## _wp0456

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### Introduction and paper contributions
- Timeframe for core analysis: 1980–2000.
- Observed regional performance:
  - Real per capita GDP in the MENA region stagnated over 1980–2000, compared to average annual growth of 4.1 percent in east Asia and 0.3 percent in all other developing countries over the same period.
  - Annual per capita GDP growth in the MENA region in the 1970s averaged 2.3 percent.
- Four stated contributions of the paper:
  - Uses an empirical model of long-run growth (rather than descriptive comparisons) to explain MENA’s weak performance.
  - Analyzes subgroups of MENA countries (oil vs. non-oil; oil further split into GCC and other MENA oil countries).
  - Combines growth accounting and growth regression approaches to examine channels (physical/human capital accumulation vs. TFP growth).
  - Includes a range of MENA countries not previously subjected to systematic growth analysis.

### Key determinants and data/methodology
- Determinants included in empirical investigation:
  - Macroeconomic policy; Institutional quality (including political instability); Trade openness; Terms of trade volatility; Initial level of secondary school enrollment; Demographics; Initial level of income.
- Investment excluded as an explanatory variable (following Levine and Renelt (1992)).
- Institutional quality instrument set:
  - Fraction of population that is English speaking; Fraction speaking major western European languages; Legal origin dummies (British, French, German).
- Trade openness instrument: predicted trade to GDP ratios (Frankel and Romer, 1999).
- Macroeconomic policy: treated as exogenous in main IV strategy; alternative IV uses lagged 1970–1979 averages where available.
- Demographic variables assumed exogenous.
- Sample and measurement:
  - Cross-section regression sample: 74 countries (21 advanced economies, 53 developing countries), including 10 MENA countries used in regressions: Algeria, Bahrain, Egypt, Islamic Republic of Iran, Jordan, Kuwait, Morocco, Saudi Arabia, Syrian Arab Republic, Tunisia.
  - MENA subgroup definitions:
    - Non-oil MENA: Egypt, Jordan, Lebanon, Morocco, Syrian Arab Republic, Tunisia, Yemen.
    - GCC: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates.
    - Other MENA oil-exporting: Algeria, Islamic Republic of Iran, Libya.
  - Explanatory variables averaged over 1980–2000 except two initial-conditions variables measured in 1980.
  - Requirement for averaging a variable: at least fifteen years of data; otherwise set to missing.
  - Terms of trade volatility: standard deviation of annual change in terms of trade over 1980–2000 weighted by 1980 share of natural resource exports in total exports.
  - Institutional quality: average of four ICRG indices over 1984–2000 (corruption; rule of law; bureaucracy quality; government stability), indices re-scaled from 1 to 12; alternative index adds internal and external conflict indicators.
  - Growth measured as average annual growth rate of real per capita GDP over 1980–2000 (WEO database).
  - Capital per worker and TFP growth series sourced from Bosworth and Collins (2003) and supplemented by IMF (2003b) for some MENA countries.

### High-level subgroup performance (1980–2000)
- GCC countries: contraction of real per capita GDP by 1.1 percent per year on average between 1980 and 2000.
- Other MENA oil countries: decline averaged 1.2 percent per annum over the same period.
- Non-oil MENA countries: per capita GDP increased on average by 1.4 percent per year.
- Non-oil MENA growth exceeded that of other developing countries excluding east Asia but did not prevent a sustained rise in unemployment given relatively strong labor force growth.

### Summary comparisons across determinants
- Institutional quality:
  - GCC countries score better than other MENA subgroups and nearly match east Asia’s scores on the institutional quality index.
  - Other MENA oil and non-oil MENA countries score only marginally better than developing countries excluding east Asia.
  - GCC countries were the least successful in curbing corruption; other MENA oil countries score worse than other developing countries (excluding east Asia) for bureaucracy quality.
- Trade openness and policy stance:
  - GCC oil exporters: very open by sum of imports and exports to GDP and by IMF trade restrictiveness index.
  - Other MENA oil countries: most restrictive regime in the region and compared with other developing countries.
  - Non-oil MENA: trade to GDP ratio comparable to other developing countries but more restrictive by the trade restrictiveness index.
- Terms of trade volatility: MENA oil exporters experienced larger volatility than any other region in the paper over the past two decades.
- Inflation: MENA inflation over past two decades about the same as east Asia and generally below threshold levels of 7-11 percent.
- Exchange rate valuation:
  - Other MENA oil countries tended to have significantly overvalued exchange rates.
  - GCC countries’ real exchange rates broadly in line with equilibrium rate.
  - Non-oil MENA overvaluation comparable to other developing countries.
- Government size: all three MENA groups, particularly the GCC, have relatively large governments.
- Demographics:
  - Other oil and non-oil MENA countries experienced relatively rapid growth of the working-age population relative to total population growth (similar to east Asia).
  - GCC countries: this phenomenon less pronounced.
- Initial income and human capital:
  - Initial per capita income in 1980: non-oil MENA broadly in line with east Asia and other developing countries; GCC and other MENA oil countries at a more advanced stage of development.
  - MENA subgroups fare relatively well on initial secondary school enrollment ratios in 1980; caveats on enrollment quality and female labor force participation.

