U.S. Department of State, Stuart E. Eizenstat, Undersecretary for Economic, Business, and Agricultural Affairs, Third Annual Les Aspin Memorial  Lecture, "Economic Security and the Middle East," The Washington Institute For Near East Policy, March 8, 1999


As Prepared for Delivery

It is a pleasure to join you once again at the Washington Institute to
discuss U.S. interests in the Middle East. I am honored to have been
chosen to deliver the third annual Les Aspin lecture. For more than 30
years, the late Les Aspin was a good friend and colleague--from the
Carter Administration, through his period in Congress, and on into the
Clinton Administration. All of us present continue to benefit from his
keen intellect and his contributions to strengthening U.S. national
security, both from his distinguished service as chairman of the Defense
Committee in the House of Representatives, and his loyal service as
President Clinton's first Secretary of Defense.

Les was surely one of this nation's foremost experts on defense policy--
indeed, as early as 1976, when I was running then-Governor Carter's
presidential campaign, I brought in Les as an advisor on national
security policy for our debates with President Ford. All of us miss his
wise counsel.

I am also no stranger to this Institute, having been present with Barbi
Weinberg and Martin Indyk at its birth. Over the past 15 years, I have
had the pleasure of working closely with Martin, Rob Satloff and their
colleagues on a number of different projects and study groups.

Ten years ago, at Martin's suggestion, I wrote a paper on the U.S.-
Israeli strategic relationship. Today, I chair the U.S. side of the
U.S.-Israel Joint Economic Development Group, one of the key pillars of
that effort.

In the early 1990's, I led a study group on the restructuring of U.S.
aid to Israel. Just last week, I was in Israel negotiating the details
of that restructuring with the new Israeli Minister of Finance Meir
Shitreet.

The Washington Institute has developed into a premier think tank on
Middle East policy, due largely to the high quality of its staff and
visiting scholars, and the timeliness and policy sensitivity of its
analyses. I salute you today for the extraordinary contributions you
have made by raising the level of scholarly debate on the Middle East.

By challenging policy makers to consider the longer-range implications
of our decisions, you are playing a valuable, important role in
enriching the policy process.

The topic you have asked me to discuss this morning-- "Economics and
U.S. National Security in the Middle East" --is very much at the heart
of the Clinton Administration's effort to help build a more secure,
prosperous, and stable Middle East. For it is only through economic
prosperity that the tangible benefits of peace will be brought home to
the peoples of the Middle East.

For the past 3 years, first at the Department of Commerce and later in
my current position at the Department of State, I have devoted a
substantial amount of time and energy--and much of my professional life-
-to this effort. Indeed, since assuming my current position not quite 2
years ago, I have traveled to the Middle East on eight separate
occasions, logging thousands of miles between Washington and Tel Aviv,
Amman, Cairo, Doha, Rabat and Tunis to press our agenda forward.

I have also met with Middle Eastern leaders in Europe, and in Washington
and Hong Kong at the IMF and World Bank meetings.

Indeed, I just returned Saturday from a full week in the region, in
Israel, Egypt, Jordan and the West Bank, which was followed by a G-8
meeting in Germany at which the issue of the Jordanian economy was a
principal topic of discussion.

I would like to use my remarks today to blend an overview of U.S.
economic policy objectives in the Middle East with some of the personal
observations and conclusions I have drawn from my long-standing
involvement with the economics of this region.

VITAL U.S. INTERESTS

The Middle East has long been a region of vital strategic interest to
the United States, due to its critical natural resource endowments, its
strategic geographical location at the gateway between Europe and Asia,
and its cultural and religious significance for many of the world's
peoples.

The achievement of a just, lasting, and comprehensive Arab/Israeli peace
is a long-standing U.S. policy objective. Advancing the peace process
has occupied a central place in the agenda of every U.S. President and
Secretary of State over the 30-year period I have been involved in
government. Throughout this process, we continue to stress our
unshakable commitment to Israel's security and well being.

