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French Version

Arab economies will not grow without political reform

Analysis - Ibrahim Akoum

Director, Office of the Director General Arab Monetary Fund Worked previously at the World Bank.

Economies throughout the world are confronting a growing challenge of coping with global changes in the technological, economic, social, and political arenas.

The world economic and financial landscape has been transforming before our eyes, particularly since the middle of the 1990s, and a new paradigm has been emerging, whose features and implications are not yet fully clear to us as its events are sill unfolding.

This new era of globalization, intensified by the information technology revolution, and characterized by economic, financial, and trade liberalization, has created mounting challenges, as well as, promising opportunities. Underdeveloped countries, in particular, including our region, have to face intense global competition as the forces of globalization take root.

Unsurprisingly, coping with the new paradigm and coming to grips with its complex nature has not been an easy task for many national policy makers throughout the globe. This is equally true for even global policy makers, namely the World Bank and the International Monetary Fund (IMF), whose opponents have intensified their ardent criticisms on the heels of the financial crises that swept most of the Asian countries in the mid 1990s.

The Bretton Woods development institutions have come under fierce fire and the so-called "Washington Consensus" has been ferociously attacked for failing to foresee and deal effectively with the consequences of the New World Order and its repercussions. Some even went as far as accusing these institutions and their policies of causing these crises, calling for their demise.

At any rate, and regardless of the extent to which the IMF and the World Bank can be considered accomplices in this matter, the fact remains that all economies, whether they like it or not, have to adapt to the emerging reality.

The Arab economies are certainly no exception and have to perform much better if we are to sustain adequate levels of economic growth, combat increasing unemployment, and raise the standards of living of people, or at least keep them from falling further, thereby averting potentially destabilizing social unrest throughout the region. As things stand, the record does not augur promising news: economic growth is low, unemployment is high, investment growth is not forthcoming, and poverty is increasing.

For instance, the Arab Labor Organization (ALO) asserts that unemployment has approached the dangerous zone in the region and estimates the unemployed to have reached 25 million people, which represents an extremely high 20 percent of the labor force, the highest in the world. The ALO reveals that the region has to create five million jobs a year and that $70 billion are to be injected in the Arab economies to help achieve that goal. On its part, the World Bank estimates that the Gross Domestic Product in the region must grow at about 7 percent annually in real terms to absorb entrants to the labor force which is forecast to increase drastically by 2025, given the relatively high population growth. Unfortunately, however, economic growth in the region is not even close to this needed figure.

As a matter of fact, real output growth rates in the region have been declining as data shows that the Middle East and North Africa region (MENA) has followed a downward pattern of growth since the mid 1960s. The region grew at an annual average of almost 8 percent during 1966-1973, compared with a sheer average of 3.2 percent during the nineties (1991-2000). The performance during the "lost decade" of the 1980s was even lower than that of the 1990s, averaging less than 3 percent. Despite the improved performance since the year 2000, growth in the region still falls short of the required levels for job creation. This unfavorable pattern of output growth was mirrored by decreasing income per capita. Compared to average growth rates of about 5 percent in the late sixties and early seventies, real income per capita hardly grew at one percent during the 1990s, and it even decreased on average during the 80s.

In addition, poverty still poses a serious problem for the region where the number of people living on less than $2 a day increased from about 59 million people to about 87 million people between 1990 and 2000, growing by nearly 47 percent, much higher than that of Sub-Saharan Africa. It is noteworthy here that failure to raise economic growth rates and create enough jobs to

both absorb the already unemployed and create new jobs for the new entrants to the labor market is a sure recipe for aggravating the poverty problem with potentially destabilizing social unrest.

It is true that many countries in the region have been implementing structural adjustment programs for years now and have managed to carry out many policy reforms in numerous area such as tax, trade, financial and investment policy, in collaboration with the IMF and the World Bank, thereby loosening their grips on economic activities and moving away from financial repression, rigid tax and trade laws, and inappropriate investment climates. Yet, these efforts have not been bold, adequate, and fast enough to generate the "critical mass" needed to jumpstart their respective economies and put them on the path of the real sustainable development process.

The reasons lying behind these halfhearted endeavors are multifaceted, the most important of which is the lack of genuine political commitment towards economic reform and the lack of effective institutional arrangements conducive to reform. This is primarily as a result of what is called "state capture," whereby the status quo is protected by those in power and who themselves set the laws and regulations. Hence, reform measures are, for the most part, adopted and implemented through a piece-meal approach merely to comply with the conditionality of the IMF and the World Bank adjustment programs or to meet the commitments negotiated as part of the accession process to the World Trade Organization. Thus, I have to emphasize here that the solution for our economic woes go way beyond the realm of economics. The lack of political and institutional reforms cast a heavy shadow on our economic future. Without profound progress on this front no tangible economic benefits are to be anticipated.

Are we doomed and is it too late to catch up with the world? I say no. Despite all these challenges and impediments, the region has the potential of registering the needed rates of economic growth provided that the ample human, natural, and financial resources available in the region are allocated efficiently and that the right policies are adopted and carried out. The most salient ingredient of these policies is introducing real and not cosmetic public sector reforms and promoting private sector development. This implies better governance and strong institutional arrangements based on the rule of law, combating corruption, and broader participation of civil society organizations.

On the economic side per se, what is urgently needed is to enact modern investment laws and investment protection regulations in order to encourage the flow of trade and investment aimed at job creation. In this regard, strengthening ties with the neighboring countries in Europe is a good step forward. Accordingly, it is imperative to take seriously current negotiations and partnerships with the European Union and the Organization for Economic Cooperation and Development (OECD) and capitalize on them for forging a mutually beneficial relationship.

For instance, the region can benefit handsomely from accelerating the MENA-OECD Investment Program, which is part of a two-pronged initiative on "Governance and Investment for Development," and the "Good Governance for Development" initiative, both aimed at strengthening ties and improving the investment environment of the Middle East and North Africa in collaboration with the OECD countries. Such an opportunity can be seized during the upcoming MENA-OECD ministerial meeting to be held this week in Jordan.

With regard to cooperation with the European Union, the region has to strive diligently to benefit from the opportunities offered by the Barcelona Process, which was launched at the Euro-Mediterranean Conference, held in Barcelona in 1995, and marked a starting point of the Euro-Mediterranean Partnership. Of particular importance are the objectives embodied in the Barcelona Declaration with regard to the economic and financial partnership and the establishment of Euro-Mediterranean free-trade area by 2010. In this context, it would be expedient to note that regional economic integration constitutes a necessity for enhancing the region's competitiveness level and for real sustainable growth. Arab economies ought to complement rather than compete with one another.

The region is at a crossroads and policy makers have to face the music before it is too late. Globalization, manifested by trade and financial liberalization, necessitates that the region makes the right pragmatic choices and departs from dogmatic approaches that do not mesh well within the new global developments. Simply, those who know how to adapt are the ones who will be winners. Those who cannot adapt are the ones who will be left with nothing but the dust thrown at them while continuously running behind the "global wagon." I only hope that the region does not lie in the latter category. Securing a better future requires much more than what is being done now.

This article reflects the views of the author and not necessarily those of the AMF.

Beirut,02 21 2006
The Daily Star
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