Middle East and North Africa:Towards a brighter outlook

Improving governance and investment are preconditions of development in the MENA region.

The countries of the Middle East and North Africa stand at a crucial stage in their development. Though several of them had until recently witnessed high growth-Morocco's economy expanded by over 5% in 2008, Egypt's and UAE's by over 7%-the global crisis has finally dealt a blow.

Real GDP in MENA countries is expected either to slow sharply in 2009 or, in the case of oil-exporting countries, record a slight drop. Although the region as a whole registered GDP growth of 6.1% in 2008, a slight increase on the 5.6% recorded in the previous year, figures from the World Bank indicate a sharp deceleration to 2-3% in 2009 which, while not a recession, is below countries such as China and India.

How fortunes have changed. Since 2000, the MENA region had started to get on top of some quite major challenges, including high unemployment and poverty-a fifth of the population lived under the poverty line of US$2 per day. The World Bank had estimated that approximately 100 million additional jobs would have to be created in the MENA region by 2020 just to keep up with current population growth. The region lagged behind other emerging country regions in attracting foreign direct investment, receiving just 0.4% of global inflows in 2000, compared to 0.7% for South East Asia.

Then the MENA region started to leap forward. Investment inflows climbed to 5.5% of total global inflows in 2008, compared to 3.5% for South East Asia. Unemployment slowly declined throughout the region in 2006-2008, although it remained structurally higher than in other developing countries.

When the global crisis reached MENA's shores, it did so slowly at first, with most of the early impact being felt by banks that had borrowed externally or were heavily exposed to asset markets, particularly in some Gulf countries. Now the squeeze is being felt everywhere.

Investment inflows are expected to fall abruptly in 2009, by up to 32% among the group of oil importers. Tourism has declined, small and medium enterprises have been hit and remittances have dried up. Trade has slowed and building projects have stalled. Government revenues have also been reduced, and though resource rich countries have been able to compensate for this somewhat, in most countries public spending has been severely constrained.

The financial crisis has forced an untimely adjustment to the region's ambitious growth and employment targets: a GDP growth of an average of 6%-7% is widely considered necessary to absorb new labour market entrants and contribute to poverty reduction. But low growth means unemployment is set to rise anew. The ILO thinks the unemployment rate could rise by around 25% in the Middle East and 13% in North Africa in 2009 compared to 2007. Young people and women are likely to bear the brunt.

This daunting prospect, together with high demographic pressures, puts MENA governments under extra pressure to create job opportunities and strengthen their business environments. The reality is simple: more investment, both public and private, domestic and foreign, will be needed to provide new engines of growth and dynamism.

This also puts more onus on the work of the MENA-OECD Initiative on Good Governance and Investment for Development, which was launched in 2004 with the participation of 18 MENA countries. As experts from both MENA and OECD countries repeatedly confirm, reinforcing governance structures and improving the investment climate go hand in hand, and without concerted efforts on these twin fronts involving all players and stakeholders, MENA countries will find it hard to reach their development goals in what has become an increasingly competitive global marketplace.

A results-oriented policy dialogue, the MENA-OECD programmes help to share know-how on best practices and lessons from past reforms. They lean on tried and trusted OECD methods such as peer review and civil society involvement, and privilege the design and implementation of innovative solutions for specific policy or country circumstances. The programmes are co-ordinated, with clear targets and monitoring to improve impact, and they reinforce development initiatives supported by international, regional and bilateral donors.

Take corruption, which continues to affect procurement deals at considerable cost to the public. However, progress is being made, for example, in Morocco. In its 2009 Global Corruption Report, Transparency International points out that while Morocco has suffered from corruption, it has taken several initiatives to combat it, including adopting a 2007 decree on public contracts and a Construction and Public Works Integrity and Social Responsibility Pact in 2008.

Still, more work is needed to tackle the problem in MENA generally. Steps could include committing to international instruments, such as the OECD Anti-Bribery Convention, which comprises eight non-OECD countries, though none as yet from the MENA region. There are also questions of government effectiveness to address, which is why simplifying administration is important.

Though some MENA countries are more restrictive than others when it comes to doing business, a recent International Financial Corporation/World Bank ranking shows that none of the MENA countries excels in all fields. Bahrain, for instance, ranks highly in dealing with building permits or employing workers, but ranks lower down for enforcing contracts. Morocco does relatively well on enforcing contracts, but scores less highly for employing workers. Getting credit is easier in Egypt and Saudi Arabia than in Algeria or Iraq. And when it comes to paying taxes, the Gulf states lead the way, with the Maghreb drifting behind.

