Breaking the Barriers to Higher Economic Growth: Better Governance and Deeper Reforms in the Middle East and North Africa PDF
Preview Breaking the Barriers to Higher Economic Growth: Better Governance and Deeper Reforms in the Middle East and North Africa
s m r o f B e R a re er ric p f A a e e h t k D t o i d or n n N Hig g ce a and h t an t s e h n a r E e ver e E c o dl o B G d r i n a e M o r tt e r e h mic ieB n t i r G r s o w t h Mustapha Kamel Nabli Breaking the Barriers to Higher Economic Growth Breaking the Barriers to Higher Economic Growth Better Governance and Deeper Reforms in the Middle East and North Africa Mustapha Kamel Nabli © 2007 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone:202-473-1000 Internet:www.worldbank.org E-mail:[email protected] All rights reserved 2 3 4 5 11 10 09 08 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank.The findings,interpretations,and conclusions expressed in this volume do not necessarily reflect the views ofthe Executive Directors ofThe World Bank or the governments they represent. 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All other queries on rights and licenses,including subsidiary rights,should be addressed to the Office ofthe Publisher,The World Bank,1818 H Street NW,Washington,DC 20433, USA;fax:202-522-2422;e-mail:[email protected]. Cover photo:© Henk Badenhorst/iStockphoto Library ofCongress Cataloging-in-Publication Data Breaking the barriers to higher economic growth :better governance and deeper reforms in the Middle East and North Africa / Mustapha Kamel Nabli ...[et al.]. p.cm. ISBN 978-0-8213-7415-3 1. Middle East—Economic conditions. 2. Africa,North—Economic conditions. 3. Middle East—Economic policy. 4. Africa,North—Economic policy. 5. Economic development—Political aspects—Middle East.6. Economic development—Political aspects—Africa,North. 7. Macroeconomics. I.Nabli, Mustapha K. HC415.15.B74 2008 338.956—dc22 2007047530 Contents Preface vii Acknowledgments xi Part I Growth, Reform, and Governance 1 1 Long-Term Economic Development Challenges and Prospects for the Arab Countries 3 Mustapha K. Nabli 2 Reform Complementarities and Economic Growth in the Middle East and North Africa 29 Mustapha Kamel Nabli and Marie-Ange Véganzonès-Varoudakis 3 After Argentina: Was MENA Right to Be Cautious? 77 Mustapha K. Nabli 4 Restarting Arab Economic Reform 89 Mustapha K. Nabli 5 Democracy for Better Governanceand Higher Economic Growth in the MENA Region? 103 Mustapha K. Nabliand Carlos Silva-Jáuregui 6 The Political Economy of Industrial Policy in the Middle East and North Africa 135 Mustapha K. Nabli, Jennifer Keller, Claudia Nassif, and Carlos Silva-Jáuregui Part II Labor Markets And Human Capital 167 7 The Macroeconomics of Labor Market Outcomes in MENA 169 Jennifer Keller and Mustapha K. Nabli v vi Contents 8 Challenges and Opportunities for the 21st Century 203 Mustapha Nabli 9 Labor Market Reforms, Growth, and Unemployment in Labor-Exporting Countries in the Middle East and North Africa 211 Pierre-Richard Agénor, Mustapha K. Nabli, Tarik Yousef, and Henning Tarp Jensen 10 Economic Reforms and People Mobility for a More Effective EU-MED Partnership 267 Ishac Diwan, Mustapha Nabli, Adama Coulibaly, and Sara Johansson de Silva Part III Trade, Competitiveness, and Investment 297 11 Cruise Control, Shock Absorbers, and Traffic Lights 299 Mustapha K. Nabli 12 Trade, Foreign Direct Investment, and Development in the Middle East and North Africa 305 Farrukh Iqbaland Mustapha Kamel Nabli 13 Making Trade Work for Jobs 329 Dipak Dasgupta, Mustapha Kamel Nabli, Christopher Pissarides, and Aristomene Varoudakis 14 Exchange Rate Management within the Middle East and North Africa Region 355 Mustapha Nabli, Jennifer Keller, and Marie-Ange Véganzonès 15 How Does Exchange Rate Policy Affect Manufactured Exports in MENA Countries? 381 Mustapha Kamel Nabli and Marie-Ange Véganzonès-Varoudakis 16 Public Infrastructure and Private Investment in the Middle East and North Africa 399 Pierre-Richard Agénor, Mustapha K. Nabli, and Tarik M. Yousef 17 Governance, Institutions, and Private Investment 423 Ahmet Faruk Aysan, Mustapha Kamel Nabli, and Marie-Ange Véganzonès-Varoudakis Index 465 Preface The world’s attention to the countries of the Middle East and North Africa1 (MENA) region has often been dominated and held captive by headline issues. Much ofthat attention has centered on instability and uncertainty in the region, supported through coverage of both recent and long-standing conflicts. More recently intermixed with this perspective on the region is the world’s growing attention to rising oil prices,from which another picture ofthe region emerges— one of strategically well-positioned oil producing economies with rapidly expanding wealth (and influence). But little of the international coverage devoted to the region considers the broad range of development challenges facing this diverse group of countries. Providing quality jobs to a rapidly increasing labor force and reducing poverty, promoting the private sector, expanding gender equity, improving education access and quality,and effectively managing scarce water resources and finite oil wealth are only a few ofthe challenges facing the countries ofthis region.Because the MENA region’s development challenges are multiple and complex, meeting them requires ambitious and coherent policy and institutional reforms.Through knowledge sharing and policy-relevant research, the World Bank’s Middle East and North Africa region’s Office of the Chief Economist has sought over the last few years to deepen understanding of these issues and help promote effective strategies for confronting these challenges.This book presents some of the work undertaken in this context. The greatest challenge on which this book centers is that of implementing a comprehensive reform agenda to “break the barriers”to higher economic growth and create needed job opportunities.It is an agenda that requires realigning the MENA economies, to move from public sector-dominated to private sector- driven economies,from closed economies to more open economies,and from oil- dominated and volatile economies to more stable and diversified economies.The central message from this body ofwork is that deeper economic reforms are need- vii viii Preface ed to attain higher growth rates and that better governance is key in achieving the required progress on reform.In Part I of this book,we explore two major themes