MibA1e East North Africa______ No. 9 - November 1093 Economic Development And Cooperation in The Middle East And North Africa by Ishac Diwan, Senior EL. toms Middle East and North Afi. :a Region and Lyn Squire, Director Policy Research Department The World Bank Discussion Document Paper 1II de Series Tra vail D;scusion papes are not tonnal publications of the Wodd Ban They prent pr_lklay and aften unpoished Isuft of country analand reseach. circulation is binteded to neourage disussion and oormet cketion Nd the use of te paper ould take accournt of ie prolaonal character. The findins en concsions of the paper entrely those of the authrs) and should not be attributed to the Wodd Sank. it affilid mte organiatios. orto members of is Board of Exacuti Dibst or the counes the reprse Ishac Dtwan, Senior Economist Middle East and Ncrth Africa Region and Lyn Squire, Director Policy Research Department The World Bank Washington, D.C. November, 1993 ECONOMIC DEVEWPMENT AND COOPERATION THE AMIDDLE EAST AND NORTH1 AFRICA Table, of Contents Executive Summary ...................................... i Introduction .......................................... 1 Section I From Boom To But ...................................... 3 Fluctuations in Net Inflows . ................................ 3 he Impact on Investment .................................. 4 Domestic Policy ........................................ 5 Net nflows and Domestic Policy ............................. . 6 ConstraintstoGwth ................................... . 8 Where Do We Stand Today? ................................ 10 Section II Regional Cooperation ...................................... 12 Trade ........................................... 12 Labor ..................... 12 Capital ............................ 14 Regional Projects .................................. . 16 The Need for Domestic Refonn ..... ............. 16 Section M: Domestic Reforn, External Financing and Creditworthiness ........ 18 Domestic Refonn ........... ............................ 18 Extend Financing ...................................... 21 Creditworhiness ................................... . 25 Section IV: hnplementing the Stratg .................................. 28 Reform ............................................ 28 Infrastructure ........................................ 32 Section V Next Steps ........................................... 37 Annex I: Selected Economic Profiles Annex 1: A Regional Data-Base ECONOMlIC DEVELOPMfENT SUD COOPERATON IN TIRE MID1DLE EAS5TAND NORTHI AF7RICA Executive Sumniwy i. This report has been prepared at thie request of the Multilateral Working Group on Regional Economic Development. It provides an over'iew of economic development and regional coopeation in thie Middle Past and Northi Africa.' As requested, thlis includes a review of financial flows to te region as well as an analysis of the Occupied Territories. It is hoped that the report will serve as a framework for the deliberations of the Working Group. ii. This summary presents the analysis and main conclusions of thie report. It begins with an historical review of economic progress and in doing so establishes the necessity fox a revitalization of economic growth in the region (Section I of the main report). It then suggests how this might be done and how it might be financed (Sections II and mI of the main report). It continues with .>n exploration of the extent to which the suggested strategy is already being implemented in the region (Section IV of the main report), and concludes wvith some suggested next steps (Section V of the main report). PoASI ECONOMCPRFRACE iii. The review of past performance leads to two conclusions: v. Durinc te frt hel oftegnn 1970 the regi, aonenoyemigh and,th least ienthcaeote Maghrebabn r fasreq, accltnd dipaced pfersons odi y g orowheBtb tha e seUond afo h barely keepn paewithi popuatonnc fromth boo Inre the economio butgaion thffeeal190 mode2a 1980 clg an betgowf remained mode,ffc~st.u w.r atiuat exception of tan- O cupied I Terrioris whred infomwst re oain1edihtrogotnfoswr iv/ Durin the first haf ofthes report the region itaenjtoye highlde Algnd, atleatindth cansea ofthe excheptionypt Jof dn the Occupied Territorisweeinfos, Sremined highn (throughout, inflowsrwere largest in the second half of the 1970s and smallest in the second half of the 1980s. The changes in capital inflows were of major proportions, often amounting to swings of about 10 percentage points of GNP. In the Mashreq the swings mirrored the rise and fall in the price of oil. Elsewhere changes in OECD assistance were more important and in one case - Algeria - commercial borrowing was a major factor. Regardless of the source and regardless of the ups and downs, net inflows of capital between 1970 and 1990 averaged 16 percent of GNP in the Mashreq, 14 percent in Israel, and 3.5 percent in the Maghreb, unusually high flows by international standards. vi. The link between these inflows and economic performance lies through investment: in both the upswing and the downswing domestic investment increased and declined with changes in capital inflows. But the changes in economic performance did not always match the increase irn investment in the upswing. And the subsequent collapse in performance was much greater than could easily be explained by declining levels of investment during the downswing. The evidence suggests a decline in the productivity of investment In the late seventies, this is to be expected - the sudden increase in investment encountered decreasing returns. It is much more worrsome when the productivity of capital falls at the same time as the rate of investment is declining. But this is whit happened in all countries in the second half of the 1980s. vii. The declining productivity of capital can be attributed to domestic policies and to their strong interaction with external financing - both its composition and its swings. With respect to composition, of the almost US$55 billion that flowed into the region on a net basis in the 1970s, more than 90 percent accrued to the public sector. This inflow helped finance a rapid expansion of the region's public sectors, an expansion that was associated with a policy framework inhibiting the growth of private entrepreneurship, shunning the use of markets, and povecting public production from foreign competition. And with respect to swings, then the flow of external capital began to shrink, inappropnate domestic policies were put in place to ration increasingly scarce resources, leading to an inefficient incentive regime, inflation, and capital flight. The magnitude of the capital ffight, the exodus of mainly private capital, attests to the private sector's unfavorable assessment of domestic policies: the average annual outflow in the 1980s is estimated at US$1.6 billion in the Maghreb and US$4.5 billion in the Mashreq, enough to virtually offset the annual inflows of worker remittances. viii. This review of past performance points to the need to revitalize growth both by increasing the level of investment and improving the productivity of capital. This task, difficult as it is at the best of times, is made even more challenging in the Middle East and North Africa by three factors. First and foremost is population growth. The rapid growth in population - regionwide population is still growing by 2.8 percent a year - puts severe pressure on the capacities of governments to even maintain current levels of investment in human resources. And yet throughout much of the region standard measures of educational attainment and health status fall short of those in comparator (and competitor) countries. Second, past population and economic growth has inflicted severe costs on the environment - many counties are now threatened by water scarcity, past environmental damage will have to be corrected, and future problems must be avoided by appropriate preventive action. And third, basic infrastructure will have to be modernized and developed and, in the particular cases of Lebanon and the Occupied Territories, reconstructed. The key characteristic of these three factors is that they increase the investnent required for any given level of future growth compared with past experience. ii A SuATy FoR TE FuUR ix. Looldng to the future, the nalysis presented here suggests the need for a strategy that combines three elements: increased regional cooperation, reform of domestic economic policy, and a new approach to external financing. The key points pertaining to each component and their role in the overall strategy are: x. R egi onal cooperation i n f trade lanbor, caiptlovn nd" wonomic prnosperty Coand o win h the areaify iteradtio fon extiamlenlrs mkt and sca Sll or aispheres. Butoie by iscale. Btaprsnitaregional coprto ilntrsade acutsh o ol develoment roblem confontin the0 retg oren. cw jombs.i Aer sila pointraplie to lbor irtho'ee a resurenct fe iprWae^G eeso migion noeldmentod an sal rdrention the existing unvemploment trowlm ar ialfls human heourbe sinificant.cireald pr otectnl to t. he l labo p. .. .d .. .ditionl US1e bicion an earing xi. Theinplesmentation be high-retur regional ide.t ntefed fcmuiain wats,envirnmentl mangemen, and ..ergCisPt. mos IPncretend sossibl thams beeica form ofreionancn copratom.offIcls surchpoecs halvno bee asdpentifuld asfeWol sank an ther pandstoul Attractinvebay partue ofithe.saing hpaeld abroad rtofth Multil estmatedn trows But s$uch prlonjects, im eotan thoug they are,qwirl cosiueol a factonof fietoal nvetmnt nrhearginof aS$140 bS50blllioyer.Ules.h xrodRegional op netenation al ssis apoentally s imporantmechanisd o improvemngs regonewk mirationwolmakeonlyeatsmall dnot inlv the prbexiso oruti ndhgh unemploymentprbe.Cailfow from the Gulf could however be significant~~~~~~~~~. O.. il.lw.aeulieytorgin..irlvl Bank and others.. and should... be.. acitiveyprudwt, faporae tespotoh Multilateal Workin Groups.Butsc rjcs motn huhte r,wl osiueol a fractin of th total ivestmen in th. eino.run S5 ilo aya.Ulsh reioa pRegojelcts perawino isov th probleniyimspfowrowntmehandihighounemploymg egint. ecnnc efmine Coeato teae o rdefrexml elgs h aremn xmi. Domesdc reform then is vital. The key reforms necessary to increase the quantity of private investment and improve the quality of public investment are well known in broad terms. Macoeconomic stabilization, an incentive structure conducive to the development of private entrepreneurhip, a transparent regulatory framework, and an open trading environment are the elements that have proved successful elsewhere in securing prvate sector-led growth. Equally important is a redirection of public investment to those areas where it will be most productive. For example, to make a package of family planning services, basic health care, and primary education available to all citizs would require additional expenditure of less than one percent of GDP, a sum that could be ealized through a reallocation within exisfing public budgets. This and ether shifts in favor of physical infrastructure and environmental protection would both improve the quality of public investment and simultaneously support the private sector. xiii. Reforms of the magnitude envisaged here are not easy to implement, in part because the increased levels of investment imr.plicit in this approach limit the resources available for domestic consumption. One projection undertaken in this report suggests that investment levels equal to about 27 percent of GDP will be required to generate sufficient growth to provide adequate job opportunities for the region's expanding labor forces. This compares with a current regional average of 23 percent (only 20 percent when the Maghreb is excluded). As with all projections, the ones presented here depend on many assumptions which may or may not materialize. With this caution in mind, the analysis suggests the need for additional investment, including the special needs of the Occupied Territories and Lebanon, of between US$10 and US$15 billion a year in th.e medium term. xiv. Financing for this higher rate of investment could come from domestic or external sources. While there is room for redirecting public expenditures away from military budgets, the scope for action on the domestic front remains limited by the need to maintain consumption levels. Extemal financing will, therefore, also be necessary. Circumstances, however, are uiely to allow countries to regain the level of public sector financing achieved in the late 1970s. Assistance from Arab, OECD, and multilateral sources is likely to be constrained and, with the conclusion of the Cold War and the collapse of the Soviet Union, the former Easten Bloc has ceased to be a source of assistance and is indeed now competing for the limited quantities of international assistance. This calls for more reliance on inflows of private capital. xv. in this respect, the past exodus of private capital provides a potential solution. In total, residents of the region hold an estimated US$180 billion in savings abroad. For some counties - Egypt, Jordan, Syria - the estimated amount exceeds GDP. International expeience points to two factors that are critical in attracting past outflows back to the originating country. One is an appropriate domestic economic program. This has already been discussed. The other is an acceptable degree of international creditworfthiness. Past experience suggests that countries with ratios of debt to exports in excess of 200 percent are not viewed as creditworthy. The expectation that this approach to external financing will succeed depends therefore on the size of the savings held abroad and the size of each country's debt burden. Country-by-country projections demonstrate that such a strategy would indeed allow most of the countries of the region to grow out of their indebtedness and achieve long-run creditworthiness and growth. iv xvi. An assessment of recent economic policy region-wide, and the World Bank's more detailed study of the Occupied Territories, suggest that: befun n h poresoneonmc eon.Several countries in Ethe.Irl ;:rdion-Morocco, Ab~~~~Tnisia- andIrae lhae@ bpementfloing a eons gnafrsome oim wthe preomisin xce;dyunertkenfa reacmind efoms In t Ls ebtandn th oseaiiztorv lcisbing purreusd will t a lon iwayltwars ofreviving adisuscaiinngecomnt.mic retrnfinif chpitarel tt problms bu arenog tine spcnidaeration th fe eccipinaioo marrtoreonmi the lncs reduingpolcy ndued prc itortosn improven bhaangmetofpbic resources.. n. Icras Purfie evdece anpr oundion tbe soiaflow of p ffivaecaital asist ane nwil beginn oocr Ptivte cpita infeqsire i992 aaoulte toi USectillor invEstypt,S$. amountng to Jrdn and ~ ~ abu US$12 biiUion inLbnn n counrenweestaints 1993 pvrieas) aremuhls pot dirctnvetmet estimaed US$0.5 bi qUired in th92 andin Termsi (1994.98)lio. xviii. Evdene thecat thse apoacthe pOccposed hertoes ih ol aks alredy benvmlmne ntearedo chan beifondficnth iprogresens on econic reform.trct Sevaderalcutices ireneee nth ionly Moimroco Tlisia, aonditos draecly,av been follown a refpormit piagend forsome aciitmesn wth promisin resuls.mncourag etd bytiThese earlyc rfmes,cJorda haesmes also intated rocoeformst and Egyp thas reentemly undertake farl reachdeding rhefrs InmLebianon,rm the sabilmiztiont poi,ulicin pusuedto Aeia,smet Syia, cosand Yemenrces are stillipagued with aSrous macroecillonfomi and microteronmi problem but, are ano gdiviongl coS.bidelion to the elimnation of9-20) macreonomcu imalnces,h reduing pemoulynduced prihe deaisitortions and impgroving thffe management o public inresources. and Us$2rbillio in Leaton. Inply countrie,soi whrsavigs held ovrsneasr ae muchiiy less aimorand, prvtecpia ifow av aknth or f oeindiet nesmnt n oocofoeg health. In addition, some support would be needed for strengthening agricultural services and for improving natural reso'irce management though erosion control measures and fore try development. The associated annual extemal financing requirements of the public sector (including UNRWA) in nominal terms during 1994-98 would be US$550-US$600 million. Donors currently spend about US$175 million annually in the Territories, including UNRWA. Thus, external aid flows would have to be tripled from present levels to meet the financing needs of the public sector. NEXT STE xix. The Multilateral Working Group has a mandate to encourage regional cooperation. Given the considerable effort that has been undertaken on several regional projects and initiatives, it may now be appropriate to advance this work to the next stage. In particular pre- feasibility studies are required to provide a better basis for choosing among alternatives and arriving at more precise cost estimates. For this purpose, seed monev of about US$9 million is estimated to be required. Within this framework, it would be useful in the case of the Occupied Territories to have a shelf of priority projects ready for implementation as soon as adequate progress has been made in the bilateral negotitons. To strengthen institutional capacity, preparatory studies and institutional development activities should also be initiated. The cost of the preparatory studies, technicai assistance and training required immediately is estimated at US$35 million, of which approximately half would be for project preparation and feasibility studies and half for institutional development. These remarks suggest two conclusions: .... . . rk. U $ .......i. r t se Prel-'imina` estmaesbaed ..th.W. dank Mtd niaeta funin o abutUS35mffonwoud e equre fr hisproe Trust Fund~~... ..... .cliniterdb h ol a a eetybe lanhd i aca.nri.etJditdb mednr. -b~~v DEVELOPPEMENT ECONOMIQUE ET COOPERATION AU MOYEN-OPJENT ET EN AFRIQUE DU NORD R6humi analytique I. Le present rapport a ete etabli b la demande du Groupe de travail multilateral sur le developpement dconomique regional. II offre une vue d'ensemble du developpernient economique et de la cooperation regionale au Moyen-Orient et en Afrique du Nord 2, et contient notaniment, comme il avait ete demande, un examen des flux financiers destines a cette region et une analyse de la situation des Territoires occupes. On sspere ainsi fournir un cadre de reference pour les discussions du Groupe de travail. H. Ce resume analytique presente les analyses et principales conclusions contenues dans le rapport. 11 commence par passer en revue les resultats economiques anterieurs de la region, en faisant ressortir la ncessite de relancer l'activite economique dans les pays concernes (Section I du rapport principal). II suggere ensuite les moyens qui permettraient d'y parvenir et la fagon dont its pourraient etre financEs (Sections II et HI du rapport). Enfin, apres avoir etudie dans quelle mesure la strategie ainsi suggeree est deja appliquee dans la region kSection IV), il fait, en conclusion, quelques suggestions sur les mesures pouvant etre prises des a present (S,tion V). RESULTATS ECONOMQuEs ANTERmERS iii. Deux conclusions ressortent de l'exanien des resultats economiques anterieurs de la region: ...:..,.. ... v.. Drnlapeiee mniuti des annees 70,I ceterogiosn avatobnefiie de pasx decoisac economiquenonseulment elevesais aussi,empoins pou.r lpavoir du ire et a ffpu o ss.epent caie prde ....a.nsdo . i....ib£e l a de l moif desrans 80 aupM atirt c audMashreq, en eroissance do 'o millions 0t Laosc ppassagla e6intcndrde lo nn6oes 7'Al6ne leMsro nn et h0 Tunise (paysoduaheb) d~~~~~~~~~~~~.. 0:0'".n: _pd sIn . une phase do rEcession, peut:~ ,etremiis, au !compte de iv. Durant la premiere mnitiE des ann6es 70, cette region avait beneficie de taux de croissance Ecnonomique non seulemient ElevEs mais aussi, au moins pcuir les pays du Maghreb et du Mashreq, de plus en plus soutenus. Cependant, cette pEriode d'expansion Etait terminEe lorsqu'a d6but6 la seconde moitiE des annEes 80 : au Maghreb comme au Mashreq, la croissance de l'Economie etait I peine egale 2V Dama ce rapport, la rEgion corisid6r6e eraglobe : 'Alg6rie, le Maro et la Tunisie (pays dui Maghreb); I'Egypte, la Jordanie, le LIAban, les Territoiras occupds, la Syrie et le YWmen (pays du Mashreq); et Isael. Vii I la croissance d6rnographique et, en Israel, la stagnation du debut des anndes 80 etait certes moins prononcde, mais la croissance restalt moddrde. v. Ces p6riodes d'expansion et de recession ont suivi de pres I'evolution des apports de capitaux: exception faite des Territoires occupds, ot ils sont constamment restes dieves, ces apports ont en effet atteint leur niveau maximum dans la seconde moiti6 des annees 70, pour tomber au niveau le plus baw apres le milieu des ann6es 80. Ces variations ont -t6 d'une ampleur considerable; dans bien des cas, les dcarts ont atteint environ 10 points de pourcentage du PNB. Dans les pays du Mashreq, ces changements ont refletd la hausse et la baisse des cours du petrole. Ailleurs, c'est ievolution de l'aide provenant de l'OCDE qui a davantage jou6 et dans un cas, celui de I'Algerie, les emprunts commerciaux ont 6te un facteur dEterminant. Independamment de leur origine et de leurs fluctuations, les appors nets de capitaux entre 1970 et 1990 ont atteint en mgyenne 16 % du PNB dans les pays du Mashreq, 14 % en Israel et 3,5 % dans les pays du Maghreb, soit des niveaux extremement eleves au regar.1 des normes internationales. vi. C'est au niveau des investissements que s'etablit le lien entre ces apports et les resultats economiques : que ce soit en phase d'expansion ou en phase de contraction, l'investissement interieur a en effet augmente et diminue parallelement aux fluctuations des apports de capitaux. Mais l'evolution des performances economiques n'a pas tjujours correspondu a la hausse des investissements en periode d-expansion, et l'aggravation ulterieure des resultats de l'economie a ete nettement plus marquee que ne l'aurait laiss6 pr6sager la baisse du niveau des investissements durant la pi. -se de contraction. Tout laisse penser que c'est la producivit6 des investissements qui a diminuE. Cette Evolution etait pr6visible I la fin des Rnndes 70, I'augmentation subite des investissements s'etant accompagnee de rendements de moins en moins 6lev6s. Mais elle est bien plus pr6occupante lorsque la productivit6 des capitaux dniinue parallblement au taux d'investissement, et c'est pr6cisement ce qut s'est produit dana tous les pays durant la seconde moitie des annees 80. vii. La baisse de productivite des capitaux peut etre mise au compte des politiques interieures et des rapports etroits qui existent entre celles-ci et le tinancement extdrieur - en ce qui concerne aussi bien sa structure que ses variations. S'agissant de la structure de ce financement, plus de 90 % des apports nets de prbs de 55 milliards de dollars dont a bdneficid la region au cours des annees 70 sont ailds au secteur public. Cela a aide a financer une expansion rapide de ce secteur dans les pays concernes, expansion assortie d'un cadre de politique economique qui avait pour effet d'entraver le ddveloppement de lentreprise privee, de decourager le recours aux marches et de proteger la production ('es entreprises publiques vis-h-vis de la concurrence etrangere. En ce qui concerne les variations du fmancement, lorsque les entrees de capitaux exterieurs ont commence a diminuer, des politiques interieures inappropriees ont ete adopt6es pour rationner des ressources de plus en plus rares, ce qui a entraine un regime d'incitations inefficace, l'inflation et la fuite des capitaux. L'anpleur de ce dernier probl%me et I'exode de capitaux essentiellement prives montrent que les politiques interieures etaientjugees d'une facon defavorable par le secteur prive: selon les estimations, les sorties annuelles moyennes de capitaux ont atteint, durant les anndes 80, 1,6 milliard de dollars dans les pays du Maghreb et 4,5 milliards dans ceux du Mashreq, soit des montants suffisants pour compenser I peu pres les envois de fonds des travailleurs de ces pays a I'etranger. viii. Cet examen des resultats economiques anterieurs montre donc qu'il faut retablir la croissance non seulement en augmentant le niveau des investissements mais aussi en amdliorant la productivit6 des capitaux. C'est 1l une entreprise difficile dans le meilleur des cas, mais qui 1est d'autant plus dans les pays du Moyen-Orient et d'Afrique du Nord, ob trois facteurs sont en jeu. Le premier, et le plus important, est la croissance demographique. Sous l'effet de la pression demographique - la vi population continue d'augmenter de 2,8 % par an dans l'ensemble de la region -, les gouvernements ort du mal ne serait--e qu'k maintenir les niveaux actuels d'investissement dans les ressources humainos, alor' eOme quo les indicateurs de niveau educatif et de situation sanitaire d'une bonne partie do ces pays sont inferieurs I ceux des pays comparateurs (et concurrents). Deuxitmement, la croince demographique et economique des anndes precedentes a serieusement porte atteinte A 1'environaement : beaucoup de pays sont ddsonrais sous la menace d'une pEnurie d'eau, et il va falloir en outre r6parer les ddgAts dejk causes I 1'environnement et prendre les mesures preventives appropriEes pour eviter de fuiturs problbmes. Troisibmement, l'infrastructure de base devra etre non seulement modernisee et developpee mais aussi, en particulier au Liban et dans les Territoires occupes, reconstruite. Ces trols facteurs ont tous pour effet essentiel d'accroltre 1'effort d'investissement qui devra 6tre entrepris pour parvenir I I'ave gir I un niveau quelconque de croissance, par rapport I ce ,ul Etaft le cas auparavant. STATGE POUR LES ANNS A VD= ik. Pour l'avenir, I'analyse presentee ici laisse penser qu'il faut adopter une stratgie associant trois Eldmens : une cooperation regionale accrue, une rdforme des politiques ecc womiques interieures et une nouvelle approche du fmancement extIrieur. Voici les aspects essentiels de chacune de ces composantes, et la place qu'elles occupent dans la strategie d'ensemble: E :~~~~~~~~~~~~~~~~~~~~~~~~ x. L~a io n ooreKinl peut con~triuxeret po iurlier bone parjts au ameiorereefonne Xnomi 4es deltus leus pays iconcrib0ron Dan le prospori des ecarEinges comecun a ewmple r e nfeperment a e cuci olrtgir leur fedmaic n te poitqer etr dsoil dnmats dehle MAis lel comere intrvbt^r.goa n~e .efleseule~ auord'hui qe 6o % del' nenseml desdlag C Rx devcespays et muI s' etait muti reu,lno ix.