Number 2 | FEBRUARY 2011 62228 EMERGING DEVELOPMENTS AND CHALLENGES IN THE ARAB WORLD Shamshad Akhtar1 x Inequitable Growth: One example is MENA’s high unemployment rates – 20-25% for youth Introduction: The events of the last few weeks in some countries, and steeper for university are a watershed for Tunisia, Egypt, and other graduates and women. Note that female MENA countries. The ongoing political events labor force participation rates in MENA are will resonate regionally and globally and, if among the lowest globally. The population at followed by sound transitions to better the lower end of the spectrum is quite governance structures, these events provide a vulnerable - the number of poor almost unique opportunity to change MENA’s political doubles in Egypt when a cut-off of $2.50 is and social landscape. The root cause of the adopted. Regional disparities are quite political turmoil in MENA is fatigue with long- significant too. standing authoritarian rule and weak political x Below Potential and Non-labor Absorbing and economic governance as confirmed by public Growth: Largely due to lack of economic concerns over voice, social justice, accountability diversification, low private investment, and access to services. The MENA Region also averaging 15% of GDP, less than half the East has its strengths: its youth, resource base and the Asia level, with significant barriers to entry resilience shown during the global crisis. Prior to and an incentive framework promoting the political turmoil, economies were recovering privilege rather than competition. Economic as the global economy rebounded. Tunisia reforms have been undertaken over the years further curbed its fiscal deficit and Egypt had yet World Bank surveys at the firm level embarked on a fiscal consolidation program. Both report that the quality of reform countries have foreign exchange reserve cushions implementation has been low with and benefitted from foreign flows and tourism. institutions tied to outdated regulations and practices2. Another Bank study recognizes The economic and social impact will be the rise in total factor productivity since 2005 significant in the short term with slippages in in Egypt, but note that growth is explained economic growth, fiscal revenues and tourism by factor accumulation and not productivity and FDI receipts. As global equity markets grew, growth3. Labor productivity remains low Egypt and Tunisia’s fell 21% and 14% and for higher growth there is a need to respectively in January. Macroeconomic move from a low-wage, low value-added imbalances and vulnerabilities will increase. economy to a skill-intensive, technology- Large parts of the population lack adequate based economy. access to jobs, land, services, finance and justice. x Dysfunctional Labor Markets and Education They may be further affected as inflationary Systems: According to recent Bank analysis, pressures grow depending, among others, on oil high labor taxes (social contribution), rigid and food prices. Fiscal difficulties are likely, labor regulations and skill mismatches are particularly in Egypt as government and public among key reasons why firms do not expand enterprises face wage and other pressures. Longer-term Challenges: Aside from short term 2 For more on reform implementation see Benhassine, Najy difficulties, deep-rooted challenges remain: and Stone, Andrew “from Competition to Privilege: Unlocking Private-Led growth in the Middle east and North Africa”, The World Bank, 2009. 1 3 Vice-President, Middle East and North Africa Region, the World Herrera, Santiago, et al“Egypt Beyond the Crisis” Policy Bank. Research Working Paper, The World Bank, 2010. employment4. Others include high labor governments the Bank stands ready to address taxes, insufficient innovation and immediate challenges, while engaging on entrepreneurship and lack of labor market medium-term issues. Upfront commitment on clearing mechanisms. Quality of education, changes in economic governance would facilitate as illustrated by international testing effective implementation of programs adopted. mechanisms, has been compromised as access expanded. To remedy would require In response to the global economic crisis, in the an overhaul of the governance of the last 18 months the World Bank Group has been education system and changing the modes of heavily engaged with both Egypt and Tunisia learning, teacher incentive frameworks and and has delivered substantial economic and reforming higher education systems. sector work. This can be channeled to develop an x High Financial and Social Exclusion: Access to understanding of the complex issues at hand and finance is low with social protection system prepare appropriate responses. Aside from fragmented and inefficient – almost 8% of assessing initial economic and financial costs of GDP largely subsidizes fuel and inefficient the events, engagement is underway to develop public food distribution systems that do not short-term policy responses, while maintaining a reach poor. dialogue on medium-term challenges. x Trade Integration and Diversification: This is low at both the product and market level. Changing Methods of Engagement: Besides Regional trade within MENA and non-oil navigating the shoals of transitional