Middle East and North Africa Economic Developments and Prospects, Jan 2011 by World Bank Publications

Sustaining the Recovery and Looking Beyond

Middle East and North Africa Region Economic Developments & Prospects, January 2011

Sustaining the Recovery and Looking Beyond

Middle East and North Africa Region Economic Developments & Prospects, January 2011

Sustaining the Recovery and Looking Beyond ISBN 978-0-8213-9889-0

the world bank

Middle East and North Africa Region Economic Developments & Prospects, January 2011

Sustaining the Recovery and Looking Beyond

the world bank

© 2011 The International Bank for Reconstruction and Development/The World Bank 1818H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet www.worldbank.org E-mail feedback@worldbank.org All rights reserved. This volume is a product of the Chief Economist’s Office of the Middle East and North Africa Region. The findings, interpretations, and conclusions expressed herein are those of the author (s) and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

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Table of Contents Acknowledgements...................................................................................................................................ix Foreword...................................................................................................................................................xi Abbreviations......................................................................................................................................... xiii Executive Summary................................................................................................................................xvii Part I: Sustaining the recovery................................................................................................................. 1 Chapter 1. MENA is recovering from the crisis, but slowly................................................................ 3 MENA’s recovery has been driven by the global rebound and, to varying degrees, by domestic stimulus.............................................................................................4 MENA labor markets remained relatively unscathed by the crisis but Impacts Differed between countries.......................................................................................................8 Job losses in the GCC countries were steep but affected mainly expatriate workers..............................................................................................................................9 The impact of the crisis on oil importers’ labor markets was mild..........................................10 Chapter 2. MENA’s recovery is proceeding in an uncertain global economic Context................... 13 Financial market volatility reflects the unusually uncertain global outlook..............................14 The outlook for GCC countries is tied to the outlook for the global economy...........................17 Most developing oil exporters are vulnerable to oil price shocks and volatility........................25 Oil Importers’ Recovery Depends on Developments in Key Markets, Notably the EU...........................................................................................................................................31 Part II. Looking Beyond the Recovery and Beyond Oil.......................................................................... 37 Chapter 3. MENA remains uncomfortably dependent on the capital-intensive . Oil sector............................................................................................................................. 39 MENA’s non-oil exports of goods and services are below potential due to developing oil exporters’ underperformance................................................................................44 MENA has opened up and diversified its exports.............................................................................46 Services are an area of relative strength for MENA..........................................................................49 Market access is more of an issue for oil importers than oil exporters........................................54 MENA countries are less successful than other developing economies in penetrating foreign markets..............................................................................................................55

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Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Chapter 4. What are the major constraints to MENA’s nonoil exports?........................................... 61 Protection in developing MENA is high, largely due to NTMs.......................................................61 Tariff and nontariff protection rates vary widely across MENA....................................................62 Intra-regional trade stagnated and intra-industry trade remains limited................................65 MENA’s services sector is heavily protected......................................................................................69 Other factors hurting MENA firms’ competitiveness......................................................................75 Access to finance is limited, especially for small enterprises...................................................79 Governance issues impede reform implementation, raise uncertainty and lead to uneven playing field....................................................................................................82 Skill shortages in the GCC states are an acute but old problem..............................................83 A focus on technology is central to MENA’s efforts to improve competitiveness................................................................................................................................83 Chapter 5. What should countries do to improve nonoil export growth?....................................... 93 What did we learn? Summary of key findings............................................................................ 93 Are reforms implemented by countries addressing the major constraints?................................96 Statistical Annex.................................................................................................................................... 101 References.............................................................................................................................................. 117

List of Boxes Box 1: The Dubai World debt restructuring..............................................................................................................21 Box 2: How is the overall trade restrictiveness index calculated?........................................................................55 Box 3: Nontariff measures – definitions and state of knowledge..........................................................................63 Box 4: Intra-industry trade (IIT) index......................................................................................................................68 Box 5: Measuring restrictions affecting trade in services.......................................................................................72 Box 6: Tunisia’s national innovation system: achievements, challenges and vision.........................................90 List of Tables Table 1: Demand-side sources of growth in MENA..................................................................................................4 Table 2: MENA countries’ fiscal space in 2008.........................................................................................................6 Table 3: Debt restructurings in the GCC, 2008–2010............................................................................................24 Table 4. Impact of a wheat price hike in GCC oil exporters.................................................................................26 Table 5: MENA fiscal space in 2009..........................................................................................................................27 Table 6: Impact of a wheat price hike in developing oil exporters.....................................................................29 Table 7: Impact of a wheat price hike in oil importers..........................................................................................33 Table 8: Shares in world exports...............................................................................................................................50 Table 9: Contribution of intensive and extensive margins to nonoil merchandise growth, 1998–2008.....................................................................................................................................................51 Table 10: Decomposition of the intensive margin....................................................................................................52 Table 11: Index of export market penetration by country, 1995 and 2005 (percent).......................................58 Table 12: Bilateral index of export market penetration of EU and US markets.................................................60 Table 13: Bilateral index of export market penetration of MENA markets.........................................................64 Table 14: Technological Achievement Index.............................................................................................................84 Table 15: Index of Technological Adaptive Capacity...............................................................................................85 Table 16: Knowledge Economic Index.......................................................................................................................85 Table 17: Index of Technological Readiness.............................................................................................................85 Table 18: FDI has grown rapidly in MENA (% of GDP, net inflows)......................................................................86 Table 19: Number of resident patents filing per million people............................................................................89

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List of Figures Figure 1: Growth outlook (real GDP growth rates in percent)......................................................................... 3 Figure 2: Growth accelerations in 2010 (percentage point change relative to 2009)..................................... 3 Figure 3: MENA’s annual real growth performance before, during, and after the crisis................................. 5 Figure 4: Sources of external revenue, 2008..................................................................................................... 5 Figure 5: Global unemployment and real growth.............................................................................................. 9 Figure 6: Changes in number of unemployed, 2007–09 (in millions).............................................................. 9 Figure 7: Job cuts by country and sector in GCC, 2009.................................................................................. 10 Figure 8: The crisis did not affect aggregate employment in Egypt, Arab Rep............................................. 10 Figure 9: Crisis-related decline in real earnings and wages growth in Egypt, Arab Rep.............................. 11 Figure 10: Output and employment growth in Jordan...................................................................................... 11 Figure 11: Industrial production (percent difference from pre-crisis peak to June 2010)............................. 13 Figure 12: Industrial production, seasonally adjusted year-on-year real growth rates................................... 14 Figure 13: Output growth (real GDP, % change quarter-on-quarter).............................................................. 14 Figure 14: Credit growth (YoY, in percent)........................................................................................................ 15 Figure 15: Import growth, seasonally adjusted year-on-year in volumes......................................................... 16 Figure 16: Export growth, seasonally adjusted year-on-year basis in volumes............................................... 16 Figure 17: Sovereign 5-year CDS spreads (bps)............................................................................................... 17 Figure 18: Stock market reaction to events in Europe..................................................................................... 18 Figure 19: Risk perceptions reflecting developments in Europe...................................................................... 19 Figure 20: Crude oil average spot price (current US$ per barrel)................................................................... 20 Figure 21: MENA fiscal outlook (percent of GDP)............................................................................................ 20 Figure 22: MENA current account positions (percent of GDP)....................................................................... 21 Figure 23: Credit growth in GCC........................................................................................................................ 22 Figure 24: Spreads over LIBOR on Global (SKBI) and GCC sukuk (GSKI) and GCC conventional bonds (SKBI)...................................................................................................... 24 Figure 25: Exposure to EU markets for merchandise goods............................................................................ 25 Figure 26: US wheat prices................................................................................................................................. 26 Figure 27: Commodity volatility (standard deviations in monthly prices)...................................................... 28 Figure 28: Some potential poverty impacts of a wheat price spike.................................................................. 29 Figure 29: Non-oil merchandise exports to EU25............................................................................................. 30 Figure 30: Non-oil merchandise exports to Southern Euro Zone..................................................................... 31 Figure 31: Credit growth in oil importers.......................................................................................................... 34 Figure 32: Rodrik’s real undervaluation index for Lebanon.............................................................................. 34 Figure 33: Jordan has made a dramatic shift in export destinations................................................................ 35 Figure 34: Population and labor force growth (%, annual averages)............................................................... 40 Figure 35: Growth of per capita income by region (percent)........................................................................... 41 Figure 36: MENA’s oil dependence..................................................................................................................... 42 Figure 37: Current account surpluses and deficits (US$ billions).................................................................... 43 Figure 38: Contribution of demand components to growth in MENA.............................................................. 43 Figure 39: Export revenue by type of exports (% of GDP, 2008).................................................................... 44 Figure 40: MENA underperformed relative to its nonoil export potential in the period 1998–2007................................... 45 Figure 41: MENA countries’ nonoil export potential relative to that of other middle income countries for the period 1998–2007.................................................................................................. 46 Figure 42: Non-oil merchandise exports as a share of GDP (percent)............................................................ 47 Figure 43: Export concentration in developing regions.................................................................................... 47 Figure 44: MENA’s export structure, 2008......................................................................................................... 48 Figure 45: MENA’s non-oil merchandise export destinations........................................................................... 48 Figure 46: Import growth in major export markets........................................................................................... 49 Figure 47: Non-oil merchandise export growth by region for the period 1998–2008 (in value terms)..................................... 50

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 48: Nonoil merchandise export growth by market and industry, 1998–2008....................................... 53 Figure 49: Market access for MENA merchandise goods, overall trade restrictiveness index....................... 56 Figure 50: Market access for nonagricultural products, overall trade restrictiveness index (2008).............................................................................................................................................................. 57 Figure 51: Tariff protection in China’s market (2008)...................................................................................... 59 Figure 52: Overall trade restrictiveness by market and product (2008)......................................................... 62 Figure 53: Estimated NTM-related protection rates in MENA......................................................................... 63 Figure 54: Tariff and nontariff barriers (NTBs) by MENA country.................................................................. 64 Figure 55: Protection faced by different regions and country groups in MENA............................................. 65 Figure 56: Intra-industry Trade index by region............................................................................................... 67 Figure 57: Intra-Regional, Intra-Industry Trade index by region..................................................................... 68 Figure 58: Services value-added (% of GDP).................................................................................................... 70 Figure 59: Size of service sector (% of GDP) and income per capita in MENA.............................................. 71 Figure 60: Restrictiveness of services trade policies and share of services in GDP........................................ 71 Figure 61: Global Competitiveness Index (GCI) ranking by region, 2010....................................................... 75 Figure 62: Leading constraints to export-oriented firms in MENA region (weighted average of share of firms ranking a constraint as “major” or “severe”)........................................................ 76 Figure 63: Leading constraints to export-oriented firms in GCC oil exporting countries (share of firms ranking a constraint as “major” or “severe”).......................................................... 76 Figure 64: Leading constraints to export-oriented firms in developing oil exporting countries (share of firms ranking a constraint as “major” or “severe”).......................................................... 77 Figure 65: Leading constraints to export-oriented firms in oil importing countries (share of firms ranking a constraint as “major” or “severe”).......................................................... 77 Figure 66: GCC’s Global Competitiveness Index rankings by pillar.................................................................. 78 Figure 67: Developing oil exporters’ Global Competitiveness Index rankings by pillar.................................. 78 Figure 68: Oil importers’ Global Competitiveness Index rankings by pillar..................................................... 79 Figure 69: Regional ranking of ease of getting credit........................................................................................ 80 Figure 70: Gross domestic saving, 2007............................................................................................................. 80 Figure 71: MENA countries’ FDI potential conditioned on openness, natural resources and population for the period 1998-2007 (actual to predicted net FDI inflows as % of GDP)...................................................................................................................................... 87 Figure 72: Structure of FDI, cumulative 2000–07 (percent of FDI)................................................................ 87 Figure 73: Technological content of exports by region..................................................................................... 88 Figure 74: Research and development expenditure (% of GDP)..................................................................... 89 Figure 75: Research and development expenditure in MENA (2005)............................................................. 90 List of Appendix Tables Table A1: Macroeconomic outlook...........................................................................................................................102 Table A2: Trade restrictiveness in East Asia excluding China, 2008 (in percent)..........................................103 Table A3: Trade restrictiveness in India, 2008 (in percent)...............................................................................104 Table A4: Trade restrictiveness in South Asia other than India, 2008 (in percent).......................................105 Table A5: Trade restrictiveness in LAC, 2008 (in percent).................................................................................106 Table A6: Trade restrictiveness in SSA, 2008 (in percent).................................................................................107 Table A7: Trade restrictiveness in ECA, 2008 (in percent).................................................................................108 Table A8: Trade restrictiveness in MENA, 2008 (in percent).............................................................................109 Table A9: Trade restrictiveness in GCC oil exporters, 2008 (in percent).........................................................110 Table A10: Trade restrictiveness in developing oil exporters, 2008 (in percent).............................................111 Table A11: Trade restrictiveness in oil importers, 2008 (in percent).................................................................112 Table A12: Trade restrictiveness in oil importers with GCC links, 2008 (in percent).....................................113

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Table A13: Trade restrictiveness in oil importers with EU links, 2008 (in percent)........................................114 Table A14: Trade restrictiveness in HICs, 2008 (in percent)................................................................................115 Table A15: Trade restrictiveness in China, 2008 (in percent)..............................................................................116

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Acknowledgements The Middle East and North Africa Economic Developments and Prospects report was prepared by Elena Ianchovichina (principal author) and a team comprising Lili Mottaghi, Kevin Carey, Julien Gourdon, Christina Wood, Hiau Looi Kee, Daniela Marotta, Ndiame Diop, Leonardo Garrido, Caroline Freund, Maros Ivanic, Alberto Behar, Julian Lampietti, Cosimo Pancaro, Subika Farazi, Komlan Kounetsron, Augusto Clavijo, Michelle Battat, and Yasmine Rouai. Countryspecific data were provided by country economists and analysts working in the World Bankâ&#x20AC;&#x2122;s Middle East and North Africa Region. The report was prepared under the guidance of Shamshad Akhtar (Regional Vice President, Middle East and North Africa Region). Valuable comments were provided by Farrukh Iqbal (Country Di-

rector, Middle East and North Africa), Ritva Reinikka (former Sector Director, Social and Economic Development Group, Middle East and North Africa Region) and three peer reviewers: Bernard Hoekman (Sector Director, International Trade Department, Poverty Reduction and Economic Management Network), Juan Zalduendo (Lead Economist, Office of the Chief Economist, Europe and Central Asia) and Punam Chuhan (Lead Economist, Office of the Chief Economist, Sub-Saharan Africa). We also appreciate useful comments on various topics from Ingo Borchert, Elliot Riordan, Andrew Burns, Najy Benhanssine, Andrew Stone, and Jamus Lim. Excellent assistance with administrative arrangements was provided by Isabelle Chaal-Dabi.

Foreword The impact of the global financial and economic crisis on the Middle East and North Africa region was relatively mild. Lack of integration and a large public sector helped insulate the region to some extent, but now these and other factors are slowing down the speed of its economic recovery. The report Middle East and North Africa: Sustaining the Recovery and Looking Beyond examines the major factors threatening the recovery and those that obstruct long-term growthâ&#x20AC;&#x201D;especially non-oil export growth. The report focuses on non-oil export growth as despite some progress in the past decade net exports contributed little to regional growth, and nonoil exports of goods and services remain below potential for the region as a whole. The post-crisis period provides an opportunity for the countries in the Middle East and North Africa to re-evaluate their trade and growth strategies in an attempt to increase possibilities for accelerated development and employment creation. The region is already undergoing multiple transformations as countries launched spadework to catalyze industry diversification by innovating and adopting new technologies; energy diversification by embracing aggressive renewable energy exploitation plans; and export diversification by expanding markets and the range of exported products and services. The shift towards the fastgrowing markets of Asia has been particularly remarkable, and the services sector has emerged as an area of relative strength and a key source of export revenue and future potential growth. Notwithstanding these trends, the growth response in developing MENA since 2000 has

been modest in per capita terms compared to other developing regions, and the region has not been able to make substantial progress in reducing persistently high unemployment ratesâ&#x20AC;&#x201D;especially among youth. The report underscores that while there are risks to the short-term economic growth outlook, including those stemming from debt problems and fiscal austerity measures in key markets such as the EU; weak credit recovery in the GCC; and oil price volatility, the region faces much more serious long-term growth challenges. MENA continues to depend on the capitalintensive oil sector which has been and remains the primary vehicle for revenue and wealth creation in the region. Oil dependence however brings a number of challenges, and the laborabundant developing oil exporters have been far less successful than the GCC economies in dealing with the pitfalls of oil dependence. Developing oil exporters have been suffering from weak institutions, conflicts, macroeconomic volatility, and Dutch disease which has spread beyond the oil exporters and become a threat to some oil importers receiving large remittances and finance from the GCC markets. While the outlook for oil remains promising in the medium-term due to strong demand for oil in Asia and other fast-growing markets, counting on oil will not generate inclusive growth in the region. Thus, the report pays special attention to issues related to competitiveness and nonoil sources of growth. Although the report takes a differentiated look at the problems facing MENA countries, common messages can be distilled for the region

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

as a whole. The report emphasizes three major areas in need of policy makers’ attention. First, it underscores the problems related to restrictive trade policies, particularly those affecting trade in services. Such policies distort incentives, discourage foreign direct investment, and limit MENA’s integration within the region and with the rest of the world. Second, the report confirms that governance issues linked to discretion in applying rules and regulations are a serious obstacle to firms’ growth, including the growth of export-oriented companies. These issues have led to stagnation, inefficiencies and privileged access for some, but limited access to services and information for micro and small firms. Third, the report finds that inefficient and inflexible labor markets and scarcity of skills, innovation and technological capabilities hurt firms’ productivity, limit employment creation and the technological content of MENA’s exports. MENA governments are implementing reforms addressing some of the constraints identified in this report, but in many countries in the region a lot more needs to be accomplished as wide policy gaps remain in some areas. In the GCC, more needs to be done to address the issue

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of skill shortages in a comprehensive way, and to understand the nature and extent to which regulations restrict trade and FDI in the services sector. In developing MENA, countries need to intensify efforts to strengthen institutions, improve information gathering and dissemination and reform implementation. A priority should be to understand better the nature and extent to which nontariff barriers and regulations restrict trade in non-oil goods and services. Developing MENA countries should press on with financial market development—especially improving financial infrastructure, while further strengthening macroeconomic management, addressing inefficiencies in labor and goods markets, and facilitating innovation activities, knowledge and technological acquisition. Addressing the issues identified in this report would require resources, expertise and a sustained government effort. The World Bank is supporting MENA client counties as they press on with reforms to remove the major roadblocks to inclusive growth.

Shamshad Akhtar Regional Vice President MENA Region

Abbreviations and Acronyms AVE

Ad-valorem Equivalent

Bbl Barrels BOP Balance of Payments BP/BPS Basis points BRICs Brazil, Russia, India, and China CAB Current Account Balance CDS Credit Default Swaps CPI Consumer Price Index DECPG Development Economics Prospects Group DEV Developing Countries DFSF Dubai Financial Support Fund DIFC Dubai International Financial Center DW Dubai World EAS/EAP

East Asia and Pacific

ECA

Europe and Central Asia

EMBI

Emerging Market Bond Index

European Union

FDI

Foreign Direct Investment

FTA

Free Trade Agreement

G3 US, EU and Japan GCC Gulf Cooperation Council GCI Global Competitiveness Index GDP Gross Domestic Product GEM Brazil, China, India and Indonesia HIC High Income Countries HS6 Harmonized Commodity Description and Coding System, 6-digit level ICT

Information and Communication Technologies

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Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

IIT

Intra-industry Trade

ILO

International Labor Organization

IMF

International Monetary Fund

KEI

Knowledge Economic Index

LAC Latin America and the Caribbean LNG Liquefied Natural Gas LPI Logistic Performance Index MDGs

Millennium Development Goals

MENA/MNA Middle East and North Africa MFN

Most Favored Nation

MIC

Middle Income Countries

NTB

Non-tariff Barrier

NTM

Non-tariff Measure

OPEC Organization of the Petroleum Exporting Countries PAFTA Pan-Arab Free Trade Area PIP Public Investment Plan PPP Public Private Partnership PTA Preferential Trading Arrangement R&D Research and Development RoW Rest of World SA South Asia SAAR Seasonally Adjusted Annual Rate SEZ Southern Euro Zone SME Small Medium Enterprises SPS Sanitary and Phyto-sanitary measures SSA Sub-Saharan Africa STRI Services Trade Restrictiveness Indices SWF Sovereign Wealth Funds TAC

Technological Adaptive Capacity

TAI

Technological Achievement Index

US United States of America UAE United Arab Emirates UK United Kingdom UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme UNIDO United Nations Industrial Development Organization USDA United States Department of Agriculture

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Abbreviations and Acronyms

VAT Value-Added Tax WDI World Development Indicators WEF World Economic Forum WIPO World Intellectual Property Organization WLD World WTO World Trade Organization YoY

Year on Year

Executive Summary Economic activity has rebounded in most countries of the Middle East and North Africa (MENA). Growth is expected to average 4 percent in 2010 and to reach 4.8 percent in 2011 and 2012. The recovery has been driven by the global economic rebound and, to varying degrees, by domestic stimulus. Industrial production, which in MENA is dominated by oil, has nearly reached its pre-crisis peak, largely due to the strong recovery in emerging markets, especially Asia. However, the upturn weakened in the summer of 2010 as global growth slowed down, and serious concerns emerged about the sustainability of the global recovery. In response, many MENA governments have continued to stimulate their economies in 2010, and even those that did not use any type of fiscal stimulus in 2009 have started implementing fiscal measures in 2010. MENA’s economic recovery has not been spectacular. With the exception of the Gulf Cooperation Council (GCC) economies, the region was affected much less than other regions by the global financial and economic crisis. Lack of integration and a large public sector helped soften the impact of the crisis, but now these and other factors are limiting the pace of expansion on the upside, though these factors are present to a different extent in the three major MENA groups of countries—the GCC oil exporters, the developing oil exporters and the oil importers. Part I of the report examines the short-term growth prospects of the MENA countries and the risks to the outlook. Part II discusses long-term development obstacles—particularly those related to non-oil export growth.

Composition of country groupings GCC oil exporters: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates (UAE) Developing oil exporters: Algeria, Islamic Republic of Iran, Iraq, Libya, Syrian Arab Republic, and Yemen Oil importers include countries with strong GCC links (Djibouti, Jordan, and Lebanon) and those with strong EU links (the Arab Republic of Egypt, Morocco and Tunisia). For ease of exposition and analysis, this country classification is used consistently throughout the report. Developing MENA is used to refer to the group of developing oil exporters and oil importers.

Part I: Sustaining the recovery The well-integrated GCC countries were hardest hit by the global economic and financial crisis, but they recovered quickly as demand for oil picked up driven by the rapid recovery in emerging markets, and their financial sectors stabilized. In 2010, economic growth of the GCC group is projected to reach 4.2 percent—compared to half a percent growth in 2009, and the expectation is that growth will reach 5 percent in 2011 before declining to 4.8 percent in 2012. The oil price rebound from the lows in 2009 has allowed GCC governments to maintain expansionary fiscal policies in 2010, while avoiding deterioration in their fiscal and current account positions. All GCC governments continued to stimulate their

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Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

economies as the global economy started slowing down in the second quarter of 2010. The stimulus has supported private consumption, and because of its large capital spending component is expected to have facilitated these countries’ economic diversification activities. The short-term growth outlook for the GCC economies depends on developments in the rest of the world, and on the extent to which they affect oil markets. Global growth is expected to weaken somewhat in 2011, before picking up a bit in 2012. Oil prices moved above $85 per barrel on a depreciating dollar, rising seasonal demand and a tight global distillate market. Support for price increases based on demand and supply factors however is expected to be weak due to robust non-OPEC production, high inventories in the US, and ample spare capacity—most of it concentrated in Saudi Arabia. However, unanticipated shocks to supply and other factors including price speculation might lead to price spikes. Tight credit conditions, particularly in interbank markets, pose another threat to the economic recovery in the GCC countries. With the exception of Qatar, credit growth to the private sector remains anemic due to the uncertainty arising from ongoing debt restructuring, and the effect of the Dubai World (DW) events. Significant government support has enabled the market for large project and corporate finance to continue functioning, despite heightened risk aversion and uncertainty. When the GCC governments have not been directly present in bond markets, yields have been high. Given the small export exposure to the EU, the debt problems in Europe are unlikely to alter significantly the growth prospects of the GCC countries unless these problems spread beyond Europe and affect global demand for oil. The spike in wheat prices—which nearly doubled in August 2010 from their lows in June 2010—has caught the GCC countries in the early stages of implementing food security strategies, but the impact of the price spike is expected to be small, as all GCC countries have fiscal space to respond to increases in the food import bill. Nevertheless, the recent food price increases coupled with a

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weakening dollar might stoke inflationary pressures and be a cause for concern. The GCC countries have fiscal space to cushion the impact of a potential negative termsof-trade shock but the systematic reliance on government spending poses a medium to longterm challenge. Some of the fiscal expansion will be self-terminating when projects get completed, although the medium-term burden of continued public spending growth could increase the cost of capital for the private sector as public saving declines. It is also unclear to what extent private sector growth would pick up when public sector spending declines. In the United Arab Emirates, there is a huge overhang of partly completed property developments, and the property price slump shows no signs of easing. In Qatar, the outlook is clouded by the oversupplied real estate market and weak LNG market. Developing oil exporters such as Algeria, the Islamic Republic of Iran, Iraq, Libya, Syria, and the Republic of Yemen felt the impact of the crisis, and later the recovery largely through the oil channel as their financial sectors are mostly state-dominated, and not linked to global financial markets. Real growth of the developing oil exporters is projected to average 2.9 percent in 2010—up by less than a percentage point from growth in 2009, and is expected to reach 4.2 percent in 2011 and 3.9 percent in 2012. While stimulus has helped the recovery, the rebound has been weak as quite a few developing oil exporters faced production-related problems limiting their oil output. In addition, Algeria backtracked in its reform efforts by passing laws that increased protection and the discriminatory treatment of firms. Developing oil exporters, especially Iraq and the Republic of Yemen, are vulnerable to a sharp decline in oil prices as they have much more limited fiscal space than the GCC oil exporters. Signaling the increasing use of oil as a mainstream asset and OPEC’s difficulties with supply management, oil price volatility has grown over time and is now much higher than volatility of other commodity prices. This implies that prudent macroeconomic and oil revenue management have become more challenging and more

Executive Summary

important than ever before. Strategies aimed at diversifying the economic base and scaling up non-oil sources of growth will also help reduce the vulnerability of these countries to excessive terms-of-trade volatility. Some developing oil exporters, most notably the Republic of Yemen, are also vulnerable to a food price shock. The cuts in estimated wheat global production between May and August are projected to have raised domestic wheat prices in the Republic of Yemen by 26 percent. This price increase is likely to have raised poverty in the Republic of Yemen by slightly more than 0.3 percentage points, which represents an increase in the number of the poor by an estimated 80,000 people. Iraq also appears to be vulnerable although slightly less than the Republic of Yemen due to sourcing a smaller share of its wheat consumption from abroad. Oil importers such as Egypt, Morocco, Tunisia, Lebanon, Jordan and Djibouti weathered the effects of the global economic and financial crisis better than other MENA countries, but developments in Europe are expected to have dampened growth in 2010, especially of oil importers with strong EU links. In 2010, real economic growth of oil importers is expected to average 4.9 percent and is unlikely to surpass growth in 2009. Assuming steady progress with structural reforms, oil importers’ growth after 2010 is expected to surpass pre-crisis levels in the 2000s, and average 5.3 percent in 2011 and 5.7 percent in 2012. Oil importers with EU links are likely to face some repercussions of the expected significant fiscal contraction in the heavily-indebted, highincome European countries (EU-5), and more broadly, the Euro zone. The effects would come through the balance of payments, reflecting the impacts on trade, remittances, and FDI flows. Oil importers with EU links have the greatest trade exposure to the highly-indebted countries in the Southern Euro Zone (SEZ), and the second highest trade exposure to the EU25, after ECA. In addition, two of the oil importers with EU links— Morocco and Tunisia—are much more dependent on the EU for their remittance flows than Egypt

and the rest of the oil importers. How hard these countries are hit depends on the extent of the fiscal contraction in the EU, and how quickly MENA countries can shift sales to markets outside the EU. The impact on the oil importers with GCC links is expected to be marginal. With the recent developments in agricultural markets, the risk of a food price hike has become a threat to all oil importers. Egypt and Morocco have the largest estimated monthly imports of wheat, and therefore face the largest increases in the import bill as a percent of monthly foreign reserves. Stimulus has helped oil importers weather the crisis and support the recovery, but many of them are now squeezed for fiscal space which represents a key source of long-term vulnerability.

