Throughout 1974 alarming bulletins from the Middle East suggested that the "oil-rich" Arabs and their Iranian neighbors were about to buy the Western world. Solidly financed by multiplying oil revenues, the story went, Arab governments and businessmen were able and ready to seize control of airlines, hotels, banks, steel mills and other industrial plants in Europe and America.
According to a study we recently launched, however, the facts are quite different. Contrary to popular belief, the Arab nations and Iran are investing impressive amounts of money in their own countries. Between December 1973 and January 1975, for example, they committed somewhere between $38 billion and $62 billion to the construction of pipelines, railroads, highways, steel mills, cement plants, petrochemical complexes, entirely new communities, desalting plants and numerous other projects representing virtually all sectors of economic life.
The study we made, furthermore, was limited to publicly announced agreements between Middle Eastern governments and private firms or trading associations. It did not include the normal flow of trade, the establishment of branch plants and offices by foreign firms, or contracts signed by private Middle Eastern nationals with foreign firms, all worth many additional millions of dollars. But the results, nevertheless, provide clear evidence of an unprecedented effort to funnel the so-called petrodollars into massive programs of industrialization.
The heart of the study was 1,039 contracts signed by governments of various states between December 1973 and January 1975. Most of the states produce oil but others were included as well for purposes of comparison, to preserve a regional unity and to include oil money that might have been channeled through them. The 18 nations are: Morocco, Algeria, Tunisia, Libya, Egypt, Lebanon, Syria, Jordan, Saudi Arabia, Kuwait, Iraq, Iran, Bahrain, Qatar, United Arab Emirates, Oman and the two Yemens.
As shown in Table 1 (see original publication for table ), these 18 nations awarded contracts whose known value exceeded $38 billion during the 14 months under review. Almost half, or 43 percent, of this vast sum was allocated to new industrial projects—projects which ranged from simple facilities to produce matches, cigarettes, baby food, wooden boxes, vinegar, date syrup, glass and metal containers, to vast multimillion-dollar complexes to assemble trucks and buses, construct ships, process metals, or to produce petrochemicals, to modernize, to become independent of Western industrial powers. And the inference is obvious: a determination to master modern technology, to provide new sources of employment and to improve living standards.
The pattern of industrial development is suggested in Table 2 (see original publication for table ). Middle Eastern governments are placing the biggest proportion of their petrodollars in steel, petrochemicals, cement and oil refining. During the 14-month period contracts were let for 25 cement, 12 iron and/or steel, 28 petrochemical and two aluminum-reduction plants.
The impact of these contracts will be substantial. At the moment the 18 nations produce more than 2.6 million tons of steel. But by the early 1980's, more than 39 million tons of steel will be poured annually and Bahrain, Oman, the two Yemens and, possibly, Kuwait will be the only countries not engaged in steel production. Most of the new mills, furthermore, have been designed to use natural gas to produce sponge iron directly from iron ore and then convert the sponge iron into steel in electric-arc furnaces. As this system completely bypasses the expensive, environmentally destructive blast-furnace operation, and is based on abundant and previously unused natural gas, the use of the new sponge-iron process makes solid economic sense. Indeed, their large reserves of natural gas may well give the Arabs and Iranians a competitive edge in world steel markets. It is even possible that Middle Eastern sponge iron could be exported to steel-making areas, such as Japan and Western Europe, where the high cost of coal and pollution control poses serious problems for the processing of crude-iron ore.
Table 2, however, also points up weaknesses in the area. The paucity of contracts for plants producing machinery, electrical goods, scientific equipment and transportation equipment underlines the non-industrialized nature of most of the region. Such industries require technicians, highly skilled workers and large, sophisticated, affluent markets. It may well be decades, for instance, before plants are established to produce the machinery and equipment for the region's growing petrochemical industry. Although autos are assembled in a number of countries and buses are assembled in Iran, Algeria and Lebanon there are no supportive industries to supply parts to the assembly plants. On the other hand, a beginning is being made in Morocco, Egypt, Lebanon, Iraq and Iran, where contracts have been let for the construction of plants to produce tires, batteries, valves and miscellaneous auto parts.
The contracts let also suggest the present level of industrial achievement in individual countries and their potential. Saudi Arabia, for example, having both financial reserves and untapped mineral resources, has the potential to become an industrial power. For quite different reasons so does Lebanon, whereas Tunisia, Libya, Jordan, Bahrain, Oman and Yemen still have considerable catching up to do.
