The Financial Crisis, Recovery, and Long-Term Growth in the Middle East and North Africa

Transcription

1 22 The Financial Crisis, Recovery, and Long-Term Growth in the Middle East and North Africa Ritva Reinikka The impact of the global financial and economic crisis varied substantially among three country groupings in the Middle East and North Africa (MENA): the Gulf Cooperation Council (GCC), developing oil exporters, and oil importers. 1 Among these three groups, the GCC oil exporters were hardest hit because the crisis affected them directly through two different channels: (a) a negative terms-of-trade shock associated with the drop in oil prices; and (b) a financial shock, which destabilized overextended domestic banks and led to the bursting of a real estate bubble. Growth plummeted for this group of countries from 6 percent in 2008 to less than 1 percent in 2009 (figure 22.1). Ample reserves and repatriated funds enabled the GCC governments to respond quickly with monetary and fiscal stimuli and prevent a deeper deceleration in growth. Due to the limited integration of their banking sectors into global financial markets, developing oil exporters felt the impact of the crisis mostly through the negative oil price shock. Growth declined only slightly from 2.9 percent in 2008 to 2.2 percent in Although typically these The author would like to thank Najy Benhassine, Elena Ianchovichina, Roberto Rocha, Andrew Stone, and Tara Vishwanath whose work was drawn on for this chapter. 377

2 378 The Day after Tomorrow Figure 22.1 Real GDP Growth Rates, Middle East and North Africa percent GCC oil exporters developing oil exporters oil importers (estimate) Sources: National agencies and World Bank staff estimates for Note: GDP = gross domestic product. countries pursue procyclical fiscal policies, during this crisis some governments responded with countercyclical measures, but the extent to which they were able to do so depended on their fiscal space, reserves, and access to external financing. Strong non-oil gross domestic product (GDP) growth at nearly 5 percent in 2009 helped soften the decline in overall growth (World Bank 2010). Oil-importing MENA countries were hurt mostly by the secondary effects of the crisis on trade, remittances, and foreign direct investment (FDI). Growth, which was high before the crisis, decelerated from close to 7 percent in 2008, to a moderate pace of 4.8 percent in Key nonoil sectors such as services and tourism remained relatively resilient, while the decline in oil and other commodity prices limited the deterioration of their external balances. Stimulus packages in the Arab Republic of Egypt, Jordan, Morocco, and Tunisia also helped soften the deceleration in growth. High unemployment has been a problem in MENA for years, and the crisis has dimmed prospects for improvement in the near term. While the impact of the crisis on official unemployment rates has been negligible in most MENA countries, participation rates, which were already low compared to other countries prior to the crisis, have declined as discouraged workers dropped out of the labor force and decided not to seek work in the official labor market. In addition, aggregate labor statistics

3 The Financial Crisis, Recovery, and Long-Term Growth in the Middle East and North Africa 379 hide the negative impact on some sectors. Workers in the manufacturing sectors have been especially vulnerable during this crisis, although job losses in these sectors were offset to some extent by the job creation in the nontradable goods and services industries. Slower growth is expected to result in a decline in the rate of poverty reduction in the region. Because of the economic crisis, approximately 2.6 million more people are likely to fall into poverty in the region by 2011, with nearly half of those in Egypt (Yemtsov and Iqbal 2009). Any weakening of the rate of poverty reduction is a concern because, while absolute poverty in MENA is relatively low (about 5 percent), vulnerability is high. In 2005, 17 percent of MENA s population lived on US$2.00-a-day purchasing power parity (PPP), and a sizable share of the population lived on more than US$2.00-a-day PPP but less than US$2.50-a-day PPP. Limited survey data on household incomes and expenditures, a perennial problem in the region, makes it difficult to assess the impact of the crisis on the poor. These estimates are based on a number of assumptions and past patterns of poverty and growth. Recovering from the Crisis The Gulf countries are leading the regional recovery as oil prices have rebounded, and the GCC financial sector is stabilizing. Growth in the GCC countries is projected at 4.4 percent in 2010 a remarkable comeback. The recovery in the GCC countries is expected to have a positive impact on other MENA countries, mainly through increased flows of remittances and FDI. Although Dubai was among those countries in financial crisis, the Dubai World debt restructuring offer has contributed to greater clarity about the prospects of the United Arab Emirates (UAE). The restructuring package is partially funded through loans from Abu Dhabi to Dubai, and its adverse impact on UAE banks is cushioned by the likelihood of increased support to these banks from Abu Dhabi and federal entities. These short-term measures are helping to contain the negative impact of these events on UAE growth. Ongoing large fiscal spending by Abu Dhabi is also expected to help the recovery and support the service center approach to integration and economic development. The question remains whether growth of the private sector will pick up when the public sector starts spending less and the effects of the stimulus packages in UAE and Saudi Arabia wear off.

