Economic Development in the Middle East and North Africa Region - Essay Example

Name: Tutor: Course: Date: Economic Growth and Development in the Middle East and North Africa (MENA) Region The MENA region has experienced slow and uneven economic development. The aim of this essay is to discuss the main factors that affect economic growth and development of the countries in this region (Bahrain, Algeria, Jordan, Israel, Iran, Kuwait, Djibouti, Syria, West Bank and Gaza, Egypt, Iraq, Yemen, the United Arab Emirates, Qatar, Morocco, Libya, Lebanon, Saudi Arabia, Tunisia, Oman and Malta (The World Bank, “Middle East & North Africa”). According to The World Bank website, the MENA region’s economic destiny over much of the of last 25 years has been shaped largely by two factors – the economic policies and structures developed by these countries, which emphasise a leading role of the state, and the price of oil. Therefore, to a large extent this paper will highlight the key economic growth determinants and discuss how the economic policies and structures of the MENA countries affect economic growth and development. The determinants of economic growth fall into a number of categories: macroeconomic instability; role of government; openness of trade and volatility of terms of trade; quality of institutions; and finally, demographics (International Monetary Fund (IMF) n. pag.). To start with, macroeconomic instability, which refers to the factors that make a country’s domestic macroeconomic environment less predictable (The World Bank, Economic Growth 93), is frequently mentioned as a major cause of poor growth (IMF n. pag.). Macroeconomic instability characteristics such as high inflation adversely affect investment and productivity, and this consequently results in poor economic growth. The numerous instances of political tumult in the MENA region often cause macroeconomic instability because of the resulting uncertainties which result in inflation and lack of economic freedom. Such instances include the Iran-Iraq War (1980–1989), the Gulf War (1990–1991), the Iraq War (2003) and the persistent conflict between Israel and Palestine. In recent times there have been political upheavals such as the Arab Spring that started in Tunisia in 2010 and led to forced removal from power of leaders of Egypt, Libya, Yemen and Tunisia itself. The World Bank states that currently, the ongoing civil war in Syria has forced many people to seek refuge in countries such as Iraq, Lebanon and Jordan (Middle East and North Africa 1). Such turmoil creates macroeconomic instability which in turn slows down economic growth and development in the affected countries and to a great extent the larger MENA region. The second factor that affects economic growth and development in the MENA region is the role of governments in the respective countries. It is evident that high levels of government spending – beyond a certain threshold, have adverse impacts on productivity because of the negative consequences on incentives to save and the economic distortion that results from excessive government intervention in the economy, such as through high taxation (IMF n. pag.; Hakura 18). In addition to this, most governments in the MENA countries are large in terms of a high number of staff (IMF n. pag.), and this means high expenditure on the government wage bill at the expense of investing in activities that would promote economic growth. In terms of openness of trade and volatility of terms of trade, it is argued that restrictive trade regimes reduce incentives that enhance productivity such as competition between firms and transfer of technology between regions (IMF n. pag.). For instance, Shachmurove argues that the governments of a number of countries in the MENA area, including Yemen, Algeria, and Saudi Arabia, continue to enforce widespread control over their own economies. Consequently, these countries suffer from levels of gross national income (GNI) and gross domestic product (GDP) per capita that are lower compared to those of economies that are less interventionist. For instance, Iran and Syria had low GNI ratings of $1,710 and $1,130 respectively compared to the high earnings of $22,670 and $22,010 for Germany and France respectively in 2003 (254). When it comes to volatility in terms of trade, MENA oil exporting countries witnessed higher volatility of terms of trade than any other region over the past 20 years, confirming the great variations in prices of oil (IMF n. pag.). With respect to the quality of institutions, there is a powerful influence of institutions in terms of leadership on economic progression since good institutions promote productive ventures as opposed to aspects such as corruption, rent-seeking and other non-productive activities (IMF n. pag.). Since some of the MENA countries are rich in oil deposits, institutional quality is likely to be affected if rent-seeking is encouraged. In addition, excessive government discretion in the implementation of rules implies that many countries in the MENA region are prone to corruption. In fact, Chauffour cites a Transparency International report which indicated that MENA countries have the