State's Wayne sees economic growth potential in middle east
Regional-USA, Economics, 5/19/2005

Given the proper economic environment, the wealth of human and productive resources in the countries of the Middle East and North Africa could generate dramatic economic growth over the next decade, according to US Assistant Secretary of State E. Anthony Wayne.

"Countries can achieve sustainable economic growth fastest by accessing all development resources.Ê This means harnessing the power of the private sector, increasing intraregional and international trade and attracting private investment flows," Wayne told regional business leaders at a trade and investment conference in Amman, Jordan, May 18.

He said that countries achieve their greatest economic potential when governments provide their people with political and economic freedom.Ê He also told the business leaders that they have the ability to work as agents of reform, both in terms of economic issues and social issues such as education, women's empowerment and civic participation.

Wayne praised those leaders of the region who have recognized the need for economic reforms and begun to implement legal and regulatory changes, but he said more must be done in order to produce the kind of growth that will be necessary to absorb the growing labor force.

He said the private sector should be the primary engine of economic growth, but he noted that private sector investment, as a proportion of total economic investment in the Middle East and North Africa, is little more than half of what it is in North America, Europe and East Asia.

He also observed that the region is starved for investment.Ê He said that the Middle East and North Africa receive about 1 percent of foreign direct investment (FDI) flows in the world.Ê In addition, he said the people of the region are not investing locally.

"Sustainable economic growth will only occur when Arab money starts investing more seriously in Arab enterprise.Ê FDI is important but equally important is 'Arab Direct Investment,'" he said.

Wayne said the governments of the region must create a more attractive environment for investment by ensuring legal and regulatory transparency, enforcing the rule of law, protecting property rights, strengthening the financial sector, and privatizing inefficient public enterprises.

The State Department official also spoke about the power of trade to build cooperation between countries, strengthen the rule of law and encourage peaceful conflict resolution.Ê He noted that countries with high trade-to-GDP [gross domestic product] ratios grow three to five times faster than countries with limited trade.Ê He said the countries of the Middle East and North Africa should revise their customs procedures and lower their tariff and nontariff trade barriers in order to promote greater intraregional and international trade.

"Governments in the BMENA [broader Middle East and North Africa] region increasingly understand the challenges that lie ahead, and want to respond to the thirst for opportunity that now characterizes the region," Wayne said.

Following is the text of Wayne's remarks:

Thank you, David, for your introduction.Ê I also want to thank the Government of Jordan, the Export-Import Bank of the United States the Overseas Private Investment Corporation, and the U.S. Trade and Development Agency for inviting me to speak to this remarkable group of people you have brought together.Ê The leaders of the G-8 and countries of the Broader Middle East and North Africa (BMENA) launched the Partnership for Progress and a Common Future -- a blueprint for how the G-8 could support indigenous calls for reform -- nearly a year ago.Ê This conference is exactly the kind of event that these heads of government envisioned taking place, where leaders of government, business and the financial sector come together and address head-on the challenges that face the region today.Ê

These challenges reach across economic, political and educational boundaries.Ê This complexity can be hard to grapple with, and it can be tempting to segment our discussions in venues like this and look only at those issues we traditionally address.Ê But leaders in the region recognize that they must consider the challenges of reform in a comprehensive way, and that the overarching need in the region is to create opportunities -- especially for the fast-growing youth population Ð opportunities that engender a sense of a better tomorrow.Ê

From Afghanistan, through Iraq, to the West Bank and Gaza, President Bush has set promoting freedom and democracy as our top priority.Ê The United States and our partners around the world recognize that victory in the war against terrorism can only be finally achieved if we address the underlying causes of strife and conflict.Ê When people are free to express their economic and political interests, they seek resolution of differences through peaceful means, not through destruction and terror.Ê Working to build stable, free and prosperous countries from Morocco to Pakistan is not only the right policy, but the only way to replace frustration with hope.Ê

Governments have a critical role in providing their citizens the political and economic freedom to achieve a more prosperous and rewarding future.Ê The World Bank just released its fourth annual report on governance, "Governance Matters," which stated unequivocally that good governance leads to higher standards of living and poverty alleviation.Ê It is a point worth stressing: providing citizens with the ability to voice their concerns, making governments accountable to the people, reducing corruption and improving the regulatory environment lead to economic growth.