*... ~. *.~*.... 4 Des r4formes ent6rleuros . sor------t; lnipenais tn oirrln Yivet~enotprv qa or ~ieto l_esis,.tJubi Vr Is vaorfsttondes .0ssorcea humines~1'inrastuotue et,I ~t00ciOn4eI iemrit : D' 1 ~1I~miti~ds4e oIar X. La coppto r6gio onds pu cotnbueur por ue onante poarts am1iorer les prformne 6wn seonuq etou lespay s cu cms a le dom.u amev des dcat ges c~ ommciax a ample, nlepermtiet I n teake d'wir leur march0 estde m lpartides deonomes dWele Mai l cmmrceitra-gr: onal n Threprds te auouardhu queg 6 s dea 1enseimble des 6 exempe, ede poretay et,xmem d l'l darir ot mulchE pat deux lero pambt e des mpcooies dnocveaux ix ainsi cr6s ne serait sans dotute pas suffisant. n en est de meme de la migration de la main-d'oeuvre: meme un retour aux flux migratoires anterieurs A la guerre du Golfe ne r6sorberait qu'une partie infime du probleme du chBmage tel qu'il se pose A I'heure actuelle. Par contre, les apports de capitaux en provenance du Golfe pourraient tre importants. II ne faut gubre s'attendre h ce que les flux d'aide publique retrouvent les niveaux qui etaient les leurs au milieu des annees 70, mais les pays I exc6dent de main-d'oeuvre de la region pourraient attirer les avoirs financiers consid6rables des pays de l'OCDE si les conditions offertes Etaient suffisamment attirantes. xi. La forme de cooperation la plus tangible et peut-tre la plus bdnefique consiste I entroprendro des projets regionaux h forte rentabilite dans des secteurs comme les communications, les ressources en eau, la gestion de l'environnement ou l'Energie. Plusieurs projets de ce type ont Wte identifies par la Banque mondiale et divers autres organismes, et il convient d'y dormer suite d'une faon active et, le cas dchdant, avec l'appui du Groupe de travail multilateral. Mais ces projets, pour importants qu'ils soient, ne constitueront qu'une petite partie de l'ensemble des investssements dans la rEgion, qui se chiffrent aux alentours de 50 milliards de dollars par an. Si l'on n'ameliore pas la productivite des investissements sous tous les plans, ce n'est pas par un effrt accru et des ameliorations dans un domaine - les projets d'ampleur rdgionaux - que l'on r6soudra les problbmes posEs par le faible niveau de croissance et le fort taux de chomage. xii. Les rEformes int6rieures sont donc indispensables. On sait bien, de fagon generale, quelles sont les reformes essentielles a entreprendre pour accroitre le volume des investissements prives ot ameliorer la qualite des investissements publics. Dans d'autres pays, divers elements ont reussi & faire entrer l'6conomie dans une phase de croissance sous l'impulsion du secteur prive: la stabilisation de la situation macro6conomique, une structure d'incitations favorable au d6veloppement de l'esprit d'entreprise, un cadre rEglementire transparent et un systeme d'dchanges ouvert. Un autre dlEment tout aussi important consiste I rdaffecter les investissements publics dans les domainos ob ils seront le plus productifs. Ainsi, un ensemble de mesures destin6es & donner I chacun accis aux services de planning familial, aux qoins de santE de base t l'enseignement primaire exigerait une depense supplementaire representant moins de 1 % du PIB, et une somme de ce genre pourrait ftre dEgag6e moyennant une redistribution entre les budgets en place des administrations publiques. De telles reaffectations en faveur de l'infrasc et de la protection de l'environnement permettraient a la fois d'ameliorer la qualite des investissements publics et de soutenir le secteur prive. xiii. Des rEformes de l'ampleur envisagde ici ne sont pas faciles a mettre en oeuvre, notamment paroe que le surcroit d'investissements qu'une telle approche suppose implicitement reduira les ressources disponibles pour la consommation interieure. Selon une projection figurant dans le rapport principal, il faudra des niveaux d'investissement de l'ordre de 27 % du PIB afin de parvenir i une croissance suffisamment cr6atrice d'emplois pour rEpondre a l'augmentation de la main-d'oeuvre disponible de la rEgion. Par comparaison, le niveau actuel moyen de la region se situe i 23 % (et & 20 % seulement si l'on exclut le Maghreb). Comme toute projection, celles qui sont prdsent6es ici reposent str beaucoup d'hypothMses qui peuvent ou non s'avdrer exactes. Cola dit, la prsente analyse indique que les investissements supplementaires A r6aliser, notamment pour faire face aux besoms particuliers des Territoires occupes et du Liban, devront se chiffrer entre 10 et 15 milliards de dollars par an i moyen terme. x xiv. Le financement de ce surcrolt d'investissements pourra provenir de sources int6rieures ou ext6rieures. Sur le plan int6rieur, il est certes envisageable de reaffecter des crddits publics pr6c6demment insrits aux budgets de I'armee, mais les possibilit6s d'action restent limitdes par la necessit6 de maintenir les niveaux de consommation. n1 faudra donc avoir aussi recours aux financements ext6rieurs, mais la situation est telle qu'il ne faut gubre s'attendre a ce que les pays retrouvent les niveaux de financement public qu'ils avaient connus I Ia fin des annees 70. L'aide provenant des pays arabes, de 1'OCDE et de sources multilatdrales risque d'8tre limit6e; quant I I'ancien bloc des pays de l'Est, non seulement il n'est plus une source d'aide depuis la fin de la guerre froide et l'effondrement de l'Union sovietique, mais il est en fait en concurrence avec les autres pays pour attirer une aide internationale en quantite limitde. I1 faudra donc s'en remettre davantage aux apports de capitaux prives. xv. A cet egard, une solution pourrait 6tre trouvee du c6t6 des capitaux prives pr&ddemment enfuis. Au total, on estime que les habitants de la region detiennent pour 180 milliards de dollars d'dpargne I l'etranger. Dans certains pays, comme l'Egypte, la Jordanie ou la Syrie, les montants en jeu d6passeraient le PIB national. D'apres l'experience faite par d'autres pays, deux facieurs sont indispensables pour arrver I faire revenir les capitaux enfuis dans leur pays d'origine. Premirement, le pays doit avoir un programme economique intdrieur approprie, comme on l'a d6ji vu. Deuxiemement, il doitjouir d'un degre de solvabilit6 acceptable sur le plan international. L'expErience ant6rieure laisse penser que les pavs ayant un ratio dettes/exportations superieur a 200 % ne sont pas considerds comme solvables. Pour que cette strategie de financement extenieur ait des chances de reussir, il faut donc considerer le volume de l'epargne detenue a l'etranger et le degrd d'endettement de chaque pays. Les projections etablies pays par pays montrent qu'une telle stratEgie permettrait effectivement i la plupart des pays de la region de sortir de leur endettement et de parvenir, a long terme, a une situation de solvabilite et de croissance. BM EN OEUVRE DE LA STRATEGE xvi. L'evaluation des politiques economiques appliquees ces dernieres anndes dans la rEgion et l'Etude plus detaillee consacree par la Banque mondiale aux Territoires occup6s tendent a etablir deux choses: ......... u n is reto -r i"N mllrddodolas at ri. ontettdo193 devralet 4 flEe $~al0~ ~ rnQyfl term (I9d9tre4m-io8e). xi xvii. Les prog&s r6alis6s en matiere de reformes economiques montrent, si besoin etait, que l'approche ici propos6e est d4jk suivie dans la rdgion. Plusieurs pays - le Maroc, la Tunisie et Israi! - se sont d6j& engages depuis un cetain temps dans un programme de reforme qui donne des r6sultats encourageants. S'inspirant de leur exemple, la Jordanie a 6galement entrepris des r6formes, et l'Egypte a rdcemment mis en oeuvre un vaste ensemble de reformes. Au Liban, les mesures de stabilisation actuellement entrepnses contribueront pour beaucoup a relancer et h soutenir la croissance dconomique, I condition que cet effort soit maintenu. En Algerie, en Syrie et au Y6men, de s6rieux problbmes continuent de se poser sur les plans macroEconomique et micro6conomique, mais les av' orit6s ont mis I l'tude des mesures destindes I eliminer les dds6quilibres macro6conomiques, k r6duire les distorsions des prix r6sultant des politiques suivies et & amdlioret la gestion des ressources publiques. Une autre preuve de l'application de cette statgie est constitude par les apports de capitaux prives qui commencent I 6tre enregistres. En 1992, ils ont atteint 3 miliards de dollars en Egypte, 600 millions en Jordanie et 2 mil#ards au Liban. Dans les pays qui ont un volume d'dpargne a l'6tranger beaucoup moins important, les apports de capitaux pri-is se sont faits sous la forme d'investissements directs etrangers. En 1992, ceux-ci se sont chiffrds a 500 millions de dollars au Maroc et A 200 millions en Tunisie. xviii. Dans le cas particulik. des Territoires occupes, l'etude r6alis6e par la Banque mondiale a rdv61 que des am6liorations consid6rables devront 6tre apportes a l'infrastructure et aux services publics, que ce soit pour amdliorer les conditions de vie proprement dites ou pour soutenir ;'activit6 des entreprises privd& et eviter la degradation de l'environnement. C'est pourquoi les investissements dans le secteur public devront venir en premier, et des capitaux ext6rieurs seront n6mcssaires pour cela dans l'immediat. Sur la base des engagements, les investissements dans le secteur public sont estimes aux alentours de 1,9 millard de dollars (en prix constants de 1993) & moyen terme (1994-98), et i 1,6 milLiard de dollars de plus sur le long terme (1999-2004). Pour le moyen terme, les efforts devront porter en priorit6 sur la remise en 6tat et l'amelioration de l'nfsucture et dea services publics locaux pour l'alimentation en eau, l'assaiussement, l'limination des di! .ets solides, les transports routiers, l'approvisionnement en electricit6, 1'6ducation et la sant6. Une certaine aide devra 6galement 6tre fournie pour renforcer les services agricoles et am6liorer la gestion des ressources naturelles, grice a des mesures de lutte contre l'erosion et d'am nagement forestier. Les besoins correspondants du secteur public (UNRWA compris) en matiere de financement exterieur seront de l'ordre de 550 a 600 millions de dollars par an, en valeur nominale, durant la pdriode 1994-98. A l'heure actuelle, les bailleurs de fonds consacrent environ 175 millions de dollars par an aux Territoires occupds, UNRWA compris, et es rilux d'aide ext6rieure actuels devront donc etre multiplies par trois pour repondre aux besoins de financement du secteur public. BESURES A PRENDItE DANS LBIMMEDLAT xix. Le Groupe de travail muldla*ial a pour mandat d'encourager la coopdration a l'dchelon r6gional. Etant donne les efforts considerables qui ont ete ddploy6s dans le cadre de plusieurs projets et initiatives I ce niveau, le moment est peut-6tre venu de passer a la phase suivante de ces activit6s. On doit en particulier entreprendre des 6tudes de faisabilit6 pour pouvoir, sur de meileures bases, faire des choix entre les diff6rentes options possibles et etablir des estimations de ooats plus pr6cises. On estime a 9 millions de dollars le capital de d4part qui sera n6cessaire k cette fin. Dans ce contexte, on aurait interet, dans le cas des Territoires occup6s, I disposer d'une r6serve de projets prioritaires qui soient prets & &tre mis en oeuvre des que les progrbs xii voulus urnt 6t6 rEalisEs darns les nEgociations bilaterales. Par ailleurs, des etudes prEpratore et des activitEs do dEvelopeent des instittions devraient Ftre mises en oeuvre afin de renforcer les capacitds institutionneiles. Le coet des Etudes prEpaatoires, de l'assistance technique et de l'effort de formation nEcessaires dans l'mmddiat eat estimE k 35 millions de dollars, rEpartis pour moitiE envrn entre la prEaraion des projets et les Etudes de faisabiiite, d'une part, et l'effort de developpement des institutions, d'autre part. 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JSc et ass5J ;*1bJY s Zs*t JI 4L0 l JJJI 461 -jl_ 'j.L al.41 {skjy L0_gJI vL 3 jtcjl 4 aaLj tii9 -FLO JALA WI o' vL_ '" v , L_,YI 4: Jj I W@ L4r$1 * I IJ~A xx JXX I5PP1AA 11C - H et ~~ 0 ECONOMIC DEVELOPMENT AND COOPERATION IN THE MIDDLE EASTAND NORTH AFRICA J[NToDucrnoN This report presents the results of work undertaken by the World Bank at the request of the Multilateral Worldng Group on Regional Economic Development. At its meeting in Brussels, the Worldng Group requested a report on Economic Development and Regional Copertion in the Middle East and North Africa. At the Paris meeting, the request was expanded to include an analysis of the Occupied Territories and a review of financial flows to the region. This report covers all aspects of these requests (see Box 1 for regional coverage and data sources). Following this Introduction, the report has five sections. Section I summarzes the economic performance of the region through the boom of the 1970s, the bust of the 1980s, and the aftermath of the Gulf crsis. It argues that the observed swing in peormance is in part a reflection of inappropriate domestic policies and in part a reflection of a swing in financial flows to the region. The section concludes by pointing to the low growth rates of production and the high levels of unemployment that prevail throughout most of the region and hence the need to reconsider the basic strategy for economic and social development. Sections II and HI begin the task of identifying such a strategy. Section II explores the scope for regional cooperation. It begins with an assessment of the potential gains from intra-regional trade, labor migration, and capital flows. The main conclusion here is that neither trade nor labor migration can be seen as a full solution to past problems and that capital flows, although potentially of significant magnitude, will matrialize only in the event of appropriate domestic refonns. It then turns to a review of the regional projects that have been identified by the World Bank and others. While these are seen as an important means of both contributing to the economic prosperity of the region and providing a physical foundation for increased interaction, they represent only a small fraction of regional investment and thus, by themselves, ere unlikely to prompt the resumption of regionwide economic growth. Coopweation can, however, serve to reduce geo-political risks and in turn increase the retmns from actions on the domestic policy front. Section m, therefore, oudines the critical domestic component of the strategy, a component that focuses on the need for higher levels of investment and for more productive investment than in the recent past. It describes the kinds of reforms that are required and projects their likely impact on future economic performance. It then outlines a complementary sttegy for external finance by noting that in the past, inflows of capital have accrued disproportionately to the public sector but that in the future a sustainable mode of financing will require a shift towards greater reliance on flows to the private sector. It also assesses whether 1 the heavy burden of past debt is likely to constrain efforts to move to a growth path based on domesdc reform and financed primarily by private inflows. The paper examines in Section IV the extent to which this strategy is already being implemented in the region. It begins with a summary of regionwide progress on domestic reform. Additional material on Egypt, Ismel, Jordan, and the Occupied Territories is provided in Annex 1. It then discusses two economies where infrastructure needs to be rehabilitated before sustainable economic growth can occur - the Occupied Territories and Lebanon. The analysis of the Occupied Territories draws on a series of missions undertaken by the World Bank at the request of the Working Group to appraise the current economic structure of the Territories, identify investment and technical assistance needs, and draw the financing implications. Box 1: Coverage and Data Sources The final section discusses next steps. Given the mandate of the Multilateral The report covers Algetia, Morocco asd Working Group on Regional Economic Tunisia in the Maghreb; Egypt, J,oran, LebanoR, :,: Development, the section focusses on two , me, and the West,Bank and ( issues - first, the actions that the Working c Trties) in t Group might undertake with respect to the -Io Fisi Statistics data-base ofthe.' regional projects and initiatives that have tnational Mon,etru. Mcrec'Mio been identified, and second, within that varales,exceptthoseoh piedTrorie framework, the actions that the Worldng frm the J)ebt eoring System and h World Group might recommend to support the Tab14 d of th Wol ak particular needs of the Occupied Territories. s nt ue f ti A statistical appendix (Annex 2) completes etiIJb d oneiftr,o the Word the paper. eW contyecnmit at the World Bank Whilen daita " :.aie' &;omoGther souros, 'it ,isnote* d,'u.jinth ,te'xt. . '>. 2 Section I From Boom To Bust The regional economic crisis started in the mid and late 1980s. In marked contrast with the strong performance of the late 1970s, both the Maghreb and the Mashreq saw growth decelerate sharply after 1985 to the point where it was barely keeping pace with population growth (see table 1). Between 1985 and 1989 real per capita income was declining at a rate of one percent a year in the Maghreb and 2 percent in the Mashreq. Individual country performance however varied especially in the Maghreb where Algeria's deteriorating economic performance stood in contrast to slowly rising per capita income in Morocco and Tunisia. The situation in Israel was different -- here economic performance improved slightly in the mid- 1980s, following a long period of stagnation during 1973-84 and the sharp recession associated with the stabilization policies pursued in 1985. Tabbk 1: Economni Growth 1970-1992 Annual Average Growth in Real GDP 1%) 1970-74 1975-79 1980-84 198589 1990-91 Maghreb 5.4 6.3 4.8 1.2 2.3 Masbeq 7.9 10.9 5.4 2.4 -0.9 Israe 7.6 3.8 3.0 4.2 7.2 The swing in performance can be related to many factors, but two are particularly important - capital inflows and domestic policies. The swing in net financial inflows had a major Impact on the availability of resources for investment especially in the public sector. But when the flow of external capital began to shdink, the collapse in economic performance was in sveral countries much deeper than could easily be explained by declining levels of investment. The productivity of investment must also have declined. This does indeed appear to be the case - standard measures of the efficiency of investment deteriorated. This in turn is attributed to inappropriate domestic policies. FLCTATIONS IN NPEr wLOWS Many countries in the region have received unusually large amounts of net capital inflows over long periods of time.' Between 1970 and 1990, these flows averaged 16 percent of GNP in the Mashreq, 14 percent in Israel, and 3.5 percent in the Maghreb. These are very high flows by interational standards. Indeed, for several countries they were a more impdrtant source of foreign exchange in the late 1970s than exports of goods and services. But, for present purposes, the fluctuations in net inflows are more important than their average values. J/ Net capitd inflows are defined as the balance of goods and non-factor services. Looked at from the financig side, they comprise a varidy of imflows (officia loans and grats, remittances, foreign direct investme at) and outflows (debt sevicing, capital flight, reserve accumulation). 