Nashashibi: Major economic problems face the Arab states; stronger reform needed
Regional, Economics, 1/6/2004

Renowned Arab economist, Karim Nashashibi, who is the ( International Monetary Fund (IMF) senior representative for the West Bank and Gaza, said highlighting the economic situation in the Arab states that to fix the change for the economic issues which are affecting the region, the first, and most important factor is the demographics.

The population growth in the Arab region is relatively high. In fact, it is higher than in most developing countries. Although it has been declining, it is still relatively high, around 2.8% a year. But what's more important is that the people who were born 15 years ago, when the population growth was higher, are coming onto the job market today; there is a huge inflow of new job seekers, and this active population, is growing at about 3.2% into the job market. So there is a very strong need to provide jobs for all entrants.

Now, by contrast, the growth of the region, specially the southern Mediterranean countries, has been lagging behind the average growth for developing countries. The annual growth of the region over the last 30 years has been about 2.8% while the developing countries have been growing more like 4%, so there has been a growing gap. Over the last five years, the eight southern Arab Mediterranean states have been growing at an average of 3%. This is less than the growth of the active population, and therefore it would result in higher unemployment. Indeed, unemployment has been increasing in the are ranging from 14.7% in 1990, to about 16.2% in 2000. The Arab Human Development report, a very good and bold UNDP study of the problems facing the region, estimates that unemployment will double by the year 2010 to about 25 million people if the same trends continue.

Consequently, the major challenge facing the region is accelerating growth to a level which not only provides job, for the new job seekers but also reduces unemployment. At a minimum average, growth needs to be sustained at five to six percent, which has been achieved by many other developing countries. In order to accelerate growth, we have to look at why has growth been lagging, with the legacy of most of these countries being one of large governments, Typically, these governments intervene in most economic activities, particularly through pricing policy. By distorting the incentive system, through subsidies, these policies have misallocated resources and discouraged investment in competitive activities, thereby lowering total factor productivity. These countries also tended to have large public enterprise sectors which were inefficiently managed, resulting in losses and in future liabilities, such as under-funded pension funds and large debts to public sector banks.

Nashashibi pointed three manifestations of this interventionalist. He said that economic policies to be inward- oriented, focusing on rent seeking activities and a protected domestic market. A major manifestation of this policy has been trade restrictiveness. The southern Mediterranean countries have been more restrictive in their trade practices than most other countries. At the IMF, there is a restrictiveness scale going from one to ten, where ten is the most restrictive, like for instance, North Korea or Cuba, and one is the most liberal such as Singapore.

However, on the average, the southern Mediterranean countries are at 7.8, which is the most restrictive region, both in terms of tariffs and non tariffs barriers. Africa is at 4.9 and Latin America is at 4.2. The other manifestation of this inward orientation legacy is that exports have become quite low. Non- oil exports of the region have been only 1% of global exports, even though the GDP is in the order of 2-3%. Another indicators of the poor export performance is very low exports per capita which is about 130 dollars. Trade restrictiveness makes it difficult for exporters to obtain inputs for their exports from the cheapest sources in the world. Without tariffs, or bureaucratic difficulties forcing exporters into a comparative disadvantage over exporters from other countries. The poor export performance can also be explained by overvalued exchange rates.

The other manifestation of this legacy is that there has been relatively low foreign direct investment. FDI has been only around 2-3% of Global FDI, and has only reached three or four countries ( Egypt, Morocco, Tunisia, Jordan). Given the favorable location of the area, and the good quality of human resources, there should be much greater FDI for them. Of course, this is also due to the political instability that has been plaguing a number of countries in the region.

The Arab human development report stressed that there was a deficit in manpower, in the sense that the manpower needed by the market does not match the manpower produced by the education system. There is also a deficit in knowledge, in terms of IT connections to the rest of the world. The southern Mediterranean countries have weak institutions and have often had autocratic governments. All these factors have contributed to lower quality governance than would have been necessary in order to have a dynamic economy, which would be fully integrated in the global economy.

Nevertheless, there has been substantial progress, particularly in the last ten years. For instance, fiscal deficits have been reduced in most countries to below 5% of GDP. Recently Lebanon introduced a VAT (Value added tax) in conjunction with technical assistance from the European Union and IMF. This is beginning to tackle its very large deficit, which is of the order of 15%. Jordan has boldly moved ahead with a pension reform, for both the civil service and the military, which is very important because under-funded pensions can be a major liability for the public sector. So fiscal deficits are being tackled. These countries have also achieved low inflation of 2-3%, almost equivalent to the inflation rates of the European Union. They have also had supplies in their external balance of payments so that their external reserves have been rising.

Some countries have also lowered their external debts through devices. Morocco has very successfully negotiated debt swaps. Jordan had its debts rescheduled with the Paris Club and Lebanon has recently received financing to reduce its debt burden, so there has been progress in terms of the whole external sector.

On the human development front, there has also been some progress. Tunisia managed to reduce its population growth to less that 1.5%, and has achieved greater gender and income equality than any other Arab state. It would be cited as an example that other Arab states may want to follow. Similarly, Morocco had a very successful transition to democratization with broad representation across the political spectrum and successful elections, but progress in democratization in other Arab states is slow.

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