Arab Strategy Forum December 4-6, Talking points: Session: Will the New Oil Boom Kill the Reform?

Transcription

1 Arab Strategy Forum December 4-6, 2006 Talking points: Session: Will the New Oil Boom Kill the Reform? MENA region is in an economic boom (put reform into context of current economy) o Without a doubt, the dramatic upswing in oil prices represents the single greatest economic shock to the MENA region in a decade. For the last four years of rising oil prices, the MENA regional economy has grown by some 6.1 percent a year 1, or about 70% higher than the region s average growth over the late 1990s (3.6%), and the highest four-year growth period for the region since the 1970s. o Oil prices have risen almost 160% 2 since The impact of this price shock on government revenues has been spectacular. Since 2002, oil revenues have tripled, from $150 billion to $450 billion. The accumulated increase in revenues to oil producers is some $667 billion or more than half of oil producers total output in o This oil boom comes at an important time in terms of reform. With two decades of anemic growth following the collapse in oil prices in the mid 1980s 4, most of the economies in MENA had initiated some program of reform to transition to more open, private-sector oriented growth. Resource poor economies like Egypt, Jordan, Morocco, and Tunisia 1 Excluding Iraq. 2 Increase in average oil price (average of Brent, Dubai, West Texas Intermediate price) between January 2002 and November Oil revenues as percent of GDP taken from September Economic Monitoring notes (for Libya, from IMF s Article IV consultation from April 2006). GDP in current $ from Unified Survey submissions/ldb (for Libya, from IMF Article IV consultation; April, 2006). 4 GDP per capita was virtually unchanged between , with both GDP growth and population growth averaging 2.6% a year over the period.

2 embarked on reform earlier (beginning in the mid-1980s), but the sustained lack of growth inspired almost all countries in MENA to, at least notionally, embrace the need for reform by Thus, the present oil boom occurs in a markedly different environment than the previous oil booms. This oil boom happens in the midst of an economic transition. What does the oil boom mean for reform? How will it affect reform momentum? o For resource poor countries in the region, the oil boom is unlikely to have negative impact on the reform movement: Twenty to thirty years ago, the economic growth outcomes in MENA s resource-poor economies were deeply linked to oil price movements. Resource-poor economies in the region received strong benefits from oil windfalls through vigorous transmission channels, especially labor remittances, official aid, and capital inflows. Although there remain positive transmission channels from oil producers to the resource-poor economies and these channels have experienced a boost under the current oil boom (particularly through rising portfolio equity inflows, foreign direct investment and intraregional tourism) the relative size of combined transmission mechanisms from oil producers to resource-poor economies in the region has declined substantially over time. In addition, with rising energy use among resource-poor economies (relative to the past oil booms), the costs of higher oil prices (with regard to oil imports and oil import subsidies) have increased for non-oil economies.

3 As an example, look to Egypt: At the peak of the 1980s oil boom, more than 20 percent of the Egyptian labor force was employed abroad, primarily in the Gulf. Today only about 7 percent work in Arab states. Labor remittances as a percent of GDP have fallen from a high of 14 percent in 1979 to 3 percent today. FDI inflows reached a peak of almost 7 percent of GDP in 1979, less than 1 percent by 2003 (now up to 4 percent) Official aid, which reached more than 19 percent of GDP in 1975, now accounts for less than 2 percent today And with rising energy use, net oil exports have declined as a share of GDP from more than 20 percent in 1980 to 3 percent today. For the resource poor countries, the need for reform remains very clear. And we have seen a continued reform effort for most of the non-oil economies: Resource poor countries in the top 30% worldwide in terms of tariff reform between , partly through EU Association agreements and other bilateral and regional trade accords. They rank in the top 40% with regard to a host of business and regulatory reforms.

4 And they have made strong progress with governance reform: ranking in the top 20% worldwide with regard to reform of the quality of administration, and in the top 40% with regard to reform of accountability mechanisms. o Among oil producers, while the inclination is that rising oil prices delay the need for reform, this does not appear to be in evidence: But the NEED for reform remains: With the labor force among oil-countries growing in excess of 3.9 percent a year 5, just keeping pace with labor force entrants requires growth averaging between 5-7 percent a year 6. Although growth has been within that range (albeit even then at the low side), as oil prices stabilize, maintaining high rates of growth will require a strong and competitive private sector, not yet in evidence throughout the oilproducing region. And the behavior among oil producers has changed substantially from the past. As a group the oil producers are maintaining impressive fiscal restraint. Expenditure growth has been restrained, and oil countries are building up liquidity through external reserves, oil stabilization funds, and paying down debt. This partly reflects lessons learned from the past oil booms. Budget balances have turned from 1% of GDP in 2002 to 13% by 2005; Current account balances turned from about 6% of GDP in 2002 to 22% by 2005; 5 Growth of combined RRLA/RRLI labor force, Assuming optimistic employment elasticities of growth between 0.6 and 0.75 (as a comparison, at the height of the East Asian miracle, the employment elasticity of growth averaged 0.5)

5 External reserves increased from 12% of good imports to 16%. But oil producers are demonstrating different pace with structural reform, partly a reflection of the way in which windfall revenues are intermediated. Among GCC countries, much of the windfall has been intermediated through the private sector. o Debt payoffs in Saudi Arabia, Qatar, Oman, Bahrain all for DOMESTIC (private) debt. Debt pay-backs in Algeria, Iran, Syria, Yemen for external debt: Doesn t enter private hands. o Ownership of the banking sector affects who has gotten the windfall credit. o Other And partly as a result, the oil-rich and labor importing economies of the GCC are far more advanced with business and regulatory reform and with trade liberalization. o They have worked almost in unison to develop trade ties and encourage greater foreign participation in their economies. o Moved aggressively to establish themselves as regional hubs for a variety of services, including financial services, trading, tourism and transport.

6 One area of reform in which oil producers as a group have backed off with the oil boom, however, has been reform of the oil subsidy systems: Iran has yet to implement its smart card bill (where car owners would be provided with smart cards, fixing the subsidized gasoline allowance and forcing drivers to pay full price when they exceed the ration), and in November, the parliament approved a bill to add $3.5 billion from reserves to this year's budget to pay for petrol imports, preventing the need to start rationing fuel until at least March In Saudi Arabia, meanwhile, the heavily subsidized domestic prices of gasoline and diesel have actually been lowered in early 2006 by nearly 30 percent, in an effort to soften the impact of the country s recent stock market declines. And equally telling, no other resource-rich economy has attempted to enact subsidy reform since the oil boom began.