### Growth regression results and robustness
- Basic regression (1980–2000 growth_i = α + β·Macroeconomicpolicy_i + θ·Institutionalquality_i + γ·Tradeopenness_i + μ·Termsoftradevolatility_i + λ·Demographics_i + χ·Initialconditions_i + OPEC_i + ε_i) estimated by OLS with robust standard errors; IV estimations also reported.
- Key OLS associations (broad consistency with Barro, 1991):
  - Higher real per capita growth associated with: low initial income; stronger institutions; more open trade; smaller governments; lower terms of trade volatility; higher growth of working-age population relative to total population growth; lower inflation; lower exchange rate overvaluation; higher initial secondary school enrollment.
- OPEC dummy: coefficient suggests membership had an overall positive but insignificant effect on real per capita growth over 1980–2000.
- Statistical significance: all explanatory variables statistically significant at the 10 percent level except the inflation variable (in OLS).
- Model fit: explains 64 percent of cross-country variation in growth rates.
- IV results:
  - Broadly consistent with OLS in sign and significance.
  - Trade openness and terms of trade volatility lose significance in IV, suggesting potential reverse causality in OLS.
  - Alternative IV using lagged macro policy instruments leads to weaker significance for several variables; some countries dropped due to data constraints.
- Robustness to sample exclusion: excluding GCC countries leaves magnitude and significance broadly similar.

### Decomposition of growth differentials with east Asia (aggregate and subgroup findings)
- Aggregate finding: initial level of income explains about 25 percent of the growth differential between MENA and east Asian countries.
- Observed output per worker differential with east Asia (memorandum): 3.8 (All MENA), 5.9 (GCC), 4.7 (Other MENA oil), 3.0 (Non-oil MENA).
- TFP differential with east Asia: 2.1 (All MENA), 4.5 (GCC), 2.5 (Other MENA oil), 1.5 (Non-oil MENA).
- Capital per worker differential with east Asia: 1.6 (All MENA), 1.1 (GCC), 2.1 (Other MENA oil), 1.5 (Non-oil MENA).
- Selected contributions to output per worker differential:
  - Initial income: 1.2 (All MENA), 2.6 (GCC), 1.4 (Other MENA oil), -0.1 (Non-oil MENA).
  - Government consumption to GDP: 1.0 (All MENA), 1.5 (GCC), 0.4 (Other MENA oil), 0.6 (Non-oil MENA).
  - Institutional quality: 0.7 (All MENA), 0.3 (GCC), 1.0 (Other MENA oil), 0.9 (Non-oil MENA).
  - Unexplained component: 0.7 (All MENA), 1.2 (GCC), 1.3 (Other MENA oil), 1.5 (Non-oil MENA).
- Subgroup highlights:
  - GCC: observed growth differential with east Asia 5.2 percent; contributions include high initial income (2.3 percentage points) and large government consumption (1.3 percentage points), with terms of trade volatility, population, and institutions contributing less.
  - Other MENA oil exporters: initial income is the single largest factor explaining a 5.4 percent growth differential with east Asia; followed by real exchange rate overvaluation, terms of trade volatility, government consumption, and trade openness.
    - In restricted-decomposition (countries included in regressions), institutional quality and real exchange rate overvaluation rank more important than initial income.
  - Non-oil MENA: institutional quality explains about 1 percentage point of the 2.7 percent growth differential with east Asia; government consumption explains 0.5 percentage points; real exchange rate overvaluation and trade openness contribute less.

### Subperiods (1980–89 versus 1990–2000)
- Regression coefficients differ across subperiods; R2 lower for subperiod regressions, particularly 1990–2000.
- Decomposition dynamics:
  - Population growth more important in the 1980s than in the 1990s for other oil and non-oil MENA.
  - Terms of trade volatility key for GCC differential in the 1980s (consistent with oil price decline).
  - Government consumption remained important for GCC differential, particularly in the 1990s.
  - Institutional quality consistently key for other MENA oil countries’ shortfall across subperiods.
  - Institutional quality and government consumption key for non-oil MENA in both subperiods.

### Effects of oil and conflict channels
- Standard oil abundance measures highly correlated with OPEC dummy; substituting them yields negative but similarly insignificant coefficients.
- Channels through which oil affected growth:
  - Initial high per capita income from 1970s oil revenues accelerated catching-up but much spending was government-directed and relatively unproductive for tradables.
  - GCC: oil abundance → high government consumption → financing public employment/wages, reducing labor market flexibility and non-oil private sector development.
  - Other MENA oil exporters: oil abundance → poor-quality institutions → rent seeking and corruption.
  - Terms of trade volatility from oil price fluctuations exposed private sectors to boom-bust cycles, adversely affecting non-oil sector growth.
- Conflicts:
  - Region has higher incidence of internal and external conflicts than other developing groups.
  - Regression evidence: coefficients on internal conflicts negative and significant when included alongside institutional quality (reflecting high correlation); when institutional quality excluded, internal conflicts coefficient becomes positive and significant; external conflicts coefficient remains negative and insignificant.
  - Using an institutional quality index that includes conflict indicators reduces the unexplained residual by 9 percentage points for other MENA oil exporters, 6 percentage points for MENA non-oil exporters, and 3 percent for GCC oil exporters—confirming internal conflicts adversely affected growth.
  - Lebanon and the Republic of Yemen excluded from regressions due to extended internal conflicts.

