MENA: Emerging Developments and Challenges

Shamshad Akhtar
Vice President
Middle East and North Africa
The World Bank

Brussels
February 23, 2011

The events of the last few weeks are a watershed for Tunisia, Egypt, and other countries. Still unfolding, the political developments will have wide ranging repercussions throughout the Region and the World.  If supported by properly managed democratic transition, these events provide a unique opportunity to all concerned to leverage people and civil society power to change the landscape of the Middle East and North Africa. We welcome meetings such as this one to exchange ideas, and to learn from the experience of the EU as well as other parts of the world, particularly the emerging markets of Asia, Latin America, Eastern Europe and Africa.

The root cause of political turmoil in MENA is fatigue with long-standing authoritarian rule and weak political and economic governance as confirmed by public concerns regarding issues of voice, social justice, fairness, accountability and access to public services.  The MENA Region, however, has its strengths: its youth, its resource base and its resilience that has been well tested during the global crisis. Moreover, just prior to the political turmoil, economies notably were on a path of economic recovery as the global economy rebounded.  Tunisia further managed to curb its fiscal deficit and Egypt, given its high fiscal deficit, had embarked on a consolidation program. Both countries have a foreign exchange reserves cushion.  These countries, based on their openness and potential, have been the beneficiary of foreign flows and tourism.

The economic and social impact of the past few weeks’ events, yet to be fully realized and assessed, is likely to be significant in the short term.   Slippages in economic growth, fiscal revenues and tourism and FDI receipts are inevitable.  While global equity markets posted gains, Egypt and Tunisia markets fell by 21% and 14%, respectively in the last month.  Macroeconomic imbalances will come under renewed pressures.  Vulnerabilities are likely to magnify.  A large segment of the population does not have adequate access to jobs, land, basic services and finance and justice. They may be further marginalized as inflationary pressures grow depending, among other things, on trends in oil and food prices.  Fiscal complications are likely to grow, particularly in Egypt as the Government and public enterprises are grappling with wage and other pressures.  In Tunisia, banks may face stress as second round effects of the slowdown in businesses and investment permeate.  

In dealing with the short term challenges, we cannot but remind ourselves of the deep-rooted problems that MENA is faced with – attention to these will help shape our collective thinking.

• Benefits of growth have not been shared equitably:The illustration of this is the high unemployment rates in MENA – in the range of 20-25% for youth in some countries, and steeper for university graduates and for women – whose participation rates are one of the lowest in the world.  The population at the lower end of the spectrum is quite vulnerable, for example the number of poor almost doubles in the case of Egypt when a cut-off of $2.50 is adopted.  Regional disparities are quite significant too.

• Growth has been below potential in MENA (and not labor absorbing) because of the lack of economic diversification, low private investment (averaging at 15% of GDP relative to over double this level in East Asia) in the wake of barriers to entry and an incentive framework that promotes privileges’ rather than competition.  A range of economic reforms has been undertaken over the past years. A World Bank survey at firm level reported that the quality of implementation of reforms has been low and institutions remain tied to old outdated regulatory framework and practices.   Another Bank study recognizes the rise in total factor productivity since 2005 in Egypt, but finds that growth in Egypt is mostly explained by factor accumulation and not productivity growth.  Key determinants of productivity growth are public expenditure, exports, investment, and inflation, while labor productivity has been low.   To attain higher growth, there is a need to move from a low-wage, low value-added economy to a skill-intensive and technology-based economy.

• Labor markets and education systems are dysfunctional:According to the 2009 Investment Climate Assessment (ICA), high labor taxes (social contribution), rigid labor regulation and skill mismatches are among key reasons why firms do not expand employment.   High labor taxes, insufficient innovation and entrepreneurship and lack of labor market clearing mechanisms are some other issues.   Quality of education, as illustrated by international testing mechanisms, has been compromised in striving to broaden access.  This however would require a complete overhaul of the governance of the education system with due regard to changing the modes of learning, teacher incentive frameworks and reforming higher education systems.

• Financial and social exclusion is high:access to finance is low and the social protection system fragmented and inefficient – almost 8% of GDP is directed largely to subsidize fuel and inefficient public food distribution systems that do not reach poor.

• Trade integration and diversification, both at product and market level, are quite low.  Most notably regional trade within MENA, and non-oil trade with the rest of the world,  have been quite low and have impeded growth and employment opportunities

Client ownership and close cooperation among all stakeholder including development partners

Supported by public demand, authorities have a unique opportunity to address these daunting challenges and seek a “break with past” and a paradigm shift that defines clearly the path of political, economic and social transformation.  Moving in a calibrated manner, the region will need to ensure the quality and speed of short-term economic policy responses and position for addressing medium-term challenges.  The pace and sequencing of reforms will need to be coordinated to ensure macroeconomic stability is maintained, while judging the institutional capacities for the implementation of programs.  

