precisely the sort of exogenous shock the Arab world needs, spurring calls for reform throughout the region.
After all, the Arabs do not lack the desire for freedom according to the UNDP, about 50 percent of adolescents polled say they would like to emigrate. They do not lack for talent, as the countless success stories of those who have already done so attest. And they do not lack an understanding of markets, as anyone who has ever visited an Arab souk would know.
The problem is that bureaucracy, corruption, and uncertainty make it difficult to build a business bigger than a market stall. If accountable government and the rule of law could be brought to the region, fortunes could change very rapidly. |