3 Table 2 summarizes the region's experience in this respect through the 1970s and 1980s. With one exception - the Occupied Teritonies where inflows remained high throughout - the region experienced a pronounced pattrn of boom and bust: inflows were largest in the period 1975-79 and smallest during the period 1985-89. The magnitude of the boom and the timing and severity of the bust varied among countries. In two cases - Algeria and Tunisia - boom and bust were relatively modest and gradual. But in most other cases including Morocco, Egypt, Jordan, Syria, and Israel, the boom and/or the bust were of major proportions, amounting to about 10 percentage points of GNP. Table 2: Net Injlows: 1970-1992 Percent of GNP 170-74 1975-79 198 1989 190-92 Maghreb 2.5 9.2 1.2 1.0 -0.2 Mashreq 8.5 20.4 19.5 15.2 8.7 Israel 18.8 18.0 12.3 6.8 8.9 THE eACT ON INVZSnEWr Net inflows can supplement domestic savings and lead to an increase in investment or they can substitute for domestic savings and lead to an increase in consumption. In the case of this region, there is a clear association between the changes in net inflows and in investment. Fluctuations in net inflows were mirrored in fluctuations in investment in atl counties (see table 3), and in some cases, especially Egypt and Algeria, cven magnified. Taking the region as a whole, when net inflows increased by about 6 percentage points of ONP during the boom (from 1970-74 to 1975-79), investment increased by 10 percentage points. And during the collase (1975-79 compared with 1985-89), when net inflows fell by more than 8 percentage points of GNP, investrWent fell by almost 9 percentage points. There is, therefore, a strong association between net inflows and domestic investment (see figure 1). Tabke 3: Investnent 197041992 Prcent of GNP 1970-74 197S-79 9804 198549 1990M9- Maghreb 28.4 39.1 35.0 29.4 28.4 Masbroq 15.7 30.7 29.1 24.0 21.7 isael 30.1 26.2 21.9 17.5 21.6 Changes of this magnitude - both up and down - in the rate of investment ought to be reflected in changes of comparable magnitude in the rate of economic growth. But during the 4 upswing growth rates increased much less than might have been expected % 1: Nd Inflow and Investments: 1970-89 given the increases in investment, and - during the downswing the collapse in growth was much more marked than would be suggested by the fall in levels ___a_{c__ ) of investment. Experience varied a among countries - Egypt and Jordan for example enjoyed increases in economic growth rates that more than matched the increases in investment during the upswing - but in general the close association between shifts in net 10 ...... .. inflows and shifts in investment was not reflected in a similarly tight link between investment and economic .... ..o growth (see Figure 2). DOmESIIC POLICY 74 7-?8 80a4 8-s Two aspects of domestic F 8 I;iiweotmat economic policy contributed to this outcome. First, the predominant development strategy throughout the Fiue 2: Investment and Economic Growth. 1970-89 region was one that relied heavily on F__2_Inestmnt____EconmicGrowh_____ the -state as a locus for investment, the i mainstay of production, and a source of ps o af employment. Except in Lebanon, the 8 public sector's share of total investment . has been high by international standards throughout the region. Ihis general a . expansion in the public sector was .- associated with an economic *4 environment that inhibited the growth of 80\ private entrepreneurship, shunned the 4 use of markets, and adopted highly protected trade regimes. 12 Second, adjustment to the decline in capital inflows also proved damaging 4 to economic growth. The necessary reduction in budget deficits was 70 74 7e-7e 80-I'4 8we accomplished mostly though expenditure cuts. This skewed public spending __ ___ ____ ___ because costly and untargeted consumer subsidies and unusually high military expenditures proved difficult to control. In addition, the public wage bill initially soared in some countnes as govemments sought to increase their hirng m order to offset rising unemplo;ynent elsewhere in the economy. Instead, expenditure 5 reductions were accomplished in all cases by deep cuts in public investment. Private investment also plummeted due to crowding out by the public sector and the deterioration in the incentive system. The tightening external financing constraint and the inability to expand exports in the short run led to increased import restrictions with further adverse effects on investment and growth. Attempts to finance the budget deficit domestically also caused distortions in domestic financial markets. Monetization of the deficit led to episodes of high inflation (Algeria, Egypt, Israel, Yemen). Sharp foreign exchange depreciatio;as were undertaken at various points in most countries, but usually only when reserves had been nearly depleted (Algeria, Egypt, Jordan, Lebanon, Syria). Devaluations when they occurred effected negatively the soundness of domestic financial sectors caught with balance sheets dominated by foreign exchange obligations and local currency assets. In addition, governments borrowed heavily from the domestic banking sector at regulated rather than market-determined rates (Algeria, Egypt, Jordan, Syria). These factors contributed to large amounts of capital flight and encouraged the development of an unofficial curb market. The underlying development strategy and the initial efforts to adjust to changed external circumstances account for the disappointing investment-growth link in the upswing and the disastrous collapse of growth in the downswing. The deterioration in the quality of investment can be gauged by comparing the incremental capital to output ratios (ICORs) over time (see table 4). These ratios show the amount of investment required to produce an annual stream of future income of one dollar. Typically values between 3 (very productive) and 5 (moderately productive) are found in intemational comparisons. In the Middle East and North Africa, the ICORs have risen in most cases and now stand at unusually high levels. The productivity of investment began to deteriorate in the late seventies when capital inflows peaked. This is understandable - the rise in investment must have hit decreasing returns. It is more worrisome when the productivity of capital falls at the same time as the availability of capital is reduced. But this is what happened in all countries during the mid- 1980s. More recently, the ICORs have come down in the three countries that have been most active in terms of policy reforms - Israel, Morocco, and Tunisia, indicating that the productivity of investment has risen. Table 4: Producdviy of Investment incremetl Capital to Output Ratios 197-74 197S-79 1980-84 1985-89 L988-91 Maghreb 5.6 7.1 8.4 25.9 14.3 Masbreq 2.7 2.8 5.5 9.0 18.1 Israel 4.3 6.6 7.0 4.2 5.0 NET INFws AND DomEsrc PoucY The two factors - net inflows and domestic policy - identified as important determinants of the changes in regional economic performance are interrelated. This point is revealed in the 6 way in which the =W-aWm of foreign savings is both a facilitator of the development strategy followed in the region and a consequence of the domestic economic policies pursued by the region's governments. Table 5 reveals that of the almost US$130 billion that flowed into the Maghreb, the Mashreq, and Israel between 1970 and 1989 on a net basis, almost 80 percent accrued to the public sector. The percentage was even higher -- over 90 - for the 1970s and has been consistently high for the Mashreq -- almost 90 percent. Over the whole period the loans (net of principal repayment) and grants received by the public sectors of these countries amounted to US$180 billion. To give a sense of magnitudes, this is about 50 percent of the debt accumulated by latin America during the same period. In absolute terms, the largest recipients have been Israel and Egypt followed by Syria and at some distance Algeria, Jordan, and Morocco. These inflows contributed to the financing for the expansion of the public sector throughout the region. In this sense, the surge in foreign savings facilitated implementation of a public sector-oriented development strategy. The sources of finance and their terms have fluctuated over time. Much of the increase in flows to the Mashreq in the 1970s reflected the major event of the period -- the increase in the price of oil - and the consequent flow of Arab assistance. Elsewhere the causes were different but the result the same. In the Maghreb, Arab assistance was much less important during the boom but assistance from the OECD saw a large increase as did commercial borrowing mcst of it by Algeria. Israel also saw an expansion in assistance from the OECD. Tabk 5. Composition of Nd i4flows 1970-1989 1970-79 184 ($ billions) Maghreb Masbre in-adlMgr asrq Zr Total net transfers 19.6 24.1 104. 1 Of which: Publicsector 18.0 24.1 7.8 Private sector 1.7 0.0 2-7 8 7 Public sector flows pet flowofdebt 22.7 1. 31 8 .5.0 Grants 0.2 13.1 71 5. 3 interest payments -4.9 -1.7 -56 4.U1 4. Private sector flows Workerre tneb8.5 10.5 7.82143 3 Otherfinflows 1.8 2.0 1.0277 4 capital Outflows -8.6 -12.5 -6.141 '4. 7 a. Disbusmen minus princal repayment of medium- and long-em debt b. Includes net private transfes c. Fore direct invema and on-gare mediun- and longmerm debt County coverge: Magbreb: Jgeii, Moroco and Tunisia; Mahireq: Ept, Jordan, Syria, and Yemen. Data for Israel, 197389. 7 In aggregate, multilateral, CMEA, and Arab assistance decreased steadily over time, while OECL) assistance rose. An important consequence of these shifts in composition has been an increase in the cost of extenal funds - the average interest on loans has increased. As debt accumulated and terms hardened, debt service payments increased, reducing the net intake (the net transfer). This has been especially important in the Maghreb and Israel, where it accounts for the decline in the share of total net inflows accruing to the public sectors in the 1980s. While the dominance of flows to the public sector reflects the sources of financing, the relative unimportance of flows to the private sector reflects reactions to domestic policies. Although remittances from migrant workers have been an important source of flows to the private sectors of the region, they have been offset by large outflows of capital. These outflows - most of which originate from the private sector - are motivated by a higher expected return from abroad from the same class of risk, or by a lower risk abroad from the same expected return. Low domestic returns arise when the domestic financial system is repressed, thus reducing the return on financial investment, or when the real side is repressed, reducing retuns to real investment. Empirically, periods of capital flight have been associated with periods of exchange rate overvaluation, high domestic inflation, reduced international creditworthiness, and discriminatory taxes. These conditions prevailed throughout most of the region during this period. By their nature, these capital outflows are difficult to measure preciseiy. Using the World Bank -Residual' Method (see box 2), the amounts are substantial. For example, the average annual outflow in the 1980s was US$1.6 billion in the Maghreb and US$4.5 billion in the Mashreq. By way of comparison, remittances during this period averaged US$2.2 billion and US$4.4 billion a year in the two regions and othe inflows (mainly foreign direct investment) averaged US$0.3 billion in the Maghreb and US$1.0 billion in the Mashreq. Thus, in the 1980s, capital outflows offset almost exactly the inflow of remittances, and foreign direct investment remained small. Both the outflow of capital and the small inflow of foreign direct investment attest to the unfavorable assessment of domestic policies by both domestic and foreign private investors. CoNSERAIW TO GRowTn Besides the quality of policy and the magnitude of available financing, several factors are likely to constrain economic growth in the future. First, rapid population growth is placing unusual strain on the capacity of governments to provide more and better socil services. services. Second, the combination of rapid population growth and past patterns of economic growth have led to water scarcity and environmental degradation. And third, rapid ubanization has increased the demands on the provision of urban infrastructure. An additional burden is the urgent need to rehabilitate infrastructure after years of neglect in the Occupied Territories and after war in Lebanon. Each of these factors will increase the investment required to achieve any given rate of economic growth compared with past experience and will have to be factored into any estimate of future requirements. 8 Box 2 Esdmatig Cpital Fght Measuring capital flight Is difficult. The data ped h (se armae on the, 'World Dankc: Residual" metho4, hic uses balaneE of payments components to' deteni the rsda.It is.4etbd as folws: Capital Flight - ~ te I Bo-rrowig + oreign Direct Investment) - (Current ,A ounet Deficit +.-t Increase in Reerves) lExternal: Borawing id as the ehange hi exteomal debt, adjustd to exclude private nonguasanteed debt flowsand. the effects of ou¢rrecy :vauation -hanges and debt euion. Foreigii direct investmet, tbe Current Account leficit, and the Icrease in Rl es are talk from IMF Baitlane of Pavment Staistics. The basic World Baik measure is a net .hisidual.1TiS Ls the broadst measure of cexital ght an'd.;it udesthbe chsange i.n all e a ass bot recored ad unecored. heseaigets I-nclde.to exm plde, j egitimate o rtl.i ditesulc an nebn ra. es Pofcornttke no co" b'hs measures howvri xe,a (aith.bugh tey wyas epc-u purcre m iUtz hrwarepucae tdIthcsef Jordau, reitac toeSn oaetn1n n the iT C0UNTRY'- 197,74 1957 1S$.:'98044. 9 Mgeria $1 , 5 . 34 1.4 3'.,''': .Morc, .' I' ' 1' :.',6> Magh ....2 ;. .03 . 3 Syria <5 25 7*4 55$ 96 : 'Yme ' '..,., . .. 16' Region~ 36 $1 0.2 9 Rapid population growth has complicated economic management and constrained overall progress. With annual growth rates exceeding 3 percent, many countries in the region have among the highest population growth rates in the world. Some countries, such as Tunisia have pursued very active population policies and brought the growth rate down to an impressive 1.9 percent. Other countries, such as Jordan and Yemen, have population growth rates well above 3 percent. The resultant young age structure of the region's population - 44 percent are under the age of 14, compared with 36 percent for other middle-income countries -- poses unprecedented challenges to the provision of education, health, and housing. Even though much progress was made on some fronts during the last decade, many countries in the region still lag substantially behind the middle-income countries as a whole. Anothe: common development challenge facing the countries of the region is thlie environment and, in particular, water scarcity. With few exceptions, countries in the region are rapidly moving towards a water crisis. There are very few untapped sources of fresh wate.r and countries are increasingly mining groundwater aquifers. Rational management of the region's water resources will increasingly require agreements at national and trans-national levels. The region is also experiencing difficult environmental conditions due to the concentration of the region's population, industry, and agriculture along the coast and in river valleys. In rural areas, long term sustainability has been undercut by the loss of arable land to urban expansion, soil erosion from deforestation of watersheds, and deterioration of rangelands by overgrazing. Rapid urbanization has intensified the demands on public budgets to provide adequate infrastructure. Within the space of a single generation, urban populations have quadrupled. Today, the region's cities house ovwer 50 percent of total population, and are continuing to grow at explosive rates of 4-6 percent a year. Municipal solid waste and sewerage services have been overwhelmed by population pressures. The need to rehabilitate the infrastructure - roads, sewage systems, power plants, telecommunication, civil administration -- is especially acute in Lebanon and the Occupied Territories. Lebanon has emerged from 16 years of turmoil with major damage to its infrastructure. In the Territories, past provision of public services has been inadequate, especially in the Gaza strip. In both cases, economic growth would not be possible without major investments in infrastructure rehabilitation. WIERE Do WE STAND TODAY? In the early 1990s the region has been buffeted in the aftermath of the Gulf crisis by: a slump in tourism; the return of many migrants especially to Jordan, Lebanon, the Occupied Territories, and Yemen; and tightening resource constraints in the Gulf. Some economies have managed these new difficulties well. Israel and Jordan in fact experienced a construction-led boom (but on a per capita basis, incomes stagnated in Jordan). In the Occupied Territories, a bountiful olive harvest, and a recovery from the 1991 recession led to high growth in 1992. But due to the recent tightening of labor movement with Israel, a severe recession has now taken hold. Other countries have been reasonably insulated - Tunisia's reform program continues to yield benefits. But the collapse of growth in the 1980s remains the predominant concern of the policy maker. The social implications of the divergence between the job-creating capacity of present growth rates and the demand for jobs from new entrants to the labor market are now fully manifest in the form of high and increasing rates of unemployment (see table 6). These 10 outcomes point to the urgent need for a new or revised approach to economic and social development. The following two sections address this challenge. Take 6: Recent Eoonmic Peifsomea Estimated Real GDP Vuemphlymt Growth 1992 1990 a (Percent) (Percent of loborrce) Egypt 0.3 15 Jordan 11.3 25 Lebanon 4.5 b 25 Occupied Territories 7.0 0 5 Syri 6.5 20 Yemen -4.0 26 Algeria 0.4 24 Mosocco -2.6 15 Tunisia 8.2 15 sraelw 6.5 10 a. Definitors of unmployenot ans ot comparable wogm economies. Mme low rawe foc the Occupied Terdtories, for emample, rafect th usw of Ome anderW 11.0 definitIo for unemployment, a definitio tha Is much nanower fthn that used in moa Arab economIes. b. Red GDP gowth fo 1991. c. Avage fr 1990-91. 11 Section II: Regional Cooperation Regiona'. cooperation in economic relations offers one potenially important direction through which economic performance can be strengthened. There are several reasons for this. Cooperation in the area of trade enlarges the market; allows for gains from economies of scale and for a quicker appropriation of new technologies; and strengthens the bargaining position of the region when negotiafing with other trading blocks. Similarly, incrased factor mobility generates gains between countries with abundant labor and those with abundant capital. And, in the medium-term, the implementation of high-return regional projects in the fields of communication, water, environmental management, and energy would contribute to prosperity in the region. Finally, and perhaps most importantly, increased cooperation reduces regional tensior sets the stage for arms reduction, and leads to a more favorable growth environment, especially in market economies where strategic uncertainties deter private investment. While actions in all these areas should be vigorously pursued, the question addressed here is whether by themselves they are likely to solve the problems of low growth and high unemployment identified above. TRADE Excluding Israel, intra-regional trade has constituted a very small fraction of total international trade of the region (about 6 percent). Intra-GCC trade and intra-Maghreb trade in relation to the total export of each of these groups has been even lower (see table 7). In part this simply reflects the fict that the region accounts for onlv a small share of the world economy - about 5 percent. But it also reflects the lack of diversification of the economies in the region. Exports are dominated by primary commodities (oil, cotton, phosphates) and non-traditional export3 represent only a small share of the total. The scope for intra-regional trade cannot be increased much in the short term even if regional trade is liberalized faster than trade with the rest of the world. In the long run, intra-regional trade will only rise following the development of a dynamic private sector that bas incentives to expand the range and quality of goods produced. As a result, efforts to increase intra-regional trade must be premised on more comprehensive actions designed to develop an active, outward-oriented private sector. Tabke 7: Composiion of Eepois Odgingfrom the Region as a Share of Total Maghreb and Mashreq Expont ae) 1980 1985 1990 Ita-Maghreb/Mashreq Exports 4.S 6.6 6.0 Expots to EEC 33.5 36.2 31.8 Exports to US and Canada 15.6 7.6 13.5 Mano Items Int-GCC ExportTotal GCC Expons 3.0 4.6 5.8 Inft-UMA Exports/Too UMA Exports 0.3 1.0 2.3 .tra-EEC Trade Export/Total EEC Export 55.7 54.4 59.8 US/Caa Exportsotal Exports fom US and Canada 26.5 38.0 33.8 hua-ASEANrToWaI ASEAN ExNort _ 16.9 18.4 17.8 ,a8' nMWui Fr*Spa, -UN WOt Ban, 199 12 Experience elsewhere suggests that exposure to international competition is an essential ingredient in the successful development of the private sector. The highly successfil East Asian counties, for example, emphasized integration in the global market. And Mexico, another highly successful country, reduced its average tariffs with the rest of the world to less ta 12 pecent before embarking on a trade agreement with the U.S. and Canada. This suggests that efforts to increase regional trade should be consistent with the gradual integration of the region into world markets. In pardcular, while intra-regional trade liberalization may precede global liberalization, progress on the former should not be at the expense of advances on the latter. One approach which may be appropriate for some sectors would be to Lberalize within the region in order to reap the benefits of a larger market and more competition while providing enterprises with an oproortunity to improve their ability to compete intemationally, and then proceed to full liberalization. But if such protection is pursued, there should be a clear time- table for phasing it out with the market determining which sectors can swim, and which must sik. Action in other areas may do more to promote inter-regional trade than trade policy itself. For example, there is scope for significant gains from improvements in infrastructure, baning, and communication networks that support trade. In this respect, intra-regional communication channels have lagged behind intemational ones, especially in banking and trade- related finance. There is also scope for increased harmonization of regulations and standards. Migration has served an important role in alleviating pressures in domestic labor markets and redistributing wealth from Europe and the oil-rich countries of the Gulf to the labor-surplus countries of the Maghreb and Mashreq. Labor remittances generally accrue directly to millions of recipients, often tenant farmers or landless peasants, and their economic effects are quite different from those of capital flows that occur at the intergovernmental level. Remittances have been substantial, especially for Egypt, Jordan, Lebanon, Yemen and Morocco (table 8). But demand for migrant labor by the Gulf and the European countries has shru recently. The crisis in the Gulf, with the attendant movement in populations, dramatically reduced the level of remittances as Iraq, Kuwait and Saudi Arabia released several million Arab workers. In Yemen and Egypt, one million have returned; in Jordan 300,000; and in Lebanon 260,000. Unemployment has shot up and the public sector has had to provide housing, schooling, and other social services to the returnees with detrmental budgetary implications. The shock was to some extent buffeted by the repatriaton of workers' savings - a one-shot event. The continuation of restrictive immigration policies will hurt economic growth in the region. The alternative of greater mobility will alleviate demographic pressures and strengthen entrepreneurship throughout the region, as well as reduce markedly the external imbalances (especially in Jordan, the Occupied Territories, and Yemen) and provide support for economic reform. 