At the moment, however, Algeria is the country to watch. With a 30 percent rate of industrial growth in 1973, Algeria is giving top priority to industrial development to help solve its chronic unemployment problem. Industrial contracts awarded between December 1973 and January 1974 included six cement and concrete products plants, eight petrochemical complexes, two paper and paper-products plants, three transportation-equipment plants, one oil refinery, one textile complex, one steel mill, two electrical-equipment plants, two plastic plants, four building-products factories, one leather plant, one ceramics plant, seven food-processing plants, one tube mill and one container plant. The total known value of these contracts exceeded $3 billion. Algeria could become the industrial leader of Africa within a few decades.
In reference to Table 1, it is clear that although investment in armaments is heavy—12 percent of the total known value—and might be much more, an overwhelming proportion of investments is in infrastructure: bridges, seaports, airport improvements, housing, sewage and water systems, electrification, communications and education and health services. Contracts for harbor deepening and expansion, new docks, dock-side cranes, storage sheds and the like were common during the 14-month period as just about every major port from Casablanca to Aden to Umm Qasr is undergoing major improvement to handle the increased shipping load. Two large hospitals and 100 clinics for Saudi Arabia are included in the general-construction category, as well as new hospitals and clinics for Bahrain, Iraq, Morocco and Kuwait. There are also dozens of projects throughout the area to expand telephone service, to lay down transmarine cables, improve earth-satellite communication systems and expand radio and television networks. These investments in infrastructure are extremely significant. They help to modernize all sectors of the economy and improve living standards; they also provide the fundamental base upon which further development can take place—but at a more rapid pace.
Another fact that emerges from the study is the extent to which Western nations and Japan are benefiting from these expenditures. As Table 3 shows (see original publication for table ), a solid 86 percent of contract money went to the developed nations, with France, the United States, West Germany, Italy, the United Kingdom and Japan the leading participants in that order. Together those nations accounted for more than $28 billion of the approximately $38 billion awarded.
With over $10 billion worth of contracts, or more than 25 percent of the total amount awarded, France was substantially ahead of the other nations. The French, furthermore, participated in joint ventures with other nationals to the tune of another $1.2 billion and were the leading contractual partners in Algeria, Iraq, Iran, Kuwait, Morocco, Qatar and Tunisia. The United States was first in Lebanon and Saudi Arabia, Great Britain in Bahrain, United Arab Emirates and Yemen (San'a) and West Germany in Libya.
Two other facts emerge too. One is that the United States, despite its size, industrial efficiency and aggressiveness and its increasing need for export markets, was sixth in sales of non-military goods and services. The other is that the Soviet bloc has done even worse. Contracts awarded to the nine nations in the Soviet bloc amounted to slightly more than $1 billion, about 10 percent of the known value of the contracts awarded to France alone. Forty percent of this sum went to Yugoslavia, which has strong ties with the Arab world. The known value of contracts with the Soviet Union was only $176 million, giving the Russians a rank of 18th in monetary value of contracts. It would appear that the Eastern-bloc nations have not made any significant economic penetration of the region.
The study also provides grounds for an optimistic assessment of future economic prospects. Indeed, it might even be predicted that petroleum and natural gas will do for the Gulf what coal did for the West in the 19th century.
There are, of course, qualifications to such rosy predictions. There is still a serious shortage of engineers, technicians and skilled workers. There is the problem of small internal markets. There is the uncertain capacity of world markets to absorb manufactured goods from the area. There is the need to resolve some of the political conflicts which trouble the area. Finally, there is the threat of war.
But on the positive side there is already in existence a small but increasing pool of managers, engineers and skilled workers, especially among the Egyptians, Lebanese and Palestinians. The use of a common language among the Arabic-speaking nations permits the mass shift of workers from one area to another which, in fact, has been taking place for years. Economic inducements are being utilized to persuade Western-trained Arabs and Iranians to return to their homelands from abroad. Pakistan, India and Africa have already provided large numbers of highly trained migrants. The Turkish workers in Germany and the Algerians in France, who are now facing unemployment, form a large potential labor force. Moreover, most of the nations have made strong commitments to educate their people. Schools, colleges and universities are being established in ever-increasing numbers and free education from kindergarten to the Ph.D is now the rule in a number of countries.
We believe, in fact, that continued investment in Middle Eastern development will eventually result in a vast and affluent market for the industrialized nations. While there may be some economic dislocations in the short run, the recycling of petrodollars will eventually become merely an item of interest to the economic historian. Development demands so much capital that capital needs may soon exceed oil-export earnings, and trade between the Middle East and the rest of the world should increase enormously. Industrial nations make the best trading partners, and so, too, will the Arabs and the Iranians as they develop modern, industrial societies.
Bertrand P. Boucher, Associate Professor and Chairman of the Department of Geography and Urban Studies at Montclair State College in New Jersey, specializes in economic geography. Harbans Singh, Assistant Professor at Montclair, specializes in Third World economic development. This article is an adaptation of an on-going, two-year study of Arab petrodollar expenditures.