Part II. Looking beyond the recovery and beyond oil In the last ten years MENA’s growth accelerated relative to the previous decade in response to intensified efforts in many countries to bolster their private sectors and diversify their sources of growth. The growth response in developing MENA since 2000 however has been modest in per capita terms compared to other developing regions. The capital-intensive oil sector has been and remains the primary vehicle for revenue and wealth creation for the oil exporters in MENA, while the spillover effects to the oil importing countries in the region and beyond have been significant. With the benefits from oil, however, come serious risks as MENA remains uncomfortably dependent on oil. Some of the risks of this dependence are well-understood and include macroeconomic volatility, Dutch disease, environmental degradation, political instability and conflict, and institutional weakness and corruption. Other risks are less obvious and have to do with a mismatch between the economy’s endowment base and its endowment use, and in the future, the threat of viable alternatives to oil. Some MENA oil exporters have been taking steps to minimize the potential risks and enhance the potential benefits of oil-driven growth. The GCC

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Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

countries, in particular, have followed prudent macroeconomic policies, opened up their markets for goods and labor, saved their oil revenues and used them strategically to manage volatility and finance infrastructure, technology and education investments. However, the labor-abundant developing oil exporters have been far less successful than the GCC countries in dealing with some of the pitfalls of oil dependence. These countries suffer from weak institutions, conflicts, macroeconomic volatility, and Dutch disease. The latter has led to increases in the prices of nontradeables relative to tradeables, making the nonoil tradeable sector less competitive internationally, and exacerbating the dependence on capital-intensive oil exports. Dutch disease has also become a threat to some oil importers receiving large remittances and finance from the GCC markets. And while the outlook for oil remains promising in the medium term due to strong demand for oil in Asia and other fast-growing markets, counting on oil will not solve the problem of fueling inclusive growth in the region in coming years. As the oil industry is capital-intensive, continued reliance on oil will not address developing countries’ major issue—employment creation, and will only worsen the current situation. MENA needs to expand exports of nonoil goods and services in order to spur job creation for the fastest-growing labor force in the middle-income group of countries. Despite some progress, in the past decade net exports contributed little to regional growth, and nonoil exports of goods and services remain below potential. However, the situation differs significantly for the GCC oil exporters and the MENA oil importers whose nonoil exports of goods and services are at potential, and the developing oil exporters whose nonoil exports are only slightly more than a fifth of expected levels. How did nonoil exports evolve during the past decade? Do MENA countries face special market access issues? What are the major obstacles to MENA’s nonoil export growth? Are reforms implemented by countries addressing the major constraints? The answers to these questions vary by country, although common messages emerge for the region as a whole.

• Restrictive trade policies—especially those in services—distort incentives, discourage foreign direct investment, and limit MENA’s integration within the region and with the world economy. • Governance issues linked to discretion in applying rules and regulations have led to stagnation, inefficiencies, and privileged access for some, but limited access to services, including finance, resources and information for micro and small enterprises. • Inefficient and inflexible labor markets and scarcity of skills, innovation and technological capabilities hurt firms’ productivity, limit employment creation and the technological content of MENA’s exports.

How did nonoil exports evolve during the past decade? To its credit, pre-crisis MENA has made progress in achieving greater openness, diversifying its exports and export destinations. Countries adopted new technologies and aggressive renewable energy exploitation plans to catalyze industry and energy diversification. Importantly, MENA made a major shift in the destinations for its nonoil goods towards fast-growing Asia and away from slow-growing EU—a move that has been a lot less dramatic, but nevertheless substantial for the oil importers. The shift towards Asia and fast-growing BRICs is good news for MENA as South-South trade is expected to play a much more prominent role in the new post-crisis world trade order. Nonetheless, the importance of various markets differs by country group. Europe remains the most important export destination for MENA’s nonoil products and services. This reflects largely the fact that the EU receives around half of oil importers’ exports. Nonoil exports destined to other MENA countries represents the largest share of GCC’s total nonoil exports, while for developing oil exporters Asia has become the most important nonoil export destination. The services sector appears to be an area of relative strength for MENA and a key source of export revenue and future potential growth. MENA expanded its share in the global nonoil

Executive Summary

export market largely due to an increase in exports of services. Only one other region in the world—South Asia—generates a higher share of output than MENA by exporting services. And the importance of services as a source of export growth is much greater for MENA’s oil importing countries than any other region in the world. By contrast, merchandise exports of other developing countries grew much faster than MENA’s suggesting that MENA firms producing nonoil merchandise goods are not as competitive as some of their foreign counterparts. Regional nonoil merchandise export growth was driven more by an expansion of existing products to new markets and new products to existing markets than by an increase of existing exports to existing markets. The latter is also indicative of substantial pressures from competition with other emerging countries’ exports. Oil exporters expanded exports of industrial products, notably in Asia, while oil importers were much more successful than oil exporters in expanding exports of parts and components to the EU and Asia, and capital goods to the EU. However, export growth linked to global production sharing arrangements was weak relative to export growth of industrial, consumer and food products—especially to the EU. Growth at the extensive margin is evidence of the shift toward rapidly growing product and market segments in Asia and the EU, and also of the growing importance of exports of industrial products, and to some extent, global production sharing arrangements in the electrical and motor vehicle industries in the oil importers with strong EU links. However, intra-industry trade (IIT) remains limited within MENA and with the rest of the world, and manufacturing activities in MENA appear to be mostly assembly-type operations directed at domestic markets. The only country in the region with a significant share of components in its total exports is Tunisia.

Do MENA countries face special market access issues? MENA countries have relatively good market access for nonagricultural goods in high income countries, but overall agricultural protection in

developed markets is high mainly due to nontariff barriers (NTBs), especially constraining oil importers with EU links. MENA countries have more restricted market access in China than in advanced markets, and oil importers with EU links encountered much higher overall protection than others because of high tariffs on specific products exported to China. All regions face higher protection in India than elsewhere, and MENA region is not an exception. Furthermore, the region encounters higher protection on its nonoil exports to India than most other regions, largely because of high barriers on GCC’s nonoil exports. However, overall protection on oil importers’ exports was generally lower in India than in China, reflecting a product composition effect. Notably, there is no evidence that in general protection has increased substantially since 2008 when the global crisis erupted. Despite good market access developing MENA countries do not exploit well existing opportunities for nonoil export growth. Developing oil exporters such as the Republic of Yemen, Algeria, the Islamic Republic of Iran, and Syria exported their products to less than 5 percent of markets in 2005. Oil importers were more successful than them, but still most exported products to less than 7 percent of markets, and compared poorly to other countries, including Turkey which reached 27 percent of markets for its products. Furthermore, success in penetrating foreign markets varies greatly across MENA countries and cannot be explained just with differences in protection across markets, but rather reflects lack of information about markets—an area of special concern to export-oriented firms in MENA—and other constraints limiting firms’ competitiveness.

What are the major obstacles to MENA’s nonoil export growth? A range of factors impede MENA’s nonoil export growth, discourage investment, and hurt firms’ competitiveness, and labor and total factor productivity levels vary substantially within the region. Firms from GCC countries are much more productive than firms from developing MENA, while developing oil exporters’ firms are least

xxi

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

productive. Accordingly, the three major groups of countries face different constraints to nonoil export growth. In the GCC countries, limited access to finance for small and medium enterprises (SMEs), distortions in labor markets that discourage skill acquisition and entry into the private sector, and discriminatory policies that discourage FDI inflows into some of the services sectors are major problems. Innovation and technological readiness also appear to be areas in need of special attention as these countries are behind their peers in the developed world. In developing oil exporters, nonoil tariff and nontariff protection is highest in the world, taxes and corruption are the most frequentlymentioned major complaints by exporting firms, but due to the dominance of the state, other issues, especially inefficiencies in labor and goods markets, and poor financial market development, present even bigger problems for the competitiveness and growth prospects of the export-oriented sector. In oil importing countries—especially those with EU links—protection is still high largely due to nontariff barriers. Wide dispersion of tariffs across countries implies that industries in these countries benefit to varying degrees from policy-generated transfers, making the opening of markets among regional partners difficult despite PAFTA. Protection in services also remains high and beyond the scope of regional agreement such as PAFTA and the bilateral FTAs with the EU. Limited fiscal space in quite a few of the oil importers implies that macroeconomic uncertainty remains a top-most concern for firms, while the inefficient and inflexible labor market is another weakness. Furthermore, to be able to compete effectively in global markets, firms in oil importing countries must catch up with East Asian firms in terms of innovation efforts.

Are reforms implemented by countries addressing the major constraints? MENA countries are implementing reforms addressing some of the constraints to nonoil export

xxii

growth identified in the report, but in many countries a lot more needs to be accomplished as wide policy gaps remain in some areas. The average number of reforms in MENA steadily increased during the last 5 years. Between June 2009 and May 2010, 11 of 18 economies in MENA adopted a total of 22 business regulation reforms to improve the climate for doing business according to the latest Doing Business report (2011). The top reformers in the region were Saudi Arabia and Egypt which were among the 15 most active reformers in the last 5 years. MENA governments improved macroeconomic management, simplified business regulations, reduced tariffs, and started gradual opening of their financial sectors. In an effort to increase access to finance, the Islamic Republic of Iran, Syria, the United Arab Emirates, Jordan and Lebanon made improvements of their credit information systems. Many of the reforms involved the application of new information technologies which would increase information flow and the efficiency and transparency of operations. Improvements were made to trade facilitation in some GCC countries including Saudi Arabia, the United Arab Emirates, and Bahrain, as well as in the oil importers with EU links. The Republic of Yemen approved an amendment to its Customs law to meet WTO membership requirements and standards, with the aim of completing WTO accession by end of 2010. In the GCC, Qatar is easing restrictions on majority foreign ownership of local companies, while some GCC countries are preparing or already implementing reforms addressing issues related to their major competitiveness issue—skill shortages and labor market regulations. Developing oil exporters are planning to improve the functioning of their financial, inputs and goods markets. As part of its ongoing financial system reform program, Syria has initiated a new competition and anti-trust law for the financial sector. Iraq has adopted an action plan to modernize its banking sector. Several developing MENA countries with limited fiscal space are planning reforms to address macroeconomic imbalances and uncertainty. Tunisia is preparing a law to ensure financial

Executive Summary

viability of pension schemes over the next 20 years without additional tax increases or budget financing. Jordan is making a shift away from publicly funded investments towards PPP arrangements. Some developing oil exporters are preparing improvements to their tax code and removals of costly distortions. A number of oil importers are planning measures to strengthen financial stability, improve access to finance for SMEs and remove limits on FDI in certain sectors. Wide policy gaps, however, remain in a number of areas where governments should step up reform efforts. In the GCC, more needs to be done to address the issue of skill shortages in a comprehensive way. GCC governments should continue to invest in skills, facilitate the matching of labor supply and demand through improved data collection, information and intermediation services. It would be critical to coordinate migra-

tion reform and reforms required to transition to technology-intensive production. A lot more needs to be done to understand the nature and extent to which regulations restrict trade and FDI in the GCC services. In developing MENA, countries need to intensify efforts to strengthen institutions, improve information gathering and dissemination, and reform implementation. Countries should press on with financial market developmentâ&#x20AC;&#x201D; especially improving financial infrastructure, while further strengthening macroeconomic management, addressing inefficiencies in labor and goods markets, and facilitating innovation activities, knowledge and technological acquisition. Finally, it should be a priority to understand better the nature and extent to which nontariff barriers and regulations restrict trade in non-oil goods and services.

xxiii

Part I. Sustaining the Recovery

Chapter 1

MENA is recovering from the crisis, but slowly

Developing countries World Developed countries MENA

ECA LAC

6 4 2 0 –2 –4 –6

2008

2009e

2010f

2011f

2012f

Source: World Bank, Global Economic Prospects 2010 and MENA Social and Economic Development Group.

Figure 2: Growth accelerations in 2010 (percentage point change relative to 2009)

LAC

ECA

MENA

Developing countries

10 9 8 7 6 5 4 3 2 1 0 Developed countries

In the near term growth would be driven by consumption and investment expansion, and a recovery in exports (Table 1). Government consumption is expected to remain an important driver of growth in MENA although the extent to which individual governments will be able to stimulate their economies will depend on the degree of fiscal space available. Given the uncertainty about the economic prospects of the global economy, it is difficult to forecast the extent to which exports would contribute to growth in MENA going forward and the extent

Figure 1: Growth outlook (real GDP growth rates in percent)

World

The Middle East and North Africa (MENA) region is recovering from the global financial and economic crisis along with the global economy and with all the attendant uncertainties. MENA was affected by the financial and economic crisis but to a much smaller extent than developed economies and developing regions outside Asia. The economic recovery in MENA has also been much less vigorous than the recovery in countries that suffered sharp output contractions (Figure 1). The factors that helped MENA avoid severe recession—a large public sector and lack of integration with the global economy—now seem to be constraining the growth recovery. Growth in MENA is expected to average 4 percent in 2010, an increase of slightly less than 2 percentage points over growth in 2009, and weak compared to increases of 5.6 percentage points in advanced economies and 4.5 percentage points in developing nations on average (Figure 2). MENA’s output growth in 2011 and 2012 is expected to return to the average growth rates observed in the 2000s, prior to the economic and financial crisis.

Source: World Bank, Global Economic Prospects 2010 and MENA Social and Economic Development Group.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Table 1: Demand-side sources of growth in MENA GDP growth, %

Private Consumption

Government Consumption

Gross Domestic Investment

Exports of Goods and Services

Imports of Goods and Services

2007

5.6

4.4

2.5

4.3

2.2

–7.8

2008

5.3

3.2

2.1

2.8

2.7

–5.5

2009

2.0

1.4

2.0

0.6

–1.1

–1.0

2010f

4.0

2.4

1.8

1.7

1.2

–3.1

2011f

4.8

3.1

1.9

1.7

1.8

–3.7

Source: Staff calculations based on World Bank data. Data for 2010 and 2011 are forecasts.

to which private consumption and investment will pick up pace. It is important to recognize that the outlook by country will differ depending on initial conditions and the linkages to the global economy through the financial, oil, and the balance-of-payments channels.

MENA’s recovery has been driven by the global rebound and, to varying degrees, by domestic stimulus In MENA, the well-integrated GCC countries were hardest hit by the global economic and financial crisis, but they recovered quickly as demand for oil picked up, driven by the rapid recovery in emerging markets, most notably Asia, and the GCC financial sector stabilized. In 2010 growth is projected at 4.2 percent—a strong comeback from near zero growth in 2009 (Figure 3), and the expectation is that growth will accelerate to 5 percent in 2011 before declining to 4.8 percent in 2012. GCC governments responded quickly with monetary and fiscal stimuli, and their accumulated reserves and other assets enabled them to prevent a deeper deceleration in growth, and support a rebound in growth. However, economic growth has been constrained by anemic credit growth, which has started inching higher only recently, and by the fact that the four GCC members of OPEC have restrained output of crude oil to support oil prices, in the face of large stock overhang and rising non-OPEC supply. At present, nearly two thirds of OPEC ample spare capacity of 6 million barrels per day has been in Saudi Arabia.

Governments facilitated the recovery and the return to stability by using monetary easing, including lower reserve requirements of banks, liquidity support from central banks or governments, government guarantees on deposits and debt, capital injections and, in Qatar, asset purchases.1 The fiscal stimulus aimed to help the recovery, but also to enhance long-term growth prospects, mainly through capital expenditures concentrated on infrastructure investments. For example, ongoing large fiscal spending by Abu Dhabi has supported its long-term diversification strategy. The GCC recovery has had a positive impact on other MENA countries, and more broadly, on the global economy, mainly through increased outflows of remittances and capital flows. 2 Remittance outflows from GCC countries remained resilient during the crisis and continued to grow in 2009, albeit at a smaller pace than the one registered during the pre-crisis period. The investment programs part of the GCC governments’ fiscal stimulus tended to be labor intensive, although most entailed use of imported labor, and therefore stimulated the economies of countries supplying migrants, e.g. those in developing MENA and South Asia.

These share common elements with the support measures introduced in the US, EU and Eastern Europe. 2 The GCC states are an important source of remittances, and increasingly foreign investments. These countries generate more than 10 percent of global annual remittance flows, while their estimated accumulated reserves and assets in sovereign wealth funds exceed US$1.5 trillion. 1

Chapter 1: MENA is Recovering from the Crisis, but Slowly

Unlike other governments which eased liquidity constraints in 2009, Algeria’s gov-

Figure 3: MENA’s annual real growth performance before, during, and after the crisis 8

MENA region GCC oil exporters

Developing oil exporters Oil importers

7 6 Percent

Developing oil exporters such as Algeria, the Islamic Republic of Iran, Iraq, Libya, Syria and the Republic of Yemen also felt the impact of the crisis, and later the recovery largely through the oil channel as their financial sectors are mostly state-dominated, and not linked to global financial markets. The strong rebound in oil prices during the past 12 months improved the fiscal and growth outlooks (Figure 21 and Figure 3) for this highly dependent on oil country group (Figure 4). Real growth is projected to be 2.9 percent in 2010, up from 2.1 percent in 2009, and accelerate to 4.2 percent in 2011, and 3.9 percent in 2012. Public spending of developing oil exporters is typically pro-cyclical, but during the recent crisis governments in a number of these countries responded with counter-cyclical fiscal policies, in addition to monetary easing and financial sector support measures. Monetary easing measures included lower reserve requirements in Algeria, the Islamic Republic of Iran, and Syria, interest rate reductions in Syria and drawdown of reserves in Algeria, while financial sector measures covered government guarantees on deposits, liquidity support and asset purchases. Debt relief measures were adopted in Algeria, where they benefited mostly farmers and SOEs, and in Syria.

5 4 3 2 1 0

2006

2007

2008

2009

2010e 2011p 2012p

Source: National agencies and World Bank staff estimates (e) for 2010, and projections (p) for 2011 and 2012.

ernment passed a supplementary budget law which banned credit to consumers, except for mortgages, as well as supplier credits to finance imports—only letters of credit may now be used. The law aims to protect consumers from excessive debt and restrain importation of durable consumer goods. The measures form part of a package of regulatory reform measures passed in 2009 in favor of domestic over foreign operators, including minimum local ownership of 51

Figure 4: Sources of external revenue, 20081 Goods exports (non oil)

Oil exports

Services exports

Remittances

70%

Share of GDP

60% 50% 40% 30% 20% 10% 0%

SSA

EAP

ECA

LAC

SAS

MENA

Oil Importer

Other Oil Exporters

GCC

Source: COMTRADE data and IMF. Note: Other oil exporters are developing oil exporters in MENA. Oil importers are MENA’s oil importing countries. 1 See statistical appendix for country-specific macroeconomic information.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Table 2: MENA countries’ fiscal space in 2008

Fiscal balance as % of GDP

Current account balance as % of GDP

Government debt as % of GDP

Reserves in months of imports

Reserves (including SWF) in months of imports

Bahrain

4.9

10.6

15.2

2.9

13.6

Kuwait

19.9

40.7

5.3

6.3

86.6

Oman

13.9

9.1

5.0

5.5

6.4

Oil exporters GCC

Qatar

10.9

33.0

15.0

3.8

23.1

Saudi Arabia

32.5

27.8

13.3

27.4

45.4

United Arab Emirates

20.4

8.5

15.1

1.8

16.7

Algeria

7.7

20.2

8.2

34.5

45.1

Iran, Islamic Republic of

0.0

7.2

16.1

8.0

9.2

Developing oil exporters

Iraq

–3.3

12.8

108.5

14.6

Libya

24.6

40.7

0.0

42.6

65.7

Syrian Arab Republic

–2.8

–1.9

30.2

9.4

—

Yemen, Rep.

–4.5

–4.6

36.4

7.5

—

Oil importers Oil importers with GCC links Djibouti

1.3

–27.6

60.2

3.0

—

Jordan

–8.8

–9.6

62.3

5.6

—

Lebanon

–8.8

–19.8

157.1

18.7

—

–6.8

0.5

76.6

6.6

—

Morocco

0.4

–5.2

47.2

6.3

—

Tunisia

–1.0

–3.8

47.5

4.0

—

Oil importers with EU links Egypt, Arab Rep.

Source: World Bank data, Government debt and SWF data are from IMF Fiscal balance

Larger than 2% of GDP

Less than –2% of GDP

Current account balance

Larger than 3% of GDP

–3% to +3% of GDP

Less than –3% of GDP

Government debt

0 to 30% of GDP

30% to 80% of GDP

Larger than 80% of GDP

International reserves in months of imports

More than 6 months

Between 3–6 months

Less than 3 months

percent on foreign investment, and policies to restrict imports to encourage domestic production. The law included a 400% increase in the cap on government guarantees for SME loans. The extent to which governments were able to use fiscal stimulus depended on their fiscal space

–2% to +2% of GDP

(Table 2). Unlike the GCC countries, developing oil exporters implemented their stimulus mainly through increases in current expenditures, 3

Indeed, only one of the 6 developing oil exporters (Syria) increased capital spending by 40% in 2009 relative to 2008.

Chapter 1: MENA is Recovering from the Crisis, but Slowly

especially subsidies and transfers, but also public wages, and therefore could hurt, not enhance their long-term growth prospects. In Algeria, the fiscal stimulus involved increases of 25 percent in transfers and social subsidies, including milk and wheat subsidies, and housing support. While a portion of this spending, such as aid to students from poor families or those living in remote areas, targeted the poor, some of it supported special groups. For example, a new public investment fund was created to invest in SMEs created by young Algerian entrepreneurs, subsidies for down payment and interest were extended to low-income households and tax exemptions were granted to homeowners renting housing to lowincome families, but also mortgages were granted to public servants at a subsidized interest rate of one percent. In Syria, the stimulus was a mix of spending measures and tax cuts. The government increased wages by 23 percent, investment by 40 percent, and implemented measures to compensate for rising fuel prices and mitigate the impacts of drought. Tax incentives included tax breaks for farmers and tax incentives to encourage companies to contribute to strategic objectives such as locating production in remote areas, creating jobs and participating in initial public offerings. The Republic of Yemen had limited fiscal space and provided few interventions. Social security interventions for the most vulnerable were implemented with financing from the Crisis Response Facility provided by the World Bank. In Iraq, where the fall in oil prices severely affected public finances, the World Bank provided financial support through a development policy loan, working closely with the IMF. Oil importers such as Egypt, Morocco, Tunisia, Lebanon, Jordan and Djibouti, were least affected by the global economic and financial crisis, but growth in 2010 is expected to average 4.9 percent and is unlikely to surpass growth in 2009 (Figure 3), largely due to the weak growth expected in developed markets, and the fact that growth will moderate from relatively high levels in Lebanon and Djibouti. Assuming steady progress with structural reforms, oil importersâ&#x20AC;&#x2122; growth in 2010 is expected to surpass pre-crisis levels in the 2000s, and average 5.3 percent

in 2011 and 5.7 percent in 2012. Despite the challenges brought by the global economic and financial crisis, with a few exceptions,4 reforms have broadly remained on track, while in some cases countries have steamed ahead with reforms started before the crisis. Examples of such reforms include pension and social welfare reform in Egypt and trade liberalization and economic integration in Tunisia. Fiscal policy of oil importers with EU links has been expansionary, as countries launched various measures to stimulate demand, and in some cases the private sector. This expansionary stance will make it harder for these countries to improve fiscal space and reduce macroeconomic vulnerabilities. In addition to easing liquidity constraints on banks and firms,5 so far the response has focused on mitigating the shortterm impact of the crisis on the real economy, although some measures including tax cuts and investment expenditure would promote sustained growth. In Tunisia and Morocco, fiscal stimulus through increased current expenditures included measures to support private consumption, in the form of public sector wage increases, and measures to help SMEs cope with the decline of external demand, including guarantees of working capital loans, easing of regulation, and debt rescheduling facilities. Assistance to firms, irrespective of size, was provided in Egypt through transfers supporting exporters, industrial zones in the Delta region, and logistic areas for internal trade. Stimulus through capital expenditure increases went into job-creating infrastructure investments in Egypt and Tunisia. In addition, Egypt increased investments in rural and social sectors. A range of tax measures were

For example, Egypt halted the energy subsidy reform. It adopted a one-year freeze of the energy subsidy phase-out plan for non-intensive industrial users, and extended the freeze for another six months to June 2010. 5 Liquidity support was pursued in Tunisia and Morocco, while government deposits in the banking sector were increased in Egypt. Monetary easing, particularly reduction in reserve requirements, was employed in all three countries. Interest rates were lowered in Tunisia and Egypt, and international reserves declined in Egypt. 4

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

introduced in Egypt, including cuts in customs duties on selected industrial inputs and capital goods, temporary suspension of the sales tax on selected capital goods, introduction of import tariffs on steel, and imposition of antidumping duties on sugar to protect domestic production. The economies of oil importers with strong GCC links such as Lebanon, Jordan and Djibouti were relatively unaffected by the crisis and managed to grow at a robust pace of 6.5 percent per year in 2009. Growth slowed down substantially only in Jordan, where it fell from 7.6 percent in 2008 to 2.3 percent in 2009. This sharp slowdown prompted authorities to respond with a combination of financial, monetary and fiscal measures, the latter reflecting a mix of tax cuts and spending increases. Financial measures included full guarantees provided on all bank deposits, initially through the end of 2009, and subsequently extended through the end of 2010; the provision of guarantees for private sector borrowing, targeting listed industrial and real estate companies with sound credit record facing temporary difficulties obtaining financing;6 and a scale back of operations to soak up liquidity by the Central Bank of Jordan. Monetary measures included lower reserve requirements and interest rates, and an increase in international reserves. To mitigate the impact of the crisis on the poor, the government of Jordan used largely a combination of tax cuts and exemptions, and capital spending increases that are likely to enhance the country’s growth prospects. Jordan increased public investment by 52 percent between 2008 and 2009 in order to tackle infrastructure bottlenecks in the road and water sectors, and granted tax relief for a number of sectors. The government granted tax exemptions to the tourism sector, extended tax exemptions on some imported construction materials in response to signs of contraction in key sectors, full exemptions from income taxes in the agriculture sector and for households with income up to a certain level, corporate tax exemptions or reductions in a number of sectors.7 Jordan used subsidies sparingly extending a subsidy only on gas cylinders used for cooking.

Djibouti and Lebanon registered only minor declines in growth during the same period, with both economies growing at 5 and 9 percent, respectively, in 2009. Lebanon grew at a much faster pace than other oil importers with GCC links, reflecting a post-conflict recovery boom aided by strength in certain sectors—tourism and real estate—and vibrant private investment. Policy interventions in Lebanon helped fuel the post-conflict recovery boom, but strained further the fiscal outlook. Public sector wages increased, and a daily compensation fee was introduced for low-income public school students. Other policies were introduced to ensure access to finance, including subsidized interest rates extended to all sectors, except construction and trade, and strengthen macroeconomic fundamentals such as an increase in international reserves.

MENA labor markets remained relatively unscathed by the crisis but impacts differed between countries Even though economic recovery has been under way, global unemployment has been lagging behind and the specter of a jobless recovery has been observed in many countries. Globally, unemployment is estimated to have risen in 2010 with an increase of more than 30 million since 2007 (Figure 5). Three-quarters of this increase has occurred in the advanced economies and the remainder among developing economies. Within the advanced countries, the problem is particularly severe in Spain, where the unemployment rate increased by nearly 10 percentage points, and the United States which

6 The proposed scheme covers 35 percent of the value of the loan, requires security of at least 125 percent of the financing value and targets projects that are more than 25 percent complete. 7 These included full exemption from income taxes of income arising from the agriculture sector, as well as for households with income up to JD24,000; full exemption from corporate tax for agribusinesses, for the first JD75,000 in income; and corporate tax reduction for industrial companies (from 15 to 14 percent), for trade and tourism companies (from 25 to 14 percent), and for financial and telecommunications companies (from 35 to 30 percent).

Chapter 1: MENA is Recovering from the Crisis, but Slowly

Figure 5: Global unemployment and real growth Unemployment

GDP growth (right axis)

215

205

Millions

185

175

165

–1

155 145

Percent

195

–2 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

–3

Source: World Bank data and ILO. Note: Data for 2010 is a forecast.

has seen the highest increase in the number of unemployed. Among developing economies, China and the Russian Federation had the largest increases in the number of unemployed (Figure 6). The export sectors were hardest hit in terms of jobs, and informal employment expanded implying that the number of workers with little or no social protection increased. The economic crisis triggered dramatic reductions in activity in sectors that had expanded substantially during the upswing and were at the center of the crisis—such as financial services, real estate and construction. In response, many advanced economies put in place mechanisms to stimulate labor demand including direct job subsidies, wage subsidies or reductions in payroll taxes targeting specific groups in the labor force that are most vulnerable to joblessness such as the long-term unemployed and the youth.