Keeping these in perspective, restoring public confidence would require a proper signal and a swift change of governance structures, safeguarding public interests and protecting vulnerable groups through innovative well-targeted programs with due regard to fiduciary concerns and engaging civil society in economic reforms, while re-energizing the private sector to unleash its economic potential.  To support transition governments the Bank stands ready to address immediate challenges, while engaging on medium-term issues.  Upfront commitment on changes in economic governance would facilitate effective implementation of programs adopted. 

In response to the global economic crisis, in the last 18 months the World Bank Group has been heavily engaged with both Egypt and Tunisia and has delivered substantial economic and sector work.  This can now be channeled to develop an understanding of the complex issues at hand and prepare appropriate responses.  Besides assessment of the initial economic and financial costs of political events, engagement is underway to develop short-term policy responses, while maintaining a dialogue on medium-term challenges.    

Recent events and lessons learned have amplified that as we go forward there will be emphasis on:

Changing methods of engagement.  Besides judging the mandates and ownership of transition governments and navigating carefully given the rising sense of social entitlement, it is critical that development partners be inclusive and work closely to ensure coordinated approaches.  There is a need to go beyond the governments and reach out to civil society including economic thinkers, private sector and NGOs and visibly demonstrate our adaptability and flexibility, while carefully managing expectations and risks.  Assistance has to include a range of products: quick budgetary support (to meet the growing financing requirements) and a rapid investment response to support the required poverty interventions, employment generation and special areas programs. This has to be accompanied by advisory support, strengthening of institutional capacities and the provision of entrepreneurship and other training programs.   However, the development partners should clearly be coordinated primarily by the MENA countries themselves, and any complementary mechanisms should have their support.

Strengthening of governance frameworks is a clear public demand and will have high payoffs for incoming regimes.   Advocacy in this area should involve focus on improving:

Fostering inclusive growth that is broad based and equitable.  As many countries in the region can no longer continue to be employers of first and last resort, private-sector led, job-creating economic growth has to be the cornerstone of any development strategy for countries in MENA.   In this context, the underlying challenges for the region have not changed.  The World Bank Group hence will support faster and effective responses to establish an enabling policy environment that fosters competition, adoption of technology and innovation and skill enhancement backed by qualitative changes in education systems.  In response supportive global and European engagement would be beneficial to encouraging trade and private flows by opening up market access, encouraging labor mobility, partnerships in renewable energy, legal and regulatory harmonization, service liberalization etc.  In light of the current crisis, IBRD and IFC will be open to restructuring its portfolio and adjust its pipeline to align and sharpen some of its areas of intervention.  Increasing access to finance for underserved segments of the MENA population, improving infrastructure services, raising the quality of education and health services, and supporting high value-added sectors remains even more valid today than previously as avenues for enhancing employment opportunities and the region’s competitive edge.  

Within this overarching framework, IFC plans assign priority to increasing social inclusion by better addressing the needs of the middle-class/poor.  In this context, among others, IFC will explore more opportunities with Tier II and Tier III companies despite the possibility of higher short-term risks and investments in disadvantaged regions within MICs.  In the short-term, IFC will (i) undertake a coordinated private sector needs assessment in affected countries; (ii) stress test the portfolios; (iii) help clients restructure their portfolios and provide additional financing to mitigate against further losses; and (v) provide rapid financing through short-term finance instruments such as trade finance, SME risk-sharing facilities, SME credit lines, microfinance etc.

IBRD and IFC, while focusing on short term challenges, will continue to focus on increasing regional investments and providing high quality Advisory Services to build the institutional capacities in key public and private entities in the region. Priority areas of advisory focus will include improving corporate governance/transparency, investor rights and alternate dispute resolution, access to finance and credit information systems, bank risk management, PPPs, and business edge — to address the structural and capacity constraints facing the private sector.  Support for transfer of seized assets will be important to help both government entities (like central banks) and private sector players in affected countries refocus their priorities.  

Moving from fragmented to coherent and sustainable social protection systems that are well coordinated with the broader social insurance and labor market policies.  An immediate response could be to consider:

• Targeted cash transfer programs for the poor and vulnerable groups;
• Establishing a Community Driven Development (CDD) fund to empower local communities to finance small public projects in disadvantaged regions (with high unemployment rates) with local participation;
• Establish an  ‘Emergency Employment Package’ to provide an immediate short-term mitigation response to the unemployment crisis, including School-to-Work Transition programs for new graduates.

