Global Policy Forum

By Emad Mekay

Middle Eastern governments need to adopt extensive free market economic policies, liberalise their business and trade and chop official spending if they want to spur growth and create jobs for their burgeoning populations, say the International Monetary Fund and the World Bank.

That dose of liberal economic advice comes in a series of reports and conferences just ahead of the annual meetings of the IMF and the World Bank in the Arab desert city-state of Dubai, Sep. 19-22, the first time for the meetings in an Arab nation. Among other topics, the gathering is expected to focus on the economy of Iraq, cutting funding for terrorism and ''economic reform'' in some of the 24 countries in the Middle East and North Africa region, known as MENA.

The region began receiving increased attention from international institutions, including Western-dominated financial bodies like the Fund and the Bank, after the Sep. 11, 2001 attacks on U.S. landmarks by attackers who came from the region. Interest also increased as the United States invaded Iraq, a major Arab country with the world's second largest oil reserves, earlier this year. The need for economic analysis on the area grew urgently as Washington, which holds major influence in those institutions, adopted the view that poverty and lack of democracy in the region -- whose countries are ruled by many regimes backed by the United States -- are among the primary reasons for terrorism emerging there.

Iraq will send an official delegation to the meetings that begin Friday for the first time in years. Planning Minister Mahdi al-Hafez has reportedly said that the occupied country is moving toward opening up its economy to the outside world. But some independent analysts say the IMF and World Bank, often blamed for forcing liberal economic policies on unprepared developing markets, may be moving too fast in the area. Middle Eastern countries might not be ready for intensive economic liberalisation and capital inflows because they lack efficient institutions, says Amer Bisat, senior economist and portfolio manager with UBS, Switzerland's leading investment bank. ''Institutions, broadly defined, remain weak and may be well overwhelmed by any surge of international capital,'' he said during a recent panel discussion at the IMF. ''The domestic financial sector is probably ill-prepared for intermediate large surges of flows.'' He suggested that domestic reform should precede ''the more risky one of deepening international integration''. ''More is needed in terms of strengthening regulation, development of money markets, building non-bank financial institutions, developing a modern legal framework, including for bankruptcies, strengthening risk controls, and perhaps most importantly, weaning the (financial) sector from being excessively dependent on the public sector, including lending to it,'' Bisat added.

Despite the warning, the World Bank last week said that the Arab world's feeble economic growth could only be spurred by more liberalisation, combined with more transparent and accountable regimes -- a view echoed a few days later by the bank's sister institution, the IMF. The region, added the Bank, ranks at the bottom of the index of overall quality of governance when compared to countries with similar incomes and characteristics. Its report said average annual per capita economic growth for the region has been at 0.9 percent since 1980 -- even lower than sub-Saharan Africa. Economists from the Washington-based pro-free market powerhouse went as far as to warn of ''a state of crisis'' in the region. ''I think there may be, you know, the roots of some kind of crisis that is brewing in the region and that we have to be aware of,'' said Mustapha Kamel Nabli, chief economist and director of Middle East and North Africa at the bank. ''When you look at the oil rent per capita, it continues to fall on average in the region,'' he told the panel. "'When you look at remittances per capita, they continue to fall. When you look at aid per capita, it continues to fall ... So the resources that were available to sustain the old model... are being eroded increasingly.''

But in its report -- which came as part of the World Economic Outlook, the IMF's high-profile annual commentary on the direction of the global economy -- the Fund attributed the region's poor economic performance to big government, the poor quality of institutions (including political instability), misalignment of the real exchange rate, and barriers to trade -- the same reasons it often points to elsewhere in the developing world.

But the Fund's analytical report distinguished between oil-exporting countries, like Saudi Arabia and Kuwait, and those that do not export the commodity -- Tunisia, Jordan, Morocco and Egypt. The region's poor growth reflects mainly declining or low growth rates in oil-exporting countries but positive, yet feeble, growth in non-oil-exporting countries generally, it said. Yet growth in the non-oil-exporting nations was not sufficient to create enough new jobs to absorb the rapid expansion of the labour force, resulting in increased unemployment, it added. ''In those economies that derive a large share of their income from oil, the large size of the government sector has been the overriding problem, stifling private sector growth and making it hard to diversify production,'' said Kenneth Rogoff, director of the IMF's research department, in a conference call. ''In countries where oil revenue is significant but not dominant, poor institutions and corruption are the biggest single hindrance to growth,'' he added.

Between 1980 and 2001, real per capita gross domestic product (GDP) in the MENA region stagnated, compared to average annual growth of 6.3 percent in East Asia and 1.3 percent in all other developing countries. The Fund and the Bank advised the MENA countries to improve the quality of their bureaucracies and the strength of the rule of law, in which these countries score low relative to other developing regions. Oil-exporting countries would need to reduce the size of government consumption to the average level observed in East Asian countries, added the IMF.

In countries like Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia, poor institutional quality -- code words for rampant corruption and mismanagement -- combined with large governments have impeded growth. ''A key policy implication is thus to improve institutional quality, especially with regard to the control of corruption, the strength of the rule of law, and the quality of the bureaucracy for which these countries had relatively low scores,'' said the IMF. Both institutions also blamed political tensions and conflicts in the region for the slowdown in the growth of oil and other exports.

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