Job losses in the GCC countries were steep but affected mainly expatriate workers Job losses in the GCC countries were steep because of their high exposure to credit financing and global markets. Labor markets were hardest hit in the United Arab Emirates (Figure 7), most notably Dubai, where the labor-intensive real estate sector contracted sharply. Recent analysis

Figure 6: Changes in number of unemployed, 2007–09 (in millions) Total number of unemployed in Developing countries: 8 millions

Russian Federation, 1.9 Other developing countries, 1.2 Mexico, 0.9

China, 3

Turkey, 1.1

Source: IMF, World Economic Outlook.

based on labor surveys of professionals shows that a total of 10% of professional jobs in the Gulf were cut down over the 12-month period up to August 2009. Small firms registered steeper job losses (14 percent) than larger firms (8 percent). Moves by some GCC governments to restrict termination of Gulf nationals have helped secure their jobs in the short run. However, with termination not an option, some employers have become more cautious in hiring nationals.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 7: Job cuts by country and sector in GCC, 2009 Retail Health care

Oman

Oil & gas

10%

Construction

10%

Education

Saudi Arabia Qatar 12%

Telecom & IT

12%

Real estate

11%

Advertising Banking

Kuwait

10%

Bahrain

13% 15%

12%

United Arab Emirates

18%

Source: Survey based on Gulftalent.com

The impact of the crisis on oil importers’ labor markets was mild The impact of the crisis on the labor markets in Egypt and Jordan was mild, according to recent analyses, based on a unique set of labor force surveys conducted in the two countries before and after the crisis.9 In Egypt, opposite to expectations, there was a mild decline in unemployment (Figure 8), combined with a slight increase in both labor force participation and employmentto-population ratios during the period from 2006 to 2009. This decline in unemployment was observed in rural and urban areas, and affected both men and women. Additionally, the effects

Figure 8: The crisis did not affect aggregate employment in Egypt, Arab Rep. Labor force participation Unemployment rate (RHS)

Linear (Labor force participation) Linear (Unemployment rate (RHS))

47 46

0 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4

The job cuts have disrupted the lives of many expatriates as they typically lack social security or unemployment benefits, and most are required by local immigration laws to depart within 30 days of termination. With new vacancies few and extremely competitive, many have relocated from Dubai to Abu Dhabi,8 and other GCC countries or have returned home. Across the region, some firms took advantage of the greater supply of candidates to get rid of underperforming employees, and to replace them with higher-skilled professionals who had previously been either unavailable or unaffordable. It is estimated that in 2010 further job cuts are likely, albeit at a slower pace than the one witnessed over the past 12 months.

Source: Population Council (2010). Note: RHS stands for right-hand side.

of the crisis on hours worked, informality of employment and sectoral labor shifts have been 8 Survey data show that, among expatriates living in Dubai, the percentage who work in Abu Dhabi has tripled over the last year from 1% to 3%. Most of those who relocated from Dubai to Abu Dhabi are high-income professionals. 9 The report presents analysis of the impact of the crisis on labor markets only for Egypt and Jordan as data are not available for any other developing MENA country.

Chapter 1: MENA is Recovering from the Crisis, but Slowly

minimal. However, the crisis-related decline in real earnings growth and, hence in the wage bill growth have been substantial (Figure 9).10 The young, old, unskilled and female workers were more likely to be vulnerable than other groups in the workforce.

Figure 9: Crisis-related decline in real earnings and wages growth in Egypt, Arab Rep. Wagebill growth Employment growth Monthly real earnings growth 40

20 10 0 –10 –20 Q4Yr09

Q3Yr09

Q2Yr09

Q1Yr09

Q4Yr08

Q3Yr08

Q2Yr08

Q1Yr08

Q4Yr07

Q3Yr07

Q2Yr07

Q1Yr07

–30

Source: Population Council (2010).

Figure 10: Output and employment growth in Jordan

Q4Yr09

Q3Yr09

Q2Yr09

Q1Yr09

GDP growth

Q4Yr08

Q3Yr08

Q2Yr08

Q1Yr08

Q4Yr07

Q3Yr07

Q2Yr07

Employment growth 16% 14% 12% 10% 8% 6% 4% 2% 0% –2% –4%

Q1Yr07

Unemployment remains on an upward trend in Tunisia, although the measures adopted by the government during the crisis to support distressed firms helped contain the impact of the economic slowdown on employment. To achieve Tunisia’s medium-term objectives of boosting employment-generating growth and lowering unemployment, the authorities are developing an export promotion strategy that seeks to diversify target markets and products.11 The authorities have also identified a number of reforms of labor market policies, the education system, and public employment services that will serve to

Percentage change

The crisis slowed down employment growth in Jordan (Figure 10), but changes in labor-force participation, employment and unemployment were small in magnitude. Unlike Egypt, the segments of the labor force hit hardest by the crisis included those with tertiary levels of education or above. Indeed, men with tertiary degrees were the only group that experienced increases in unemployment rates following the crisis. People in urban areas suffered more from the crisis than those in rural areas. Among men, older workers tended to be somewhat more negatively affected than younger ones, whereas among women, the middle-aged group was the worst affected.

Source: Population Council (2010). The real wage bill is defined as the product of total employment and median real earnings. 11 The government of Tunisia signed a preferential trade agreement with the West African Economic and Monetary Union, and is currently negotiating free trade agreements with the Central African Economic and Monetary Community. Bilateral negotiations with the European Union are also under way to extend the FTA beyond industrial products to services, agricultural products, and processed food. 10

facilitate labor mobility and reduce mismatches between demand and supply in the labor market. The implementation of these reforms will be supported by several World Bank Development Policy Loans.

Chapter 2

MENA’s recovery is Proceeding in an uncertain Global economic context The Middle East and North Africa (MENA) region is recovering in an uncertain global environment. Industrial production, which in MENA is dominated by oil, has nearly returned to its pre-crisis peak (Figure 11), largely due to the strong recovery in emerging markets, especially Asia (Figure 12). However, the upturn weakened in the summer of 2010 as global growth slowed down (Figure 13) and serious concerns emerged about the sustainability of the global recovery. The pace of recovery decelerated as the impact of rebound factors, including inventory restocking and government stimuli, faded. Industrial pro-

duction growth rates declined, with almost all of the decrease occurring in developing countries. But latest information suggests that industrial production in emerging economies is beginning to pick up, while deceleration continues in high income countries. Persistently high unemployment rates, weak housing data, anemic credit growth, especially to SMEs in the US, and a deceleration of growth in developing countries (Figure 12), notably China, have added to concerns about the sustainability of the global recovery. Credit growth in China

China

India

SAS x India

EAP x China

Dev x China

World

MENA

ECA x Russian Federation

Brazil

LAC x Brazil

Russian Federation

35 30 25 20 15 10 5 0 –5 –10 –15

High income

Figure 11: Industrial production (percent difference from pre-crisis peak to June 2010)

Source: World Bank based on data from Datastream.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 12: Industrial production, seasonally adjusted year-on-year real growth rates DEV EAP

WLD ECA

HIY LAC

MENA SAS

Mar–10

May–12

Jan–10

Nov–09

Jul–09

Sep–09

May–09

Jan–09

Mar–09

Nov–08

Jul–08

Sep–08

Mar–08

May–08

Jan–08

25 20 15 10 5 0 –5 –10 –15 –20 –25

Source: World Bank based on data from Datastream.

Figure 13: Output growth (real GDP, % change quarter-on-quarter) World Advanced economies Emerging and developing economies 15 10 5 0

–10

2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2

–5

Source: IMF.

continues to moderate and is approaching precrisis rates, but credit growth in other emerging markets is picking up pace (Figure 14). It increased steadily in Latin America and Caribbean (LAC) since end-2009, and it turned positive even in Eastern Europe and Central Asia (ECA) in the second quarter of 2010. In developed countries, large firms have had good access to corporate debt markets but credit growth remains anemic in the US. Credit growth in MENA

has slowed down but the rates at which credit is expanding remain higher than in other emerging markets. However, GCC countries other than fastgrowing Qatar are exceptions. Credit growth in these countries slowed down rapidly in response to the crisis and has started inching higher only recently (Figure 14). Growth in global trade volumes has decelerated (Figure 15, Figure 16) as developing countries, adjusted the pace of importing goods from the rest of the world, likely in response to the end to inventory re-stocking. However, import demand of high income countries appears to be reviving after recent lows, in line with the increase in domestic demand in the US and EU. The persistent lack of jobs growth in the US constrains consumer spending, which is a major driver of US output growth on the expenditure side. Strong external demand for European, and especially German capital goods and motor vehicles, has been supported by the depreciation of the euro against the dollar and other currencies since the start of the year. The surge in exports strengthened considerably the growth outlook in the EU in the second quarter of 2010, while the opposite was the case in the US, where imports surged in response to strong domestic final demand.12 In Japan, the strong contribution of exports to growth in the first quarter of this year is likely to have moderated substantially in the second quarter due to the appreciation of the yen against the dollar and the weakened import demand in China and elsewhere.

Financial market volatility reflects the unusually uncertain global outlook Financial markets have been unsettled since the end of April when equity markets reached their peak during the last 12-month period. Sentiments changed often based on news about the global recovery, Europe’s debt problems, the passage of new financial reform legislation and

12 In July, however, the US trade deficit contracted sharply as export of airplanes surged and imports fell across the board.

Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Figure 14: Credit growth (YoY, in percent) Credit Growth (YoY, in percent) – Emerging Regions Asia excl. China

ECA

LAC

China

45 35 25 15

Mar–10

May–10

Jan–10

Nov–09

Sep–09

Jul–09

Mar–09

May–09

Jan–09

Nov–08

Sep–08

Jul–08

May–08

Mar–08

Jan–08

Nov–07

Sep–07

Jul–07

May–07

Mar–07

Jan–07

Nov–06

Sep–06

Jul–06

May–06

Mar–06

–5

Jan–06

Credit Growth (YoY, in percent) – MENA GCC

Non-GCC Emerging

Non-GCC State-dominated

60 50 40 30 20

May–10

Mar–10

Jan–10

Nov–09

Sep–09

Jul–09

May–09

Mar–09

Jan–09

Nov–08

Sep–08

Jul–08

May–08

Mar–08

Jan–08

Nov–07

Sep–07

Jul–07

May–07

Mar–07

Jan–07

Nov–06

Sep–06

Jul–06

May–06

Mar–06

Jan–06

Source: Datastream.

fiscal austerity measures in a number of developed economies. The move of many European governments toward fiscal austerity, combined with well-publicized outcomes of stress tests on the largest European banks, appeared to have increased confidence13 and is expected to be helpful to medium-term growth in the euro area. Indeed, EU confidence surveys were sharply up in July. But the shift in market sentiment has not been dramatic and sovereign default remains a concern in Europe as the real test for the European banking sector will be the expected

refinancing of 1.6 trillion euro-denominated debt by 2012. Financial markets reflected the debt difficulties in Europe with a pullback in equity

The EU stress test covered 91 European banks and focused on how they would cope with another economic downturn and losses on trading portfolios of government bonds. Results revealed that seven EU banks, including a group of five Spanish unlisted savings banks, Germany‘s Hypo Real Estate and the Agricultural Bank of Greece, failed the test. 13

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 15: Import growth, seasonally adjusted year-on-year in volumes EAP

DEV

HIY

ECA

LAC

SAS

WLD

MENA

100 80 60 40 20 0 –20 –40 Jun–10 Jun–10

Apr–10

May–10 May–10

Mar–10

Jan–10

Feb–10

Dec–09

Nov–09

Oct–09

Sep–09

Jul–09

Aug–09

Jun–09

Apr–09

May–09

Feb–09

Mar–09

Jan–09

Dec–08

Oct–08

Nov–08

Sep–08

Jul–08

Aug–08

Jun–08

May–08

Apr–08

Mar–08

Jan–08

Feb–08

–60

Source: World Bank, DECPG.

Figure 16: Export growth, seasonally adjusted year-on-year basis in volumes EAP

DEV

HIY

ECA

LAC

SAS

WLD

MENA

80 60 40 20 0 –20 –40 Apr–10

Mar–10

Jan–10

Feb–10

Dec–09

Nov–09

Oct–09

Sep–09

Aug–09

Jul–09

Jun–09

Apr–09

May–09

Feb–09

Mar–09

Jan–09

Dec–08

Nov–08

Oct–08

Sep–08

Jul–08

Aug–08

Jun–08

May–08

Apr–08

Mar–08

Jan–08

Feb–08

–60

Source: World Bank, DECPG.

markets worldwide, a widening of sovereign CDS and bond spreads for some countries (Figure 17), and corporate bond and CDS spreads in Europe. European interbank lending rates diverged to their highest levels since their inception as stress built up in the Euro zone banking system. Investors reduced their tolerance for risk and channeled funds into US treasuries and gold—assets traditionally per-

ceived as safe havens. Since then equity markets have recovered some of the recent losses (Figure 18), but in most regions they remain below levels prevailing in the first quarter of 2010 and volatility remains high. GCC stock markets, which are more globally integrated than markets in other MENA countries, have followed global trends, while non-

Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Figure 17: Sovereign 5-year CDS spreads (bps) Greece Spain

Portugal Italy

Ireland

1200

ity for further declines in the short term, serious concerns remain about the ability of companies, especially those in Europe, to refinance a large stock of leveraged loans due for repayment in the next few years.

The outlook for GCC countries is tied to the outlook for the global economy

1000 800 600 400 200

8/2/2010

7/2/2010

6/2/2010

5/2/2010

4/2/2010

3/2/2010

2/2/2010

1/2/2010

12/2/2009

11/2/2009

Source: Bloomberg and DECPG, World Bank.

GCC stock markets reacted less to these global developments (Figure 18). Tunisia’s stock index continued its climb, proving for yet another time its resilience during difficult times. This performance, attributed to good fundamentals and strong demand for equity by domestic investors, is less impressive when compared with other non-MENA emerging countries. MENA’s risk premiums and CDS spreads have declined somewhat and are below those for ECA, but remain higher than those in East Asia and Latin America, even when Iraq is excluded (Figure 19). This is because many countries in the region, especially oil importers with EU links, are dependent on European markets where uncertainty about future growth prospects remains high. In addition, a few countries—most notably Lebanon—have limited fiscal space, and remain sensitive to negative shocks which push their credit spreads higher than those of their peers. Further movements in the markets will depend on evidence that private sector growth in consumption and investment has started to pick up globally. Despite a sharp decline in global corporate default rates, and the possibil-

The sustainability of the recovery in GCC economies (Figure 3) depends on developments in the rest of the world, and on the extent to which they affect oil markets. In September, oil prices were around $80 per barrel and the average for the year up to beginning of September stood at around $77 per barrel—an increase of 24 percent over the 2009 average price of $62 per barrel (Figure 20). Since then oil prices moved above $85 per barrel on a depreciating dollar, rising seasonal demand and a tight global distillate market. China has been a key driver of oil demand, accounting for 30–40 percent of the projected incremental increase in oil consumption. China’s crude oil imports grew at a fast pace reflecting overall rapid economic growth, plans to add 280 million barrels of strategic petroleum reserves by 2011 and a sizable refining expansion program. While OPEC expanded its previous “ideal” price band of $70–80 per barrel to $70–90 per barrel, support for further price increases based on demand and supply factors is expected to be weak. Following production cuts to support prices, OPEC’s space capacity has nearly reached 2002 levels when oil prices were $25 per barrel, inventories in the US remain high, and oil demand is expected to grow in the medium term only slowly, while non-OPEC output continues to rise modestly. The positive terms-of-trade shock from the oil price rebound has allowed GCC governments to keep their expansionary fiscal policies while maintaining or improving fiscal and current account positions14 (Figure 21 and Figure 22). All GCC governments continued to stimulate their See statistical annex for a complete set of macroeconomic indicators by country in MENA region.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 18: Stock market reaction to events in Europe Stock Market Indices – Global BRIC

High Income

GCC

Non-GCC

180 160 140 120 100 80

Mar–10

May–10

Jul–10

Mar–10

May–10

Jul–10

Jan–10

Nov–09

Sep–09

Jul–09

May–09

Mar–09

Jan–09

Nov–08

Sep–08

Jul–08

May–08

Mar–08

Jan–08

Nov–07

Sep–07

Jul–07

May–07

Mar–07

Jan–07

Stock Market Indices – Non-GCC Egypt, Arab Rep.

Jordan

Morocco

Lebanon

Tunisia

220 200 180 160 140 120 100 80

Jan–10

Nov–09

Sep–09

Jul–09

May–09

Mar–09

Jan–09

Nov–08

Sep–08

Jul–08

May–08

Mar–08

Jan–08

Nov–07

Sep–07

Jul–07

May–07

Mar–07

Jan–07

Source: Datastream.

economies as the global economy started slowing down in the second quarter of 2010. Even Kuwait, which was the only GCC country without a fiscal stimulus in 2009 and suffered the worst recession in the region, started implementing a fiscal stimulus in the summer of this year. Private consumption in all GCC countries was stimulated by increases in current spending and freezes on cuts of public sector employment and subsidies. All GCC governments kept invest-

ment stimulus through direct capital spending, and in some cases through guarantees on private financing. The stimulus supports these countries’ economic diversification strategies, and in the meantime is helping the revival of non-oil economic activities. Saudi Arabia continued to implement its $400 billion public investment stimulus program. Abu Dhabi stimulus spending has encouraged investment and consumption. Despite rapid growth in Qatar, the government kept spending on projects and revived private

Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Figure 19: Risk perceptions reflecting developments in Europe EMBI Global – Spread (bp) LAC

ECA

East Asia

MENA

MENA excl. Iraq

800 700 600 500 400 300 200

Mar–10

May–10

Jul–10

Mar–10

May–10

Jul–10

Jan–10

Nov–09

Sep–09

Jul–09

May–09

Mar–09

Jan–09

Nov–08

Sep–08

Jul–08

May–08

Mar–08

Jan–08

Nov–07

Sep–07

Jul–07

May–07

Mar–07

Jan–07

100

Sovereign 1 yr Credit Default Swap LAC

ECA

East Asia

GCC

Non-GCC

600 500 400 300 200

Jan–10

Nov–09

Sep–09

Jul–09

May–09

Mar–09

Jan–09

Nov–08

Sep–08

Jul–08

May–08

Mar–08

Jan–08

Nov–07

Sep–07

Jul–07

May–07

Mar–07

Jan–07

100

Source: Datastream.

investment by extending large-scale government financing or implicit guarantees. Saudi Arabia’s stimulus spending supported domestic non-oil growth, and more broadly the global recovery because of its large size and high import content.15 In the United Arab Emirates, re-export trade held up much better than expected due to steady regional growth and strong growth in Asia. Growth in most non-oil sectors in Kuwait remained depressed although consump-

tion and Iraq-related logistics fared considerably better. Steady export-led recovery in Bahrain’s downstream energy-related sectors, including aluminum and petrochemicals, and governmentdriven construction have been the major sources of economic growth. In Qatar, LNG has been the key driver of growth, while in Oman the main

15 Saudi Arabia‘s fiscal package is the largest as a share of GDP of any G-20 country.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 20: Crude oil average spot price (current US$ per barrel) 140 120 100 80 60 40 20 2010M11

2010M04

2009M09

2009M02

2008M07

2007M12

2007M05

2006M10

2006M03

2005M08

2005M01

2004M06

2003M11

2003M04

2002M09

2002M02

2001M07

2000M12

2000M05

1999M10

1999M03

1998M08

1998M01

1997M06

1996M11

1996M04

1995M09

1995M02

1194M07

Source: World Bank, DECPG.

non-oil source of growth has been construction which benefitted from government spending. A number of risks cloud GCC countries’ growth prospects. The outlook for the global economy remains uncertain, although the risk of a negative terms-of-trade shock remains remote. The GCC countries have fiscal space to cushion the impact of an unlikely negative oil price shock but the systematic reliance on government spending poses a long-term chal-

Figure 21: MENA fiscal outlook (percent of GDP) 2009

2010e

2011p

2012p

8.0 6.0 4.0 2.0 0.0 –2.0 –4.0 –6.0 –8.0

Oil Exporters

Developing Oil Exporters

Oil Importers

Source: National agencies and World Bank staff estimates (e) for 2010, and projections (p) for 2011 and 2012.

lenge. Some of the fiscal expansion will be selfterminating when projects get completed, but the medium-term burden of continued public spending growth could increase the cost of capital for the private sector as public saving declines. Furthermore, in some countries, it would be difficult to cut public spending due to political considerations. It is also unclear to what extent private sector growth would pick up when public sector spending declines. In the United Arab Emirates, there is a huge overhang of partly completed property developments, some stalled for two years and the property price slump shows no sign of easing. In order to revive the construction sector, the emirate of Dubai put substantial new funds into Nakheel—its flagship property developer, and paid trade creditors. It is too soon to say whether these measures have had the desired effect. Furthermore, Abu Dhabi’s property market has not remained immune to the effects of the crisis and has entered a downturn with a lag. In Qatar, where the property market, especially for commercial real estate, is oversupplied, and the banking sector has had significant exposure to domestic property loans, the construction sector is expected to grow at a slow pace in the coming years. More importantly, the outlook for the LNG market has been weakened significantly given developments in the US and EU LNG markets.

Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Figure 22: MENA current account positions (percent of GDP) 2009

2010e

2011p

2012p

15.0 10.0 5.0 0.0 –5.0 –10.0

GCC Oil Exporters

Developing Oil Exporters

Oil Importers

Source: National agencies and World Bank staff estimates for 2010, and projections for 2011 and 2012.

Tight credit conditions, particularly in interbank markets, pose another threat to the eco-

nomic recovery in the GCC countries. With the exception of Qatar, credit growth to the private sector remains anemic (Figure 23) due to the uncertainty arising from ongoing debt restructuring, and the spillovers from Dubai World (DW) events (see Box 1). The DW case has highlighted the complexity of out-of-court debt restructurings in the context of GCC countries’ lack of experience with modern insolvency procedures, the central role of government-related enterprises, and the complicated financing mix of many companies, including Islamic finance and working capital funded from purchaser deposits. Nonetheless, DW would be a relatively quick restructuring by GCC standards, where some cases have taken 2 years to resolve. The direct engagement of the emirate’s government via the Dubai Financial Support Fund has been a major reason for the relatively quick progress made with this restructuring (Table 3). The government has been able to use a mixture of

Box 1: The Dubai World debt restructuring The Dubai World (DW) restructuring is close to completion on terms very similar to those outlined in the April 2010 Regional Economic Update. A formal offer was made to creditors in July 2010, with the terms outlined by the companies in March 2010 providing the basis for negotiations. As was clear when the terms were announced, DW’s property development subsidiary Nakheel has been separated from the rest of the DW restructuring and is proceeding on a parallel track. Nakheel has indicated that it is close to final agreement with its bank creditors on a 5-year extension of its loans. The extension would be at an interest rate that is 4 percentage points above the relevant interbank rate. This rate is significantly better than the one DW is offering its creditors. Nevertheless, Nakheel’s bonds coming due in future years are yielding around 15 percent, well above the rate on the restructured bank facilities. From the perspective of the Dubai government, Nakheel is essential to restarting stalled construction activity in the emirate, and so funds have been provided to enable it to redeem sukuk as it comes due and to

re-engage with its trade creditors. The latter group is receiving cash payments (totaling US$680 million so far) equal to 40 percent of outstanding obligations, with the remaining 60 percent to be settled by a sukuk whose terms will be finalized shortly. Notably, Nakheel has been making these payments without having final agreement on its restructuring package, indicating an objective of keeping activity flowing as smoothly as possible. As for DW, virtually all creditors accepted its proposal by the deadline of September 10, 2010. Although the terms of the DW offer are not as severe as some initial predictions, due to the extension of maturities at below commercial interest rates they represent a substantial haircut in net present value terms (on the order of 25 percent). There were indications during the summer that some creditors were balking at these terms, leading the company to reiterate its option to force a deal via the special insolvency tribunal established in Dubai International Financial Center (DIFC) last year. As the creditors became convinced that no better deal was possible, DW’s offer was able to go through.

Source: Compiled by World Bank, MNSED.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 23: Credit growth in GCC Credit Growth (YoY, in percent) – GCC Bahrain

Kuwait

Oman

Qatar

Saudi Arabia

United Arab Emirates

80 70 60 50 40 30 20 10 0 May–10

Mar–10

Jan–10

Nov–09

Jul–09

Sep–09

May–09

Mar–09

Jan–09

Nov–08

Jul–08

Sep–08

May–08

Mar–08

Jan–08

Sep–07

Nov–07

Jul–07

May–07

Mar–07

Jan–07

Sep–06

Nov–06

Jul–06

May–06

Mar–06

Jan–06

–10

Source: Datastream.

persuasion and authority to move things along. It has promised new funds for viable entities and the prospect for financial institutions’ continued engagement with the Dubai business model, but has reserved the right to move the restructuring to a special insolvency tribunal in the Dubai International Financial Center16 if a consensual restructuring could not be reached. Not all parties to the GCC debt restructuring have been satisfied. Some creditors have found themselves in particularly weak positions as a result of this process. Creditor bargaining power has varied with the type of obligation. The creditors in the weakest position vis-à-vis distressed debtors have been lenders at the holding company level and purchasers of yet-to-be-delivered assets. Lenders to the holding company level of a corporate entity have been vulnerable to the problem of co-mingled finances and lack of clarity about which assets they could pursue in the event of default, whereas subsidiary companies typically offer clearer outcomes in both respects. A further complication is evident in the case of the Saad and al-Gosaibi groups in Saudi Arabia, where the holding companies were managing financial operations in Bahrain and

creditors of the latter are thus forced to pursue cross-border claims. The experience of purchasers of off-plan Dubai property has made clear their lack of recourse when things go wrong. These investors have been faced with the conundrum of whether to provide further funds into a distressed entity in order to get its developments closer to completion. On the other hand, secured lenders and asset-based financiers (as in Islamic finance) have been in a somewhat stronger position, although the unraveling of various claims on specific assets could also pose difficulties. Significant government support has enabled the market for large project and corporate finance to continue functioning, despite heightened risk aversion and uncertainty. Although private sector bank credit availability remains tight throughout the GCC, GCC firms have been able to conduct large funding operations. In Saudi Arabia, major financing has been carried out by key government-related enterprises such as the petrochemicals giant Sabic and the electric The DIFC tribunal was created specifically for DW and there has been no indication that the government intends broadening its scope to other “Dubai Inc.” debt distress situations, such as that of Dubai Holding.

Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Table 3: Debt restructurings in the GCC, 2008–2010 Current status

Involves sukuk (Y/N)

Company

Country

Initiated

Amount

Kuwait Finance & Investment Co.

Kuwait

2008 (early)

$0.5 bn

Concluded June 2010

Global Investment Kuwait House

Dec-08

$1.7 bn

Creditor agreement obtained Dec 2009

Investment Dar

Kuwait

Jan-09

$3.5 bn

Creditor agreement (tentative) obtained Dec 2009. Some litigation continues. Restructuring terms will have to be approved by court since the company is in court protection.

Gulf Invest

Kuwait

Apr-10

$0.05 bn

Loan guarantee called from United Arab Emirates’ bank.

International Investment Group

Kuwait

Apr-10$

0.2 bn

Ongoing “business review”; sukuk being dissolved; 2nd missed payment in July.

Saad & al-Gosaibi Saudi Arabia/ groups Bahrain

May-09

$15-20bn

Partial local settlement in Saudi Arabia. Ongoing negotiation and legal actions elsewhere.

Dubai Holding plus United Arab subsidiaries Emirates

May-10$

1-3 bn

Loan extensions sought at holding company and subsidiary level. No formal default.

National Central Cooling

United Arab Emirates

Apr-10

$1 bn

Ongoing

Dubai World

United Arab Emirates

Nov-09

$26 bn

Virtually all creditors accepted offer in September 2010. Finalization expected shortly.

Nakheel

United Arab Emirates

Nov-09

$10 bn

On parallel track to the above but with larger sukuk and trade credit elements.

Blue City

Oman

$0.6 bn

Project not viable as originally conceived; bonds bought at 33% discount by an Abu Dhabi fund (June 2010)

Gulf Finance House

Bahrain/Kuwait

Feb-10

$0.3 bn +

Rollover granted but strains continue. No formal restructuring request.

Source: Staff compilation from media reports.

utility Saudi Electric, while the government has also been a direct lender to both of these companies and to other large projects with mixed public and private participation. In Qatar, the central government and a unit of the sovereign wealth fund have raised billions of dollars through bond issues. The bonds provide a safe asset for riskaverse banks, and the funds allow the government to play a more direct role as a financier of major projects, especially in real estate, at a time when other players withdrew. The government of Bahrain has also used bond sales to support macroeconomic stimulus efforts. When the government has not been directly present in bond markets, yields have been high.

