Spurring Economic Growth in the Middle East: What Needs to Be Done?
A briefing by Inder Sud
September 6, 2000
Inder Sud, Director of the Middle East Department at the World Bank since 1995, addressed the Middle East Forum in New York on September 6, 2000.
Economic growth in the Middle East, especially in the 1990s, has been disappointing, having barely kept up with the region's demographic growth. This means that an average person in the Middle East today is not better off than ten years ago. This performance of poor growth is particularly disappointing at a time when the rest of the world - including the West, Asia, and the former Soviet Union - have all experienced at least a reasonable per capita economic growth. The Middle East has been the second slowest growing region in the world, ahead only of Latin America - where the number has been weighed down by the poor performance in Brazil.The "Human Capital Crisis"
The "crisis of growth" in the Middle East is the source of many of the region's problems. Its biggest manifestation is the unusually high rate of unemployment, which averages about 20-25 percent of the working-age population, and up to 30 percent and more in Yemen, Iran, Syria, and Lebanon. In a region where most of the population is young, unemployment has hit first-time job seekers particularly hard. Unfortunately, the Middle East's success at promoting education - measured by years students spend in school, it is one of the highest in the world - has only made matters worse. The combination of young, educated, and unemployed people is a potentially explosive problem often referred to as the "human capital crisis."
Thanks to the availability of resources in the 1970s and 1980s, Middle Eastern countries have managed to avoid a genuine poverty crisis by generating a reasonable safety net that includes subsidies, social transfers, and social programs. Nevertheless, it is safe to assume that few governments can maintain this same level of services and public support. To make matters worse, recipients are now used to a certain level of support and are likely to be reluctant to accept the necessary sacrifices that the reform process entails.Lack of Dynamism in the Middle East: Possible Explanations
Where do we go from here?
- As oil prices began to decline in the late 1980s, countries were slow in adjusting their economies. One chief economist, in fact, likes to state that oil can be a curse, since it retards the reform process.
- Oil-producing countries have experienced the "Dutch disease": oil revenues have raised the prices of non-traded goods such as land and labor. At the same time, prices of traded goods - commodities that can be exported - are not very profitable. This vicious cycle has hampered some of the export-led efforts.
- During the high oil revenues of the 1970s and 1980s, most countries built up a large state sector. Many governments financed regional projects - which do not create much dynamism in the economy.
- Countries have spent enormous amounts on military expenditures.
- Countries have been slow in global integration. The private sector in the Middle East has not been dynamic enough to integrate in the global economy. Similarly, the degree to which Israel has been integrated into the regional economic system has been disappointing; for other Middle Eastern countries could gain from trading with Israel, whose economy should have a tremendous spillover effect into her neighbors.
- The region is preoccupied with fixed exchange rates. These create a very negative signal for exporters and have rendered many Middle Eastern economies uncompetitive by forcing investment into the non-tradable sectors.
- Just as good economics often makes good politics, growth depends on good governance. Good governance allows people to sell reform processes to their population. In the Middle East, this would be a challenge. The World Bank is realistic and understands that it cannot change the political environment in a country.
In the late 1980s and early 1990s many countries in the Middle East initiated major efforts at fiscal reform. These measures have helped the countries become macro-economically stable, making hyperinflation and out-of-line fiscal balances a rare occurrence.
Some countries - notably Tunisia and Jordan - have undertaken structural reforms to get their economies moving. The measures taken include reductions of tariff and investment barriers, as well as promoting exports and privatization programs.
The pace of these reforms, however, has been slow, hesitant, and not sustained over time and has therefore produced only modest results. The incestuous relationship between the public and private sectors can add clarity as to why these countries have not managed to experience the anticipated rate of growth:
- The size of the public sectors is still far too large, accounting to 40-50 percent of these countries' outputs.
- The public sector usually considers itself the controller, rather than supporter of, the private sector.
- The private sectors have grown up under the patronage of the government. They embody established families that have flourished during the eras of protection and have not been subject to the competition of the market forces.
The reforms that have been undertaken so far are "easy" because governments can execute them administratively. Future reforms will be more difficult because they run against serious vested interests and entail political problems. Fortunately, one does see in the Middle East a cadre of leaders that seem to be committed to economy first. But with an increasingly stringent competition, the road ahead is bumpy. Nevertheless, there is no reason why the Middle East - with its stable macro-economic situation and its educated workforce - cannot achieve the same level of performance of other regions.Summary account by Assaf Moghadam, a graduate student at the Fletcher School of Law and Diplomacy, Tufts University
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