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Authors: Marcus Noland and Howard Pack
Publisher: Peterson Institute for Int'l Economics, 2007
Most of us are all too aware of the economic boom in some areas of the Middle East . The growth of the UAE, the economic might of Saudi Arabia , and the competitive posturing of Qatar and Bahrain are common themes of daily business reports from the region.
But what the daily reports don't tell us is that the economic performance of the broader region has been middling over the past four decades. |
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Overall the Middle East has performed worse than East Asia , better than sub-Saharan Africa and about the same as Latin America and South Asia . It is to examine the causes of this lackluster economic performance that the Peterson Institute for International Economics published The Arab Economies in a Changing World earlier this year.
The book
The Authors
The authors of the book, Marcus Noland and Howard Pack , are senior and visiting fellows respectively at the Peterson Institute for International Economics. Mr. Noland (PhD, Johns Hopkins University ) has been associated with the Institute since 1985. Mr. Pack (PhD, MIT) is a professor of Business and Public Policy, Economics, and Management at the Wharton School of the University of Pennsylvania .
The Publisher The Peterson Institute for International Economics (formerly the Institute for International Economics) is a private, non-profit, and nonpartisan think tank focused on international economics, based in Washington , DC . It was founded by C. Fred Bergsten in 1981. The Institute's focuses on the following areas:
• Debt and Development
• Globalization
• International Finance/Macroeconomics
• International Trade and Investment
• US Economic Policy
Why the book was published
The book was published earlier this year (April 2007) to address a range of issues faced by the Arab economies from Morocco in the west to Iraq in the east. These issues - from terrorism to political instability and global competitiveness - are all linked to the most pressing problem for the region as a whole - "how to successfully employ a large cohort of young people reaching working age." Due to constraints on data availability eight countries are used for the study. These are:
• Algeria
• Egypt
• Jordan
• Kuwait
• Morocco
• Saudi Arabia
• Syria
• Tunisia
The book examines the historical performance of the Arab economies as well as their future prospects especially in the light of the challenges they face. It also takes into account that while economic issues can be understood in conventional terms it's the particular social and political sensitivities of the region that present challenges for those addressing them.
Major issues
The Demographic Imperative
According to statistics, the labor force in Arab economies will grow at a rate of 3 percent per annum or more for the next 15 years. Compounding the problem is the already low wage growth combined with high unemployment rates and the poor prospects for educated workers.Some of the jobs needed to employ this growing labor force could be created if the economies of the region were to focus on creating more labor-intensive jobs with a focus on exports. This was the basic solution used by the East Asian economies in the 1960s and 1970s. But this type of fix may not be a viable option given the stiff competition by many countries including China , India , and some Latin American and Eastern European transition economies. These countries are largely dominant in the area of manufacturing low-cost, high quality, technologically sophisticated exports.
Oil
While on the surface the presence of oil may seem like a blessing in reality oil-related economies have generated limited requirements for labor and have kept economies from diversifying into other income producing lines of business. In addition, the industrial experience of Arab countries is very limited. According to the authors, in the early 1960s the per capita income of " Egypt , South Korea , and Taiwan were virtually identical, but the latter two quickly pulled ahead leaving Egypt a generation behind". In 1980 Asian countries already had achieved more than eight times the level of Egypt 's export of manufactured goods. Although Egypt has a population greater than South Korea and Taiwan combined, "the Asian countries export more manufactures in two days than Egypt does in an entire year". The manufacturing sector in Arab countries actually lags behind that of sub-Saharan Africa .
Financial Market Development
If the region lags behind in manufacturing then how is it doing in terms of its financial sector? This is a key issue in spurring investment and a multi-faceted expansion of the private sector. According to the authors a country's financial sector helps in identifying projects, monitoring management, pooling risk, and the development of secondary markets through which projects can be freed of dependence on a small number of investors.The authors cite an IMF study done in 2003 which concluded that while the MENA region's financial sector development trails tat of the OECD it is above most other developing countries. The region's financial sectors are now on the up tick with the countries of the GCC taking leaps to bring a new sophistication to their local financial markets.
Cross Border Economic Integration
One way to enhance participation in the international market is to leverage preferential trade agreements.
The authors point out that while this may make economic sense the region has historically been ambivalent toward integrating with the outside world. While all Arab countries are members of the Bretton Woods institutions (the World Bank and the IMF) almost half of the Arab countries are not members of the World Trade Organization (WTO).
What's kept some from joining?
According to the authors there are a number of factors. Oil producers such as Algeria , Iraq , and Libya have little incentive to join since no country imposes tariffs on oil. Small oil producers have joined in order to shield themselves against the moves of their larger counterparts and to tie themselves to the fortune of the larger players. Other issues have also factored into the consideration of WTO membership.
In Saudi Arabia 's case there were concerns that WTO rules might clash with Islamic injunctions on food, financial services, and other areas. Negotiations began in 1990 culminating in Saudi Arabia joining the WTO in 2005. |
Country |
WTO Membership Status |
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Egypt |
1970 |
Jordan |
2000 |
Lebanon |
Observer |
Morocco |
1987 |
Syria |
- |
Tunisia |
1990 |
Yemen |
Observer |
Algeria |
Observer |
Bahrain |
1995 |
Iraq |
Observer |
Kuwait |
1963 |
Libya |
Observer |
Oman |
2000 |
Qatar |
1994 |
Saudi Arabia |
2005 |
United Arab Emirates |
1996 |
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Overall the authors conclude that Arab countries are progressing steadily in their integration to the international market through preferential trade agreement. Role of Islam/culture
Noland and Pack open their discussion on the role of religious affiliation to growth by saying, "Despite some assertions, Islam has not been inconsistent with growth in the Middle East nor in other areas - witness the spectacular performance of Indonesia and Malaysia between 1970 and the onset of the East Asian crisis in 1997."
In the context of the Middle East they say, "few in the region would consider Islam. an obstacle to development." If anything it could be the opposite. At the same time however, the authors point out that ". other cultural or historical experiences may have affected the development of local institutions or conditioned local attitudes on a wide range of issues that could indirectly affect economic performance." This is extremely important in considering the legacy of colonialism in the region as well as the tense geo-political environment in the region. Conclusion
Ultimately, Noland and Pack conclude that if the region successfully employs the large cohort of people that are to enter the labor force it can reap a potential "demographic dividend". These people will be entering their most productive years and could contribute to the region's growth in the same way that East Asia reaped its "demographic dividend" over the past four decades. But there are many variables that stand in the way including political liberalization, cross-border economic integration, economic efficiency, and the will to tackle the challenges that the region faces.
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