According to OECD figures, the picture is reversed for restrictiveness towards foreign direct investment, with Algeria and Morocco being no more restrictive than the OECD average, whereas the Gulf countries are. Whatever the barriers, breaking them down is paramount to overcoming the economic and social pressures the region must confront.

The MENA-OECD programme points the way forward. Consider the Good Governance for Development (GfD) initiative, whose aim is to promote development and favour sustainable economic growth by modernising public governance and improving public service delivery and policymaking. The fruit of this work shows up in the spread and penetration of information and communication technologies in administration and in improved recruitment policies. It also shows in the introduction of merit-based promotion, and the recruitment of women.

The Good Governance for Development initiative also promotes e-government and administrative simplification, and focuses on issues such as public service delivery, public-private partnerships, the judiciary and enforcement, and civil society and the media. A key role is to encourage ministries and government agencies to co-ordinate their actions. Improving performance in public action and reinforcing capacities in policymaking is at the core of the programme mandate. In Istanbul, Turkey, this October, high-level officials from the MENA region met to drive forward work on public sector integrity. Such collaboration improves effectiveness and reassures donors.

While improving governance is key to creating a more efficient public service, the MENA-OECD Investment Programme focuses on helping governments to improve the business climate. In addition to enhancing consultation between business and policymakers, such as through the MENA-OECD Business Council launched in 2009, it also fosters reform efforts in areas such as investment, taxes, small and medium-sized business support, corporate governance, trade, skills development and responsible business conduct.

The programme has developed regional guidelines on free economic zones, supports a collaborative process known as the OECD Business Climate Development Strategy, and has adapted the OECD Principles for Private Sector Participation in Infrastructure to the MENA region. Economic diversification is also encouraged in areas such as manufacturing and renewable energy.

The MENA-OECD Investment Programme also seeks ways of improving access to finance. Though financial markets in the region are developing, firms and local investors have traditionally relied far more on family and friends and far less on credit or equity for their funding than do their counterparts in OECD countries. Even if Islamic finance, with its relatively prudent and risk-averse approach, has become more appealing and probably helped cushion the initial blow of the crisis, expanding finance to wider populations remains a challenge.

Supported by the MENA-OECD initiative, governments in the region are working away at improving the climate for foreign and domestic investors, and their efforts have already led to a sharp rise in private sector participation in the economy.

In Morocco, for example, the government is reinforcing its institutional frameworks, focusing on commercial law, justice, and business start-ups. A new investment promotion agency is also being established. Better public services for business are being promoted by introducing performance in civil service and public budget. 

In Egypt, the authorities are streamlining investment procedures and dismantling bureaucratic obstacles, while innovating with new types of investment zones and promoting public-private partnerships in infrastructure. E-government is making progress through several initiatives at central and local levels. In Saudi Arabia, efforts are under way to strengthen the country's financial system by lowering restrictions to foreign ownership and approving new debt instruments. The UAE is moving to lift the 49% ownership restriction on domestic companies in most sectors. Tunisia is relaxing restrictions on FDI in retail distribution, banking and finance while making progress in improving its regulatory environment. And Jordan's government remains committed to its National Investment Strategy to ease bureaucratic restrictions, simplify rules for start-ups, ease labour regulations and overhaul the tax system.

These reforms are all steps towards getting the MENA region on track to sustainable growth and development. They demonstrate a belief that the global crisis must not be allowed to halt action, but rather spur new reform. By building on measures such as these, the outlook for the MENA region will surely brighten in the months ahead. RJC


To know more about these programmes, contact Alexander Böhmer of the MENA Investment Programme and Carlos Conde of the Good Governance for Development initiative. The OECD Observer would like to thank their teams for their assistance in preparing this edition.

OECD (2009) Trends, Achievements and Challenges: MENA Investment Programme, October, Presentation available online at www.oecd.org/mena  
OECD (2009) Modernising Government: The Way Forward, available at www.oecd.org/bookshop

See video interview with Neveen El Tahri, Managing Director of ABN AMRO DELTA and CEO of DELTA EAB Brokerage at http://www.youtube.com/oecd

See French video interview with Soukeina Bouraoui, Executive Director of the Centre for Arab Women's Education and Research, Tunisia at http://www.youtube.com/oecd

© OECD Observer, No. 275, November 2009


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