The Middle East’s Blowout Bellicosity Bill

On the eve of the UN General Assembly’s special session on large refugee movements, the IMF updated its tally of MENA region civil and ISIS-related war costs, underscoring enduring conflict over one-quarter of the post-World War II period. Their underlying economic, political, social, demographic and religious causes are “deeply entrenched” and average episodes have lasted a decade. Currently 10 million refugees are in the area and mainly hosted in neighboring countries, with the Syria and Iraq influx swelling populations in Jordan and Lebanon and stretching budgets and infrastructure. Almost 2 million have reached Europe and 3 million are in Turkey and the immediate humanitarian emergency has morphed into a long-term development crisis requiring fresh donor funding and government policy reforms, according to the working paper. After four years of fighting Syria’s GDP is half the pre-war sum, inflation topped 300 percent and the currency is one-tenth the previous value, and growth has also been shaved 1 percent next door with housing expense skyrocketing in border zones. Total factor productivity has collapsed with the human capital toll in Syria alone at 6.5 million displaced and 500,000 killed, with 50 percent unemployment and 20-years reduced life expectancy. The statistics from Iraq and Yemen are equally “dramatic,” with their respective poverty rates at 25 percent and 50 percent. In Lebanon informal labor force entry depressed wages and arrivals overwhelmed public services with only one-third of refugee children able to attend school. A Syrian think tank estimates physical damage near $150 billion, a multiple of 2010 GDP, and in Libya oil output plunged to one-quarter of capacity with shutdowns and blockades, leaving a 45 percent of GDP current account deficit from former surplus. Jordan’s exports to Europe have suffered, and crime and insecurity have spread throughout the region, and affected tourism in Egypt and Tunisia outside the immediate frontlines. Human traffickers operate large smuggling rings diverting border protection, and FDI has been unable to return to pre-Arab Spring levels. Financial sectors have been hollowed out with deposit runs, asset crashes and capital flight, and the Syrian bad loan ratio was already 35 percent as of the most recent 2013 figures.

Social cohesion and institutional quality measures have slipped with only small minorities “trusting” the political and economic systems in opinion surveys. Central banks and finance ministries have lost authority and tax and payments network control, and international banking practice has further eroded their capacity by severing suspect correspondent relationships. Fiscal deficits have “ballooned” to averages above 10 percent of GDP, and monetary policy has been forced to step into the breach with government financing. International reserves are almost exhausted in Yemen and were halved in Libya as a portion of imports. Even with peace agreements, history shows the conflict cycle often repeats in the near-term and debt distress and fragility linger, with recovery taking decades. State intervention in wartime circumstances is hard to unwind, and reintegrating refugees is slow with the tendency toward prolonged absence and desired resettlement abroad. Working rights and private sector strengthening are important pillars of successful strategy the World Bank and IMF plan to support with increased technical and concessional assistance, along with possible debt relief aid the area’s unrelieved misery.

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