Broadening and deepening Arab/Israeli peace would carry with it a number
of important benefits--the end of Israel's isolation in the region,
greater security for all the peoples of the region, and increased
pressure on those remaining states that still rely on violence and
terror to change their course. From an economic perspective, progress
toward an Arab/Israeli peace settlement would enable the peoples and
political leaderships of the region to focus more intently on the steps
they need to take to assure a better livelihood for current and future
generations.

It would allow governments to redirect precious resources away from
defense expenditures and into social spending and productive civilian
investments. It would also greatly improve the investment climate by
reducing the risk profile, thereby attracting private capital to a
region that has been a net exporter of capital in recent decades.

Assuring access to stable supplies of oil and gas from the region is
another component of U.S. strategic interests in the region. While non-
OPEC supplies have expanded rapidly over the past decade, the Middle
East region continues to account for fully 35% of the world's oil
production, and nearly 70% of proven reserves.

We need to ensure that rogue regimes--including Iraq--are not allowed to
intimidate their neighbors and threaten the fabric of regional security.
Our current policy of containment and the encouragement of regime change
in Iraq is an effort to advance that goal.

It is also a fundamental national interest to create and deepen overseas
markets for U.S. exports and investment. Today, the Middle East is a
small market, but it has been a central goal of my tenure as Under
Secretary to turn that around, both by deepening our commercial ties,
and by promoting policies that will accelerate economic growth rates.
Later in my talk, I will identify some of the specific initiatives we
have underway to advance these objectives.

ECONOMIC GOALS IN THE REGION

U.S. economic policy initiatives support our overall objectives of
advancing a comprehensive Arab/Israeli peace, ensuring the stability of
oil supplies in the Gulf, and improving the environment for U.S. trade
and investment.

Let me be clear--economics in the Middle East cannot get too far ahead
of peace and stability, which are vital to create the appropriate
environment for economic growth.

Economic prosperity to a great extent depends on peace. Equally,
however, peace depends on prosperity. For peace to be sustained, it must
generate jobs and raise incomes. We must find a way to give the peoples
of the region a direct stake and an equity interest in peace and hope
for a better future.

With regard to Israel and its immediate neighbors, the peace process is
the cutting edge to provide an environment where economies can flourish,
and nourish and sustain peace. It is precisely this economic dimension--
which demonstrates the benefits of peace to the elusive "man in the
street"--which is critically missing today in the West Bank and Gaza and
Jordan.

Indeed, Jordan and the West Bank and Gaza are prime examples of the
confluence of economics and politics in the Middle East. Both signed
peace agreements with Israel and neither has yet seen an economic peace
dividend. This lack of a peace dividend, in turn, has undercut support
for the peace process. It is a top priority of the Clinton
administration to reverse this negative dynamic by working on both
tracks--the political and the economic--so that progress toward peace
and prosperity can reinforce each other.

In the broader region, political acrimony and division must be reduced
for the region to achieve its full economic potential. At the same time,
prosperity is the primary ingredient needed to create the opportunities
and social mobility necessary to reinforce long-run political stability.

Our overriding goal is to work with the countries of the Middle East to
help build economies that meet the challenges of the twenty-first
century. As I will suggest later, this means economies that are market-
oriented; outward looking; based on a strong, vibrant private sector;
and that have the resilience to generate jobs and prosperity for their
peoples.

We must press forward with this task now. We simply cannot afford to
wait for the final resolution of the Arab/Israeli conflict or the ideal
security situation in the Gulf to launch our work.

SITUATION NOW AND CHALLENGES WE FACE

The Middle East region presents a highly disparate economic picture. On
the one hand, it includes the state of Israel--a high technology, $95
billion, cell phone and software startup society, in which 10% of
households are already hooked up to the Internet.

