• The credit crunch and the Dubai model  - Christopher Davidson
The year 2008 will expose the fundamental flaws in the new post-oil economies.

• Lebanese enigmas  - Michel Nehme
Einstein once noted that problems cannot be solved with the same mentality that created them.

• Little shop of horrors  - Mark Perry
All of the region's issues fade to insignificance, so long as the solutions to them remain in the hands of single party thugs.

• The decline of religious fundamentalism in Iran  - Sadegh Zibakalam
Rafsanjani warned that the failure of the present government would be interpreted as the failure of radical Islam.

The credit crunch and the Dubai model
 Christopher Davidson

The credit crunch is moving around the world, claiming new scalps every week. Toxicity has spread from mature US financials to Europe and Britain and now it is the turn of the developing world. When the crunch hits a region, confidence rapidly falls, banks are jeopardized and credit dries up. The western extractive states have been able to rescue their financial sectors by part-nationalizing banks and injecting liquidity. These are abilities that weaker states do not have.

Thus far, the Gulf states have remained fairly isolated from the impact of the crunch, partly due to the cushioning effect of surplus liquidity in their immediate neighborhood and the unspoken guarantee that massive sovereign wealth can be used to shore up any domestic collapse. Indeed, up until a few months ago the mood had been one of optimism, with many stakeholders in these economies contending that the region is impervious to the West's problems and that it is has successfully decoupled from any global recession. Rightly, it has been argued that even plummeting oil prices are not a problem, as the annualized returns from the various overseas investment funds in many cases exceed total oil revenues.

This view does not however appreciate the heterogeneity of Gulf states' economies. Certainly, Kuwait, Qatar and the UAE's Abu Dhabi are in very good shape: they have massive oil and gas exports and the largest sovereign wealth assets in the world. They also have relatively small national populations to distribute their wealth to. But in contrast, the more resource-scarce Gulf states, notably Bahrain, Oman and the UAE's Dubai are now highly exposed to the credit crunch.

Since the 1990s, these economies have sought to diversify their economies away from hydrocarbon exports and heavy, energy-reliant industries, often by building up new sectors such as real estate and tourism. On paper this diversification has been successful: other, associated sectors such as construction have boomed, and in Dubai's case the non-oil share of the emirate's GDP has grown to over 90 percent. Moreover, the rapid economic liberalization required to kick-start these new sectors and the many lavish projects they have involved have won these countries international recognition and praise.

The year 2008 will, however, expose the fundamental flaws in these new post-oil economies. They have been built on a wave of global boom, relying on excess liquidity in their oil-rich neighbors and massive and uninterrupted foreign direct investment from further afield, often from the West. Indeed, they have never been put to the test as they have yet to really experience a true boom-bust cycle. The sectors that have been developed are particularly sensitive to a global downswing, indeed are prime examples of "peripheral economies" that have to respond in a dependent fashion to circumstances and retrenchment decision-making in the world's "core economies".

The biggest victim is likely to be Dubai, as real estate and tourism (and by extension construction) have been allowed to develop into the key pillars of the economy. No moratorium has been placed on the expansion of these sectors and the city state has grown wildly in the last few years, with growth rates that would normally be associated with an overheating economy and rampant, unrestrained speculation. Furthermore, few sustainable economic activities have been introduced and attempts to build a vibrant knowledge economy have remained stalled.

International financial observers and realtors have now begun to identify worrying trends: rapidly declining house prices, a stagnant resale market, the inability of off-plan property investors to keep up with their payment schedules, a marked decline in hotel occupancy rates and wage and hiring freezes in property companies. To make matters worse, they have highlighted the government's indebtedness: Dubai has borrowed heavily in recent years to finance all of the physical infrastructure needed to support and connect these new economic sectors. Thus, if the situation should deteriorate further--as it may well be doing given that large mortgage lenders have already had to be merged--there is a question mark as to whether the government can step in and come to the rescue.

But in some ways, the true merits or demerits of the Dubai model may never come to light, as the UAE brand is likely to be resurrected should Abu Dhabi intervene and bail out its close neighbor. - Published 6/11/2008 © bitterlemons-international.org


Dr. Christopher Davidson is a fellow of the Institute for Middle Eastern Studies at Durham University. He is the author of Dubai: The Vulnerability of Success and The United Arab Emirates: A Study in Survival.

