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Why hasn’t economic growth been more inclusive in MENA?

Elena Ianchovichina's picture
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The topic of inclusive growth has captivated the minds of economists and politicians in the Middle East and North Africa (MENA) for some time. The interest was there before the events of the Arab Spring and only intensified with the revolutions of 2011. But inclusive growth has eluded the countries of the MENA region. Why? A comparison of the experience of economies successful in achieving inclusive growth during past decades with the situation in MENA points to some areas MENA could address to reverse the fate of the last three decades.

World Bank | Arne HoelThe Growth Commission report identifies and reviews the experience of 13 economies which achieved inclusive growth, defined as high and sustained economic growth that leads to poverty reduction by lifting wages and creating jobs for millions of people. Although dominated by East Asia, the sample is diverse as it includes economies from around the world, some resource rich and some not. Only one of these economies – Oman – is located in the MENA region. Successful economies grew their average per capita incomes by 5 percent or more for a period of at least 30 years, reduced unemployment, and improved job quality. The average pace of MENA’s economic growth during a similar span of time pales by comparison. The latter grew their average per capita incomes by slightly less than 3 percent during the period 1969-2008. Notably, the region’s unemployment rate has been much higher than the rates in successful economies and good quality jobs in MENA’s private sector have been scarce.  

 
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The Growth Commission report identifies some similarities among the successful cases, although it cautions that generalizations are difficult because each successful economy followed a unique development path. All countries with strong and inclusive growth record traded intensively and benefited from global economic integration. They protected macroeconomic stability, let market forces allocate resources, and achieved high saving and investment rates. Importantly, they had governments committed to strategies for job creation and high, sustainable growth and improving institutional capacity.

By contrast, trade played a relatively small role in MENA’s economic growth story. Non-oil export performance varied greatly across the region. Macroeconomic volatility and imbalances were a problem, in some countries more than others. Policy distortions prevented the efficient allocation of resources. Energy subsidies, in particular, biased production towards capital-intensive industries, while labor market distortions discouraged entry into the private sector and acquisition of skills demanded by the market. Rent seeking discouraged competition and technology upgrading, and access to finance was limited, especially for Small and Medium Enterprises. Governments chose to redistribute instead of creating conditions for inclusive growth and development. Redistribution occurred via subsidies, government sector employment and public investment. Importantly, institutions remained relatively weak with regulations applied in an uneven and preferential way. Weak rule of law discouraged private investment which remained relatively low and lowered the efficiency of public investment.


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There is no one-size-fits-all recipe for success when it comes to inclusive growth, but this comparison suggests that MENA countries will benefit from improving macroeconomic fundamentals, governance, and institutional capacity. Countries will have to remove costly distortions and other policies protecting rents, and improve incentives to trade, especially in manufacturing and services. Investments in manufacturing activities and services have much higher propensity to create jobs than investments in capital-intensive, resource-driven sectors. Such a reform agenda is ambitious and will require political vision, commitment and continuity, as well as strengthening support measures such as safety nets and training programs. Economies in the region will have to experiment and ultimately craft inclusive growth strategies that suit their unique strengths and conditions.

Comments

Hi, Nice piece. We have an invest problem in the MENA region (especially Tunisia)and your chart of public to private investment ratio show it very well! There will be no real change as long as this investment shortage is not properly addressed. We are also somewhat "stuck" competitive-wise between the developed world and east Asia. We produce things which they are not as good as those produced in Europe and not as cheep as what China, say, produces! So Either we enhance our competitiveness or we reduce our costs. Neither of these two options is obvious !

Submitted by Elena on
Thank you for your comment. I agree with your assessment about the competitiveness problems facing Tunisia, but you seem to imply that the problems would disappear if investment increases. Actually, a look at the data suggests that Tunisia did relatively well in terms of private investment in the 1990s and 2000s. Its private investment rate in both decades (private gross fixed capital formation as a share of GDP) averaged 20 percent. Of course, since the beginning of 2011 the political turbulence has resulted in a decline in private investment, but the rate is expected to pick up as the political situation stabilizes.