On the other end of the scale is Yemen, with a per capita income of less
than $500, high rates of illiteracy and poverty, and an economy that has
changed very little over the past three centuries. In between, there are
exporters of oil, exporters of labor, and two potentially large but
dysfunctional economies--Iran and Iraq.

But in this image of disparity, it is possible to identify a number of
factors that unify the economies of the Middle East.

Many of the regimes invest a large percentage of their budget in
military expenditures. Military expenditures as a percentage of GDP have
fallen by half over the past decade to an average of 8.1%--for Israel,
with its significant defense needs, the level is still around 10%. For
the region as a whole, military spending levels still represent three
times the average of all developing countries. Nearly all are coping
with a region-wide shortage of water, that promises to be exacerbated by
high levels of population growth or, in the case of Israel, immigration.

Environmental degradation, especially the declining quality of
groundwater, affects nearly every country in the region. External labor
continues to flow between the countries of the Middle East to meet
skills shortages, though a greater portion of labor needs are being met
by workers from outside the region -- especially from South Asia and
Eastern Europe. Indeed, in Israel, nearly 10% of the total labor force
now comes from outside the region, half of it illegal.

This has caused a social problem for Israel and damaged job
opportunities for the Palestinians.

The region enjoys tremendous potential for economic growth in such
unexploited sectors as tourism and high-value added seasonal
agricultural products. An improved security environment, and a less
protectionist European market are the keys to unlocking these
possibilities.

On a purely commercial basis, the Middle East region--which I define to
include the countries of North Africa as well--is for us a relatively
small, but not insignificant market.

About four percent of total U.S. exports go to the region; and the
absolute value of those exports increased by 37 percent from 1991 to
1997, to about $25 billion.

In return, the U.S. purchased an almost equivalent amount of goods and
services from the region. Oil was a major element in our purchases:
fully 12 percent of the U.S. crude oil supplies comes from just two
countries--Saudi Arabia and Kuwait.

In terms of direct foreign investment, the region continues to absorb
less than 1% of worldwide flows--a strong indication that more work
needs to be done to improve the investment climate.

There have been some notable changes in the economics of the region in
recent years, especially since the launching of the Madrid peace
process. Between 1991 and 1996, overall trade levels in the region
increased by 42%. Almost all Middle Eastern countries are now members of
the World Trade Organization or are in the process of accession.

And there are ongoing efforts by the governments of the region to
advance structural reforms and privatization. Indeed, these programs are
touching previously sacrosanct sectors, including energy and
telecommunications.

A number of countries have also reached out to tap external capital to
deepen their financial sectors. Emerging markets investors pay close
attention to political and economic developments in Egypt, Jordan, Oman,
Lebanon, and Qatar, among other countries. Lebanon has recently issued a
Euro-denominated bond, and even the nascent Palestinian stock market
gets coverage from the financial wire services. Israeli software firms
are highly sought after as investment targets for major U.S. high
technology companies. The international bankers at the Davos forum spend
a lot more time talking with their private sector counterparts from the
region than with the political leaders present.

On the positive side, debt levels are generally within manageable limits
in the region, and many Middle Eastern countries are committed to
maintaining macroeconomic discipline as a brake against inflation.

All this is encouraging, but this region remains far from reaching its
potential. The region remains largely closed--both to the rest of the
world and among the nations themselves--and inward looking. As the World
Bank has noted, manufactured exports per capita have not increased for
more than a decade. In key politically important economies such as
Egypt, Jordan, and the West Bank and Gaza, workers' remittances, aid
receipts and other services receipts continue to equal or exceed the
level of manufactured goods exports.

Globalization is coming late to the Middle East, and integration remains
more of an idea than a reality. The region risks being left behind--or
left out altogether--from the rest of the world in technology and
information advances and in financial integration.

Due principally to the impact of high tariff and non-tariff barriers--
and to a far lesser extent to the Arab/Israeli conflict--only about 7%
of all trade in the Middle East is between countries within the region.