Three significant bond issues without a government guarantee have seen near double-digit yields, and other potential issues have been postponed in the wake of market uncertainties which were particularly pronounced during the height of concerns about Greece’s debt crisis. Nevertheless, two United Arab Emirates’ banks have successfully tapped the Malaysian sukuk market at attractive yields, but these banks benefit from their implicit government backing. For many other borrowers, all indications are that conditions are very tight. DW restructuring has had a long-lasting effect on the market for GCC sukuk. The amount of GCC sukuk issuance has declined from 2009

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 24: Spreads over LIBOR on Global (SKBI) and GCC sukuk (GSKI) and GCC conventional bonds (SKBI) GSKI

GCBI

SKBI

700 600 500 400 300 200 100 31-Aug-10

17-Aug-10

3-Aug-10

20-Jul-10

6-Jul-10

22-Jun-10

8-Jun-10

25-May-10

11-May-10

27-Apr-10

13-Apr-10

30-Mar-10

16-Mar-10

2-Mar-10

16-Feb-10

2-Feb-10

19-Jan-10

5-Jan-10

22-Dec-09

8-Dec-09

24-Nov-09

Source: HSBC/Nasdaq Dubai Indices.

levels. Furthermore, yields on new issues have been high, at around 10 percent, and yield spreads on existing securities over the LIBOR benchmark have not returned to their November 2009 levels prior to the first DW announcement, and are higher than East Asian sukuk spreads. GCC sukuk spreads are about 120 basis points above their November level, while GCC conventional spreads are about 30 basis points lower than their November level, and global sukuk spreads are about 30 basis points above their November level (Figure 24). The state of the sukuk market is not surprising because the DW debt standstill crystallized concerns about two aspects of sukuk financing in the GCC: (i) the lack of clarity about procedures in the event of a default, and (ii) the use of real estate as the underlying asset in sukuk transactions. Sukuk markets have been illiquid prior to the defaults and became more illiquid since then as spreads widened. Clarity on asset recovery in the event of default could boost activity in sukuk trading and lower yields. As is to be expected, tighter supervision of banks and other financial institutions is a key outgrowth of the crisis, even though GCC finan-

cial sectors came through the crisis relatively well. GCC banks were well positioned in terms of liquidity and capital adequacy in the run-up to the crisis. Nevertheless, central banks are placing increased emphasis on stability in sources of funding. For example, the Central Bank of the United Arab Emirates is placing heightened emphasis on a long-standing prudential rule requiring that, for each bank, the ratio of loans and advances to stable resources equals one.17 The Central Bank of Kuwait, which had taken a relatively hands-off approach to investment companies prior to the crisis, is now directly monitoring their leverage, liquidity, and external borrowing. And the Central Bank of Bahrain has imposed limits on real estate lending as a proportion of banks’ total lending portfolio. Other than through financial markets, the debt problems in Europe are unlikely to alter significantly economic growth prospects of the GCC countries. A very small share of GCC exports goes

17 Stable resources consist of free capital and reserves, interbank deposits with a remaining maturity of more than six months and 85 percent of customer deposits. This rule is currently binding for several UAE banks.

Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

to EU25 (Figure 25). Given the dominance of hydrocarbon exports in total merchandise exports and gross domestic product (GDP), growth in the GCC economies will depend mostly on how the debt problem in Europe evolves, whether it spreads beyond Europe and slows down the global recovery and global demand for oil. Recent developments suggest that the possibility of contagion has become a much less likely scenario. The recent spike in wheat prices—which nearly doubled in August 2010 from their lows in June 2010—has caught the GCC countries in the early stages of implementing food security strategies. Wheat reserve levels in all GCC countries except Saudi Arabia are low, at less than one month of consumption, and these countries are highly dependent on wheat imports (Table 4). According to recent data, the GCC countries import 87 percent of their wheat consumption with all but Saudi Arabia producing no wheat domestically and relying 100 percent on imports. The impact of the price spike on the GCC countries however is expected to be negligible (Table 4). An increase of 50 percent in the price of wheat is estimated to increase the import bill

by just 0.05 percent of GDP in the GCC countries. And although wheat price increases might transmit to other products, at the macro-level all GCC countries still have fiscal space to respond to increases in the food import bill (Table 5). However, food price increases coupled with a weakening dollar, might stoke inflationary pressures, and be a cause for concern in countries like Saudi Arabia where inflationary pressures are a special problem. In 2007–08 rises in wheat prices led to a rise in overall food inflation, which outpaced overall inflation.

Most developing oil exporters are vulnerable to oil price shocks and volatility Developing oil exporters are expected to have benefited from increases in oil exports and oil prices in 2010 (Figure 3). Fiscal and current account balances are expected to have improved (Figure 21 and Figure 22) due to an increase in oil revenue in 2010 compared to 2009. Developing oil exporters however are vulnerable to a sharp decline in oil prices as they are dependent on oil and have much more limited fiscal space than GCC oil exporters to respond to terms-of-trade

Figure 25: Exposure to EU markets for merchandise goods Total Exports over GDP

Exports to EU 25 over Total Exports

Exports to EU 25 over GDP

70 60 50 40 30 20 10 Oil Importers with EU links

Oil Importers with GCC links

Developing Oil Exporters

GCC

MENA

SSA

LAC

ECA

EAP

Source: Data source: WDI, World Bank and Comtrade.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Table 4. Impact of a wheat price hike in GCC oil exporters Net Imports (% of consumption)

Wheat reserves (months)

Change in import bill due to a 50% in wheat prices (% of GDP)

Change in import bill increase due to a 50% increase in wheat prices (% of foreign reserves)

Bahrain

100

0.05

n/a

Kuwait

100

0.02

1.12

Oman

100

0.06

1.41

0.06

1.68

100

0.05

n/a

0.05

n/a

Saudi Arabia United Arab Emirates GCC oil exporters

Source: Staff calculations based on USDA and World Bank data for 2009 GDP in ‘000s and 2008 monthly foreign reserves data.

Figure 26: US wheat prices 450 400 350 US$/mt

300 250 200 150 100 50 Jul-10

Aug-09

Sep-08

Oct-07

Nov-06

Dec-05

Jan-05

Feb-04

Mar-03

Apr-02

May-01

Jun-00

Jul-99

Aug-98

Sep-97

Oct-96

Nov-95

Dec-94

Jan-94

Source: World Bank.

shocks. Most developing oil exporters have used some of their fiscal resources to cushion the impact of the crisis in 2009 (Table 2 and Table 5). Excessive volatility in oil prices is one of the major problems facing developing oil exporters going forward. Oil prices dropped $20 per barrel in May 2010, before recovering to trade back close to OPEC’s target range of $70–$90 per barrel. Signaling the increasing use of oil as a mainstream asset and OPEC’s difficulties with supply management, volatility in oil markets has grown over time and is now much higher than the volatility of other commodity prices (Figure 27). Volatility of oil prices is expected to be present going forward implying that prudent macroeconomic

management and oil revenue management have become more challenging and more important than ever before. Strategies aimed at diversifying the economic base and scaling up non-oil sources of growth will also help reduce the vulnerability of these countries to excessive oil price volatility. Several developing oil exporters including Iraq and the Republic of Yemen are especially vulnerable to this volatility due to their limited fiscal space (Table 5). In the Republic of Yemen, where the government obtains 60 percent of fiscal revenue from oil exports and distribution, and fiscal and current account deficits were above 10 percent as a share of GDP in 2009, the goal of the government is to reduce the fis-

Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Table 5: MENA fiscal space in 2009

Fiscal Balance as % of GDP

Current account balance as % of GDP

Government debt as % of GDP

Reserves in months of imports

Reserves (including SWF) in months of imports

Bahrain

–8.7

1.6

27.1

4.1

19.2

Oil exporters GCC Kuwait

19.3

29.2

6.9

6.8

88.9

Oman

2.2

–2.2

6.7

6.2

7.3

Qatar

13.0

15.7

39.5

7.6

27.3

Saudi Arabia

–6.1

6.1

16.3

25.8

44.2

0.4

–2.7

26.4

2.2

20.4

United Arab Emirates Developing oil exporters Algeria

–6.6

0.3

15.0

33.6

43.5

Iran, Islamic Republic of

–2.7

2.6

16.2

9.3

10.7

Iraq

–14.2

–25.7

141.6

12.9

—

Libya

10.6

16.8

0.0

41.8

64.8

Syrian Arab Republic

–5.5

–2.4

29.1

10.7

—

–10.2

–10.7

39.9

9.2

—

Djibouti

–4.9

–17.3

60.3

2.9

—

Jordan

–10.3

–5.1

66.1

8.4

—

–8.1

–15.5

148.0

24.0

—

Egypt, Arab Rep.

–6.9

–2.3

76.2

6.3

—

Morocco

–2.2

–5.0

46.9

7.8

—

Tunisia

–3.0

–2.9

47.2

4.9

—

Yemen, Rep. Oil importers Oil importers with GCC links

Lebanon Oil importers with EU links

Source: World Bank data, Government debt and SWF data are from IMF. Fiscal balance

Larger than 2% of GDP

–2% to + 2% of GDP

Less than –2% of GDP

Current account balance

Larger than 3% of GDP

–3% to + 3% of GDP

Less than –3% of GDP

Government debt

0 to 30% of GDP

30% to 80% of GDP

Larger than 80% of GDP

International reserves in months of imports

More than 6 months

Between 3–6 months

Less than 3 months

cal deficit by containing current expenditures and slashing energy subsidies, but to protect investment and priority spending. Development spending, including social transfers to the poorest households and basic education and health, are projected to increase in order to compensate

the poor and vulnerable for the increase in domestic energy prices as a consequence of the energy subsidy cuts, and sustain the progress towards meeting the Millennium Development Goals (MDGs). To accelerate non-oil growth and employment opportunities, the government has

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 27: Commodity volatility (standard deviations in monthly prices) Jan-94-feb 04

Mar-04-Aug10

Coffee Steel Wheat Gold Tin Natural Gas Copper Crude Oil 0

100

120

140

160

Source: Staff calculations based on World Bank data.

put in place an incentive system for private investment in line with international best practice. In Iraq, the government has aimed to contain current expenditures while protecting priority public investments, and to commit to a mediumterm-oriented approach to oil revenue management. Despite these efforts Iraq’s fiscal deficit is expected to decline only modestly and remain close to 12 percent of GDP in 2010. Agriculture is the second engine of growth in Iraq but since 2002 its contribution has eroded as infrastructure and productivity have deteriorated significantly. In addition, oil price risks are compounded by political risks in Iraq. A prolonged political vacuum or the formation of a government that excludes part of the electorate could result in a worsening of the security situation. This could also put at risk the development of new oil fields by international oil companies, which could limit projected increases in oil production, and can put at risk the growth outlook presented here. Syria’s economy is much less vulnerable to oil price shocks than the economies of other developing oil exporters. Syria is a lot less dependent on oil exports than other developing oil exporters, and a substantial share of its non-oil exports go to the GCC, and other countries. Given expectations that Syria’s recoverable oil reserves will be depleted by 2030, Syria has started di-

versifying its economic base. Its non-oil exports grew rapidly in the 2000s but so did imports of goods and services. The government is taking measures to boost exports further and tighten its fiscal stance in 2010 compared to 2009, although fiscal and current account deficits are expected to persist in the near term. Algeria is much less vulnerable to oil price shocks than other developing oil exporters. The government of Algeria has used its fiscal space to launch an ambitious public investment program over the next 4 years. This investment stimulus is $100 billion larger than its 2005–09 plan and intends to diversify the economy, promote private investment and reduce unemployment. So far the stimulus has had a positive impact on the construction, infrastructure and energy sectors. However, manufactures remain uncompetitive due to the poor investment climate and restrictive policies toward FDI. Some developing oil exporters are also vulnerable to a food price shock stemming from the recent increases in wheat and food prices. The Republic of Yemen in particular stands out as the most vulnerable in the region (Table 6). It is one of the poorest countries in MENA, relies on wheat imports to meet 82 percent of its consumption, has reserves that would cover less than a month of its average monthly wheat consumption and has a

Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Table 6: Impact of a wheat price hike in developing oil exporters Change in import bill due to a 50% increase in wheat prices (% of GDP)

Change in import bill due to a 50% increase in wheat prices (% of foreign reserves)

Net Imports (% of Consumption)

Wheat reserves (months)

0.4

—

Iran

—

Iraq

0.6

Syrian Arab Republic

0.4

—

Yemen, Rep.

0.9

Developing oil exporters

0.2

—

Algeria

Source: Staff calculations based on USDA and World Bank data for 2009 GDP in ‘000s and 2008 monthly foreign reserves data.

weak fiscal position. A 50 percent increase in the wheat price would translate into an estimated increase in the import bill of nearly 1 percent of GDP or more than 20 percent of foreign reserves. The cuts in estimated global production between May and August are projected to have raised the domestic wheat price in the Republic of Yemen by 26 percent. This price increase is likely to have raised poverty in the Republic of Yemen by slightly more than 0.3 percentage points (Figure 28), which represents an increase in the number of the poor by an estimated 80,000 people. Because

wheat production in the Republic of Yemen is limited and its sales among the poor represent less than 0.5 percent of their income, the poverty impact of higher wheat prices is dominated by the rising costs to the poor consumers who spend on average 12.5 percent of their income on wheat and wheat-related products. Iraq also appears to be vulnerable although slightly less than the Republic of Yemen largely due to sourcing a smaller share of its wheat consumption from abroad (Table 6). Algeria reacted

Figure 28: Some potential poverty impacts of a wheat price spike

CIV

ALB

BLZ

PAN

PER

ARM

RWA

UGA

GTM

NEP

LKA

IDN

ECU

2009/10–August 2010 + embargo May 2010–August 2010 + embargo

MWI

NIG

VNM

YEM

NIC

BGD

TLS

NGA

TJK

1.0% 0.9% 0.8% 0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0%

PAK

2009/10–August 2010 May 2010–August 2010

Source: Staff estimations, World Bank. Note: Simulations of poverty impacts in response to wheat price changes due to the decline in world wheat production over different periods and the impacts of embargoes by Russia, Kazakhstan and Ukraine. The assumption is that only half of the increase in the price would be transmitted to the domestic markets of each country. The names of economies follow the UN 3 letter code system.

â&#x20AC;&#x192; Sustaining the Recovery and Looking Beyond â&#x20AC;&#x201C; A Regional Economic Developments and Prospects Report

Figure 29: Non-oil merchandise exports to EU25 Total Exports over GDP

Exports to EU 25 over Total Exports

Exports to EU 25 over GDP

50 45 40 35 30 25 20 15

Oil Importers with EU links

Oil Importers with GCC links

Developing Oil Exporters

GCC

MENA

SSA

LAC

ECA

EAP

10 5

70 60 50 40 30 20

Yemen, Rep.

United Arab Emirates

Tunisia

Syrian Arab Republic

Saudi Arabia

Qatar

Oman

Morocco

Lebanon

Kuwait

Jordan

Iran, Islamic Rep.

Egypt, Arab Rep.

Bahrain

Algeria

Data source: WDI, World Bank and Comtrade.

to the Russian wheat export ban by purchasing extra wheat on the spot market. The impact of a 50 percent price hike on its import bill would however be very small. Among the developing oil exporters, Syria seems to be most prepared to face the jump in wheat prices as its wheat reserves can cover roughly 10 months of consumption. In addition, Syria is far less dependent on wheat imports than other developing oil exports. The Islamic Republic of Iran is not vulnerable as it imports only a tiny share of its annual wheat consumption.

A possible future slowdown in Europe, triggered by fiscal compression in the highly indebted parts of the EU and combined with financial sector instability, is expected to have marginal effect on developing oil exporters as their shares in non-oil exports to the EU25 and the Southern Euro Zone18 are small and their financial sectors are not exposed to global financial markets (Figure 29 and Figure 30). 18

Southern Euro Zone includes Portugal, Italy, Greece and Spain.

Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Figure 30: Non-oil merchandise exports to Southern Euro Zone Total Exports over GDP

Exports to SEZ over Total Exports

Exports to SEZ over GDP

45 40 35 30 25 20 15 10 5 Oil Importers with EU links

Oil Importers with GCC links

Developing Oil Exporters

GCC

MENA

SSA

LAC

ECA

EAP

Data source: WDI, World Bank and Comtrade.

Only one country—Algeria—appears to be highly exposed to the EU 25 through trade. Its exports to the EU25 account for more than 50 percent of its merchandise exports. This high exposure is due mostly to oil exports which can easily be redirected to other markets. Among developing oil exporters, Syria is the country with the highest non-oil trade exposure to the EU25 market. Still with a non-oil merchandise export share to the EU25 of around 8 percent, the impact on Syria’s economy is expected to be small.

Oil Importers’ Recovery Depends on Developments in Key Markets, Notably the EU Oil importers weathered the effects of the global economic and financial crisis better than other MENA countries, but developments in Europe are expected to have dampened growth in 2010, especially the growth of those countries with strong EU links (Figure 3). Even though at present a resolution of the fiscal issues in high-income Europe is a likely scenario, oil importers with strong EU links are likely to face some repercussions of the expected significant fiscal contraction in the heavily-indebted, highincome European countries (EU-5),19 and the

expected slow growth in the EU. The effects would come through the balance of payments, reflecting the impacts on trade, remittances and FDI flows. Oil importers with EU links, such as Tunisia, Morocco and Egypt, have the greatest trade exposure to the highly-indebted countries in the Southern Euro Zone (SEZ) and the second highest trade exposure to the EU25, after ECA (Figure 29 and Figure 30). The share of these countries’ exports to the SEZ exceeds ECA’s share by such a wide margin that even these countries’ lower openness does not diminish the impact of this exposure on income. In this group of countries, Tunisia is the most vulnerable to shocks in the EU25 and the SEZ (Figure 29), followed by Morocco and Egypt. How hard these countries are hit depends on the extent of the fiscal contraction in the EU, and how quickly they can shift sales to markets outside the EU. In addition, two of the oil importers with EU links—Morocco and Tunisia—are much more dependent on the EU for their remittance flows 19

This group includes Portugal, Italy, Island, Greece and Spain.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

than Egypt and the rest of the oil importers. According to data for 2000, 72 percent of Morocco’s emigrants and 75 percent of Tunisia’s migrants were located in the EU27, compared to just 10 percent for Egypt’s.20 Demand for migrants in the GCC countries is expected to grow at a much faster pace than that in the EU as the GCC countries have fiscal space and long-term investment plans that will fuel demand for imported labor, while fiscal space in EU is extremely limited and many large EU members have plans for large fiscal contractions. According to the IMF fiscal consolidations in the range of 9.2 and 4.8 percent of GDP, respectively, are needed in Greece and Italy to reduce the debt burdens in these countries to 60 percent of GDP. Compared to ECA, the oil importers are a lot less likely to be affected through the financial channel as their financial sectors are much less integrated into the EU and global financial markets than ECA’s financial sector. Indeed according to a recent report prepared by the Arab Monetary Fund and the World Bank, a sizable share of capital flows in MENA is intra-regional suggesting that the MENA countries have a buffer insulating them to some degree from turmoil in global markets. In anticipation of a prolonged slowdown in the EU, most oil importers with strong EU links extended or implemented new fiscal stimulus.21 Tunisia has chosen to maintain its expansionary fiscal policy to support growth and delay fiscal consolidation until at least 2011, as well as initiate additional reforms aimed at improving the business climate and foster foreign investment. The government remains vigilant of the situation in the Euro Zone and has set aside in the budget an unallocated expenditure cushion of around 1.5 percent of GDP that could be used if the situation prevailing in European partner countries worsens in the second half of 2010.

number of measures, including the provision of guarantees on working capital loans; finance for promotion campaigns and market surveys; debt rescheduling; insurance coverage for exports; training and logistics in partnerships with business associations; removal of some types of import restrictions; and public contribution to the payment of social insurance by employers in eligible categories. Specific programs have been designed for firms operating in Morocco’s tourism sector and for the remittances and investments of Moroccan workers residing abroad. As of June 2010, 443 firms requested social insurance relief, 129 firms benefited from loan guarantees, 134 benefited from training. The majority of firms that sought these types of support operate in the textile industry, while the remaining are in automotive equipment and electronics sectors. In addition, the government continues to extend tax relief, wage increases and social expenditures for selected groups. These measures, along with a much higher public investment program kept domestic demand high, but those expenses related to Morocco’s food and fuel subsidy system constitute a key macroeconomic risk in the event of an unexpected increase of oil and food prices. With the recent droughts in a number of countries and the wheat export ban in Russia, the risk of a food price hike has become real. All oil importing countries are vulnerable to the effects of a sharp increase in food and wheat prices. Egypt, Jordan and Lebanon rely heavily on wheat imports, especially from Russia, and the grain harvests in Morocco and Tunisia are expected to be smaller this year compared to last year. To head this off Egypt—the world’s biggest importer of wheat, as well as Tunisia and

Source: World Bank (2010). In Egypt, the fiscal deficit is expected to have widened due to the economic slowdown and the fiscal stimulus implemented by the government of Egypt during the past fiscal year from July 2009 to March 2010. Although the stimulus package adds up to 1.5 percent of GDP, 40 percent of it was spent in the fourth quarter of the fiscal year. At the time this report was written the government had no plans for additional fiscal stimulus packages. Furthermore, the government plans fiscal measures aimed at reducing the fiscal deficit to 3 percent of GDP over the next 5 years.

20 21

The government of Morocco implemented several measures to help affected firms cope with the decline of external demand well before recent months, but in June 2010 the government decided to extend the implementation of the stimulus package until the end of 2010. The support costs 0.2 percent of GDP and includes a

Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Table 7: Impact of a wheat price hike in oil importers Net Imports (% of consumption)

Wheat reserves (months)

Change in import bill due to a 50% increase in wheat prices (% of GDP)

Change in import bill due to a 50% increase in wheat prices (% of foreign reserves)

Egypt, Arab Rep.

0.5

Morocco

0.4

Tunisia

0.4

Jordan

0.4

Lebanon

0.1

Oil importers

0.4

Source: Staff calculations based on USDA and World Bank data for 2009 GDP in ‘000s and 2008 monthly foreign reserves data.

Jordan, reacted quickly by buying extra wheat on the spot market at higher prices than those prevailing before the ban announcement. Egypt and Morocco have the largest estimated monthly imports, and therefore face the largest increases in the import bill as a percent of monthly foreign reserves (Table 7). Strong domestic demand supported growth in all oil importers. In Egypt economic activity in 2010 is expected to average 5.1 percent, driven by private consumption and investment, on the demand side, and strong expansions in construction, services and non-oil manufacturing, on the supply side. By contrast, Morocco and Tunisia—the two economies most heavily dependent on trade and remittances from Europe—are expected to grow at a much slower pace than Egypt and other oil importers.22 On the demand side, growth in Morocco is expected to be driven by expansion of consumption and private investment, as the rebound in exports will not offset the surge in imports. On the supply side, growth is expected to be driven by an expansion of industry and services, while agricultural output is expected to have contracted following an exceptionally successful year. In Tunisia, internal demand is driving the recovery too as import growth has outstripped export growth due to a strong inflow of imports of capital and intermediate goods. Manufacturing output expanded, while most services expanded only modestly. The growth outlook for oil importers with GCC links continues to be strong largely because

of the high expected growth in Lebanon, where credit to the private sector has been growing at the highest pace among oil importing economies (Figure 31). Strong regional demand fueled by oil wealth and inflows of capital into Lebanon’s real estate and banking sectors—considered a safe haven in times of crisis by the Lebanese Diaspora and some GCC nationals— has been driving the boom in the construction and trade sectors. Sectors producing tradable goods and high value-added services however remained weak due to structural bottlenecks in infrastructure, and the loss in competitiveness associated with the continued real exchange rate appreciation (Figure 32), driven by the massive inflows of financial resources into the Lebanese economy. Management of large financial inflows has been one of Lebanon’s key macroeconomic challenges. In 2009, deposits in the banking sector increased by 23 percent—an increase equivalent to 54 percent of GDP, and by 4.5 percent between December of 2009 and June of 2010. In addition to the appeal of Lebanon as a safe haven, the country has attracted financial resources by offering large spreads between interest rates on deposits in Lebanese banks and international rates. The spreads widened substantially in the course of the financial crisis, but in 2010 have narrowed down. The Central Bank of Lebanon

See statistical appendix for country-specific macroeconomic information.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 31: Credit growth in oil importers Credit Growth (YoY, in percent) – MENA Emerging Egypt

Jordan

Lebanon

Morocco

Tunisia

40 30 20 10 0 –10 May–10

Mar–10

Jan–10

Nov–09

Jul–09

Sep–09

May–09

Mar–09

Jan–09

Nov–08

Jul–08

Sep–08

May–08

Mar–08

Jan–08

Sep–07

Nov–07

Jul–07

May–07

Mar–07

Jan–07

Sep–06

Nov–06

Jul–06

May–06

Mar–06

Jan–06

–20

Source: Datastream.

Real undervaluation index

Figure 32: Rodrik’s real undervaluation index for Lebanon 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0 –0.2 –0.4 –0.6

1972 1977 1982 1987 1992 1997 2002 2007

Source: Staff calculations. Note: The Rodrik’s (2008) real undervaluation index is a measure of the deviation of the actual real exchange rate from the PPP real exchange rate which takes into account the BalassaSamuelson effect, i.e. it takes into account the fact that the relative price of non-tradable goods are higher in countries with higher income per capita.

has already initiated a new interest rate policy aiming to gradually reduce the spread on depositor’s rates between Lebanon and the international market. The spread has already declined by 81 basis points between October 2009 and June 2010. This has been a key factor behind

the deceleration of foreign inflows in the first half of 2010, and the deceleration of growth compared to 2009. Limited fiscal space—defined by large twin deficits and government debt above 145 percent of GDP—is a key source of long-term vulnerability in Lebanon. It constrains the ability of the government to respond to unexpected adverse shock, including the one related to the recent wheat price spike. Most importantly, over the long-run, a failure to implement structural reforms aimed at increasing the competitiveness of the economy and addressing the fiscal risks could erode further the country’s growth outlook and debt servicing capacity. Annual growth in Jordan is expected to increase relative to 2009 but remains far below its pre-crisis level as credit to the private sector expanded at the lowest pace among the oil importing countries in the region (Figure 31). Jordan continues to rely on remittances and financial flows from the GCC countries, but its exports have become a lot more dependent on the US and Asian markets and a lot less dependent on the EU and the GCC (Figure 33).

Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Figure 33: Jordan has made a dramatic shift in export destinations 1998

2008

Africa 3% USA 2%

LAC 0%

Africa 3% Other MNA 10%

Other MNA 10%

RoW 9%

Asia 33%

Asia 42%

USA 20%

GCC 28% EU 13%

ECA 2%

RoW 6% LAC 1%

GCC 9%

EU 7%

ECA 2%

Source: COMTRADE data.

The government of Jordan has decided to tackle the country’s main source of vulnerability—its limited fiscal space, by tightening the fiscal policy stance in 2010 and adopting measures to rationalize government consumption. At the same time the government has taken measures to stimulate investment and economic activity. These measures include income tax exemptions on export activities, reduction in land and property registration fees, and the provision of public lands for production, tourism and services projects. Hoping to encourage lending to the private sector, the government has started providing guarantees to SME’s borrowing for productive projects. The government has also approved a new debt strategy emphasizing further reliance on external borrowing in order to reduce any potential crowding out effects of government borrowing. For this purpose, the government has announced the first Eurobond issuance in the history of Jordan. This issuance is expected to serve as a benchmark for future operations.

A pronounced global economic slowdown in the second half of the year is the key near term risk to Jordan’s outlook, although for now the chance of this happening has receded. Weakening political support for the medium term reform agenda adopted by the government is another risk that the government will need to take into account as it decides to balance the need for stimulus with the need to improve its fiscal stance. The main effect of the financial and economic crisis in Djibouti was felt in the form of a significant slowdown in FDI flows as a consequence of the financial difficulties in Dubai. In 2010, transport and port-related activities have been areas of strength, but growth is expected to have decelerated to 4.5 percent on weakness in agriculture and manufacturing. With limited fiscal space—including very small reserves—the government has not extended any fiscal stimulus this year. Instead, the government adopted a fiscal stability plan in addition to a multiyear payment schedule to partly cover domestic payment arrears accumulated in 2009.