4 380 The Day after Tomorrow Growth of developing oil exporters is expected to accelerate to 4.2 percent in The sustainability of their recovery hinges on the evolution in the global demand for oil and oil prices. The Islamic Republic of Iran and Iraq are especially vulnerable to oil price volatility. At present, further upward pressure on oil prices is not expected due to ample spare capacity and little or no growth in oil demand in North America, Europe, and Japan. Temporary spikes, however, cannot be ruled out in response to unanticipated shocks (Samba Financial Group 2010). The recovery of oil importers in MENA will depend crucially on their key markets, especially the European Union (EU) and the GCC countries. The feeble recovery expected in the Eurozone will drag down growth in the near term, particularly the growth of those with strong links to EU markets. Growth of oil importers is expected to decelerate slightly to 4.5 percent in Trade is recovering, with export revenue of oil importers expected to grow by 7.7 percent in 2010, after contracting by 13 percent in Remittance flows are expected to grow by 1.3 percent in 2010, albeit this pace is much slower than the one observed during the precrisis years. The crisis has not led to any major reform reversals, except perhaps a slowing of food and energy subsidy reforms, which have generally been very slow to progress. Some countries have steamed ahead with the reforms started prior to the crisis. These include the financial sector reform in Egypt and trade integration in Tunisia. Fiscal policy is expected to continue to be expansionary as countries use various measures to stimulate demand and, in some cases, to stimulate the private sector. Expansionary fiscal policy is having an adverse effect on fiscal balances, however. For some countries, including Egypt, Jordan, Lebanon, and the Republic of Yemen, the fiscal space is limited and the fiscal situation risks creating an obstacle to long-term growth. Hence, a painful fiscal adjustment is in store in the coming years. But fiscal prudence alone will not be enough to return MENA to the rapid growth path that the region experienced briefly in the mid-2000s. So, what should the MENA region do to restore higher growth in the longer term? In a nutshell, the private sector will have to expand and gain new dynamism to be able to create most of the 40 million new jobs that the region needs to create in the next decade.

5 The Financial Crisis, Recovery, and Long-Term Growth in the Middle East and North Africa 381 A More Dynamic Private Sector Increased openness and liberalization over the past two decades have transformed the economies of MENA from public sector driven to ones where more than 80 percent of nonhydrocarbon value added is produced by private enterprises. This private sector growth has been fostered by investment climate reforms. For example, Egypt has ranked among the top 10 reformers four times in the past five years on the Ease of Doing Business index published by the World Bank Group, complemented with dramatic changes in taxes, tariffs, selected regulations, and several other key areas of government interaction with private investors. Jordan carried out reforms in 6 of 10 areas measured by the index, and Saudi Arabia has ascended to 13th place in the world among 183 economies evaluated. Among reforms documented by the index, Morocco established a private credit bureau to facilitate access to finance; Tunisia strengthened investor protection and reduced customs processing delays by two days on average; and the UAE sped up its building permit process by putting it online. Despite reforms and a growing role, the private sector has fallen short of transforming MENA countries into diversified, high-performing economies. Private investment rates have stagnated at around 15 percent of GDP, while dynamic regions like East Asia managed to raise private investment rates close to 30 percent or double the prevailing MENA rates. MENA s average number of registered businesses per 1,000 people is about a sixth of that in the Organisation for Economic Co-operation and Development (OECD) countries, and less than a third of that in Eastern Europe and Central Asia (World Bank 2009a). Productivity in MENA s average manufacturing firm is about half that of Turkey s manufacturers. Limited productivity is reflected in a weak export base. The most diversified countries in MENA export around 1,500 goods most of them in low-value-added sectors, compared to close to 4,000 goods in countries like Malaysia, Poland, or Turkey. Diversification is even weaker in oil-rich countries, many of which export less than 500 goods (World Bank 2009b). World Bank enterprise surveys of about 10,000 firms conducted throughout the region show that MENA has a higher average age of both