related to the economic reform and growth nexus.First,we attempt to understand the factors which caused the growth collapse ofthe 1980s and the failure ofreforms undertaken since then to spur a growth revival until the early 2000s.Second,we delve into the domain of the political economy of reform,in order to understand the reasons behind MENA’s slow progress with implementing economic reforms. The core of this work points to the central role that public governance has played in hindering the region’s progress with implementing the extensive reform agenda. In “Long-Term Economic Development Challenges and Prospects for the Arab Countries”I provide a broad overview ofthe development challenges in the region, examining the constraints of the old models of development and defining the set of transitions that constitute the contours of a new development model. In “Reform Complementarities and Economic Growth in the Middle East and North Africa,”(with Marie-Ange Veganzonès-Varoudakis) a quantitative analysis of the relationship between economic reforms and economic growth in the Middle East and North Africa region is undertaken,in an effort to understand whether the ane- mic growth over the 1990s was the result of insufficient economic reforms or a poor growth dividend from reform. “After Argentina: Was MENA Right to Be Cautious?” looks at Argentina’s experience with reform and its subsequent eco- nomic crisis and draws lessons for MENA on the strategic directions with respect to speed,consistency and scope ofreforms so as to avoid such crises.In “Restarting Arab Economic Reform,” the difficulties with implementing deeper economic reform are explored,and the reasons behind the stalled reform agenda in the region and ways in which to move it forward are discussed. In “Democracy for Better Governance and Higher Economic Growth in the MENA Region?”(with Carlos Silva-Jáuregui) we review the literature on the relationship between economic growth and democracy,and explore the implications for MENA,in order to under- stand whether democratic development could help or hinder a stronger economic performance in the MENA region,and under what conditions democracy leads to better governance. Finally, in “The Political Economy of Industrial Policy in the Middle East and North Africa,”(with Jennifer Keller, Claudia Nassif, and Carlos Silva-Jáuregui) the specific topic ofthe region’s experience with industrial policy is explored,to understand the political economy factors behind the persistence of a traditional model ofgovernment intervention,and to discuss the likely direction of new models of“industrial policy”in the region. A central motivation for the economic growth agenda in the MENA region is the challenge it has been facing over the last two decades—and which it will con- tinue to face over the next two decades—in terms ofjob creation.This challenge is unprecedented in the world and throughout history,with the region experiencing rates of growth of the labor force of 3–4 percent a year over several decades.The members of MENA’s labor force,of which a growing proportion are women,are better educated than their parents and increasingly aware ofeconomic opportuni- Preface ix ties worldwide,and they have greater expectations for good jobs.In Part II,the extent of this development challenge is explored, along with the links between labor market outcomes and various reforms. The first paper on “The Macroeconomics ofLabor Market Outcomes in MENA:How Growth Has Failed to Keep Pace with a Burgeoning Labor Market”(with Jennifer Keller) reviews the trends and developments in labor markets in MENA over the 1990s and analyzes the links between these disappointing outcomes and the weak economic growth experience (which is the subject of Part I) and private investment (which is the subject of Part III). In “Challenges and Opportunities for the 21st Century: Higher Education in the Middle East and North Africa,”the labor/education rela- tionship is addressed, looking at ways in which the MENA region can best improve the social and private returns from its higher education systems in an increasingly globalized world. In “Labor Market Reforms, Growth and Unemployment in Labor-Exporting Countries in the Middle East and North Africa,”(with Pierre-Richard Agénor,Henning Tarp Jensen,and Tarik Yousef) a quantitative assessment is made ofthe impact oflabor market reforms in a typi- cal labor-exporting MENA country on growth,real wages,and unemployment. Finally,in “Economic Reforms and People Mobility for a More Effective EU-MED Partnership,”(with Ishac Diwan,Adama Coulibaly,and Sara Johansson de Silva) the developments in labor markets in the Southern Mediterranean countries are linked to the potential for managed migration and people mobility with the European Union (EU),and the role it may play in supporting the reform agenda in these countries. The overall thrust of the analysis in Parts I and II points to one critical mes- sage:In order to break the barriers to higher growth and meet the employment challenge, the power of the private sector in MENA countries needs to be unleashed—through greater openness and integration with the world economy and greater competitiveness.Part III ofthe book looks in more detail at a number of issues relating to trade reform,the enhancement of competitiveness,and the growth ofprivate investment in the region.In “Cruise Control,Shock Absorbers, and Traffic Lights:The Macroeconomic Road to Arab Competitiveness,”I discuss the key macroeconomic policy elements needed for a supportive business envi- ronment in MENA,a business environment that facilitates long-term planning, promotes investment and knowledge transfer,and supports the efficient alloca- tion ofresources throughout the economy.In “Trade,Foreign Direct Investment, and Development in the Middle East and North Africa,”(with Farrukh Iqbal) we discuss how the limited progress in trade reform and weak foreign direct invest- ment,in interaction with a weak domestic investment climate,contributed to the region’s weak growth performance.In “Making Trade Work for Jobs:International Evidence and lessons for MENA,”(with Dipak Dasgupta,Christopher Pissarides, and Aristomene Varoudakis) the relationship between international trade and employment in manufacturing is examined,to analyze the prospects for stepping up employment growth in the region through trade and investment policy
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