Post-war Iraq and the peace dividend

Overall in the Middle East windfall profits from oil revenues will have more than offset the economic impact of trade lost due to the Iraq War and a slump in tourism in the first quarter of 2003.

Now the $100 billion reconstruction of Iraq promises a regional trade boom that may send regional economic growth rates to Chinese levels. In this scenario, far from destabilizing the region, the Iraq War will prove to be a turning point for economic reform and a boom for business.

For without punishing United Nations' economic sanctions, and with a huge injection of global economic capital, Iraq is set to become the next boom market of the Middle East. Indeed, it may soon match the 10% GDP growth now expected in Taliban-free Afghanistan this year.

The World Bank reckons that the UAE and Iran were the biggest net beneficiaries of the Iraq War in terms of oil revenues. In the case of the UAE that has to be balanced against a major slump in tourism.

Iran too claims that the Iraq War had some negative effects. But finance minister Tahmasb Mazaheri says that Iranian GDP should grow by 6.5 per cent this year with eight per cent a possibility. Certainly if Iran can manage its relations with the new regime in Iraq with skill the latter figure is not wishful thinking.

The post-war position of Saudi Arabia is more difficult to assess. ExxonMobil's decision to pull out of a $15 billion project, part of the $20 billion Saudi Gas Initiative, is a very bad sign. It may be that the oil and gas sector has simply tired of delay and obstruction in Saudi Arabia and is going to transfer its energies to less frustrating and more lucrative options.

Likewise, a good deal of the transportation of goods and materials to Iraq, and reconstruction contracts, could bypass Saudi Arabia because it is quicker and more efficient to use alternatives available in the region. If Saudi Arabia wants to stay locked in the past then Western companies may increasingly choose to ignore the kingdom and invest elsewhere, perhaps in Iraq.

On the other hand, the Iraq War has not produced the collapse in oil prices that many feared. Indeed, the world's emergency oil stocks were not released, and it was this factor that depressed oil prices so dramatically in 1991. So Saudi Arabia is relieved of the worry of an immediate slump in oil prices, although the post-war situation in Iraq and the latter's continued membership of Opec remains an issue.

All the same, it looks as though the smaller GCC states will be the ones to benefit most from the post-Iraq War boom in the Middle East. Qatar is now about to join Kuwait and Bahrain as a democracy and the first council elections will be held in Dubai shortly.

These smaller states increasingly shine as models of economic, political and social development, and it may be that the larger nations of the Middle East now follow suite. Thankfully there is no better time for peaceful reform that during an economic boom when rising prosperity can make the process of adjustment to change far easier. This is surely the region's next major challenge.