6 382 The Day after Tomorrow manufacturing firms and their managers. Firms are almost 10 years older than the average in Eastern Europe and East Asia, and managers on average are seven years older than in these two regions. This disparity occurs despite MENA having one of the youngest populations in the world. In some cases, this reflects dominant and connected firms using a privileged position to limit competition. The average MENA manufacturing firm faces close to six times fewer competitors in its domestic market compared to the average firm in Eastern Europe. Private sector performance has been subdued due to a variety of factors, critical among which are issues surrounding the quality of reforms in the region. This is captured by the low private sector investment response to past reform in the region. As shown in figure 22.2, private investment across MENA increased by a modest 2 percentage points in response to the reforms. Compare this to a private investment response to similar reforms in other regions of more than 10 percentage points in East Asia, 7 in South Asia, and 5 in Latin American economies. Evidence shows that investment response has been dampened by weak and uneven implementation of reforms and lack of enforcement by institutions whose transformation lags behind policy change. Too many would-be entrepreneurs across the region still believe that the key to success is how connected or how privileged they are instead of how creative, persistent, and competitive. World Bank enterprise surveys show that 60 percent of business managers do not think that the rules Figure 22.2 Reform Episodes and Private Investment Response, Middle East and North Africa 20 private investment (% of GDP) t 15 t 10 t 5 reform t+5 t+10 5-year time intervals Latin America South Asia East Asia MENA Source: World Bank 2009a.

7 The Financial Crisis, Recovery, and Long-Term Growth in the Middle East and North Africa 383 and regulations, as they appear on paper, are applied consistently and predictably in MENA. The same surveys also show that regulatory policy uncertainty, unfair competition practices, and corruption often appear as top constraints to businesses. The challenge is to enable a new generation of entrepreneurs to emerge, to create dynamic firms that can compete on the basis of productivity and that are efficient enough to export even advanced products to the rest of the world. It is important that this new generation sees evidence that businessfriendly policy reforms will benefit them as well and not just a minority of privileged or connected individuals. Institutions need to be reformed to implement private sector policies equitably and consistently. For a real improvement in the business environment in the region, transparency, accountability, and quality of service in public agencies interacting with firms should be at the core of reform. There are some regional examples where this has begun to occur, such as customs reform in Morocco and Tunisia and the one-stop-shop for investors in Egypt s General Authority for Investment (GAFI). More transparent and computerized processes, strong incentives for agency staff members to improve the quality of service to investors, and limiting of the points of interactions with public servants (thus limiting opportunities for discretion) have allowed GAFI to reduce delays for business registration at its Cairo offices from 34 days to 3. Streamlining also eliminated some 40 procedures. Business registration increased dramatically thereafter. To be sure, such institutional reforms will need to expand to other agencies for their impact to be felt. The private sector also has a responsibility and an important role to play within this agenda. Too often, its voice has been dominated by proponents of the status quo in order to maintain their privileges. But the world is changing. Already, a new generation of entrepreneurs is emerging in MENA. Their ability to influence the future direction of reform will be crucial. For this, the private sector needs to be better organized and more inclusive. It needs to be a stronger partner with governments in developing, implementing, and evaluating reforms. Skeptics voicing doubt that the private sector will succeed in generating needed jobs and growth are legion in the region and elsewhere, and the global financial crisis may have added to this skepticism. However, the lessons of past crises as well as the current one support the core

