Overhauling the Arab World’s Economies
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- Authors: Jihad Azour, TALINE KORANCHELIAN
- Published: September 1, 2023
Overview and strategic challenge
- Region: the Middle East and North Africa ("the Arab world") comprises two dozen nations spanning 4,000 miles and four time zones from Morocco to the Islamic Republic of Iran.
- Population: 600 million people.
- Economic diversity: includes some of the world’s wealthiest nations—Qatar, the United Arab Emirates, Saudi Arabia—and some of the poorest—Somalia, Sudan, Yemen.
- Political and economic context: past two decades marked by significant change (including the Arab Spring uprisings of 2010–11) and persistent challenges: lackluster growth, low female labor force participation, high youth unemployment, rising debt, high inflation, climate stress, and equity pressures.
- Demographic pressure: more than 100 million people are projected to enter the workforce in the next 10 years.
- Central claim: macroeconomic stability is necessary but insufficient; a comprehensive structural transformation is required to deliver jobs, better education, improved governance, and broader, fairer distribution of opportunities.
Macroeconomic and fiscal stability—findings and policy recommendations
- Findings:
- Many governments increased spending and social support during the COVID-19 pandemic and cost-of-living crisis, often financed by borrowing, raising debt servicing costs and reducing fiscal space.
- In Tunisia, public-sector wage and rigid outlays account for four-fifths of revenues.
- Policy recommendations:
- Mobilize revenue by withdrawing ineffective exemptions and improving tax equity.
- Limit spending on untargeted subsidies.
- Control the public sector wage bill to free resources for education, health care, and social protection.
- Central banks should be forward-looking with a clear focus on price stability while maintaining financial stability; adjust policy in line with new data, global developments, and the policy posture of major central banks.
- Treat macroeconomic stability as the foundation for structural reforms, not as the ultimate goal.
Social protection and targeting
- Findings:
- Most social spending goes to untargeted, broad subsidies that benefit the wealthy and waste resources.
- Generalized price subsidies limit governments’ ability to invest in targeted programs.
- Examples and outcomes:
- Morocco removed fuel subsidies in 2016.
- Egypt introduced an automatic fuel price index mechanism in 2019.
- Mauritania substantially reduced untargeted fuel subsidies while progressively increasing cash transfers to the most vulnerable.
- Morocco used digital payments during the pandemic to reach informal workers with cash transfers quickly.
- Jordan improved the targeting of its cash transfer system, greatly broadening its reach.
- Recommendation:
- Replace generalized price subsidies with targeted support and deploy efficient targeting mechanisms, including digital payments.
Private sector expansion and labor market reform
- Findings:
- Private sector generates more than 90 percent of jobs in developing economies.
- State-owned enterprises play an outsized role across sectors (tobacco, textiles, foodstuffs, furniture, communications, electricity), creating inefficiencies and weighing on productivity.
- Female labor force participation is low; legal barriers and discriminatory practices hinder inclusion.
- Policy recommendations:
- Ensure the private sector is the driver of investment, productivity, competitiveness, and workforce training.
- Strengthen the public sector’s role in institutions, correcting market failures, and providing public goods.
- Improve education and skills development to formalize the labor force and prepare workers for technological change.
- Remove legal barriers and discriminatory practices to bolster female labor force participation.
- Implement stronger economic governance and decisive anti-corruption policies; enhance transparency and accountability.
Climate, resilience, and the energy transition
- Findings:
- Climate change is urgent for a region with significant water and food needs; it will exacerbate hunger, deepen economic upheaval, conflict, and displacement.
- Tunisia’s tourism and fishing sectors face beach erosion risks with employment implications.
- In Mauritania, growth could fall by as much as 1 percentage point as drought intensifies, but expanding access to electricity could cut the losses in half.
- World Bank simulations for Morocco show that investment in water infrastructure would improve resilience to drought, reducing GDP losses by almost 60 percent and capping the rise in public debt.
- Examples:
- Morocco built the world’s largest concentrated solar plant that continues to generate power after sunset.
- Egypt pioneered green bonds in the region and has accelerated renewable energy integration over the past decade.
- Egypt, Mauritania, Morocco, and the United Arab Emirates are moving to tap into green energy.
- Policy recommendations:
- Prioritize measures that are beneficial under all plausible climate-change scenarios and build adaptation capacity.
- For lower-income, fragile, and conflict-affected countries: strengthen disaster preparedness, water resource management, climate-adapted infrastructure, and institutional capacity for climate response.
Digitalization and technology adoption
- Findings:
- According to the World Bank, GDP per capita in the region could rise by more than 40 percent as digitalization elevates efficiency, inclusion, and resilience.
- Smartphones are widely used, but e-commerce is still nascent; disparities in digital adoption persist between low-income and high-income nations.
- Policy recommendations:
- Create a strong enabling environment: enhance digital infrastructure, upgrade digital literacy, and develop workforce digital skills.
- Reduce adoption costs for small and medium enterprises.
- Example: Tunisia’s Startup Act (begun in 2018) simplifies administrative procedures to encourage entrepreneurship and innovation in the digital sector.
Reform sequencing, ownership, and governance
- Findings:
- Successful, durable reforms require government full ownership and transparent communication to build public support.
- Reform progress is non-linear and vulnerable to external shocks, domestic conditions, and conflicts; perceptions that reforms favor elites can undermine momentum.
- Policy guidance:
- Ensure government ownership to overcome resistance and sustain reforms.
- Use transparent, two-way communication with stakeholders and incorporate feedback.
- Sequence reforms to start with measures that deliver broad gains and quick wins to build trust and a track record.
- Maintain ambition and flexibility in reform plans.
Regional and global cooperation
- Findings:
- Fragmented global landscape and declining trade integration would most harm low-income countries in the region.
- Reduced capital flows and foreign direct investment would constrain financing, technology diffusion, and growth.
- Despite multiple trade agreements, intra-regional trade remains weak.
- The Gulf Cooperation Council (42-year-old) members—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—have taken steps to support regional investments.
- Policy recommendations:
- Reboot and strengthen regional partnerships in trade and investment to improve resilience to exogenous shocks and market volatility.
- Diversify economies and develop greater regional self-sufficiency as global "friendshoring" and supply-chain realignment proceed.
- Multilateral institutions should upgrade rules to ensure cooperation on global public goods, fair competition, and protection of the most vulnerable.
- Principle:
- External prescriptions require domestic buy-in; successful examples include Jordan (consistent ownership of IMF-supported program since 2019) and Morocco’s transformation supported by IMF credit facilities.
Source: Overhauling the Arab World’s Economies, Jihad Azour and Taline Koranchelian, F&D Magazine, September 2023.
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