62242 March 2011 – Number 38 THE MIDDLE EAST AND NORTH AFRICA AND DEPENDENCE ON THE CAPITAL-INTENSIVE HYDROCARBON SECTOR Elena Ianchovichina1 Economic Growth in the Last Decade: In the last ten years regional growth accelerated as Introduction: MENA felt the impact of the compared to the 1990s as countries responded financial and economic crisis to a much lesser to intensified efforts to bolster their private extent than developed economies and emerging sectors and diversify their sources of growth. markets outside Asia, however, the economic Governments improved macro-economic recovery in MENA has also lacked vigor. management, simplified business regulations, Before the recent uprisings, MENA was reduced restrictions to trade and investment, expected to return to pre-crisis growth rates of and opened up their financial sectors. Indeed, 4.8 percent by 2011-12, but growth rates in this the average number of reforms in MENA has range are not high enough to address the key challenges facing the region, including high Figure 1 - Growth of per capita income by unemployment rates – especially for young region (percent)2 people and low labor-force participation rates, notably for women. The region also has one of 9 the world’s lowest formal employment rates as 8 7 well as the highest population and labor force 6 growth rates among middle-income economies. 5 To address these challenges MENA’s economy 4 should be growing at rates close to those 3 1990-99 observed in East Asia and other high- 2 2000-08 performing emerging economies. It has not 1 0 done so. -1 -2 1 The Middle East and North Africa Economic Developments and Prospects report on which this Fast Brief is based on was prepared by Elena Ianchovichina (principal steadily increased during the last 5 years. author) and a team comprising Lili Mottaghi, Kevin Carey, Julien Gourdon,Christina Wood, Hiau Looi Kee, Daniela However, the annual per capita growth of Marotta, Ndiame Diop, Leonardo Garrido, Caroline developing MENA countries3 advanced on Freund, Maros Ivanic, Alberto Behar, Julian Lampietti, Cosimo Pancaro, Subika Farazi, Komlan Kounetsron, Source: World Bank WDI. 2 Augusto Clavijo, Michelle Battat, and Yasmine Rouai. The 3 report is available at For ease of analysis and exposition, the region is divided http://siteresources.worldbank.org/INTMENA/Resources into three main groups: the GCC oil exporters, developing /MENAEDPMARCH7web.pdf. Country-specific data and oil exporters and oil importers. The Gulf Cooperation information were provided by country economists and Council (GCC) countries are Bahrain, Kuwait, Oman, Qatar, analysts working in the World Bank’s Middle East and Saudi Arabia, and United Arab Emirates. The developing North Africa Region. The report was prepared under the oil exporters include countries such as Algeria, Islamic guidance of Shamshad Akhtar (Vice President, Middle East Republic of Iran, Iraq, Libya, Syrian Arab Republic, and and North Africa Region). Yemen. Oil importers include countries with GCC links average only modestly in the period between advances would likely offer a low-carbon 2000 and 2008 and averaged just 2.5 percent per emitting alternative to fossil fuels in the future. annum – a rate that compares poorly with the Dutch disease has also become a threat to those mean of 4.6 percent for the developing world MENA oil importers receiving large (Figure 1). remittances and finance from the GCC markets. The capital-intensive oil sector has been and Young people in oil importing countries, remains the primary vehicle for revenue and especially those with GCC links, prefer not to wealth creation for the oil exporters in the work in their home countries due to good region, while the spillover effects to the oil prospects of finding a high-paying job in the importing countries in the region and beyond GCC countries and elsewhere. This has have been significant. Oil revenues enabled increased wages for some occupations in the oil governments in oil exporting countries to importing countries. provide public services and infrastructure, budgetary support in times of crisis, and some Figure 2 – MENA’s Oil Dependence4 – especially the GCC countries – have used their oil wealth to pursue state-led economic Oil exports diversification strategies. MENA oil importers (% of total exports) also benefitted from the oil wealth as they 100 supplied labor to the oil-rich MENA economies 90 80 and absorbed investments coming from these 70 countries. Percent 60 50 1975 MENA’s Dependence on Oil: With the benefits 40 30 2008 from oil however come serious risks as MENA 20 remains uncomfortably dependent on the 10 capital-intensive oil sector. In 2008, 55 percent 0 of MENA’s population lived in MENA’s oil GCC oil exporters Non GCC oil exporters Oil importers exporting countries, oil accounted for nearly 90 percent of these countries’ exports (Figure 2), and more than 50 percent of these countries’ Oil exports GDP. In 2007 twenty-two countries in the world (% of GDP) received at least 90 percent of their 70 merchandise export earnings from 60 commodities, and approximately one third of 50 them were MENA countries. Percent 40 Dependence on oil carries serious risks to 30 1975 growth