Einstein once noted that problems cannot be solved with the same mentality that created them. This is the state of affairs now prevailing in the Middle East. More conflict and less cooperation are still predominant in the democracy-resistant Arab world. Yet this stubborn mentality is challenged by the changing material and organizational conditions that stem from the trends of both regionalization and globalization.

The big question is how to perceive the Middle East in the forthcoming decade. Today, the world's biggest issues are global and governments are losing relevance because economic interdependence, balance of power standards, technological issues, financial stability and demographic and cultural realities disregard borders and idiosyncratic sensitivities.

The challenges in the Middle East are multifaceted. Here, from a Lebanese perspective, we deal with five of them.

First, sectarian divisions are reflective of the entire Middle East arena. This time they are taking a form that is unprecedented in Lebanon. It replicates the division that prevails in Iraq and the Gulf at large between the two opposing major branches of Islam, Sunni and Shi'ite. The tension between these two sectarian communities is indeed quite sharp in Lebanon. The old Arab-Israel balance of power is no longer the same. Iran as a Shi'ite Islamic power is very much at the core of the new multi-polar Middle Eastern system; Turkey is a de-facto contender with the potential to be a major player in the near future, supported by the US.

In an effort to shield itself from potential Arab threats against it and to avoid a replay of the Iran-Iraq war of the 1980s, Iran has resorted to pan-Islamic rhetoric and has been outbidding all Arab regimes in anti-Israeli speechmaking, including provocative stances on the Holocaust, just to play the Arabs against Israel and keep them busy on that front. Tehran is also building up a protective shield in the form of a network of alliances that goes beyond the Shi'ite realm. Thus, Hizballah is keen on not appearing as a purely sectarian force. It has an alliance with Michel Aoun, who is a major force among Lebanese Christians, and is trying to cozy up to certain Sunni forces, including Lebanese Sunni Islamic fundamentalists and any other allies it can find outside the Shi'ite community.

Then there is American policy in the region. The United States continues to wield an iron fist to pressure Iran to abandon its nuclear ambitions and to encourage continued dialogue between Iran and Saudi Arabia. The capture of Baghdad by the Shi'ites and the ethnic cleansing of most Sunnis from it have set the stage for a big Sunni-Shi'ite battle in Iraq that could potentially lead to all-out sectarian hostilities in the region. Yet calm is absolutely essential to Gulf security and to American energy security; Saudi Arabia and Iran must not be drawn into a devastating Sunni-Shi'ite proxy war. Maintaining close contact with each other and with Iraqis of the other sects is the best way for them to avoid a replay of the Iran-Iraq war of the 1980s.

The US government will also continue to be serious about the threat of terrorism. Congress will probably expand funding for the Combating Terrorism Center at West Point. Its researchers analyze the writings and activities of the Salafeyien Jihadeyien and project how best to combat them in order to undermine the threat of al-Qaeda, which is likely to remain with us for some time in the future.

With the election of a new American president, the US is bound to find itself mediating the Israeli siege of Gaza. That siege will continue to be used as an element of pressure until a breakthrough on the Syrian track is realized. Learning from the past and projecting to the future on the Palestinian track, it is one of the multiple ironies of the Middle East that when the US pushes hard on one door, another one opens instead. Meanwhile, sponsoring Israeli-Syrian negotiations does not require the US to drop any of its other concerns, from maintaining the independence of Lebanon to pressing Damascus to end its human rights abuses and sponsorship of terrorist organizations.

Yet unless something drastic happens, Syria will cling to its involvement in Lebanon. This is also one of the problems projected by Hizballah's strategy: its links with Syria. Indeed, most of the Lebanese opposition is pro-Syrian. One of the critical points for the future is the ability of Syria and its allies to block the international tribunal on Rafiq Hariri's assassination (Hariri was killed on February 14, 2005 by a car bomb for which the Syrian security services have been implicated) that Washington is pushing through the UN in order to use as a tool to exert pressure on Damascus.

