Long road to transition for Arab countries

The past two years have been difficult for the Arab countries in transition – Egypt, Jordan, Libya, Morocco, Tunisia and Yemen – and the situation will remain difficult in the near term. Unless countries adopt a comprehensive policy package that aims to maintain macroeconomic stability and lays the foundations for job-creating growth, the hopes and aspirations of people will be dashed, with implications well beyond the region.

Political uncertainty and pressing social demands, a continued weak external environment and still fragile private sector confidence have all contributed to growing budget deficits and diminished international reserves. Fiscal deficits last year stood at an average of almost 9 per cent of GDP and international reserves have declined towards – or, in Egypt, fallen below – the critical level of three months of import demand. Measures to maintain macroeconomic stability are thus urgently required, including fiscal consolidation that includes subsidy reform while protecting the poor with well-designed safety nets. Libya is in a different position from the other Arab countries in transition given its substantial oil wealth: the immediate challenges there are to raise the quality of spending to support sustainable growth and to strengthen institutional capacity.

Looking ahead, Arab countries in transition can only expect moderate growth for this year. We at the IMF forecast an average growth rate of about 3 per cent for these countries (excluding Libya), which is not enough to make a significant dent in unemployment. In fact, the number of unemployed in the region has increased by more than 1.1 million since the onset of the Arab Spring, and unemployment rates continue to stand at 9-15 per cent. Alarmingly, youth unemployment is even higher at 15-30 per cent.

This brings me to my key point: the success of the political and economic transitions across these countries will ultimately be determined by the extent to which they can generate higher and sustainable growth to bring down unemployment. Progress on this agenda is as urgent as is short-term macroeconomic stabilisation. Reform packages will be home-grown and necessarily vary in emphasis and timeframe. Nevertheless, I see five common priorities.

1. Trade integration
Greater trade integration will be essential for boosting growth. There is significant potential: the region’s exports are proportionally smaller than in other economies, are directed mainly to Europe and intraregional trade is not well developed. This has prevented the region from benefiting from the high growth of many emerging markets, especially in Asia. Trade integration calls for better access to advanced economy markets, but also for action in the countries themselves to further liberalize their own tariffs and non-tariff barriers, and diversify trade towards each other and towards fast-growing emerging markets.

2. Transparency
Business regulation and governance reforms are needed to ensure simple, transparent and even-handed treatment for companies, and ultimately greater transparency and accountability of public institutions. Reality is sometimes different: Egypt, for example, has 36,000 often overlapping regulations that affect the private sector. As a result, it can be a lengthy, expensive and complicated proposition to start and run a business. And opportunities for arbitrary treatment and corruption are created along the way.

3. Social reform
Labour market and education reforms are needed for adequate skill building and protection of workers. We need to recognise that high unemployment is compounded by significant demographic pressure as more of the young enter the labour market, the public sector dominates the job market and labour laws are rigid. All three issues need to be addressed. Governments should reduce disincentives to hiring, while still protecting workers. The education system must also shift its focus from training young people for entry into the civil service to preparing them for a career in the private sector.

4. Access to finance
Improving access to finance will help catalyse entrepreneurship and private investment. At the moment, only 10 per cent of firms finance investment in the Middle East and North Africa through banks – by far the lowest share among the world’s regions – and 36 per cent of firms in the region identify access to finance as a major constraint, surpassed only in sub-Saharan Africa. Strategies for improving access to finance must include developing or strengthening alternatives to bank financing, improving the financial infrastructure and strengthening competition in the financial sector.

5. The buy-in
Improving communications is the final element of a convincing reform package. It is not enough for policy-makers to be willing to carry out difficult reforms. They need to be open about their intentions. What is required is broad understanding and buy-in to the country’s reform programme among their populations, so that the countries in transition are able to implement the policy changes without prohibitive popular opposition.
In all these areas, there are already good examples from within the region. The challenge ahead is to learn from them and achieve the scaling up required to lay the groundwork for inclusive growth, create more jobs and build a brighter future. No time should be lost to give hope to the populations still waiting for a dividend from the political reforms that started two years ago.

Read the Outlook on the Global Agenda in Arabic, released at the World Economic Forum on the Middle East and North Africa.

This opinion piece first appeared in The National.

Author: Masood Ahmed is the director of the Middle East and Central Asia department of the IMF, and vice chairman of the Global Agenda Council on the Arab World.

Image: Al-Hajjara village located on the Haraz mountain region REUTERS/Mohamed al-Sayaghi