Although the countries of the Eastern Mediterranean (Israel, Jordan, Lebanon, the Palestinian Authority, and Syria) occupy a relatively small geographic area, they represent different economic and political systems. Regional integration, particularly in the energy sector, while increasing, is complicated by the ongoing Arab-Israeli conflict.

Israel has the largest and most developed economy in the region. In 2000, a period of renewed Israeli-Palestinian violence ushered in an economic contraction followed by period of low growth. However, a strong increase in exports of technology products, as well as a revival in tourism and private investment contributed to a recent recovery. Growth of real gross domestic product (GDP) in 2005 was 5.2 percent, and is forecast at 4.7 percent for 2006. However, security concerns such as armed hostilities in Lebanon could threaten sustained growth in the near term.

Between 2004 and end-2005, the economy of the Palestinian Authority (PA) showed strong recovery with GDP growth rates between five and six percent annually. However, the January 2006 election of a Hamas-led government and subsequent reduction of donor support, limited access to the international banking system, and cross-border travel restrictions, have been an economic setback for the PA. According to the World Bank, the economic contraction is causing an increase in unemployment, a large contraction in personal income and a significant rise in poverty rates. As few up-to-date figures are available, it remains unclear to what extent the current political situation, including re-engagement in Gaza, will effect the economy and attempts at economic reform in the near-term.

Jordan has experienced strong economic growth (more than seven percent annually) since 2004, and GDP is forecasted to grow another five to six percent in 2006. Much of this growth is due to rising exports, its location as a services hub to Iraq, and private capital inflows. However, in mid-2005 economic pressures started to build due to world oil prices and worsening terms of trade, as well as reduced grants and aid. Specifically, the loss of subsidized petroleum products from Iraq, Kuwait and Saudi Arabia has been a drain on the country's current account balance. In addition, an influx of displaced people following the war has put additional pressure on energy consumption, and costly fuel subsidies have pushed the oil bill to just under 20 percent of GDP. As part of a plan to reduce the fiscal burden and promote long-term economic stability, the Government of Jordan is focused on a $3-billion, 20-year national energy development plan, which includes privatization and the elimination of fuel subsidies by March 2007.

In Lebanon, the economic and political shock that resulted from the February 2005 assassination of former Prime Minister Rafik Hariri threatened to reverse several years of consistent growth (GDP grew five and six percent in 2003 and 2004, respectively). However, in the same year, the subsequent withdrawal of Syrian military forces and the election of democratic government helped to improve Lebanon’s investment climate and resulted in economic stabilization, with moderate recovery in foreign investment, tourism and exports (GDP growth was one percent in 2005). In a turn of events, in July 2006, armed conflict broke out in the south of the country between Hezbollah and Israel, and has since caused billions in damage to the country’s infrastructure as well as a large population displacement. In addition, Lebanon’s large external debt (approximately 180 percent of GDP) and budget deficit present a pre-existing obstacle to growth.

Syria has continued a pattern of low economic growth in recent years, despite some limited attempts to reform and to open the highly centralized economy. High global oil prices for its modest quantities of oil exports continue to buoy the economy and offset problems in the non-oil sectors in the short-term. Real GDP growth in 2005 was 3.5 percent, and growth is projected at 3.7 percent in 2006. In May 2004, the U.S. government imposed unilateral economic sanctions against Syria, under the provisions of the Syria Accountability Act, although the direct economic effects have been modest, due to the small volume of U.S. trade and investment with Syria. (U.S. energy companies operating in Syria were not forced to divest their investments in Syria although some have chosen to do so). Increased international pressure on Syria, politically and economically, has only further deterred much needed foreign investment, particularly in the oil sector.