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LECTURE 18: THE MIDDLE EAST DURING THE LONG BOOM
The Middle Eastern economy grew at its fastest ever rate in the period 1950-73, as did much of the rest of the
world. Growth was, of course, fastest in those countries with major oil resources, but the general buoyancy of the
entire world economy spilled over and produced rapid growth even in those countries without oil. Both those with
and those without oil reserves embarked on a vigorous programme of ISI, import substitution industrialisation, but
unlike Latin America, there are no real success stories in the Middle East, at least not yet. However, one trait that
both the Middle East and Latin America show very clearly is rapid rates of population growth, which muffled the
impact of fast growth on individual welfare. The best place to begin an assessment of the Middle Eastern economy
during the long boom is indeed with demographic factors.
Rapid Growth of Output and Population
The economy of the Middle East expanded rapidly during the postwar years, but so too did population. The data in
Table 18.1 shows quite staggering rates of growth of output measured by GDP, but there is evidence of extremely
fast population growth. For the region as a whole, it is not unreasonable to estimate a rate of economic growth at
roughly 6 per cent per annum during the long world boom. This is at the upper end of international experience, and
contrasts sharply with Latin America, where performance in the long boom was somewhat disappointing.
Table 18.1: Growth of Output and Population in the Middle East, 1950-73
Egypt
Iran
Iraq
Israel
Syria
Turkey
Output Population
5.1
2.4
7.0
3.1
5.2
3.1
9.5
4.5
6.0
3.1
6.1
2.8
GDP/cap
2.7
3.9
2.1
5.0
2.9
3.3
There are two main reasons why the growth rate was higher in the Middle East. First, the region was starting from
a lower base level. The Middle Eastern economy was rather underdeveloped when compared with Latin America,
but it had laid some foundations for faster growth during wartime. Secondly, and more obviously, world demand
for the staple export of the Middle East, oil, was much stronger than for anything that the Latin American
economies had to offer. During the long boom, the industrial economies launched themselves on a path of
development that rested on lavish use of oil energy. The quintessential emblem of the Fordist mass production era
is of course the automobile, but there was huge growth also in the chemicals industry as it shifted from distilling
coal tar to refracting oil, and lavish use of energy was a characteristic feature of the boom. The Middle East,
however, also saw very substantial rates of population growth during this period, so the rise in living standards was
rather less impressive than the rates of growth of output might lead you to expect.
Middle Eastern Oil
There are three obvious driving forces behind this spectacular record of crude economic growth. The first,
obviously enough, is oil. For a variety of reasons, Middle Eastern oil has been staggeringly cheap to produce.
Middle Eastern oil tends to be found on or very near the coast, in huge fields and at comparatively low depths,
making exploration and drilling costs low and transportation to the ports very low. All the major Middle Eastern
oil fields are much bigger than any in the USA, and the regions biggest oilfield in Kuwait is probably ten times
larger than the largest US oilfield. Muslim law vests the ownership of minerals in the state rather than with the
individuals who own the surface land, and this has allowed the fields to be tapped by a relatively small number of
wells, especially when compared to the USA. The Abqaiq oilfield in Saudi Arabia and the largest US field in East
Texas are approximately the same size; the Saudi field has 62 wells, and the US over 2,600, even after attempts to
consolidate production. State ownership of oil has allowed concessions to the major companies to develop the
fields over a very long timespan, thus avoiding the over-capitalisation that comes from the need to maximise shortterm production. Thus, the costs of developing Middle Eastern oil were incredibly cheap during the long boom.
The figures produced by Adelman for the mid-1960s suggest that Middle Eastern oil cost something in the region
of 10 cents for the Middle East, 46 cents for Venezuela, and $1.22 for the USA (see Figure 18.1.
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Figure 18.1: Cost of Producing Oil in Various Locations in the mid-1960s
USA
Venezuela
Nigeria
Algeria
Libya
Middle East
Cents per
barrel
0
50
100
150
With the development of super-tankers to transport oil, which cut transport costs by roughly 75 per cent in the
period 1950-73, Middle Eastern crude oil set the benchmark price for the world’s oil industry and the Middle East
contains approximately 60 per cent of the world’s known reserves of oil. For recent estimates of world oil reserves,
see http://www.eia.doe.gov/emeu/iea/table81.html. Middle Eastern oil was cheap, and sold at prevailing world
market prices, thus providing a significant rent.
