MIDDLE EAST AND NORTH AFRICA: RECENT ECONOMIC DEVELOPMENTS AND PROSPECTS

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2 MIDDLE EAST AND NORTH AFRICA: RECENT ECONOMIC DEVELOPMENTS AND PROSPECTS Dr. Mustapha Kamel Nabli, Senior Advisor, Development Economics, (Former Chief Economist, MENA Region), World Bank Islamic Development Bank Headquarters, 6 Jumad Awwal 1429H (11 May 2008) Jeddah, Saudi Arabia

3 Disclaimer: The views expressed in this document are of the author and do not necessarily represent those of the Islamic Development Bank Group or its member countries. For enquiries about this publication, please write to: Director, Economic Policy and Statistics Department Islamic Development Bank P.O. Box 5925, Jeddah Saudi Arabia Fax: ISSN

4 CONTENTS Foreword...ii Opening Statement... iii Middle East and North Africa: Recent Economic Developments and Prospects...1 I. Recent Economic Developments...1 II. Progress on Structural Reforms...4 III. Labour Market Developments...7 IV. Recent International Turbulence and the Prospects of MENA...9 V. Conclusion...12 General Discussion...15

5 FOREWORD In 1428H, the IDB launched the Economic Lecture Series Initiative under which it invited Chief Economists of Asian Development Bank, African Development Bank and World Bank (MENA Region) to share their views on the current global challenges and outlook for the economic growth at regional level with a particular focus on IDB member countries. The lecture on Middle East and North Africa: Recent Economic Developments and Prospects by Dr. Mustapha Kamel Nabli, Senior Advisor, Development Economics, (Former Chief Economist, MENA Region), World Bank was the second lecture in which Dr. Nabli analyzed key factors and constraints for sustaining MENA region s economic growth and development. The central message of the lecture is that for MENA economies to be able to sustain their economic growth there is need for increase in the level of investment and its productivity. This requires creation of the enabling environment that will attract necessary investment and improve competitiveness. The focus of investment should be on the development of infrastructure, skills, strengthening of institutions, and promotion of regional trade and integration. The lecture is published with a view to making accessible international perspectives on current development challenges facing IDB member countries in MENA. It is hoped that the publication of the proceedings of this lecture will contribute to the debate and understanding of the challenges facing MENA. Dr. Lamine Doghri Director Economic Policy and Statistics Department ii

6 Opening Statement by Dato Dr. Syed Jaafar Aznan, Vice President (Policy) I am pleased and honoured to welcome Dr. Mustapha Kemal Nabli to the second lecture in the IDB Economic Lecture Series which is a great opportunity to enhance dialogue and understanding of the developmental challenges and prospects of our member countries in various regions of the world. On behalf of the IDB, I would like to express our sincere thanks and heartfelt appreciation to Dr. Nabli for accepting our invitation to come here and share his valuable thoughts with us. I would like to extend a very warm welcome to Dr. Nabli. Dr. Nabli is the Senior Advisor, Development Economics and former Chief Economist Middle East and North Africa Region of the World Bank Group. Between 1990 and 1995, he served as Tunisia s Minister of Economic Development and Minister of Planning and Regional Development. He also held the position of chairman of the Tunis Stock Exchange between 1988 and He is the author of several books and has published extensively in various international journals. As you are aware, two weeks ago, the IDB received a high level delegation from the World Bank led by its President, Robert Zoellick, along with a number of senior officials. Discussions with President Zoellick provided us an ideal opportunity to review the bilateral cooperation between our two institutions and discuss recent developments, including the food crises. We also discussed the Arab World Initiative, which is a new strategy for World Bank engagement in the Arab region. Distinguished Guests, Brothers and Sisters, The lecture by Dr. Nabli comes at an opportune moment. The recent surge in liquidity in the Middle East has resulted in significant amounts of capital in search of higheryield investment opportunities. However, the reality is that, overall, IDB member countries score very low when it comes to receiving FDI, especially the ones which are not endowed with natural resources. The challenge would therefore be to channel this excess liquidity in the MENA region and other member countries for economic diversification and creating employment opportunities. It is notable that over the past few years economic growth in IDB member countries has been sustained at over six percent. Despite this growth, countries in the MENA region are facing many challenges, the most important being youth unemployment which is amongst the highest in the world. According to some estimates, over 50 percent of the youth population in the region is not directly involved in economic activities. It is also estimated that over the next 10 years, with an average population iii

