Can economic stagnation in the Middle East be reversed?

February 25, 2002

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Only if countries in the region tackle domestic policies that hinder investment and progress, concludes new study from the Council on Foreign Relations.

February 21 – Middle Eastern and North African (MENA) countries will have to do a lot more than lower tariffs and reduce inner-regional trade barriers to generate sustained economic growth, says a Council on Foreign Relations report by leading experts, “Harnessing Trade for Development and Growth in the Middle East.”

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MENA countries must also dramatically reduce the role of the state in their economies and cut bureaucratic red-tape and corruption. Without major moves like these, both at the border and behind the border, nations of this region will fall even further behind the rest of the world, concluded the study, chaired by Peter Sutherland, former head of GATT and the WTO.

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Thirty to forty years ago a number of key MENA nations were on an economic par with Asian countries. According to the Council’s report, in the 1950s per capita income in Egypt was similar to South Korea, whereas Egypt’s per capita income today is less than 20 percent of South Korea’s. Saudi Arabia had a higher gross domestic product than Taiwan in the 1950s; today it is about 50 percent of Taiwan’s.

MENA economies also must move quickly to reform their service sectors, such as banking, if they are to generate outside investment. This is part of the report’s emphasis on the need for MENA countries not only to liberalize trade, but to pursue a regulatory agenda that encourages genuine economic competition.

“Greater openness to trade and domestic economic reforms can…reinforce each other to generate faster growth, lower unemployment, and high standards of living,” writes Sutherland, who is currently Chairman of Goldman Sachs International and BP, p.l.c. “The fundamental problems of these economies (are) essentially domestic and related to the need for new policies to govern the internal economy,” adds Sutherland.

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The report also contains an economic multi-country business survey conducted specifically for this study. Remarkably, 20% of the respondents said corruption payments averaged between 2% and 9% of the value of traded goods. The survey gives weight to long-held suspicions that corrupt practices and other economic inefficiencies and bottle-necks undermine prospects for outside investment and economic growth.

Underlying the analysis in this report is the belief that lack of economic prospects and poverty in the everyday life of people in the MENA region contributes to extremism, and perhaps even to terrorism. The report urges that real efforts at economic reform be made, in terms of any long-term policy toward the region and by the states of the region themselves.

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This Council report was authored by two noted economists, Bernard Hoekman of the World Bank and Patrick Messerlin of the Paris-based Institut d’Etudes Politiques. The project was directed by Council Senior Fellow Henry Siegman, who also directs the Council’s U.S./Middle East Project. The Council will soon release an Arabic version of this report.


HARNESSING TRADE FOR DEVELOPMENT AND GROWTH IN THE MIDDLE EAST

A Council on Foreign Relations Paper

Factsheet – February 2002

The Middle East is falling behind:

On par with other developing countries years ago, most states in the Middle East have been falling dramatically behind.

  • In the 1950’s, per capita income was on par in Egypt and South Korea – today the average Egyptian earns just one-fifth that of South Koreans.
  • For years, Saudi Arabia had a higher GDP than Taiwan – today its GDP is half that of Taiwan.
  • In the 1950’s, per capita GDP was on par in Morocco and Malaysia – today Morocco stands at just one-third Malaysia’s rate.

Business survey reveals obstacles to growth:

A survey of 250 businesses conducted in 2001 for this project revealed a number of startling findings:

  • Corruption – 20% of respondents acknowledged “payments” of between 2-9% of the value of traded goods, 3.5% said they made “payments” exceeding 10% of value.
  • While tariffs were ranked as the greatest impediment to trade, non-tariff barriers (NTBs) remain significant, averaging 10% of the value of traded goods.
  • The West Bank and Gaza were cited as the most problematic places to do business, Syria ranked second.

Privatization needs to accelerate:

  • In Egypt, 70% of commercial bank assets are held by just four government-owned banks.
  • In recent years the Middle East has generated only 3% of global privatization receipts.

Capital markets are weak:

  • Capital markets remain underdeveloped – of the 1000 companies listed on the Cairo and Alexandria exchanges, 800 are not traded.

Contact: Lisa Shields, Director of Communications, 212-434-9888

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