This compares to a level of 20% for the Americas, 30% for Asia and 60%
for Europe. More importantly, this level has been stagnant in the Middle
East for the past decade. By comparison, intraregional trade has served
as a major engine of growth in Europe, the Americas, Asia, and,
increasingly, Africa.

Overall growth continues to be held back by a combination of rapid
population growth, lack of diversification, continued state ownership,
and lingering protectionism. Average tariff rates--while declining--
continue to be high by world standards. Non tariff barriers also
continue to be high--just ask the Gazan exporter who tries to get his
products out through either Israel or Egypt. Again, the insularity of
the Middle East threatens to hold the region back.

Until recently, the region had been thought to be largely immune from
contagion stemming from the economic malaise in East Asia and elsewhere;
but this is no longer the case. Falling share markets in Asia have
affected the economies of the Middle East region, principally by
reducing world consumption of oil.

Low export volumes have combined with low oil prices to seriously affect
the economies of the entire region. Financial markets in Oman and Egypt
have been affected, and the Israeli Shekel fell by about 15% late last
year.

Debt rating agencies are taking a more careful look at downside risks in
the emerging markets of the Middle East. International investors are
more cautious than they were before the Asian crisis and are
scrutinizing markets with a more careful eye to see that the necessary
fundamentals are in place and in order.

As the World Bank has pointed out, the Middle East region suffered from
a "lost decade" between 1985 and 1995, when per capita growth turned
negative. Beginning early in this decade, this trend began to change, as
a consensus for policy reform developed among a number of the key
developing economies in the region--Egypt, Tunisia, Morocco, and Jordan,
to be specific. While in Egypt I applauded the government for achieving
four straight years of 5% or higher growth. Nevertheless, further
liberalization and privatization will be needed to boost Egypt's growth
rate to the 7-8% levels needed to significantly reduce unemployment.

Ironically, just as this trend started to change in the Middle East, the
economies of Asia began to stumble. Positive growth rates were restored
in 1996 and 1997, but the picture for the coming decade is considerably
less clear. Per capita growth in the Gulf countries has been negative
since 1995, and the prospect of sustained lower oil prices could have a
significant impact on longer term growth prospects in the Gulf, and in
the economies that depend heavily on remittances--like Egypt, Jordan,
and the West Bank and Gaza.

>From $32 a barrel when I served in the White House during the 1979 oil
crisis, the price of oil fell to $19 a barrel in the fall of 1997, then
to a low of just $9 a barrel by mid 1998, before recovering to its
current levels of around $12 per barrel. The dependency of key Gulf
countries on a single product--whose price may well remain low for the
foreseeable future--is an added drag on regional development.

Saudi Arabia and other economies heavily dependent on oil revenues for
budgetary support no longer have the same level of resources available
to support their traditional levels of social welfare and defense
spending. They have also found that the cushion they once enjoyed is now
eroded. Saudi Arabia, in particular, which depends on oil for two thirds
of its budget, will have to curtail government expenditures and
institute major structural reforms. With a budget deficit estimated at
10% of GDP in 1998, the situation for Saudi Arabia is especially
difficult. It will be tough to restore growth in the Saudi economy this
year.

The situation in the Gulf has changed substantially from that prevailing
at the beginning of this decade. Countries that were previously highly
liquid--such as Qatar--continue to have solid prospects, but have been
forced to borrow in international markets to keep up the pace of
investment.

Gulf oil producers have been especially hard-hit, but peace process
countries have not been immune. Jordan's GDP fell by 1% last year, the
third consecutive year of low or no growth. Israeli GDP growth has
fallen over the past three years from 4.5% to just under 2% in 1998, and
may go little higher this year.

Rapid population growth is among the most serious problems faced by the
government of the region. It threatens future prosperity and stability.
In some countries, population growth has reached crisis levels,
straining resources and creating severe burdens on government to provide
services and employment.