13 Table 8: Worker R a wa a shoan of GNP (percent) COn=t"y 1970-74 1975-79 1980-84 1985-89 1990 1991 Algeria 4.4 1.7 0.7 1.4 2.6 3.0 Morocco 2.7 5.4 6.7 8.3 9.3 8.6 Tunisia 2.9 3.S 4.4 4.9 5.9 5.4 Maghreb 3.5 3.0 2.4 3.1 4.8 5.2 Egypt 1.2 8.2 12.1 10.6 13.5 13.3 Jordan 3.0 18.2 18.4 14.3 12.1 10.5 Occupied Terdtoies 20.2 22.9 30.5 26.8 26.4 25.6 Syria 0.8 3.7 3.1 3.1 3.0 2.8 Yemen b n.a. n.a. n.a. 6.6 21.8 10.9 buashreq 1.8 8.1 10.3 9.9 11.5 10.6 lsrad 11.4 7.4 4.9 3.8 3.7 3.5 Region 4.6 5.5 5.4 5.2 6.23 6.1 a. Refib to Cuo Twons for AMguia, Morocco, Tuniida and tml. b. 198S-1989 avera zfe to 1989 oiy. o. Dowe am Ie Lebanon and Yemen, becaue ofak of daft. Wile labor mobility should be an important part of any overall strategy, it is unrealistic to expect that it can play a major role in resolving current unemployment and providing adequate jobs for future increases in the labor force. Well over 10 million are currently unemployed; past population growth is adding a further 4 million to the labor force every year. But the proects for incased migration in general in the near future are limited. And anyway, even a return to the levels of migration prior to the Gulf Crisis, would provide jobs for at most 3 million. The solution for the remaining unemployed and for the future labor market entrants must lie with domestic reforms and the resumption of economic growth. As far as remittances are concerned, as credibility in reform programs gathers momentum and as exchange controls are relaxed, potential remittances that had previously been retained abroad or had been diverted to informal markets (Algeria, Egypt, Syria) can be expected to enlarge officially recorded flows. Even so, remittances are likely to fall as a share of GNP in the receiving countries (see box 3). CAffAL As shown in Section I official capital flows from the capital surplus to the labor surplus countries of the region took off with the oil boom in 1973 and increased dramatically during the seventie&. But beside some foreign direct investment, especially in the real estate sectors, and 14 Box 3: What Will Happen to Workers" Remittances? .~~~~u ...... ... .P._. _.i . .. . the> .ulf, a miii tur ofpoliticanSW ed tions underlying economic etals suggest t wate t non-tona lam or forwill continue to expand, the slae of Arab migants will fall ii some c ries. Pr ea , if te no-national labor force grows at the 1985-1990 rate of three percent a year aad if, as suggested by on sourc, the effects of the Gulf cdsis result in an Arab shar -of oly 20 percent,thes 1995 number -of Arab migrants in -the Gulf would be well below the 1990 number, Oa the othr band,- better economic -performance in the labor-surplus countries and hence . bttrinvesment oppoiRities may encourage more remittance per worker. Discounting the surge in remittanke to Egypt in 1992, this suggests that at best one might expect remittances to stabilize - .between $5 imd $6 billion a year implying a steady decline relative to GNP. Ih Western Surope e ewtlook is similar although the causal factors are differeiit In this case - tow-of ts hasbee mucb more stable and, given moderate growth in Westn E on thb onei band nd ncreased -competition for 'obs from Eastern Europe and the former Soviet Union on the i Ul y to inese datically in the foreseeable future. Here then-the factors influencing rmittane peu worke are ikely to dominate. 'The stability of the migration flows from North Africa oWeten Frop siggests ties Will: e estab'ished in the receivmng couries d over time familes will.;l g This s ap rfu de moraic factor which will tend to reduce the flow of remittbnces h ne- ie, tin n ofoid economic perforance in Morocco anid isia e o oic mn Algenrs, codA se an in e in remiittafnces as migir see thes * countries as attractive investv,en opportunitie s . OneQnight spece, therefore, that totalrremitaWn wIl atbatincras ;:byol otwo prcnt eraoecret levels of abot $3 fbillionia yer t m~~~~~~t project-related loans from the Arab multilateral institutions,2 ihese flows were mainly in the form of bilateral loans and grants, especially to the frontline Arab states and the Palestinians. Arab aid and bilateral flows have been highly volatile, fluctuating with oil revenues as well as other considerations. These flows dwindled however by the end of the eighties. Arab assistance increased during 1990, when US$4 billion were disbursed (as opposed to less than US$1 billion in 1989) but prospects for future transfers are mixed. Aid to Jordan, Yemen, and the Palestinians was reduced substantially after the Gulf war in 1991. More fundamentally, relatively low oil prices, the fall in reserves related to the cost of the Gulf war, and rising domestic expenditures, make it unlikely that Arab aid will increase dramatically in the near future. Total Arab foreign direct investment in the Mashreq and Maghreb is small, compared to a portfolio of assets of several hundred billion dollars invested in OECD countries. Clearly, there is considerable scope for increased investment by Gulf businessmen in other Arab countries. International experience, however, has demonstrated that a well performing domestic economy with a well designed and implemented economic policy is an essential prerequisite for substantial inflows of foreign direct investment. Thus, a strong program of economic reform will be the key determinant of direct foreign investment from the capital surplus Arab countries. Z/ As a share of total multiateral debt, Amb multilateral debt stands curently at 25 percent in the Mashreq, and at 14 percmet in the Maghreb. For bilater debt, these shares are repetively 5 and 10 percent. 1S REGIONAL PROJECrS Of all forms of regional cooperation investment in physical infrastructure is one of the most attactive because it simultaneously strengthens regional integration and yields substantial economic benefits. Many of the problems confronting the region demand a regional approach. This is obviously true of infrastructural projects designed to foster inter-regional trade and of power projects where the least-cost solution may require participation of more than one country. But a concerted regional effort will be most essential if the serious problems of environmental degradation and water scarcity are to be adequately addressed. A review by World Bank staff of a large number of possible infrastructural projects led to the selection of five that seem particularly attractive and warrant further analysis. Of the three transport projects, one involves completion and improvement of the key highways linking the countries of the Maghreb. Another entails reconstruction and improvement of the Coastal Highway corridor along the Eastern Coast of the Mediterranean running mainly through Syria, Lebanon, Israel and Gaza. And a third entails upgrading the roads and rebuilding the bridges forming the three East-West corridors between the coast and Israel, the Occupied Territories, and Jordan. In the power sector, two attractive possibilities are the Mashreq Electric Power Interconnection and the Interconnection of the Power Grids of Egypt, Jordan, the Occupied Territories, Lebanon and Syria. In addition, a number of initiatives involving policy coordination, information gathering and improved management activities have been identified, which could be quite important. Among others, these include a proposal for an environmental acon plan for the Gulf of Aqaba which would lead to a joint approach to the development of the Gulf involving Egypt, Israel, Jordan, and Saudi Arabia, and a Regional Hydrological Data Network that would provide reliable, consistent, and timely hydrological data throughout the region. These and similar projects offer a potentially effective means of contributing to regional integration. Others are under discussion in the Middle East Peace Initiative Multilateral Working Groups on Water and the Environment. It will not be feasible to undertake all of them if not for political reasons then cerainly for financial ones. Some of the proposals -- the Regional Hydrological Data Network, for example - are not costly because they are focussed on the generation and use of information for planning purposes. Others, however, would require substantial capital outlays. This suggests considerable flexibility in matching actions to the availability of financing. As an illustration, the total cost of the proposals described above is of the order of US$2 billion over a period of 4 to 5 years. But, as important as these regional projects undoubtedly are, they will at best represent only a small part of total investment in the region - the total in 1990, for example, was in the range of US$50 billion. This number underscores the importance of ensuring that domestic investment is as productive as possible while simultaneously taking advantage of regional opportunities. THE NEED FOR DOMEIC REFORM Whether the focus is on trade, labor, capital, or regional projects, the preceding arguments suggest that they cannot be expected to solve the region's unemployment and development problems in the absence of domestic reform. Thus, domestic reform is critical to 16 reap the full potential of intra-regional trade and capital flows especially those in the form of foreign direct investment. Refom of the domestic economy is also essential given the relative magnitudes involved - external migration cannot solve the unemployment problem and even well-chosen regional projects will not yield acceptable growth rates of GDP if domestic investment remains unproductive. At the same time, the full potential of domestic reform will not be realized in the absence of regional economic cooperation and the reduction in strategic uncetainty and political risk that such cooperation can be expected to bring. While both avenues - regional cooperation and domestic reform - can be pursued independently, it is their intection that is likely to secure the greatest improvement in regional stability and prosperity. 17 Section II[: Domestic Reform, External Financing and CreditWorthiness Both the assessment of recent economic performance in the region (Section I) and the review of the scope for regional cooperation (Section II) point to the importance of the domestic component of the strategy aimed at increasing the levels of domestic investment and improving the productivity of that investment. This section elaborates this component of the strategy in three steps. First, it outlines the kinds of reforms that are required and projects their likely impact on future economic performance. Second, it explores a private-sector based approach to external financing. The two steps are connected - domestic reforms are necessary to attract private financing; private financing will be required because official flows are unlikely to regain the levels experienced during the boom; and private financing, because it is subject to the test of the market, will contribute to the needed improvement in the productivity of investment. And third, the section assesses whether the heavy burden of past debt is likely to constrain efforts to move to a growth path financed primarily by private inflows. Domc RE[RM What should be done in the short and medium terms at the domestic level to realize the full potential of the region? Countries that have successfully increased the income and welfare of their people and have kept unemployment low have managed their economies such that: output growth has been significantly above the rate of population growth - by about 2 percent or more; and growth has taken advantage of abundant labor resources by maldng use of labor. To achieve such rates of per capita growth over the long term, the quantity and quality of investment must be increased. In particular, when population is growing by 2.5 percent or more a year: o The rate of investment must remain high - 25 percent of GDP or more. o The efficiency of investment and of resource use in general must be increased to achieve ICORs between 5 and 6. These necessary economic conditions for growth are not yet present in the region. Regional population is growing at a rate of 2.8 percent a year, investment is about 21 percent of GDP, and the ICOR is about 10. This means that output is growing by 2.1 percent a year, below the rate of population growth. Policy actions to increase the level and efficiency of investment would have to be tailor- made to individual country circumstances, especially initial conditions, implementation capacity, degree of internal consensus, and availability of external support. In general, action is called for in two areas. First, the necessary economic framework must be put in place to encourage higher levels of private investment, and to ensure that such investment makes good use of scarce 18 resources and contributes to the goals of society, especially that of reducing unemployment. And second, public investment must be redirected towards those needs which are unlikely to be met by the private sector and/or which support the development of an active private sector. Prime among these are actions -- investment in human resources, in infrastructure, and in protection of the environment - essential to sustain economic growth in the long run. The key actions to establish an attractive and responsible environment for private sector initiative include: o Macro-economic stabilization with an emphasis on both external and intemal equilibria; o Improvements in public sector management including civil service reform and reform and/or privatization of state enterprises in non-strategic sectors; e Price liberalization to bring - and keep - key domestic prices in line with those in the rest of the world and reflecting true scarcities; o Tax and regulatory reforms of the labor market, the financial market, and the investment regime to facilitate and encourage private sector activity; o Trade reform to encourage an increased flow of goods and services, both regional and global, increased competition and efficiency, and increased tansfers of modern technology. The need to redirect public investment in part reflects the limited return to past investments and in part the increasing pressure being exerted by the explosion in population. The review of performance in the 1980s has already documented the declining productivity of investment, much of which was public and went for unproductive purposes (such as military spending) and for unprofitable state enterprises. At the same time, population growth has been exerting extreme pressure on the capacity of govemments to provide adequate social services and sufficient infrastructure especially in urban areas, and on limited natural resources especially water. Three statistics illustrate the point. The school-age population will increase by 70 million by the year 2025. Urban populations are growing at a rate of 4.5 percent a year. And at least 10 countries are currently classified as suffering from water scarcity. These factors may impose an additional burden on scarce investment resources but at least part of the burden can be managed by redirecting public spending. This can only be assessed on a case-by-case basis but work on human resources undertaken by the World Bank illustrates the potential of this approach. A three-pronged strategy, including expanded family planning services to reduce future population growth, universal primary enrollment, and provision of a basic package of healthcare, is an affordable option. With an objective of increasing contraceptive usage by 25 percent in the near future and delivery of the basic education and health package to all menbers of society by the year 2000, the cost would be about 2.5 percent of regional GDP. Some countries - Israel for example - are already close to or beyond these norms. For the Arab countries as a group spending for these purposes already amounts to 2 percent of GDP so that the incremental expenditure is likely to be less than one percent of GDr. Modest reallocations from military spending or within the social sectors from 19 high-cost tertiary education and curative healthcare would be sufficient to cover the additional costs of this human resource package. To assess the levels of investment required to achieve growth rates that will in turn geneate job opportunities for the region's expanding labor force, a simple, country-specific simulation has been undertaken (box 4). While no simulation model can handle all the underlying deterninants of growth, the capital-based model used here is a useful tool for quantifying the financing requirements associated with alternative growth paths. The approach adopted involves specifying growth rates of GDP that will be sufficient to absorb expanding Box 4: Qangifg Me Reforn Program Sevralf~aureotte smultios urtan metioni. First, uuuisually high levels of investment Syri~, ntiYetert.Inthee tunties th e.ait tcsOfpbot phcal and humxan captita can be dictfrn 8ITU4~Ir -s sBill dominated by public rprses. th developnt of i dna it i~~~~~~~~~~~~cn , f '"' 2 ' i:.'.:.5^'.::5:f: :... ... . .... .... Xw ~~~~~~~~~~~~~~~~~~~~~~Xm | | iX fam ' .":, ' :,. ..;.:.: ,,..M....'.: :.,..: ,::,: :. gie~~~~~~~~~~~~. .. ... .ela Is ikeyt ;. fflajj procems kefonn in Algeria, for example s s~~~~~~~~~~~~~~~~~~~~~f :WU" aV-f Y-"31.f labor forces and allow for a gradual rise in real wages. it also specifies lower tCORs, on the assumption that the policies outlined above are fully implemented. Accordngly, this is caled thie "with refomwt scenario. In contrav, a second scenario assumes a continuation of current 20 policies and results in declining GDP per capita, and rising unemployment except in those counties that have already undertken significant reform - Israel, Morocco, and Tunisia. A comparison of the two scenarios allows an assessment of the required increase in investment. Excluding Algeria where investment is projected to fall, and the special reconstruction needs for Lebanon and the Occupied Territories, the required increase in investment amounts to about US$11 billion per year for the region as a whole (US$1 billion for Morocco and Tunisia, US$7 billion for the Mashreq, and US$3 billion for Israel). The large increases required in the Mashreq reflect the combined effect of currently low, levels of investment, rapid population growth, and the needed improvement in physical infrastructure. The extraordinary financing needs in Lebanon and the Occupied Territories would add an extra US$700 million a year over the next S years. To sustain such high expenditures on investment in the medium term, new sources of finance must be found. On the domestic front, resources can be redirected from unproductive activities as noted above. A security arrangement, accompanied by an arms non-proliferation treaty will allow the front-line states to reduce defense expenditures without harming their national security. In turn, this would allow a substantial reallocation of resources to more productive purposes. Domestic saving could also be increased but the scope for action in this area is limited in the medium term by the need to maintain consumption levels. To get a sense of magnitudes, suppose that some reallocation of spending from unproductive purposes and some increase in domestic savings (arising in part from lower public deficits, and in part from higher household savings) can together yield an additional 3 percentage points of GDP in the medium term. While this would be enough to close the gaps in Morocco and Tunisia and reduce the gap in Israel to US$1 billion, the remaining financing needs in the Mlashreq would amount to almost US$5 billion a year. Thus, additional external financing will be requwred for the Mashreq and Israel to reach the desired investnent targets; it will also be required in the Maghreb to safeguard against the possibility of shrinking official flows in the future. EXERNAL FINANCING The need for additional external financing leads to one of the key conclusions of this paper: e in the future external financing will have to shift in favor of more funding for the private sector. The argument behind this proposition is summarinzed here and developed more fully in the remainder of the section: O past flows of capital have accrued predominantly to the public sector; together with inappropriate domestic policies, this predominance has resulted in inefficient investment, low growth rates, and high unemployment; * in the future extemal circumstances are unliklly to allow countries to regain the level of public sector financing achieved in the late 1970s; 21 * the past exodus of private capital, however, represents an alternative source of funds which could be attracted back to the region with appropriate domestic policies; ° but successful realization of this strategy in the form of adequate and sustained flows of private capital wiU require not only adoption of appropriate domestic policies but also a resolution to the debt problems confronting several countries. The first point -- the predominance of flows accruing to the public sector - and its consequences have already been established. The remainder of this section elaborates the remaining three points. The contraction in the external sources of public finance that took place since the mid- 1980s has already been documented. This situation is not likely to be reversed, requiring a redirection in growth strategy toward more emphasis on the private sector. Indeed, an important argument in preferring a market-based strategy now is that the balance in the availability of external funds is shiffing away from public to private sources. Assistance from Arab and OECD countries is likely to be constrained by their difficult fiscal situation. Nor can the region rely in the future on multilateral institutions for increasing levels of net flows. In some cases multilateral institutions have reached exposure levels that limit new lending. In others, such as the Arab multilaterals, new lending is limited because of capital constraints. And, with the conclusion of the Cold War and the collapse of the Soviet Union, the former Eastern Bloc has ceased to be a source of assistance -- at its peak in 1983 CMEA provided the region with US$2.5 billion - and is indeed now competing with the developing countries for the limited quantities of international assistance. In total, the region's public sectors received about US$9 billion of net flows in each of 1990 and 1991 (down from an average of US$12 billion in the preceding decade), over 80 percent of which was in the form of grants (instead of 50 percent in the late 1980s). This amount is expected to decrease as the exceptional element associated with the Gulf crisis disappears. In these two years, interest payments amounted to US$7 billion for the region, leaving only US$2 billion in net transfers accruing to the public sector. The net intake however varied among countries. In the Mashreq, the net transfer to the public sector remained sizable in 1990-91 at about 5 percent of GNP, but it was negative and growing in the Maghreb (-1.6 percent of GNP in 1990, 4.3 percent in 1991). All of this suggests that any future strategy should be based on the presumption that flows of external assistance directed to the public sectors of the region are likely to be more in line with those of the bust of dhe late 1980s than the boom of the 1970s. in contrast, net inflows accruing to the private sector were the principal source of external fnance throughout the region in the past few years: workers remittances, foreign direct investment, and a reversal of capital flight generated inflows of 14.7 and 6 percent of GNP in 1990 and 1991 in the Mashreq, and 5.1 and 7.9 percent of GNP in the Maghreb. This performance with private capital flows indicates what is feasible in the future. The potential for increased future flows resides however with increased foreign direct investment and a reflow of past capital flight, rather than with increased work abroad. In the past, remittances from workers abroad have been the most important source of external funding for the private sector, but the available evidence suggests that in the future remittances will decline as a share of GNP (see box 3). 