### Growth accounting, channels, and component regressions
- Growth accounting (average annual growth rates 1980–2000, Table 4):
  - Middle East and North Africa: Output per worker -0.06; Capital per worker 0.99; TFP -1.00.
  - Non-oil MENA countries: Output per worker 0.98; Capital per worker 1.12; TFP -0.15.
  - Oil MENA countries: Output per worker -1.09; Capital per worker 0.85; TFP -1.86.
  - Developing countries excluding East Asia: Output per worker 0.01; Capital per worker 0.47; TFP -0.45.
  - East Asia: Output per worker 3.98; Capital per worker 2.62; TFP 1.32.
- Key observations:
  - TFP contribution particularly low for oil MENA countries relative to non-oil MENA and other developing countries.
  - Growth of capital per worker higher than in other developing countries but well below east Asia for both non-oil and oil MENA.
  - Both low TFP growth and low capital accumulation contribute to growth differentials with east Asia.
- Regressions on growth components (Table 5; 1980–2000, Observations: 63; No. of MENA countries: 8):
  - Growth in output per worker:
    - Institutional quality coefficient: 0.80 (0.20)**.
    - Government consumption to GDP: -0.11 (0.04)**.
    - Initial income (1980): -1.37 (0.42)**.
    - R-squared: 0.58.
  - Growth in capital per worker:
    - Institutional quality coefficient: 0.25 (0.13)*.
    - Government consumption to GDP: -0.07 (0.02)**.
    - Economically active pop. growth minus total pop. growth: 0.71 (0.37)*.
    - R-squared: 0.34.
  - TFP growth:
    - Institutional quality coefficient: 0.54 (0.13)**.
    - Real exchange rate overvaluation: -0.01 (0.002)**.
    - Initial income (1980): -0.92 (0.23)**.
    - R-squared: 0.64.
- Channels emphasized by regressions:
  - Initial income: negative influence on TFP growth.
  - Government consumption: primarily adversely affects capital accumulation.
  - Working-age population growth: positive association with capital accumulation.
  - Institutional quality: predominantly affects efficiency of resource use (physical and human capital).
  - Real exchange rate overvaluation: negative effect on TFP growth.
- Decomposition results (Table 6): high initial income in GCC and other MENA oil countries largely affected TFP contribution and had sizable effect on capital accumulation contribution.

### Quantitative diagnostics and selected statistics (preserved)
- Model explains 64 percent of cross-country variation in growth rates (basic regression).
- Observed subgroup output per worker differential with east Asia: 3.8 (All MENA), 5.9 (GCC), 4.7 (Other MENA oil), 3.0 (Non-oil MENA).
- TFP differential with east Asia: 2.1 (All MENA), 4.5 (GCC), 2.5 (Other MENA oil), 1.5 (Non-oil MENA).
- Capital per worker differential with east Asia: 1.6 (All MENA), 1.1 (GCC), 2.1 (Other MENA oil), 1.5 (Non-oil MENA).
- Selected regression coefficients (examples reported):
  - Institutional quality: positive and statistically significant (e.g., 0.63, 0.88 in different specifications).
  - Government consumption to GDP: negative and statistically significant (e.g., -0.07, -0.09, -0.11).
  - Initial income (1980): negative and statistically significant (e.g., -0.94, -1.22, -1.30).
  - Economically active population growth minus total population growth: positive and significant in many specifications (e.g., 1.74, 1.94, 2.06).
  - Real exchange rate overvaluation: negative and in some specifications significant (e.g., -0.01).

### Main conclusions and policy implications
- Overall diagnostic: MENA’s growth shortfall relative to east Asia is less well explained in the 1990s than in the 1980s; internal and external conflicts contributed to relatively slow growth, especially for other oil and non-oil MENA countries.
- Subgroup-specific policy recommendations:
  - GCC countries:
    - Reduce the size of government over time.
    - Find better ways to distribute hydrocarbon revenues to minimize distortions to incentives and reduce unproductive public employment and investments.
  - Other MENA oil countries:
    - Improve institutional quality—especially the quality of the bureaucracy and the strength of the rule of law—to raise TFP and promote growth.
  - Non-oil MENA countries:
    - Improve institutional quality—especially control of corruption, rule of law, and bureaucracy quality.
    - Reduce the size of government to lessen negative effects on capital accumulation.
- Security implication: improving internal and external security would be conducive to reviving growth.

