A new World Bank report, Middle East and North Africa Economic Developments and Prospects: Investing for Growth and Jobs highlights the important links between good governance on a level legal and regulatory playing field, and the ability of investment to stimulate growth.
“Indeed, if we look at examples from other countries undergoing transition, investment surged in many economies that made early moves to improve governance,” says Caroline Freund, Chief Economist for the Middle East and North Africa region at the World Bank. “Overall, while improving government institutions is necessary for voice and accountability, it is also necessary for growth and efficient use of resources.”
To revive investment above and beyond pre-Arab-Spring levels, a move to transparency and accountability is urgent, she argues.
The report notes that investment in the Middle East and North Africa (MENA) region has been strong over the last two decades in comparison with Latin America and Eastern Europe. However, in the oil exporting countries, such as Algeria and Oman, it has been primarily supported by large and expanding public investment. Oil importers, in contrast, like Egypt and Morocco, have shown more strength in private investment, which has increased in recent years.
A concern with public investment in the developing oil exporters is that in economies with weak governance there is no evidence that public investment stimulates growth. In contrast, in countries with an adequate level of protection of property rights and legal institutions, public investment is strongly linked to growth. Further, public investment cannot substitute for private investment, especially when governance is weak.
“When governance is good, public investments crowd in private investment by providing the energy, roads, logistics and communications links necessary for firms to function productively,” says Freund. “But with poor governance, public investment is more likely to crowd out private investment by using resources that would otherwise be used by the private sector. Moreover, public investment may not stimulate growth because it is spent on unproductive assets that are desirable only to special interest groups.”
The report also makes a strong case for private investment in services and manufacturing as engines of job creation and income growth in the region. It presents evidence that while the majority share of foreign direct investment (FDI) received by the region flows into the real estate and fuel sectors, most FDI-related jobs are in fact generated in the manufacturing sector.
“Services and manufacturing are where the action is,” says Elena Ianchovichina, Lead Economist in the MENA region and principal author of the report. “Services have been a source of strength for both income and jobs, in levels and growth, especially in the oil importing countries. Manufacturing has also contributed to growth in income and jobs, but in MENA the sector is small relative to the manufacturing sectors in Brazil, Indonesia, Malaysia and Turkey, for instance.”
She highlights that in recent years the public sector could not generate the attractive high-quality jobs typically sought by graduates, and the private sector has not been vibrant enough to make up the difference.
As in previous editions, the report also presents the near-term macroeconomic outlook, forecasting growth in the MENA region to average 4.1 percent in 2011 and 3.8 percent in 2012. With the strong caveat that global uncertainty is clouding the horizon, the forecast for 2011 is up by half a percentage point relative to the May 2011 forecast due to more expansionary fiscal policies in the region, expanded oil production (excluding Libya), better than expected growth in Iran, and a quicker than anticipated pickup in industrial production in Egypt. Growth is expected to decline by half a percentage point in 2012 because of lower expected oil prices and slower global growth.
Unlike in 2008, when MENA countries were in a strong position to weather the storm, the ongoing political and economic uncertainties have put a number of countries in a weaker position for additional response to another global downturn. With contracting global demand, lower oil prices will put further pressure on fiscal balances in many developing oil exporters, especially in a period of expanded government spending. Lower oil prices will be a relief to developing oil importers, but this will be offset by lower exports and remittances, and these countries have little room to stimulate their economies.
Editor’s Note: This is a press release from World Bank