In the Middle East region today, about 40% of the total population is
under the age of 14. Compare this with the developed world, where that
number is about 20%. Because of population growth momentum, Middle East
populations will increase substantially even if more effective efforts
are undertaken to restrain growth. The influx of new entrants to already
tight job markets will place further pressure on government and hamper
their ability to grow. It also threatens to unleash social unrest.

Bloated state sectors of many countries traditionally acted to absorb
extra labor, offering secure low paid employment (and often
underemployment) to many who could not find better opportunities.

Labor mobility especially the employment of millions of skilled and
semi-skilled worker in the Gulf served as a second important safety
valve. In an era of low oil prices and constrained budgets, these
options are becoming increasingly less sustainable.

The better alternative is expanded private investment--driven by
privatization--to create opportunities for the many new entrants to the
labor force. That implies a shift of government priorities to public
sector investment in education, with the private sector picking up
responsibility for manufacturing and infrastructure, in association with
foreign investment.

It also implies a new focus for the governments of the region on steps
they can and must take to improve the investment climate.

U.S. INITIATIVES

That brings us to the issue at hand--what can the U.S. government and
the U.S. private sector do to advance our economic objectives in the
region--to underpin the peace process and strengthen the economic and
social fabric of the Middle East.

This has been my focus--and, I might add--my passion--for more than a
decade. I strongly believe that the United States needs to take a
leadership role in strengthening the economies of the Middle East to
meet the coming challenges.

We have the necessary tools to make a difference. Only the United States
possesses the combination of diplomatic experience, a vibrant and
engaged private sector, financial resources, political commitment,
influence in international financial community and international
institutions, and trust on the part of the key regional players--to take
on a leadership position.

I should add, however, that the European Union is playing an
increasingly important economic role in the region--with its traditional
trade links, its creative Euro Mediterranean Partnership and its
substantial assistance programs to key parties in the region.

Let me lay out for you a series of principles which I believe ought to
guide our efforts, what we have been doing during this administration to
advance them, and finally lay out some new policy directions that I
believe deserve examination in the months ahead.

Principle Number One: The peace process must deliver economic benefits
now, particularly to core constituencies in Jordan and the West Bank and
Gaza. To date, economic fruits of the peace process have been limited.
Since the 1993 Oslo accords, per capita incomes in the West Bank and
Gaza have declined by over 20%--hardly the basis to sustain popular
support for the process. Nor has Jordan experienced the economic
benefits it expected from its 1994 peace agreement with Israel.

My trip to the region last week reinforced my longstanding belief that
economic stagnation in Jordan, and the West Bank and Gaza is severely
eroding private sector commitment to the peace process. I believe it is
absolutely imperative to lay some of this groundwork now, even if the
political negotiations are not moving forward as rapidly as all of us
would like.

Greater economic cooperation among Israel, the Palestinians, and Jordan
should be possible to achieve in the near term, and should be the
principal focus of our efforts.

In the case of Jordan, opportunities to expand market access with the
two principal external markets--the U.S. and the EU--should complement
efforts to build stronger intraregional trade and investment networks.
Over the last two years, we have put in place a very creative
arrangement for Qualifying Industrial Zones in Jordan, where goods can
be manufactured and exported duty free to the U.S., provided they have a
minimum level of Israeli content. This arrangement is simultaneously
boosting Jordanian exports, generating new jobs and encouraging joint
ventures between Jordan and Israel.

USTR will soon sign a new QIZ agreement establishing a second QIZ in
Jordan. Jordan's principal historic market--Iraq--has shrunk from the
necessary impact of the multilateral sanctions regime imposed on Saddam
Hussein. We need to reinforce the recent signals of rapprochement
between Jordan and the Gulf countries. Jordan urgently needs new outlets
for trade and labor resources, and the Gulf must play a role.

