Can Middle East States Choose Prosperity? The World Bank Thinks So

By Colin MacKinnon

The World Bank has just done a stunning report* on the economic future of the Middle East and North Africa. The report, timed for the Amman summit, will surely stimulate discussion (at least) in the region and, the bank obviously hopes, action.

Think about this: from 1960 to 1985 says the report, the Middle East and North Africa (the MENA countries) outperformed all other regions in the world economically except East Asia. Infant mortality was cut in half, life expectancy rose by more than 10 years, primary school enrollment went from 61 percent in 1965 to 98 percent in 1988, and adult literacy went from 34 percent in 1970 to 53 percent in 1990.

Poverty decreased during the same period. By 1990 only 5 or 6 percent of the region's population lived on less than $1 a day—compared with 15 percent in East Asia, 29 percent in Latin America, and 50 percent or worse in sub-Saharan Africa.

In short, MENA's accomplishments during the '60s and '70s were a fine performance, one that's even more impressive when you think that those accomplishments occurred during war, revolution, and all the strains of decolonization.

Now think of this: from the middle 1980s to now in the same MENA countries, real per capita GDP fell 2 percent a year, the worst performance in any developing region.

Furthermore, and almost unbelievably, the report shows that the MENA countries are less integrated with the outside world today than they were 30 years ago. By "integration" the bank essentially means the degree of trade links a country has with the outside world. The bank measures integration by adding a country's exports and imports and dividing by its GDP. The resulting index is supposed to show how connected a country is economically with the outside world. MENA's index rose from 0.64 in 1970 to about 0.8 in 1981, then dropped to about 0.5 in 1992. This even though communications are better today than anyone could have imagined in 1970.

More gloom: MENA export earnings are declining, with oil prices likely to stay flat. Regional interest and dividend earnings are down because of depleted foreign reserves (especially in the GCC states in the aftermath of the Gulf war). Food imports are growing. Public and private financing requirements as a proportion of GDP are the highest of any developing region and private capital isn't coming in the needed quantities. Obviously none of this is good.

What on earth happened? Why did a region that had done so well in the '60s and '70s fall into such a hole in the '80s and stay there? And what's to be done?

Oil Boom, Easy Times

Back in the '60s, the world, at least in some ways, was an easier place. Oil prices were high, the world economy buoyant, industrialization was a straightforward process (site a factory where it belongs and turn out the widgets), and markets less competitive.

At the same time, a lot of MENA countries, almost all of them ex-colonies, adopted "statist" policies, using the state to play a modernizing role. Governments took control over investment and production, promoted mass education, and provided large public health programs. They nationalized foreign investments, protected domestic industry (much of it state-owned), and subsidized basic goods like bread and basic services like electricity and water. Growth was fast and distribution of new wealth fairly equal.

The bank economists who wrote the report, though, attribute the successes of that era not to statist policies but to oil income and the investment it allowed and they're probably right. But oil income, as noted, is down now and likely to stay down.

So is investment, at least under current circumstances. As the report puts it, across the region "the investment regime is not seductive."

No, it isn't. Attorneys and businessmen who operate in the MENA region will tell you it's one of the hardest in the world in which to do business.

In Morocco it takes as many as 20 separate documents to register a business and the process may drag on for six months (in Washington, DC, which does not enjoy a reputation for bureaucratic efficiency, you can register a business in 45 minutes, though you have an overnight wait to get your documents back).

Business disputes in the MENA countries can take years to resolve (one fabulous case in Saudi Arabia—I'm not kidding—took 10 years). According to one study, 30 percent of an entrepreneur's time in Egypt is spent resolving problems with regulatory compliance. In Jordan, legislation intended to facilitate investment actually adds three months to a year to the application process. In Lebanon, clearing customs can require as many as 18 separate signatures.

Thus the regional business regime. There are local variations but the general story is the same.

There are other serious problems. Productivity has fallen (it's risen in Asia, the OECD countries, and Latin America). And even as MENA governments have been investing in education, there's been a low "completion rate." That is, too many students drop out of their courses—and among graduates there's been high unemployment.

The bank's prescriptions for investment will be hard to sell.

So what to do? The bank says MENA countries can choose to be prosperous. What the bank means is that MENA countries can, if they wish, adopt policies to get their countries out of the hole they're in and get them moving again.

Four measures are necessary, says the bank. Governments have to promote non-oil exports (carpets, pistachios, textiles, refrigerators, whatever); the private sector has to be made more efficient (there's plenty of room there); workers have to be trained up—made more skilled and flexible; and poverty has to be reduced, the mechanism for this being faster growth.

The bank's prescription includes liberalizing trade, providing clear, simple, credible rules for investors, and protection for what are called intellectual property rights (that is, patents, trademarks and copyrights). The bank suggests privatization of state-owned and quasi-state-owned enterprises. And the bank urges MENA states to join the World Trade Organization. Members of the WTO have to adopt a wide range of liberal trade policies and the organization has mechanisms that help solve business disputes. Perhaps just as importantly, membership in the WTO is a signal of seriousness, and credibility is a key to reform.

The bank's prescriptions, which would indeed be "seductive" for investment, will be hard to sell. Local companies that have benefitted from protectionism, subsidies, and cheap credit won't buy the bank's program easily. Middle classes that are used to subsidized commodities and well-paying public-sector jobs won't want to see their privileges eroded. And the poor, whether in cities or in rural areas, will be hard hit if governments can't get safety nets in place (regionally, the record isn't good). Governments—properly—are terrified of urban poor being further impoverished by rising prices.

Nevertheless, pressures for reform are building. Jobs for 47 million new entrants into the job market will have to be found by 2010 (the labor force is growing at 3.3 percent a year). The poor and the unemployed outnumber the workers in protected jobs. (In Egypt the under-dollar-a-day poor total 3.2 million, the unemployed 1.7 million; but only 1 million workers have protected jobs in public enterprises.) Regional governments really will have to address their problems.

How fast they do it is anybody's guess, but the bank's new report, well researched and well laid out, should contribute to the process.

*Claiming the Future: Choosing Prosperity in the Middle East and North Africa, The World Bank, Washington, DC, 1995.

Colin MacKinnon is chief editor of the Washinton, DC-based Middle East Executive Reports.