8 384 The Day after Tomorrow message: sustained job creation can only come from a competitive private sector, which in turn requires governments to build efficient regulatory capacity and a supportive, nondiscriminatory environment. This is doubly important because more and more educated women will join the labor market in the future. Women s Labor Force Participation The MENA region has made significant progress in reducing gender gaps in human development. The ratio of girls to boys in primary and secondary education is 0.96, which compares favorably with that in low- and middle-income countries worldwide. Women in the MENA region are more likely than men to attend university, and fertility rates have decreased in the past decade. However, as figure 22.3 reveals, this progress has not translated into improvements in economic and political inclusion. The region s female labor force participation rate of 26 percent is well below the developing country average of 39 percent. Women are severely underrepresented in politics, holding only 9 percent of the seats in parliament. Among those participating in the labor force, women face greater challenges than men in accessing employment opportunities. In most MENA countries, women experience higher unemployment rates than Figure 22.3 The Gender Gap in Middle East and North Africa percent ratio of girls to ratio of young boys in primary literate females and secondary to males education MENA females as % of total labor force low- and middle-income countries % of seats held by women in parliament Source: World Bank Central Database/Edstats (August 2009).

9 The Financial Crisis, Recovery, and Long-Term Growth in the Middle East and North Africa 385 men. Also, the World Bank s Enterprise Surveys show that women s entrepreneurship in MENA remains low compared to other regions and that while there are no significant differences in the types of firms owned by women and men, women face a more hostile business environment. In one finding, for example, female-owned firms in Egypt report needing 86 weeks on average to resolve a conflict through the legal system compared to 54 weeks for male-owned firms. The data suggest that even highly educated young women are increasingly vulnerable. To illustrate, between 1998 and 2006, the percentage of young Egyptian women having a university degree rose from 6 to 12. Strikingly, the female labor force participation rate in this age group remained near stagnant, while their rate of unemployment increased from 19 percent to 27 percent. In Jordan, 27 percent of women compared to 9 percent of men with a bachelor s degree or above are unemployed. Social and cultural factors remain pertinent to understanding female participation in the labor force. But given such barriers, decisive reforms to create job opportunities through an improved policy environment especially to propel private sector employment have the potential to make a big difference. Moreover, cultural norms are slow to change, but change they do. A compelling case in point is the United States, where views about women s work outside the home were fairly conservative even as late as the 1940s, but were transformed as women s economic participation rose (from about 20 percent in 1940 to 60 percent in 1980) due to a combination of factors such as rising education levels, campaigns to attract women to the workplace during World War II, new work opportunities for women in clerical and other women-friendly jobs, and the introduction of scheduling flexibility in the workplace. Conclusion MENA is a region endowed with considerable human capital, creativity, and resources, and its growth potential is high. Meeting that potential will require a credible commitment to reduce discretion and ensure a more equal enforcement of the rules, so that more entrepreneurs can invest in and create jobs. Job creation is indeed a burning challenge in MENA, especially because many more educated young women are entering the labor market. Deep

10 386 The Day after Tomorrow analytic work and policy experimentation are called for to identify the scope for policy reforms that would positively contribute to an increase in female labor force participation in the region. Note 1. For ease of analysis and exposition, the MENA region is divided into three main groups: the GCC oil exporters, developing oil exporters, and oil importers. The first group contains the GCC countries, namely, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates. The second group comprises the developing oil exporters such as Algeria, the Islamic Republic of Iran, Iraq, Libya, the Syrian Arab Republic, and the Republic of Yemen. Oil importers include countries with strong GCC links (Djibouti, Jordan, and Lebanon) and those with strong European Union links (the Arab Republic of Egypt, Morocco, and Tunisia). References Samba Financial Group Oil Market Outlook and Implications for GCC Economies. Samba Financial Group, Saudi Arabia. World Bank. 2009a. From Privilege to Competition: Unlocking Private-Led Growth in the Middle East and North Africa. MENA Development Report. Washington, DC: World Bank b. Strengthening China s and India s Trade and Investment Ties to the Middle East and North Africa. Orientations in Development Series. Washington, DC: World Bank Recovering from the Crisis. Middle East and North Africa Economic Update. Washington, DC: World Bank. Yemtsov, R., and F. Iqbal The Impact of the Global Economic Crisis on Poverty in MENA. Washington, DC, World Bank.