Part II. Looking Beyond the Recovery and Beyond Oil

Chapter 3

MENA remains uncomfortably dependent on the capital-intensive oil sector MENA felt the impact of the financial and economic crisis to a much lesser extent than developed economies and emerging markets outside Asia, but the economic recovery in MENA has also lacked vigor. By 2011–12 MENA is expected to return to growth observed in the period 2000–06, but growth rates in the range of 4.8 percent are not high enough to address the key challenges facing the region. These include high unemployment rates—especially for young people, low labor force participation rates—notably for women, one of the world’s lowest formal employment rates, and the highest population and labor force growth rates among middleincome economies (Figure 34). In the last ten years MENA’s growth accelerated relative to the previous decade in response to intensified efforts in many countries to bolster their private sectors and diversify their sources of growth. Governments improved macroeconomic management, simplified business regulations, reduced restrictions to trade and investment, and opened up their financial sectors. Indeed, the average number of reforms in MENA has steadily increased during the last 5 years. Achievements related to external barriers to trade however have been more limited, and per capita growth in developing MENA has been modest. Governments have relied frequently on “positive list” trade agreements which liberalize trade for specific “listed” products and grant a tariff preference to the signatories of these agree-

ments, and by construction do not open trade in goods produced domestically.23 Annual per capita growth of developing MENA countries advanced on average only modestly in the period between 2000 and 2008 and averaged just 2.5 percent per annum—a rate that compares poorly with the mean of 4.6 percent for the developing world (Figure 35). The capital-intensive oil sector has been and remains the primary vehicle for revenue and wealth creation for the oil exporters in the region, while the spillover effects to the oil importing countries in the region and beyond have been significant. Governments in oil exporting countries have relied on oil revenues to provide public services and infrastructure, and budgetary support in times of crisis, and some—especially the GCC countries—have used their oil wealth to pursue state-led economic diversification strategies. MENA oil importers also benefitted from the oil wealth as they supplied labor to the oil-rich MENA economies and absorbed investments coming from these countries. Going forward the outlook for oil remains promising, but there is significant uncertainty in the projections. There is a consensus that crude oil prices will remain high in the next decade due to rapid demand growth in developing countries, declining production from mature fields and higher costs for new production in remote areas and unstable regions. Indeed, the International 23

For more information see Hoekman and Sekkat (2009).

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 34: Population and labor force growth (%, annual averages) Population growth rates 1990–99

2000–2008

3.0 2.5 2.0 1.5 1.0 0.5 0.0

EAP

SSA

SAS

ECA

LAC

MNA

Labor force growth rates 2005–10

2010–20

3.5

Percent

3 2.5 2 1.5 1 0.5 0 Low income EAS

LAC

SSA

SAS

MENA

Source: World Bank, WDI. Note: Labor force growth rates are projection based on estimations presented in Koettl (2008) and assuming constant participation rates.

Energy Agency (IEA 2008) announced that “the era of cheap oil is over”. China and India are expected to account for just over half of the increase in global primary energy demand between 2006 and 2030. However, climate change and policies to mitigate green house gas emissions could push energy prices lower by 2030, and increase demand for low-carbon bio-fuels (IEA 2008). Not surprisingly, a number of MENA oil exporters are actively engaged in energy diversification through the adoption of an aggressive renewable energy exploitation plans based on untapped sources, innovative technology, use of private capital and energy trading.

With the benefits from oil however come serious risks as MENA remains uncomfortably dependent on the capital-intensive oil sector. In 2008, 55 percent of MENA’s population lived in MENA’s oil exporting countries, oil accounted for nearly 90 percent of these countries’ exports (Figure 36), and nearly 50 percent of these countries’ GDP. In 2007 twenty-two countries received at least 90 percent of their merchandise export earnings from commodities,24 and approximately one third of them were MENA

Source: Mitchell and Aldaz-Carroll (2010).

Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

Figure 35: Growth of per capita income by region (percent) 1990–99

2000–2008

World

Developing economies

SSA

LAC

ECA

EAP

Developing MENA

GCC

MENA

9 8 7 6 5 4 3 2 1 0 –1 –2

Source: World Bank WDI.

countries. Dependence on oil carries serious risks to growth sustainability. Some of the risks of dependence are well-understood and include volatility, Dutch disease, environmental degradation, political instability and conflict, and institutional weakness and corruption. Other risks are less obvious and have to do with a mismatch between the economy’s endowment base and its endowment use, and in the future, the threat of viable alternatives to oil. The latter should also not be discounted just because at present Asia has a tremendous appetite for commodities. Technological advances would likely offer a low-carbon emitting alternative to fossil fuels in the future. Some MENA oil exporters have been taking steps to minimize their potential risks and enhance the potential benefits of oil-driven growth. The GCC countries, in particular, have followed prudent macroeconomic policies and management of oil revenues, and accumulated large savings in the form of reserves and sovereign wealth funds. Indeed, during the period between 1997 and 2007, the group of GCC countries became the fourth largest exporter of capital after China, Germany and Japan (Figure 37). Over the years, GCC oil exporters have used their sovereign oil wealth funds to finance infrastructure, technology and education, as well as to acquire

different types of foreign investments in an effort to diversify their domestic and foreign sources of revenue. The United Arab Emirates’s servicedriven 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. However, the labor-abundant developing oil exporters have been far less successful than the labor-importing GCC countries in dealing with some of the pitfalls of oil dependence. These countries suffer from weak institutions, conflicts, macroeconomic volatility, and Dutch disease. The latter has led to increases in the prices of nontradeables relative to tradeables, making the tradeable sector less competitive internationally, and exacerbating the dependence on oil exports. Between 1975 and 2008 oil exports grew in importance as a source of export revenue and growth in the developing oil exporting countries. By contrast, during the same period oil exports declined in importance in the GCC countries. GCC oil exporters improved their competitiveness as they implemented successfully pru-

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 36: MENA’s oil dependence Oil exports (% of total exports)

Percent

1975

2008

100 90 80 70 60 50 40 30 20 10 0 GCC oil exporters

Non GCC oil exporters

Oil importers

Oil exports (% of GDP) 1975

2008

70 60

Percent

50 40 30 20 10 0 GCC oil exporters

Non GCC oil exporters

Oil importers

Source: World Bank, WDI. Note: Non-GCC oil exporters are the developing oil exporters.

dent macroeconomic and structural reforms. Real exchange rate overvaluation became much less of a problem in most GCC countries as they opened labor and goods markets and blocked two important channels through which “Dutch” disease operates. Real exchange rate overvaluation however remains a problem in most developing oil exporters.25 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 (Figure 4). As the oil industry is not labor intensive, continued reliance on oil will not ad-

dress developing oil exporters’ major issue—employment creation, and will only exacerbate the current situation. Dutch disease has also become a threat to those MENA oil importers receiving large remittances and finance from the GCC markets. Young people in oil importing countries, especially those with GCC links, prefer not to work

Yemen is a special case which reflects dwindling oil reserves in a country that has not adjusted its aggregate demand.

Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

Figure 37: Current account surpluses and deficits (US$ billions) 1997

2002

2007

400 200 0 –200 –400 –600 –800

USA

Australia

MENA Oil importers

Oil exporters ( X GCC)

EA X China

GCC

Japan

Germany

China

Source: World Bank, WDI.

Figure 38: Contribution of demand components to growth in MENA Net Exports Private Consumption 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 –2.0 –4.0 –6.0 –8.0

2003

2004

2005

Gross Domestic Investment GDP growth, %

2006

2007

2008

Government Consumption

2009

2010f

2011f

Source: Staff estimates based on World Bank data and projections for 2010 and 2011.

in their home countries due to good prospects of finding a high-paying job in the GCC countries and elsewhere. This has increased wages for some occupations in the oil importing countries. The oil boom in 2000s also triggered an increase in investment flows from the GCC and other developing oil exporters into the oil importing countries in the region. The magnitude of these flows was boosted perhaps because of an increase in “home-bias,” or preference to retain oil wealth in the region after 2001 on

concerns about potential restrictions on MENA investments in other parts of the world.26 Much of this investment has gone into the nontradeable sectors, notably real estate, and has been less likely to help firms boost productivity or get access to new technologies and integrate into global production networks than investment derived from a more diverse set of countries. Indeed, net exports contributed little to growth 26

See for detail Noland and Pack (2008).

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

in MENA in the past decade (Figure 38), while the contribution of gross exports was comparable in size to the contribution of the government sector. Given this imperative, the second part of this report looks at non-oil export growth trends and the obstacles facing MENA’s nonoil exportoriented firms in the context of the challenging, post-crisis global economic environment. The analysis is structured around four sets of questions. How did nonoil exports evolve in the past decade? Do MENA countries face special market access issues? What are the major constraints to MENA’s nonoil export growth? Are reforms implemented by countries addressing these major constraints? The answers to these questions vary by country, although common messages emerge for the three major types of MENA countries—the GCC, developing oil exporters and oil importers. The analysis is guided by a diagnostic framework which evaluates the relative importance of factors affecting returns to investment and cost of financing investments in nonoil exportoriented activities. On the rate of return side, these include factors such as market access, infrastructure, human capital, technology, policy

and institutional environment, information and coordination issues. On the cost of capital side, these include access to domestic and foreign savings, and financial intermediation issues. The report does not discuss all the factors in depth, but focuses on those that are likely to be of special concern for non-oil export growth. Furthermore, some of the topics such as labor market issues and governance are not discussed in depth in this report as they have been presented in detail in other regional studies.

MENA’s non-oil exports of goods and services are below potential due to developing oil exporters’ underperformance Exports of non-oil goods and services play a much smaller role in MENA than in other regions. In 2008, MENA’s share of exports of non-oil goods and services in GDP was just 16 percent compared to 44 percent in East Asia and 22 percent in South Asia, and lower even compared to the shares of LAC and SSA (Figure 39). However, the regional average hides big differences in the contribution of non-oil exports of goods and services within MENA—in particular, between oil importing and oil exporting countries. In the oil import-

Figure 39: Export revenue by type of exports (% of GDP, 2008) Nonoil goods and services

Oil and gas

Remittances

70% 60% 50% 40% 30% 20% 10% 0%

SSA

EAP

ECA

LAC

SAS

MENA

Oil Importers

Non GCC oil exporters

Data source: Comtrade for goods, UN Services Trade Statistics for services, and World Bank for remittances.

GCC

Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

ing countries, non-oil exports of goods and services accounted for 38 percent of GDP—a ratio slightly lower only than East Asia’s, yet they are insignificant as a share of total output in the GCC countries, and especially in the developing oil exporters. Furthermore, the temporary movement of people to deliver services abroad27 is of particular importance in oil importing countries where remittances account for a high share of income.

Figure 40: MENA underperformed relative to its nonoil export potential in the period 1998–2007 1.2 1 0.8 0.6 0.4

The analysis can be conducted more carefully by comparing the performance of MENA countries with their estimated potential to export nonoil goods and services. This export potential is estimated with the help of a model that conditions per capita exports of nonoil goods and services on per capita natural resource endowments, measured by the value of resource-based exports as a share of population. For a cross-section of 71 middle-income countries including 15 MENA countries for which data were available for the ten year period between 1998 and 2007,28 the results indicate a strong positive association of per capita exports of nonoil goods and services with income per capita which controls for skills, technology and institutional endowments indicative of the capacity to export; and a negative association with per capita natural resource exports which tend to be associated with rents that discourage non-natural resource exports. Nonoil exports of goods and services of the oil importers and the GCC countries are found to be at potential, while the situation for the developing oil exporters is significantly weaker than for the other two groups (Figure 40). Developing oil exporters’ non-oil exports are, on average, only one fifth of predicted levels. The weak performance of this group pulls down the overall MENA average to 80 percent of predicted levels. The two middleincome countries with weakest export performance among the 71 middle-income countries in the sample are Algeria and the Islamic Republic of Iran, while those with strong performance include the United Arab Emirates, Bahrain, Jordan, Tunisia and Morocco (Figure 41). The rest of the fifteen MENA countries appear to be underperforming relative to their predicted potential.

0.2 0

Oil Importers

GCC countries

Developing Oil Exporters

MENA 15

Source: Staff calculations of export potential is based on the following estimated regression: PCNOX =-181.09+0.2* PCGDPPPP-0.185*PCNatRes, sample size is 71, Adj R2=0.54, where PCNOX stands for per capita exports of nonoil goods and services, PCGDPPPP is the value of the PPP GDP in per capita US$, PCNatRes is the value of per capita resource-based exports in US$. The data has been adjusted for re-exports.

Other studies explore MENA’s potential to export nonoil merchandise goods only, and come up with the finding that overall MENA underexports such products. Using cross-section data for the period 2005–09, Behar and Freund (2010) find that the typical MENA country exports around 30 percent of its potential, conditioning on size distance and other covariates. Miniesy and Nugent (2002) also find that the typical MENA country exports only 30–36 percent of its potential. Similarly, Bhattacharya and Wolde (2010) estimate that the average MENA country exports 30 percent of potential. These results suggests that overall MENA underexports nonoil

This is part of Mode 4 of trade in services. Mode 1 refers to cross-border trade, consumption abroad as Mode 2, and establishment abroad is Mode 3. 28 The sample includes all middle income countries with per capita income lower than US$11,456 and greater than US$935 in 2007, except for small economies with population less than 1 million. It also includes GCC countries and Yemen that are not middle-income countries, but belong to MENA. The group of GCC countries includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates. Developing oil exporters refer to Algeria, Iran, Syria and Yemen, while oil importers include Lebanon, Jordan, Egypt, Morocco and Tunisia. 27

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 41: MENA countries’ nonoil export potential relative to that of other middle income countries for the period 1998–2007 3.0 2.5 2.0

Good performers

1.5 1.0

Underperformers

Malaysia Mauritius Thailand Philippines Costa Rica Chile Lithuania Latvia Botswana Bulgaria Poland China Ukraine Mexico Azerbaijan Uruguay Sri Lanka Georgia South Africa Indonesia Romania Turkey Cameroon Kazakhstan Albania Argentina India Russian Federation Nigeria Colombia Venezuela, RB Bahrain Jordan United Arab Emirates Tunisia Morocco Qatar Lebanon Syrian Arab Republic Kuwait Egypt, Arab Rep. Oman Saudi Arabia Yemen, Rep. Iran, Islamic Rep. Algeria

0.5

Source: Staff calculations of export potential is based on the following estimated regression: PCNOX =-181.09+0.2* PCGDPPPP0.185*PCNatRes, sample size is 71, Adj R2=0.54, and PCNOX stands for per capita exports of nonoil goods and services, PCGDPPPP is the value of the PPP GDP in per capita US$, PCNatRes is the value of per capita resource-based exports in US$.

merchandise goods, but the degree to which it underexports declines after exports of services are included in the analysis. The econometric results above suggest that the typical MENA country exports around 80 percent of its potential when both nonoil goods and services exports are considered.

MENA has opened up and diversified its exports During the past decade most MENA countries increased their openness and the average MENA share of nonoil exports in GDP rose from 7.5 percent in 1996–99 to 9.2 percent in 2006–08 (Figure 42). All MENA oil importers also made progress in reducing the concentration of their merchandise export baskets (Figure 43). Only the GCC oil exporters seem to have made virtually no progress in diversifying their merchandise exports. They export primarily processed industrial goods such as chemicals, fertilizers and other processed goods (Figure 44), although some GCC countries such as the United Arab Emirates and Qatar have made advances

in diversifying their exports by expanding and diversifying services exports.29 Oil exporting countries export mostly processed industrial products, as well as primary and processed food items. Capital goods such as machinery and equipment represent a tiny share of their merchandise exports. By contrast, oil importers have a more diverse export basket (Figure 44). They export a mix of industrial, food and other consumer items, including some parts and components, and to a smaller extent, capital goods such as machinery and equipment. Tourism and transport are the main sources of export revenue in MENA’s service sector. In the GCC countries the communication sector features as another major source of export revenue. MENA has made a major shift towards the fast-growing markets of Asia. In 1998, 14 percent of MENA’s non-oil merchandise exports went to Asia, but by 2008 this share nearly doubled and reached 25 percent (Figure 45). The switch has

Note that exports of services are not captured in Figure 43.

Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

Figure 42: Non-oil merchandise exports as a share of GDP (percent) 1996–1999

2006–2008

40 35 30 25 20 15 10

MENA

Yemen, Rep.

United Arab Emirates

Tunisia

Syrian Arab Republic

Saudi Arabia

Qatar

Oman

Morocco

Lebanon

Kuwait

Jordan

Iran

Egypt, Arab Rep.

Bahrain

Algeria

Source: COMTRADE data and World Bank MENA region, GDP data. Note: The rise in export-to-GDP ratios is robust to data sources and types of exports.

Figure 43: Export concentration in developing regions Herfindahl

0.30 0.25 0.20 0.15 0.10 0.05

Herfindhal Index on Exports

0.35

5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0

Africa

Asia

ECA

Latin America

Oil importers

Developing oil exporters

2005

2000

2005 1995

2000

2005 1995

2000

2005 1995

2000

2005 1995

2000

2005 1995

2000

2005 1995

2000

0 1995

FDI Inflows (millions $US)

FDI inflows

GCC oil exporters

Source: Gourdon (2009). Herfindahl index is a flow-weighted concentration index H = (∑(sk)2–1/n)/(1–1/n), where sk is the share of export line k in total exports, and n is the number of export lines. A drop in the index indicates a decline in the degree of export concentration. Numbers for Asia exclude China and the newly industrializing economies.

been particularly dramatic for the developing oil exporters, whose share nearly tripled from

12 percent in 1998 to 35 percent in 2008. The move towards a greater reliance on Asia was a

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 44: MENA’s export structure, 2008 Export of nonoil goods Food Capital

Industrial Consumer

Export of services Parts & components

Transport Insurance & finance

Other oil exporters

Oil importers

GCC countries

GCC countries 0%

20%

40%

60%

80%

100%

20%

Travel Other business

40%

Communication Gov services

60%

80%

100%

Source: Comtrade data for goods and UN Services Trade Statistics for services.

Figure 45: MENA’s non-oil merchandise export destinations MENA

GCC countries

1998

MENA 29% EU 41%

2008 RoW 10% USA 6% Asia 14%

MENA 27%

1998

RoW 15%

USA 4%

Asia 25%

EU 29%

2008

RoW 9% MENA USA 44% 8% Asia EU 20% 19%

Developing oil exporters 1998

MENA 37% EU 37%

Source: Comtrade data.

MENA 24% EU 21%

USA 3%

MENA 41% Asia 34% EU 11%

Oil importers

2008 RoW 13% USA Asia 1% 12%

RoW 11%

1998

RoW 19%

Asia 35%

2008 RoW 9%

USA 1% MENA 12%

USA 6% Asia 8% EU 65%

MENA 14%

EU 50%

RoW 17%

USA 6% Asia 13%

Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

lot less dramatic for the oil importing countries. Their share increased from 8 percent in 1998 to 13 percent in 2008. Freund (2010) also finds that MENA and other developing countries increased exports to the four growing emerging markets30 (GEMs) that did not experience import collapses during the crisis in 2008–09. The shift towards Asia and the GEM (Brazil, China, India and Indonesia) is good news for MENA as these markets are well positioned to drive trade growth in the future (Figure 46). Indeed, a new post-crisis world trade order is emerging in which South-South trade will play a prominent role (Hanson 2010). Large and growing emerging markets are absorbing capital and goods from the rest of the world, and developing countries from MENA, SSA and SAS are shifting exports towards BRICs and low and middle-income countries. The GEMs appear to be among the most promising markets. They remained remarkably resilient during the crisis of 2008–09 despite sizable exchange rate depreciation in Brazil and Indonesia, and without extensive fiscal support in Brazil, India and Indonesia (Freund 2010). In the past decade, the GEMs increased import demand for a variety of industrial goods—in particular, chemical products in Brazil, light manufactures in China and Indonesia, and machinery and transport in India (Freund 2010). Overall, however, import growth in the GEMs has been largely at the intensive margin, i.e. import growth has been driven by an increase in the volume of existing imports from existing sources. There has been some growth at the extensive margin, especially in Indonesia. Thirty percent of Indonesia’s imports in 2007/08 came from new exporters (Freund 2010). Despite the shift away from the old continent, Europe remains the most important export destination for MENA’s nonoil goods (Figure 45). This reflects largely the fact that the EU received half of the oil importing countries’ exports in 2008. For the GCC oil exporters, nonoil exports destined to other MENA countries represented the largest share, while for developing oil exporters, Asia became the most important destination for their nonoil merchandise exports. The market shift experienced by the developing oil exporters has been particularly striking. In 1998, 37

Figure 46: Import growth in major export markets 2009

2010e

2011p

20 15 10 5 0 5 –10 –15 –20

East Asia

EU25

South Asia

USA

Source: World Bank, DECPG.

percent of their nonoil exports were destined for MENA countries—a share equal in size to their EU nonoil export share (Figure 45). In 2008, their MENA and EU shares declined substantially to just a quarter and a fifth of their nonoil merchandise exports, respectively.

Services are an area of relative strength for MENA In 2008, MENA’s share in world exports of nonoil goods and services was just 1.2 percent, up from 1 percent in 1998 (Table 8), and the share grew at a pace comparable to the average for middle income countries (MICs) excluding China, largely because of the expansion of services exports. During the period from 1998 to 2008, MENA’s share in world exports of services grew by nearly 30 percent compared to just 15 percent for the MICs excluding China. However, when it comes to exports of nonoil goods, the situation reverses with MENA’s share of exports of nonoil goods growing by just 17 percent compared to 26 percent for the MICs other than China (Table 8).31 These results suggest that MENA firms exporting nonoil goods remain less competitive than firms

The four countries are Brazil, China, India and Indonesia. In this comparison we allow other MICs to benefit from exports of commodities other than petroleum.

30 31

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Table 8: Shares in world exports Exports of nonoil goods & services 1998 MENA MICs without China China

2008

Change

Exports of nonoil goods 1998

2008

Change

Exports of services 1998

2008

Change

1.0

1.2

20.0

0.6

0.7

16.7

2.4

3.1

29.2

13.2

16.3

23.5

13.3

16.7

25.6

13.0

15.0

15.4

3.1

8.6

177.4

3.5

10.0

185.7

1.7

3.7

117.6

Source: COMTRADE data. Note: Change is percentage change in the share between 1998 and 2008.

Figure 47: Non-oil merchandise export growth by region for the period 1998–2008 (in value terms) Exports of new products to new markets Exports of existing products to new markets

Exports of new products to exisiting markets Exports of existing products to existing markets

400% 350% 300% 250% 200% 150% 100%

LAC

ECA

EAP

SAS

SSA

MENA

Oil Importer

Other Oil Exporter

GCC

50%

Source: Staff calculations based on Comtrade data.

in other MICs, but the opposite is true for MENA firms exporting services. MENA nonoil merchandise goods exports grew at a slower pace than exports of other developing countries. MENA’s nonoil merchandise export growth was around 60 percent of growth in East Asia and ECA, and two thirds of growth in South Asia (Figure 47). Regional export growth was driven more by an expansion of existing products to new markets and new products to existing markets than by an increase of exports of existing products to existing markets. Growth at the extensive margin32 played a much bigger role in MENA

than in other regions. This was especially true in the case of the developing oil exporters, whose extensive margin accounted for 82 percent of nonoil export growth during the period 1998–2008—an outcome consistent with the spectacular shift in their nonoil export destinations. The dominance of the extensive margin can be explained partly by the decline or disappear-

The extensive margin captures the expansion of existing products to new markets and new products to existing and new markets.

Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

Table 9: Contribution of intensive and extensive margins to nonoil merchandise growth, 1998–2008 Exports of existing products to existing markets

Exports of existing products to new markets

Exports of new products to exisiting markets

Exports of new products to new markets

GCC

45%

40%

14%

Developing oil exporters

20%

57%

20%

Oil importers

53%

38%

MENA

45%

41%

13%

SSA

44%

43%

SAS

58%

40%

EAP

82%

17%

ECA

61%

37%

LAC

77%

22%

Source: Staff calculations based on COMTRADE. Note: Intensive margin refers to exports of existing products to existing markets or column (1). Extensive margin refers to exports of existing products to new markets, exports of new products to existing markets and exports of new products to new markets, or columns (2) through (4).

ance of exiting flows to some existing markets, notably Europe.33 MENA’s exports of existing products declined or disappeared at the highest rate in the developing world. Some of the reasons behind these outcomes might be linked to pressures associated with increased competition from China and other emerging economies in specific markets such as the EU. China and other East Asian developing countries were able to scale up in a big way their existing exports in the EU and elsewhere. Indeed, East Asia’s intensive margin accounted for 82 percent of export growth in the past decade, compared to 45 percent in MENA (Table 9). Had MENA countries been able to maintain the level of existing export flows that actually declined or disappeared, export growth would have been 50 percent higher in MENA, 59 percent higher in the GCC and developing oil exporters, and 39 percent higher in oil importers (Table 10). For East Asia, the decline and disappearance of existing exports reduced export growth by just 30 percent (Table 10). Behind MENA’s weak nonoil merchandise export growth performance might have been shifts in demand or intense competition between MENA firms and firms from other emerging markets. Firms from oil importing countries

seemed to have withstood competition better than those from oil exporting countries,34 but they were less successful in shifting existing products to new markets, perhaps because they were constrained by existing preferential trade arrangements. Consequently, merchandise export growth of oil importers lagged behind that of non-GCC oil exporters and other emerging regions, except Latin America and Sub-Saharan Africa (Figure 47). During the past ten years oil importers grew their exports in EU markets mostly by increasing exports of existing products (Figure 48), but they also managed to expand on a smaller scale some types of merchandise exports to Asia. MENA oil importers had much greater success than MENA oil exporters in expanding exports of parts and components to EU and Asia (Figure 48). They were also more successful than oil exporters in expanding exports of capital goods to the EU. However, export growth

Source: Brenton, Shui and Walkenhorst (2010). The intensive margin of oil importers was affected to a much smaller degree by the decline or disappearance of existing products to existing markets.

33 34

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Table 10: Decomposition of the intensive margin Exports of existing products to existing markets

Increase in export of exisiting products to exising markets

Fall in export of exisiting products to exising markets

Exctinction in exports exisiting products to exising markets

GCC

80%

139%

–30%

–29%

Other oil exporter

54%

114%

–26%

–33%

116%

154%

–20%

–19%

MENA

92%

143%

–25%

SSA

89%

137%

–21%

–27%

SAS

178%

213%

–20%

–15%

EAP

290%

321%

–21%

–9%

ECA

213%

255%

–25%

–17%

LAC

139%

171%

–22%

–11%

Oil importer

Source: Staff calculations based on COMTRADE.

linked to global production sharing arrangements was weak relative to export growth of industrial products, consumer goods and food products—especially to the EU. Developing oil exporters’ nonoil export growth was driven by an export expansion of industrial products in Asia (Figure 48), followed by much smaller increases in Europe, MENA and the rest of the world. This group faced serious competition in the EU markets for consumer and capital goods. Exports of capital goods to nontraditional markets grew more relative to exports of these goods to other regions, but the expansion was insignificant in quantitative terms. The export growth of the GCC oil exporters could be attributed to a strong expansion of industrial exports to Asia, and within the MENA region. GCC oil exporters lost some ground in all other industries in the EU (Figure 48). Important information is hidden behind the margin indicators. In a number of countries, the key products that have driven growth to certain markets have also driven the decline to other markets. For example, in Tunisia, the same product group “men’s and boy’s cotton trousers” is at the top of the lists of existing products with increased exports to existing markets and decreased exports to existing markets. This is an indication of the considerable change in the structure of markets

to which Tunisia exports this product.35 Perhaps in response to greater competition, in many countries, in sectors with differentiated products, there were substantial within-industry adjustments as firms switched production to exports of similar goods within the same product class. For example, the decline in “men’s and boy’s cotton trousers” has been compensated by an expansion of “women’s and girl’s cotton trousers”. Growth at the extensive margin is evidence of the growing importance of global production sharing arrangements in the electrical and motor vehicle industries of oil importers with strong EU links, and the increasing importance of chemicals and chemical products for a number of countries, including the GCC oil exporters. Finally, for a number of products that have driven export growth in MENA, China’s share in the world market has increased significantly, suggesting a complicated picture of export growth. In the EU, MENA’s export expansion was limited by the expansion of China and other emerging market exporters in the EU market, but MENA firms appear to have reallocated toward more rapidly growing product and market segments of the European Union and Asia.

For further analysis see Brenton, Shui and Walkenhorst (2010).

Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

Figure 48: Nonoil merchandise export growth by market and industry, 1998–2008 Exports of existing products to new markets Exports of existing products to existing markets

Exports of new products to new markets Exports of new products to existing markets Capital goods

Parts & components 5%

2% 1%

–1%

GCC

USA

RoW

MENA

USA

Asia

RoW

Oil importer

USA

RoW

MENA

Asia

USA

RoW

Asia

USA

RoW

Other oil exporter

MENA

Asia

USA

RoW

–4%

–2%

MENA

5% Asia

USA

10%

RoW

15%

MENA

20%

Asia

25%

USA

30%

RoW

10%

MENA

12%

35%

40%

Asia

Other oil exporter

Consumer goods 14%

Oil importer

Industrial primary & processed 45%

GCC

MENA

USA

Asia

RoW

Other oil exporter

MENA

Asia

USA

RoW

MENA

USA

Asia

RoW

Oil importer

–3%

MENA

GCC

MENA

USA

Asia

RoW

MENA

–2% Asia

–2%

Other oil exporter

Food primary & processed 8% 7% 6% 5% 4% 3% 2% 1%

GCC

Oil importer

USA

RoW

MENA

Asia

USA

RoW

MENA

Asia

USA

RoW

MENA

–1%

Asia

Other oil exporter

Source: Staff calculations based on COMTRADE.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Market access is more of an issue for oil importers than oil exporters Do MENA countries face any special market access issues? To answer this question, this section discusses estimates of overall protection by type of merchandise goods such as agricultural goods, manufactures, nonoil and oil products, and by region, including MENA, its three major subgroups—the GCC oil exporters, the developing oil exporters and oil importers, and other key regions. It is important to note that only in this section, non-oil goods are a subcategory of manufactured products, while in all other sections of the report, non-oil goods refer to all merchandise goods other than petroleum products. The estimation required a split of products at the HS6 level into two mutually exclusive sets of agricultural and manufactured products. Manufactured products were then split again into another two mutually exclusive sets comprised of oil products and non-oil products. Appendix tables A2 through A15 present the complete set of estimates of overall protection, tariffs and ad-valorem equivalents (AVEs) of NTMs. Box 2 elaborates on the methodology for computing the different types of protection rates. MENA countries have relatively good market access for nonagricultural goods in high income countries. The average protection encountered by MENA’s exports in advanced countries’ markets, measured by the overall restrictiveness index (see Box 2), was less than 1.9 percent in 2008 (Figure 49). This low average protection reflects mainly low or zero tariffs on oil exports, which dominate MENA oil exporting countries’ export baskets, as well as tariff and quota free access to the EU and the US for manufactured goods coming from some oil importers.36 MENA’s average nonoil protection rate is higher at 5.2 percent but this rate is in line with nonoil protection on exports of firms from other regions (Figure 49). However, overall agricultural protection is high, reflecting restrictive NTBs and constraining exports, especially for oil importers with EU links. Overall protection on agricultural goods is highest for Tunisia (51.1%), followed by Morocco (37%) (Appendix Table A14).

MENA countries have more restricted market access in China than in advanced markets. Overall nonoil protection in China averaged 10.2 percent for imports from MENA and 15.6 percent for imports from MENA’s oil importing countries (Figure 49). MENA oil importers with EU links encountered much higher overall protection than others (Figure 50 and Figure 49) because of high tariffs on specific products exported to China. Indeed, China’s protection rate on nonoil imports from these countries was around 11 percent, and approximately 3 to 4 times higher than protection imposed on imports from other parts of Asia, and the rest of the world. By contrast, China’s overall barriers on nonoil goods exported by MENA’s oil exporters and oil importers with GCC links are much lower than the ones imposed on oil importers with EU links and other regions (Figure 50). The relatively low trade barriers appear to have facilitated the rapid growth of these countries’ exports to China and other parts of Asia in the period between 1998 and 2008. Tariff protection on MENA’s agricultural exports to China was steep compared to other regions (Figure 51), reflecting high tariffs on specific products. All regions face higher protection in India than elsewhere, and MENA region is not an exception (Figure 50). However, the overall protection on MENA’s nonoil exports to India is among the highest in the world, largely because of high barriers on GCC’s nonoil exports. Protection on oil importers’ exports was generally lower in India than in China largely due to product composition effects as the simple average tariff in India was 18% vs. 10% in China in 2008. Tariffs in China and India vary substantially by product line, with more than 100 tariff peaks each. In China, these peaks affect agricultural and industrial products in equal proportions. In India, four fifths of all peaks fall on agricultural goods (Pigato 2009).

Within the group of oil importing countries, Morocco, Tunisia, Egypt, Lebanon, and Jordan have signed bilateral FTAs with the EU, while Morocco, Jordan and Lebanon have signed bilateral FTAs with the US. See for further detail Hoekman and Sekkat (2009).

Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

Box 2: How is the overall trade restrictiveness index calculated? The trade policy instruments of a country typically include both tariffs and non-tariff barriers (NTBs). While tariffs are mostly expressed in terms of a certain percentage of the custom value of an imported product, NTBs are sometimes hard to quantify. Examples of NTBs include quotas, non-automatic licensing, antidumping duties, technical regulations, monopolistic measures, and subsidies. Thus, to adequately measure the restrictiveness of the trade policies of a country, one needs to combine the different forms of trade policies in a meaningful way. The question is how to combine a 10% tariff, with a 1000 ton quota, a complex non-automatic licensing procedure and a $1 million subsidy? To achieve this objective, Kee, Nicita and Olarreaga (2009) first estimate the quantity-impact of NTBs on imports in a good level regression, conditioning on the existing tariff level of each product in each country. The estimated quantity impacts of NTBs on trade imports of the good is then converted to price effects using the import demand elasticities of the product in each country from Kee, Nicita and Olarreaga (2008). These are the estimated ad-valorem equivalents (AVEs) of NTBs for each country at the tariff-line level. Combin-

There is no evidence that protection has increased substantially since 2008 when the global crisis erupted. Indeed, a study by Bown and Kee (2010) underscore the limited role of trade barriers in the global trade collapse at the end of 2008.37 They find evidence that much of the new post-crisis protectionism is in the form of â&#x20AC;&#x153;South-Southâ&#x20AC;? trade barriers such as antidumping that one developing economy imposes on the imports of other developing economies. This phenomenon has not been new but has been trending in this direction long before 2008â&#x20AC;&#x201C;09, and was accentuated during the crisis.

MENA countries are less successful than other developing economies in penetrating foreign markets Despite good market access developing MENA countries underexploit existing opportunities for export growth as measured by the index of

ing the estimated AVEs of the NTBs with tariffs for each product in each country gives us the overall trade policy restriction of each country at tariff line level. To obtain the overall trade restrictiveness index of a country, the weighted average of the overall trade policy restriction of each country at tariff line level is calculated with weights reflecting the import share and import demand elasticity of the each tariff line product. For more details please refer to Kee, Nicita and Olarreaga (2009). For the estimations presented in this report we relied on tariff data for 2008 and latest NTB data. However, for the MENA countries the information refers to the period prior to 2005 as more recent information on NTBs was not available for these countries at the time of writing. GCC oil exporters are represented by Oman and Saudi Arabia, and developing oil exporters by Algeria, due to lack of data on other GCC and developing oil exporters. Thus, the results for the GCC countries and developing oil exporters should be interpreted with caution. Oil importers include countries with strong GCC links (Jordan, and Lebanon) and those with strong EU links (Egypt, Morocco and Tunisia).

export market penetration. The index is calculated by dividing the number of export bilateral flows by the number of bilateral flows that would occur if the country were to export its products to all the markets that import such products.38 Developing oil exporters such as the Republic of Yemen, Algeria, the Islamic Republic of Iran, and Syria exported their products to less than 5 percent of markets in 2005 (Table 11). Oil importers were more successful than them despite facing There are a number of hypotheses about what caused the collapse and why it became so widespread and deep. Some argue that the collapse in trade was the result of a synchronized postponement of purchases, especially of durable consumer and investment products. Others insist that the collapse in trade was a consequence of the sudden financial arrest, which froze global credit markets and spilled over to the specialized financial instruments that finance international trade. Still others note that with the globalization of supply-chains, a fall in manufactures could lead to an outsized fall in total trade, particularly if supply chains are disrupted. For more detail see Haddad et al. (2010). 38 For more details see Brenton and Newfarmer (2009). 37

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 49: Market access for MENA merchandise goods, overall trade restrictiveness index All products

Agriculture

Manufactures

Nonoil products

Oil

High income markets 40% 35% 30% 25% 20% 15% 10% 5% 0%

MENA

GCC oil exporters

Other oil exporters

Oil importers

Oil importer with GCC links

Oil importers with EU links

Oil importers

Oil importer with GCC links

Oil importers with EU links

China 40% 35% 30% 25% 20% 15% 10% 5% 0%

MENA

GCC oil exporters

Other oil exporters

Source: Staff estimates based on tariff data for 2008 and latest official NTBs data. Note: (1) Agriculture includes primary and processed agricultural products and food items. Note: The estimates exclude restrictive NTBs imposed by China on natural gas imports from Algeria. These are extremely high and distort the average protection rates faced by developing oil exporters in China. (2) The estimations exclude quotas on manufactured exports from Algeria, Morocco, Tunisia, Lebanon, Jordan, and Egypt to the EU as these countries have FTAs with EU.

in many cases higher barriers in world markets, but still most of them exported to less than 7 percent of markets, and compared poorly to other countries, including Turkey which reached 27 percent of markets that import its products. Furthermore, success in penetrating foreign markets varies greatly across MENA countries (Table 12) and cannot be explained just with differences in protection in these markets. For instance, MENA countries take advantage of market opportunities in some EU countries to a

much greater extent than in others EU countries. Morocco, for example, takes advantage of nearly 60 percent of opportunities to sell its export products in France and Spain, but just 20 percent of its export opportunities in the Netherlands and Portugal. Tunisia has much greater success in France and Italy than in Spain and Portugal. By contrast, the variability of Turkey’s index was much smaller than that of MENA countries suggesting that Turkey’s firms market their products successfully and consistently in different country contexts.

20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

China

High income

Oil importers with EUlinks

Oil importers with GCC links

Oil importers

Other oil exporters

High income

Oil importers with EUlinks

Oil importers with GCC links

Oil importers

Other oil exporters

GCC oil exporters

MENA

ECA

SSA

LAC

SAS w/o IND

India

China

High income

Oil importers with EUlinks

Oil importers with GCC links

Oil importers

Other oil exporters

GCC oil exporters

MENA

ECA

SSA

LAC

SAS w/o IND

India

EAS w/o CHN

Nonoil products

GCC oil exporters

MENA

ECA

SSA

LAC

SAS w/o IND

India

20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% EAS w/o CHN

20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

EAS w/o CHN

Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

Figure 50: Market access for nonagricultural products, overall trade restrictiveness index (2008) Manufactures

High income markets

China

World

(continued on next page)

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 50: Market access for nonagricultural products, overall trade… (continued) Nonoil products

Manufactures

China

High income

Oil importers with EUlinks

Oil importers with GCC links

Oil importers

Other oil exporters

GCC oil exporters

MENA

ECA

SSA

LAC

SAS w/o IND

EAS w/o CHN

India 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Source: Staff estimates based on tariff data for 2008 and latest official NTBs data. Notes: (1) The estimates exclude restrictive NTBs imposed by China and India on natural gas imports from Algeria. These are extremely high and distort the protection rates faced by developing oil exporters in China and India. (2) The external trade barrier on nonoil products in EAS excluding China averages slightly more than 20 percent.

Table 11: Index of export market penetration by country, 1995 and 2005 (percent) 1995

2005

Algeria

2.1

2.4

Egypt, Arab Rep.

6.6

11.3

Iran, Islamic Rep.

4.6

6.9

Jordan

2.9

4.9

Lebanon

4.1

7.6

Morocco

6.0

8.8

Syrian Arab Republic

4.3

7.2

Tunisia

4.4

7.7

Yemen, Rep.

1.5

2.0

13.5

27.1

Turkey Source: Brenton, Shui and Walkenhorst (2009).

Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

Figure 51: Tariff protection in Chinaâ&#x20AC;&#x2122;s market (2008) Agriculture

Manufactures

Nonoil products

14% 12% 10% 8% 6% 4% 2% 0%

EAS w/o CHN

India

SAS w/o IND

LAC

SSA

ECA

MENA

Oil importers

Oil importers with GCC links

High income

14% 12% 10% 8% 6% 4% 2% 0%

MENA

GCC oil exporters

Other oil exporters

Oil importers with EU links

Source: Staff estimates based on tariff data for 2008. Note: The estimates exclude restrictive NTBs imposed by China on natural gas imports from Algeria. These are extremely high and distort the average protection rates faced by developing oil exporters in China.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Table 12: Bilateral index of export market penetration of EU and US markets Exporters

Importer

Iran, Egypt, Islamic Algeria Arab Rep. Rep.

Jordan

Syrian Arab Lebanon Morocco Republic

Tunisia

Yemen, Rep.

Turkey

Europe and the United States Belgium

9.0

17.3

6.3

4.6

12.9

25.9

9.6

28.1

1.2

52.0

32.5

26.6

17.7

6.1

21.8

57.3

18.5

61.3

2.6

57.0

Germany

7.4

33.2

32.9

11.5

16.7

33.5

18.7

36.2

6.6

71.8

Greece

1.0

22.0

3.4

3.6

9.1

7.1

11.8

6.2

0.2

61.7

France

18.3

34.0

18.2

9.8

18.8

36.9

17.8

50.4

2.6

62.5

Netherlands

Italy

4.2

18.4

13.0

7.5

7.7

20.8

7.1

15.6

1.2

51.4

Portugal

3.4

7.1

3.0

1.6

2.1

19.4

0.7

11.0

—

32.2

19.9

27.1

15.3

11.2

19.1

57.0

12.9

29.5

0.6

54.3

United Kingdom

8.6

29.4

16.5

13.3

16.0

28.1

14.6

19.7

7.6

64.1

United States

3.8

27.2

5.8

20.6

19.5

26.1

13.1

17.2

4.0

52.0

Spain

Source: Brenton, Shui and Walkenhorst (2009).

Chapter 4

What are the major constraints to MENA’s nonoil exports? Protection in developing MENA is high, largely due to NTMs MENA region has liberalized its trade considerably by lowering its tariff barriers, which are now comparable to tariffs in other regions (Figure 52). In the GCC oil exporters, tariffs on agricultural products averaged around 10 percent in 2008, while tariffs on manufactured goods were less than 3 percent on average (Figure 52). Overall trade restrictiveness was also low—lower even than the restrictiveness in high incomes countries. By contrast, tariffs in developing MENA countries were higher than in most other regions. For manufactured products they were 10 percent in the developing oil exporters and around 7 percent in oil importers. For agricultural products, tariffs were comparable to those in high income countries and ECA, and were much lower than tariffs in India. Within MENA, agricultural tariff protection was higher in the oil importers with EU links than in all other regional subgroups. Overall protection in developing MENA is much higher than tariff protection due to restrictive nontariff measures (NTMs) (See Box 3). Nonoil NTMs which act as nontariff barriers (NTBs) are estimated to be extremely large in developing MENA, especially in the non-GCC oil exporters (Figure 53). When nontariff barriers are included the rate of overall protection on nonoil goods in developing MENA more than triples and reaches 35 percent in developing oil exporters and 28 percent in oil importers. The increase is more dramatic for agricultural goods which are much more heavily protected than manufactures. Agricultural protection averages

around 50 percent in developing MENA, while protection on manufactured goods reaches 35 percent in developing oil exporters, and 28 percent in developing oil importers. Given that by the Lerner symmetry theorem, removing import restrictions is tantamount to removing restrictions on exports, there is thus a substantial nontariff agenda in developing MENA countries. In a set of MENA countries for which NTM information is available,39 more than 19,000 tariff lines were affected by some type of NTB at the HS6 digit product level. This implies that of all 5,200 existing product lines at the HS6 digit product level, most products are affected by NTMs and many of these are affected by more than one NTM. In MENA, technical barriers account for 60 percent of the product lines affected by some type of NTM, followed by quotas and prohibitions which cover just 25 percent of the product lines and licenses—18 percent. Estimates produced for this report suggest that NTM-related protection rates on nonoil goods range from 12 percent in MENA (Figure 53), LAC and EAS outside China, to around 5 percent in developed economies and China. Nonoil NTMrelated protection rates in other developing countries fall within this range and average 10 percent in ECA, 9 percent in SSA, 8 percent in India and 6 percent in other South Asia. Within MENA, the range of NTM-related protection rates widens dramatically, from 2 percent in the GCC countries, to

The countries include Egypt, Jordan, Lebanon, Morocco, Tunisia, Algeria, Bahrain and Oman.

â&#x20AC;&#x192; Sustaining the Recovery and Looking Beyond â&#x20AC;&#x201C; A Regional Economic Developments and Prospects Report

Figure 52: Overall trade restrictiveness by market and product (2008) All goods

Agriculture

Manufactures

Nonoil

Tariff and nontariff barriers 60% 50% 40% 30% 20% 10% China

EAS w/o CHN

India

SAS w/o IND

LAC

SSA

ECA

China

EAS w/o CHN

India

SAS w/o IND

LAC

SSA

ECA

High income

Oil importers with EUlinks

Oil importers with GCC links

Oil importers

Other oil exporters

GCC oil exporters

MENA

Tariffs only 60% 50% 40% 30% 20% 10% High income

Oil importers with EUlinks

Oil importers with GCC links

Oil importers

Other oil exporters

GCC oil exporters

MENA

Source: Staff estimates based on tariff data for 2008 and latest official NTBs information. In MENA latest official NTB data reflects information for different years between 1999 and 2003 in different countries.

19 percent in the oil importers, and to 26 percent for developing oil exporters (Figure 53).

Tariff and nontariff protection rates vary widely across MENA Tariff and nontariff barriers on agricultural and manufactured imports vary widely across MENA countries. The GCC oil exporters have liberalized

their trade, while Lebanon and, to a large extent, Morocco have opened their markets for manufactured imports. Tariffs on manufactures are low in Jordan, but NTBs substantially increase the rate of protection there (Figure 54). In Tunisia tariffs on manufactures are above 10 percent, and are high relative to the world average, whereas in Egypt and Algeria protection is high largely due to NTBs (Figure 54). In agriculture protec-

Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

Box 3: Nontariff measures – definitions and state of knowledge Nontariff measures (NTMs) include a wide array of instruments such as sanitary and phytosanitary measures (SPS), technical barriers to trade (TBT), quotas and prohibitions, import and export licenses, custom surcharges, financial, anti-competitive, and anti-dumping measures and others. Some of these measures are essential by nature and imposed to achieve objectives other than to restrict trade. Evidence exists however that countries are using NTMs to erect NTBs as trade agreements impose limits on the use of traditional trade policy instruments such as tariffs. NTBs are difficult to measure since there is no comprehensive and continuously updated information on NTMs. The most comprehensive source of NTMs information—the UNCTAD Trade Analysis and Information System (TRAINS) database used in this study—has not been updated regularly since 2001 and does not have adequate and accurate country coverage and coverage of new forms of non-tariff measures.

Figure 53: Estimated NTM-related protection rates in MENA 30% 25% 20% 15% 10% 5% 0%

MENA

GCC oil exporters

Other oil exporters

Oil importers

Source: Staff estimates based on tariff data for 2008 and latest official NTBs data. In MENA latest official NTB data reflects information for different years between 1999 and 2003 in different countries.

tion is high mostly because of substantial NTBs, except in Jordan where markets for agricultural goods are opened to imports. Only Tunisia and Morocco use tariffs above 20 percent to protect agriculture (Figure 54).

Given these caveats, the estimates of overall protection inclusive of NTMs should be interpreted with caution and considered indicative of the restrictions created by NTMs prevailing in the set of countries on which data are available. The tariff-only protection rates provide lower bounds to protection discussed in the report. NTMs typically affect a very large share of imports and technical barriers, including SPSs and TBTs, which are the most prevalent form of NTM. Estimates of NTM coverage range from 34 to 54 percent for industrial countries’ imports from the developing world (Nogues et al. 1986, Kee et al. 2009). Kee et al. estimate that NTMs result in protection rates of 9.2 percent in simple average terms and 7.8 percent in trade-weighted terms. Similar to trade logistics barriers, NTMs have a trade-reducing impact. Hoekman and Nicita (2008) find that cutting NTMs in half from around 10% to 5% would boost trade by 2–3 percent.

In most MENA countries other than the GCC oil exporters NTM barriers on manufactured goods are estimated to raise protection substantially. And these barriers appear to be higher for exports coming from within MENA. Indeed, oil importers with EU links, and developing oil exporters such as Algeria encounter much higher overall protection rates on manufactured goods in MENA than the developed countries, India, Latin America, Europe and Central Asia, and East Asia except China (Figure 55). Furthermore, MENA countries do not exploit well opportunities to sell their exports in other MENA countries. Turkey has a better export penetration in the MENA region than the MENA countries themselves (Table 13). Within the group of oil importers, those with GCC links have better access to MENA markets than those with EU links (Figure 55). Overall protection rates on manufactured goods exported by the oil importers with GCC links within MENA averaged slightly over 10 percent, while the protection on corresponding products exported by importers with EU links averaged close to 18 percent (Figure 55). In addition, political tension

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 54: Tariff and nontariff barriers (NTBs) by MENA country NTBs

Tariffs

Manufactures

Agriculture

Tunisia

Morocco

Lebanon

Jordan

Egypt, Arab Rep.

Algeria

Algeria 0%

10%

15%

20%

25%

30%

10%

20%

30%

40%

50%

60%

Source: Staff estimates based on tariff data for 2008 and NTBs in different countries for different years between 1999 and 2003.

Table 13: Bilateral index of export market penetration of MENA markets Exporters Importer

Egypt, Iran, Islamic Syrian Arab Yemen, Algeria Arab Rep. Rep. Jordan Lebanon Morocco Republic Tunisia Rep. Turkey

Middle East and North Africa Algeria Egypt, Arab Rep. of Jordan

—

29.9

4.9

12.5

13.7

17.0

34.2

38.4

0.8

57.2

2.6

—

4.2

26.6

18.3

2.9

19.8

4.7

10.2

431.0 51.8

1.0

38.4

8.7

—

32.5

1.6

40.5

2.9

3.8

15.5

25.2

4.9

4.4

10.7

—

17.8

23.6

40.6

0.8

19.8

6.4

16.2

19.2

1.1

—

1.3

0.9

28.3

Tunisia

11.0

18.3

2.3

4.3

6.9

24.2

14.5

—

0.8

38.2

Yemen, Rep. of

0.4

26.6

7.5

18.7

12.9

1.0

29.3

1.3

—

Turkey

9.8

19.6

25.8

10.8

6.5

16.5

12.2

14.5

0.2

Saudi Arabia

5.8

69.9

34.2

56.3

56.1

23.2

72.5

18.7

39.0

Morocco Syrian Arab republic

62.1

Source: Brenton, Shui and Walkenhorst (2009).

between Algeria and Morocco has limited trade between the two countries. Not surprisingly, oil importers with GCC links trade a lot more within the region than those with EU links. In 2007, a third of Jordan’s trade and a fifth of Lebanon’s trade in goods was intra-regional, compared to 3 percent for the countries in the Maghreb.40,41 None of the members of the Agadir Agreement, including Egypt, Jordan, Morocco and Tunisia,

trade more than 3 percent of total imports and exports with the other three partners, and except for Tunisia, the same is true for the five members of the Arab Maghreb Union.42 Source: Rouis (2010). The Maghreb includes Algeria, Libya, Mauritania, Morocco, and Tunisia. 42 Source: World Bank (2008a). 40 41

Chapter 4: What are the Major Constraints to MENAâ&#x20AC;&#x2122;s Nonoil Exports?

Figure 55: Protection faced by different regions and country groups in MENA Nonoil products

Manufactures

Tariff and nontariff protection 45% 40% 35% 30% 25% 20% 15% 10% 5% Other oil exporters

Oil importers

Oil importers with GCC links

Oil importers with EUlinks

High income

China

Other oil exporters

Oil importers

Oil importers with GCC links

Oil importers with EUlinks

High income

China

GCC oil exporters

MENA

ECA

SSA

LAC

SAS w/o IND

India

EAS w/o CHN

Tariffs only 45% 40% 35% 30% 25% 20% 15% 10% 5% GCC oil exporters

MENA

ECA

SSA

LAC

SAS w/o IND

India

EAS w/o CHN

Source: Staff estimates based on tariff data for 2008 and NTBs in different countries for different years between 1999 and 2003.

Intra-regional trade stagnated and intra-industry trade remains limited The Pan-Arab Free Trade Agreement (PAFTA) and the Free Trade Agreements (FTAs) with the EU were driving forces behind the opening up of MENA markets. However, intra-regional exports remained approximately the same as a share of MENAâ&#x20AC;&#x2122;s total nonoil exports between 1998 and

2008 (Figure 45). GCC and developing oil exporters shifted their nonoil exports away from MENA and EU towards Asia and rest of the world, while intra-regional exports of oil importers increased slightly as a share of their total nonoil exports (Figure 45). Low trade complementarity places natural limits on intra-regional trade. The dominance of oil in more than two thirds of the countries in the

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

region, and the similarity of industrial policies and cultural characteristics imply that trade complementarity is low among MENA countries. The degree of complementarity between two countries can be measured with the bilateral complementarity index which captures the similarity between the export basket of one country and the import basket of another country.43 The index ranges from 0 to 100, with higher values indicating greater complementarity. Typically, the complementarity indexes between partners in successful regional agreements are above 50, while for moderately successful ones, they are between 25 and 30. In MENA, bilateral complementarity indexes are almost always below 20, with a large share of the numbers in single digits. The non-oil complementarity indexes tell a similar story. Thus, unlike East Asia, Europe and North America, there is no natural hub or anchor country in MENA and no equals, i.e. large countries with interests in cooperating. Outside MENA, the EU could serve as a hub for developing MENA, while Turkey could serve as an intermediate link in the production network. Complementarity indexes of MENA countries with the North are greater than those between MENA countries. There is also evidence that Turkey has started the process of moving operations to low-cost locations in the Mashreq,44 for instance Syria. The challenge would be to build momentum and to address the barriers to trade, including those created by existing preferential arrangements. When integration is limited to a PTA without common external tariffs, the rules of origin become a major determinant of the incentive regime confronting firms. Countries with high most-favored-nation (MFN) tariffs, for instance Tunisia and Morocco, are exposed to high risk of costly trade diversion. Opening toward selected partners in the region or outside the region can divert trade flows from more efficient third-country producers to less efficient partner country producers, resulting in a loss of tariff revenues without the benefits of lower purchasing costs. The risk of trade diversion is higher if the intensity of trade between partners before bilateral liberalization is low as is the case in MENA.

Wide dispersion of tariffs across MENA countries complicates matters further as it implies that industries in these countries benefit to varying degrees from policy-generated transfers. When the costs and benefits of opening up are unevenly distributed, it becomes politically difficult to open markets among regional partners. The fact that members of PAFTA continue to limit access for specific products by using NTBs or not implementing the policies specified in the agreement is evidence of these political tensions. MENA countries have generally failed to seriously implement most PTAs. Fawzy (2003) argues that, on the political front, concerns over the distribution of gains from integration across and within countries, issues of national sovereignty and the cost of adjustment resulting from increased competition, all constrained intra-MENA PTAs. Another limiting factor, with a political dimension, was a lack of mechanisms to compensate losers. Despite the emergence of “credible” PTAs such as PAFTA, the GCC and the FTAs with the EU and the US, it is not known to what extent these are implemented and their impact. Finding out answers to these questions is a research priority in MENA. When a country both exports to and imports from another country in the same industry, it does so either because it trades differentiated products or because it participates in international supply chains. When measured at the product level, one is more likely to find that intra-industry trade occurs because of differentiation, while when measured at the industry level, it can be a result of both effects. Traditional adjustment effects of trade liberalization are less likely to be felt when trade is intra-industry since resources do not have to move across industries where retraining and retooling is necessary, rather they need to move across firms within a given sector. However, as seen during the recent crisis countries engaged in intra-industry trade because of their participation in global production networks are vulnerable to external shocks affecting these networks. Source: See Yeats (1998) and Khandelwal (2004). Mashreq includes Iraq, Jordan, Lebanon, Syria, and West Bank and Gaza.