22 The critical question then becomes: what can be expected from foreign direct investment and a partial reversal of capital flight? Since the potential for attracting residents' savings }.eld abroad back to the region depends on the size of these holdings, and since the potential for both foreign direct investment and returning savings depends on the perceived degree of crelitworfthiness in the receiving country, the answer to this question depends in part on the external balance sheet of the region. The combination of the external financing strategy and inappropriate domestic policies that prevailed through most of the last two decades left the countries of the region with two major legacies - a significant stock of mainly private external assets, and a large stock of mainly public debt. Both have important implications for the design of a future development strategy. Table 9 provides a country-by-country comparison of estimates of the savings held abroad by domestic residents, and the present value of external debt (see box 5). Although there are important variations among countries, for the region as a whole the two stocks are large and of similar magnitude -- about US$180 and US$140 billion respectively. These numbers highlight two of t . propositions of this paper -- that past outflows of private capital constitute a valuable source of funds since some of these savings could be attracted back to the region if the circumstances are ripe, but that the existing burden of debt may well prove a severe obstacle to the pursuit of a market-based growth strategy. Tabk 9: Accwnndated Savings Abroad and Present Value of External Debt, 1991 Stock of Savig Prsent Present Saving Abroad Value Value of Country Abroad a over GNP of Debt Debt to GNP (f Billion) (Percent) (S BW&n) Oeperceft) Algeia 32.5 80 28.1 69 Egypt b 82.6 271 21.S 71 inia 19.7 ~~~~32 33.0 54 israel 19.7 163 7.9 208 Jordan 6.2 N.A 1.8 Si Lebanon N.A 36 19.5 73 Mc_occo 9.6 161 12.1 75 Syria 26.1 36 7.S 60 Tunisia 4.5 N.A 5.4 74 Yemen N.A 90 136.8 71 Region 179.0 a. Ihe sock of savings abread is estimated by capitalizng the outfows described in box 2 at the LIBOR rate. b. Aswniing the fuli conditional debt reduction granted by the Paris Club goes thrugh. Sources: World Debt Tables, and Authors' computations (see boxes 2 and S for methodology). On the positive side of the balance sheet, accumulated savings held abroad for the countries where estimates are available (the set of economies studied here minus Lebanon, Occupied Territories, and Yemen) amount to 90 percent of GNP in 1991. This represents more than twice the amount of estimated savings held abroad for Latin America where the recent rebound in economic activity owes much to the repatriation of past capital flight. The potential for a strategy based on attracting back such capital, however, varies among countries. In Egypt, Jordan, and Syria, countries that witnessed acute macroeconomic imbalances and financial 23 Box 5. PresenS Value of Ddet The 1Xtce iralue of debt fais to account for the term tructure and the voncesionaty of debt, which has an impact on t he lash flow debi The presnt value of debt service c*pturea the effect ofbosrowing eonccseiliytat s co3d e bsiosel debt rsts in lower debt service than the nominal value otdebt. The deteining factorsfor preset value being above orbelow p Vare atesof l.n anth iscount rate usedain the present value calculation. A loan with an ntest ratehihrttra ed a est value that is larger than the nominalue ebt; t ho fo1 swith inter rates lower than the discount rate. The discount rates ucitculation are intersrates harjed bi OECD couatries for e t crdits.- Td eY rep t, an average, the most favorable terms of fixed rate, noneoneeionl debt developimg:,ountries ar able to cotrct *n the international loan market. noe rates a f eurecy i for .ayor cur-,nces and are appi. i to debt denominated in .these -e c tian l,J e yen, Brit pounds sterling, and US dellml~kl)loa, and A crdits re dscouneduing te motM reet BRD lendn rate. For deb ti;i t iised is the average of interest rates on export credits eharged by OBVI) eountaips-nother than listed above. arrem, te prsen vale ofdebtserice s caculaedis- th 4umo theftureintees paymen- -Ad repression in the past, the ratio exceeds 150 percent. Not surprisingly, these are alpo the countries where the investment needs are largest. Although smaller, the ratio of savings abroad to GDP is also high in Algeria (80 percent, similar to that for SubSaharan Africa). In comparison, the estimated ratio of savings abroad to GNP is 35 percent for Israel, Morocco, and Tunisia, similar to the average for all developing countries. The potential of the debt overhang to thwart a strategy based on inflows of private capital also varies in the region. Using as a yardstick the present value of debt relative to exports of goods and non-factor services, Jordan, Syria, Yemen and Morocco are the most indebted countries in the region. All have ratios in the 230 to 260 range. Virtually all countries in the world that have reached debt ratios of this magnitude have encountered serious and long-term debt servicing problems, with a significant negative impact on growth prospects (see box 6). Indeed each of these four countries has experienced debt servicing difficulties in the 1980s. Jordan and Morocco rescheduled with the Paris Club (official bilateral debt or bilaterally- guaranteed debt) and with the London Club (commercial loans). Since these reschedulings were basically at market interest rates with no principal forgiveness, they had no real impact on the present value measure of debt. Yemen and Syria were also unable to meet debt service payments as scheduled and they were not able to reach rescheduling agreements with creditors. As a result, arears have mounted steadily since the mid-1980s. 24 Box 6: Debt Ovehang and Inveshnent Incentives are iuo its an built On arl b iiicl pV s : developmt.Tsrvcg of exera ubic ecr debt requires bot an ext ltrnfr(rn L. countiy to he creditors) and an fer (from the private to the piblc sector). The sii .of domestic public debt quit intena tf. earn sufficiet foreig e g, delutions maybded. And to cofrome s variousitaxs yahve ito be imposed, ncludg X i i , t dmcpiblc et must rise fiuer, rwding Out private investmnt. ee -s-as well as teiti t ey my need to take place ini th* future - depress domestic savins and invstmt. Whn the public sector is ficiayi :pivate caplial to fle d int afrbv and l goes into ,og tr ini tein. hoe ecoomy until Xh stratic: it i r l -; : C~~~~~~~~~~~~~~ V. Telverlshe ol edtors db evenif in soae cuntlesbeiniservice -onern that even if dentrs tado refthe books.amsni ne dvestovrhang wind droftab e i infl.ows ofpivte they mairey pnereiven the povpertsllo netprotach.Ter xpor taxsa ihl cetin givsen ah smlon e oimulatioantmdes -sa(on th7uli) us. The model t inco rpoateds b the dein fverantu alsof thertrivatdesetoblirn oinlenedrfm invyestos. Fibny a nsbiiysexertdwe.the public sec.tor thao has larg o chee expenalbla cit and thpuicithedb rati ateachpoit intim.3 I th resltigdbt ra Vo are t iooihatrrfrsaecmltd li seabioitis jtudoed t euraitc h etoehn slkl opeetteasmdifo of~~~~~~~~~~ ~.. ........ capta fro tain place CREDiTORTHINES The levels of external debt, especially in some countries, raises the concen that, even if countries adopt refomn programs, the debt overhang will discourage inflows of private capital thereby undermining the overa approach. To explore this issue, a simple simuation model is used (box 7). The model incorporates the main features of the private sector oriented reform programs sumnmarzed in box 4, and adds the estimates of the existing stock of debt, future debt servicing, and expected levels of grants in order to compute the next external borrowings (or repayments) by the publhe sector that are needed to achieve extad balance, and thus, the debt ratio at each point in time. If the resulting debt ratios are too high after reforms are completed, the scenario is judged to be unrealistic: the debt overhang is likely to prevent the assumed inflow of private capital from taking place. The creditworthiness test is brought to bear on the simulations in a fashion that is consistent with recent international experience (see box 8). If after 5 years of reforms, the ratio of debt to exports remains below 150 percent with moderate inflows of grants (specifically, a continuation of the past level of flows), external debt is not seen as a constraint to a market- based reformn strategy. At the other extreme, if a country's ratio of debt to exports exceeds 200 T/7ese borrowings include possible reschedulings of obligatin coming due To be consistentwth the reform program, (a part of) the new public sector borrowings can be passed on to the private sector thrugh the banking system, a reduction in the domestic public debt, or the extinction of other public liabihities (for example, they can be used for severnce pay during public sector reorganzation). 25 Box 7: Slnudaton Model ebn~~ulations are pot nisant to h ,vel..n ents. .-at..r, t..t, "nSWr a si m ner t t of ciumstancs isbout weal reform's, and taking into &:aaideration the cursunt .ruotizm of. poduction and demogrhics, can a country grow faster than its estemnl ibteess; 'The goal gitees i9 to fnd ut whether, iven lhe growth prospects and the cing e te to aiiv t growt, the outsg debt is too large compared with the eeuatry*a capacity to.servioe-dbt; if the anwer i6 yes,e strategy of growth out of debt wil be unlkey Xsto e bcueit would be difSicult to convinacthe prvate Scto thiat auterity will be maintained l 04g epouoMolth pUbi rector imbial andthat the frits from investment will not be taxed away. : :R o ;eallocat:eion of publc wspenduig fomm unproductive purposes =n increased domestic saving yield an .E a dioinal 3 percentage points of GDP; of efms is plemnd As a result, te quaglity and quantity of investment .; cr;eases over time (vt desc4bd in box 4); : The terms pubfl s bt asrOe simila;r to the avrap tms of the old debt. 0 litAlgera, Iraeland yria prvaiato yiedsufcin resources for domestic public debt to be percent even with a substantial increase in grants (specifically, a doubling of past flows), the country would find it hard to attract the assumed private inflows on a sustainable basis. For countries falling in between, it is harder to tell: more in depth country specific studies are required. Table 10 reports the results. In Israel and Tunisia, the debt ratios remain low and do not constrain future growth. Egypt also belongs to this group, and with the Paris Club full debt Table 10: Pmjected Debt to Export Ratios (@ercent) In Five Years Current Increased' Countries 1991 Grant level Grant level Tunisia 124 136 130 Egypt (post Paris Club full debt reduction) 148 115 62 Israel 153 135 66 Lebanon 175 172 139 Algetia 191 88 88 Morocco 235 178 153 Egypt (post first-phase Paris Club debt reduction) 252 212 98 Yemen 244 272 245 Syria 245 255 240 Jordan (pn-1992-93 debt reducSions) 259 218 184 Egypt (pr-debt reduction) 331 281 203 a. Increased to twice the curran level of grant. 26 reduction, creditworthiness would continue to improve, stimulating the private sector-led growth strategy further. In Jordan, the ratio of debt to exports will decline fast provided the refonn programs are deepened and the current level of grants is increased. But if a grant-based approach turns out to be difficult to implement, measures of debt relief would be required for a market based growth strategy to work. Similarly to Jordan, Syria and Yemen currently face very high debt burdens. In addition they also have large but unmet financing needs. This combination wivl almost certainly affect the feasibility of a private sector-led strategy. Even a doubling of the current flow of grants would be insufficient to prevent the debt indicator from rising. For these countries, adoption of a program of domestic reform and debt relief would be required to restore economic growth and achieve external creditworthiness. B"- & How Large are Sustinable Debt to Export Ratios? c|oneeptuay debt ratios are .indicators of a country's credit ceiling. When a country's debt is below ,(or at) its credit ceilig, it is expected to be able to maintain smooth relationships with the international financial aet. lin such a aa'se, the country ' some (marginal) market access and it can refinance obligations coming | X without having to resowt to i'nreasd taxes. For simplicity, the ratio of debt to exports plus remittances (D/X) inused here as the relevant indicator of the aapacity to service debt in thc long run. At what level of debt does a country lose its creditwodhiness? A review of the rent debt and debt lservce reduction (DDSR) agreements can help in deriving sorne estinates since debt reduction is intended to elimnate th need for constant debt recontracting and ultimately, help bring a country close to creditworthiness. Tlus, it needs to be daep enough to aUow the country to end up with an outstanding debt close to its credit ceilig. 'The tabl blow reviews the rece,nt evidence. The ratio of debt to export of countries that benefited from l'DSgreements ranged from 210 to nearly500 perentjustbeforetheagree :nts weresigned. Debt reduction h reiiduced these ratos to a range of,lS0 ut 200 percent. e pecie dt ceing is of course untry-specific. Debt reduction in Poland and Egypt has lrodu4ed ''low DiXDrXatios ' by'Latine standards. New investors had to be convinced that they would be l paid i spite of thc sks nherent in t1e radical reforms that need to be implemented. In addition, given the elpected costa of£refonn, the public sectrs financing needs are lrge, and austerity alone could not be cxpected l ahiev ntad batace. Thus 'debt reduction had to be deep enough to create some headroom, for future, oanfs, IX i' likely that thease of the'refo'ring countries of the Middle East is clos to those of Egypt and Poland than to those of Ltian Amei c. ; Effect of DDSR Agreements; DIX:' fo~ : byefore and after DDSR ! Just~ 0 ovbitOilefore< ' ' After -,';C,OUNTRY 'A':r' ' "4 e1t Agreement 1991"b ' 'e:xi - 'o: 266. \ ' - 217 Philippines 223 209 Costa Rica {,.<, ' 250 164 Venezuela 211 174 ruguay 22, ; , , * ,,4 , , 225 ' EPola, ;', ' . ' ,'d' - ' ' ; 0 496 161 ;'--Egyptd : 3 33 148 bAAfci th' iag 'ment , the preental of debt, is ued to efect r Antest rate reducton received. e,assues ond cJub agenessmlr o te iecet Pahs Chub. :d. Assmes deshcdi foil Parik Club debt redutoc8 Is approved. World Debt Table. i992-93. 2 27 secdon MV Implementing the Strategy To generate economic growth and create new employment opportunities, the challenge facing policy-makers in the region will be to implement domestic policy-reforms that can simultaneously improve the quality of the incentive framework, thereby increasing the overall productivity of the existing human aad physical capital, and create profitable opportunities to attract new investment on market terms. In addition, there is a pressing need to rehabilitate infstructure, especially in the Occupied Territories and in Lebanon where major public investments are needed to support renewed economic growth. This section tackles both issues: it first describes the emerging reform strategies in the region, and then reviews the extraordinary public sector investment needs of the Occupied Territories and Lebanon. Additional material on Egypt, Israel, Jordan, and the Occupied Territories is provided in Annex 1. REFORM Several countries of the region have been following a reformist agenda for some time with various measures of success. Others are still plagued with serious macroeconomic and microeconomic problems. The strategies followed in terms of policy reform and the impact of those policies on economic growth have been affected by a multitude of structural factors, and in particular, by the elements of the external balance sheet discussed above - the levels of external assets and liabilities. Accordingly, it is useful to organize the discussion on the progress to date on the reform front along these two dimensions. First, the extent of savings abroad, as countries with large savings abroad have tended to move faster on reforming their fnancial sector - a precondition for attacting these funds back - while countries with little savings abroad have moved faster on real-side reforms. And second, the extent of the debt overhang, which affects both the strength of the supply response and the availability of extemal financing to smooth the short-run costs of reform. With respect to the first factor, Egypt, Jordan, Lebanon, Syria, and the Occupied Territories, are cases where success ultimately relies on attracting back past capital flight. This possibility has shaped recent policy measures in important ways, particularly in Egypt, Jordan, and Lebanon where stabiization policies coupled with ambitious policies to liberalize the domestic financial sector and the capital account have succeeded in attracting large capital reflows (in 1992, private capital inflows are estimated at about US$3 billion in Egypt, US$600 million in Jordan, and US$2 billion in Lebanon). The case of Egypt where the implicit taxation of financial intermediaries had generated large capital outflows in the past illustrates well Ohis sequence of reform. The government has moved fast on stabilization and on financial and foreign exchange liberalization: in the past two years, a treasury bils market has been established, interest rates have been liberalized, banks' solvency and prudential regulation have been improved, the foreign exchange market has been decontrolled, the exchange rate has been unified and significant measures were passed in the areas of trade liberalization and price decontrol in the agriculture and industrial sectors (see Annex 1). However, the Government has taken a gradual approach with rspect to the privatization of public enterprises. In all these 28 countries however, investment has not yet increased substantially following reforms. The emergence of a strong supply reWonse will depend on the maiiitenance of macroeconomic stability and the deepening of structural reform. A second group of countries have smaller stocks of capital abroad. They have moved fast on real reform and have tended to delay financial reform and capital account libezalization. Their strategy has emphasized in particular trade reforms aimed at increasing efficiency, and the mobilization of domestic savings and foreign direct investment. This group comprises Morocco, Tunisia, and Israel, countries that been following a reformist agenda for some time with some promising results (see box 9 for a more detailed review of the case of Tunisia). While the stage has been set for private sector growth, further action is needed - on both stabilization and adjustment - to enhance the dynamism of the supply response. But the needed change is now incremental rather than comprehensive. In Morocco and Tunisia, the foreign direct investment response has been impressive: in Morocco, foreign direct investment averagcd US$160 million in 1989-90, rose to US$320 million in 1991 and to over US$500 million in 1992. In Tunisia, the progression has been equally impressive, with US$75 million in 1989-90, US$145 million in 1991, and US$215 in 1992. In spite of the breadth of Israel's reform program (see A inex 1), the supply response including foreign direct investment has been modest. While this can be related to the presence of some inflexibilities, especially in the labor market, perhaps the more important reason is the uncertain geo-political situation. It is becoming increasingly apparent that geo-political instability limits the developmental potential of market-based strategies by depressing the supply-response and shortening investors' time horizon. In many ways, the current situation in Israel may be indicative of the ultimate constraint to growth that all countries of the Mashreq will confront once their reform agenda is well dvanced if the peace process does not continue. Another important difference across countries is in the extent of their external indebtedness. Israel and Tunisia - the early reformers of the region -- can clearly attract the needed financing and keep their debt ratios low without unsurmountable austerity. The Occupied Territories also belongs to this group (see Annex I). Economic growth has been depressed in recent years by regulatory repression, low levels of public investment, and acute geo-political instability. But with no external debt and large assets abroad, there could be significant growth given the right cLimate, supported by inflows of official and private capital flows. Given the strategic location of the area and the problems that the Occupied Territories have experienced, there are good prospects for attracting international official assistance to help overcome infrastructural bottlenecks and deficiencies. In addition, private flows to the Occupied Territories from the large anid relatively prosperous expatriate Palestinian community in the Arab world and elsewhere would occur when the circumstances are ripe. Egypt also has a manageable debt burden because of the recent debt reduction granted by its official creditors. In 1QQO-91, recognizing the unsustainability of the external debt situation, the Egyptian Government's commitment to reform, and the extraordinary situation created by the Gulf war, the major creditors cancelled or restructred about 70 percent of Egypt's external debt. As a result, total external debt has declined from $51 billion in 1990 to about $38.5 billion in mid-1993 and the scheduled-debt-service-t-exports ratio has faUen from 46 percent to 17 percent. Debt reduction took place in several phases. In October 1990, Kuwait, the UAE and Qatar forgave $2.4 billion; in December 1990, the US cancelled $7.1 billion of 29 Box 9: Reforms in Tunsia Tunisia is appoaching 'th eind of a major ecnomic adjustment that his produced remarable rsults and red good prospects for "ustained economic growth. From being a highly regulated economy led by a dominant public .ector, it is being gadually transformed into an outward-oriented, private-led economy. But itwnll. ta sometime before institutions and economic agents adapt fully to the new environment. The adjustment proces siaed in 1986 as a reponse to a treat of balance of payments crisis. By 1985, it bad become clear tha the pistent resource gaps (-9 percent of ODP on average during 1981- 85) could no longer be financed, especially with the world debt crisis unfolding. Domestic absorption had grown excessively, export growth was'sluggisb, and Ttnisia's oil reseves were being depletd fast, Maintaining high growth while ensuring macroeconomic, balances rquired investment to become mone efficient.' Te altemative would have been to raise the domestic savin ratio, but it was not clear how this could be done, nor that this would lead to improvement ssmce consumption would be lower. The corollary was that the pn,vale sector would have to b,ethe main source of investment in a policy environment that einsred its efficiency. aO the macroeconomic -font, the distotions that had threatened the economy in the mid-1980s :have bee reduced to mnageable levelswith the cent:account Aid budget deficits reduced significantly fm 7.3 and 5.5 percent of GDP :in'1986, to an average o'f3.7 and 3.3 percent over the period 1987-91 r.4espect.vel, While thie imvestment 'iio declined -from'30 p"rcent of GDP in the early 1980s to 23 percent in 1992, the ICOR'also declined over the same period from 8 to 4.5. As a rewlt, real GDP gowth avrd 4.3 percent dur-ig 9879,2 of manufa'ct gew on average at 15 percent a year, and inflation remained b.elo 8e ne s was aided by a sharp srie in foreign direct investment ind a ptoesivefall 'in external debt. Th' debt to export ratio has fallen from 170 percenti,' in 1986 'to'i2$ percent'in .1992." Efficiency improving measures were Undert on several *rots simultaneously. -Since1987, the libealoizatio -of d a mquantitative restrictions on i rts which protected 90 percent. of agicultuire and industry in 1987 ha,ve ben reduced. A new value added tax ias * been put in'place, and the.ta system, has evolvedfrom a tightlyo c d bmaing sec .into.abroad fnia a dirsitof ietr.'Trasury bills"are o,wauctioned rathe nplak'bt.T rocsof o hasb tiated *with 30 enterpiss riaied(utof a toal f 200 .undrsat contrl. A%.t th;e sae time 'and inlke,epiog: *ith a lo,ading adn, t rhaot ith i u esource deLop en effirts dur'ng the a men pha's. : '.