State or no state
The weak role of the financial sector in the economies of the MENA is a daunting challenge for its countries. Wael Gamal reviews a World Bank assessment
Economists have recently come to widely acknowledge that finance truly matters for economic growth, and in more ways than had been recognised. The inspiration for this shift in thinking was the so-called "new economic paradigm" in the US during the 1990s, with the stock market leading the American economy to outstanding performance especially compared to Western Europe and Japan. Changes in the financial services industry are providing immense possibilities for economic development, but simultaneously raise daunting problems for developing countries. The recently released World Bank paper "the Changing Financial Landscape: Opportunities and Challenges for the Middle East and North Africa", by Wafik Grais and Zeynep Kantur, explores the issue of financial reform in MENA.
The authors name liberalisation, technological changes, and market participants' drive for innovation to be the main forces in the transformation of financial intermediation. "The MENA region is engaged in all three forces though it does not seem yet to have become the prevailing 'rule of the land' internalised by both public authorities and market participants," the authors write.
While it is gaining increasing attention in MENA, the liberalisation of financial sectors is still sporadic and very much incomplete. As the report observes, liberalisation for MENA countries "is highly affected by a direct ownership presence of the state in financial institutions generally combined with a heavy call on national savings through notably a large control on contractual savings". State ownership of financial institutions is not considered to be inherently opposed to market freedom, but tends to be uninventive and "errs on the side of conservatism in managing the difficult policy trade offs between liberalisation and stability".
Over-regulation and direct intervention by the state has led to an underdeveloped financial market. Although stock exchanges have mushroomed across the region in recent years, they remain marginal to economic activity. The exchanges suffer from a very limited number of active listed companies and domination by enormous banks or telecommunications companies. According to the report, as a share of GDP, stock market capitalisation ranges between 10 and 25 per cent while banking assets are between 60 and 72 per cent, both figures well below the norm for more advanced regions of the world.
Also, financial liberalisation movements in the region have not yet contributed to the development of vibrant debt markets. Both public and corporate bond markets remain limited with secondary markets almost entirely absent. Money markets continue to rely heavily on central banks interventions. Other non-bank financial intermediaries, often subsidiaries of banks, have slowly emerged, some operating in the absence of a well-defined legal and regulatory framework.
The paper records the noteworthy fact that the MENA region is the most under-insured area in the world with insurance premiums around 1.1 per cent of GDP in 1999, less than one eighth of that in North America and Western Europe and less than a third of Sub- Saharan Africa's share.
The authors see the high degree of state intervention through central banks as the main weakness throughout the MENA region. The ability to conduct monetary policies better adapted to liberalised market economies is severely limited, as "banks appear to want to remain in the centre stage in terms of sponsorship of less intermediated activities constraining competition and limiting to some extent the potential that liberalisation, technological penetration, and market participants' creativity could unleash."
Concerning the issue of technology penetration the situation is not better. Most of the MENA region appears to be lagging behind, even compared with countries at similar levels of development. The region is the least connected in the world in terms of the number of people on-line. Besides the United Arab Emirates, where 30 per cent of the population has access to an Internet connection, most countries in the region are well below five per cent, with a regional average equivalent to that of Africa. The paper warns that this limited penetration may become a serious hurdle in the transformation of the financial services industry in the region and a constraint to its potential to support overall development.
The paper assesses MENA as relatively well positioned to undergo a financial revolution, already possessing substantial resources and technical knowledge. "The MENA region is facing the opportunity of adapting its financial services to allow the various channels from finance to growth and equity to take place" but again the primary obstacle is the role of the state.
Moving to the heart of the report's neo- liberal policy prescription, the authors write that "A dynamic private financial sector cannot emerge at the behest of the state and creativity needs decentralisation. The role of the state needs to be limited to that of a facilitator in matters of financial services. In particular, it needs to constantly monitor and upgrade the legal and regulatory environment in which the industry operates without stifling independent initiatives or disorienting it through frequent, poorly transparent changes."
Nevertheless, a neo-liberal strategy must admit realities showing weaknesses in the textbook approach. The American economy, after all, fell into recession when the Wall Street bubble exploded, clearly illustrating limits to the role of finance in stimulating growth. The financial system does help to expand the productive forces by recycling surplus funds to companies and even countries where there are more profitable outlets for investment. But stock exchanges alone, for example, raise relatively little new investment. Their main function is in providing a marketplace for the buying and selling of shares in already-existing companies. Finally, the need for state intervention as a lender of last resort has been repeatedly shown as rational and essential during financial crises, drawing into question the laisssez-faire role for the state as suggested by the World Bank.
