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7 Deadly Stories: Middle East out of the ashes?

Middle Eastern countries embroiled in turmoil turn to Saudi Arabia for economic aid.

Middle east out of ashes 11 8 1Enlarge
Egyptian demonstrators demanding the ouster of President Hosni Mubarak throw fire bombs at police in Suez on January 27, 2011. (Khaled Desouki /AFP/Getty Images)

Editor's note: 7 Deadly Stories is a GlobalPost series on the main drivers of the global economy, all of which are facing severe challenges at once. Will the U.S. economy relapse? Is Europe finished? Will China, Inc. crash? Can Japan recover from disaster? How will the Middle East emerge from the ashes? How did the world become awash in debt? What is the true cost of climate change? These are the stories that are pushing the world economy, once again, to the brink.

CAIRO, Egypt — When it comes to the Middle East's role in the global economy, one three-letter word invariably arises: oil.

It's easy to understand why. 

Six of OPEC's 12 members are here, including the world's largest exporter of the black stuff, Saudi Arabia. The global economy, quite simple, runs on oil. 

So when the region erupted this year in protests, economists naturally focused on the fluctuating price of crude and what that might mean to global economy and the geopolitics of the region.

Egypt, the largest economy and country in the region, has complied with that preordained script. Desperate to revive its battered economy, Egypt's interim government is now raising eyebrows by turning to its oil-rich, and decidedly less democractic, neighbors to the east.

The nation's transitional military leaders, who assumed power after the ouster of Hosni Mubarak on Feb. 11, announced earlier this year that Saudi Arabia, together with several other countries belonging to the Gulf Cooperation Council, had pledged roughly $17 billion to reinvigorate Egypt's post-revolution economy.

More from 7 Deadly Stories: With the Euro in crisis, is Europe finished?

Meanwhile, the government turned down a billion-dollar loan offer from the International Monetary Fund, despite having applied for the assistance just weeks before.

That change of heart, along with Egypt's clear financial shift eastwards, has left some economists scratching their heads in disbelief, and have raised suspicions about the motives of the lending countries.

"I believe the IMF would have given Egypt very favorable conditions for loans," said Alia al-Mahdy, the dean of Cairo's University's school of economics. "But I am much more doubtful about the money that is supposedly coming from the Gulf."

Egypt's already sluggish economy took a nosedive at the start of the revolution in late January and has yet to come up for air.

Frequent unrest since Mubarak's departure has scared off the few foreign tourists that were still here and is causing risk-averse investors to turn away from Egypt's unpredictable stock market. On top of all that, labor strikes and prolonged protests continue to disrupt the national economy by blocking access to major city thoroughfares and reducing Egypt's ability to capitalize on its exports.

With the economy deteriorating to the point of panic, a situation that is being made even more tense by looming elections, Egypt decided that international assistance in the form of loans was the best, and quickest, way out of the doldrums.

More from 7 Deadly Stories: Can the Japanese economy recover?

Demonstrators in places like Cairo's Tahrir Square, however, have been wary of western-backed IMF loans that appeared available only on the condition that Egypt encourage neoliberal economic reform. Some revolutionaries believed that the strings attached to the IMF money encouraged policies similar to those instituted by Mubarak over the past decade — policies that fueled both public anger and economic stagnation.

Ziad Abdel Samad, the director for Network for Development, a Lebanon-based Arab nongovernmental organization, was one of many who lobbied Egypt's government against taking the IMF assistance. "The strings that came with similar money never helped Egypt in the past," he said. "Mubarak received similar funding, and his policies were not ever able to address poverty, unemployment and social justice."

Egypt's interim leaders, under pressure from the growing chorus of activists camping out in Tahrir, ultimately decided to go with aid from the Gulf.

The state budget was slashed to cut the national debt to a significantly more manageable number, about 9 percent of the GDP. Saudi Arabia agreed to help fill the gap by pledging up to $4 billion. The United Arab Emirates offered $3 billion and another $10 billion may come from tiny Qatar. Egypt's finance ministry has described the aid as soft loans, grants, and "gifts" — but how or when the money will arrive is far from certain.

Also unclear is what exactly the Gulf countries will demand in return down the line, and also whether this money will succeed in fostering the growth needed to rehabilitate Egypt's economy.

"We don't know what conditions the Gulf money comes with. We don't know how it will come in to the country, what it will be used for, when it will come, or even if it will come," al-Mahdy said.

In addition to the apparent lack of transparency, some analysts said they were concerned about the ideological tension that might be caused by a fledgling democracy pinning its survival on assistance from long-standing monarchs that have opposed democracic reforms at home.

The Saudi royal family, after all, publically supported Mubarak during Egypt's 18-day uprising.

Saudi Arabia and other GCC nations have largely avoided the Arab Spring unrest by providing handout payments to appease citizens — around $37 billion in the case of Saudi Arabia.

Bahrain was the only country in the grouping that faced significant calls for reform. But, earlier this spring, the movement was crushed by a multilateral security force led by the Saudis.

"It is not going to make investors confident that newly democratic Egypt is turning to the Gulf, which has quelled its own would-be uprisings with petrodollars," said Amira Ahmed, the business editor at the Daily News Egypt. "It seems like a huge contradiction."

Continued unrest across the Middle East has sent world oil prices up more than 20 percent so far this year, adding to the coffers of the already wealthy GCC states.

But regional stability is their ultimate goal, according to Oraib Al-Rantawi, director of the Al-Quds Center, a political think tank based in Jordan.

He believes that Saudi Arabia and others are investing heavily in countries like Egypt, Yemen and Tunisia in a bid to contain the spread of the pro-reform movements that began sweeping across the region earlier this year.

"Saudi Arabia and the GCC's major strategy now is to avoid the spillover of the Arab Spring to maintain their status quo at home. Instead of making reforms, they spend money to gain political clout," al-Rantawi said. "For them, it's not only about oil revenue — it's about staying in power."

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http://www.globalpost.com/dispatch/news/business-tech/110729/7-deadly-stories-middle-east-turmoil-foreign-investment