Suffice it to mention as a concluding statement that despite or alongside its current despair, the Middle East stands right at the center of the developing world. Threats such as terrorists, insurgents and radical Islamists in the Middle East are the tip of an iceberg concealing a much deeper and wider movement for world change. They merit the attention of the major western powers.- Published 6/11/2008 © bitterlemons-international.org

Professor Michel Nehme is director of University International Affairs, Notre Dame University, Lebanon.

I once asked one of my Palestinian friends what he thought the United States should do to help the peoples of the Middle East. He was incredulous: "Haven't you done enough?" In retrospect that pained reply seems the perfect answer to my presumption: I'm from America and I'm here to help.

Sadly, the self-congratulation attendant on Barack Obama's election has seemingly revived this tradition of selfless altruism. As a former Clinton administration official told me several weeks ago: "We're going back into the Middle East, but this time we're going to get it right." That it did not occur to this official that we aren't exactly "out" of the Middle East is a testament to American optimism--and amnesia. "Really," he added, "our capacity for doing good is limitless."

Spare me.

When asked recently to list the five goals of his presidency, then-candidate Obama ticked them off: improving the economy, working for energy independence, providing affordable health care to all Americans, cleaning up the environment and improving education. The Middle East did not make the list. For good reason: it appears that we've "done enough." And for those who claim, with Colin Powell, that "if you break the china, you own it" here's a bit of news--no we don't. America is busy dog-paddling its way out of Iraq, is looking for someone to negotiate with in Afghanistan, has so offended the leaders of Egypt and Saudi Arabia that we are barely on speaking terms and has abandoned the Israeli-Palestinian peace process. We are leaving the china shop in a shambles, but too bad. You don't "own it" if you can't pay for it. And we can't.

That the new Obama administration will reengage in the Middle East is not in question. It will. But, in the wake of the failed "war on terrorism" (the definition of a "terrorist" has been broadened, apparently, to include anyone who's not a Republican), the Bush administration's dream of spreading democracy (so long as you are not Hamas or live in Pakistan) and the galactically stupid war in Iraq (whose purpose is yet to be determined), America will be focused more on--as one of my colleagues described it--"doing politics." Which is to say: after nearly 2,500 years of bumbling interventions (from Alexander the Great to Anthony Eden to George Bush), the future of the region is finally in the hands of the people who live there. The challenge for them is simply stated: they have to determine what they want.

On May 17, 2005, George Bush told the International Republican Institute that sixty years of American diplomacy in the Middle East had yielded sixty years of failure. The fault, he said, was America's--because it had failed to promote democracy. "If the Middle East remains a place where freedom does not flourish, it will remain a place of stagnation and resentment and violence ready for export."

While Americans now doubt that democracy can be "promoted" and have turned against the policies (and leaders) that, in the name of democracy, cost tens of thousands of Iraqi lives, this does not obviate his statement's essential truth: all of the region's issues fade to insignificance, so long as the solutions to them remain in the hands of single party thugs, ruling cliques and family kleptocracies. The single most important issue facing the region is whether that will continue.

Unfortunately (or blessedly), the people of the Middle East will not have Americans attempting to "help" them in their search for democracy. We're leaving your shop, shattered china and all, because our shop is on fire. By the way, it was arson.- Published 6/11/2008 © bitterlemons-international.org


Mark Perry is an author and foreign policy, military and intelligence analyst based in Washington, DC.

During the past three decades the rise of militant Islam has in many ways dominated political events in the region. The consequences of Iranian religious radicalism can be observed in the Persian Gulf region, in the Arab-Israel conflict, in Iraq and in Afghanistan. Although Iranian Islamic militancy appears to be as dominant as ever, this may not be the case during the next decade.

The main reason for this conjuncture lies with the present Iranian government headed by President Mahmoud Ahmadinezhad, who came to power in July 2005. Ahmadinezhad's rise to power was indeed a watershed in post-Islamic revolution Iran. His presidency marked a new political configuration in the Islamic republic. Hitherto, although the Iranian regime was described as radical and Islamic, it was far from a united political group. It consisted of diverse currents that all described themselves as Islamist. They included hardline conservatives on the "right", the "left", the pragmatists headed by Akbar Hashemi Rafsanjani, the moderates and those who with some qualification could even be described as "liberal". During the reign of the late Imam Khomeini the left had the upper hand. After his death, the pragmatists headed by Hashemi Rafsanjani held the center stage; then it was the turn of the moderate-liberal currents headed by the reformist president, Mohammad Khatami. No matter who had been elected as Iran's president, all the other currents were, albeit to various degrees, present in the government.