In contrast with the period before 1950, during the long boom the governments of the Middle Eastern oil
producers managed to get their hands on a growing proportion of this rent. Re-negotiation of oil royalties began
outside the regions in Venezuela during the Second World War, but spread to the Middle East in 1950 in
negotiations with Saudi Arabia and Kuwait. The producing countries had been paid a fixed royalty per ton of oil
produced, but rising prices had eroded the purchasing value of the sum. Increasingly, governments wanted a bigger
share of the profits from oil. The test case was undoubtedly Iran, where the negotiations between the government
and AIOC stalled and led to nationalisation of the company by a radical, nationalist Iranian government set on
accelerating the pace of national development. The resolution of this crisis involved an international embargo on
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Iranian oil, a coup engineered by the USA and UK secret services and the opening of the Iranian oilfield to US as
well as UK companies.
For a view of the Mossadegh crisis, see: http://www.asiasource.org/society/mossadeghmohammed.cfm
But it made clear to both the oil companies and to Middle Eastern governments the costs of failing to agree, and
the principle of equal shares of the profits of oil to the company and the producing country. This pattern lasted for
approximately two decades, but ultimately it too was undone by inflation. The re-emergence of discontent over
prices and the rate of production led to the formation of OPEC in 1960.
For a portal to OPEC’s web-site and related information, see: http://www.saudinf.com/main/d50.htm
In the 1970s serious discontent over the distribution of the profits from oil mixed with dissatisfaction with UK and
US strategic policy in the region led to the OPEC price rises, nationalisation of the industry and a big shift in the
balance of power between producing company and nation. The net impact of this foray into business and strategic
history is to note that the oil producing nations had a substantial flow of income into their economies, which raised
income per head and provided substantial resources potentially for development. Figure 18.2 illustrates the share of
Iraqi national income from the various sectors, and shows the immense proportion of state finance that came from
oil revenues.
Figure 18.2: Sectoral Contribution of Iraqi GNP, 1961
Agriculture
Oil
Manufacturing
Construction
Public Admin
Figure 18.3 shows oil revenue per capita in 1974 US$.
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Figure 18.3: Per capita Oil Revenues in the Middle East, 1974
Source: Issawi, Economic History of the Middle East and North Africa, p. 197.
Admittedly, the latter comes immediately after the OPEC price rise, but nonetheless it shows the immense value of
oil revenues to the smaller (in terms of population) gulf states. The oil revenue per capita for Iran and Iraq was
comparatively modest by comparison with these rather special cases in the Persian Gulf. But note also that Saudi
Arabia had relatively high levels of revenue per head.
One additional point should be mentioned. Oil revenues flowed to a very select group of countries in the
Middle East, but some efforts were made to channel some, albeit small, part of this wealth to the poorer countries
in the region. Jordan, for example, one of the poorest Arab states was heavily dependent on aid, to the extent of 20
to 30% of GNP in much of the long boom. Arab aid began to flow in 1964, and from the later 1960s onwards Arab
aid became the dominant, if highly unstable, part of total foreign aid into the country. Egypt also received aid from
its richer Arab neighbours, in recognition of the role that the country played in the fighting against Israel,
especially in 1967, 1969-70 and 1973.
ISI in the Middle East
The second driving force behind the fast growth of output in the Middle East during the long boom was import
substitution industrialisation. ISI was common throughout the developing countries, as we saw in the first
semester, but there was a distinctive pattern to ISI in the Middle East; the public sector has played a very much
more substantial role than is common outside the socialist bloc. The reasons for the strength of the public sector in
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the Middle East have varied from country to country, but among the most important have been the loss by
emigration or expulsion of the existing bourgeoisie, the prevalence in the Arab countries of single party socialist
regimes and the rapprochement with the Soviet Union by a number of countries. The example of Turkey in the
interwar years under Mustapha Kemal was a powerful example for the region, not least because it forged an
independent state without recourse to foreign capital from extremely unpromising beginnings. The Kemalist
programme essentially consisted of six broad principles for the Turkish state: it would be republican, nationalist,
populist, secular, etatist and revolutionary.
