Skeptics See U.S.-Israeli Agenda For Middle East Multilateral Bank

By Colin MacKinnon

Don't look now, but a Middle East multilateral bank of some kind probably is in the offing. The Clinton administration is pushing the idea and it probably will happen. Hard questions about the proposed institution have to be asked, though, and asked up front.

What will the bank's real purpose be? How will it be structured? How will it work? And most important, just how political will it be?

The idea of a Middle East regional bank isn't new. Various proposals for some kind of multilateral institution have been afloat for years, mostly among peace visionaries.

The need for one seems clear enough. The Middle East needs nothing if not development of its infrastructure and reform of its business culture. Multilateral institutions in other regions—the Asian Development Bank, the Inter-American Development Bank—are respected and useful, so why can't the Middle East have one?

The answer to that, of course, has been that the Middle East is riven and fractured like no other region on earth and until recently multilateral cooperation looked unlikely even among nominal allies, let alone across the Arab-Israeli divide.

But with the signing of the PLO-Israeli Declaration of Principles in September 1993, the idea of establishing a regional bank gained strength. Then at the "Casablanca Summit" last fall, the U.S. and others plumped for the idea despite negative rumblings from some participants, notably the Saudis. In the end, the summit communiqué called on participating states to create a $10-billion bank that would fund regional development projects.

Washington Meeting

Following up on Casablanca, the State Department organized a meeting in Washington, which took place Jan. 11-12 of this year. Thirty-nine countries attended—the major EU countries, the U.S., Canada, Israel, the PLO, and all Arab states except Syria, Lebanon, Iraq, Sudan and Libya.

Despite the numbers that State was able to assemble, the Washington session doesn't seem to have been wildly successful. For whatever reason, the proposed size of the bank has reportedly been scaled back to $5 billion at most, with an initial capitalization far less than that, perhaps no more than $1.5 billion. The New York Times quoted "American and Middle Eastern diplomats" as saying scaling back the bank was an attempt to overcome Saudi opposition to it.

At the meeting, the State Department put forward an American proposal for structuring the institution. State is sitting on the document, but some people who've seen it don't like it much. The U.S. draft reportedly stresses lending to the private sector, speaks of the "Middle East market" as the raison d'étre of the bank, and calls repeatedly in one way or another for integrating Israel into regional trade.

The U.S. draft reportedly calls for integrating Israel into regional trade.

"What bothers me most is the political agenda," says one knowledgeable analyst, "which is to 'integrate' the Middle East, and it's all over the place in the American proposal. I don't know what it means really. Is it to open these markets to each other very fast?"

That could be a problem for some states. Take Egypt. Egypt's tariffs are very high and Egyptian industry, cozily protected, does not compete well with the outside world. "Cutting tariffs is a very good goal over 15 years," says the analyst, "but to move very fast is not realistic. The key is to open Egypt to the rest of the world in a balanced way, not just to Israel. And here's a document that places a very special value on Egypt opening up to Israel."

Furthermore, if Egypt cut tariffs on Israeli products but not on the products of other countries, Israeli goods would be cheaper than possibly better or more efficient American, European or Japanese goods. How smart would that be?

"Already you're getting a reaction from Egypt. The Egyptians feel they are being pushed around. They are not interested in opening their trade overnight to Israel."

The Egyptians are also said to be worried about their foreign aid. Will some of it get routed through the bank? Will it come with more stringent conditions? "It's tense overall," says one observer.

Another problem with the proposals so far is that they seem to envision a mixed mission—infrastructure development and private sector finance. "It's a little strange," says a Washington-based economist. "It's not clear to me how we can have development projects like constructing electricity grids, things like that, while just lending to the private sector. I guess you'd have to privatize everything."

Some observers prefer the European approach, finding it more practical. The European Union has basically told regional states, "You can sell immediately into our market at very favorable terms—but in return we want free access to your markets in 15 years." Under the European proposal, regional states would break down tariff barriers gradually, giving local industries time to adjust and become more competitive. And as they opened up to Europe—that is, lowered tariffs generally—regional states would open more to each other.

Private Sector Enthusiastic

Still, some private sector Arab businessmen are enthusiastic about the bank. "I'm completely for it," says one, a New York-based banker. "I don't know why they're scaling down the capital. Unfortunately, most of the banks in the Arab world do not provide medium- or long-term financing because they consider it risky. There's plenty of equity capital in the Arab world, especially in the private sector, but there the banks are not doing their job. If you look at the liquidity ratio of the Arab banks, they are very liquid but they are not providing the loans."

"A regional development bank is an excellent idea," says another businessman, who works out of London, "if it is capable of judging things on their own merits without dictating on a national basis. This is something we've never had and something that is greatly needed."

Other Regional Banks

The Asian Development Bank and the Inter-American Development Bank get high marks among many development specialists and probably ought to be the models for the Middle East institution. Their role basically is to complement the World Bank and its megaprojects and adjustment loans. They focus more and specialize better with labor-intensive loans, loans that ultimately go to small enterprises. They can do better than the World Bank on some projects because they're closer to the field and can pay more careful attention to ongoing projects. They also play an important role in getting regional decision makers to get to know each other better.

"If you stick to financing regional projects," says an observer, "I think it's a good thing because it's complicated with several countries involved. It's not clear that normal financial institutions can deal with that. It's even too much of a headache for institutions like the World Bank. To get agreement with one government on a project is hard enough, but to get three to agree, especially if they have been enemies for 40 years, is extremely difficult."

A task force working on the new bank meets for the first time in Washington in March. Let's keep an eye on the proposal as it moves forward.

Colin MacKinnon is chief editor of the Washington-based Middle East Executive Reports.