What sustains the barriers to globalization in the Middle East?

Marcus Noland and Howard Pack have written a must-read policy brief for the Institute for International Economics on why the Middle East appears to be suffering from relative economic stagnation. They lay out the challenge in stark terms:

[T]he region as a whole will experience labor force growth of more than 3 percent for the next 15 years or so. On current trends, according to an Arab League report, unemployment in the region could rise from 15 million to 50 million over this period. Under plausible assumptions about the rate of productivity growth and required investment levels, the economies of the region will have to maintain investment rates on the order of 30 percent of GDP and income growth of 5 to 6 percent a year to absorb all this labor. This is a very tall order. And recent history is not reassuring…. Yet the implications of not achieving rapid growth to absorb the rising number of entrants to the labor force could be dire. In the Zogby (2002) poll of Arab attitudes, Saudi males stand out as uniquely dissatisfied and pessimistic about their children’s future. Presumably these feelings are rooted in the reality of dwindling employment prospects, the 40 percent decline in per capita income from its peak in 1982, and the lack of political voice. Dissatisfaction and pessimism about the future are mildly correlated with age, education attainment, and internet access. The youngest, most advantaged sections of society have the bleakest appraisal of the future. It goes without saying that 15 of the 19 September 11 hijackers were Saudi males.

The authors dismiss the simple argument that Islam retards receptivity to capitalism. Rather, Noland and Pack’s key finding is that “public attitudes toward foreigners and globalization” more generally is the greatest barrier to foreign investment. Their operationalization of this kind of attitude is most intriguing:

Three of the many questions posed in the Pew [Global Attitudes] poll have particularly high correlations with measures of risk in economic exchange, especially FDI that involves a local physical presence. The regional pattern of responses to three issues—the necessity of closing large, inefficient factories; the need to protect their way of life against foreign influence; and the desirability of societal acceptance of homosexuality—are displayed in figures 2 through 4. Relative to most respondents in the rest of the world, the Arabs were less willing to close inefficient factories, more committed to protecting the local way of life, and less tolerant of homosexuality. The picture that emerges from the pattern of responses to the full set of Pew survey questions is of local populations that are relatively averse to change, instead favoring the maintenance of existing economic and social arrangements—especially if the forces of change are regarded as emanating from foreign or nontraditional sources. Controlling for economic fundamentals such as the level of per capita income, macroeconomic stability,and corporate taxes across a broad sample of countries, these responses have some explanatory power with respect to measures of interest such as the level of inward FDI, sovereign debt ratings, and local entrepreneurship. Although the precise channels of causality are ill defined, it is plausible that the attitudes manifested in the survey responses are underpinning behaviors and practices that may impede successful globalization. The question about closing of factories could be interpreted as a straightforward question about the priority placed on efficiency. The questions about protecting against foreign influence and accepting homosexuality could be interpreted as capturing the extent of entry barriers to human capital from nontraditional sources. (emphasis added)

From this finding, the authors return somewhat gloomily to the role of Islam and conclude:

Islam may matter—not in the simple sense that belief in Allah dooms one to a low personal saving rate or that Islamic banking systems handicap financial efficiency—but rather in a more subtle way. Today there are Muslim communities in the Middle East that are relatively discomfited by aspects of ongoing social change. To the extent that adherence to Islam is a significant component of personal and communal identity, Islamic teachings will be one prism through which these developments are evaluated. This pattern of apprehension may be reinforced if Islam itself is regarded as being part of this contested terrain.

Read the whole brief.