Table 18.2: Quasi-Kemalist Strategies
Egypt under Nasser (after Suez) and Sadat, 1957-74
Syria under Ba’thist rule, since 1963
Iraq under Ba’thist rule, since 1963
A Kemalist strategy implies radical economic and social transformation towards a
socialist, egalitarian, nationalist and largely secular future, with the state playing a central
role in this process. It is/was hostile to an independent private sector and to dependence
on foreign capital.
This was sufficiently broad and radical to be attractive to many of the first generation of post-independence leaders
in the region and of the countries that we are looking at, and Egypt, Syria and Iraq have certainly attempted to
follow a similar path for much of the long boom.
There were a number of broad principles that underlay this experiment. First, market forces were
considered as inferior to planning to guide the economy. Under President Nasser, Egypt embarked on a programme
of five-year national planning in 1960, and there were very substantial increases of output of electricity,
construction and other heavy industries. However, the attempt to manage every aspect of economic life through a
network of controls and targets posed command and control problems that the Egyptian bureaucracy could not
solve. One of the central problems was the acquisition and distribution of foreign exchange and the difficulty of
securing export revenues forced Egypt to borrow abroad for its second plan, but few lenders appeared and the
government was forced to stumble along as best it could. There was no second five-year plan, as conventionally
understood. Of course, there was much more to Egyptian policy under Nasser than simply economic development.
For a simple introduction to Nasserism, see: http://www.geocities.com/iturks/html/modern_history_3.html
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There were different economic rules in the Middle East from those in Western Europe. This can be seen
in the strength of the public sector. The private sector was distrusted, and in all three of the countries there was a
major programme of nationalisation, especially of the major manufacturing and commercial enterprises. The basic
principles of Middle Eastern public sector provision were that jobs should be created, basic goods should be
produced at prices that made them accessible to ordinary citizens and that self-sufficiency should be a major goal.
In these three countries in particular, public sector operations became increasingly monopolised behind substantial
tariff protection. The state-led ISI experiments in the Middle East fell into a similar quandary in the early 1960s as
had occurred in Latin America at roughly the same time. Operating behind such a cushion of protection, and with a
high priority to job creation, the state-owned enterprises were not efficient (at least as ‘efficiency’ was understood
in the developed market economies). These state owned enterprises ran at a loss and the budget deficits that
resulted helped to increase inflationary forces. This was contained for a while by price controls, but inflation
accelerated in all Arab countries from the later 1960s. These difficulties persuaded Nasser’s successor, Sadat, to
change course in 1974 by opening and liberalising the economy (the infitah policy). A less dramatic but
nonetheless significant change took place in Syria in 1970, under the direction of Assad. But note that both
countries adjusted their policies approximately a decade later than Brazil and Mexico, which began to take markets
more seriously from the mid-1960s.
ISI was pursued by other countries in the region without the same emphasis on the public sector and
economic nationalism. Turkey, for example, which had been the architect of state centred development in the
interwar years, switched policies after the Second World War in large part as a result of geo-political reasons.
Turkey’s border with the Soviet Union was attractive to both the Cold War super-powers. The USA wanted to be
able to place signals intelligence close to the border with the USSR, which, with its a major Black Sea navy,
wanted much freer access to the Mediterranean than had been allowed under interwar treaties. The Soviet Union
posted major territorial claims on Turkish territory in 1946 and precipitated a massive response from the USA.