governments trade with the rest of the world have been while being cognizant of the rising sense of social low, impeding growth and employment. entitlement, it is critical that development partners be inclusive and coordinate closely. Client ownership and close cooperation among There is a need to reach out further to civil all stakeholder including development partners: society including academics, the private sector Supported by public demand, authorities have a and NGOs and visibly demonstrate our unique opportunity to address these daunting adaptability and flexibility, while carefully challenges and seek a “break with past” and a managing expectations and risks. Assistance has paradigm shift that defines clearly the path of to include a range of products: quick budgetary political, economic and social transformation. support (to meet the growing financing Moving in a calibrated manner, the region will requirements) and a rapid investment response need to ensure the quality and speed of short- to support the required poverty interventions, term economic policy responses and position employment generation and special areas itself for addressing medium-term challenges. programs. This has to be accompanied by The pace and sequencing of reforms will need to advisory support, strengthening of institutional be coordinated to ensure macroeconomic stability capacities and the provision of entrepreneurship is maintained, while judging institutional and other training programs. However, the capacities for the implementation of programs. development partners should clearly be coordinated primarily by the MENA countries Restoring public confidence will require a swift themselves, and any complementary mechanisms change of governance structures, safeguarding of should have their support. the public interest and protecting the vulnerable through innovative well-targeted programs with Strengthening Governance Frameworks: due regard to fiduciary concerns and engaging Moving forward in this area will have high civil society in economic reforms, while re- payoff for incoming regimes. Advocacy in this energizing the private sector to unleash its area should involve focus on improving: economic potential. To support transition x Transparency and opening up access to information and economic data; 4 MNSHD, “The Labor Market Policy Reform Agenda in MENA”, x Reducing/removing barriers to entry; MNA Knowledge and Learning Quick Note, #35, The World Bank, x Competition and anti-trust policies; March 3011. x Fostering independent NGOs and investments and provide high quality Advisory associations; Services to build the institutional capacity in x Developing conflict-of-interest regulations public and private entities. Priority areas of for all officials; and advisory focus include improving corporate x Public administration reforms. governance/transparency, investor rights, alternate dispute resolution, access to finance and Fostering inclusive growth: Countries in the credit information systems, bank risk region can no longer continue to be employers of management, PPPs to address structural and first and last resort. Private sector led, job- capacity constraints facing the private sector. creating economic growth has to be the Support for transfer of seized assets will be cornerstone of development strategies. The important to help government entities and the World Bank Group (WBG) will support faster private sector players to refocus their priorities. and effective responses to establish an enabling policy environment fostering competition, Establishing Sustainable Social Protection technology adoption and innovation and skills Systems: These will need to be coordinated with enhancement backed by qualitative changes in broader social insurance and labor market education. In response, supportive global and policies. In the immediate, one could consider: European engagement would benefit trade and x Targeted cash transfer programs for poor and private flows by opening up markets, vulnerable groups; encouraging labor mobility, legal and regulatory x Establishing a Community Driven Development harmonization, service liberalization, etc. In the (CDD) fund to empower local communities to current environment, IBRD and IFC will be open finance small public projects in to restructuring portfolios to better align and disadvantaged regions with high sharpen areas of intervention. Increasing access unemployment rates; to finance for underserved segments of the x Establish an ‘Emergency Employment Package’ population, improving infrastructure services, to provide immediate short-term mitigation raising the quality of education and health responses to the unemployment crisis, services, and supporting high value-added including School-to-Work Transition sectors is ever more key to enhance employment programs for new graduates. opportunities and regional competitiveness. In the medium-term, the World Bank will engage Within this overarching framework, IFC plans to in developing appropriate labor market policies assign priority to increasing social inclusion by and regulatory frameworks, promote private better addressing the needs of the less-well-off. intermediation, revise social security systems The IFC will explore more