We also need to find a solution to the limited levels of trade between
Jordan on the one hand, and the West Bank and Gaza and Israel on the
other. Last year Jordanian exports to the West Bank/Gaza and Israeli
markets measured less than $25 million each. Having worked on this
problem for the past three years, I know there is ample blame to go
around to all parties. That said, we need to move quickly on
disassembling the tariff and non-tariff barriers to this trade. The
Israeli government has just agreed to significantly expand the so-called
A-1 list for Jordan, which will free up over 1200 items for access to
West Bank/Gaza markets. It is important that this commitment be promptly
implemented. Based on my meetings in Israel and Jordan, I believe that
improved door to point truck deliveries from Jordan to the West Bank
will soon commence. To boost Jordanian exports, I suggested that Jordan
and Israel establish quantitative monetary target levels for Jordanian
exports. I received a positive indication from senior Jordanian and
Israeli officials to this proposal. We will help facilitate
establishment of these goals.

Over the longer run, I also believe it would be useful to take a fresh
look at different models of economic integration for the Israeli,
Palestinian, and Jordanian economies.

As many of you know, the Palestinian economy has suffered as a result of
Israeli security measures that have periodically barred the movement of
people and goods into and out of the West Bank and Gaza. In addition, a
more permanent regime of restrictions on the movement of goods and
people has dampened investor interest and hindered the development of
export markets.

Clearly, Israel has an obligation to protect its citizens from terror.
The challenge is to balance this near term security concern with
Israel's long term security interests in reducing poverty and
desperation in the West Bank and Gaza.

For over a year now, I have maintained a dialogue with the Israeli
government based on input I have received from the Palestinian business
community, to encourage Israel to reduce restrictions on the movement of
Palestinian goods, services and people, consistent with Israel's
security needs.

We are beginning to see the fruits of this effort, though much more
needs to be done. On the positive side, over 60,000 Palestinians are
legally working in Israel, though this is still only half the level of
the late 1980's. More Palestinian business people can enter Israel and
travel between the West Bank and Gaza, and Palestinian good and labor
are beginning to move across borders with fewer restrictions.

Much more needs to be done, however, to build on the progress to date. I
have proposed the creation of a closure-proof list of business people,
an idea to which the Israeli government seems to be receptive. Economic
links between the West Bank and Gaza need further strengthening. While
this goal will be enhanced by the establishment of a safe passage
between the two sides as stipulated in the Wye Agreement, much can be
done in the meantime to facilitate these linkages.

Israel's role is crucial, but there is also much that we and other
international donors can do to stimulate economic growth in the West
Bank and Gaza. That is why President Clinton hosted an international
donor's conference for the Palestinians, following on the heels of the
Wye Agreement--a conference that raised over $3 billion for the
Palestinians. And that is why, for our part, we are consulting with
Congress on substantially increasing U.S. assistance to the Palestinians
as well as Jordan and Israel through a supplemental appropriation that
would support the Wye Agreement. Over the last few years U.S. assistance
to the Palestinians has focused on three areas, water projects,
democracy and governance and private sector development. One initiative
we have supported is the Gaza Industrial Estate, which offers investors
a secure environment where they will have reliable access to both the
Palestinian labor pool and markets in Israel and beyond. The estate
should be up and running in a matter of weeks and we expect that it will
employ up to 20,000 Palestinian workers.

It is precisely the kind of activity that we must continue to support
because it produces economic dividends now, when they are most needed.

Principle Number Two: We must strengthen our bilateral economic
relationships with the countries of the Middle East, both for the sake
of the region, and for our own sake.