In the medium-term, the World Bank willengage in developing conducive labor market policies and regulation frameworks (albeit politically sensitive), promotion of private intermediation, a revision of social security systems (including tax wedges, social contributions, and pensions), liberalization of professions.  Emphasis will now have to shift from protecting jobs to protecting workers’ income with more social support, unemployment insurance, and active measures to assist workers during periods of transition.  According to recent enterprise surveys, high labor taxes (social contributions) and rigid labor regulation are among the top reasons why firms in countries like Tunisia, Egypt, Lebanon, and Syria do not expand employment.

In tandem IFC will sharpen its interventions in:

• employment generating real sector investments, e.g., retail, services including tourism, ICT, telecommunications etc.;
• increased access to finance for underserved segments like mortgage and student borrowers to better address the needs of youth and lower-income groups;
• improving the quality of post-secondary education services (especially technical and vocational education) to meet the needs of the private sector and reduce youth frustrations-- the E4E initiative is to outline an action plan for IFC’s Investment and Advisory engagements in this area in the next few years; and
• increased investments in agribusiness and higher value-added sectors where IFC can help in transfer of technology, international best practices, and E&S standards to help build a competitive and knowledge-economy.  

Fast track regional program to reduce food price volatility: MENA countries import 30% of the world’s traded wheat which is expected to rise to rise to 55% by 2030. The sharp rise in food prices have triggered grave concerns about food security, malnutrition and increased poverty throughout the world. This trend is of particular concern for MENA countries because of their rapidly growing populations, limited water and arable land resources, and significant dependence on international food commodity markets.

• Surging international prices place significant upward pressure on national and household budgets, depending on the level of domestic consumption subsidies and the pass-through. The poor will likely be hardest hit because they typically spend anywhere from 35 to 65 percent of their income on food. 

• In response to the 2008 food price crisis, the World Bank launched a number of rapidly disbursing operations to strengthen safety nets for the poorest people in fragile regions including Yemen, Djibouti and West Bank and Gaza.   Supportive programs of this nature can be structured to meet the food requirements of the affected countries.

• Lending for agriculture productivity and irrigation efficiency has also increased since 2008, with approximately $450 million in commitments for projects to improve agriculture productivity and irrigation efficiency in Morocco, Egypt, Yemen, Tunisia, and Djibouti. The projects in Egypt and Tunisia are particularly relevant in these difficult times because they emphasize community driven development approaches with strong local accountability and transparency in the allocation of resources.

• The World Bank is also supporting analytical work to examine issues such as the bread distribution system and poverty targeting in Egypt and the agriculture sector in Tunisia, Morocco, and Egypt. The World Bank is also leading an ongoing regional study, in which ten countries in the region are participating, on the efficiency of wheat import supply chains and how these can be improved to increase food security.

Fostering global and regional economic integration.  At the request of the Arab world, the World Bank group has launched a number regional cooperation programs.  This takes place within the broader context of our policy advice to MENA countries on economic integration - internally and externally.  Let me mention just a few key regional programs, which may offer opportunities for further development partnerships.  We are launching two regional financing facilities - one to help open up the Micro and SME sector and the other for infrastructure.  In both cases, there is a strong focus on trade and employment generation, and on external support for risk-mitigation. 

In a similar vein, we are financing, along with a number of partners represented here, the scale-up of solar energy in MENA.  The World Bank studies show this can create about 80,000 jobs in MENA, but that depends partly on solar exports accessing the green energy markets in Europe on a level playing field.  We look forward to Europe taking action very soon to demonstrate that the Mediterranean Solar Plan is feasible. That would send a very strong signal to the MENA countries, about integration, employment, technology transfer, and climate change.

We are also proposing to finance cross-border trade facilitation and transport infrastructure in the Mashreq and in North Africa, and would welcome development partners’ participation.  That program will serve to integrate each subregion, but will critically connect them more efficiently to Europe and to other neighboring regions (including the GCC for the Mashreq).  Similarly, we are working on maritime transport in the region, and marine highways in the Mediterranean.  These are all flexible regional programs that can move at the pace that each country in the Arab world is able and willing to move, and are therefore well-adapted to addressing the competitiveness challenges facing the region.  We invite you to join us.  In our view, MENA's economic future lies in better accessing regional and global markets - for goods and services, for capital, and for labor.  We are of course interested to hear from you what are the plans of the EU and other parts of the world vis-a-vis MENA, and whether they will now be scaled-up to a new level.  A historic opportunity is presenting itself, and we hope it will be seized by all.