- ' f.e ,p > H. . . .. . ..- ... :i ..-. . .:~ .d -.. military debt; and in December 1991, Saudi Arabia and the Gulf Organization for the Development of Egypt cancelled $3.8 billion. Finally, in May 1991, Egypt concluded an agreement with the members of the Paris Club to reorganize and reduce its debts owed to the members of the Club by up to 50 percent in present value terms. Debt reduction was scheduled to take place in three phases. The first phase, a reduction of 15 percent, took place in May 1991 after the Fund's Executive Board approved an 18 month stand-By agreement (SPA) (later extended by six months). The second (another 15 percent) is scheduled to take place following the successful conclusion of the SBA and agreement on a successor arrangement (EFF). The latter was approved by the Executive Board on September 20, 1993. The last tranche (20 percent) is contingent upon Egypt's carrying out the agreement and is scheduled to be effected by July 1994. Following the debt relief agreement, large flows of private capital took place and workers' remittances have increased by about a third. Egypt is emerging as an attractive, safe 30 and convenient altemative place for Gulf residents to maintain part of their savings. However, real growth remained low in FY91-93, while unemployment continued to rise (see Annex 1). In contrast, the debt overhang in Syria and Yemen has constrained the reform agenda. Both countries still suffer from severe macroeconomic imbalances and microeconomic problems. However, it is not realistic to expect that even if reforms are undertaken, the financial needs of Syria a-d Yemen can be met throughout their reform program or that a meaningful supply response will materialize because these countries are far from creditworthy. They cannot be expected to grow out of debt unless unrealistically harsh austerity is maintained for a long period, or measures to reduce the debt overhang are pursued. The remaining countries fall in between these two extremes and have followed cautious reform policies. In Algeria, the situation is close enough to the borderline to exert some destabilizing influence, but creditworthiness is expected to be maintained under the most likely scenario. Growth prospects could however quickly evaporate if oil prices fall. In Lebanon, the stabili ation policies being pursued should go a long way towards contributing to renewed growth if they are maintained and if the basic infrastructure is rebuilt. But external debt would rise rapidly if the level of grants does not rise to offset future financing needs related to reconstruction. Morocco and Jordan present more complex cases. Both have benefitted from some debt reduction. And a continuation of current policies would result in sustainable debt ratios in the future. The question is one of degree: can austerity be maintained long enough to allow for a strategy of growth out of debt to work? In both cases, the debt overhang is likely to exert some negative influence on private capital inflows and investment, unless government resolve on adjustment and reform is perceived to remain strong. The recent experience of Jordan is instructive in this respect. Jordan has initiated a reform program. But its finances - both external and internal -- remain fagie after the Gulf Crisis. In 1991 and 1992, the investment response has remained modest, particularly in the productive sectors, in spite of significant repatriation of savings by the returnees from the Gulf (at least US$700 million in 1991, and US$600 million in 1992). While this has fueled a real estate boom in 1992, most of the remitted savings ended up as foreign assets: the holdings of the banldng sector and the reserve of the centrl bank increased by about US$2.5 billion in this period. The likely explanation for the lack of a strong supply response is related to Jordan's high level of external indebtedness which deters private investment. Managing the debt overhang is thus a crucial component of any ambitious private sector driven growth strategy. In this respect, Jordan has recently taken a number of steps which are promising for the future: it has regularized its position with the Paris club, with a recent rescheduling; its CMEA debt has been repurchased; and an agreement with its commercial creditors is near conclusion and will result in additional debt reduction (see Annex 1). Nevertheless, Jordan will continue to need generous amounts of concessional assistance as well as debt relief to enable the maintenance of confidence and attract private capital flows from abroad. 31 NRAUCTUE In both the Occupied Territories and Lebanon, significant improvements in public infrastructure and services are needed not only to improve living conditions directly, but also to support private business activities and economic growth in general. In both cases, international support is required. The :ecent World Bank study of the Occupied Territories (see box 10) revealed that the economy appears capable of generating sustainable economic growth provided there is peace and stability in dhe region and provided the economy is soundly managed with a mix of prudent macroeconomic policies, expanded public services, support for private sector development and an expansion of trade to the region and the rest of the world (see Annex 1). Significant external capital flows - both private and public - will be needed during the take-off partly to help overcome the existing deficiencies in public infrastructure and services and partly to augment the production base for private sector activities. In contrast to important gains in private incomes and consumption over the past two decades, the provision of public services and physical infrstructure in the Occupied Territories has remained highly inadequate. Although the coverage of services, particularly in the major urban areas, is fairly high, quality is poor. This applies to urban water supply, solid waste collection and disposal, and the physical condition of the road network. In addition, electricity supply for vilages is insufficient. Public provision of social services is also inadequate. Educational facilities, libraries, and laboratories are in poor condition, the curricula require modernization, and the qualifications of educational personnel in almost all positions need to be upgraded. And while the Occupied Temtories devote an unusualUy large share of their output to the health sector, the health impact is below what could be expected from this expenditure. In assessing the future investment and technical assistance needs of the Occupied Territories, three main phases have been distinguished linked to the hIkely time frame of the ongoing peace negotiaions: Phase I, the immediate tern, extends to the time when an agreemt is reached in the bilateral peace talks on interm self-government. It is assumed that new external assistance for financing investments is not available during this phase. Phase II, the mediunterm, covers Box 19: TheOccupiedTeio the period from the end of Phase I until.'U~(T cnito h the time when final potical arrangements regarding the Occupied Territories are inm(~ obndae f bu I00~.ks place. Phase III, the long-termn, ree-t091ppuain.aot1. ilo;a(N D!."'n the post-peace period, following a= agreement on the final political *. ii ea isaout 30 0. In arrangements. The duration of these t ther aout 135sQOei ets residing .. . IfO gttleRi~~~~~~~~~~th tat havo been bil neO phases will depend upon progress in the S eaeste M otthar daiatilleOT peace talks. However, for the purposes ~MsoteaanhOae iely or, *epurposesflyo fiom official Israeli soures,- of this report, it is assumed that the wichtrtEast em aspartI. Data o immediate phase will not extend beyond man d I.eIinofficial mid-1994 and that the medium term will -az Tihs the fires prted il ths last for a penod of five years thereafter. othda The analysis of investment and technical .ti. ^. 32 assistance needs has been based on the assumption that there would be no large population movements in the periods under consideration. The recent Declaration of Principles signed between the PLO and the Israeli Government suggests that this assumption may have been overly conservative, leading to an underestimate of investment needs. The prioritizing and phasing of the various investment and technical assistance programs being considered for the Occupied Territories are based on several principles. First, that public sector investments should support rather than preempt private initiative. Second, that it would not be feasible during the medium term to implement investments whose design and viability depend upon agreement on the eventual political arrangements (such investments are considered for implementation only in Phase III). Third, that the investment program for the medium term would need to recognize the limited institutional capacity, especially during the early years. Fourth, that all feasibility studies and project preparation work for the long-term investments would occur in Phase II while those concerning the medium term are included for financing in the immediate term. Finally, technical assistance and training to support institution-building, manpower development, improvements in the Occupied Territories database and analytical work to sharpen policy choices facing the Occupied Territores should be launched as early as possible. Based on the above framework, the World Bank report originally estimated public sector investments (in constant 1993 prices) at US$1.35 billion for the medium term and US$1.6 billion for the long term (table 12). The focus during the medium term should be on the rehabilitation and upgrading of the public infrastructure and services in water supply, sewerage, solid waste, road transport, electricity, education and health. In addition, some assistance would be needed for strengthening agricultural support services and for improving natural resource management through erosion control measures and forestry development. The tentative priorities for the long term include, besides the completion of the rehabilitation works started in Phase II, power generation facilities and high voltage transmission lines (preferably as part of a regional power grd), selective capacity expansion in the main road network, capacity expansion in health and education systems, the design of a modem education curriculum, the strengthening of university education and the improvement/construction of airport facilities. The projections developed in the World Bank report were based on some simplifying assumptions that seemed reasonable at the time of writing. In particular, costs related to the issues of security needs, initial investment expenses associated with setting up of a government, and returnees were ignored in the analysis. On the basis of the discussion during the technical meeting held in Washington in late September, some of these assumptions have been relaxed. In particular, additional capital expenditures amounting to about $60 million a year related to security, government infrastructure, and support for housing, have been added to the baseline estimates, which are presented in Table 12. 33 Table 12: Public Sector Investment Needs in the Occupied Territories (US$ million, constant 1993 prices) Mediun TerMb LOT Item (1994-98) (199923 Water & Wastewater 280 200 Tnspor 330 500 Power 350 600 Solid Wasts 100 Education 190 160 Health 60 90 Agricultural Supply Services 20 10 Natural Resource Management 20 40 Occupied Territories 1,350 1,600 a. Fus shown are for comrmitmenh during the indicated period. Actual dsbursements may lag comniitment by up to hee years. b. Ahout US$70 million of these invesments could be launched as soon as fiancing is available. Because of limited information, the estimates here are merely indicative of the broad investment priorities and the likely investment magnitudes. The picture is particularly cloudy in this respect for long-term investments where the usual data limitations are further reinforced by design uncertainties related to the outcome of the ongoing bilateral negotiations. To ensure that scarce aid resources make the greatest possible contribution to improved living standards in the area, detailed project feasibility studies are needed in most cases. In addition, technical assistance and training are needed to foster institutional development and enhance implementation capacity. The cost of the preparatory studies, technical assistance and training proposed for the immediate term is estimated at US$35 million. A further US$50 million of technical assistance would be needed over the medium term (table 13). Slightly over half of the technical assistance would be for project preparation and feasibility studies. The rest would be for institutional development. The public sector is not expected to finance its fiscal deficit internally in the next five years. The projected fiscal deficit amounts to 12.5 percent of GNP in 1994 ($420 million), declining to an average of 9.2 percent over the periou 1994-98, or $385 million per year in current terms, and going back to near balance by 2003 when the extraordinary investment program is completed. This does not account for possible financing debt service obligations as the financing for the next few years are expected to be available externally and on a highly concessional basis. To arrive at the financing needs on a commitment basis requires assumptions on the speed at which disbursement can take place, which is taken to be 70 percent (as opposed to an average annual disbursement ratio of 0.85 in the initial report) given the likely institutional constraints. Under these assumptions, the financing needs on a commitment basis amount to 34 Table 13 Technica MsLftance Needs in the Occupied Territories4' (US$ mUlion, constant 1993 prices) Short Term bC Medium Term (1993) (1994-98) Water and Wastewate 8.0 (6.5) 10.0 (8.5) Transport 6.0 (4.5) 12.0 (8.5) Power 7.0 (3.0) 7.0 (5.0 Solid Wastes 1.5 (1.0) Education 4.0 (3.5) 1.5 (1.5) Health 1.0 (1.0) 1.0 (1.0 Agriculture 1.5 (0.5) 2.5 (0.5) Local Government & Public Administration 1.0 3.0 Housing 0.5 2.0 Moneay, Fiscal and Trade Iss 0.5 0.5 Institutional Framework for Public Utilities 1.0 1.5 Socioeconomic Studies and Surveys 2.0 2.5 Business Support Services 0.5 1.5 Occupied Territories 35.0 (20.0) 50.0 (25.0) a. Fsur shown ane for commitment durng the indicated period. Actual disburements nay lag commaitmnts by up to two years. b. Some of this tehnical assance may have been initiaed recenldy with suppott fiom bilateral and multilateral donors. c. Figures in parenthes are the respective technical asitnce amounts required for project feasibility studies and project prepaation work. $575 million for 1994, rising to an average of $610 million over 1994-98. Given existing sources of financing of about $125 million a year, the remaining financing gap (on a commitment basis) amounts to $400 million in 1994, rising to an average of $475 million over the five year period. This assumes that the new Palestinian self-governing authority will collect all the taxes paid by Palestinians, including those accruing now to the Israeli Treasury. The above discussion raises the issue of the terms on which external aid to the Occupied Territories during the transitional period would be extended. Currently, all official aid to the Occupied Territories - whether through UNRWA or from other sources - is in the form of grants, as the aid is mostly of a humanitarian nature and there is no legal entity to lend to. In view of the large uncertainties involved at this stage, the World Bank study has not analyzed the extemal borrowing capacity of the Occupied Territories in the transitional period and beyond. As the Occupied Territories does not currently have any external debt, there is clearly some scope for borrowing. Care should be taken, however, not to overburden the economy and strain future growth. Given the likely fragility of the public sector revenues and of exports during the transition period, the external assistance to the Occupied Territories over the short-term should include an element of concessionality. An additional argument is that public debt must remain low to elicit the flow of private capital in the future. 35 While the challenges faced by the Lebanese economy are different from those of thie Occupied Territories, the need to rehabilitate infrast cture is just as pressing. With the destruction of much of the nation's infrstucture and productive assets and disl'cation of its human capital after an extended civil war, the reconstruction of the Lebanese economy is a daunting task, and is expected to require massive capital investment, development of human resources, and rebuilding of institutions over a protacted period of time. By training its unemployed manpower, restoring the pre-war quality of education, re-equipping labor with infrastructure and productive capital stock, and tapping the resources of its large expatriate community, Lebanon could rebound and restore rapid growth. Lebanon's reconstruction and development should be responsive to the needs of the private sector whose vigor and dynamism remains the country's main asset. Especially in the initial stage of reconstruction, government involvement will be crucial as restoration of basic physical and social infrastructure, to be undertaken by the government under the National Emergency Recovery Program (NERP), is the most urgent need. The government envisages a pLased strategy for rebuilding Lebanon's ravaged economy and addressing social problems, consisting of a short-term emergency reconstruction phase followed by a medium-term recovery phase. The NERP provides for initial urgent investments, which will be made concurrently with the identification and implementation of longer-term development strategies in the various sectors. The NERP is designed as a multi-sectoral operation, focussed on removing cntical infrastructure bottlenecks, alleviating pressing social problems, and strengthening the existing institutions in charge of planning, financing, and implementing the NERP. All principal sectors of Lebanon's economy are characterized by widespread damage to physical assets and the obsolescence of remaining facilities, given the reluctance during the years of conflict to invest in new capital or spend on maintenance. The serious damage sustained to basic infrastructure in virtay all sectors now presents the most immediate obstacle to economic revival. In terms of infrastructure, the NERP focuses on rehabilitation of the transport, power, telecommunications, water supply, sanitation, and solid waste disposal sectors. In the social sectors, the NERP focuses on the complex issue of housing and resettlement of displaced persons, rehabilitation of the health sector, and the upgrading of the education sector. Overall, the cost of the NERP is estimated at US$2.3 billion for 1993-96. The amount of loan and grant financing required during 1993-96, about US$600 million per annum, can only be raised if Arab and other donors are willing to support Lebanon. Current indications are that this may indeed be the case, but financing for the NERP will need to be confirmed in the context of a Consultative Group to be convened in late 1993. Although the level of public debt is projected to increase five-fold to about US$1.8 billion over the next four years because of the external financing required for the NERP, debt indicators would remain low, tanks to Lebanon's current low level of exteral indebtedness. By the mid-1990s the ratio of external public debt to GDP is projected to be less than 20 percent and the ratio of public debt service to exports to be less than 5 percent. 