opportunities with (including tax wedges, social contributions, and Tier II and Tier III companies despite higher pensions), and liberalize professions. Emphasis short-term risks and investments in will have to shift from protecting jobs to disadvantaged regions within MICs. In the protecting workers’ income through social short-term, IFC will (i) undertake a coordinated support, unemployment insurance, and active private sector needs assessment in affected measures to assist during periods of transition. countries; (ii) stress test the portfolios; (iii) help Recent enterprise surveys note that high labor clients restructure their portfolios and provide taxes and rigid labor regulation are the top additional financing to mitigate against further reasons why firms in Tunisia, Egypt, Lebanon, losses; and (v) provide rapid financing through and Syria do not expand employment. short-term finance instruments such as trade finance, SME risk-sharing facilities, SME credit In tandem IFC will sharpen its interventions in: lines, microfinance etc. x employment generating real sector investments - retail, tourism, ICT, IBRD and IFC, while focusing on short term telecommunications etc.; challenges, will also increase regional x increased access to finance for underserved Global and Regional Economic Integration : segments (mortgages, student loans) to better Responding to our countries, the WBG has address the needs of youth and the poor; launched regional programs within the context of x improving the quality of post-secondary our policy on economic integration. Two regional education services (especially technical and financing facilities are being launched, one on the vocational education) to meet private sector Micro and SME sector and the other on needs and increase youth employment; infrastructure. Both will focus on trade and x Increase investments in agribusiness and employment generation with guarantees for risk- higher value-added sectors where the IFC mitigation. The Bank and partners are also can help in technology transfer and scaling-up solar energy in MENA. World Bank international best practices to build a studies show this can create some 80,000 jobs, so competitive and knowledge economy. long as exports access green energy markets in Europe5. The expectation is that Europe will take Reducing Food Price Volatility: MENA action demonstrating the feasibility of the countries import 30% of the world’s traded Mediterranean Solar Plan, sending a strong signal wheat. By 2030 this will rise to 55%. The sharp to MENA on integration, jobs, technology rise in food prices have triggered concerns about transfer, and climate change. The Bank is also food security, malnutrition and increased proposing to finance cross-border trade poverty. This is of particular concern for MENA facilitation and transport infrastructure in the countries due to fast population growth, limited Mashreq and the Maghreb. This will serve to water and arable land resources, and significant integrate each sub-region and also connect them dependence on international food commodity more efficiently to Europe and neighboring markets. regions, including the GCC for the Mashreq. • Surging international prices place significant Work is ongoing on maritime transport and pressure on national and household budgets, marine highways in the Mediterranean. These depending domestic consumption subsidy are flexible regional programs that move at each levels and the pass-through. The poor will be country’s pace. Clearly, MENA's economic future hardest hit since they typically spend 35 to 65 is in better accessing regional and global markets percent of their income on food. - for goods and services, for capital, and for labor. • After the 2008 food price crisis, the World Bank launched rapidly disbursing operations Contact Arab World Briefs: to strengthen safety nets for the poorest in Director, Regional Strategy and Programs Yemen, Djibouti and West Bank and Gaza. Jonathan Walters • Lending for agriculture productivity and Arab World Briefs Team: Omer Karasapan, Roby Fields, irrigation efficiency has increased since 2008, and Hafed Al-Ghwell – Tel #: (202) 473 8177 with $450 million in project commitments for Morocco, Egypt, Yemen, Tunisia, and The Arab World Briefs are intended to summarize lessons Djibouti. Projects in Egypt and Tunisia are learned from the Knowledge and Learning activities of the particularly relevant as they emphasize CDD World Bank Group and our partners. The Briefs do not approaches with strong local accountability necessarily reflect the views of the World Bank, its board or and transparent resource-allocation. its member countries. • The World Bank is supporting analytical work on issues such as bread distribution systems and poverty targeting in Egypt and the agriculture sector in Egypt, Morocco, and Tunisia. The World Bank leads an ongoing study with ten regional countries on the 5 Roger Coma-Cunill, Chandra Govindarajalu, Silvia efficiency of wheat import supply chains and Pariente-David, Jonathan Walters “Clean Technology Fund on improvements to increase food security. Investment Plan Approved for Concentrated Solar Power in the MENA region” , MENA Knowledge and Learning Quick Note #15, The World Bank, December 2009.