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Finding the trend in transition

Caroline Freund's picture
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Twice a year, we put together an economic outlook for Middle East and North Africa (MENA) as part of the economic analysis we do at the World Bank.  Over the last two years, a series of political and financial shocks have made the regional economic trends and turning points that we are looking for in these reports difficult to identify. 

Kim Eun YeulOn the political side, there have been elections with sharp winners and losers and referendums that have challenged prior assumptions. The new space in which citizens have been able to organize and speak out has yielded a vibrant civil society. But in this same contested space, the assassination of an opposition figure changed the course of history. All the while constitutions are being written and rewritten; and all-out conflict in one state is having devastating consequences internally and repercussions throughout the region.

On the financial side, tourists shunned a number of countries in the aftermath of the Arab Spring only to return and depart again.  More public sector jobs and higher government wages supported the livelihood of those that got them, but left less funds to support the rest of the people.  High oil prices eased transitions in oil exporters but raised financing concerns in oil importers; and sadly, the global economy has not been able to moderate regional volatility, with the Eurozone crisis restraining global demand and resources.

Identifying trends and turning points amid this much volatility is difficult. But, three things are clear:

One, MENA is more diverse now.  In the past, we discussed the outlook for oil exporters (developing and developed) and oil importers.  Now we also have various stages of transition.  This includes post-revolutionary countries, evolving democracies, fragile states, and states in conflict.  The political and policy uncertainty that prevails to varying degrees in countries around the region has important implications for economic growth, job opportunities, and poverty of which we must remain cognizant.

Two, economic pressures are mounting in the oil importers.  We are seeing rising fiscal deficits and growing government debt, in line with an expansion in government expenditures on subsidies and public wages, and also a decline in government revenues as income growth slows.  Current account deficits have also worsened, as exports, especially of tourism, contracted; while expenditures on imports, buoyed by high oil prices, rose.  Reserves are being depleted as countries have relied on them to support declining demand for local currencies.  These macro trends cannot continue indefinitely, something has to give.

Three, unemployment is high and rising in a number of countries.  The structural economic issues that plagued MENA in the past, leading to insufficient opportunities for young people and fueling frustration prior to the Arab Spring, have not abated.  Unfortunately, the political and policy uncertainty that has accompanied transition has brought a halt to investment, compounding an already weak labor market and making it even harder to find work.  The very sectors that provide jobs: manufacturing, construction, and tourist-related services are the ones that took the biggest hit in transition.  Getting these sectors back on track is critical to generate a jobs recovery and reduce poverty.

Going forward, the outlook depends on how and when macro imbalances are addressed and whether a sufficient level of policy predictability and political inclusiveness is achieved to bring investors and tourists back.  Expenditures on fuel subsidies and the government wage bill have swelled in the transition countries since 2010.  A macro plan that brings these in check, coinciding with the development of a strong social safety that protects the most vulnerable would be a first and necessary step.  This would also bring confidence to investors, supporting stronger growth and more jobs. But a solid macro plan is not enough.  In the short run, the growth and jobs situation needs political clarity and policy predictability to encourage foreign investment and tourism, and also confidence builders such as public works and training. 

In the medium run, there are a host of additional challenges that need to be addressed (see our blog series on jobs) but now there is a growing danger of losing the long run for the short run.

Comments

Brilliant post!! The traditional way to look at MENA has been a two speed region or inequality increasing between oil importers vs. oil exporters. You present a different way to look at the region. I wonder what a third perspective would be.

Submitted by Jamal Ibrahim Haidar on
The statement "all-out conflict in one state is having devastating consequences internally and repercussions throughout the region" makes me question whether certainty can actually be good or bad for the economy. In finance, "higher risk (should) lead to more return". In economics, "more uncertainty (may) enhance innovation and competition". And, sure, "more violence and uncertainty (may) lead to loss of human capital and lack of government incentives" at the country-level. No doubt, violence is bad. But, apparently, entrepreneurs in some countries learn how to adapt with it. In MENA, Lebanon can provide a good case to assess such trade-off(s)? Thinking about transition and looking forward, I would not be surprised if we observe that countries in conflict and uncertainty now emerge to be standing on the frontiers of creative industries in MENA, say, in few years.

Submitted by Trade on
Great post! To what extent does intra-regional trade have the potential to jumpstart capital accumulation and support growth in the MENA region?

Submitted by Caroline on
Thank you for your comment and question.

Given that MENA countries are significantly less integrated than would be expected given income and distance from global markets, any boost to trade would be good for growth in the region. Intra-MENA trade, alone, however, is unlikely to have a large effect as intra-MENA trade is a small share of total trade (about 10% of total trade, 25% of trade excluding petroleum).

Greater openness to trade and investment from around the world, combined with investment climate reforms, would encourage a more efficient use of resources and higher long run growth.

Best, Caroline Freund

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