The crux of the matter
Why are high levels of investment in the Arab world not being translated into high growth rates? Wael Gamal reviews a report that deciphers the mystery
A survey, released at the start of the Global Reconciliation Summit in Jordan, of 300 global businesses that had put investment plans in the Middle East on hold since the Iraq war showed that three-fourths had still not resumed such plans.
However, the Arab World Competitiveness Report 2002-2003, which assesses the conditions for economic growth in the Arab World and determines the key growth engines required to improve the region's competitiveness, paints a brighter picture. It concludes that the prospects for the area appear favourable in light of recent reforms being undertaken in a number of Arab countries to improve the investment climate.
Published under the umbrella of the World Economic Forum's Global Competitiveness Programme, this report has been produced as an accompanying volume to the Global Competitiveness Report.
While growth is the most essential element in the report's methodology, competitiveness is defined as the set of institutions and economic policies supportive of high rates of growth in the medium term.
Both the report and the summit come at a critical time. The global economy is wrestling to achieve a recovery and several countries in the Arab world have been hard-hit by the recent decline in economic activity. Added to this, the security situation in the post-11 September period continues to have important bearing on economic activity.
According to the report, growth in the region has been highly disappointing. While in the 1980s the substantial slowdown was attributed to a massive deterioration in the terms-of-trade in oil-exporting countries, in the 1990s, it became apparent that poor growth performance largely mirrored the lack of restructuring. The annual growth rate of per capita GDP for the Arab region as a whole between 1963 and 1973 was higher than four per cent. The growth rate declined slightly to just above three per cent between 1974 and 1980. And between 1980 and 1985, the growth rate fell to minus two per cent.
The region's ability to achieve sustained economic growth over the medium and long run is severely impeded by a wide range of structural factors. This becomes immediately clear when one looks at the Arab world's growth performance over the last few decades relative to other regions.
"While the current slowdown has much to do with lower oil production and the deteriorating security situation, it is also consistent with the trend of decline in real per capita incomes in most Arab states in the last 10 years," the report said. "Economic activity in the Arab world surged during the oil boom of the 1970s and fell along with the sharp decline in oil prices that occurred first in 1981 and again in 1986. It would have been hard for the oil-exporting countries to avoid a dip in economic activity during the 1980s. However, the region continued to stagnate in the 1990s."
The typical reason for that lies normally in investment. Countries that grow quickly are countries that invest a substantial fraction of their GDP and countries that fail to grow are countries that fail to invest. Interestingly, the report finds that investment rates in the Arab world are not particularly low: "The average investment rate over the period 1974 to 2000 was 24.6 per cent, a rate higher than that of the OECD economies (22.9 per cent) and only slightly lower than that of the successful economies of East Asia." Investments rose in the second half of the 1970s and the early half of the 1980s and have remained fairly robust since then. The paradox is clearer during the 1981 to 1985 period, when the investment rate rose to 28 per cent, while the growth rate was negative.
The answer to this high investment/low growth puzzle lies in the quality of investment, the authors argue, emphasising that private investment in the Arab region is both insufficient and inefficient.
Another factor is the state of financial markets. Examining the banking industry and bond and equity markets in the Arab world, the report finds that in several countries, financial markets have remained in their infancy, retarding economic growth. "The stock market value of traded companies as a fraction of GDP is 10 times higher in the OECD than in the Arab world and 13 times higher in East Asia. The turnover ratio is four and five times larger, respectively," the report said.
A weak business environment is also playing a role in constraining growth. Complex regulations, which are unclear and inconsistent with the rules that apply in the rest of the world, scare investors away, leading to a lack of competition and, consequently, more inefficient and less innovative economic systems.
The fast-growing population is considered a major challenge. "It will take only about 30 years for the total population in the Arab region to double from its current level of 290 million," the report warns.
Nevertheless, the report sees that governments in the region have succeeded in restoring macroeconomic stability in the face of significant fluctuations in the price of oil and accompanying volatility in capital flows and remittances. "Performance with respect to integration with the global economy has been outstanding," the report confirms.
There are preconditions for sustained growth in nine different areas that must be met, the report maintains, in order to launch the economies in the Arab world on a steeper growth trajectory. Developing an improved macroeconomic environment and well-functioning financial markets, opening up to trade, introducing quality governance and the rule of law, providing accessible and relevant education and infrastructure, eliminating or reducing corruption and ushering in the new economy are all essential.
"Meeting these preconditions is no guarantee, however, that economic growth will actually accelerate on a sustained basis," the report said. "For this to happen, the growth engine needs to run smoothly, fostering innovation and technological transfer and ensuring the ease of business start-up."