7 growth rate of approximately 1.9 percent, the MENA region will need to create 47 million new jobs. Additionally, many of our member countries are facing food crises, with some having experienced unrest due to soaring food prices. Oil importing member countries face unprecedented high prices both in terms of oil and food, which threatens to aggravate their internal and external balances. The key policy challenge is to strike a balance between containing inflationary pressures and ensuring progress toward poverty alleviation and sustainable economic growth. Although many of our member countries are on track to achieve the IDB 1440H Vision targets and the MDGs, a significant percentage is still lagging. A concerted effort is required, otherwise many of these Least Developed Member Countries (LDMCs) will be unable to achieve the 1440H Vision Targets and the MDGs. With Dr. Nabli s rich background and long experience, I am certain that he is going to stimulate our minds and provide useful insights into how these challenges in the global arena impact on the economic performance and prospects of our member countries specifically in the MENA region. Once again, I thank Dr. Mustapha Nabli for his kind acceptance of IDB invitation and agreeing to share his thoughts with us on the Economic Outlook and Prospects for the MENA Region. Wassalamo Alaikum Warahmatullah Wabarakatuh iv

8 MIDDLE EAST AND NORTH AFRICA: RECENT ECONOMIC DEVELOPMENTS AND PROSPECTS by Mustapha Kamel Nabli In this lecture, I would like to provide a broad picture of recent developments in the Middle East and North Africa (MENA) region but putting it in the context of a longer term perspective on what has been happening for the last 10 years or so. Four themes will be developed in this presentation. Firstly, I would like to review the recent developments and the economic performance in the MENA region, which in the World Bank terminology includes essentially all of the Arab countries except three Sub-Saharan African countries Sudan, Somalia and Mauritania and includes Iran. Secondly, I would like to link these developments to the progress in terms of economic and structural reforms. Thirdly, I would like to talk more specifically about recent developments in the labor markets because employment and unemployment are the most critical issues in this region. Finally, I will consider the recent turbulence in international markets and the prospects for the region as a whole going forward. I. RECENT ECONOMIC DEVELOPMENTS When reviewing the experience over the last ten years or so in the region three observations can be made. First, there has been strong economic growth acceleration over the last few years in the region but this growth performance has been differentiated across group of countries. The second observation is that the major driver for this growth, as you are all aware, is the increase in oil revenues. The third observation is that the source of this growth has been shifting towards domestic demand sources as compared to external demand sources. The average rate of GDP growth for the region as a whole is shown in Figure 1 by the black line and was about 3.5% per year during the late 1990s. This average rate of growth increased by 1 percentage point in the early 2000s and reached 6% over the last four years. In order to give a sense of the size of this increase we should note that over the seven-year period since 2000 the overall GDP for the region has increased in real terms by 40%, which is a significant growth performance. As can be seen from the bars in Figure 1, GDP growth varied among three different groups of countries. The first group, the Resource Poor Labor Abundant (RPLA) includes countries which don t have (relative to their overall size) significant hydrocarbon resources but have relatively large populations and Labor

9 Force. These include: Djibouti, Egypt, Jordan, Lebanon, Morocco and Tunisia. The second group is called Resource Rich Labor Abundant (RRLA) and includes countries which have significant hydrocarbon resources and at the same time have large populations and labor force. They include Algeria, Iran, Iraq, Syria and to some extent Yemen. And finally, the Resource Rich Labor Importing (RRLI), which are the Gulf countries and Libya and are rich in hydrocarbon resources but are major importers of labor. As shown in Figure 1, the pattern of growth is different for the three groups of countries. The growth of the RPLA group was around 5% during the second half of 1990s but dropped by the end of the 1990s and early 2000s. It recovered during the last few years. As can be seen from Figure 2 this is driven to a large extent by Egypt which is the biggest country in the region, as the average growth rates are weighted by GDP. Egypt went through a difficult period in but growth recovered starting But there is growth acceleration in Jordan, Djibouti and Tunisia as well. In the RRLI countries, there has been a surge in growth: it has gone from as low as 3% or less in the second half of the 1990s to about 7% in That s a huge surge in growth and is really shaping the economics of the region. In the RRLI, Qatar is always leading in terms of growth followed by the United Arab Emirates (see Figure 3). There has been a recovery for the RRLA from low growth as well, but that recovery has not been of the same type as for the GCC. It didn t continue to surge but just stayed at about 5% or less during this recent period. Figures 2 and 3 provide a sense of the variability between countries, but show that the trends are very similar within each group of countries. The same pattern can be seen more or less across countries with some variations. The second observation is that this growth was mainly driven by oil prices. But at the same time, I think that for the non-oil exporters the strong growth in the last couple of 2