*Source: Excerpt from _wp0456 (IMF working paper), pages 3–9 and associated tables/figures covering introduction, empirical strategy, regression and decomposition results, growth accounting, channels, conflicts, and policy implications (sample period 1980–2000).*

### References..............................................................................................................

### _wp0456 - References

### Introduction and paper contributions
- Over the last two decades (1980–2000) real per capita GDP in the MENA region stagnated, compared to average annual growth of 4.1 percent in east Asia and 0.3 percent in all other developing countries over the same period.
- Annual per capita GDP growth in the MENA region in the 1970s averaged 2.3 percent.
- The paper makes four contributions:
  - Uses an empirical model of long-run growth (rather than descriptive comparisons) to explain MENA’s weak performance.
  - Analyzes subgroups of MENA countries (oil vs. non-oil; oil further split into GCC and other MENA oil countries) to account for regional diversity.
  - Combines growth accounting and growth regression approaches to examine channels (physical/human capital accumulation vs. TFP growth) through which determinants affected growth differentials between MENA subgroups and east Asia.
  - Includes a range of MENA countries not previously subjected to systematic growth analysis.

### Key determinants examined
- Factors included in the empirical investigation:
  - Macroeconomic policy
  - Institutional quality (including political instability)
  - Trade openness
  - Terms of trade volatility
  - Initial level of secondary school enrollment
  - Demographics
  - Initial level of income
- Investment is not used as an explanatory variable following Levine and Renelt (1992) and because several key variables affect growth through their effect on investment.

### High-level findings on subgroup growth performance (1980–2000)
- GCC countries: contraction of real per capita GDP by 1.1 percent per year on average between 1980 and 2000 (Table 1).
- Other MENA oil countries: decline averaged 1.2 percent per annum over the same period (Table 1).
- Non-oil MENA countries: per capita GDP increased on average by 1.4 percent per year.
- Non-oil MENA growth exceeded that of other developing countries excluding east Asia but was insufficient to avoid a sustained rise in unemployment given relatively strong labor force growth.

### Summary of subgroup differences across growth determinants
- Institutional quality:
  - GCC countries score better than other MENA subgroups and nearly match east Asia’s scores for an institutional quality index that encompasses quality of the bureaucracy, the rule of law, government stability, and the incidence of corruption.
  - Other MENA oil and non-oil MENA countries score only marginally better than developing countries excluding east Asia.
  - GCC countries were the least successful in curbing corruption; other MENA oil countries score worse than other developing countries (excluding east Asia) for quality of the bureaucracy.
- Trade openness:
  - GCC oil exporters are very open to trade by the sum of imports and exports to GDP and by an IMF trade restrictiveness index.
  - Other MENA oil countries had the most restrictive regime in the region and compared with other developing countries.
  - Non-oil MENA countries: trade to GDP ratio comparable to other developing countries but more restrictive by the trade restrictiveness index.
- Terms of trade volatility:
  - MENA oil exporters experienced larger terms of trade volatility than any other region in the paper over the past two decades, reflecting large oil price fluctuations and high oil export shares.
- Inflation:
  - Inflation in the MENA countries over the past two decades was about the same as in east Asia and generally below the threshold levels of 7-11 percent beyond which inflation has been shown to have a detrimental effect on growth (e.g., Khan and Senhadji, 2000).
- Exchange rate valuation:
  - Other MENA oil countries tended to have significantly overvalued exchange rates over the past two decades (consistent with “Dutch disease”).
  - GCC countries’ real exchange rates were on average broadly in line with the equilibrium rate.
  - Non-oil MENA exchange rate overvaluation comparable to other developing countries.
- Government size:
  - All three MENA groups, particularly the GCC, have relatively large governments which may have contributed to poor growth performance.
- Demographics:
  - Other oil and non-oil MENA countries, like east Asia, experienced relatively rapid growth of the working-age population relative to total population growth.
  - In GCC countries this phenomenon was less pronounced, more similar to developing countries excluding east Asia.
- Initial income and human capital:
  - Initial per capita income levels in 1980 vary widely: non-oil MENA broadly in line with east Asia and other developing countries; GCC and other MENA oil countries at a much more advanced stage of development (oil wealth).
  - MENA subgroups fare relatively well on initial secondary school enrollment ratios in 1980, suggesting poor growth is not easily attributed to low initial stock of human capital. (Caveats: enrollment may not capture education quality; female labor force participation low relative to female enrollment; female tertiary enrollment lags other regions.)

### Empirical strategy (sample and model)
- Cross-section regression for a sample of 74 countries: 21 advanced economies and 53 developing countries, of which 10 are MENA countries (5 non-oil MENA, 3 GCC, and 2 other MENA oil countries).
- Basic regression specification (dependent variable Growth is average real per capita GDP growth over the 1980–2000 period):
  - 1980–2000 Growth_i = α + β·Macroeconomicpolicy_i + θ·Institutionalquality_i + γ·Tradeopenness_i + μ·Termsoftradevolatility_i + λ·Demographics_i + χ·Initialconditions_i + OPEC_i + ε_i
- Explanatory variables are averages over the 1980–2000 period except two initial-conditions variables measured in 1980.
- Growth accounting decomposition used to split per capita output growth into contributions from growth of factor inputs (physical and human capital per worker) and a residual interpreted as TFP growth.