Today, Israel is a key trading partner in the region, second only to
Saudi Arabia. The U.S. Israel Free Trade Agreement, which entered into
force in 1985, is the only bilateral free trade agreement the United
States has entered into outside North America. The agreement has helped
to expand two way trade to a current level of $12 billion by phasing out
all tariffs on industrial goods and reducing non-tariff barriers. The
U.S. Joint Economic Development Group, which I chair, was created in
1985 by Secretary of State Shultz as a device to assist the government
of Israel with a serious hyperinflationary and budgetary crisis. Since
that time, utilizing the skills of a talented corps of prominent
economists (including such impressive alumni as Herb Stein, Stan
Fischer, Larry Summers, Joe Stiglitz, and now, Jeffrey Frankel of the
CEA and Ben Bernanke of Princeton), the JEDG has grown into a valuable
forum to promote sound macroeconomic policies in Israel. Such a sound
policy environment enhances the ability of Israel to service its large
debts to the U.S. government, and eventually grow out of a two decade
long history of economic assistance grants from the United States.
Indeed, we are working with the Government of Israel in an effort to
come to a historic agreement on the phase out of U.S. civilian
assistance. Such a phase-out--which is being undertaken at the request
of Israel--is a strong testimony to Israel's economic self-reliance. A
strong, healthy bilateral economic relationship with Israel--buttressed
by these institutional structures--is yet another manifestation of the
depth of overall U.S./Israel ties.

The JEDG has served both Israel's interests and ours. Today we have
similar economic dialogues throughout the Middle East. In Jordan we have
a Bilateral Economic Commission. In Egypt we have the Gore-Mubarak
Partnership, which includes a subcommittee on economic policy that I co-
chair. In the Gulf we have the GCC dialogue. With the Palestinians we
have a new Bilateral Commission which focuses on investment and economic
issues, among other things. With Morocco, Tunisia and Algeria we are now
in the process of launching a U.S.-North Africa Economic Partnership.
Like the JEDG, each of these economic dialogues serves not only the
region's interest, but ours as well, because they are broadening and
deepening our bilateral ties, enhancing U.S. markets, lowering barriers
to trade and investment, and, in many cases, helping to create a more
stable and sustainable political climate by broadening economic
participation.

Principle Number Three: It is essential to bring down intraregional
barriers to trade and investment.

North Africa is an important example of a group of countries that could
greatly benefit if trade barriers within the region were eliminated.

Currently, the border between Morocco and Algeria is closed to trade due
to political differences over the Western Sahara. This affects not only
Morocco's ability to trade with Algeria, but also with Tunisia and
countries further east. There are virtually no lateral east-west trade
linkages in North Africa, only north-south linkages with Europe. Indeed,
those north-south ties are being further solidified through trade
agreements being negotiated under the Euro Mediterranean Partnership.

An unfortunate aspect of this is that investors interested in selling
consumer products in North Africa are better off locating their plants
in Europe, from which they can reach all the key markets in North
Africa, rather than within North Africa, where they could effectively
reach only domestic markets.

That is one reason why last summer, we agreed with the governments of
Morocco, Tunisia and Algeria to establish a new U.S.-North Africa
Economic Partnership. This initiative is designed not just to build our
bilateral economic relations with the region, but also to encourage
better economic relations within the region.

The partnership will be based principally on enhanced private sector
ties, and I have stressed to the regional governments that U.S.
investors will be much more interested in any given North African
country if it can be seen as a platform to the region as a whole.

For regional barriers to be reduced over the long run, regional
institutions will eventually need to be formed to cement policies and
broaden the scope of regional cooperation. These institutions need to be
inclusive in their membership, grounded in the region, created and
managed by regional actors, and draw most of their financial resources
from within the region.

Regional parties need to take hold of the agenda for these institutions,
and agree on regional solutions to pressing economic problems. The Bank
for Economic Cooperation and Development in the Middle East and North
Africa (MENABank) was one such institution--a model, I believe, of what
should eventually emerge if the Middle East is to speak with one voice.

Unfortunately, despite some truly extraordinary work on the part of a
group of devoted professionals, the MENABank concept was unable to be
launched last year. Key regional governments balked at the price tag,
and the politics of the peace process were not properly aligned. The
MENABank may have just been a little bit ahead of its time.

Other structures are also possible--the Asia Pacific Economic
Cooperation group could be another model, as could the Hemispheric
Summit process in the Americas. The important point here is that the
economic leaders of the region must eventually take the future into
their own hands.

