World Bank Report: Where the Middle East is Heading

By Colin MacKinnon

On April 18, the World Bank released a major report called Global Economic Prospects and the Developing Countries. For those of us who love the Middle East and North Africa, it's a sobering piece of work.

The main message of the document is cheery enough: the industrial countries of the world are firmly in recovery, developing countries are poised for sustained growth, and globalization—the integration of markets and the quick movement of capital from region to region, which the Bank sees as good—is the most significant feature of the world economy today.

The report in fact is remarkably and agreeably upbeat about the prospects for the world's developing countries. The report makes an exception, however, for the countries of the Middle East and North Africa. It points out that, for the most part, they have not done well economically over the last decade, and predicts that they are unlikely to do so in the foreseeable future.

In the Middle East, real per capita GDP actually fell 2 percent per year over the past 10 years.

How so? Consider. Over the last decade, growth in gross domestic product in the region averaged only 0.9 percent a year, the worst in the world. During the 1980s, regional growth in GDP was only 0.2 percent. For comparison, sub-Saharan Africa, hardly a collection of economic powerhouses, averaged 1.7 percent over the same period. For the world as a whole, the average was 3.2 percent.

This is more than disappointing. Population growth in the region was 3.2 percent in the 1980s. When population growth outpaces GDP growth, countries get poorer, which is what has happened in the Middle East. There, real per capita GDP actually fell 2 percent per year over the past 10 years. This was the worst decline in any developing region, except for the so-called "transition" economies—the countries of the former Soviet empire that are stumbling from command to market economies.

This dismal performance has numerous causes, some of them external, some not. Oil prices have stayed flat. Two disastrous Gulf wars have been fought. Civil war has broken out in places like Algeria and Yemen, and drought has afflicted Morocco.

There are internal reasons as well. The Bank—and it's surely right—cites bloated public sectors and governmental policies that hamper or at least don't foster private sector development.

Lag in Trade Integration

In addition to being slow to develop, the region lags in what economists call trade integration—how much business a country does with the outside world. Economists measure trade integration by toting up how much exports and imports have risen and then subtracting from that figure the figure for growth in output. The difference is the growth in trade integration.

In 1991-1993, for example, world trade grew 3.9 percent. World output grew 1.1 percent. The difference, 2.8 percent, was the growth in trade integration. For the Middle East and North Africa, the figure over the same period was 0.3 percent.

So both in development and integration into the global economy, the region is running well behind the rest of the world.

The political implications of this, whether for Gaza or Egypt or Algeria or elsewhere, are not pleasant.

What About the Future?

How does the Bank see the future for development in the region? The authors of the report allow their readers a bit of optimism, but only a bit. Growth, say the Bank's economists, may average better than three percent over the next 10 years, but if so, that growth will depend on three conditions, whose fulfillment is far from guaranteed: "structural change," peace, and firmer oil prices at least in the long term.

Structural change—basically a Bank term for privatization, reduction of government subsidies, and exchange-rate reform—is occurring, but it's uneven. Tunisia, Morocco, and Algeria are all moving, in different ways and at different paces, to restructure. Other countries, Egypt for example or Syria, show varying degrees of reluctance to take chances on structural change. Thus, prospects for structural change across the region are mixed.

Peace is uncertain, of course.

As for oil prices, they are currently soft and seem likely to stay that way into the near future at least. In real terms, oil prices last year were about as low as at any time since the 1973 oil shock. The Bank expects prices to increase very little in real terms this year or next. World demand will go up, true, but there's plenty of spare capacity (three million barrels a day among OPEC members alone).

Maybe by the end of the decade, says the report, real oil prices will start rising as increases in world demand bite into spare capacity and as non-OPEC production slows down.

Even this is uncertain, though. Technology is relentless and it will probably get cheaper and easier to explore for and produce oil. Furthermore, the Central Asian states and Russia may be lifting more petroleum by then. All this will tend to keep prices down. The Bank is warning oil producers to diversify their economies.

Even with restructuring, with peace, with firmer oil prices, the region's growth rate as projected by the Bank, 3.2 percent over the next 10 years, still will be the lowest in the world (again with the exception of the transition economies) and there seems to be no way around this.

Carlyle called economics the dismal science. It is. Still, Middle Eastern governments can act to ensure sustained growth. Some have done it and done it well. Good examples, according to the Bank, are Morocco and Tunisia, which are restructuring, have diversified their economies and, as the Bank puts it, "should be well placed to benefit from a favorable global economic environment."

Tunisia, in particular, looks very good. Real growth has been five percent a year over the past five years and inflation has been around three percent. Population growth is down to 1.9 percent. Literacy is high for the region, 65 percent.

The region, it seems, needs more Tunisias.

Colin MacKinnon is chief editor of the Washington-based Middle East Executive Reports.