### Main analytical conclusions and interpretation
- Relative importance of growth determinants varies across MENA subgroups:
  - GCC countries: large governments, associated with adverse effects on incentives to accumulate capital per worker, appear to have stifled private-sector growth and impeded diversification despite substantial oil revenues.
  - Other MENA oil countries: institutional quality has been a key factor hampering productivity and growth.
  - Non-oil MENA countries: poor institutions combined with large governments have been the main impediments to growth.
- Political instability is shown to have played a role in holding back growth across the region.
- The paper uses empirical findings to quantify potential impacts of improvements in growth-promoting factors for MENA subgroups and analyzes channels through which oil abundance affected growth among oil exporters, including the role of conflicts.

*Source: Excerpt from _wp0456 (IMF working paper), pages 3–9 (Introduction through empirical strategy).*

### 1980. A key consideration of the empirical analysis is to include as many MENA countries in

### _wp0456 - 1980. A key consideration of the empirical analysis is to include as many MENA countries in

### Data scope and sample construction
- Sample period: 1980–2000.
- Requirement for averaging a variable: at least fifteen years of data available; otherwise the variable is set to missing.
- Several MENA oil exporters are OPEC members; an OPEC dummy is included to control for possible effect of OPEC membership on growth over the period.
- Initial-period weighting for terms of trade volatility: weighted by the initial period share of natural resource exports in total exports (1980) to capture volatility of income flows associated with natural resource exports.

### Instrumentation, endogeneity, and exogeneity assumptions
- Institutional quality instrument set:
  - Fraction of population that is English speaking.
  - Fraction of population speaking one of the major languages of western Europe.
  - Dummy variables for legal origin (British, French, or German).
- Trade openness instrument:
  - Predicted trade to GDP ratios as constructed by Frankel and Romer (1999).
- Macroeconomic policy variables:
  - Treated as exogenous in main IV strategy (following difficulty finding good instruments).
  - Alternative IV strategy: instrument macroeconomic policy variables with their lagged values calculated as averages over the 1970–1979 period where data are available (results reported separately).
- Demographic variable: assumed exogenous.
- Use of initial period values of education and income and initial-period share of natural resource exports intended to lower endogeneity of those variables.

### Growth regression results (OLS and IV)
- Estimation method: basic regression (1) estimated using ordinary least squares (OLS) with robust standard errors; instrumental variables (IV) estimations also reported.
- Key empirical associations (OLS, broadly consistent with literature such as Barro, 1991):
  - Higher real per capita growth rates associated with:
    - Low initial levels of income.
    - Stronger institutions.
    - More open trade regimes.
    - Smaller governments.
    - Lower terms of trade volatility.
    - Higher growth of working-age population relative to total population growth.
    - Lower inflation.
    - Lower exchange rate overvaluation.
    - Higher initial level of secondary school enrollment.
- OPEC dummy: estimated coefficient suggests membership in OPEC had an overall positive but insignificant effect on real per capita growth over 1980–2000.
- Statistical significance:
  - All explanatory variables statistically significant at the 10 percent level except the inflation variable (in the OLS specification).
- Model fit: explains 64 percent of the cross-country variation in growth rates.
- IV results (column 2, treating macro policy as exogenous):
  - Broadly consistent with OLS: most variables enter with same sign and significance.
  - Trade openness and terms of trade volatility lose significance in IV, suggesting potential reverse causality in OLS for these variables.
- IV with lagged macro policy instruments (column 4):
  - Some countries (including 4 MENA countries) dropped due to data constraints.
  - Significance of several variables weakens (including real exchange rate overvaluation and government consumption).
  - Inflation variable takes the wrong sign in this specification.
  - Magnitudes of estimated coefficients vary only slightly from column 2, except for the constant term and trade to GDP ratio.
- Robustness to sample exclusion:
  - Excluding GCC countries: magnitude and significance of estimated coefficients broadly similar.

### Decomposition of growth differentials: MENA vs. East Asia
- Comparator region: group of east Asian countries (used as benchmark for strong growth performance).
- Method: apply regression coefficients to differences in average values of explanatory variables between MENA (and subgroups) and east Asia.
- Use of averages:
  - Calculations reported use averages for each variable and for all countries in the relevant group for which data are available, not restricted only to countries included in the regressions.
- Aggregate finding:
  - Initial level of income explains about 25 percent of the growth differential between MENA and east Asian countries.
- Heterogeneity across MENA subgroups:
  - Fractions explained by each variable vary considerably across MENA subgroups, indicating important differences in factors depressing growth.

