Middle East is able to impose its presence in the global economy

Over the last few years the economies of the region witnessed growth. Tunisia and Egypt were seen as rising economies, with the stock market in Egypt even receiving emerging market status. Meanwhile the Gulf oil states boomed. Yet this economic growth was uneven, unequal and failed to satisfy its populations. Now, urgent reforms are needed, or the positive changes sweeping the region will be undone by economic malaise.

The basic facts are clear. Unemployment did fall over the last ten years; youth unemployment remained in the high double digits. Underemployment also rose, along with a sense of economic exclusion and loss of dignity. Facing challenging demographic trends, governments were incapable in addressing equity, distribution and welfare.

Oil importers (Egypt, Jordan, Lebanon, Morocco, Syria, Tunisia) attempted to move from state-owned enterprise model to private capitalism. But these processes of privatization and opening up favored mostly the cronies of the regime who were willing to pact with the ruling elites. FDI did enter the region but most went in the hydrocarbons sector which created few jobs for nationals. Meanwhile bloated bureaucracies were not reformed, while real estate also became the prerogative of the few.

For the oil exporters (Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, UAE, Yemen) hydrocarbons were both blessing and curse, given they cushioned states from reforming and diversifying. Waste and lack of governance was also high but just like the oil importers, populations have grown.

As their economies grew, the future for the oil exporters has been convoluted by inordinate planning. In the latest oil boom of 2003-2008, the oil exporters of the Gulf competed on the same sectors head to head, wasting time and resources. Financial centers, tourism, real estate, airlines, industrial parks and aluminum smelters were viewed as the center points of growth by all.

Extensive foreign investment, which was concentrated in the hydrocarbon sector, didn’t help to increase economic diversity. Critically, Gulf oil exporters became overly reliant on expatriate labor for its private sector as nationals found refuge and protection in the public sector.

More destructively, all of the economies were handled from a distance by their leaders, entrusted in the hands of “technocrats”. Most of the leaders in the Middle East exhibited a sense of ownership amongst their own elites which was observed by society. This mean all these economies failed to compete in the global economy. In 2003, the Philippines had more manufactured exports than the entire Middle East. Pockets of excellence are found in some countries, but these are exceptions.

To succeed, Middle East economies now need a vision that it’s not hijacked by crony or other incumbency interests.

Public institutions have to be reformed and become effective and pro-business. Corruption has to be tamed by enforcing oversight rules which exist and making everyone more accountable.

For the oil exporters the road is very challenging as they need to instill urgency behind economic reforms without getting hallucinated by oil revenues.

Unlike the oil importers, the oil exporters have a huge capital base, which they now need to invest more in areas such as quality human capital in order to uplift education and training as per international standards. Also, the region has to move away from cheap infrastructure mentality to quality projects.

Renewable energy and technology could offer a better future for the oil exporters. Replacing expatriates with nationals in the work force is a key element of success. Open migration has to end and phasing out existing expatriates over a period of time will compel economies to move from low wage/low skill wage expatriate equilibrium to high wage/high skill national workforce.

For the oil importers, access to capital is a more important issue while grappling with far larger populations is not an easy task. They would have to look to global markets and make their economies friendly and accessible to international investors.

Especially if oil exporters hire more nationals, fewer nationals from the oil importing countries will not find easy jobs in the Gulf in the future. Expansion of labor-intensive export activity and entrepreneurship can absorb many new labor force entrants. Incentives given towards capital goods and intermediate goods could help incentivize local businesses and SMEs. Productivity gains are paramount as the region tries to become more globally competitive and transparent.

Businesses will become more productive and less parasitic as the government steers the development project, escaping from the trappings of special interests and rents. The region has to maximize all the economic tools available. If the employment challenge is properly addressed Middle East economies can look forward to the benefits of the “demographic dividend.”

The region has multiple chances to make it in the global economy as long as rulers and society move together in one direction.

John Sfakianakis

John Sfakianakis

John Sfakianakis is chief economist at Banque Saudi Fransi in Riyadh, Saudia Arabia.

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