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Why growth in MENA is so volatile

Lili Mottaghi's picture
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Regional uncertainty in the Middle East and North Africa (MENA) region has brought economic challenges and slower growth.  The weakening global economy due to the Eurozone crisis has lowered the prospects for a rebound next year. A major factor that could affect the growth in MENA is whether a downturn in European Union (EU) affects the price and quantity of oil. Our new report MENA: Eurozone Storm on the Horizon  finds that a looming crisis in the Eurozone could severely impact the region, especially if it is accompanied by lower oil prices. Since EU accounts for 25 percent of global oil import demand, a sharp slowdown in EU could likely soften oil prices through a decline in demand for oil. This could reduce growth by about 2 percentage points leaving Gulf Cooperation Council (GCC) and other oil exporter countries feeling the brunt.  However a moderate slow down in the EU, with no impacts on the oil prices, would have minimal impact on the overall growth in MENA, though some countries with high trade linkages with the EU will still feel the pain.

This dependence on one commodity has led to high volatility being a salient characteristic of growth in MENAcompared to other developing regions.  MENA countries are highly concentrated in a few sectors and lack of diversification has increased vulnerability to external shocks and introduced uncertainty in growth.  Except for a few oil importer countries, the rest of the countries in MENA rely heavily on one commodity. Of 18 countries in the region, two thirds depend on the oil sector as the main source of earnings. In these countries, oil revenue accounts for almost 60-90 percent of their total export receipts and more than 60 percent of their GDP. 

Heavy reliance on oil together with high price volatility in the oil market has relentlessly exposed MENA to trade shocks and increased growth volatility over time. Moreover, price volatility in the oil market has intensified since the onset of the financial crisis. Oil prices dropped by 50 percent per barrel at the end of 2008, increased by 80 percent during 2009 and grew by about 23 percent in 2010 and 2011 signaling that high price volatility could persist in the oil market going forward. 

Growth volatility is a major concern in the MENA region. Of course the degree of volatility differs among MENA countries depending on their level of dependency on oil (See Growth Performance in MENA, Four Decades of Volatility). In particular GCC countries have shown higher degrees of growth volatility due to their heavy reliance on oil. Oil exports in Kuwait and Saudi Arabia for example account for more than 85 percent of total exports.  Growth volatility in GCC has had significant spillovers for other countries in the region especially those with close economic ties through trade, remittances and financial linkages, namely Djibouti, Jordan and Lebanon.  By contrast, North African countries experienced the least fluctuations in growth as they have opened up their economies. 

In sum, MENA is prone to oil price shocks, and with the focus on the transitions and the Eurozone, this key channel has been overlooked. If Eurozone enters a recession - as OECD warned this week - it could deteriorate MENA’s growth prospects.  But the magnitude will depend on the extent to which oil prices are impacted. Until MENA economies become more diversified, the region will remain dependent on the global demand for growth prospects and be subject to wide fluctuations.

Comments

Submitted by Caroline Freund on

The risky business of oil prices is highlighted in yesterday's Financial Times. Traders in oil futures are increasingly betting on price collapse and super spike.  Despite the Eurozone crisis, more bets are on a super spike ($130-155) than a collapse ($40-65) in 2012, and the jump in bets on a spike is bigger.  In particular, while bets on a spike have nearly doubled since the beginning of this year, bets on a collapse are up about 50%.  In any case, whatever happens next year will have important implications for growth in the region.

Submitted by Ohan Balian on
A reduction in oil prices could be good thing after all. As oil prices fall, the competitiveness of the manufacturing sector increases which in turn leads to industrialization - something that the MENA region badly needs as it is struggling to diversify its economy away from oil. (Also known as the Dutch Disease effect).

One of the long-standing goals for many natural resource dependent countries (also in MENA) has been the management of resource wealth and the ability to diversify into other sectors. This however is largely dependent on two other important resources: human capital and governance (institutions) and whether a country is well endowed with these assets. For those countries in MENA that are highly dependent on oil revenue, a declining oil price could likely be beneficial if they have already set up institutions needed to manage their resource wealth well. This would help increase their abilities to channel the oil windfall into productive investment for example in education (building human capital) or infrastructure and increase the competitiveness of manufacturing sector thus raising productivity and income. Without or with lower levels of a productive human capital and good governance, countries dependent on natural resources would find it difficult to diversify into other sectors. Although many countries in MENA have put good policies in place, still lag far behind these areas compared to other developing countries. Until then, growth in MENA countries will remain volatile and unsustainable.

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