Turkey was included in the Marshall Aid programme of post-war European reconstruction assistance, and US
military and industrial advisers followed close behind. The industrialists advised that the Turkish economy should
be liberated from the system of Kemalist controls, the state-owned manufacturing enterprises be privatised and
greater emphasis be given to agriculture than hitherto. These recommendations were followed, particularly in
relation to agriculture, and Turkish farmers did very well in the world boom in the prices of primary products
associated with Korean War rearmament. The prosperity of agriculture however declined after the price boom had
ended, and policy instead drifted into slower growth and balance of payments difficulties, brought about in large
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part by the efforts of the government to protect farmers by a system of price supports. Balance of payments
difficulties forced the government to seek help from the IMF, and the IMF package of cuts in government
expenditure, price rises, import liberalisation led the economy into a steep recession, rising unemployment, popular
disturbance and a military coup. The military governments that followed returned to ISI, protection and the liberal
use of state funds for investment in manufacturing industry. Like everywhere else we have studied, Turkish ISI
enjoyed a phase of comparative success as manufacturing output expanded to meet domestic demand without
competition from imports. Turkey did not have oil, but agricultural exports and remittances home from the
growing number of Turkish emigrants to Western European countries helped to supply the foreign exchange
needed for essential imports. Turkey’s GDP grew at over 6 per cent per annum from the early 1960s to the later
1970s under this policy, and manufacturing output grew even faster at roughly 10 per cent per annum. But only a
tiny proportion of Turkish manufactures was exported.
Iranian Postwar Development
A similar pattern is evident in Iran. Its wartime and immediate postwar history is more turbulent, not least because
the Shah had been a prominent supporter of Germany between the wars and had taken many German advisers into
his administration. Once Germany invaded the USSR, his position became very precarious since the major regional
powers, Britain and the USSR, were military allies. Reza Shah’s unwillingness to remove his German advisers led
to invasion and partition by the USSR and Britain, and the abdication of the Shah in favour of his son. Iran’s
postwar position remained uncertain until Iran too fell under the US sphere of influence, but more slowly than did
Turkey. In 1946 Soviet troops withdrew from areas they had occupied during the war, but the country remained in
chaos, with Azerbaijani and Kurdish separatists holding part of the country until the regime of Reza Shah could
reassert itself in the later 1940s. The USA was rather slower to get involved in Iran than in Turkey, but the
Mossadeq crisis of 1951-3 probably convinced the USA that stability would return only when American power
was exerted. The USA took the leading role in engineering the coup that both toppled Mossadeq and permitted the
return of the new Shah, who had been forced to flee during the high point of the crisis. Thereafter, the Shah rebuilt
his power, largely with US aid, and turned back to the problem of economic development for his country. Iran too
followed a strategy of ISI and concentrated on the same industries as it had identified in the 1930s; sugar, textiles
and cement.
Just as with Turkey, US advisers were invited to give their opinions and just as in Turkey they
recommended improving agriculture as the basis for immediate development. These principles formed the basis of
Iran’s first seven-year development plan from the beginning of 1949 to the end of 1955. However, the Mossadeq
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crisis threw everything into the melting pot and a very important switch of priorities occurred. The Iranian planners
concentrated on infrastructure, transport and communication and on public utilities, and their agricultural spending
went not on peasant production but on large-scale prestige projects, especially dam-building which held few
benefits for traditional agriculture. Like his father, the new Shah believed that agriculture was a repository of
tradition and should not have a major part in a modernisation programme. Iran too embarked on ISI but it was
much more favourably placed than Turkey. Under the new Anglo-American rather than exclusively British control
of the Iranian oilfields, output grew enormously, producing totally unexpected flows of royalty income for the
Iranian government, leading to rapid growth of Iran’s national income and its development budget. Between 1955
and 1962, the period of the second Development Plan, Iran received over $3.0 billion in foreign exchange, for
which it had to do very little. One highly important feature of Iranian development planning in this period was the
Shah’s need to allow personal consumption to increase. And yet, by the end of the Second Development Plan Iran
had rising inflation, a severe balance of payments problem and was more or less bankrupt. Like Turkey, Iran had to
go to the IMF for assistance and swallow its medicine of curbing growth, restraining state expenditure and pressure
to liberalise imports. In this last area, Iran resisted successfully. Tariffs were raised to very high levels in the
balance of payments crisis of 1959-60, and remained there to support full-blown ISI after 1960. Iran had paid less
attention to the need for comprehensive defensive tariffs than had Turkey, and protected industry on a more
selective basis in part from the confidence that oil revenues would take care of the balance of payments. Domestic
industry did not expand fast enough to meet rising domestic demand, and selective protection was overwhelmed in
the tide of imports. The value of manufactured imports doubled in two years between 1957 and 1959.