36 Section V Next Steps This report has presented a strategy for the region that rests on three pillars: regional cooperation, domestic policy reform, and external financing mainly from pnvate sources. The analysis suggests that, with the exception of two counties - Syria and Yemen - where exceptional measures of debt relief may be required, pursuit of this statgy is feasible and beneficial. Thle case of Jordan is more complicated; the continuation of the present economic reform efforts and policies is imperative for economic success, as is the continuation of concessional external financial assistance and debt relief. For the region as a whole, with regional cooperation, domestic policy reform and external financial support, growth rates capable of providing productive employment for fast growing labor forces can be achieved. Much of the implementation of this strategy rests with the countres of the region. The international community can and should support such efforts through a continuation of official assistance, through more open trading arrangements, and through efforts to encourage private investment in the region. Given the increased scarcity of official flows, targeting will be crucial. There are five areas in which official assistance can play an important role. The first is to assist in the design and financing of regional projects. The second is to provide financing for the reconstruction of infrastructure in Lebanon and in the Occupied Territories. The third is to help in smoothing the costs of adjustment in countries undertaking reform programs, including the financing of social safety nets and severance pay programs to shield the poor and those adversely affected by reform. The fourth is to ensure that markets for regional exports keep expanding in the future. And the last is to provide debt relief for the countries that are willing to adjust, but where the debt overhang does not allow a market-based staegy to work. Eah of these areas warrants support by the intenational community. But what role can the Multilatal Worldng Group play given its mandate to encourage regional cooperation? An obvious area of focus by the multilateral working group is the financing of regional projects. Considerable work has now been undertaken on several regional projects and initiatives. To advance this work to the next stage, pre-feasibility studies are required to provide a bette basis for choosing among designation and amving at more precise cost estimates. For the infrastructural projects provisionally identified by the World Bank, seed money amounting to US$9 million would be required for further work on feasibility studies and technical analysis. Funding for such activities needs to be established and a mechanism developed for implementing the worL The special needs of the Occupied Territories could also be considered within this framework. To have a shelf of priority projects ready for implementation as soon as adequate progress has been made in the bilateral negotiations and to strengthen institutional capacity, preparatory studies and institutional development activities should be initiated. Preliminary estimates based on the World Bank study of the Occupied Territories indicate required funding of about US$35 million. A Trust Fund, to be administered by the World Bank, has recently been launched for the purpose of providing the proposed technical assistance. 37 _ pS_7&i; o5l__Ct_ 74izzNSCs_Ve_ssfy w slRas9 ;WP Peb mSiwf-g 0ufcr-Z n : ~~~ E >Sz y^ t )i^40 0 :2~~~~~~0.q,4,'','0 :', S''< ' i; ;t S t XA o ' ~~O 0 'Z' '' '' ' ' '.'' ' ".'''''' L ............. ' " ~~~~~~~~~~~~~. . , . . 0 .,.,o.. . .......... ..... I "L.00 t ':; ;X D: 00 0 0 f ''S; ' ''L rit; N Economic Development and Cooperation in the Middle East and North Africa Annex I: Selected Economic Profiles The annex presents more detail on four economies discussed in the review of regional progress in Section IV of the main text. EGYPT After the 1973 war and the introduction of the "Open Door Policy" in 1974 Egypt experienced rapid economic growth undl the mid-1980s (8 percent real growth per year on average), stimulated by high oil prices, large workers remittances and tourism revenues, and substantial foreign borrowing, primarily from bilateral sources. During this period, Egypt pursued an import substitution and public-sector-led development strategy with public enterprises playing a dominant role in supporting an ambitious program of reconstruction and infrastructure rehabilitation. In the mid-1980s however, the economy was hit hard by the sharp drop in the price of oil, the increase in world interest rates, and the start of the regional economic recession. By the end of the 1980s, output growth had decelerated to less than that of population growth. The slow process of adjusting to these negative shocks depressed investment and economic growth. The reduction in the budget deficit was mainly accomplished by cuts in public investment (which fell from 18 percent of GDP in 1982 at the height of the expansion to less han 13 percent by 199e). At about 20 percent of GDP, the deficit remained large throughout the decade. This was financed initially by foreign loans, but as the external debt grew (reaching 150 percent of GDP in 1989), the gap had to be increasingly filled with revenues from the implicit taxation of fimancial intermediation (i.e, government borrowing at less than market interest rates) and the implicit taxation of money holdings through inflation, leading to distorted prices and increased dollariation. Crowded out by public deficits, constrained by an array of regulations, and squeezed by smaller savings, private investment also fell by about 25 % during the decade. Unemployment was first contained by public hiring, but as the fiscal crisis deepened, public sector hiring was constrained and open unemployment shot up, rising from 7.5 percent of the labor force in the mid-seventies to around 12 percent by the end of the decade. In 1990, the economy was again hit hard, this time by the economic ramifications of the Gulf war, as hundreds of thousands of Egyptian workers returned from the war zone. Faced with a rapidly deteriorating economic situation, the Government embarked on a comprehensive adjustment program to tackle the macroeconomic disequilibria and structural imbalances and restore growth. The Government's strategy has been to create an enabling environment for private-sector-export-led growth. Key objectives of the Government's program were: to stabilize the economy and achieve internal and external equilibrium and to liberalize the financial and foreign exchange markets; to restructure the economy and increase the efficiency of resource use through price liberalization, decontrol of investment, and the rationalization of the regulatoty framework to reform and privatize public enterprises; and, to strengthen and improve the social safety net to minimize the negative effects of the reforms on the poor. ECONOMIC DEVELOPMEIN & COOPEBRATION IN MENA ANNEX 1: SELECrED ECONOMIC PROFILES Over the past three years, the Government has succeeded in initiating a major transformation of the economy. In particular, the Government has successfully stabilized the macroeconomic environment with the budget deficit falling to about 4 percent of GDP in FY1992-93 and the inflation rate to 11.2 percent, from a level of some 25-30 percent at the start of the program. The overall balance of payments moved into a large surplus since 1991 (US$5.9 billion in FY1991-92 and US$3.9 billion in FY1992-92, as opposed to an average deficit of US$2 billion a year in the recent past), and the current account reached near balance in 1993 (excluding official transfers, the current account deficit was reduced to US$0.4 billion in PY1992-93). At the same time the level of net international reserves held by the Central Bank soared to about US$15 billion (15 months of imports) by mid-1993. The improvement in the external balance reflects the impact of the macro-economic adjustment, the debt reduction granted to Egypt by its major creditors, private capital reflows and workers remittances, exceptional grants and increased revenues from the Suez canal and oil exports. The reform process was greatly enhanced by the debt relief granted to Egypt by its major creditors. In 1990-91, about 70 percent of Egypt's extemal debt was cancelled or restructured. As a result, total extemal debt has declined from US$51 billion in 1990 to about US$38.5 billion in mid-1993 and the scheduled-debt-service-to-exports ratio has fallen from 46 percent to 17 percent. Debt reduction was scheduled to take place in three phases. The first phase, a reduction of 15 percent, took place in May 1991 after the IMF's Executive Board approved an 18 month Stand-By Arrangement (SBA) (later extended by 6 months). The second (another 15 percent) is scheduled to take place following the successful conclusion of the SBA and agreement on a successor arrangement (EFF). The latter was approved by the Executive Board on September 20, 1993. The last tranche (20 percent) is contingent upon Egypt's carrying out the agreement and is scheduled to be effective by July 1994. Following the debt relief agreement and the macroeconomic adjustment, large flows of private capital took place with about US$5 billion repatriated since 1992. Since June 1991, the private sector has been drawing on its foreign exchange accounts while increasing its domestic currency denominated deposits in the banking system. This reverses past portfolio choices which were predominantly composed of foreign currency assets and domestic currency liabilities. In addition, workers remittances have increased by about a third as Egypt is emerging as an attractive, safe and convenient alternative place for wealth holders resident in the Gulf to maintain part of their savings. The Central Bank has been sterilizing most capital inflows (about two-thirds). This policy helped to stabilize the nominal exchange rate. The government has moved fast on fiscal and monetary stabilization and on financial and foreign exchange liberalization. On the financial side, a treasury bills market has been established, interest rates have been liberalized, banks' solvency and prudential regulation have been improved, the foreign exchange market has been decontrolled, and the exchange rate has been unified. A sales tax has been introduced, prices in the agriculture and industrial sectors 2 ECONOMIC DEVELOPMEN & COOPERATION IN MENA ANNEX 1: SELECED EcoNoMIc PROFILE have been liberalized and subsidies significantly reduced, particularly in energy. Several barriers to trade and private sector investment were removed. Real output remained virtually stagnant in FY1991-92 and grew slightly in FY93, while unemployment continued to rise. High real interest rates and weak domestic demand have dampened the response of private investment to the reforms. Most recently, the Government has launched the second phase of its Economic Reform and Structural Adjustment Program, the aim of which is to accelerate growth and employment and to complete the transition successfully while offsetting its negative short-term effects through a well-designed social safety net. Liberalization of the trade regime, reform of the tax system, reform and deregulation of the financial sector, and reform and privaization of public enterprises constitute the core of these reforms. ISRAM The Israeli economy grew at a fast pace until the early 1970s (about 6 percent a year on a per capita basis). Growth was fueled by generous inflows of foreign capital: unilateral contributions from the World Jewry and the U.S government, Gernan reparations, and loans (mainly from the U.S). After 1973 however, the limitations of a government-led growth suaegy became increasingly apparent. Growth was more modest, with periods of stagnation, persistent double-digit inflation, worsening fiscal and balance of payment deficits, and increased public debt. The economic stabilization program undertaken in 1985 reduced macroeconomic imbalances and inflationary pressures. The stabilization process was facilitated by a shift in U.S. assistance from a loan to a grant basis.' This also led to a steady improvement in the debt indicators. By 1991, the (goss) external debt-to-export ratio had fallen to about 150 percent (or 60 percent of GDP), half its level during the mid-1980s. Public debt also fell markedly, from 150 percent of GNP in 1985, to 90 percent in 1992. Its domestic component, however, remains high at over 70 percent of GNP. At the same time, and in contrast to the other counties of the region, the private sector seems to hold relatively little capital overseas - only an estimated US$20 billion. Thus, and in relation to the other countries of the region, the related issues - heavy debt burden and large volumes of capital accumulated abroad -- are somewhat less applicable to Israel. The private sector does not seem unduly constrained by liquidity constraints or by worries flowing from a heavy debt overhang, so that, even if large flows of repatriated capital cannot be expected a pnvate sector-led strategy is feasible, provided domestic policy is supportive and recourse to official debt is managed prudently. The goal of reducing public debt over time imposes tight constraints on the ability of the government to finance fiscal deficits in the future. I/ This process was further enhanced by the conversion of part of Israel's long-term debt to the U.S. into partially collateralized long-term bonds completed in 1989. 3 ECONOMIC DEVELOPMENr & COOPERATION IN MENA ANNEX I: SBLECr8D ECONOMIC PROILES The turn-around in the fiscal account -- from a fiscal deficit that averaged 10 percent in the first half of the 1980s, to near balance in the second half of the 1980s - laid the ground for structural change. Following a consumption-led mini-boom during 1986-87, (3 percent per capita growth), the hardening of the public sector budget constraint (especially in finns controlled by the labor unions) and high real interest rates generated a recession during 1988-89 (about zero percent per capita growth) and a steady rise in unemployment. This exposed the limits imposed by the rigidities of the labor, capital, and goods markets, and led to an increased recognition that a private-sector-oriented growth strategy would require -- in addition to fiscal probity - major structural change aimed at increasing the efficiency and competitiveness of the economy. Accordingly, an ambitious program of reforms was initiated. Its major goals are to integrate Israel in the world economy by reducing the role of the state in the economy, increasing the flexibility of the labor market, opening the trade regime, and deregulating financial markets. Reform has been implemented gradually. The most conspicuous change has taken place in the real sector, especialy on the trade front. Since 1988, the economy has been increasingly opened to international competition in the context of free trade agreements with the European Community and the US which were followed by a gradual elimination in tariffs. The exchange rate was unified in 1993. And in 1991, most non-tariff barriers on imports from third world countries were replaced by custom duties (with the exception of agriculture), some of which are expected to be gradually reduced. Export subsidies have also been reduced over time. Reform of the capital and money markets is well advanced. Reserve requirements and mandatory purchases of low yield government bonds by financial institutions are being phased out, and a larger sbare of government securities is marketable. The capital account is being opened more slowly. Most restrictions on borrowing abroad by domestic residents have been removed, and there is more scope for dom,stic agents to hold foreign assets and for foreign agents to repatriate profits. As a result, the private sector's net external claims have grown and now amount to 16 percent of net external debt. But at the same time, the ongoing integration of Israel in the international financial market is making it increasingly difficult to implement an independent exchange rate and monetary policy. For example, a recent attempt to lower interest rates while sticking to a pre-determined exchange rate devaluation schedule had to be reversed after this policy led to large private capital outflows. The privatization program, initiated in 1991, has progressed slowly, (only about US$800 million worth of assets being divested during 1991-92) but is expected to accelerate in 1993. In manufactuing, the public sector and the labor unions still account for 60 percent of investment and produce 45 percent of output. Public sector finns, especially in the military sector make large losses and have yet to be restructured. Agriculture, which accounts for about S percent of GDP, is about one third prvate, with the remaining two-thirds in a troubled financial position. Another area of concern is the slow change in the banldng industry which remains characterized by a lack of competition and difficulties created by inefficient but large 4 ECONOMIC DEVELOPMENr & COOPERATON IN MENA ANNEx I: SELECrED ECONOMIC PROFILE borrowers. Here too, the process of privatization has just begun (the industry is virtually owned by the state after the bankdng crisis of 1983). Over the past three years, Israel's economy has been hit by a major supply-side shock in the form of an inflow of immigrants that has already led to a population increase of about 10 pent. The government has accommodated the housing needs of the immigrants by providing them with subsistence grants and training, but has counted mainly on market forces to create new employment opportunities. The cost of these programs - about 7 percent of GDP a year during 1990-92 - has been financed by increased taxation and a moderate rise of the public sector deficit which now stands at about 2.5 percent of GDP. Official estimates of future financing needs related to this immigration have varied. They are now estimated at about US$6-10 billion for the next 5 'ears, provided investment demand rebounds. This is the same order of magnitude as the US i an-guarantee program. However, if this program is used to fill a large part of she external financing needs, the current private sector-led growth strategy may suffer a temporary setback unless a mecha.Asm is found to channel a large share of these funds to the private sector. Since 1990, real GDP growth has average 6 percent a year. Given the increases in the population, and the slow integation of the new immigrants into the labor force, this impressive performance translates into a relatively small growth in per capita GDP (about 1 percent a year). In addition, growth remains fragile. In 1990-91, the economy was boosted by a boom in construction (25 percent increase per year) related to the ongoing migration; in 1992, exports, and in particular tourism, recovered from their depressed levels during the Gulf war. Activity will need to be channelled to other sectors in the future as these one-off factors C 'appear. But while the business sector has shown some dynamism recently (for example, competitive exports have grown at 8 percent a year), reflecting the continuing process of improved efficiency and profitability (the return on capital is over 13 percent in real terms), there is no massive investments in the types of industries that can sustain growth. At the same time, unemployment has increased and now stands at 11 percent. Clearly, it would take time to fully integrate the new immigrants in the economy. However, the modest per capita growth and increased unemployment of the past two years aie a cause for concern. After rapid growth during 1990 and 1991, investment has stabilized at only 22 percent of GDP, in spite of the existence of a current account surplus. This is clearly not enough to sustain long-term growth and reduce unemployment quickly. This moderate supply response can be related to two main factors. O Ffrst, macro imbalances have risen somewhat, the reform process has slowed down, and the labor market is still characterized by inflexibilities, in spite of the recent measures introduced to increase mobility and delink wage agreements across sectors. S ECONOMIC DEVEoPMENT & COOPERAMION IN MENA ANNEX I: SELECrED ECONOMIC PROFILES 0 Second, and perhaps more importait, ihe uncertain geo-political situation seems to be exerting a dampening e£ect on investment, with private investors preferring to wait on the side-line and invest in financial instruments rather than put their funds at risk in long-term business ventures. Similarly, foreign investment, an important vector of change and efficiency improvement, remains depressed. In many ways, the current situation in Israel may be indicative of the ultimate constraint to growth that all countries of the Mashreq wil confront once their reform agenda is well advanced. Unless the peace process moves ahead in the near future, it will become increasingly apparent that geo-political instability limits the developmental potential of market-based strategies. JORDAN The Jordanian economy suffered a severe shock in 1967 with the loss of the West Bank which constituted an important part of its production base. In addition, an estimated 300,000 Palestinians moved to Jordan following the 1967 war, thus adding pressure on resources. By 1991, Palestinian refugees from the 1948 and 1967 wars were estimated at about one-third of Jordan's population of 3.7 million. Jordan has also extended substantial financial help to the West Bank during the 1970s and 1980s. This financial assistance has amounted to over $760 milion during the period 1967-91. After a deep recession during 1967-73 in the aftermath of the 1967 war Jordan enjoyed unprecedented growth in its income and expenditures during 1973-84, boosted by foreign assistanoe and loans, workers' remittances, and exports to regional markets. This ended in the mid-ighties as a result of the collapse in the price of oil and the subsequent slowdown in regional economies. As a consequence, Jordan experienced a drastic decline in growth, which became more pronounced after 1986 - by 1991, real per capita income had declined to about half of its value during the pre-crisis years; unemployment and poverty had increased; and the income of the middle class was substantially eroded. The Government responded in 1989 by undertaking policy adjustments to stabilize the economy and to restore growth. The stabilization policies, notwithstanding the disruptions caused by the Gulf crisis in 1991, have been persistent and largely successful. Jordan now faces reduced external transfers. Given the reduction in aid, especially from Arab sources, resources for investment must come in the forn of direct foreign investment and from the savings accumulated abroad by Jordanians. One recent crude estimate (which does not take into account the savings accumulated abroad by migrants but includes as savings the remittances to Palestinians in the 0I) places the stock of savings abroad by residents in 1990 at over 100 percent of GNP. This indicates the possible magnitudes of return flows provided that the domestic policy environment continues to improve. Partly prompted by fears of expropriation abroad, the returnees from the Gulf brought back some of their accumulated savings (at least US$700 million in 1991, and US$600 million in 1992). This fueled a real estate boom in 1992. 