The Arab Economies in a Changing World Marcus Noland (Peter G. Peterson Institute for International Economics) Howard Pack (The Wharton School, University of Pennsylvania)
Recent accomplishments and long-term challenges Three drivers: Demographics, Globalization, Political risk, (And the price of oil: people v. petrodollars) US$ 70 60 50 40 30 20 Petroleum:Average Crude Price Permanent v. transitory Current boom may mask underlying stresses. Ongoing reform. Will it be enough? Will the future be more like the last 5 years or the last 50? 10 0 1960 1983 2006 Egypt: CASE-30 Index 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 1/10/2002 23/05/2004 25/12/2005 15/08/2007
What is the Middle East? No commonly accepted definition Our definition: Morocco to Iraq A complication: heterogeneity and choice of comparators Two subgroups: Typically endowed economies Super natural resource endowed economies Core MENA countries Periphery MENA countries
Driver I: The Demographic Challenge Lowest employment rate in the world 3.5-4% labor force growth Need to create 55-70 million jobs. Unemployment associated with education, gender Foreigners account for most hires in some countries Continued reliance on public sector in some countries; foreigners disproportionate in private sector percent 60 50 40 30 20 10 0 Bahrain Jordan Morocco Tunisia Yemen Female Labor Force Participation Egypt Lebanon Syria Palestinian Territories 1950 1960 1970 1980 1990 2000 2010* 2020**
Driver II: Globalization and employment A proven method is increasing exports of labor-intensive manufactures and services. Problematic track record Secular decline in global trade, investment shares, lagging technology absorption Recent upturn driven by oil boom Increasingly stringent global conditions Oil puts a floor under wages US$ Billion 1200 1000 800 600 400 200 0 Middle East & North Africa Manufactures Exports East Asia & Pacific Europe & Central Asia Latin America & Caribbean 1980 2005 South Asia Sub-Saharan Africa
Driver III: Political Risk: Enduring Authoritarianism 10 Average Polity Score, 2004 3.0 Average number of regime changes, 1960-2004 8 2.5 6 4 2.0 2 1.5 0 1.0-2 -4 0.5-6 MENA South Asia Sub Saharan Africa East Asia E. Europe/ Central Asia Latin America OECD Primary implications are for local residents Uncertain transitions, tendency to externalize discontent. Hard to pre-commit, easy to lose credibility heightened assessment of risk. 0.0 OECD MENA E. Europe/ Central Asia East Asia Sub Saharan Africa South Asia Latin America
Progress and discontent 200 180 160 140 120 100 80 60 40 20 Infant Mortality Rate Algeria Egypt Jordan Kuwait Morocco Saudi Arabia Syria Tunisia 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Big improvements in social indicators Yet do not score particularly highly on polling of well-being Stresses of urbanization, modernization Un- and underemployment Lack of political voice Disaffection may be particularly acute among young, educated, internetusing males
Geography, institutions, policies Constraints microeconomic, institutional in nature Big intra-regional variation in business indicators it is not Islam or Arab culture Big pay-offs to achieving local best practices Role of globalization, technology transfer, and local adaptation Starting a Business Region or Economy Procedures (number) Duration (days) Cost (% GNI per capita) Middle East & North Africa 10 39 66 Algeria 14 24 13 Egypt 7 9 29 Jordan 10 14 66 Kuwait 13 35 2 Lebanon 6 46 94 Morocco 6 12 12 Oman 9 34 4 Saudi Arabia 7 15 32 Syria 13 43 56 Tunisia 10 11 8 United Arab Emirates 11 62 37 West Bank and Gaza 12 92 280 Yemen 12 63 179
Discomfort with globalization Not anti-market, but uncomfortable with globalization on current terms Pew Responses by Country and Regional Average Close Large, Inefficient Factories Markets Globalization Tolerance Support Free Markets Growing Business Ties Good for Family Faster Communication and Travel, Good Foreign Media, Good for Family Foreign Products, Good Connected World, Good Glob. Good* MNC's Good Int'l Orgs. Good Anti-Glob. Protestors Bad Our Culture is Superior (disagree) Foreign influence (do not protect) Accept Homosexuality Middle East 34 58 63 72 63 67 69 36 50 38 49 31 25 17 Egypt 34 52 59 69 55 60 66 37 n.a. n.a. n.a. 18 11 not permitted Jordan 27 47 53 54 50 60 57 27 42 32 57 54 43 12 Lebanon 42 76 77 92 83 82 83 44 57 44 40 21 