Is the Arab world poised for a growth spurt?

Report says that reforms could spur region’s economies to expand 6% annually, labor force participation must be increased.

By DAVID ROSENBERG / THE MEDIA LINE
October 5, 2011 21:00
4 minute read.
Construction in Dubai [file]

Construction in Dubai with camel yawn 311 (R). (photo credit: REUTERS/Steve Crisp)

The Middle East and North Africa (MENA) could enjoy a period of rapid economic growth if the countries of the region seize on the Arab Spring upheavals to undertake political and economic reforms, a report by London-based Capital Economics says.

The Arab world could grow at an average annual rate of 6 percent a year, beating the 4% annual pace they posed over the previous 20 years, Said Hirsh, MENA economist at Capital Economics. That pace of growth would lift gross domestic product per capita to $26,000 annually by the year 2030, nearly five times its current level, he said.

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Political reform has been the focus of the Arab Spring agenda, but most analysts say the region must address pressing problems like creating jobs and reducing gaps between the rich and poor by fostering faster economic growth in order to create a stable environment where democracy can take root.

Right now, however, the turmoil has weighed down on the region’s economies. Last month. The International Monetary Fund lowered its economic-growth outlook for the region to 4% in 2011 and 3.6% in 2012. The hardest hit countries are those now contending with Arab Spring unrest, with the Syrian economy likely to contract this year.

One measure of the economic distress MENA is experiencing came in a report from the investment consulting firm Dealogic, which reported on Wednesday that the region’s mergers and acquisitions activity dropped to its lowest level in six years. The total value of Mideast-targeted M&A so far this year is $13.4 billion amid concerns about political stability, it said.

But Hirsh told The Media Line that economic takeoffs in places like China and India took observers by surprise.

“When they started to happen most people were skeptical. Everyone looks at the history and asks why should things change now and then they’re surprised at the transformation that comes,” Hirsch said. “There’s no reason that the Middle East could not be transformed in unexpected ways in the next few years.”

While Capital Economics cited improving education, labor market regulations and other regulatory structures, as well as cracking down on corruption as the top reform-agenda items, Hirsh said progress would be limited on all of them without political reforms.

If the MENA region can begin implementing market reforms, the countries most likely to benefit are among the region’s poorest. Hirsh said Egypt had the potential to lead regional growth with GDP expanding close to 8% a year that would vault its economy to a value of $2.5 trillion by 2030, making it as big as Australia’s or Canada’s are projected to be.

“They [the Egyptians] have the potential for catch-up growth and for productivity gains from changes in education and the regulatory environment, plus they have a rapidly growing population. These are things that are positive,” Hirsh said. “Potentially, Egypt could be a good growth story.”

Among other potential growth leaders are Syria and Morocco, which enjoy conditions that could accelerate their annual growth to around 7% annually.

Capital Economics said that efforts to diversify the economies of the hydrocarbon-rich countries of the Gulf by investing in industry, tourism and technology will take a decade or more to bear fruit. Part of their problem is the absence of incentive for people to seek employment or start businesses because oil revenues finance generous social welfare programs and public sector employment.

“The political will to change (especially following social unrest) is not evident,” the report said.

Although the Gulf has largely avoided Arab Spring protests, the region’s leaders are anxious. Clashes erupted on Monday night in Saudi Arabia’s oil-rich Eastern province, home to a large Shi’ite population, which left 14 people injured.

Hirsh said the MENA region as a whole had a strong enough base for growth that even without wide-ranging reforms, it could improve on its economic performance over the last two decades, which averaged 4% annually. At an annual average pace of growth of 5% annually, per capita GDP in the region would reach $20,000 by 2030, Capital Economics estimated.

While MENA has to overcome serious problems of corruption and cronyism as well as poor educational systems and inefficient labor markets, it has considerable assets that other parts of the world like China and Eastern Europe lacked before their economies took off, the reported noted. MENA has established market economies, is integrated into the global trading system and has little debt.

Its high rate of population growth, which raises the threshold of minimum economic growth it needs to generate to create enough jobs, also serves to create growing demand.

Capital Economics warned that despite MENA’s strong foundation for growth there is still a risk that the region could continue to underperform economically. Assuming that the region’s economies push more people into their workforces, annual GDP growth would grow on average 3.5% and boost GDOP per capita to $16,000.

To achieve that, MENA economies would have to increase the percentage of their working age populations in the labor force to 50% from the low rate of today of 45%.


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