6 ECONOMIC DEVELOPMENr & COOPERATON IN MENA ANNEx I: SELECTED ECONOMIC PROFILES Private investment in other sectors also increased as many returnees opened new businesses. However, most of the remitted savings ended up as foreign assets: the holdings of the banking sector and the reserve of the central bank increased by about US$2.5 billion in this period. While structural reforms offer the best prospect of encoiraging investment in productive activities, the task is challenging. Jordan's main comparative advantage in the recent past has been to educate and export highly skilled workers to the Gulf states. With this option now partially closed and with a small internal market, a growth oriented strategy aiming at greater integration with the world economy is needed. Such a strategy has been followed for a few years with some initial success. At present, the country has a narrow industrial base - manufacturing accounted for only 11 percent of GDP in the period 1985-89 and 30 percent of exports. While dominated by large joint venture projects between the public and private sectors, (fertilizer, cement, refined oil prowuct), the sector also comprises a large number of small- and medium- sized private establishments engaged in the production of processed food, pharmaceuticals, chemicals, textiles, footwear, furniture, and various etigineering and building materials. The boom of the 1970s has left Jordan with a well developed infrastructure. Thus, over the medium-term, public sector investment can be maintained at the present level without unduly hurting growth prospects, and the acceleration of growth can be achieved by increasing the use of existing capacity and improving the business environment. The viability of such a strategy has increased recently thanks to the post-Gulf-crisis rise in Jordan's stock of human and financial capital. In recent years investment has stabilized at 25 to 30 percent of GNP, a relatively high level, but one which masks important deficiencies in the structure of capital formation. Public investment now stands at about 7 percent of GDP. Private investment has rebounded in 1990-92, but it is mostly concentrated in residential construction. Jordan has a very high level of external indebtedness, with debt ratios well in excess of countries that have retained access to international capital markets. The debt overhang is likely to deter private capital inflows particularly those oriented to investments in the productive sectors. While the public sector's debts are large, private agents and the domestic banking system hold large reserves abroad. Thus the main issue is one of internal transfer: while the country may have the capacity to repay its external debts, the public sector may not be able to extract the needed resources from the private sector without senously hurting economic activity. Managing the debt overhang thus emerges as a crucial component of any ambitious private sector driven growth strategy. In this respect, Jordan has recently taken a number of steps: it has regularized its position with the Paris club, with a recent rescheduling; it is seeking international assistance with higher grant element than in the past; it is reported that all of CMEA debt has been repurchased recently; and discussions with the London club are well advanced, and likely to result in additional debt reduction. Nevertheless, in addition to maintaining the thrust of current domestic policy reform, Jordan will continue to need a combination of generous amounts of concessional assistance and debt relief to provide private investor confidence and to attract capital flows from abroad. 7 ECONOMIC DEVELOPMENr & COOPERAnON iN MENA ANNEX I: SELECED ECONOMIC PROFILS TEE OCCUPE TERRT s The World Bank's study of the Occupied Territories of the West Bank and Gaza is presented as a separate report and summarized here. This summary first reviews the legacy of past development in particular in the areas of labor, trade, and the provision of public services, and then exanines the future prospects and discusses the type of strategy that can generate sustainable growth for the future. At the risk of some oversimplification, the economic performance of the Occupied Territories over the past 25 years has been characterized by two imbalances: 0 rapid growth in private incomes but inadequate provision ofpublic infrastructure and services; and Y5 an unusual reliance on the export of labor relative to the export of goods. Specifically, while the current per capita income levels in the Occupied Territories are about thrice the level that prevailed at the start of the occupation, public provision of physical infrastructure and social services has not kept pace. And labor exports to the Gulf and Israel have, until recently, played a much more important role than trade in commodities which itself has been highly influenced by the links with Israel. The economy of the Occupied Territories grew rapidly between 1968 and 1980 (average annual in-crease of 9 perceni i[i per capita real GNP), triggered by a number of factors, including the rapid integration with Israel and the regional economic boom. In the early years of the occupation, there was a sharp expansion in the employment of unskilled Palestinian labor in Israel and a rise in incomes, which in turn spurred domestic economic activity, especially in the construction sector. Earnings of Palestinian workers in Israel rose from negligible levels in 1968 to almost one quarter of GNP in 1975. The rapid growth in the economy continued even after economic growth in Israel slowed in the mid-1970s following the first oil crisis, as skilled Palestinians from the Occupied Territories increasingly found employment in the Gulf. As oil prices increased, so did the remittances of Palestinian workers and transfers from oil-rich Arab countries, offsetting weaker opportunities in oil-dependent Israel. Since unskilled labor played a central role in the growth, the poor benefitted, and as a result, in all likelihood, there was a reduction in poverty in this period. After this period of high growth during the 1970s, growth started slowing down with the end of the regional boom in the early 1980s, and decline set in after 1987. Between 1980-81 and 1986-87, GNP per capita increased by only 13 percent, and GDP per capita by only 5 percent. Export growth also stagnated during this penod. The situation was exacerbated after 1987 with the Intifada and the Gulf war, which caused disruptions in economic relations with Israel. Periodic border closures and strikes adversely affected employment and trading activity. 8 ECONOMIC DEVELOPMENr & CooPERATON iN MENA ANNEX I: SELECrED ECONOMIC PROFILES Exports fell shiply after 1987 and never fully recovered. In 1991, merchandise exports were estimated at US$248 million, compared with US$395 million in 1987. The border was effectively closed for several weeks in 1991 during the Gulf war, causing large income losses. There was also a large decline in the number of hours worked; in 1991, the number of hours worked in Israel was about 75 percent of the 1987 level. In the aftermath of the Gulf war, many Palestinians also lost employment in the Gulf countries, leading to a significant decline in remittances from abroad; in turn, the reduced purr ing power adversely affected domestic economic activities. As a result, the per capita incon ;vels hardly increased during the 1980s - a major turnaround from the almost explosive growth of the 1970s. In contrast to impressive gains in private incomes and consumption, the provision of public services and physical infrastructure in the Occupied Territories is highly inadequate. Although the coverage of services, particulary in the major urban areas, is fairly high, the quality of services is poor. The average urban water supply, for example, is only about 60 liters per capita per day (compared to 115 for Tunisia, 137 for Jordan and 230 for Egypt), mainly because of limited access to water resources and inadequate investment. Due to supply constraints and network deficiencies, current electricity consumption of about 680 kwh/capita/year is also low compared to Egypt (815) and Jordan (1,055). Some 138 Palestinian villages have no electricity supply or only a part-time supply from isolated diesels. Suppressed peak demand is estimated at 30-50 percent. Solid waste collection and disposal is grossly inadequate, ramising serious health and environmental concerns. There are no modern santary landfills in the Occupied Territories. Refuse, if collected, is simply dumped outside municipal boundaries and often burned to reduce volume, leading to air pollution. While the length of road nctworks per Wita is typical of a country with similar per capita GDP, the physical condition of the roads serving the Palestinian population has deteriorated to the point where, without immediate rehabilitation, past investments may be completely lost. Most of the network needs to be improved through pavement strengthening and many sections of the system need to be upgraded through improved vertical and horizontal alignments. Public provision of social services is also inadequate. Educational facilities are in poor condition. Many school buildings require major repairs. Libraries and laboratories are generaly inadequate, as are supplies of textbooks and materials. The curricula require modernization, and the qualifications of educational personnel in almost all positions need to be upgraded through pre-service and in-service training. The frequent school closings since the beginning of the Intifada have reportedly led to increased dropout rates, a breakdown in discipline and a deterioration in student achievement. Widespread violence has also produced an alarming growth in the population that is physically or mentally disabled. The Occupied Territories devote an unusually large share of their output to the health sector (7 percent of GNP) but do not obtain the health impact that should be expected from this expenditure. Several reasons for the poor performance are apparent. First, most social resources are being used to provide costy, high technology, hospital-based care for the benefit of the relatively well to do. Second, very small, inefficient hospitals have been allowed to proliferate (over two thirds of all 9 ECONOMIC DEVELOPMENr & COOPERATION IN MENA ANNEX 1: SELECrED ECONOMIC PROFILES hospitals have fewer than 100 beds). Third, highly specialized procedures are being carried out by units that are too small either to exploit economies of scale or to provide physicians and staff with enough practice to maintain skills. Finally, too little attention is being given to reaching out to disadvantaged groups, especially women. The second imbalance is that between labor and trade. Over the past 25 years, Palestinian employment has grown dramatically in two areas: unskilled work in Israel and higher-skill services throughout the world, but particularly in the Gulf countries. In contrast, domestic employment increased quite slowly during the period. Prior to the 1967 war, the West Bank and Gaza had no economic relations with Israel. That changed rapidly after the occupation, and the number of Palestinians working in Israel rose to 75,000 in 1980 and to 109,000 by 1987; these workers accounted for 35 percent of the employed population in the West Bank and 45 percent in Gaza. This source of growth accounted for a large part of the growthi m the labor force until the Intifada. Employment was overwhelmingly in unskilled and semi-skilled work; construction employed the most workers; and wages were around the Israeli minimum wage. Only 2 percent of the Palestinians working in Israel were engaged in professional, technical, and clerical occupations. The future prospects for these labor markets, however, do not look promising; most Gulf demand for Palestinian labor has dried up in the wake of the Gulf war. The deteriorating security situation, and the increasing restrictions on the movement of people since the onset of the Intifada in 1987, and again in 1993, are threatening the continuing access to the Israeli labor market. Prospects in nontraditional labor markets in Europe and other Arab countries also do not appear good. Meanwhile, given the rapid population growth of the past, and the unusually low current labor force participation rate (especially for women), the labor force is set to double before 2010, even without considering the return of any Palestinian expatriates to the Occupied Territories in the wake of a peace agreement. On the trade side, the period saw a major redirection of trade towards Israel. The regulatory and security restrictions on trade with and via Jordan, the Arab boycott of Israel as it relates to the Occupied Territories, as well as various impediments to trade with the rest of the world, have acted to distort the overall pattern of trade. From no trading relations before the occupation, Israel has becomepractically the sole trading partner of the Occupied Territories. An analysis of trading patterns based on the size of the economies, geographical proximity and cultural similarities suggests that, in the absence of the above restrictions, Israel's share in Occupied Territories trade would have been much lower; and Egypt, Jordan, and the Gulf and OECD countries would have become significant trading partners. The disproportionate dependence on Israel for trading relations is partly linked to the relative attractiveness of subcontracting to Israeli firms, and has also resulted in inefficient sourcing of inputs for Occupied Territories firms. 10 ECONOMIC DEVELOPMENr & COOPERAnON IN MENA ANNEX I: SELECTED ECONOMIC PROFLES As the economy of the Occupied Territories tries to reduce its future dependence on labor flows to Israel, it also needs to improve its trade position by promoting exports, developing efficient import substitution and diversifying its trading relations. Significant improvements in publc infrastructure and services are needed not only to improve living conditions directly, but also to support private business activities and to avoid environmental degradation. Past distortions and a series of adverse shocks, especially in areas critical to past sources of growth, are leading to economic stagnation and putting at risk the past gains in living standards. Although the Occupied Territories suffer from serious structural problems and imbalances and have a very limited natural resource base, they also have substantial assets: O The Occupied Territories are blessed with a relatively high quality human resource base. Despite significant outmigration, there is generally no shortage of either entrepreneurial talent or professional skills. O Given the right climate, there could be significant private capital flows to the Occupied Territories from the large and retvely prosperous expatriate Palestinian community in the Arab world and elsewhere. e Because of their unique religious and cultural heritage, the Occupied Territories have the potential for developing into an important tourism center. The tourism industry was the mainstay of the economy of the West Bank before 1967. The geographic location of the Occupied Territories, and the fact that the Palestinians now have experience in trading with both the Israeli and Arab economies, should also make the Occupied Territores important transit points for future trade within the region. * Unlike most developing countries, the Occupied Territores do not have to deal with the burden of crushing external debt. Public finances are also close to balance, and there is neither a bloated bureaucracy nor any loss-making public enterprises. * Given the strategic location of the area and the problems that the Occupied Territories have experienced, there are good prospects for attracting international official assistance to help overcome infrastructural botlenecks and deficiencies. Political settement and peace is a necsary, but not a sufficient, condition for economic development in the Occupied Territories. Much will also depend upon the quality of economic managemem in the post-peace period and the strategic choices made in managing the Occupied 11 ECONOMIC DEVELOPMENr & COOPERATION IN MENA ANNEx I: SEcED ECONOMIC PROFILES Territories economy. Forecasting the pattemn of growth is a highly uncertain business. However, assuming sound economic management, it would be reasonable to expect a relative expansion of domestic over external employment. Over time, a substantial diversification in economic relations would also be probable, with greater interdependence among economies in the region and an expansion in trading relations outside the region, notably with Europe. As regards the likely changes in the production structure of the economy, there is undoubtedly some room for expansion in agricultural and industrial production, once the present constraints on private sector development are removed, including access to outside markets. However, this point should not be overemphasized. Diminishing water resources throughout the region will constrain the development of the agricultural sector with future growth limited to high-value export crops catering to niche markets. Given the paucity of industrial raw materials and the small market size, heavy industry is unlikely to be a major contributor to future growth. Instead, skill-based, light- and medium-sized industries would appear to be more promising. Above all, the economy of the West Bank and Gaza is likely to remain mainly a service-oriented economy with an important contribution made by the tourism sector. 12 0-1 X MIE M"XX Xx ......... . ... ......... Kl- .. ......... Xx Z. Economic Development and Cooperation in the Middle East and North Africa Annex 2: A Regional Data-Base Annex 2-Table 1: Foreign Savigs 'as a share of GNP @ercent) COUNTXY 1970-74 197S-79 19804&4 198S9 199 1991 19928 Algeria 3.18 6.33 -3.61 -0.51 -3.40 -8.83 -4.48 Morocco 1.76 15.35 12.23 5.39 6.18 5.93 5.88 Tunisia 2.51 8.30 8.33 3.69 7.49 5.09 4.62 Maghreb 2.48 9.22 1.23 1.02 0.51 -1.73 0.56 Egypt 7.85 18.80 16.95 15.42 13.28 7.39 11.48 Jordan 28.40 45.74 44.70 26.55 34.04 24.81 30.48 Occupied Territories 30.60 33.03 37.27 34.45 30.69 41.42 Syria 3.37 15.11 14.16 5.35 -16.17 -7.11 8.03 Yemen b n.a. n.a. na. 14.42 12.76 6.97 .tAishreq c 8.54 20.37 19.47 IS.16 8.31 6.04 1L71 Israel 18.80 18.01 12.30 6.84 6.30 9.63 10.65 PWReg 8.25 14.48 9.28 6.44 4.06 3.99 6.89 a. Negative of dIe baace of goods and non-faow sevc b. 198S-89 average refes to 1989 only. c. Does mct Inclbde T1a and Yeme. d. oeign savings for Egypt and ran ane for fisal year 1992 and date for Synri tcir to balance Of goods only. Soun,e: IMP Balance of Payments, World Bank Inernational Economics Department 1 ECONOMIC DEvELoEMErJr & COOPERATION IN MENA ANNEX 2: A REGIONAL DATA-RAWe Annex 2-Tabk 2: Real GDP Growth COUNTRY V70-74 1975-79 l9804 1985419 1990 1991 Algeria 5.18 6.20 5.25 -0.06 -1.46 1.19 M0rocO 4.70 6.45 3.25 4.34 4.04 4.83 Tunisia 8.72 6.33 4.22 3.28 7.64 3.80 Magbueb S.41 6.26 4.75 1.18 0.66 2.29 Egypt S.14 10.94 6.99 2.92 2.54 2.27 Jordan 5.84 14.05 -14.06 -11.06 -11.71 -20.76 Occupied Teitories 9.57 7.75 0.43 7.17 20.01 Syria 13.29 6.49 2.98 3.39 14.04 8.20 Masbreq 7.5S 9.65 4.78 2.9S 4.63 -1.47 lrand 7.60 3.82 2.95 4.18 6.14 7.12 Region 6.40 6.56 4.39 2.28 2.91 2.24 Some: Wod Bak IgegaM l Ucomo Dapartma Annx 2-Tabl 3: Per Capito Real GNP Growth *mvm) COUNTiRY 197075 197540 198045 19S-.0 1990 1 992 Aleda 2.3 2.6 2.1 -3.0 -4.0 -3.2 -1.7 Morocco 2.2 3.6 0.4 2.0 2.9 2.2 -4.6 Tunisia 6.6 3.6 1.3 1.3 6.6 0.7 7.6 Mabghreb 2.9 3.1 1.9 -1.S -1.4 -1.5 -1.2 Egt 3.2 7.4 3.6 0.6 -2.4 0.0 0.3 Jordan 2.5 13.2 0.2 -15.8 -19.2 -9.9 8.8 Occupied Terrtories 11.2 5.5 -1.0 3.8 12.4 -9.1 Syria 9.5 3.2 -0.7 -0.9 11.9 4.1 3.0 MaBSbreq 5.3 6.9 1.7 -0.8 0.5 0.2 -0.6 Israel 4.1 1.5 1.1 2.5 3.1 1.6 2.8 Region 3.9 3.7 1.5 -0.6 0.1 0.2 0.6 a. Dosna incud Labc on nd Y_ma Sme Woid Ba_k ln_noloal Econodo Dq_nt 2 ECONOPMC DEVELOPMENr & COOPERAION IN MENA ANNEX 2: A REONAL DATA-BAS8 Annx 2-TaJe 4: Investeet a as a share of GNP aumj COUNTRY 1970-74 1975-79 1V0 4 1 9 199 1991 1992 Algeria 37.63 46.87 38.24 31.83 30.S3 31.48 31.59 Morocco 18.04 28.00 25.70 24.31 26.03 23.16 25.95 Tunisia 23.16 30.94 32.05 23.64 27.59 24.30 25.47 Magbreb 28.44 39.13 34.9 29.41 28.97 27.58 28.64 Egypt 15.19 32.26 30.75 2S.S6 24.49 21.98 18.S1 Jordan 17.06 32.04 38.46 25.08 32.05 26.36 34.00 Occupied Territories 13.5S 21.30 23.12 21.S1 19.85 17.03 n.a. Synis 17.26 29.04 24.44 19.64 16.24 nLa. na. Yenl b n.e. B.S. ne. 18.92 16.88 14.52 n .. Mlashareq e 15.73 30.72 29.11 21.81 21.54 19.52 1832 ouIsae 30.09 26.17 21.91 17.S0 18.26 22.00 21.90 Region 24.11 33.99 30.67 23.73 23.42 23.37 23.35 a. Grs domQa_ ilw_ea b. 198S49 ,a, woos o 198 IMly o. Doew St ilukde Lebon fiorte dyes 197044; 1991 92 eat u eSxw6: Wwm BM& hotadmd Boomed" Dqptumm ECONOMIC DEVEwPmBNr & COOPRAtAON IN MENA ANNEX 2: A REGioNAL DATA-EASE Ann" 2-Tabke 5: Ia.rnmntad Catal Outpu RadIo (eu COUNTRY 1970-74 197S-79 198044 198589 1988_91 b Algeria 6.39 8.06 8.71 -569.34 24.01 Moroco0 4.25 4.82 7.42 S.14 10.68 Tunisia 3.88 5.19 7.71 6.49 3.81 S.63 7.08 8.44 25.92 14.33 Eg8n* 2.83 2.55 3.66 7.01 8.78 Jordol 6.47 4.79 -7.81 -13.26 -4.88 Occuied Territoies 1.52 3.66 69.65 4.01 7.15 Syria .. 4.21 9.57 5.65 2.19 Masbreq0 ~~~~2.72 3.09 6.2 7.56 13.27 Israel 4.31 6.55 6.96 4.24 3.81 Region 3.65 S.54 7.59 11.22 9.43 a. Does ad hs lbao and Yamen b. 991 GDP used to askula ICOR fot Occuied Tezrios Sows: W*Wd Bank _wmnI Economi Depaiuim 4 ECONOMIC DEVELOPMENr & COOPERATION IN MENA ANNEX 2: A REGIONAL DATA-BAsE Annex 2-Table 6: Tota Public Secor inance, Ne Row a (S bilon) Cumulive COlNTRY 1970-74 1975.79 198044 1985-89 1990 1991 Total 1970-91 Share of Share of Grants Non- Codec. Algeria 2.21 12.40 1.48 4.75 -0.06 -1.32 19.46 -2.81% 51.34% Morocoo 0.58 5.10 5.56 3.70 1.39 0.91 17.24 12.64% 16.61% Tunida 0.47 2.10 1.88 1.30 0.29 U.41 6.46 13.45% 19.47% Bghbreb 3.26 19.60 8.92 9.7S 1.62 0.00 43.16 5.80% 32.69% Egypt 2.27 11.87 15.70 12.03 3.65 3.40 48.90 34.32% 24.84% Jordan 0.98 3.S7 6.97 5.63 0.86 0.50 18.49 66.29% 10.13% Lebanon 0.15 0.49 1.42 0.49 0.27 0.17 3.00 83.25% 12.71% Syra 1.09 6.04 12.43 11.39 -0.73 0.09 30.32 54.31% 0.89% Occupied Terrtories .. .. 0.85 0.91 0.18 .. 1.95 100.00% 0.00% Yemen 0.23 1.58 3.59 2.37 0.30 0.21 8.28 43.40% 1.13% Mashreq 4.72 23.55 40.97 32.81 4.S3 4.36 110.95 48.26% 13.31% Israel 3.82 10.83 9.37 14.43 2.80 3.88 45.15 83.70% 8.02% RegIon 11.81 53.9 59.27 56.99 89 8.25 199.5 47.10% 16.31% MEMO nTEMS (sham) oinPceat Biata, Arab b 27.84 28.46 24.04 9.02 4S.49 12.33 21.63 Bilateral, OECD 29.68 36.44 59.11 40.35 75.17 76.27 47.36 Biatera, CidlA b6 2.88 0.77 9.26 IS.37 -7.13 -2.06 7.03 MuMilater, Arab 0.09 4.04 1.20 2.58 0.76 -2.24 2.12 Mulilkata 3 AD/IDA 2.0S 2.98 3.99 4.24 4.66 3.51 3.68 Canercmiald 33.08 24.63 -6.12 12.48 -16.23 -12.37 9.1S Grant 43.41 31.00 44.69 53.64 94.67 84.47 47.52 Cooesaiond 14.94 2037 25.58 23.40 4.14 20.49 21.70 Noa¢C