In his speech at the National Endowment for Democracy on the Broader Middle East last November, President Bush stated, "As we watch and encourage reforms in the region, we are mindful that modernization is not the same as Westernization... There are, however, essential principles common to every successful society, in every culture."Ê One such principle is that, when governments provide economic and political space for individuals to express themselves, individuals and societies achieve much more of their potential.Ê

This is how economic and political reform are inherently linked, both reinforcing one another.Ê Political freedom leads to exchanges of ideas that can spark economic growth, while engaging in commerce across borders forges new understandings and mutual incentives to seek consensus.Ê In both cases, a government that provides the space for these interactions is essential to unleashing the potential of their country and its citizens.

It is individuals, in the form of the private business sector, who form the main engines of economic growth.Ê Business leaders know better than any of us about the challenges and opportunities of doing business in the region.Ê It was this sentiment that was at the heart of the creation of the BMENA Business Dialogue at the Sea Island Summit.Ê The Business Dialogue is intended to be a forum where businesses from the region and the G-8 inform their governments of impediments to economic growth and the reforms needed to address them.Ê

Business can act as a reforming agent for many segments of society and on key social issues -- such as education, women's empowerment and civil society participation.Ê The business dialogue will feed into several of BMENA activities this year, including the Education Ministerial taking place in several days.Ê We are extremely fortunate to have some of the best business minds from the G-8 and the BMENA region here at this conference.Ê The discussions that happen here can be translated into real progress in the form of increased business transaction on the ground.

Reform Has Momentum

We are beginning to see strong signs of political and economic change:

Iraqi voices have been heard with three crucial steps in Iraq's democratic reform process Ð the January 30 elections, the creation of the Iraqi Transitional Government cabinet, and the establishment of the Constitutional Commission;

á Egypt has reduced tariff rates, accelerated the pace of privatization, introduced legislation that would slash personal and corporate income tax rates, and increased exchange rate flexibility Ð exactly the kinds of policies needed to attract foreign investors encourage domestic entrepreneurs and boost growth;

á Syrian troops have departed Lebanon, and the United States is working closely with the UN and the European Union to help the Lebanese people conduct free and fair parliamentary elections beginning later this month; and

á Free Trade Agreements between the U.S. and Morocco, Bahrain and Jordan respond to those governments' commitment to the privatization of state-owned enterprises, efforts to increase the transparency of government decision-making, and the liberalization of trade policies.Ê The U.S. is also working with Saudi Arabia in support of its bid for WTO accession; and

á The U.S. and Pakistan have just concluded the second round of negotiations for a Bilateral Investment Treaty (BIT).Ê A robust BIT would improve investors' rights, decrease investor uncertainty, and enhance Pakistan's investment climate;

á Here in Jordan an ambitious reform program is well underway aimed at creating a sure foundation for long-term prosperity.Ê Jordan's strong growth in GDP and exports show the result.

These and other changes present real opportunities for businesses.Ê The region is filled with potential, and you should get in on the ground floor.Ê Business leaders among us know that they will ultimately engage in business in the region because they see strong economic opportunity.Ê As reforms take hold, these opportunities will develop even further.Ê

The United States, along with its G-8 partners and the countries of the region, is working to make sure that happens.Ê Since the launch of the Sea Island BMENA initiatives nearly a year ago, the G-8 and BMENA countries have together taken some important steps toward a freer, more prosperous region:

á The first Forum for the Future in Rabat, Morocco last December successfully brought together Foreign and Finance Ministers from 27 countries in the region and the G-8 to discuss reform efforts.Ê Finance Ministers met again this past April, and there are meetings of the Foreign and Finance Ministers taking place this fall.