After this crisis of the early 1960s, the Shah’s government decided to pursue two separate but related
strategies. The first was to promote agricultural improvement through land reform and to take more interest in
populist politics. He called this element Iran’s White Revolution. An Iranian web-site gives a potted introduction
and history to that period: http://www.iranchamber.com/history/white_revolution/white_revolution.php
For a more detailed assessment, see the US Library of Congress (You may have to use Google as the Library
changes its codes for these sites on a daily basis – type in <Library of Congress Iran>):
http://memory.loc.gov/frd/cs/irtoc.html
There are similar, useful locations for Iraq: http://memory.loc.gov/frd/cs/iqtoc.html
For Egypt: http://memory.loc.gov/frd/cs/egtoc.html
For Turkey: http://memory.loc.gov/frd/cs/trtoc.html For Syria: http://memory.loc.gov/frd/cs/trtoc.html for Israel:
http://memory.loc.gov/frd/cs/iltoc.html etc.
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The second strand, full-scale ISI was built upon the Shah’s conclusion that Iranian manufacturing was underdeveloped even by Middle Eastern standards, and that nothing short of full state-led industrialisation would build
the industrial economy that was needed to sustain the population after oil. Tariffs went up in 1959-60 and did not
come down. Public investment was used to promote industrialisation. Advanced technology was sought from
overseas, and key advanced industries such as automobiles were introduced via foreign direct investment, for
MNCs willing to take a members of the local elite onto their boards.
The government did not want to be caught in a further balance of payments crisis, and Iran became a
leader in the formation of OPEC and was a consistent proponent of hawkish policies within the Organisation,
despite Iran’s close links with the USA. Iran attempted the easy and the difficult parts of IS together. It increased
investment in the basic consumer goods industries, but also attempted to establish basic heavy industries, like steel,
chemicals and heavy engineering. In essence, this was no more successful than the earlier phase. The move into
higher branches of technology was beyond the capacity of the Iranian workforce and management. The high tariffs,
extremely limited domestic competition and limited domestic market simply made production inefficient.
Increasing oil revenues imparted a major inflationary force to the pattern of economic development and income
differentials increased.
Middle Eastern Urbanisation
To understand this last point, we have to look at the third major driving force behind economic development in the
region since the Second World War, and that has been urbanisation. In 1950 about 80 per cent of the total
population of the Middle East lived in rural areas. By 1990, the share of the rural population in the total was below
50 per cent. The indications are that much of this movement was concentrated into the two decades after 1960,
though the data are extremely sparse. This has obviously meant the movement of the population out of agriculture
into other sectors of the economy. Agriculture must have employed about 75 per cent of the total population of the
Middle East in the late 1940s. It had probably fallen to around 65 percent by 1960, but has tumbled to less than 40
per cent by 1990. Again, the indications are that the period 1960-80 was the decisive period. This substantial
redistribution of the population has taken place despite the adoption of land reform in many of these countries in
the 1950s and 1960s.
Egypt led the way with a major land reform in 1952, which sought to take land from the large landowners
and redistribute it to the peasant cultivators. However, there were provisions to allow the rich landowners to keep
substantial tracts of land, so that only 7.5 per cent of cultivated land was transferred. Bureaucratic problems meant
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that the pace of redistribution was slow, but it was handled without any great drop in agricultural output. In Syria,
the process of land reform was even more protracted, again because of opposition from the old, land-owning elite,
but it eventually went further than that in Egypt and provided substantial support for the new peasant proprietors.
The Iraqi land reform, like that in Syria, was extensive and also like Syria obliged all those who received land
through the reform to join agricultural co-operatives. But as in Syria, the pace of reform and redistribution was
slow, and Iraq lacked sufficient support for the newly independent farmers. Iran, as we saw in the first term, made
a mess of its land reform and actively pushed peasants from the countryside. At the very least, we can say that land
reform had a very mixed record in the Middle East of stimulating new independent farmers to stay on the land and
increase agricultural production.
