## Overhauling the Arab World’s Economies

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**Canonical URL:** [Overhauling the Arab World’s Economies](https://www.imf.org/en/publications/fandd/issues/2023/09/overhauling-the-arab-worlds-economies-azour)

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## Bibliographic details
- Authors: Jihad Azour, TALINE KORANCHELIAN
- Published: September 1, 2023

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### 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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## Content in this bundle

- **Overhauling the Arab**
  - [Overhauling the Arab (Markdown version)](/-/media/files/publications/fandd/article/2023/september/azour-mena.pdf.md){rel="alternate" type="text/markdown"}
  - [Overhauling the Arab (PDF)](/-/media/files/publications/fandd/article/2023/september/azour-mena.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/fandd/issues/2023/09/overhauling-the-arab-worlds-economies-azour_