Encouraging investment

There is enormous potential for economic growth and development in the MENA region. Realising that potential will be largely achieved through improving investment-friendly policies and practices.

Gary Campkin

Inflows of foreign investment to the MENA region have surged in recent years. The area attracted some US$14 billion of foreign direct investment (FDI) in 2003, and has more than quadrupled this figure in only three years, bringing in almost $60 billion in 2006. During the same period, real GDP in the MENA region increased steadily and the employment rate grew at an impressive 4.5% per year from 2000 to 2005.

While this growth performance has been encouraging, there is still much room for improvement. Investment in the MENA region still mostly pours into a limited set of economic sectors, such as hydrocarbons, real estate, and tourism-related activities, while other sectors remain underdeveloped.

There are also striking regional disparities. Some countries, such as the United Arab Emirates, Egypt and Algeria, enjoy far greater levels of inward investment than their MENA neighbours. Furthermore, the region needs to create 100 million additional jobs between 2000 and 2020 to employ all additional entrants into the labour market.

On top of these challenges, the MENA region has not been immune to the effects of the current global economic crisis. Estimates indicate that FDI in the MENA region could plunge by as much as 30% in 2009. Meanwhile, the current account balances of the major oil-producing countries in the region have been hard hit by the drop in oil prices during the recent global recession, resulting in less maneuverability for reforms and limited funds for investment in public services. As economic growth in the region slows down due to the crisis, unemployment is also expected to increase.

Policymakers in the region will need to take action on several fronts to boost economic recovery in the short term and set the region on a longer term sustainable path for economic growth. It is imperative that policymakers work to build an attractive investment environment.

Keeping markets open to foreign investment will be important. Many MENA countries could do more to reduce discriminatory treatment between domestic and foreign investors, and could improve transparency and predictability of investment policies, particularly regarding FDI restrictions, screening and approval procedures, and expropriation. As more sectors become open to inward flows of foreign investment, these measures could help to develop economic sectors whose full potential is not being realized through domestic investment alone. This could also improve the diversification and resilience of MENA economies.

Improving access to finance in the MENA region will be important for economic recovery too, particularly for small and medium-sized enterprises struggling to obtain credit in the current economic crisis. Government stimulus measures can help provide access to finance in the short term, though more should be done to facilitate the operations of foreign private equity, venture capital firms, and multinational enterprises for important investment projects in the longer term.

Effective public-private partnerships will also be crucial for mobilising finances for major long-term investment projects, such as for telecommunications, electricity, transport, and water and sanitation infrastructure and service-provision. Improving the predictability of investment policies combined with greater transparency in political decision-making will largely determine the success of such projects and joint partnerships.

For employment, policymakers should work to improve the quality of educational institutions in the region for all ages, including vocational education and training, and should ensure greater equity in access to education for men and women. Policies should be developed in close co-operation with the business community to ensure that education outcomes increasingly meet current and future labour market needs in the MENA region, leading to a competitive, adaptable and skilled labour market. This would reduce unemployment, retain labour, and attract foreign investors seeking skilled labour in the region.

Visit www.cbi.org.uk

*Founded in 1962 as an independent organisation, the Business and Industry Advisory Committee to the OECD (BIAC) is the offi cially recognised representative of the OECD business community. BIAC's members are the major business organisations in the OECD member countries and several non-OECD countries. Visit www.biac.org

© OECD Observer, No. 275, November 2009

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