á The Business and Civil Society Dialogues made presentations to Ministers at the Forum, and at the preparatory meeting in New York last September.Ê The Dialogues' insights and recommendations were some of the most compelling of the meetings;

á We are well on our way to providing 250,000 young people with hands-on entrepreneurial training, as called for in the Plan of Support, through establishment of entrepreneurship centers in Bahrain and Morocco;

á The private sector led Investment Task Force will be launched just two days from now, and will work closely with the MENA-OECD Investment Initiative to develop clear recommendations for improving investment policy in the region and to track the progress of reforms;

á At the beginning of next week, BMENA and G-8 Ministers of Education will meet to discuss the critical issue of improving the quality of education so it is relevant to the needs of modern economies and democratic societies;

The strong representation of the export credit and other trade investment agencies here today demonstrates the commitment of the G8 to this partnership toward a freer, more prosperous region.Ê Building on the reforms that are taking hold, these trade and investment agencies can help to build a bridge to a common future and act as a catalyst for further reform and private sector financing.Ê

Challenges Remain

This is an ideal moment to gather for this kind of discussion, because the momentum for change is critical, and yet many challenges remain.Ê The World Bank's latest governance report shows the overall governance environment has deteriorated across the BMENA region between 2000 and 2004 -- including business and regulatory reform, public accountability and control of corruption.Ê While the region's real GDP growth averaged a solid 5.7 percent over the last two years, much of this growth is attributable to external factors such as historically high oil prices.Ê

Deep structural reforms, improvements in the region's educational systems, and continued progress on political reform are all necessary for strong, sustainable growth.Ê The private sector should be the main driver of the economy, and the continued dominance of inefficient state owned enterprises and politically directed lending hinder this.Ê In addition to creative entrepreneurs, businesses need skilled and educated workers.Ê Improving education and training through improved curricula that preserves cultural and national identity is needed.Ê Freedom of association and truly open elections will allow for a vibrant exchange of ideas that can help governments provide opportunities commensurate with rising expectations.

Growth is the Key

Strong economic growth and the employment it generates remain the single greatest challenge in the BMENA region.Ê As representatives of the BMENA Business Dialogue compellingly presented to Foreign and Finance Ministers in September last year, the "time bomb of unemployment is a reality that calls for the region's political, business, economic and community leaders to work together nationally, regionally and globally to overcome it."Ê Simply to maintain current unemployment levels of nearly 14 percent, 100 million jobs will have to be created in the next twelve years.Ê To do so, the World Bank estimates that sustained economic growth rates of 6 to 7 percent will be needed.Ê

This is daunting task, but the BMENA region has a great volume and quality of resources on which to draw; not least of which is the untapped entrepreneurial spirit of its own citizenry.Ê This energy has a transformational effect over economies and societies.Ê As Deputy Secretary of State Zoellick has pointed out, those individuals "who develop the practice of controlling their own economic destiny soon desire a voice in their communities and their broader societies."Ê

After more than fifty years of working to help developing countries around the world achieve greater prosperity, the United States believes strongly that countries can achieve sustainable economic growth fastest by accessing all development resources.Ê This means harnessing the power of the private sector, increasing intra-regional and international trade and attracting private investment flows.

Private Sector

It is generally known and accepted that the private sector is the most effective engine for economic growth and job creation.Ê Right now, the private sector accounts for 40-45 percent of all investment in the region, compared to 85 percent in OECD member countries and 75 percent in East Asia.Ê On the World Bank's Doing Business indicators, the region ranks second to last in the category of "Starting a Business," with by far the highest overall capital requirements to start a new business.Ê

Many governments in the region recognize the importance of tackling these impediments to growth.Ê Establishment of "one-stop shops" for business registration and simplification of procedures has greatly speeded registration in many countries.Ê Egypt, for example, reports that it has cut the time to register a business to three days.