The elections of July 2005 and the rise of Ahmadinezhad to power changed that political complexion. The conservative hardliners purged almost all the other currents from power. For the first time since the emergence of the Islamic republic in 1979, one particular political group dominated the main three branches of the Iranian political establishment.

This group, which with some justification has become known as the hardliners, has tried to change much of Iranian domestic as well as foreign policy. At the international level, Iran's stand on its nuclear program has become much more uncompromising. The Islamic regime's anti-western and anti-American attitude has intensified, as has its anti-Israel approach. Instead, Tehran has tried to establish ties with anti-American regimes in South America and elsewhere. Internally, the hardliners have intensified the state's role in the economy and curtailed political freedom and have tried to expand the country's military capabilities.

We come now to the main point of our thesis: the anticipated demise of militant Islam during the next decade. Given the widespread grip on power that the hardliners have maintained since 2005, why should their power decline in the future? The short answer lies with the performance of the hardliners since they came to power three years ago. They have alienated much of the country's intelligentsia. Students, university graduates, professionals, intellectuals, writers, journalists, artists and many similar social groups have turned increasingly critical of the hardliners' overall policies during the past three years. Civil servants, the urban middle class and the politically powerful bazaar merchants have increasingly turned against the hardliner government of Ahmadinezhad.

Politically, too, the hardliners have been in retreat. The reformists, the left, the so-called liberal-religious nationalist groups such as "nehzat azadi", Hashemi Rafsanjani and his influential political groups, all now oppose the hardliner government. In fact, Ahmadinezhad's policies have turned many conservatives as well as more moderate and pragmatist hardliners against his government. There is yet another powerful and influential group that has become openly critical of the hardliner president and some of his decisions: during the past two years, a number of senior clerical leaders have voiced their opposition to some of Ahmadinezhad's decisions.

Last but by no means least is the Iranian parliament, or Majlis. The 300-member assembly that was inaugurated in July 2008 elected Ali Larijani by a large majority as its speaker. Since the conservatives have a considerable majority in the present majlis, Larijani's election was an implicit message of defiance to President Ahmadinezhad. Larijani was until last April head of the High Council of Security Affairs, a powerful body that is responsible for the country's military and security issues, including conducting negotiations with the International Atomic Energy Agency. Larijani was critical of Ahmadinezhad's radical approach regarding Iran's nuclear program. He preferred a more moderate stand, searching for compromise with the West on the nuclear issue. Ahmadinezhad dismissed Larijani, thereby eventually paving the way for Iran to adopt a more militant and confrontational approach vis-a-vis its nuclear program.

Here we must address two important questions about the hardline government of Iran. First, given his formidable internal opposition, where does Ahmadinezhad get the support to survive and even to contemplate another term? Second, what are the reasons for so much opposition?

The bulk of Ahmadinezhad's support comes from the supreme leader, Ayatollah Ali Khamenei and the various institutions he leads, including the powerful Revolutionary Guards, the Baseej, the national Iranian Radio and Television and government-run newspapers, as well as a number of religious and political leaders close to him. The widespread opposition stems from Ahmadinezhad's overall poor performance. The country suffers from rampant inflation; unemployment hasn't come down, nor has endemic corruption and the country's brain drain continues--witness the queue of Iranian professionals outside western embassies in Tehran, seeking to emigrate in spite of the fact that the country's oil revenues have quadrupled during the past three years.

It was against this irony that Hashemi Rafsanjani, the leading moderate Iranian leader, warned last month that the failure of the present government would not simply constitute the defeat of a particular political group but rather would be interpreted as the failure in practice of radical Islam when it had all the power at its disposal.- Published 6/11/2008 © bitterlemons-international


Sadegh Zibakalam is professor of political science at Tehran University.