10 years in Europe has helped in Maghreb and Egypt together with the domestic reforms which I will discuss shortly. That oil revenues were the main driver behind the surge in growth can be seen very clearly from Figure 4 which shows the gross oil revenue for the resource rich labor importing countries in the lower part (of the bars) and in the resource rich labor abundant on the top. Total revenues from hydrocarbons rose from 180 billion dollars in 2002 to 620 billion in It can be seen that the growth in revenues is really driven by the oil price. However, a less known fact is that in most countries of the region be it in the Gulf, Syria, Yemen or Iran, oil production has started declining in 2007 (See figure 5). This huge increase in oil revenue has led to increases in public expenditures, stimulating demand and investment. This meant that domestic demand was the main driver for growth. Gross domestic investment has become the prime source of growth increasing its contribution to GDP growth from 1.3 points in to 6.1 points of growth in Private consumption increased its contribution from 1.7 in to reach 2.5 points in On the hand the contribution of net exports became strongly negative with the significant increase in imports and the slow real growth of exports. The large revenues from hydrocarbons allowed the oil-exporting countries to accumulate large positive fiscal and current account balances. Fiscal surpluses in 3

11 the resource rich labor importing countries remain large. They are in the order of 23% of the GDP with Kuwait having the largest surpluses followed by the UAE and Saudi Arabia. Fiscal balances remain strong on average in the resource rich labor abundant countries as well but with a lot of variation across countries, with Algeria and Iran as extreme cases. Algeria has been able to maintain significant fiscal surpluses but Iran has been spending all of the revenue and more. Current account balances increased significantly and remain very large in the Gulf countries, but are much lower in the labor abundant resourcerich countries. But again current account balances vary significantly between Algeria where it is very high and Iran where it is much lower (See Figure 7). Resource poor countries continue to have large fiscal deficits, driven by Egypt with a high negative balance, despite improvements by 1 percentage point per year. However in other countries the fiscal situation is better even though it has worsened in 2007 (See Figure 8). II. PROGRESS ON STRUCTURAL REFORMS The next point I would like to emphasize is that while the results in terms of growth have been driven to a large extent by the surge in oil revenues the improvements in the fundamentals and structures of the economies have played a role as well. A lot of reforms are being implemented with varying degrees of success across countries as well as across areas of reforms. The World Bank has been monitoring systematically three areas of reforms over the recent period: (i) trade policy, (ii) business environment, and (iii) governance indicators. Trade Reforms In terms of trade policy, tariff rates remain very high in MENA compared to anywhere else in the world. However, during the last 10 years, tariff reforms have been very active. Figure 9 shows the ranking of the countries in percentile terms, with the 4

12 higher the number the higher the rank of the country in the percentile distribution. For example, Egypt is at 95 percentile, which means that it is among the five percent strongest reformers in the world in trade policy over the last seven years. It can be seen from this chart that most of the countries are in the top 50th percentile with Egypt, Jordan and Lebanon at the highest. The reforms in Egypt in 2004 as well as in 2007 have driven tariff rates from 17% to 6% on average which makes Egypt rank so high. There have been reforms in Yemen and Saudi Arabia in terms of reducing tariffs across the board over time over the last 7 years. But, when we look at the level of protection in 2007 both in terms of tariffs and non-tariff barriers, it remains very high in MENA countries (See Figure 10). They are still in lower the 50 th percentile among developing countries. The big factor is non-tariff barriers, which remain a big factor in terms of protection in the region. Business Environment From Table 1, we can see that in terms of the current level of quality of their regulatory environment MENA countries are on average at the 44 th percentile, i.e below the average. The resource poor and resource-rich labor abundant countries are even lower at th percentile. The Gulf countries on the other hand, which is very interesting to observe, do have a business environment which is among of the best 30% in the world (70 th percentile). In terms of business and regulatory reforms, MENA countries did not achieve much progress compared to the rest of the world as can be seen from the last column of Table 1. The Resource Rich Labor Abundant are reforming the least, (they are in the 17 th percentile), while the resource poor are achieving some progress doing some reforms but with a weak momentum and they remain, as before, below the average. The resource rich and labor importing countries are also reforming as well but clearly, 5

13 they don t have much scope for improvement because they are already doing quiet well. The big lesson here is that you have three types of countries, behaving in different ways in the region: the Gulf countries which seem to be reforming, improving their trade policies and business environment, starting from a good base; the resource poor countries which are starting from a low base but making good progress; and the resource rich labor abundant countries starting from a low base and doing less well in terms of efforts to reform. Governance Country/region Table 1. Business and regulatory reforms Current business environment 2007 a Reform progress, b Algeria Djibouti 11 Egypt, Arab Republic of Iran, Islamic Republic of 21 1 Iraq 37 Jordan Kuwait Lebanon 42 3 Morocco 31 17* Oman Saudi Arabia Syria Arab Republic 23 8* Tunisia United Arab Emirates 54 6 West Bank and Gaza 33 Yemen, Republic of Regional averages (unweighted) MENA Resource poor Resource rich, labour abundant Resource rich, labour importing East Asia Pacific Europe Central Asia Latin America Caribbean High Income OECD South Asia Sub-Saharan Africa World The governance dimension is broken down into two components: quality of public administration and public accountability. Table 2 shows the index for the quality of public administration. We observe that MENA countries remain on average in the 6