Investment

Investment is the lifeblood of business, and creating the right environment for investment to flow in is essential to building a thriving private sector.Ê According to international business leaders, unclear, onerous, and arbitrary regulations are the biggest impediments to investment in the BMENA region.Ê Historically, Foreign Direct Investment (FDI) and domestic investment is low in the BMENA region: with five percent of the world's population, the region gets less than 1% of FDI.Ê More Arab money is invested outside the region than within.Ê

Sustainable economic growth will only occur when Arab money starts investing more seriously in Arab enterprise.Ê FDI is important but equally important is "Arab Direct Investment."Ê However, there are some fundamental preconditions to creating the right climate for investment that BMENA countries still need to address:

á Increased legal and regulatory transparency, and greater government and business accountability;

á StrengtheningÊ the rule of law, especially protection of property, enforcement of judgments, and bankruptcy procedures;

á Strengthening the financial sector through privatization, competition and better regulation;

á Revitalizing the strong pace of privatization of state-owned enterprises that has slowed in recent years; and

á Focusing on creating an attractive investment climate overall - not on providing special incentives to individual projects.

With the dynamic culture of entrepreneurship that thrives in the BMENA region, there is no reason that reforms would not lead to much higher investment levels.Ê

The United States is working to support the region in these efforts.Ê For example, within the OECD and G-8 we have linked the OECD's regional investment and governance reform initiative to the BMENA Investment Task Force.Ê This provides the region's business leaders another forum in which to advise their governments of critical reforms.Ê

Trade

Increased international and intra-regional trade are also essential for expanded prosperity in the Middle East.Ê There are few economic activities that have equal power to integrate societies, build cooperation between nations, strengthen the rule of law and encourage peaceful resolution of conflicts.Ê President Bush just declared May 15 - 21 World Trade Week in the United States.Ê In launching that event he said "Free and fair trade creates jobs, raises living standards, and lowers pricesÉIt also strengthens our relationships with other countries, helping us to forge new partnerships based on a commitment to generate new prosperity and a better way of lifeÉ"

The BMENA region has a great deal of human and productive capacity that, if tapped, could rapidly increase trade within the region and with the rest of the world.Ê The World Bank estimates that realizing even only half of the region's trade and investment potential in the next ten years would increase GDP per capita by three percent per year.Ê More broadly, the World Bank has found that developing countries with the highest trade to GDP ratios grow three to five times faster than their counterparts that do not engage actively in trade.Ê

There are a number of ways the region can work rapidly to increase trade:

á More predictable, standard, and harmonized customs procedures governing cross-border trade transactions facilitate greater economic growth, increase foreign investment, and stimulate exports. Customs administrations also play a key role in ensuring the security and integrity of borders. We welcome information on efforts that you have undertaken in the interest of facilitating trade and improving the customs environment.Ê

á Tariff and non-tariff barriers remain higher in the BMENA region than in other similar economies.Ê Average tariffs remain at seventeen percent and non-tariff levels at thirteen percent.Ê This restrictiveness stifles trade.

á Accession to the World Trade Organization (WTO) is an enormously powerful process, creating a clear framework for reform and providing assistance to undertake the work.Ê WTO trade facilitation negotiations, launched in August 2004, can ensure that potential economic gains by developed and developing country Members through work in the Doha Development Agenda are not diminished by a lack of transparency, or undue delays in customs procedures.ÊÊÊ

The United States is working to support greater trade with the Middle East region through the Middle East Free Trade Area (MEFTA).Ê MEFTA offers a framework for openness, trade integration, and economic development for the Middle East.Ê The U.S. Government is working with countries of the Middle East through a series of graduated steps tailored to their individual level of development to help ignite expansion.Ê

The United States also provides trade capacity assistance to the countries of the Broader Middle East.Ê Our Middle East Partnership Initiative (MEPI) programs were instrumental in helping Morocco meet its Free Trade Areas (FTA) obligations, and in helping Bahrain to close its FTA negotiations in less than six months.Ê Through MEPI, the USG is working with other countries in the BMENA region committed to economic reform to help prepare their trade and investment regime for eventual FTA discussions.

The Work Must Continue

Governments in the BMENA region increasingly understand the challenges that lie ahead, and want to respond to the thirst for opportunity that now characterizes the region.ÊÊ The process of reform can be slow, but should always be urged forward.Ê The changes needed to create more political and economic space for individuals to succeed in the BMENA countries are not always easy.Ê The U.S. stands with our G-8 colleagues and the international community to support the region's efforts to make those reforms.

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