### Subgroup-specific decomposition results (selected findings)
- GCC countries:
  - Observed growth differential with east Asia: 5.2 percent.
  - Contributions to the 5.2 percent differential (model estimates):
    - High initial level of income: accounts for 2.3 percentage points.
    - Large size of government consumption: accounts for 1.3 percentage points.
    - Terms of trade volatility, population variable, and quality of institutions also contribute to the differential to a lesser extent.
- Other MENA oil exporters:
  - After initial level of income, institutional quality explains the largest fraction of the growth differential.
  - Institutional quality accounts for 1.1 percentage points of the (unspecified) growth differential for other MENA oil exporters.

*Italic: Source - _wp0456 (excerpt), PDF chapter covering empirical strategy and growth regression results for MENA, sample period 1980–2000.*

### 5.4 percent growth differential with east Asia. This is followed by real exchange rate

### _wp0456 - 5.4 percent growth differential with east Asia. This is followed by real exchange rate

### Decomposition of growth differentials (aggregate and subgroup results)
- Other MENA oil countries: initial level of income is the single largest factor explaining a 5.4 percent growth differential with east Asia. This is followed by real exchange rate overvaluation, terms of trade volatility, government consumption, and trade openness variables, respectively.
- When decomposition calculations are restricted to countries included in the regression estimations:
  - Institutional quality and real exchange rate overvaluation rank as more important than initial level of income in explaining the other MENA oil countries’ differential with east Asia.
  - Only the fraction of the observed growth differential explained by initial income changes in this scenario; the fractions explained by institutional quality and real exchange rate overvaluation do not change.
- Non-oil MENA countries:
  - Institutional quality explains about 1 percentage point of the 2.7 percent growth differential with east Asian countries.
  - Government consumption explains 0.5 percentage points of the growth differential.
  - Real exchange rate overvaluation and trade openness contribute to explaining the differential but to a lesser extent.

### Subperiod analysis: 1980–89 versus 1990–2000
- Regression results differ between the 1980–89 and 1990–2000 subperiods (results reported in Table 3, columns 5 and 6).
  - Initial income and initial human capital measured at the beginning of each subperiod; other variables averaged over each subperiod.
  - Coefficients for the constant term, initial income and the OPEC membership dummy differ across subperiods.
  - Some variables significant in 1980–1989 are insignificant in 1990–2000 and vice versa; magnitude of coefficients varies.
  - The regression R2 is lower for the two subperiod regressions, particularly for the 1990–2000 subperiod, than for the full sample regression.
- Decomposition over subperiods (Figure 2):
  - Population growth played a more important role in the 1980s than in the 1990s for explaining growth differentials of other oil and non-oil MENA countries.
  - Terms of trade volatility was a key factor for GCC countries’ differential with east Asia in the 1980s (consistent with decline in oil prices in the 1980s).
  - Government consumption remained an important factor for GCC differential, particularly in the 1990s.
  - Institutional quality remained a key factor for the other MENA oil countries’ growth shortfall in both subperiods.
  - Institutional quality and government consumption were key for explaining the non-oil MENA countries’ differentials in both subperiods.

### Effects of oil and oil-related channels
- Standard oil abundance measures (share of fuel exports in total exports or oil-exporter dummies) are highly correlated with the OPEC membership dummy and, when substituted for OPEC membership, yield negative but similarly insignificant coefficients.
- Key channels through which oil affected growth (as argued and evidenced in the paper):
  - Initial levels of per capita income: soaring oil revenues in the 1970s raised initial per capita income, consumption, investment spending, and capital stock—interpreted as accelerated catching-up—but much spending was government-directed and relatively unproductive for the tradable sector.
  - For GCC countries: oil abundance → high government consumption appears the more important channel hampering growth (financing high public employment and public sector wages/benefits, reducing labor market flexibility and non-oil private sector development).
  - For other MENA oil exporters: oil abundance → poor-quality institutions appears the more important channel (resource abundance encourages rent seeking and corruption).
  - Terms of trade volatility: fluctuations in oil prices exposed private sectors to boom-bust cycles (including public expenditure), adversely affecting non-oil sector growth.
- Empirical support:
  - Figure 1 findings: initial income is the main channel; other channels differ across GCC and other MENA oil exporters.
  - Substituting institutional and conflict measures affects unexplained residuals (see conflict discussion below).

### Internal and external conflicts
- The region (particularly other MENA oil and non-oil MENA countries) has a higher incidence of internal and external conflicts than other developing country groups (rows 8 and 9 in Table 1).
- Regression evidence (column 7 in Table 3):
  - Estimated coefficients on internal conflicts are negative and significant when included alongside institutional quality—contrary to expectations—likely reflecting high correlation between conflicts and institutional quality and difficulties isolating separate effects.
  - When excluding the institutional quality variable (column 8 in Table 3), the estimated coefficient on internal conflicts becomes positive and significant; external conflicts coefficient remains negative and insignificant.
- Alternative approach:
  - Re-estimate basic growth equation using an institutional quality variable that encompasses internal and external conflict indicators, bureaucracy quality, rule of law, government stability, and incidence of corruption (column 9 of Table 3; decompositions shown in Figure 3).
  - Main findings remain broadly consistent with earlier results; the ranking of variables explaining relative growth performance across MENA subgroups versus east Asia is virtually unchanged.
  - With the alternative institutional quality indicator, the fraction of the growth differential not explained by the model declines by:
    - 9 percentage points for other MENA oil exporters,
    - 6 percentage points for MENA non-oil exporters,
    - 3 percent for GCC oil exporters.
  - This confirms that conflicts, particularly internal conflicts, have indeed adversely affected the region’s growth performance.
- Note: Lebanon and the Republic of Yemen (which suffered extended internal conflicts during the period) are excluded from the regression analysis.