14 Country/region Regional averages (un-weighted) Table 2. Quality of Public Administration (Percentile rank) Quality of administration index current status 2007 (Percentile rank) Quality of administration reform index MENA Resource poor Resource rich, labour abundant Resource rich, labour importing East Asia Pacific Europe Central Asia Latin America Caribbean High Income OECD South Asia Sub-Saharan Africa World middle of the distribution both in terms of level and reform efforts over the last 7 or 8 years. The resource poor countries are ranked at the 61th percentile in terms of level of quality of public administration and made significant progress improving it as well. While the resource rich and labor importing show a lower ranking on average than the resource poor this is explained by Libya which ranks very low. GCC countries have a higher level of quality of public administration and have done quite well in terms of reforms. But again we observe the same behavior of the Resource Rich Labor Abundant countries that have both a low level of quality of public administration and have been making less progress as well. On the public sector accountability mechanisms the region shows surprisingly stronger reform efforts (Figure 11). Because on average the MENA countries are in the 20% lower part of the distribution of countries, it is easy in principle to improve rankings. Gulf countries are doing quite well in terms of improving public sector accountability. There are many reforms taking place which differ from country to country and from a group of countries to the other. III. LABOR MARKET DEVELOPMENTS One of the major results of the observed growth over the recent period has been an improvement in the labor markets. There are two main points to make about these developments in labor markets. First, the surge in growth from 3.5 to 6% has boosted significantly the rate of job creation in the region. High growth led to high strong employment creation, declining unemployment rates, at the same time when there has 7

15 been huge, strong labor force growth to which increased labor force participation by women has been a major contributor. Second, this improvement has been mostly quantitative, and serious problems are found in terms of the quality of jobs that have been created. Figure 12 shows a set of summary indicators of the labor markets for the period for a group of 12 countries for which data are available. The first column shows that during this period the working age population (WAP), i.e. the population which is of working age of 15 to 65 years, increased at an annual rate of 2.8%. The growth rate of the Labor Force (LF), i.e. the people who are coming into the labor market looking for jobs, was 3.6% per year. This rate is very large by historical standards of the world, developing or developed. This has never happened for a long period of time. During the period of the East Asia miracle in the 70s and 80s, GDP growth was partly due to a large increase in the labor force which was only 2% per year, and that was considered a huge increase because of the demographic transition. Now here we are talking about 3.6% on average in MENA, and even higher rates in some countries. No other region has faced such a big challenge of labor force growth as MENA is facing today. The number of jobs created in MENA has been growing by 4.5% per year, which means that more are jobs was created than workers entering the labor force. This clearly led to a decline in unemployment rates While the number of jobs created was increasing at 4.5% per year, GDP growth was 5.1% per year on average in the group of 12 countries (which is less than the average for all of MENA of 6%). This means that the decline in unemployment is accompanied by low productivity growth of 0.6% per year only. Unemployment declined from more than 14% in 2000 to less than 11% in 2005, and probably even less in 2006 and This took place at the same time that the region is experiencing the crest of labor force growth path. The falling unemployment trend is found almost every where, especially in the large countries, whether it is in Egypt, Iran, Morocco, or Saudi Arabia 8

16 (See Figure 13). The few exceptions where the unemployment rate has increased are Kuwait, UAE, Jordan somewhat, and the West Bank and Gaza for obvious reasons that we will not discuss today. For these countries, the unemployment rates are increasing at the same time as the employment rates are increasing. This is due to the fact that they were importing labor and that many of the jobs created were being filled by immigrant labor. This was the case even for Jordan. One notable feature of this experience is that the jobs created are of low quality as aggregate numbers show they are mostly in the services and agriculture where productivity remains low (See Figure 14). They are created in the private sector, while very few jobs are created in the public sector except for Jordan (See Figure 15). Algeria is seen as a special case here, with a category of work at home showing large employment gains. Algeria at the highest had an unemployment rate of about 30% by the end of 90s, which declined to 15% or may be less. Most of these are low quality jobs like work at home jobs, which are of low productivity. The challenge and the dilemma of this growth experience is that the region is creating a lot of jobs in terms of quantity but which are of low quality. The question is whether we are facing a trade off between having either lot of jobs of lower quality or few jobs of higher quality? This is an interesting question which is not well understood. My own view on this is that under some circumstances you might be faced with this trade-off but it is not inevitable. We have seen cases in history where countries have been able to create large numbers of good quality jobs, but for this to happen many things need to take place in terms of the nature of the investments, firms, innovation, and technological change and so on. It is possible but not easy. IV. RECENT INTERNATIONAL TURBULENCE AND THE PROSPECTS OF MENA The future development prospects of MENA will be shaped essentially by two factors: (i) the external economic environment; and (ii) the domestic reforms. The 9

