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Better Quality Investments needed in the Middle East and North Africa Region to Boost Shared Growth

October 10, 2013

Long period of political instability has affected both the quality and quantity of investments, skewing them towards activities that create the least jobs      

WASHINGTON, October 10, 2013 – Ongoing political turmoil in 2013 has weighed down economic activity in the Middle East and North Africa (MENA) region. The World Bank Group’s latest Economic Developments and Prospects report projects MENA’s economic growth in 2013 to average 2.8 percent, half the estimated 5.6 percent in 2012.

In oil-importing countries, growth is expected to remain weak and fiscal and external deficits to persist. In developing oil-exporting countries, the pace of economic expansion is slowing considerably due to unfavorable developments. The economic expansion in the Gulf Cooperation Council economies will slow down relative to 2012, but their growth will be the region’s strongest. If the political situation evolves toward greater stability and clarity, growth will pick up and average 4 percent in 2014, but a variety of risks, mostly domestic in nature and linked to political instability, threaten this outlook. 

Developing countries in the region can’t afford to continue neglecting long-standing economic impediments,” says Shanta Devarajan, World Bank Chief Economist for the Middle East and North Africa region. “The absence of significant economic reforms, combined with political and macroeconomic instability, especially in the transition economies, will keep investment and growth below potential not only in the short run, but in the years to come, unless there are remedial actions.” 

The report, entitled Middle East and North Africa: Investing in Turbulent Times, has a specific focus on foreign direct investments (FDI). In the 2000s, FDI flows to MENA followed the rest of the world, but after the ‘Arab Spring’ there was a divergence. Whereas the rest of the world’s FDI picked up after 2010, FDI flows to MENA continued to slide as economic and political conditions worsened. The report shows that political turbulence has affected the level and composition of FDI, and has skewed flows towards extractive sectors that create the least jobs. At the same time, it has discouraged the high quality FDI in labor-intensive manufacturing and services.

“By discouraging efficiency-seeking investments, shocks to political stability exacerbate the concentration of FDI in the extractive industries and non-tradable sectors and worsen a problem associated with policy distortions and political capture that predate the Arab Spring,” argues Elena Ianchovichina, World Bank MENA Lead Economist and principal author of the report.

The report outlines several policy priorities and challenges for the region. It cautions that MENA countries might find themselves in a resource trap unless they strengthen institutions and improve the investment climate, especially political and macroeconomic stability. “Protecting rule of law and property rights and committing to stable and transparent policies are key to job creation and structural transformation in MENA,” says Devarajan.

Another priority is reforms that address long-standing challenges including distortionary and unevenly enforced regulations, favoring of privileged businesses, expensive subsidies, inadequate and irregular provision of infrastructure services, education quality and skills, and poorly functioning markets.

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