highest regional levels of corruption after South Asia (198). Because of vices such as corruption, resources that would be invested for economic development end up in just a few hands. This also makes it difficult to attract investors and hence slows economic growth and development. Another factor that affects economic growth and development in the MENA region is the demographic burden. This implies the difference between a country’s population and growth of the labour force (IMF n. pag.). Because of availability of fewer opportunities for investment and employment, many people who are of the working age remain without an economic activity to participate in. This in turn slows economic growth and development. There are several consequences that face MENA countries if they fail to resolve the issues that have been identified. To begin with, macroeconomic instability characteristics such as inflation and overvalued exchange rates reduce competitiveness of firms and increase the cost of living, which is not good for economic growth. Without intervention to reduce macroeconomic instability, it was expected that economic growth in MENA would slow down to 2.8 per cent in 2013 from the projected 5.6 per cent in 2012 (The World Bank, Middle East and North Africa 1). Secondly, if countries in the MENA region do not reduce their government expenditure, they will not be able to save resources and invest in economically meaningful activities that are necessary for spurring economic growth. These include transportation and communication infrastructures as well as health and social amenities like hospitals and schools. The third point is that if MENA countries do not enhance trade openness, they will not be able to attract investments like foreign direct investment and this will make them lose the economic benefits of trade openness such as employment and transfer of technology. As well, failure to deal with terms of trade volatility implies that MENA countries will remain susceptible to macroeconomic instabilities such as inflation and unstable domestic economic environments. The fourth point is that if MENA countries do not improve the quality of their institutions, they will continue to be grounds for rent-seeking and other vices such as corruption, which make the investment environment uncompetitive. The corollary of this is social waste (Mbaki and Kimenyi 113) at the expense of economic growth and development. Finally, if the MENA countries fail to deal with the “demographic burden” by turning it into a “demographic gift” – by increasing participation in economic activity of the population which is of working age (United Nations Economic and Social Commission for Western Asia (UNESCWA) 38), they are likely to be burdened by the problems of retarded economic growth such as unemployment. It is important to note that the recent Arab Spring started simply as protests by young people against unemployment and extreme poverty among other factors in Tunisia, and later spread to other MENA countries. In conclusion, macroeconomic instability, high levels of government spending, restrictive trade regimes, wanting institutional quality and demographic burden are the major factors affecting economic growth and development in the MENA region. Failure to resolve these issues will mean that these countries will continue to experience inflation and unstable investment environments, high expenditure on areas that do not result in economic growth, and less investment and high volatility of terms of trade. Failure to address these issues also means that the MENA countries will continue to experience social waste due to activities such as corruption and rent-seeking and an increased burden of deprived people due to factors such as unemployment, which can cause unrest as was witnessed during the recent Arab Spring. Works Cited Chauffour, Jean-Pierre. From Political to Economic Awakening in the Arab World: The Path of Economic Integration. Washington, DC: The World Bank, 2013. Hakura, Dalia S. “Growth in the Middle East and North Africa.” IMF Working Paper April 2004. IMF. World Economic Outlook, September 2003: Public Debt in Emerging Markets (e-publication). 16 March 2014. Mbaki, John Mukum and Kimenyi, Mwangi S.“Rent-seeking and Economic Growth in Developing Countries.” Contemporary Economic Issues in Developing Countries. Eds. John Baffoe-Bonnie and Mohammed Khayum. Westport, CT: Praeger Publishers, 2003. 113–128. Shachmurove, Yochanan. “Introduction Comments.” Entrepreneurship, Innovation, and the Growth Mechanism of the Free-Enterprise Economies. Eds. Eytan Sheshinski, Robert J. Strom and William J. Baumol. Oxfordshire: Princeton University Press. 31–34. The World Bank. “Middle East & North Africa.” 16 March 2014. The World Bank. Economic Growth in the 1990s: Learning from a Decade of Reform. Washington, DC: The World Bank, 2005. The World Bank. Middle East and North Africa Economic Developments and Prospects, October 2013: Investing in Turbulent Times. Washington, DC: The World Bank, 2013. UNESCWA. “The Demographic Window: An Opportunity for Development in the Arab Countries.” Population and Development Report. Second Issue, May 2006. Read More