17 international environment has of late become turbulent with financial stress, financial crisis, food crisis and so on. The analysis concerning this aspect is going to be more qualitative and speculative. So far, the impact on MENA of the global financial turbulence has been quite limited. To illustrate, looking at the stock markets, for instance, one can see that the stock markets of the countries of the region seem to be more or less disconnected from what is happening in the other emerging markets or in the developed countries (See Figure 16). Whether it is Egypt, Morocco or even the GCC, they have been insulated to a large extent from the turbulence in the international financial markets. It is not clear whether there is significant exposure of the banking system in the region, and especially the Gulf countries to the sub-prime crisis and how this may have direct effects on the economies of the region. There may be some exposure through some of the banks which may be in possession of some of this paper, but it doesn t seem to be a significant one. The expectation is that it is not going to have direct affects through the financial market channels. It may have an impact through other channels, for example through the oil price or through exports of goods and services. But there does not seem to be a big risk through the contagion effects in the financial markets. The main channel clearly is going to be the oil price. The oil price keeps going up reaching by now $125, or more. At $ the oil price is at the level it was in 1979 in real terms. So when we are talking about high oil price at $100 or $105, it is actually back to a level it reached by the end of 70s. The expectation is that oil prices might still go up a bit but they will eventually soften and come down. However, substantial uncertainties remain about the price of oil. In terms of economic growth, the World Bank s projection is that it will slowdown in 2008 and then recover by 2009 globally as well as in the high income countries, while for developing countries growth rates will remain higher than 6% on average. This means that overall the global environment is going to be fairly favorable to the MENA countries, and we don t see major disruptions which will have a big negative impact on the region. 10

18 Overall the international outlook remains favorable over next few years and probably for next decade or so. The prospects are going to depend mainly on what the countries themselves are going to do, and whether they will take advantage or waste this opportunity. My view here is that it is going to vary across group of countries. The Resource Rich Labor Abundant countries have been slow in certain aspects of reforms and do not see major changes in terms of the momentum of reforms and transformations of their economies. This means that that for most of them it will be a wasted opportunity. On the other hand, I see that Resource Poor countries are going steadier in terms of reforms, sometimes slow, but sometimes strong. Their prospects will continue to be improving on average. These prospects will be underpinned by two developments: first is the emergence of private sector investment as a strong force, and second their deeper integration into of the global economy. Figure 18 is interesting because it shows that for the resource poor countries which are shown with the yellow line, the share of private investment to total GDP has picked up since It increased by at least 3 points in a few years from about 11% of GDP to about 13-14% now. But this share of private investment in GDP remains low. Worldwide experience shows that successful countries have a private investment rate of about 20% to 25%. The MENA countries continue to under-perform compared to the successful private sector driven economies. The two countries with the strongest improvement recently are Morocco and Egypt where we have seen a strong pick-up in private investments over the last few years. The resource rich labor abundant countries have improved as well but they don t seem to be doing as well as the others. The GCC show a stronger private investment growth ( the pink line) and a higher rate compared to the other groups of countries. Another related indicator is Foreign Direct Investment (FDI) which shows a big surge for the resource poor countries where it reached more than 8% of GDP. A significant part of this FDI is intra-regional (See Figure 19). But even in the Resource Rich Countries FDI levels as a ratio of GDP have been increasing. This is good news as it means that private investment is trying to move around and take opportunities. 11

19 Domestic reforms are also producing results in terms of the integration in the global economy. Here I will use a few countries as examples to illustrate. Taking exports of goods and services as a ratio of GDP over the last 7-8 years, we see that Egypt experienced a very strong pick up in exports (See Figure 20). The country saw a decline in the 1990s up to the early 2000s in terms of exports, especially of manufacturing exports as a ratio of GDP. This has been reversed and the ratio has been increasing over the last 2-3 years. Non-oil exports have been increasing by the order of 30-35% per year in dollar terms in Egypt recently. We observe a similar trend in Morocco and Tunisia. This dynamism means that there is a possibility of extracting more GDP growth and getting more productivity growth from greater integration in the world economy. Finally, in the GCC, we are likely to see continuation of strong reform efforts, more continued dynamism and strong growth. But these countries will continue to face the challenges of diversification of their economies; the investment of the large accumulated financial wealth; and how to invest it domestically or globally as well as the issue of management of the macro economy in terms of the exchange rates and inflation. V. CONCLUSION Broadly speaking, my message is that the development outcomes under-pinned by oil and improvements in the basic structures of the economies are positive. They are strong in the Gulf, good in the Resource Poor Countries, less than promising in the Resource Rich Labor Abundant Countries. But for all of these countries their major challenges remain. In this lecture, I didn t have time to talk about a number of other important issues or challenges such as: (i) food prices and inflation which is becoming a serious problem throughout; (ii) energy subsidies which is the most serious issue that faces most of the countries of the region; (iii) the challenge of innovation and transformation of the structures of the economies and how to create the higher productivity growth needed to under-pin better quality jobs; (iv) environmental and climate change issues, with the region being the most or one of the impacted by the climate change in the world in terms of weather, rainfall, rising sea levels, water availability etc.; and (v) the education system reforms which are at the core of creating better jobs and high productivity growth. But my final word is that the region has the means to address these challenges but it needs two things: act with determination and take advantage of more collaboration and integration. 12

