Raising Competitiveness: Recipe for Tapping into the Middle East’s Growth Potential

IMF Blog, October 29, 2010

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With the global economy on the mend, countries in the Middle East and North Africa are witnessing a pickup in trade and economic growth.
Aided by rising oil prices and production levels and supportive fiscal policies, economic growth for the region as a whole is projected to exceed 4 percent in 2010, almost double what it was in 2009.
The region’s oil-importing countries saw only a mild slowdown in economic growth last year to 4½ percent and are likely to see growth nudge up to around 5 percent this year.
The October 2010 Regional Economic Outlook notes that the observed growth rate is well below the average of 6½ percent a year required to create the 18 million jobs needed over the next decade to absorb new labor-market entrants and eliminate chronically high unemployment.

Competitiveness is defined here mainly as a country’s ability to successfully export goods to other countries and for domestic industries to hold their own against imports.
Key ingredients of competitiveness identified:
- High productivity.
- Business environments that help firms rather than put obstacles in their way.
- Workers that are skilled and experienced.

Over the past two decades, most countries in the region have reduced the number and level of tariffs on imports.
Egypt and Syria have accelerated progress in tariff reduction in recent years.
Privatization of formerly government-run key industries, together with easier access to foreign capital and technology, has boosted export growth over the past decade.
Persistent impediments:
- Tariffs in these countries remain high (still averaging double digits).
- Other impediments to trade remain and need to be tackled.

Labour market inefficiencies highlighted:
- Dominant public sector attracts many of the most qualified graduates and serves as a ‘safety net’ for those who cannot find jobs elsewhere, often at wages well above those for comparable private sector jobs.
Policy prescriptions for labor markets:
- Government pay scales should differentiate across skills within a framework of overall wage and hiring restraint.
- Education systems need to focus more on ensuring new workers have the skills and knowledge the private sector needs.
- Reforms should accompany efforts to reduce—or even eliminate—regulatory ‘red tape’ and strengthen institutions to provide a more job-friendly environment for the private sector.

Becoming more competitive requires building sophisticated transport, communications, and financial services to integrate into the global supply chain and tap new export markets.
Examples within the region demonstrate success when these elements are implemented.

Tunisia:
- Became an ‘outsourcing hub,’ attracting foreign direct investment in textile production, car assembly, and food processing, and more recently in information technology and aeronautics.
- Success factors: simplified regulation, modern infrastructure, government incentives, and commitment to a knowledge-based economy generating well-trained, low-cost workers.
Dubai:
- Transformed into a dominant regional hub for international trade and services by developing a cutting-edge logistics industry, significantly multiplying the emirate’s GDP despite fallout from reliance on large-scale, highly-leveraged property development.
Other Gulf Cooperation Council countries:
- Have made great strides by enhancing institutions and upgrading infrastructure.
- Current challenge: further upgrade innovative capacity and education outcomes to diversify away from the hydrocarbon sector.

Rapidly enhance competitiveness to achieve higher growth rates and job creation.
Continue and deepen tariff reductions and remove remaining impediments to trade.
Privatize where appropriate and facilitate access to foreign capital and technology.
Reform public sector pay structures to differentiate skills and restrain overall wage and hiring growth.
Reorient education systems toward private-sector skill needs.
Reduce or eliminate regulatory ‘red tape’ and strengthen institutions.
Invest in transport, communications, and financial services to integrate into global supply chains.
Build on successful regional examples (Tunisia, Dubai, GCC countries) to promote outsourcing, logistics, and knowledge-based economies.

Masood Ahmed — October 29, 2010