World Bank: Protectionism threatens Mideast economies more than violence
The countries of the Middle East and North Africa (MENA) could ward off a major unemployment crisis in the coming years by expanding trade and private investment and generating millions of new jobs according to a recently released World Bank report, ‘Engaging with the World: Trade, Investment and Development in MENA’.
The report warns that the status quo—public sector-driven and protected economies supported by oil, aid and workers remittances—can no longer generate sufficient growth or jobs, as the experience of the past two decades suggest. Instead, it calls on countries to embrace trade and investment reforms, which promise much faster growth and much needed employment opportunities in the region.
"The region has enjoyed greatest prosperity when it has been open to trade, ideas, innovation and private enterprise, and exploited its potential of location, endowments and spirit of enterprise," says Jean-Louis Sarbib, vice president for the Middle East and North Africa Region at the World Bank.
From Morocco to Iran, the region's most important development challenge in the coming decade is to create enough jobs for their rapidly growing workforces. During the 2000-2010 period, the number of new entrants to the labor force will average four million a year—double that of the last two decades.
Unemployment rates in the region, which average 15 percent today, have doubled in the past two decades and are now among the highest in the world. Unemployment rates for the young, educated, female and first-time job seekers are even greater. With countries facing a steady decline in per capita oil revenues, aid inflows and workers' remittances, the need for a viable alternative to public sector employment has become critical.
"Today's entrants into the labor market are young and better educated which means that within a right economic environment, they could provide the basis for rapid and sustained growth, as in the rest of the world, says Mustapha Nabli, chief economist for Middle East and North Africa at the World Bank. "But if the environment is constrained, a potential demographic gift could turn into a demographic curse and give way to a social crisis".
‘Engaging the World’ says MENA countries can meet these challenges by deepening and accelerating economic reforms that many have already started. They will need to make three fundamental shifts in their sources of growth: from oil to non-oil sectors, from state-dominated to market-driven activities, and from protected import-substitution to competitive export-oriented activities. Intensifying trade and investment lies at the heart of the prescribed reforms.
Violence and conflict have been shown to have a negative influence on trade and investment integration with large spillover effects that extend beyond the conflict-ridden countries to all their neighbors. In MENA, the effect of such conflicts has been detrimental.
But according to authors of the report, domestic policy barriers play a bigger role in hindering trade and investment. Doubts about being able to compete in the world market have often steered countries towards protectionism, but this pessimism is unfounded.
Given the region's favorable size, relatively competitive wages, and proximity to the high-income markets of the European Union, trade volumes could triple what it is today. A combination of higher non-oil exports and better investment climate could increase domestic private investment, and generate five to six times the inflows of foreign direct investment, reaching some three percent of Gross Domestic Product (GDP).
"If only half of the region's trade and investment potential were realized over the next ten years, per capita GDP growth would jump from one percent to about four percent a year—half from more private investment and half from the greater productivity that openness would encourage," explains Dipak Dasgupta, sector manager for Economic Policy and principal author of the report.
"More importantly, this will create the jobs needed to absorb the new entrants into the labor force, fight the unemployment trend in the region, and improve the quality of people's lives."
With only one-third active in the labor force today, women represent a huge untapped resource in the region. Experience from around the world suggests that women, particularly the young and well educated, stand to gain from trade and investment climate reforms.
These gains are already evident in the garment and textile industry in Egypt, Jordan, Morocco and Tunisia. Provided the economic and social barriers to women in the work force are dismantled, their wider participation in economic life can boost growth and productivity in
To capture the large gains possible from faster integration into the world economy, MENA countries need to engage in a process of 'deep integration' with trade and investment policies that not only address at-the-border constraints such as quotas, import licensing, tariffs and customs clearance, but also a full range of behind-the-border constraints.
Reforms therefore need to extend to liberalizing critical backbone services in telecommunications, finance, water and power. Agricultural trade reforms will be critical to boosting productivity and create more jobs in a vital part of the region's economies.
Consistent investment deregulation can help shift resources from protected and unproductive enterprise to new, export-oriented sectors. The report cautions however that transition costs
in certain sectors such as public employment and agriculture will need to be managed.
"Reforms are never easy, and require public support to work effectively," conceded Nabli. "That's why they should start boldly and follow through with additional measures, to build both momentum and credibility for the program," he added. "This way, individual sectors or groups are able to perceive the benefits and spread the cost more evenly."
‘Engaging with the World’ proposes linking reforms to regional trade agreements and multilateral forums like the World Trade Organization (WTO) to gather public support and commitment to change. This is particularly important as countries plan their negotiations ahead of the next global trade ministerial meeting, in Cancun, Mexico, in September 2003.
But first, more countries in the region will have to become full members of the WTO, which will require the support of the region's trade partners. The recently-created customs union of the Gulf Cooperation Council (GCC) countries and the EU present a large common market, and the report calls on MENA countries to embrace these regional economic zones.
Trading partners like the EU need to reciprocate by providing expanded access to agriculture—the sector most likely to bear the brunt of job losses in the reform process. The EU could also lend support by increasing temporary migration for workers and providing funds for managing the cost of transition.
"Trade partners such as the EU and the US play an important role in revitalizing the incentives and effectiveness of trade agreements and in making trade and investment reforms work," emphasized Dasgupta. "These partners should re-examine their policies with a view to strengthening their partnerships with MENA countries to generate larger benefits for both parties." — (menareport.com)
© 2003 Mena Report (www.menareport.com)