20 GENERAL DISCUSSION 13

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22 The lecture by Dr. Mustapha Kamel Nabli, Senior Advisor, Development Economics, (Former Chief Economist, MENA Region), World Bank was followed by a general discussion in which the participants showed a great enthusiasm and asked many questions. These questions were related to productivity growth, differences in the growth between rich and poor countries, competitive advantages of the MENA region, brain-drain, global competitiveness ranking of MENA countries, food crisis, linking of development aid to economic reforms, sovereign wealth funds, and economic integration in the MENA region. Some of these questions were cross-cutting. The questions raised and their responses are given below: 1. What do you think is the biggest contributing factor or impetus to productivity growth in the region? Innovation is mainly what drives productivity growth. It s producing higher value products in a better way. Another source of productivity growth is taking advantage of the economies of scale. Overall productivity growth is all about going through transformations, innovations, and making sure that the education and skills of the work force are of better quality in order to be more productive and more effective. Now the big debate in development economics has been whether exposure to international competition is a source and a driver for productivity growth, i.e. through competition in the international markets, access to technology, access to new methods of production, access to new products, and so on. That s why I did focus here on the trade agenda, because firms are induced to be more productive when they are exposed to international markets. There is also a need to have educational systems which can produce the labor force that has the skills and the abilities to be employed with high productivity in these firms. That is the combination which is the secret of development. 2. To what extent has the growth of the region been lopsided in the rich and the poor countries? What challenge will this create in the future? You compared the price of oil in real terms today with that in 1979 which was an exceptional year. In 1979 the price of oil jumped from $11 to $34, because of the revolution in Iran and the cut in oil production from almost $2 million barrels per day to 200,000 barrel per day. On the last point, you are absolutely right; it was not my intention to say that 1979 price was an equilibrium or a long-term trend price. What I was trying to say was that today when we talk about the price of oil at $100 per barrel, it looks like a big number, but we have seen it in the past and that the price can be higher or lower than that. In terms of the composition of growth, there are differences between the three groups of countries. When you look at the resource poor countries, broadly speaking, there has been significant growth in their exports which was not driven mainly by nontradables. In the resource rich countries, that s probably not the case. We know that the growth in Algeria, for examples, has been driven by construction. A significant source of this growth is coming from the non-tradables. Thus the challenge for these 15

23 countries, be it GCC or others, is diversification, because you cannot have high quality jobs with construction as the main driver of your growth. You have got to get into either high quality services or high quality jobs in manufacturing or something of that nature. I think this is probably the biggest challenge. Earlier I said that the main challenges are innovation and structured transformation as the basis for productivity growth. What is it that you can do when you are an oil rich country? For example, Libya wants to reform, they want to have a market economy etc. They want to be managing oil revenue through cash transfers and do all kind of things which are really difficult to handle. Economic diversification and creation of good quality jobs is difficult in a country which does not have large oil revenues. But if you have large oil revenues, you have a few things which make your life more difficult. You will have an exchange rate which will be higher than the case where you don t have the oil revenue. It means that you need to be even more productive in order to be competitive in the international markets. You use oil revenue typically through the government expenditures which tends towards non-tradables. You are tempted by large projects, such as construction roads, ports, airports, and all kinds of things which are biased towards non-tradables. Another thing that happens, for example, in Gulf countries, is that transfers are made through the government budget to the population in the form of higher wages. High wages are given to people employed in the public sector, which have no relationship to productivity. This creates reservation wages in the economy, which are very high compared to what is needed for competitiveness in international markets. What happens is that either you have the imported labor which allows you to be more competitive in the tradables or you are not competitive at all. This prevents you from diversifying your economy. It tends to distort your incentives in the educational systems, because the population will tend to acquire educational skills which allow them to get public sector jobs. They would not acquire the skills which allow them to go into the private sector, and be productive. These distortions in the economy make it very difficult to be innovative and to achieve the structured transformations that are needed to grow and create good jobs. It takes a lot of efforts and it is not easy at all. I think that s an area where institutions like the World Bank or the Islamic Development Bank, or research in general has not given attention in order to give good policy advice on those issues. 3. What are the competitive advantages of the MENA region? When you talked about quality of jobs created, you did not mention anything about quality of education offered in the region. What is the relationship between the jobs offered and the education acquired by the young labor force? For many countries the oil and hydrocarbon resources are the main competitive advantages so you have to take advantage of these. What are the other advantages? Geographical location in many ways is one of them. The region has the advantage of being close to the biggest market in the world, which is Europe, and the biggest 16

