A special report prepared exclusively for The Middle East Online by international economic analyst Moin Siddiqi, a London, UK based independent economist and researcher specialising in the Middle Eastern & African economies.
Challenges ahead for MENA economies in transition
Unlike the rich GCC oil producers, the countries in transition do not have the hydrocarbon wealth of the rich GCC oil producers to fall back on.
Now into the fifth year of The Arab Spring, the Middle East and North Africa (MENA) region, especially the Arab Countries in Transition (ACTs) are still gripped by fundamental weaknesses in their respective economies – reflected in higher unemployment, poor living conditions, and unequal access to opportunities, which serves to increase socio-economic imbalances and incite frustration and growing dissatisfaction in the region.
The ACTs refers to countries that have undergone regime change such as Egypt, Libya, Tunisia, and Yemen and those that have engaged in transformation under existing regimes like Jordan and Morocco, which have progressed along transitional paths.
Managing transition and implementing reform agendas has proved extremely difficult in all these countries and core structural deficiencies in economic frameworks and institutions have yet to be addressed. There is relative isolation from the global economy and fragmentation as a region due to high barriers to trade and monopolistic markets.
The MENA region holds a negligible 1% of global market share in nonfuel exports – compared to 10% and 4%, respectively, in East Asia and South America according to the International Monetary Fund (IMF). Not surprisingly, such isolation amidst increased globalisation has meant slower modernisation, limited transfer of technology, and, ultimately, eroded competitiveness and productivity of regional companies. Hence, the region’s exports remain far below their potential because of low trade integration with the rest of the world.
The legacy of ‘State Development Models’ of the 1960s and 1970s is still dominant in various forms within the ACTs. Large/inefficient public enterprises and bloated civil services stifled the growth of private businesses. More important, the authorities fail to provide adequate public services despite their sizeable budgets. According to the United Nations Development Programme’s index of “multi-dimensional poverty,” well over a third of the people in these countries lacked access to healthcare, education, and other basic services such as sanitation, clean water, and electricity – lagging most other regions. In contrast, 26% of people in developing Asia and about 8% in South America lacked these basic services.
Burdensome business regulation (i.e. red tape) has hindered private sector led growth and encouraged corruption; state-owned enterprises and public banks – enjoying near-monopolistic powers in their sectors – have tended to operate inefficiently, leading to fiscal slippages and capital misallocation; and a lack of a level playing field between public and private enterprises, has limited competition and innovation. Moreover, access to bank finances is among the lowest in the world, constraining private investment. For example, less than 4% of the region’s population was able to obtain a loan from a financial institution in 2010. This was less than half of global average and comparable only to low-income sub-Saharan African countries.
Problems including corruption have dogged development
Red tape, weak institutional capacity and rampant corruption are retarding growth and development. Poor allocation of scarce public money coupled with inadequate social protection for vulnerable groups in society. As in most of MENA countries, generalised price subsidies constitute a kind of social contract between the authority and the people. These subsidies, however, do not always benefit the needy; for example, in Egypt in 2008 the poorest 4% of the population received only 3% of gasoline subsidies. In many other countries, the share of public resources devoted to subsidies was among the highest in the world, which prevented more productive uses, such as investment in education and healthcare – thus left the poor vulnerable.
Commentaries that could easily apply to most countries without exception of the MENA that are not explicitly named in this report; for instance Algeria for starters especially in view of its territory size, population weight and GDP command, etc.
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