### Growth accounting and channels: capital accumulation and TFP
- Growth accounting approach used to examine contributions of growth in capital per worker and TFP to growth of real output per worker (data from Bosworth and Collins (2003) supplemented by IMF (2003b) for some MENA countries; see Table 4).
- Key empirical observations:
  - Contribution of TFP growth has been particularly low for the oil MENA countries compared with non-oil MENA countries and developing countries excluding east Asia.
  - Contribution of growth of capital per worker, while higher than in other developing countries, was well below its contribution in east Asia for both non-oil and oil MENA countries.
  - Both low TFP growth and low accumulation of capital contribute to MENA subgroups’ growth differentials with east Asia, with varying extent across subgroups.
- Regression analysis with dependent variables: growth of output per worker, growth of (physical and human) capital per worker, and growth of TFP (coefficients reported in Table 5):
  - Coefficients for growth of output per worker broadly similar to previous basic regression (column 2).
  - Difference: coefficient on terms of trade volatility changes sign but remains insignificant.
  - Ranking of key factors for explaining growth differentials across MENA subgroups (Table 6) roughly matches basic regression results.
- Channels highlighted by regressions:
  - Initial income: significant negative influence on TFP growth.
  - Government consumption: primarily adversely affects capital accumulation (possible distortion of incentives to save and invest due to excessive government interference).
  - Growth rate of working population relative to total population: varies positively with capital accumulation.
  - Institutional quality: predominantly affects efficiency of resource use (physical and human capital).
  - Real exchange rate overvaluation: statistically significant negative effect on TFP growth.
- Decompositions (Table 6):
  - High initial income in GCC and other MENA oil countries has largely affected the contribution of TFP growth in explaining the differential with east Asia.
  - High initial income also had a sizable effect on the contribution of capital accumulation.

* _wp0456 - 5.4 percent growth differential with east Asia. This is followed by real exchange rate

### 0.8 percent of the growth differential with east Asia for GCC countries and 0.4 percent for

### _wp0456 - 0.8 percent of the growth differential with east Asia for GCC countries and 0.4 percent for

### Conclusions and policy implications
- The paper investigates causes of MENA’s poor growth performance over the past two decades using an empirical model of long-run growth.
- Sample: 16 MENA countries considered; 10 had complete data for all variables (with the exception of TFP growth for which data for only one GCC country were available).
- Key overall diagnostic: the MENA region’s growth differential with east Asia is less well explained in the 1990s than in the 1980s.
- Evidence, albeit indirect, indicates internal and external conflicts contributed to relatively slow growth, particularly in the other oil and non-oil MENA countries; improving security would be conducive to reviving growth.

### Main empirical findings by subgroup
- GCC countries
  - Main factors explaining the growth differential with east Asia: high initial level of income and large size of government.
  - High government consumption mainly affected the contribution of capital accumulation to the growth differential with east Asia.
  - Adverse effect of public sector consumption manifested as reduced growth of capital per worker relative to east Asia.
  - Policy implication: reduce the size of government over time; find better ways to distribute hydrocarbon revenues to minimize distortions to incentives.
- Other MENA oil countries
  - High initial level of income impedes catching up, but the main factor hampering growth after initial income is poor institutional quality.
  - Poor institutional quality mainly lowered TFP growth relative to east Asia.
  - Policy implication: improve institutional quality—especially the quality of the bureaucracy and the strength of the rule of law.
- Non-oil MENA countries
  - Poor institutional quality combined with large-size governments are the main factors hampering growth.
  - Institutional quality mainly affected the contribution of TFP growth; government consumption mainly affected capital accumulation.
  - Result: roughly equal contribution of institutional quality and government consumption to the growth differential with east Asia.
  - Policy implication: improve institutional quality—especially control of corruption, rule of law, and bureaucracy quality—and reduce the size of government.