The blog makes the point that Tunisia and other countries in the region must remove regulations and practices that stifle competition, obstruct entry into some sectors, create a rent-seeking environment, and discourage innovation. FDI in Tunisia has averaged just 4 percent of GDP in the 2000s, but this rate could have been higher given Tunisia's potential and the performance of its export-oriented sector. This sector, however, has remained isolated from the rest of the economy. So in sum, I agree with you that Tunisia could do better in terms of certain types of investments that would enable the upgrading of the country's production facilities, improve the quality of Tunisia's exports, and the productivity of Tunisia's work force.

Best, Elena Ianchovichina

Dear Elena,

Thanks a lot for taking the time to reply to my post. I agree with all what you've said, but I wrote a small piece which you can read here:

http://tuneconomics.wordpress.com/2013/04/26/the-causes-of-unemployment-in-tunisia/

I which I plotted unemployment rate and investment to GDP ratio in the same chart and I'm truly intrigued (to say the least) by the dynamic of these two ratio.

I completely agree with you that 20-22% of investment to GDP ratio is pretty decent (I wrote it), but why we haven't witnessed a drop in the unemployment rate ? Instead unemployment kept skyrocketing!

I could be missing something, but to me this means that our current 20-22% is not enough (inefficiency problems).

I would be very thankful if you share with me you thoughts on this issue.

Best

Dear Tuneconomics:

I read your blog with interest. It poses an important question and you have provided nicely data to support part of the answer. I'd like to add just a few more points that might help with some of the evidence for the points that you've made and, hopefully, give you some additional insights.

While Tunisia's private investment rate of 20% of GDP in the 1990s and 2000s was relatively good, the overall investment rate was quite a bit lower than that of the countries in East Asia, mentioned in my blog. For example, Tunisia's gross capital formation as a share of GDP averaged 24% in the 1990s and declined slightly to about 23% in the 2000s. At the same time, the overall investment rate in East Asia increased from about 34% in 1990s to nearly 38% in the 2000s. Of course, much of this can be attributed to the high investment rate in China which averaged 41% in the 2000s. My first point is that investment rates in high growth economies have been much higher than the investment rate in Tunisia. So although Tunisia's investment rate was relatively decent, it can and should investment more going forward.

Not only was China's investment rate much higher than Tunisia's in the 2000s, but investment was much more efficient. Looking at average Incremental Capital Output Ratio (ICOR)s for the 2000s on the graphs below you see that Tunisia's investment efficiency, measured by an average ICOR of about 5, was below the average in MENA, and much below that of China, whose ICOR averaged slightly more than 3. The higher the ICOR, the less efficient a country is in its use of capital. In the graphs below, the average ICORs are computed as the ratio of the average investment rates for the period 2000-04 to average GDP growth for the period 2005-09. My second point is that Tunisia should improve investment efficiency. This is critical in a period of scarce fiscal space and macroeconomic volatility.

Figure: Investment efficiency in MENA region and comparators (average ICORs for the 2000s)
 

 

Source: World Bank (2012) Middle East and North Africa: Investing for Growth and Jobs, Economic Developments and Prospects report, based on IMF data.

More investment will generate more growth, but it may not create jobs, especially for those that finish school with secondary and tertiary education. As shown on the graph below Tunisia's employment-growth elasticity has been much lower than that of other countries in the region in the second half of the 2000s. Thus, the propensity to create jobs as the economy grows has been relatively low. Therefore, my third point is that Tunisia needs not just more investments, but investments that demand skilled labor in sectors/firms that can compete in international markets. This is a complex agenda. Policies will need to encourage high quality private investments in sectors that can utilize the skills of graduates from Tunisia's schools. Businesses will need to participate actively in setting the education agenda, and in hiring and training workers on the job. The government will need to support and facilitate exchange programs for workers with specific skills that are not in demand in Tunisia, but which are in demand abroad. Facilitating this process will provide some space for adjustment and will boost remittances, a valuable source of financing. Finally, there is a need to improve the business environment and eliminate restrictions that keep out some businesses, especially foreign companies, and encourage monopolistic practices.

In summary, Tunisia must address multiple bottlenecks in order to attract high quality investments, improve investment efficiency, and advance the job agenda.

Figure: Employment-growth elasticities for 2004-08


Source: World Bank (2012) Middle East and North Africa: Investing for Growth and Jobs, Economic Developments and Prospects report, based on ILO data.

Dear Elena,

Thanks a lot for sharing with me your thoughts about this issue and for taking the time to write such an awesome and interesting reply.

Best Regards, TunEconomist.

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