43 44

Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

Intra-industry trade within MENA and with the rest of the world is measured by the intra-industry trade (IIT) index. The IIT index represents the share of intra-industry trade in country’s total trade (Box 4), and varies between 0 when there is no intra-industry trade and 1 when trade is completely balanced across sectors and countries. Behar and Freund (2010) calculate the IIT index for MENA and other regions in a background paper commissioned for this report. They find that MENA’s aggregate intra-industry trade is much more limited than that of other regions (Figure 56)—a finding similar to that presented in a paper by Brulhart (2009). However, the aggregate index obscures a significant variation among countries. The typical MENA country is not too different from the typical country in SSA, SAS and LAC in terms of intra-industry trade when measured with the average index of intra-industry trade (Figure 56). They all have low levels of intra-industry trade, but the aggregate regional results in SSA, SAS and LAC are affected by large IIT flows in large economies like South Africa, India, Mexico and Brazil. In East Asia, aggregate intra-industry trade remained constant at about one-third of total trade from 1995 to 2007, while average

intra-industry trade surged reflecting the shift of supply chains to Asia over this period. In the Middle East and North Africa, growth in intraindustry trade also appears to have been sharper within the region than globally during the same period (Figure 57). Consistent with low protection on manufactured trade in GCC countries and oil importers with strong GCC links, a study by Brulhart (2009) suggests that intra-industry trade has grown more rapidly within the block of GCC and Mashreq countries than within Maghreb, where it has stagnated. Still the increase in IIT within the GCC-Mashreq block remains small in comparison to the increase of IIT in other regions. The IIT linkages between MENA and LAC, SSA and ECA were weakest among all pairs of world regions represented in the paper. IIT linkages between MENA and the high income countries, and MENA and South Asia were stronger, but still very weak compared to those between ECA, LAC, SAS, EAS and the high income economies. Differences in the rules of origin of various regional agreements generate additional compliance costs and limit intra-regional, intra-industry

Figure 56: Intra-industry Trade index by region 1995

2007

1995

Aggregate Intra-Industry Trade

2007

Average Intra-Industry Trade

0.50

0.40

0.30

0.30 0.20 0.20 0.10

0.10

East Asia

Europe

Latin America

Middle East

South Asia

Europe

East Asia

Latin America

South Asia

Sub Saharan Africa

Middle East

Sub Saharan Africa

0.00

Source: Behar and Freund (2010). Note: Middle East stands for Middle East and North Africa.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Box 4: Intra-industry trade (IIT) index The IIT index measures the share of intra-industry trade in the country’s total trade. For example, if exports from country A to country B in a sector are 100 and imports are 50, then intra-industry trade in the sector between country A and B is 100 in that sector (50 of exports and 50 of imports). If all trade is completely balanced across sectors and countries, i.e. imports are equal to exports in every sector in every country the index takes the value of one. In contrast, if a country’s exports to all trade partners are in different sectors from its imports, then the index will take a value of zero. Specifically, the index for a country is calculated as (1)

IITc

p =1

i =1

∑ ∑ 2 ∗min(x ,m = ∑ ∑ (x + m ) pi

p =1

i =1

)

Where p is partner, and there are j partners; i is industry and there are k industries; xpi is export to partner p in industry i and mpi is import from partner p

in industry i. The numerator is the total trade between a country and its partners that qualifies as intra-industry. The denominator is a country’s total trade. The index can be aggregated up for a region as (2)

IITR

c =1

p =1

i =1

∑ ∑ ∑ 2 ∗min(x ,m = ∑ ∑ ∑ (x + m ) pi

c =1

p =1

i =1

)

where c are the n countries in region R. The numerator is the total trade between the countries in a region with the world that qualifies as intra-industry. Note that intra-industry trade is still at the bilateral level. It is the sum of trade among all country pairs that is intra-industry, where one partner is in a given region. The denominator is the region’s total trade. The average of the countries’ IITs in region R is calculated as follows: (3)

AVEIITR =

∑

IITc

c =1

Source: Behar and Freund (2010).

Figure 57: Intra-Regional, Intra-Industry Trade index by region 2007

1995

0.00

0.00 East Asia

0.10

Europe

0.10

Latin America

0.20

Middle East

0.20

East Asia

0.30

Europe

0.30

Latin America

0.40

South Asia

0.40

Sub Saharan Africa

0.50

Middle East

0.50

Source: Behar and Freund (2010). Note: Middle East stands for Middle East and North Africa.

2007

Intraregional Average Intra-Industry Trade

Sub Saharan Africa

Intraregional Aggregate Intra-Industry Trade

South Asia

1995

Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

trade. Most of the intraregional agreements adhere to a 40 percent value-added rule to confer origin, they differ with respect to cumulation rules. PAFTA allows the use of inputs from other member countries toward the value-added target, but the Arab Maghreb Union and the Agadir Agreement do not (Wippel 2005). In addition, the intra-regional rules of origin are markedly different from those pertaining to Euro-Med, so that companies need to run parallel procurement and production processes to satisfy the respective requirements or be limited in their choices of input suppliers. Cross-country networks of suppliers can be major drivers of integration and intra-industry trade. Over the past two decades, such networks have become prominent in ECA and EAS. In these regions, systems of interrelated suppliers have taken advantage of wage differentials across countries, geographic proximity and economies of scale from specialization.45 The success of these networks and the intra-regional trade volumes have depended on demand for the final goods outside the region and good logistics. In MENA, logistics performance varies substantially across countries, with GCC and oil importers scoring close to expected levels for their income groups, and nearly all developing oil exporters scoring significantly below the average for their income group.46 Given the evidence that good logistics performance and other trade facilitation measures are associated with increased exports,47 improving logistics should be a priority area, especially for developing oil exporters. But, MENA countries have long lagged in network trade,48 although some Maghreb countries have been catching up in recent years. Tunisia has been most successful in integrating into production networks. Tunisia has the highest share of IIT (40 percent), followed by Morocco and the United Arab Emirates, and IIT has grown rapidly in Egypt49 and Jordan. Given the high ratio of imports to exports of components, manufacturing appears to be mostly an assembly-type activity directed at domestic markets as opposed to integration into global supply chains. The only country in the region with a significant share of components in its total exports is Tunisia. Its share of parts and

components exports in total exports grew from less than 4 percent in 1985 to 10 percent in 2006.

MENA’s services sector is heavily protected The region relies heavily on exports of services which generated revenue equivalent to 6 percent of GDP in 2008 (Figure 4). Only one other region—South Asia—has a higher share of export revenue from services than MENA. The importance of services as a source of export growth is much greater for MENA’s oil importing countries, even compared to South Asia. Indeed, oil importers’ exports of services accounted for a fifth of their combined GDP in 2008—slightly more than the revenue from their exports of merchandise nonoil goods. Unlike many other developing countries, most developing MENA countries are net exporters of services,50 and rank better in terms of net rather than gross positions. During the past ten years, MENA’s share in world exports of services grew at a much faster pace than that of the MICs outside China. Indeed, international exports of commercial services more than doubled between 1996 and 2006, and outpaced by a substantial margin export growth of agricultural and manufactured goods. Services are an area of relative strength for MENA and a key source of future potential growth and export revenue. Rapid advances in information and communication technologies (ICT) and the ongoing

See Haddad (2007) for more information. The report measures logistics performance using the Logistic Performance Index (LPI), which ranks logistics quality on scale from 1 (worst) to 5 (best). The logistics performance index surveys logistics professionals about a number of factors affecting logistics in over 150 countries, including customs clearance, infrastructure quality, facility of international shipments, local logistics competence, the ability to track and trace shipments and the timeliness with which shipments arrive. The report benchmarks the performance of MENA countries against others by regressing LPI on the logarithm of 2009 GDP per capita expressed in 2005 PPP$. 47 See Behar et al. (2009) and Hoekman and Nicita (2008). 48 Source: Yeats and Ng (2000). 49 Egypt however needs to improve logistics as it has a low LPI score relative to the score expected for its income level. 50 Developed oil exporters run trade services deficits due to the structure of their economies. 45 46

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 58: Services value-added (% of GDP) Oil-rich countries

Libya

Algeria

Saudi Arabia

United Arab Emirates*

Iran, Islamic Rep.*

East Asia & Pacific

MNA

Sub-Saharan Africa

South Asia

Latin America & Caribbean

Europe & Central Asia

OECD

Syrian Arab Republic

MNA*

Egypt, Arab Rep.

Tunisia

Morocco

90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0

Jordan

Lebanon

By country within MENA

Djibouti*

By region

Source: Staff calculations.

Beyond being sources of economic diversification, services are also core inputs into most economic activities, and therefore determine production costs and firms’ competitiveness. Telecommunications are crucial to the dissemination and diffusion of knowledge; transport services affect the cost of shipping goods and the movement of workers within and between countries; business services are channels through which innovations are transmitted across firms; distribution services connect producers and consumers; basic services, such as electricity and water, are key inputs into the production of manufactures, and health and education services are key inputs into—and determinants of—the quality of human capital.

Figure 59: Size of service sector (% of GDP) and income per capita in MENA 5.0 Real GDP per Capita (Log)

global liberalization of trade and investment in services have increased opportunities for trade in many service activities and created new kinds of tradable services. Thus, services have offered a vehicle for many MENA countries to diversify and modernize their economies. Recent trends point to the growing importance of telecommunications in Kuwait, health services in Tunisia, port and ICT services in Dubai, call centers in Morocco and Tunisia.

4.0 3.0 2.0 1.0 0.0

0.0

20.0

40.0

60.0

80.0

100.0

Services Value Added (% GDP)

Source: Staff calculations.

In MENA region, services account for just 46 percent of GDP—one of the lowest in the world (Figure 58). Only East Asia has a lower share than MENA, but this outcome reflects the importance and dynamic nature of the manufacturing and agricultural sectors in the East Asian economies. In MENA, the low share is due to the large

Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

Figure 60: Restrictiveness of services trade policies and share of services in GDP

STRI and share of services in GDP

Share services in GDP (%)

STRI

70 60

54.6

53.5

48.2

50 40

60.8

60.6

40.9 39.4

46.4

41.6

39.3

29.6 20.7

19.9

18.9

10 0

GCC

EAP

MENA

SAR

SSA

LAC

ECA

OECD

Source: Global Services Policy Restrictiveness database. Regional scores are simple averages of constituent country scores.

size of the oil sectors in oil exporting countries. Indeed, the small share of services in total GDP in oil exporting countries makes MENA the only region in the world where the share of services is inversely correlated with per capita income (Figure 59). In other regions of the world, the higher the GDP per capita, the higher the share of services in GDP. The Services Trade Restrictiveness Indices (STRI) from the Global Services Policy Restrictiveness database compiled by the World Bank shows that restrictive policies are observed in MENA in the five key sectors—financial services, telecommunications, retail distribution, transportation and professional services—covered by the survey which provides information for the STRI (see Box 5 for detail on methodological issues). Indeed, the STRIs by region suggest that applied policies governing trade in services in the MENA region are more restrictive than those in other regions except East and South Asia. The fact that the fastest-growing regions seem to exhibit restrictive services policies has been recognized as a puzzle. On the one hand, unlike tariffs, services regulation could be prudential, so one cannot conclude a priori that less is always “better”. On the other hand, the answer depends on the proper counterfactual, and it might well be that in line with conven-

tional wisdom growth rates would have been even higher had services regulation been more liberal. In the case of East Asia, growth rates have been driven by merchandise exports, so firms might have been shielded to some extent from the adverse effects of services barriers. For South Asia, it is harder to explain the coexistence of high services trade restrictiveness in most sectors including professional services, transport, and telecoms that have higher STRIs that MENA and other regions, and remarkable growth of South Asia’s services exports. More research is needed to link the applied policy data to outcome data of interest such as FDI or foreign presence, ideally taking into account firm characteristics, or to determine to what extent current protection levels—similar to protection levels in other fast-growing regions— inhibit growth. The high restrictiveness index for the GCC group of countries also appears as a puzzle. Generally, high income countries tend to have lower barriers to trade in services as shown by Gootiiz and Mattoo (2009).51 And while the GCC telecom sector is highly protected, the GCC countries export communication services

51 Gootiiz, B. and A. Mattoo (2009) “Restrictions in Service Trade and FDI in Developing Countries.” Mimeo.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Box 5: Measuring restrictions affecting trade in services Two different approaches have been used in the literature to assess the magnitude and impact of policy barriers to trade in services (Francois and Hoekman 2010). The first one requires collection of information on applied policies, converting these into coverage/ frequency indicators and using the resulting indices to explain observed measures of prices or costs. The second one uses indirect methods including calculation of price-cost margins by sector across countries or gravity regressions to estimate what trade flows “should be” and obtain an estimate of the tariff equivalent of policies from the difference between estimated and observed flows. With this second approach it is impossible to attribute price-cost margins or differences in trade volumes to specific policies. For this reason, most of the literature uses the first approach, although researchers are increasingly using gravity estimations whenever they have access to bilateral trade in services data. Under the first approach of measuring services trade restrictiveness, the quantification of barriers to trade in services must be preceded by a collection of information on a sector-by-sector basis, relying on government documents and the expertise of sector specialists (Mattoo, Stern, & Gianni, 2008). Many studies are based on “regulation” questionnaires developed by the OECD and the Productivity Commission of Australia that attempt to capture all the regulations that can affect significantly entry, competition and trade in services. The Services Trade Restrictiveness Indices (STRI) from the Global Services Policy Restrictiveness database, compiled by the Bank and used in this report, is also based on this type of questionnaires. The

successfully. The GCC countries also appear remarkably open to trade in services under mode 4. The total number of foreign workers in the GCC was estimated at 12.5 million or nearly 40 percent of the population in 2007, compared to 70 million migrants in Europe (or 10 percent of the population) and 50 million in North America (or 14.2 percent of the population). While many of these foreign workers do not work in services but in agriculture and industry, a very large share are employed as service workers in retail,

latter are submitted to regulators, administration and private sector in order to collect qualitative information on entry, competition and business conduct barriers in services sectors. A number of steps need to be followed. First, one collects qualitative information about regulatory restrictions affecting services delivery in a particular country. Then, one converts it into a quantitative index (or indexes) using weights that reflect the relative severity of the different restrictions. The general approach in Findlay and Warren (2000)—used in many studies—is to convert qualitative information about regulatory restrictions into a quantitative index, using a priori judgments about the relative restrictiveness of different barriers (i.e., the weighs of the restrictiveness index components). This is generally less contentious within a given category of barriers than between. For example, it makes sense to score a regime that restricts foreign ownership to 25 percent or less as being twice as restrictive as one that restricts foreign ownership to 50 percent or less. What is less obvious is how to weigh the scores on foreign ownership restrictions together with those on licensing requirements, or those on restrictions on lines of business. Nevertheless, some of the inherent arbitrariness of the weighting procedures can be tested empirically. Finally, the information on barriers should be captured following the 4 modes of services deliveries recognized by the WTO—cross-border trade (Mode 1), movement of customer to the country of the provider (Mode 2), sales of services through an offshore affiliate (Mode 3) and the (temporary) movement of persons to provide services (Mode 4).

transport, tourism, real estate, and hold professional positions in banking, education and other service industries. Furthermore, while de jure policies indicate high obstacles to FDI in services, observed flows have been substantial. For example, FDI from Asia into the Gulf has increased at a breathtaking pace, and not all of it has gone into the oil and gas sector but instead has flown into transport and tourism infrastructure, and

Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

other services industries.52 This situation might reflect the fact that de facto policies could be relaxed and rendered ineffective as foreign investors have sought to involve GCC nationals as partners in their business ventures to avoid the high minimum employment requirement of nationals and other discriminatory policies. Unfortunately, there is no way to measure the magnitude of the bias. Alternatively, the STRI index might be biased upward as it excludes tourism and real estate which might be less protected. It is clear that more work is needed to understand the effective protection in services in the GCC group. Regional trade agreements have not helped to liberalize intraregional trade in services in developing MENA. A recent study by the World Bank shows that restrictions on trade in the five sectors surveyed are much steeper in the PAFTA member countries than in the rest of the world (Borchert at al. 2010).53 In reality, many services sectors in the region are liberalized, but only to a limited extent and governments tend to retain control, which leads to lack of transparency and discretion in how restrictions are applied.54 Foreign equity limits, for example, have been relaxed in most MENA countries in recent years, yet many service markets remain dominated by stateowned or domestic enterprises. High levels of state control persist in such cases through conflicting regulations that protect current market structures. Restrictions that discourage FDI inflows into services are particularly harmful as they have a negative impact on the potential size and productivity of firms, the technology used by firms, the markets firms choose to operate and the quality of services. For example, Algerian service companies are frequently informal and inward-oriented (Cattaneo, Ighilahriz, LopezCalix and Walkenhorst 2010), and in a number of countries some services sectors are dominated by SMEs that do not have the means or incentives to expand operations. Such is the situation in Tunisia’s legal, and information and communication technologies sectors (Cattaneo, Diop and Walkenhorst 2010).

In banking, Morocco and Tunisia display many restrictions, in particular cross-border and consumption abroad restrictions linked to their capital account regime which is only partially open. Egypt has an intermediate level of openness driven by mode 2, whereas restrictions span across modes 1, 3 and 4. Jordan’s banking sector is relatively open, with restrictions only in modes 1 and 4, whereas Lebanon’s banking sector is the most open in the region, with nearly no restrictions across modes 1, 2, and 3. In insurance, Egypt is among the least restrictive countries in non-GCC MENA, reflecting the liberalization of the sector in recent years. However, specific restrictions apply on commercial presence, namely the Economic Needs Test. On the other end of the spectrum, Morocco and Tunisia are among the most restrictive due mainly to restrictions on cross-border and consumption abroad. For Morocco, important non-discriminatory concessions have been made as part of its FTA with the United States,55 and once effective, the provisions in that agreement will significantly open the sector. MENA has been ranked as the most restrictive region for trade in fixed telecom services among a group of Asian and transition economies.56 However, in line with recent reforms, the sector is opening up to trade and foreign presence. Morocco and Jordan have the most open telecom sectors in the region, whereas Egypt and Tunisia still lag behind despite the very recent opening of Tunisia’s fixed line telephony to a private operator. In maritime transport, major restrictions exist in Morocco and, to a lesser degree, Egypt. In contrast, Tunisia and Jordan have fairly open maritime sectors. Across the MENA countries, it is common to award preferential treatment Asian countries signed contracts worth $500 billion to complete infrastructure projects in the Middle East (Kemp 2010). 53 The sectors are financial and insurance, retail, telecommunications, transportation, and professional services. 54 Source: Case studies conducted in Morocco, Tunisia, Egypt, Jordan and Lebanon. 55 Morocco’s FTA with the USA was signed in 2004. 56 Source: Dihel & Shepherd (2007). 52

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

to ships flying the national flag. Jordanian and Egyptian flag carriers, for instance, are given discounts on prices such as port services. Egypt also gives flag carriers priority access to the cabotage market. In Morocco, regular shipping line services established in the country must fly the national flag. While open to foreign carriers, nonliner shipping is also restricted. Foreign shippers need to contract Moroccan liner intermediaries who have the exclusivity of chartering foreign vessels. However, it is expected that Morocco will remove this restriction as it strives to converge with European maritime legislation under the EU Action Plan. Finally, in air transport, Egypt displays high restriction levels in modes 1 and 2. On the other hand, Morocco, the most open in modes 1 and 4, has recently introduced many air service reforms in an effort to promote growth in the tourism industry, but it remains more closed than Jordan which overall has the most open sector.

sia in medical tourism, back office outsourcing and information technology enabled services.

Converting services trade into an engine for growth requires emphasis on quality and efficiency. Reputation is a key to success in services trade, and competitiveness could be increased through improved efficiency at same or higher quality output (Pigato 2009). Assessing the potential exposure of the different service sectors to international competition and adopting nondiscriminatory, accompanying measures would help maximize the benefits of opening and minimize the costs.

In Morocco, a gradual regulatory alignment with the EU in the context of the European Neighborhood Policy arguably offers the country the opportunity to anchor productivity-enhancing reforms, particularly in air transport, road transport and energy (Diop 2010). This would require convergence of Morocco’s policy framework with EU rules pertaining to competition and state aid.

Impediments vary by sector and country, and so do the specific reforms needed. In Tunisia, growth in services exports has been aided by among other strengths, the large pool of skilled engineers willing to work at relatively low wages and the geographical and cultural proximity to Europe. Tunisia’s heavy investment in human and physical capital, especially higher education and telecommunication networks, has enabled substantial expansion over recent years of knowledge-based sectors, notably medical services, which attract substantial number of foreign patients; engineering and architecture; accounting; legal services, and ICT-enabled services supplied by telecom and internet providers. Substantial growth potential still exists for Tuni-

To sustain the growth momentum, however, Tunisia needs to (i) increase competition in fixed-line telecommunications and ease restrictions on foreign entry into professional services so as to lower service provision costs; (ii) improve payment discipline of public procurement services to avoid exacerbating financial difficulties facing SMEs; and (iii) strengthen selected areas of education and training such as nursing and managerial education so as to ease staffing bottlenecks for aspiring exporters (Cattaneo, Diop and Walkenhorst 2010). Furthermore, Tunisia’s telecom reforms need to extend from liberalization of private mobile market to include competition in other segments of the sector with potential impact on trade, such as internet service provision and land line to reduce cost of international communications.

In Algeria, current policies that promise to boost the further development of service trade include: (i) the privatization program; (ii) the tourism development strategy;57 (iii) an enhanced regulatory regime for services aimed at expanding the domestic market and promoting improved efficiency of domestic producers; and (iv) international trade agreements that may play a complementary role by serving as anchors for the reform process and shielding the government from domestic lobbies. International experience and research supported by local data and interviews indicate that more openness in The tourism development strategy aims at better exploiting the country‘s natural and cultural endowments, improving the quality of services and reputation of the country and rehabilitating tourism infrastructure.

Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

Figure 61: Global Competitiveness Index (GCI) ranking by region, 2010 120 100 80 60 40 20 HIC

SSA

LAC

EAP

ECA

MENA

GCC countries

Oil importers

Dev. oil exporters

Source: World Economic Forum (2010).

private services resulting from Algeria’s privatization program is essential to attract sufficient know-how and investment capital from domestic and foreign sources (Cattaneo, Ighilahriz, LópezCálix and Walkenhorst 2010).

Other factors hurting MENA firms’ competitiveness Beyond trade distortions, numerous other factors impede export growth and hurt the productivity of export-oriented firms.58 A recent report on private sector development in the region estimates that MENA’s average total factor productivity lags behind the productivity in fastgrowing developing countries. It was assessed at less than half of the total factor productivity in Brazil and 62 percent of the productivity level in China, according to data from recent enterprise surveys. The region’s ranking in the Global Competitiveness Index is higher than those of most other regions except East Asia and the advanced economies (Figure 61), but competitiveness and total factor productivity levels vary substantially within MENA. Firms from GCC countries are much more productive than firms from developing MENA, while developing oil exporters’ firms are least productive. Assessments based on labor productivity measures confirm these findings.

A number of factors have hurt the productivity of export-oriented firms and have discouraged private investment, in the process muting the investment response to reforms in the region.59 Analysis conducted for this report relies on both subjective and objective data, capturing different aspects of the investment climate in order to identify the major obstacles for private sector growth. Recent enterprise surveys for 10 MENA countries60 suggest that corruption, taxes, informal competition and access to finance are among the top concerns of the average MENA firm, and these rank as top concerns for export-oriented firms in the region as well (Figure 62). However, there are major differences between the top concerns of export-oriented firms in the GCC oil exporters, developing oil exporters and oil importers. In the GCC countries, access to finance and shortage of skills are cited as top concerns for export-oriented firms (Figure 63).

Export-oriented firms are defined as those with at least 10 percent of sales destined for foreign markets. 59 Source: World Bank (2009). 60 Survey data were available for the following GCC countries, including Oman (2003) and Saudi Arabia (2005), developing oil exporters, including Algeria (2007), Syria (2003) and Yemen (2005), and oil importers, including Egypt (2006), Jordan (2006), Lebanon (2006) and Morocco (2007). 58

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Licenses

Legal System

Tax Administration

Cust Trade Reg.

Electricity

Regulatory Uncert.

Land

Skills

Macro Uncert.

Finance

Informal Compet.

Tax Rates

50 45 40 35 30 25 20 15 10 5 0 Corruption

% Firms Identifying Constraint as Major or Severe

Figure 62: Leading constraints to export-oriented firms in MENA region (weighted average of share of firms ranking a constraint as “major” or “severe”)

Source: Staff estimates based on recent enterprise survey data for 9 MENA countries. Note: Individual country outcomes were weighed with the relative sizes of countries’ labor forces. Results do not change when population numbers are used as weights instead.

70 60 50 40 30 20 10 Tax Admin.

Electricity

Tax Rates

Corruption

Trade Regulations

Legal System

Macro Uncert.

Informal Compet.

Regulatory Uncert.

Licenses

Land

Skills

0 Finance

% Firms Identifying Constraint as Major or Severe

Figure 63: Leading constraints to export-oriented firms in GCC oil exporting countries (share of firms ranking a constraint as “major” or “severe”)

Source: Staff estimates based on recent enterprise survey data for 2 GCC countries – Saudi Arabia and Oman. Note: Individual country outcomes were weighed with the relative sizes of countries’ labor forces. Results do not change when population numbers are used as weights instead.

Other sources61 confirm that access to finance is a particular problem for SMEs in the GCCs, while employability concerns linked to basic

Source: background papers for the upcoming MENA finance flagship.

Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

Legal System

Licenses

Macro Uncert.

Regulatory Uncert.

Trade Regulation

Skills

Informal Compet.

Finance

Tax Admin.

Electricity

Land

Corruption

50 45 40 35 30 25 20 15 10 5 0 Tax Rates

% Firms Identifying Constraint as Major or Severe

Figure 64: Leading constraints to export-oriented firms in developing oil exporting countries (share of firms ranking a constraint as “major” or “severe”)

Source: Staff estimates based on recent enterprise survey data for Algeria, Yemen and Syria. Note: Individual country outcomes were weighed with the relative sizes of countries’ labor forces. Results do not change when population numbers are used as weights instead.

60 50 40 30 20 10 Licenses

Tax Admin.

Legal System

Land

Electricity

Trade Regulation

Finance

Skills

Regulatory Uncert.

Tax Rates

Informal Compet.

Macro Uncert.

0 Corruption

% Firms Identifying Constraint as Major or Severe

Figure 65: Leading constraints to export-oriented firms in oil importing countries (share of firms ranking a constraint as “major” or “severe”)

Source: Staff estimates based on recent enterprise survey data for Egypt, Jordan, Lebanon, and Morocco. Note: Individual country outcomes were weighed with the relative sizes of countries’ labor forces. Results do not change when population numbers are used as weights instead.

and advanced skill acquisition are two areas in which GCC countries rank lowest, according to the Global Competitiveness Index (Figure 66).62 Innovation and technological readiness also appear to be areas in need of special attention in

Market size is cited as the biggest obstacle to realizing efficiencies, but the GCC countries have taken measures to address this constraint by opening their markets for goods. Still, protection in services remains high and more work is needed to understand the complexities of such protection and the rules constraining firms in the service sector.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 66: GCC’s Global Competitiveness Index rankings by pillar GCC

HIC

EAP

70 60 50 40 30 20 10 Macroeconomic environment

Goods market efficiency

Institutions

Infrastructure

Financial market development

Business sophistication and innovation

Labor market efficiency

Technological readiness

Innovation

Higher education and training

Health and primary education

Market size

Source: Global Competitiveness Report 2010.

Figure 67: Developing oil exporters’ Global Competitiveness Index rankings by pillar Developing oil exporters

HIC

EAP

140 120 100 80 60 40 20 Macroeconomic environment

Health and primary education

Market size

Infrastructure

Institutions

Higher education and training

Technological readiness

Innovation

Business sophistication and innovation

Goods market efficiency

Financial market development

Labor market efficiency

Source: The Global Competitiveness Report 2010.

the GCC countries as these countries score much lower than their peer HIC group (Figure 66). In developing oil exporters, taxes and corruption are the most frequently-mentioned major complaints by exporting firms (Figure 65), but due to state dominance other issues, especially inefficiencies in input and goods markets63 and poor financial market development, pres-

ent even bigger problems for the competitiveness of export-oriented firms (Figure 67). In oil importers, corruption and macroeconomic uncertainty top the list of major constraints to growth (Figure 66). Macroeconomic stability is The developing oil exporters are mostly state-dominated economies in which market inefficiencies are expected to be pronounced.

Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

Figure 68: Oil importers’ Global Competitiveness Index rankings by pillar Oil Importers

HIC

EAP

120 100 80 60 40 20 Goods market efficiency

Business sophistication and innovation

Institutions

Market size

Financial market development

Health and primary education

Higher education and training

Infrastructure

Technological readiness

Innovation

Macroeconomic environment

Labor market efficiency

Source: The Global Competitiveness Report 2010.

indeed an area of concern as suggested by the low ranking of oil importers on this pillar of the Global Competitiveness Index (Figure 68), but an even bigger weakness is the inefficient and inflexible labor market. Firms in oil importing countries also appear to fall behind East Asia in terms of innovation efforts (Figure 68). The next few sections provide an in-depth discussion of the major stumbling blocks to firms’ competitiveness.64

Access to finance is limited, especially for small enterprises Access to finance is a top concern for exportoriented firms in the GCC oil exporters and the fourth major concern for exporters in the region (Figure 63 and Figure 62). Analysis presented in MENA’s private sector flagship report (World Bank 2009) confirms that credit rationing is high among MENA countries, especially the developing oil exporters which rank extremely low in terms of access to credit, according to the World Bank’s Doing Business indicators (Figure 69) and World Economic Forum’s Global Competitiveness Index (Figure 67). The problem of access to finance in MENA reflects financial intermediation issues rather than low savings (Figure 70). Indeed, all GCC oil

exporters and most developing oil exporters have ample domestic savings so access issues reflect barriers linked to widespread state ownership of banks and financial market underdevelopment, especially in developing oil exporters, and poor access to finance for SMEs in the GCC countries. According to the global competitiveness index, financial market development is an area of relative strength in the GCC countries (Figure 66). Low transparency in bank operations and high informality in the enterprise sector are linked to high collateral requirements, fairly high levels of nonperforming loans, and low rates of access to bank loans. Banks often use collateral requirements as a credit-rationing tool rather than to allocate credit based on risk analysis. Furthermore, the required collateral is among the highest in the world, indicating that collateral legislation is inefficiently enforced and not trusted by lenders. Most importantly, state-owned banks have traditionally served as channels of political patronage and have supported state-owned firms or channeled credit to well-connected private enterprises. And private banks in the region have not remained immune Labor markets issues are the topic of an upcoming MENA report titled Opening up Job Opportunities for All: Employability in the Middle East and North Africa Region.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 69: Regional ranking of ease of getting credit 160 140 120 100 80 60 40 20 HIC

SSA

LAC

EAP

ECA

MENA

GCC countries

Oil importers

Dev. oil exporters

Source: World Bank, Doing Business Indicators (2010).