### Quantitative decomposition and key statistics (preserving source numbers)
- Growth differentials (memorandum from decomposition table)
  - Output per worker differential with east Asia: 3.8 (All MENA), 5.9 (GCC), 4.7 (Other MENA oil), 3.0 (Non-oil MENA).
  - TFP differential with east Asia: 2.1 (All MENA), 4.5 (GCC), 2.5 (Other MENA oil), 1.5 (Non-oil MENA).
  - Capital per worker differential with east Asia: 1.6 (All MENA), 1.1 (GCC), 2.1 (Other MENA oil), 1.5 (Non-oil MENA).
- Specific contributions to output per worker differential with east Asia (selected entries from decomposition)
  - Initial income: 1.2 (All MENA), 2.6 (GCC), 1.4 (Other MENA oil), -0.1 (Non-oil MENA).
  - Government consumption to GDP: 1.0 (All MENA), 1.5 (GCC), 0.4 (Other MENA oil), 0.6 (Non-oil MENA).
  - Institutional quality: 0.7 (All MENA), 0.3 (GCC), 1.0 (Other MENA oil), 0.9 (Non-oil MENA).
  - Unexplained component: 0.7 (All MENA), 1.2 (GCC), 1.3 (Other MENA oil), 1.5 (Non-oil MENA).
- Decomposition of sources of growth, average annual growth rates 1980-2000 (Table 4)
  - Middle East and North Africa: Output per worker -0.06; Capital per worker 0.99; TFP -1.00.
  - Non-oil MENA countries: Output per worker 0.98; Capital per worker 1.12; TFP -0.15.
  - Oil MENA countries: Output per worker -1.09; Capital per worker 0.85; TFP -1.86.
  - Developing countries excluding East Asia: Output per worker 0.01; Capital per worker 0.47; TFP -0.45.
  - East Asia: Output per worker 3.98; Capital per worker 2.62; TFP 1.32.

### Regression results and robustness highlights
- Basic cross-country regressions (1980–2000) identify:
  - Institutional quality: positive and statistically significant coefficient (e.g., 0.63, 0.88 in different specifications).
  - Government consumption to GDP: negative and statistically significant coefficient (e.g., -0.07, -0.09, -0.11 in different specifications).
  - Initial income (1980): negative and statistically significant coefficient (e.g., -0.94, -1.22, -1.30).
  - Real exchange rate overvaluation: negative and in some specifications statistically significant (e.g., -0.01).
  - Economically active population growth minus total population growth: positive and significant in many specifications (e.g., 1.74, 1.94, 2.06).
- Regressions of growth components (1980–2000, Table 5)
  - Dependent variable: Growth in output per worker
    - Institutional quality coefficient: 0.80 (standard error (0.20)**).
    - Government consumption to GDP: -0.11 (0.04)**.
    - Initial income (1980): -1.37 (0.42)**.
    - R-squared: 0.58; Observations: 63; No. of MENA countries: 8.
  - Dependent variable: Growth in capital per worker
    - Institutional quality coefficient: 0.25 (0.13)*.
    - Government consumption to GDP: -0.07 (0.02)**.
    - Economically active pop. grth minus total pop. grth: 0.71 (0.37)*.
    - R-squared: 0.34; Observations: 63; No. of MENA countries: 8.
  - Dependent variable: Total factor productivity growth
    - Institutional quality coefficient: 0.54 (0.13)**.
    - Real exchange rate overvaluation: -0.01 (0.002)**.
    - Initial income (1980): -0.92 (0.23)**.
    - R-squared: 0.64; Observations: 63; No. of MENA countries: 8.
- Robustness: regression results broadly the same when an institutional quality index that encompasses internal and external conflicts is used.

### Policy recommendations (drawn from empirical findings)
- For GCC countries
  - Reduce the size of government over time.
  - Given inevitable transfers from hydrocarbon revenues, find better ways to distribute oil wealth to minimize distortions to incentives and reduce unproductive public employment and investments.
- For other MENA oil countries
  - Improve institutional quality—especially bureaucracy quality and the rule of law—to promote TFP and economic growth.
- For non-oil MENA countries
  - Improve institutional quality—especially control of corruption, rule of law, and bureaucracy quality.
  - Reduce the size of government to lessen negative effects on capital accumulation.

### Data and methodology (key definitions and coverage)
- Growth measured as average annual growth rate of real per capita GDP over 1980–2000 (WEO database).
- Institutional quality: average of four ICRG indices over 1984–2000—corruption; rule of law; bureaucracy quality; government stability; indices re-scaled from 1 to 12. Alternative index adds internal and external conflict indicators.
- Government consumption: average ratio of government consumption expenditure to GDP, 1980–2000 (WDI).
- Trade openness: sum of imports and exports of goods and services divided by GDP (WDI).
- Terms of trade volatility: standard deviation of annual change in terms of trade over 1980–2000 weighted by share of natural resource exports in total exports in 1980.
- Capital per worker and TFP growth series sourced from Bosworth and Collins (2003) and supplemented with IMF (2003b) for some MENA countries.
- Country coverage for regression sample: 74 countries (21 advanced economies, 53 developing countries), including 10 MENA countries used in regressions: Algeria, Bahrain, Egypt, Islamic Republic of Iran, Jordan, Kuwait, Morocco, Saudi Arabia, Syrian Arab Republic, Tunisia.
- MENA group definitions:
  - Non-oil MENA countries: Egypt, Jordan, Lebanon, Morocco, Syrian Arab Republic, Tunisia, Yemen.
  - GCC countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates.
  - Other MENA oil-exporting countries: Algeria, Islamic Republic of Iran, Libya.

*Source: IMF staff estimates and analyses in the provided document.*

### References

### References

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*Source: _wp0456 - References*

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