Principle Number Four: In an environment of declining assistance
resources and growing private sector ties, the private sector will be
the key instrument for advancing U.S. economic objectives in the region.
This applies to both U.S. investors and exporters as well as their
counterparts in the region.

On each of my visits to the Middle East, I have always made it a point
to target my remarks and energies to drawing the regional private sector
into the policy process. In many of the countries of the Middle East,
there is no tradition of either private sector lobbying or participation
of private sector players in government ministries. Private sector views
are frequently ignored or sidelined. This is unfortunate, as the private
sector is frequently much more aware of the specific steps that need to
be taken to cut regulation, open up trade, and develop joint ventures
with foreign firms than cadres of government bureaucrats.

Indeed, the private sector has a key role to play in promoting
transparency and good governance and in encouraging governments to
develop economic programs that support broad based economic development.

The United States has put together a number of mechanisms to foster
greater private sector involvement in economic decision-making in the
Middle East. Under the Gore-Mubarak partnership, we have developed a
Presidents' Council, which brings together 15 top business leaders from
both sides to advise our respective leaders on business friendly policy
reforms that help stoke economic growth, employment growth, and
investment. We are looking into the formation of a similar mechanism to
be attached to the U.S. Palestinian Bilateral Committee, and over time,
I believe it would be useful to see similar groups formed in both Israel
and Jordan. In the Gulf, the U.S. Gulf Coordination Council Business
Group serves as an important clearing house for commercial
opportunities. And in North Africa, through the U.S. North Africa
Economic Partnership, we are drawing the regional private sector into
the economic policy making process.

The Switzerland-based World Economic Forum has also been successful
bringing together private sector players in the Middle East for
different events. Before they were suspended in 1998, the Middle East
North Africa Economic Conferences were highly successful opportunities
for matchmaking between U.S., European and regional private sector
actors. Even in the difficult political climate of early this year, the
WEF succeeded in bringing more than two hundred regional business
leaders together after the annual Davos conference for a two day Middle
East North Africa Business Forum. We are hopeful that the MENA economic
conference process will be resumed as the peace process negotiations
accelerate.

These young entrepreneurs from the region are a home-grown constituency
for policy reform. In my view their encouragement is a lot more
persuasive than conditionality requirements that are linked to
disbursements by foreign donors. I have met many of these entrepreneurs
in Davos, and in the regional summits, and have been impressed with
their energy and creativity.

The U.S. Commerce Department has a key role to play here, because it is
best placed to bring the resources of the U.S. private sector to bear on
the economic needs in the Middle East. In coming years the U.S. business
community can have tremendous influence by strengthening investment in
the region. Increased private investment is the best leverage we have to
promote policy reform in the Middle East. And the opportunities are
there. Over the next decade, there should be promising opportunities to
invest in upstream gas and possibly oil development on the Arabian
Peninsula, in addition to significant new investment opportunities in
the downstream sector.

The Middle East lags behind Latin America and Asia in terms of the
privatization of basic infrastructure--electricity, roads, and
telecommunications. U.S. firms are well positioned to take advantage of
these opportunities. As water shortages become more acute, a major
investment opportunity in desalination technologies should also open up
beyond the Gulf into the countries of the Levant and North Africa.

CONCLUSION

There are few regions of the world where the United States has such a
confluence of political and economic interests--where our economic
interests are so dependent on political developments and where our
political interests are so dependent on economic developments. The
Clinton Administration is committed to working intensively on both
tracks. But to be successful, we need a broad-based American coalition
that includes not just the Administration and Congress but also the
private sector and members of the broader policy community, including
you at the Washington Institute.

The challenges are great, but working together I am confident that we
can consolidate the historic achievements of the past six years and lay
the groundwork for a new Middle East that offers the benefits of peace
and prosperity not only to the Middle East, but to the United States as
well.


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