20 21 Morocco n.a. n.a. n.a. n.a. n.a. n.a. n.a. 63 n.a. n.a. n.a. n.a. n.a. n.a. Kuwait n.a. n.a. n.a. n.a. n.a. n.a. n.a. 87 n.a. n.a. n.a. n.a. n.a. n.a. Eastern Europe 42 50 75 91 81 73 87 47 55 58 38 36 29 45 Bulgaria 38 31 67 90 83 81 79 33 55 48 15 13 23 37 Czech Republic 63 62 83 95 92 88 96 69 60 70 72 45 32 83 Poland 37 44 72 90 84 70 79 38 44 50 34 35 30 40 Russia 27 45 69 85 59 77 89 31 42 42 24 31 19 22 Slovak Republic 50 51 82 94 90 65 94 65 71 74 58 47 33 68 Ukraine 38 64 78 92 80 57 87 43 55 62 23 44 34 17 Memorandum Central Europe 50 52 79 93 89 77 90 57 58 65 55 42 32 64 Note: n.a. = not available. Central Europe includes Czech Rep., Poland, and Slovak Rep. Source: Pew Global Attitudes Project (2003)
Slow to grab external anchors but this is changing Generally slow to join WTO Intra-Arab integration efforts Agreements with EU, US paradoxically more intrusive US agreements may have bigger payoffs GATT/WTO and Bretton Woods Accession Status, as of 2005 Economy GATT/WTO World Bank IMF Art. VIII Middle East Normally endowed Egypt 1970 1945 2005 Jordan 2000 1952 1995 Lebanon observer 1947 1993 Morocco 1987 1958 1993 Syria -- 1947 -- Tunisia 1990 1958 1993 Yemen observer 1969 1996 Resource-abundant Algeria observer 1963 1997 Bahrain 1995 1972 1973 Iraq observer 1945 -- Kuwait 1963 1962 1963 Libya observer 1958 2003 Oman 2000 1971 1974 Qatar 1994 1972 1973 Saudi Arabia 2005 1957 1961 UAE 1996 1972 1974
Three potential sources of supply response Local entrepreneurs Foreign investors Returnees
Local Entrepreneurs Survey evidence fragmentary Adopting plausible best practices target derived could generate substantial increases in entrepreneurship Are the skills there? Increase in Total Entrepreneurial Activity (TEA) Index implied by adopting global best practices (number of points) MENA 6.3 Egypt 6.8 Jordan 9.9 Lebanon 2.3 Latin America 4.9 Eastern Europe 5.7 Sub-Saharan Africa 0 East Asia/Pacific 1.9 South and West Asia n.a. Source: Author's calculations, Reynolds, et al. (2004)
Foreign Investors Subjective assessments of risk Relative hostility to globalization High perceived terrorist risks (Lack of) affinity and trade: Ethnicity, religion Politics Affect likelihood of PTAs? Increase in trade, FDI, and Moody's rating implied by adopting global best practices Trade FDI Moody's rating (%) (%) (notches) (odds) MENA 13 92 1.3 2:1 Egypt 11 n.a. n.a. n.a. Jordan n.a. 94 1.4 2:1 Lebanon n.a. 89 1.1 2:1 Saudi Arabia 15 n.a. n.a. n.a. Latin America 3 18 0.1 1:1 Eastern Europe 1 40 0.5 1:1 Sub-Saharan Africa 2 120 1.5 3:1 East Asia/Pacific 5 62 0.8 2:1 South and West Asia 4 130 1 3:1 Source: Author's calculations, Pew Global Attitudes Project (2003), UNCTAD (2003), Moody's (2004)
A role for diaspora/returnees? Possibly greater affinity, more nuanced assessments of risk than other foreign investors Important in Taiwan, India and others Arab-North Americans: More educated, wealthier than median North American More in managerial, professional jobs Unevenly distributed by country of origin Data less informative about Arab-Europeans Arab population in the United States by ancestry, 2000 Lebanese Egyptian Syrian Palestinian Jordanian Moroccan Iraqi "Arab" or "Arabic" Other Arab 4.2 3.6 3.5 7.3 8.9 9.6 14.5 19.7 28.8 0 5 10 15 20 25 30 35 percent Source: U.S. Census Bureau, We the People of Arab Ancestry in the United States, March 2005, Figure 1
Deep Uncertainty and Irreversible Commitments Political stasis may signal brittleness Opposition increasingly Islamist what is the economic agenda? Potential payoffs to greater democracy: Enhanced credibility on policy commitments Lower subjective assessments of risk and globalization on better terms 0.25 0.20 0.15 0.10 0.05 0.00 Hazard (Likelihood) of Experiencing a Liberalizing Transition 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 Algeria Egypt Jordan Kuwait Morocco Saudi Arabia Syria Tunisia
Conclusions: Demographic Time Bomb to Demographic Dividend? One critical question is sustainability of the oil boom. Key for the 2/3rds of Arabs who do not live in major oil exporting countries, is nexus of institutional and microeconomic issues relating to local technological capacity and links with rest of the world. If get policies right, falling dependency ratios could generate demographic bonus similar to experience of East Asia.
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