24 growing market in the world which is Asia. So you are between Europe and Asia. This is a very important location which can be used. The third advantage is the acquisition of education. One of the big achievements of this region has been in terms of education. The average number of years of schooling has increased the most in this region over the last 40 years, more than anywhere else in the world. The accumulation of number of years of schooling has been astounding. How can you use these advantages? That s the challenge and it differs from country to country. Saudi Arabia, for example, is different from Morocco, and Algeria is different from Libya. Eventually every country has competitive advantages, the issue is how to use and develop them. The second thing that we have learnt is that competitive advantage is not static - it is dynamic. It is you who create your competitive advantages. It is not something that is given to you and you cannot do anything about it. You can change things, you can change your competitive advantage. Dubai for example, started from a very simple geographical advantage, the port of Dubai, which is a very specific geographical phenomenon. It built around it and continued from there. It became a known international sea transportation hub and then moved to air transportation. The Dubai international airport has nothing to do with Dubai port, but it started with Dubai port first then continued to build on that and transformed. The same thing happened in Singapore and Hong Kong. Competitive advantage leads us to the issue of education. The biggest puzzle of the MENA region is that lots of education has been accumulated in terms of quantity, but the return to this education has been very small and weak. We didn t take advantage of this education because the types of jobs and activities that have been created are not in coherence with it. So you keep producing jobs which don t require those skills. For instance, you employ labor in the public sector with low productivity or in construction where high school students end up working without skills. When you do analysis at the micro-level, all the data shows that the rates of return on education are very low in MENA, in general, and especially for females. The region has invested heavily in education but with low returns. It is not that there are no skills; it is the mismatch between the skills provided by the educational system and the kind of jobs that have been created. Now, some would argue and for good reasons that the problem is that the quality of education is not adequate for these jobs. Yes, it is absolutely so. We are seeing that in Morocco, Egypt, and some other countries, the complaint in businesses is that they don t find the skills that they need. There are lots of educated youngsters looking for jobs, but firms complain that they don t find the skills that they need. Thus there is a big problem in reforming the education system to make it more consistent with the emerging structures of the economies and demand for skills. That is one of the biggest challenges. 17

25 4. What will be the long run effects of brain-drain in North Africa? We should start by asking what is the problem and what is the cause of this problem? Is it that young people just want to leave their countries, or their countries are not giving them the opportunities? We can complain about brain-drain, we can complain that our best minds are going away, but why is this happening? Is it just because they don t love their countries? The point is that these young people are not finding the jobs, opportunities and the environment that allows them to use their skills, their minds, and their talent, and so they go and look wherever they find these. In a way it is not a problem that these people are leaving because they look for opportunities to be more productive than at home. The question is what do you need to do to induce them to stay and be productive and help their countries thrive. This takes us back to all the agenda I was talking about in terms of reforms and the quality of education. This is not theoretical; I have seen over the last few years a country where this reverse migration has started to take place. When Morocco started to provide good jobs for its skilled migrants, they started to come back. I have also seen financial market specialists from the region, from Morocco, Egypt, Jordan, and Algeria, going to Dubai because they are offered good opportunities. It is not that they are going to London or Paris, because they don t want to work at home. It is because the opportunities given to them in their home countries are not good. One can make the argument from the economic and efficiency points of view. I think if the opportunities they are given in their countries are not good it is better that they go out and use their skills and talent somewhere where they will be more productive and they might benefit their countries even more. The concept of brain drain has to be taken with lots of care because it does not necessarily mean that when somebody who is educated at home and goes abroad to work is a loss to the country. There are some studies on brain-drain which show net benefits to the home country. For example, an Egyptian physicist or financial sector expert may earn 100 Pounds, in his country, but when he goes to the US, he earns equivalent to 1,000 Pounds, thus multiplying his earning by 10 times. Now, if he remits 150 Pounds to his country, the country is better off. So initially, you think that there is a brain-drain, but overall there is no brain-drain because the brain which has moved is producing more and the country is benefiting more from that migration. It is not always the case but it is true. The fact that a person with some skills moves from his country of origin to another country is not necessarily a loss. The question is whether you can have that person stay in his country and earn 1,000 Pounds or slightly less to account for the cost of migration. The issue is how you can create opportunities for your population, for young people, young women, and men of your countries, who are educated and cannot get good jobs. If you do that, it means you have succeeded and there will be no brain drain. 18