The best known of the explanations of rural-urban migration, by Michael Todaro, sees the decision to
migrate in terms of the difference that rural workers expect to earn in the city and those that they are earning in the
countryside. Although income differences between rural and urban areas are not great by LDC standards, they are
none the less real, with urban wages usually between 150 to 300 per cent higher than rural (Richards and
Waterbury, 267). Unemployment tends to be higher in the cities, but this clearly has not stopped urban migration.
Migration to the cities, especially in Iraq, Iran, Egypt and Turkey, tends to be of entire families, rather than the
movement of individuals, which is commonly thought to have been the pattern for developed countries at a similar
stage of development. The obvious impact of this mass movement was to put pressure on urban housing, forcing
overcrowding, high rents and housing shortages. Some Middle Eastern governments, notably Turkey, have placed
urban housing among their priorities for development expenditure, but most have not. The private sector has
necessarily taken an increasing role in the provision of housing, but the private sector will naturally concentrate on
providing accommodation for those with resources to pay. As a result, migrants to the cities tend to live in
shantytowns on the fringes of the major conurbations; Ankara, Teheran, Cairo have very substantial squatter
neighbourhoods. However, building does provide jobs for unskilled workers with few barriers to entry and few
demands for even basic human capital accumulation. Adult illiteracy rates were astonishingly high over most of
the Middle East in the early part of the long boom (See Figure 18.4 below). From casual work in the private sector,
the migrant worker might hope to move to a better paid job in public works construction on the roads, dams and
other infrastructural projects upon which Middle Eastern governments spent more heavily than on housing. There
is no doubt that the possibility of employment in construction was one of the main sources of attraction for ruralurban migrants. The building boom in turn provided one of the main sources of demand for the cement and
building materials industry, helping to increase its viable scale of production. Construction, being a highly labour
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intensive industry with relatively few demands for imports once a building materials industry has been created, is
an ideal central vehicle for domestically-centred expansion, but whether the Middle Eastern governments found
this by design or by accident is not clear. Do not underestimate the role of construction in the easy and relatively
successful phase of ISI that the Middle Eastern economies enjoyed in the long boom. But its strengths are also its
weaknesses. Construction cannot earn export revenues. The most urgent need of all the Middle Eastern economies
from the early 1960s, and especially for the non-oil exporters, onwards was a viable export sector, and that was a
major problem.
Figure 18.4: Adult Illiteracy Rates in the Middle East, 1960
Sources: Owen and Pamuk, A History of Middle East Economies in the 20th Century, pp. 272-6; Richards and
Waterbury, A Political Economy of the Middle East, pp. 113, 116.
Economic Development in Israel
The economy that came closest to solving the problems of development in the Middle East during the long boom
was Israel. The Israeli economy had much in common with the other economies in the region. It was heavily
inward oriented, with a big public sector and a persistent tendency to import more than it exported. The
construction industry was particularly important in Israel, not least because its rate of population growth was high
as a result of extensive immigration of Jews from all quarters of the globe.
The Israeli economy was different in three important respects. Its agriculture was much more efficient
than anywhere else in the region. There was a huge increase in cultivated land between 1949 and 1973, taken in
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very large part from the Palestinian Arabs who were placed under military control. This was also a highly capital
intensive agriculture by Middle Eastern standards and it looked to export markets as much as to home demand.
Secondly, and as a consequence of the interwar pattern of development, it had a substantial manufacturing sector,
much of which was publicly owned and pursued policies of national economic and political development, with
comparatively little attention to the profit motive. Israel, like other Middle Eastern countries with similar policies,
tended to have high inflation and chronic balance of payments difficulties. But its manufacturing sector was
relatively efficient, at least by Middle Eastern standards. The final critical difference was the flow of funds into
Israel, from world Jewry, the US government and from the reparations paid by the West German government after
1953 with respect to the loss of Jewish lives and property in the Holocaust. Even so, this inflow was a smaller
proportion of national income than the oil producers received from oil royalties for much of the period, and so
Israel’s advantages were differences of degree rather than absolutes. Thus the Israeli economy slowed, as did most
of the non-oil producers after 1973, but I hope to look at that at the beginning of next term.
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