sustainability. Some of the risks of 20 2008 dependence are well-understood and include 10 volatility, Dutch disease, environmental 0 degradation, political instability and conflict, GCC oil exporters Non GCC oil Oil importers and institutional weaknesses and corruption. exporters Other risks are less obvious and have to do with a mismatch between the economy’s endowment base and its endowment use, and Dependence on Oil and Risk Mitigation in the future, the threat of viable alternatives to Measures: Some MENA oil exporters have oil. The latter should not be discounted just been taking steps to minimize the potential because at present Asia has a tremendous risks and enhance the potential benefits of oil- appetite for commodities. Technological driven growth. The GCC countries, in particular, have followed prudent macroeconomic policies and management of oil (Djibouti, Jordan, and Lebanon) and those with EU links 4 (Egypt, Morocco and Tunisia). Developing MENA includes Source: World Bank, WDI. Note: Non-GCC oil exporters the developing oil exporters and the oil importers. are the developing oil exporters. March 2011 · Number 38· 2 revenues while accumulating large savings in continued reliance on oil will not address the form of reserves and sovereign wealth developing oil exporters’ major issue – funds. Indeed, during the period between 1997 employment creation. and 2007, the group of GCC countries became Figure 3 - Structure of FDI, cumulative 2000-07 the fourth largest exporter of capital after (percent of FDI) China, Germany and Japan. Over the years, GCC oil exporters have used their sovereign oil wealth funds to finance infrastructure, technology and education in an effort to diversify their domestic and foreign sources of revenue. The UAE’s service-driven model of economic diversification and Saudi Arabia’s model of developing its oil-based petrochemical industry are two widely cited examples of diversification success stories. And increasingly, the oil wealth of GCC and other oil exporters is reaching other countries in the region and beyond through FDI and remittances. GCC oil exporters improved their competitiveness as they implemented successful prudent macroeconomic and The Post 2001 “Home-Bias” Effect: The oil structural reforms. Real exchange rate boom in 2000s also triggered an increase in overvaluation became much less of a problem investment flows from the GCC and other in most GCC countries as they opened labor developing oil exporters into the oil importing and goods markets and blocked two important countries in the region. The magnitude of these channels through which Dutch disease flows was boosted perhaps because of an operates. increase in “home-bias,” or preference to retain However, the labor-abundant developing oil oil wealth in the region after 2001 on concerns exporters have been far less successful than the about potential restrictions on MENA labor-importing GCC countries in dealing with investments in other parts of the world.5 Much some of the pitfalls of oil dependence. These of this investment has gone into the countries suffer from weak institutions, nontradable sectors (Figure 3), notably real conflicts, macroeconomic volatility, and Dutch estate, and has been less likely to help firms disease. The latter has led to increases in the boost productivity or get access to new prices of non-tradables relative to tradables, technologies and integrate into global making the tradable sector less competitive production networks than investment derived internationally and exacerbating the from a more diverse set of countries. Indeed, dependence on oil exports. Between 1975 and net exports contributed little to growth in 2008 oil exports grew in importance as a source MENA in the past decade (Figure 4), while the of export revenue and growth in the contribution of gross exports was comparable developing oil exporting countries (Figure 2). in size to the contribution of the large public By contrast, during the same period oil exports sector. declined in importance in the GCC countries. Real exchange rate overvaluation remains a problem in most developing oil exporters. This is unfortunate because these countries are labor abundant and need rapid job growth to accommodate the second fastest growing labor force in the world after Sub-Saharan Africa. As the oil industry is not labor intensive, 5 See for detail Noland and Pack (2008). March 2011 · Number 38· 3 Figure 4 - Contribution of Demand Contact MNA K&L: Components to Growth in MENA6 Emmanuel Mbi, Director, MNA Operational 14.0 Core Services Unit 12.0 Regional Quick Notes Team: 10.0 Net Exports Omer Karasapan, Roby Fields, and Hafed Al-Ghwell 8.0 Tel #: (202) 473 8177 Gross Domestic MENA K&L Quick Notes: 6.0 Investment http://www.worldbank.org/mena-quicknotes 4.0 Government The MNA Quick Notes are intended to summarize Consumption lessons learned from MNA and other Bank 2.0 Knowledge and Learning activities. The Notes do 0.0 Private Consumption not necessarily reflect the views of the World Bank, -2.0 its board or its member countries. GDP growth, % -4.0 -6.0 -8.0 . 6 Source: Staff estimates based on World Bank data and projections for 2010 and 2011. March 2011 · Number 38· 4