26 5. The MENA region is very important for the IDB member countries as a whole as it contributes more than 60% of the overall GDP and has sustained growth during the last 5-6 years, with significant increase in per capita income. When we see the MENA region in terms of global competitiveness we hardly find any improvement. In fact, the global competitiveness rankings of many MENA countries have deteriorated in the recent years. What are your comments on this issue? Also, what do you feel about the prospects of intra-regional trade and investment among MENA countries? You can use different indicators to assess the performance of a country. You can use the World Economic Forum Competitiveness index or other indices, but I prefer to look at a country s share in global market to see if it is losing or gaining. However, I would not apply this to oil, because oil is really a different market. If you look at tourism, transportation or manufacturing, it is true that, with few exceptions, you don t see gains in the market share. But, at the same time, there are no big losses in market shares either. When you look at the major countries, which are on the global markets such as Egypt, Morocco, Tunisia, and Jordan, to some extent there is no big trend either way no big loss, no big gain. The fact that there is no big loss is already a good news because we are living in a world where competition from China and India has become extremely strong. So if you can keep your market share, that is good enough to start with. Of course, you want to improve on it, but that s a good start in this period when competition has never been so fierce. What is even better is that I am starting to see some niche in the market for products where there are actually gains in market shares. Let me give you a few examples. In Tunisia, during the last few years there has been a huge increase in exports of auto parts. It is a new economic activity and now Tunisia accounts for about 10% of the global supply of traded auto parts. We have seen the growth in Morocco in terms of aviation parts and where new products are being developed and exported. Although there is no big diversification here, some dynamism is emerging. 6. The definition of MENA region used by the World Bank is not the same as in the case of IDB. Is the World Bank considering a revision of this definition to include countries that are members of the Arab League? How accurate is it to think of this region as an economic block? How do you predict the growth in MENA if we exclude the growth coming from oil revenues? The definition of MENA region has historical reasons and it was in response to some countries preferring to be part of this grouping. For example, it is not clear if Mauritania wants to be part of MENA region or Sub-Saharan Africa. Djibouti was in Sub-Saharan Africa and it preferred to be a part of MENA region. These things happen partly as a response to the preference of the countries. Turkey does not want to be a part of MENA, it wants to be part of Europe. So which country belongs to which group is the result of a complex process. It is not clear whether at some point the World Bank will change the groupings of its regions. I am not aware of any plan to change it. 19

27 Regarding the question concerning the MENA region as an economic block, I don t think I ever mentioned it as an economic bloc in the sense of a well integrated regional grouping. It is not, compared to Europe or even other groupings, because barriers to trade and movement of people and capital are still pervasive and very strong. Non-tariff barriers are still very high, and in some cases there is more discrimination between countries of the region than between them and Europe. On the question of growth, I would say that it is not due to high price of oil. It is growth in real terms, which is not reflecting the increase in oil price. Whether the high growth in GCC countries means more (economic) power or not is a different story. But still, the change in the economy of the region, which was about $600 billion ten years ago to about $1,500 billion, makes a big difference in the global economy. 7. How much of the food crisis is a real crisis or how much is it due to price speculation? I think there is a consensus that food crisis is not due to speculation only. The driving forces of this increase in prices are essentially three. The first one is energy prices. The cost of producing food has gone up, especially the cost of producing wheat and corn in the US which is a major supplier. The second is on the demand side. The size of middle class is broadening and the demand for food, particularly meat which requires more grains for its production, is putting pressure on the demand for grains. The third factor is the diversion in the utilization of land from the production of wheat to corn which is used in ethanol production. The debate is what are the relative shares of each one of these three causes? Different people give different weights to these three factors. Some people at the World Bank have argued that about 75% of the increase is due to the diversion to ethanol and 25% to the cost push and very little due to China, India and the increase in demand. Others dispute that, but there is no doubt that the significant chunk is due to the energy policy, especially of the US and the EU. The fact is that subsidizing ethanol production has given incentives to use more food to produce energy and therefore reducing the food supply. This fundamental problem has been compounded by two things. The first is the measures taken by some countries to restrict exports. If countries like India or Vietnam decide not to export rice anymore, it reduces the supply in the market and then speculation comes in which drives the market to go crazy. The second factor which has been advanced is the speculation in financial markets, but we really don t know how important this is. With the sub-prime and the financial market crisis, there has been a switch by investors towards commodities. And by investing in commodities they can push demand and therefore create artificial increases in prices. This has been advanced as an argument but nobody is able to say how important this is and how much it accounts for the increase in prices. The fundamental factors are the energy prices and the diversion of food to energy products which is going to stay with us for some time because we don t see the US or EU changing drastically their energy policy on this. 20