https://arab.news/48g89
Cross-border conflicts lead not only to deaths, injuries and other casualties, but can also have long-lasting economic impacts sparking domestic unrest. The key to preventing both outcomes is what type of diplomacy countries pursue and over what timeframe.
Transactional diplomacy prioritizes achieving “deals” over adherence to “rules-based” approaches grounded in international principles and humanitarian values. The term gained prominence during Donald Trump’s first presidential term and has continued into his current term. This form of diplomacy is gaining ground, including within the EU, contributing to the rise of populism, xenophobia and nationalism at the domestic level and increasing the prospect for regional and global conflicts.
Transactional diplomacy can be shortsighted. This can be seen by comparing the chaotic impact on global trade of the “reciprocal tariffs” announced by Trump in April with the gradual, yet consistent, progress made by the World Trade Organization since its inception in 1995, which has advanced globalization through multilateral negotiations.
The consequences of the increasingly fluid international order are especially evident in the Middle East and North Africa region. In addition to the effects of regional instability, the majority of Arab countries are facing economic stagnation and increasing poverty. According to a report published by the World Bank last month, the poverty rate in MENA has more than doubled to an estimated 9.4 percent this year, compared to only 4 percent in 2010. In the past year alone, an additional 11 million people have fallen below the poverty line.
The rise in poverty in MENA cannot be explained by global crises, such as the 2008 financial meltdown, the COVID-19 pandemic and the 2022 war in Ukraine. These crises have also affected the rest of the world, but the current global poverty rate of 9.9 percent is less than half the 21 percent recorded in 2010. And the typically disruptive energy price fluctuations tend to have a neutral impact on the MENA region as a whole, which comprises both energy-exporting and energy-importing countries.
The consequences of the increasingly fluid international order are especially evident in the Middle East
Dr. Zafiris Tzannatos
An obvious culprit in the region is prolonged conflict and fragility. In this context, Arab nations may ask themselves what kind of diplomacy can halt and reverse their economic and humanitarian descent. Should they adopt a transactional approach or one grounded in principles, or some balance between the two?
The question is timely, following Israel’s airstrikes on Iran last month. The strikes, considered to be “preemptive” by Israel, are based on 30-year-old statements (also repeated at the UN more recently) by Prime Minister Benjamin Netanyahu, then an MP, that Iran could fulfill its nuclear ambitions in “a matter of months, or even weeks” without an external intervention.
Yet, despite decades of warnings that Iran is on the brink of developing nuclear weapons, no credible evidence supports this claim. As recently as March, US intelligence chief Tulsi Gabbard testified before the Senate that Iran was not actively pursuing a nuclear bomb. The International Atomic Energy Agency backed this assessment in May, reporting no indication of an undeclared weapons program, a view later repeated by Director General Rafael Grossi.
Nevertheless, Israel’s strikes have been endorsed by German Chancellor Friedrich Merz, who stated that Israel is doing “the dirty work for all of us” in Iran. His assessment was in line with those of the representatives of the G7 countries that met in Canada when the strikes started. Soon after, the US conducted additional strikes on nuclear facilities in Iran, though a ceasefire was reached two days later, with hopes that it will hold permanently.
Proxy wars may serve the interests of powerful nations, but the people caught in their crossfire pay the ultimate price. The Iran-Iraq War of 1980 to 1988 is a case in point. The war devastated both countries. Then Iraq fell out of favor and, in 2003, a US-led coalition, loudly seconded by the UK, invaded it, citing the presence of nonexistent nuclear, biological and chemical weapons.
Wars exert consequences beyond the warring parties and military targets, often impacting neighboring countries even if they are not involved. The economic effects of the war in Gaza illustrate this clearly. Though both Egypt (in 1979) and Jordan (in 1994) signed peace treaties with Israel, their economies have been adversely affected by lower tourism revenues, higher energy insecurity, increased transport costs and slower economic growth. Following the recent strikes in Iran, both Egypt and Jordan, among others, immediately experienced a surge in tourism cancellations, with increases in fiscal deficits, public debt and unemployment likely to pose significant risks to their macroeconomic stability and social conditions if uncertainty continues and conflict resumes.
These economic risks are not confined to MENA. A prolonged conflict could rattle global markets, spiking shipping costs, energy prices, inflation and interest rates, and unsettling financial systems. Stock volatility, investor flight and exchange rate pressures may follow, undermining global economic stability.
Wars exert consequences beyond the warring parties and military targets, often impacting neighboring countries
Dr. Zafiris Tzannatos
Yet some Western leaders still see war as an economic stimulus. UK Prime Minister Keir Starmer recently told Parliament that increased defense spending would “restore growth,” citing NATO commitments to the Ukraine war. While defense industries may benefit under such transactional thinking, the toll of wars on human lives, livelihoods and long-term economic growth outweighs their short-term gains.
Israel’s diplomacy, exemplified by the normalization of relations through the Abraham Accords with the UAE, Bahrain, Morocco and Sudan in 2020, can be characterized as transactional in nature. Yet, a lesson can be learned from the alignment of such diplomacy with Israel’s long-term objectives to consolidate control over and eventually annex the Occupied Territories.
Arab states might take a similar approach, not by abandoning principles but by strategically aligning short-term deals with the long-term goal of peace and prosperity in their countries. A transactional approach coupled with economic cooperation can de-escalate tensions as long as it adheres to principles. For example, has refrained from joining the Abraham Accords, maintaining that normalization with Israel must be contingent on a credible and irreversible path toward the establishment of a sovereign Palestinian state along the pre-1967 borders, with East Jerusalem as its capital, in line with the two-state solution.
In conclusion, the Arab countries are once again at a crossroads. In addition to the loss of lives, renewed conflict risks deepening their economic woes. In its ongoing stabilization program in a Middle East country, the International Monetary Fund flagged “widespread domestic protests and violence” driven by poverty and unemployment as a “high risk” factor that could jeopardize the success of the program.
Arab states should unite and develop a nuanced strategy that blends pragmatic deal-making with a principled vision for peace and sustainable prosperity. The stakes are not just regional. The world, too, may pay the price of inaction and miscalculation.
- Dr. Zafiris Tzannatos is an economist based in Jordan who has served as Professor and Chair of Economics at the American University of Beirut, in senior positions at international organizations, and as an on-site adviser to governments in the Middle East and the GCC.