Gross domestive saving as % of GDP

Figure 70: Gross domestic saving, 2007 70 60

Algeria

Saudi Arabia

Iran, Islamic Rep.

40 30 Yemen, Morocco Rep. 20 Syrian 0 Arab Egypt, Arab Rep. 10 Republic –10 –20

Oman

Kuwait

Bahrain

Qatar

United Arab Emirates

Tunisia Lebanon

Jordan 3

3.5

4.5

LN GDP pc

Source: World Bank.

to the problems of public banks as supervision and regulation of credit markets is open to political interference and discretionary enforcement (World Bank 2009). Small enterprises face greater difficulties accessing finance than large enterprises because banks perceive them as less financially transparent. Small firms are also less capable of meeting the collateral requirements of banks, and face higher transaction costs per loan. In MENA

small enterprises are twice as likely to be credit constrained as large firms, and only one in five firms have a loan or a line of credit. Loans to SMEs account for only 8 percent of total lending in the region. Entrepreneurs report difficulties in accessing capital from the domestic financial system to start a new business, and finance export discoveries (Nassif 2009). Access to finance for SMEs appears to be more constrained in MENA than in any other

Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

region in the world, and there are significant differences between GCC and developing MENA countries, according to work conducted as part of World Bank’s upcoming MENA finance flagship report.65 The average share of SME lending in the GCC group of countries is only 2 percent,66 while the share of SME lending in developing MENA is 14 percent.67 The low share of SME lending in the GCC oil exporters reflects to a large extent the structure of oil-based economies. They are less diversified than the oil importers, dominated by large enterprises, and characterized by relatively small non-oil traded sectors. Moreover, GCC countries tend to have small populations, and the nationals tend to find attractive positions in the public sector, which may also discourage risk-taking in the SME sector. These factors set “natural” limits to the size of the SME sector of the GCC countries, especially in the non-oil sectors producing traded goods. By contrast, in developing MENA there is scope for SME growth across a wider range of economic sectors, including traded sectors, and also as part of supply chains linked to large enterprises. Even though the actual SME lending in the region is low, there is substantial room for further lending as shown by banks’ long-run targets for SME lending. The drivers that encourage banks to engage in SME lending include the potential profitability of the SME market, the saturation of the large corporate market, the need to enhance returns, and the desire to diversify risks. Targets are significantly lower in the GCC group (about 12% of total lending), revealing that the banks themselves have concluded that there are “natural” limits to profitable SME lending in oil-based economies. In the case of developing MENA, the long-run target is much higher and around 29% of total lending. This suggests that if constraints can be eased access to finance for SMEs can improve significantly. Banks identify two major constraints to SME lending including the lack of SME transparency and the weak financial infrastructure, in particular weak credit information, weak creditor rights and collateral infrastructure. MENA compares poorly with other regions on these aspects of

doing business. MENA has the lowest legal rights index among all the regions, and even though the credit information index has improved in recent years, the coverage of credit reporting systems is still very limited. Collateral regimes are also considered weak and inefficient by banks in MENA. While a relatively low share of banks reports serious problems with the registration of fixed collateral, a high share of banks reports that registries of movables remain very deficient. Enforcement of collateral is an even bigger problem, especially for movables, but also for fixed collateral in the case of banks in developing MENA. Finally, an even larger share of banks reports problems in selling the seized collateral. Again, this is true for both GCC banks and banks in other MENA countries, and applies to all types of collateral. Thus, creditors perceive high risks in SME lending that can only be partially offset through greater reliance on relationship lending, or through the use of other lending techniques such as leasing and factoring, or still through access to a guarantee scheme. Several MENA countries have introduced credit guarantee schemes and other policy interventions such as interest subsidies, and exemptions on reserve requirements to compensate for these weaknesses in financial infrastructure. These interventions may be well justified, but they should not be the main components of the architecture of SME finance in the MENA region. Improving financial infrastructure should be the priority item in the policy agenda of MENA countries. This will entail expanding the range of movable assets that can be used as collateral,

In order to understand the supply of SME finance in MENA, a bank-level survey was conducted as part of the upcoming MENA financial flagship report. The survey covered the following themes: i) strategic approach to SME lending; ii) main products offered to SMEs; iii) risk management techniques employed; and iv) SME lending data. The response rate for the survey was high as 139 banks from 16 of the 18 MENA countries sent in responses. These banks account for about half of MENA banks and almost two thirds of the banking system loans. 66 The share of SME lending is consistently low across all GCC countries. 67 The survey included the following countries in developing MENA: Egypt, Iraq, Jordan, Lebanon, Libya, Morocco, Palestine, Syria, Tunisia and Yemen. There is more variation in the share of SME lending across countries within developing MENA. 65

â&#x20AC;&#x192; Sustaining the Recovery and Looking Beyond â&#x20AC;&#x201C; A Regional Economic Developments and Prospects Report

improving registries for movables, and improving enforcement and sales procedures for different types of collateral. It also entails upgrading public credit registries, and more importantly, introducing private credit bureaus capable of significantly expanding coverage and the depth of credit information. Competition policy can also contribute to further SME lending. Survey results suggest that there are private banks that have more effective lending technologies, and that are able to generate and manage a significant SME portfolio, even within weak enabling environments. The entry of these banks in other MENA countries could contribute to more SME lending, both directly and through spillover effects. In this case, the policy implication is to ensure that entry requirements are not overly restrictive and that banking markets remain contestable.68 Lastly, it is important to recognize that the potential for SME finance is also a function of the structure of the economy and the size of the SME sector. In the case of developing MENA, there is huge potential for expanding SME finance, with large numbers of smaller enterprises underserved and low levels of bank competition to serve them. In the case of GCC countries, the size of the SME sector may remain more constrained by the nature of oil economies, but there is also scope for further expansion of SME finance, especially if access is also extended to resident non-nationals.

Governance issues impede reform implementation, raise uncertainty and lead to uneven playing field Governance issues top the list of major concerns of export-oriented firms in developing MENA. A serious problem is the discretion available to bureaucrats in implementing regulations. This creates an unlevel playing field and encourages the pursuit of privileged access. Coupled with barriers to entry and exit, this has created an environment of private sector stagnation. Furthermore, unequal, discretionary, and preferential implementation of announced policies are important sources of uncertainty in policy implementation affecting many areas including trade policy, entry and exit regulations, product

and factor market regulations. The way policies are prepared and announced by governments also raises policy uncertainty. Lack of consultation with the business community and opacity in reform design lead to unpredictability and discourage investors. Furthermore, policy reversals are common in some countries and reduce the credibility of reforms. Policy changes are often unannounced creating confusion about the rules governing business operations for managers, government administrators and investors. Regulatory ambiguity expands the opportunity for discretion in public agencies and enables harassment, sometimes in the form of frequent inspections, difficulties in obtaining licenses, clearing customs, resolving conflicts or obtaining permits to use land and other resources and inputs. Discretionary implementation of the rules can impose a burden on firms in any area in which they interact with the state and regulatory agencies. Regulatory opacity could also lead to political capture as the influential and powerful benefit from discretion and preferential access to public benefits while the rest develop a sense of unfairness. Export-oriented firms in oil importing countries consider this issue a top concern (Figure 65). They are concerned that privileged large competitors evade the burden of taxes and regulations or get favorable treatment and access to privileges. In Lebanon, entrepreneurs identify several types of privileged firms, including firms receiving government subsidies, firms with favored access to credit, infrastructure or customers, firms that conspire to limit access to markets and supplies for other firms, firms that violate copyrights, patents or trademarks, and avoid different types of taxes and regulations. Formal firms are concerned that small informal enterprises pay few taxes and get an unfair advantage over them. Macroeconomic uncertainty is a top concern for export-oriented firms in the oil importing countries (Figure 65), which rank Anzoategui et al. (2010) show that there is a higher rejection of banking licenses in MENA than in other regions.

Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

low in terms of macroeconomic environment in the World Economic Forum’s (WEF) Global Competitiveness Index (GCI). The low ranking reflects the fact that oil importers in the sample have had limited fiscal space in the past decade. Consequently, these countries have been vulnerable to external shocks, despite relatively diversified economic bases and favorable macroeconomic environment. By contrast, GCC oil exporters, and some of the developing oil exporters in the sample have had ample fiscal space to soften the impact of external shocks on their economies. The GCC countries demonstrated their commitment to macro and financial stability during the past financial and economic crises, including the most recent one. Indeed, the GCC’s rank in terms of macroeconomic environment is high both compared to other components of the GCI and the ranking of HICs and EAS on this component (Figure 66). Thus, it is not surprising to find out that only slightly more than 20 percent of export-oriented firms consider macroeconomic instability as a major or severe constraint to their business operations, compared to 50 percent in oil importing countries.

Skill shortages in the GCC states are an acute but old problem GCC export-oriented firms cite skills as one of the top constraints to their business operations (Figure 63)—an area of particular weakness for the GCC countries according to the WEF’s Global Competitiveness Report (Figure 66). However, the problems faced by firms as they search for qualified labor are not new and have existed for more than 30 years. The regional labor markets have been characterized by heavy reliance on expatriate labor, high unemployment among nationals, huge wage differentials between national workers and expatriate workers, and a strong preference by nationals for work in the public sector. On the supply side, the large wage differentials have discouraged GCC nationals from acquiring skills. Even if they had the skills to obtain private sector jobs, they would be competing in the labor markets with foreign nationals

who would be interested in obtaining the same jobs at much lower wages. Thus, public sector jobs have remained an attractive alternative. On the demand side, firms have had to compete with each other for the few skilled domestic workers most companies are eager to hire in an effort to promote skilled nationals. Firms have avoided recruiting and training nationals, as these are not expected to stay long in the same company. So, firms have preferred to import skilled foreign workers even at the cost of dealing with layers of bureaucracy. There are no quick solutions to the problem of skill shortages. In the short term, GCC countries could continue investing in skills, on the supply side, and in improved enforcement of employment targets for nationals in the private sector, on the demand site. Governments could facilitate the matching of labor supply and demand through improved information and intermediation services by strengthening the collection and use of labor market statistics, and employment services across the GCC countries. In the long term, the goal could be to gradually transform the economy away from the current low-wage, low-productivity equilibrium dependent on expatriate workers towards a highproductivity one in which employers offer wages sufficiently high to attract nationals through economic incentives. It would be critical however to coordinate the migration reform and the reforms required to transition to technology intensive production that relies on fewer but highly qualified workers, and modernized equipment.

A focus on technology is central to MENA’s efforts to improve competitiveness Technology has been central to both economic growth and many elements of social welfare that are only partly captured by standard measures of GDP, including health, education, and gender equality. A broad definition of technology encompasses the techniques by which goods and services are produced, marketed, and made available to the public. Thus, technological progress at the national level can occur through scientific innovation and invention, through the adoption

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

and adaptation of preexisting, but new-to-themarket, technologies, and through the spread of technologies across firms, individuals, and the public sector within the country. Total factor productivity, which is one measure of technological progress,69 explains much of the differences in both the level and rate of growth of incomes across countries (Easterly and Levine 2001; Hall and Jones 1999; King and Levine 1994). Simon Kuznets, among others, argued that the rapid economic growth in developed nations had stemmed from the systematic application of science and technology to the production process. The level of technology achieved by a country is in general positively correlated with income levels.70 However, there is considerable variation in countries’ technological achievement within income groups because of differences in the nature of production processes, the extent to which governments have given priority to and succeed in delivering services with a strong technological component, and the ease with which technologically sophisticated firms have been able to grow and expand their weight in the overall economy. These factors, which are summarized by the concept of technological absorptive capacity, determine to a significant degree the level of technological achievement to which a country is converging. Differences in absorptive capacity help explain why countries at similar income levels can have such different levels of technological achievement.

on TAI are available, MENA countries, with a few exceptions, have scored below their peers in the same income group (Table 14). As shown in World Bank (2008b), the higher the underlying level of technological absorptive capacity, the higher the level of technological achievement to which a country is converging over time. The low level of technological achievement in MENA is therefore directly correlated with the low level of technology absorption, which depends on the quality of macroeconomic and financial management, skills and institu-

Table 14: Technological Achievement Index 1990 East Asia & Pacific

0.14

0.19

Europe & Central Asia

0.13

0.20

Latin America & Caribbean

0.11

0.15

South Asia

0.10

0.13

Sub-Saharan Africa

0.08

0.11

Middle East & North Africa

0.10

0.14

Egypt, Arab Rep.

0.10

0.13

Tunisia

0.12

0.16

Syrian Arab Republic

0.09

0.12

Kuwait

0.11

0.18

Source: World Bank (2008b)

Total factor productivity reflects factors other than pure technical change such as increasing returns to scale, markups due to imperfect competition, and sectoral reallocations. 70 See World Bank (2008b). 71 Technological achievement is measured indirectly since technology does not have easily counted physical presence (see Burns 2009). TAI, published by the United Nations Development Programme (UNDP) is an index that incorporates information on the diffusion of technologies and indicators of innovation such as the number of patents. Some other indexes measuring technological achievement emphasize inputs into technological advances, such as educational levels, the numbers of scientists and engineers, R&D expenditures or R&D personnel. One example of such an index is the Index of Innovation Capability of the United Nations Conference on Trade and Development (UNCTAD, 2005). Still others focus on outputs, such as the share of high-technology activities in manufacturing value added and exports. The Index of Competitive Industrial Performance, published by the United Nations Industrial Development Organization (UNIDO) is such an index. The National Innovative Capacity Index focuses on the mechanisms by which technological progress is achieved (Porter and Stern 2004). 69

MENA, despite some progress in the past two decades, lags behind other developing regions, such as EAS, ECA and LAC in terms of exposure to external technology, penetration of old and new technologies and scientific innovation, as measured by the technological achievement index (TAI).71 Regional averages however hide a great heterogeneity between countries. For instance, Tunisia, which is among the most diversified economies in the region, has been scoring consistently better than other countries in the same group. The GCC countries, such as Kuwait or Qatar and Bahrain, score closer to the level of technological achievement their income levels would predict, and therefore higher than the regional average. Overall, up to the year 2000 when the latest data

2000

Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

Table 15: Index of Technological Adaptive Capacity

Table 17: Index of Technological Readiness 2005

2010

1990

2000

Oil exporters

3.17

3.36

East Asia & Pacific

0.45

0.49

Bahrain

4.60

4.90

Europe & Central Asia

0.44

0.49

Kuwait

4.20

3.50

Latin America & Caribbean

0.40

0.43

Qatar

4.40

South Asia

0.35

0.39

United Arab Emirates

5.30

5.20

Sub-Saharan Africa

0.33

0.36

Algeria

2.70

3.00

Middle East & North Africa

0.39

0.42

Oil importers

3.53

3.42

Jordan

0.46

0.49

Jordan

4.30

3.70

Tunisia

0.40

0.44

Egypt, Arab Rep.

3.70

3.30

Egypt, Arab Rep.

0.39

0.42

Morocco

2.80

3.50

Syrian Arab Republic

0.35

0.39

Tunisia

4.10

3.90

Iran, Islamic Rep.

0.33

0.38

Source: World Bank (2008b).

Source: Staff calculations based on a sub-index of World Economic Forum’s Global Competitiveness Index. Note: Population numbers are used as weights in country group indexes.

Table 16: Knowledge Economic Index 2000

2009

5.01

5.61

Bahrain

6.73

6.04

Kuwait

6.24

5.85

Oman

5.16

5.36

Qatar

6.06

6.73

Saudi Arabia

4.56

5.31

United Arab Emirates

5.96

6.73

Developing oil exporters

3.06

3.30

Algeria

2.73

3.22

Iran, Islamic Rep.

3.56

3.75

Syrian Arab Republic

2.96

3.09

Yemen, Rep.

2.03

2.20

Oil importers

4.21

4.05

Oil importers with GCC links

5.00

4.95

Djibouti

1.70

1.47

Jordan

5.62

5.54

GCC countries

Lebanon

4.78

4.81

Oil importers with EU links

4.14

3.97

Egypt, Arab Rep.

4.31

4.08

Morocco

3.72

3.54

Tunisia

4.12

4.42

Source: Staff estimates based on World Bank data. Note: Population numbers are used as weights in country group indexes.

tions. The index of Technological Adaptive Capacity (TAC) offers one way to measure technology absorption.72 According to this index, during the period 1990 to 2000, MENA made significant progress in terms of expanding its technological capacity (Table 15), mostly thanks to improvements in macroeconomic management and educational achievement as many of the non-GCC countries in developing MENA continue to lag other developing regions in terms of government effectiveness and institutional quality. One way to assess progress since 2000 in the absence of updated TAC and TAI indexes is to look at the World Bank Institute’s Knowledge Economic Index (KEI). It corresponds closely to the Technological Adaptive Capacity index since

TAC is computed based on a set of measures including: macroeconomic environment; general government balance as percentage of GDP; annual CPI inflation rate; real exchange rate volatility; financial structure and intermediation; liquid liabilities percent of GDP; private credit percent of GDP; financial system deposits percent of GDP; human capital; primary educational attainment percent of population aged 15 and over; secondary educational attainment percent of population aged 15 and over; tertiary educational attainment percent of population aged 15 and over; voice and accountability; political stability; government effectiveness; regulatory quality; rule of law and control of corruption.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Table 18: FDI has grown rapidly in MENA (% of GDP, net inflows) 1990

1995

2000

2005

2008

EAP

1.57

3.9

2.64

3.46

3.33

ECA

—

1.06

2.16

3.07

4.44

LAC

0.74

1.73

3.93

2.74

3.01

SAS

0.14

0.63

0.72

1.08

3.31

SSA

0.41

1.4

2.94

3.47

MIC

0.78

1.97

2.71

2.88

3.51

World

0.99

1.13

4.83

2.55

3.04

MENA

0.22

0.31

1.22

2.57

4.57

Source: World Bank, WDI

it takes into account whether the environment is conducive for knowledge to be used effectively for economic development, in addition to factors indicating the overall potential of knowledge development in a given country.73 According to this index, during the past 10 years GCC and developing oil exporters made progress in their capacity to absorb and use capacity, while oil importers except for Tunisia and Lebanon did not (Table 16). This assessment is consistent with the findings based on the technological readiness index (Table 17). It offers an alternative way to measure the agility with which an economy adopts existing technologies to enhance the productivity of its industries, with specific emphasis on its capacity to fully leverage information and communication technologies in daily activities and production processes for increased efficiency and competitiveness. The issue of whether a technology used in a country has or has not been developed within national borders is irrelevant for a country’s ability to enhance productivity. The index captures the central point that the firms operating in the country have access to advanced products and blueprints and the ability to use them.

GDP were highest in MENA compared to other regions in the world (Table 18), and FDI appears to be above its estimated potential in the oil importing countries and some developed oil exporters (Figure 71). However, except for tourism, FDI outside the energy sector was directed to nontradables with little going to export-oriented manufacturing or high-tech services (Figure 72). There is little evidence of job creation or technology and knowledge transfers via FDI from parent companies to local affiliates.74 MENA countries’ efforts to improve the technological content of their nonoil merchandise exports have had mixed results. During the period between 2000 and 2008, oil importers’ share of high technology exports in total nonoil merchandise exports declined, while oil exporters’ shares stagnated (Figure 73). Developing MENA countries were much more successful in increasing the presence of medium-high technology products in their nonoil merchandise basket during the same period (Figure 73). GCC countries’ progress however was negligible. The ability of MENA firms to discover new products is further limited by the modest doThe Knowledge Economic Index (KEI) is computed based on the average of the normalized performance scores of a country or region on all 4 pillars related to the knowledge economy— economic incentive and institutional regime, education and human resources, the innovation system and Information and Communication Technology (ICT). 74 Source: Pigato (2009). 73

Foreign Direct Investment (FDI) plays a key role in the process of technological acquisition and learning-by-doing in developing countries. In MENA, FDI started increasing at a rapid pace after 2000. Indeed, net FDI inflows as a share of

Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

mestic knowledge generation than can partly substitute for foreign technology. Two reliable indicators of domestic innovation activity are R&D expenditures and patenting activity. Arab nation’s R&D spending is low as a percentage of

GDP, compared to other middle-income regions (Figure 74). MENA residents receive very few patents. Egyptians were granted fewer than seven U.S. patents per year on average between 2001 and 2005, whereas Malaysians received

Figure 71: MENA countries’ FDI potential conditioned on openness, natural resources and population for the period 1998-2007 (actual to predicted net FDI inflows as % of GDP) Kuwait Iran, Islamic Rep. Yemen, Rep. Developing Oil Exporters Syrian Arab Republic Morocco Algeria Oman Saudi Arabia GCC Countries MENA 13 Tunisia Egypt, Arab Rep. Oil Importers Bahrain Jordan Lebanon 0

0.5

1.0

1.5

2.0

2.5

3.0

Source: Staff calculations of export potential is based on the following estimated regression: FDI/GDP = –0.077+0.033*NOX/GDP0.007*NatRes/GDP-0.003*log(POP), sample size is 69, R2=0.1, and FDI/GDP stands for net foreign direct investment inflows as a percent of GDP, NOX/GDP defines the value of nonoil exports of goods and services as a percent of GDP, NatRes/GDP defines the value of resource-based exports as a share of GDP,a POP stands for population. a The value of resource-based exports is given by the sum of the value of exports of oil, mineral, food and agricultural raw products.

Figure 72: Structure of FDI, cumulative 2000–07 (percent of FDI) Manufacturing

Telecoms

Finance

Tourism & Construction

Energy

High Tech Services

90 80 70 60 50 40 30 20 10 European Union

China

Turkey

Syrian Arab Republic

Lebanon

Jordan

Tunisia

Morocco

Egypt, Arab Rep.

Algeria

Sources: United National Conference on Trade and Development, World Development Indicators, national accounts.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

quality of Tunisian research institutions is among the best in MENA region, according to the Global Competitiveness Report (World Economic Forum 2010). Education absorbs 7 percent of GDP, and the system produces a large number of university graduates in general fields as well as in sciences and technologies. The country is rated 7th in the world in terms of availability of scientists and engineers—well ahead of MENA and even the EU average (World Economic Forum 2010). Despite these successes, Tunisia faces serious challenges in its quest for a gradual transformation of tradi-

5 times more per year and Koreans and Taiwanese each earned thousands (Table 19). Still, some MENA countries are vastly more successful than others in their use of technology. One such country is Tunisia whose R&D expenditure as a share of GDP doubled between 2000 and 2005, when it became more than double the average for MENA region (Figure 75). The country has a complex innovation infrastructure and a large number of public programs aimed at providing incentives for R&D and innovation. The

Figure 73: Technological content of exports by region High technology ECA

LAC

Oil importers

Developing oil exporters

GCC oil exporters

40% 35% 30% 25% 20% 15% 10%

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

5% 1990

Share in Exports of Nonoil Goods

EAP

Medium-High technology LAC

Oil importers

Developing oil exporters

GCC oil exporters

50% 40% 30% 20%

Source: COMTRADE data.

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

10% 0%

ECA

60%

1990

Share in Exports of Nonoil Goods

EAP

Chapter 4: What are the Major Constraints to MENAâ&#x20AC;&#x2122;s Nonoil Exports?

Figure 74: Research and development expenditure (% of GDP) 2000

2005

3.0

% of GDP

2.5 2.0 1.5 1.0 0.5 0.0

EAP

ECA

LAC

SAS

MENA

OECD

MIC

World

Source: World Bank, WDI. Note: No data were available for MENA region in 2000. MIC stands for Middle Income Countries.

Table 19: Number of resident patents filing per million people Country of Origin

2000

2001

2002

2003

2004

2005

2006

Egypt, Arab Rep.

Morocco

Tunisia

Malaysia

Philippines

584

623

640

651

646

703

742

1549

1557

1608

1887

2191

2538

2598

GCC oil exporters Saudi Arabia Developing oil exporters Algeria Syrian Arab Republic Yemen, Rep. Oil importers with EU links

Chile

United States of America Republic of Korea Source: WIPO and World Bank, WDI.

tional sectors into high-value-added, knowledgeintensive sectors (see Box 6). Innovations, technological adaptation, customization or licensed production of foreignowned products can all lead to export discoveries. A paper by Nassif (2010) discusses six possible triggers for export discovery75 based on

more than 100 interviews structured around 23 case studies in five MENA countries. Although

Export discoveries were defined as products that had not been sold abroad, or sold only in very limited amounts, at the beginning of the period (1989) and were consistently exported in large quantities by the end of the period (2004).

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 75: Research and development expenditure in MENA (2005) 1.2

Percent of GDP

1.0 0.8 0.6 0.4 0.2 0

Algeria

Egypt, Arab Rep.

Iran, Islamic Rep.

Kuwait

Saudi Arabia

Tunisia

MENA

EAP

Source: WDI

Box 6: Tunisia’s national innovation system: achievements, challenges and vision Over the last decades, Tunisia has emerged as one of the regional leaders in science, technology and innovation in the region and abroad. The government’s ambition is to further accelerate the rate of investment in R&D in the years to come, and become a regional innovation hub and a destination of choice for hightech FDI. However, Tunisia has to address a number of important challenges to convert the country’s considerable R&D capacity and human capital into an asset for an innovation-driven economy.

Human capital is underutilized As shown in a 2010 Tunisia’s Development Policy Review conducted by the World Bank, the economy is still largely dominated by low-skilled activities, only 15% of currently employed people have a university degree. This explains the high and growing unemployment rate of this category of job-seekers. At the same time, Tunisian firms struggle to find adequately educated workforce to accompany their development (World Economic Forum 2010). Private sector innovation capacity is limited Tunisia’s productive sectors have limited innovation capacity. Business spending on R&D constituted only 0.15% of GDP in 2009, and the number of patents submitted in the United States and the EU remains negligible. There is also little collaboration between research centers and the private sector. Among those firms that do invest in R&D, only 15% collaborate with universities.

Limited technology spillovers from FDI The energy sector absorbs the bulk of FDI in Tunisia, while FDI inflows into manufacturing go predominantly to low value-added sectors. Furthermore, FDI is largely located in the offshore sector disconnected from the rest of the economy. In these circumstances, while industrial upgrading may occur, technological spillover effects are limited. Inefficiencies in public R&D expenditures Public R&D spending is scattered around a large number of themes and public institutions without clear alignment with national priorities. The objectives of a large number of R&D programs overlap and the performance criteria for distributing R&D spending are unclear. As a result, budgets received by individual laboratories are limited, and so are production and its economic relevance. Government’s vision In light of the above, the government’s new strategy is to promote a gradual transformation of traditional sectors into high-value-added, knowledge-intensive sectors as well as increase investments in emerging technology-intensive sectors. As highlighted by the recent Tunisia Development Policy Report of the World Bank, to achieve this goal Tunisia has to (i) enhance the efficiency and effectiveness of public R&D spending; (ii) improve supply of adequate skills and competencies; and (iii) strengthen private financing of innovation.

Chapter 4: What are the Major Constraints to MENAâ&#x20AC;&#x2122;s Nonoil Exports?

the results should be treated with caution as the methodology is open to selection bias, and the sample of firms is not representative, they are indicative of the factors that mattered to the process of export discovery by existing MENA firms. These factors included external unanticipated shocks; market evolution; research; information about new business opportunity; capacity to produce in excess of domestic market; and random events. The paper found that in many cases more than one trigger was at play. Information about a new business opportunity obtained by an entrepreneur willing to take high risks and invest in new technologies and management techniques was shown to be decisive. Technology can be used to gather and disseminate information needed by entrepreneurs to make export discoveries. Entrepreneurs identified insufficient information about demand in specific markets, prices of new products or services, and the methods for producing quality goods and services efficiently as the key obstacle to the discovery of new export activities. Lack of information about these processes increases uncertainty and raises risk perceptions, which in turn discourage

investors. The high cost of gathering the required information is the greatest hurdle in initiating new export activity (Klinger 2007). According to the survey, MENA entrepreneurs overcame these uncertainties by partnering with firms with the required knowledge; some benefited from subsidies from input suppliers; many accepted the higher risks and absorbed the costs; a few benefited from export promotion, technical assistance or knowledge transfer. Except for access to finance, survey participants did not think policy-induced business constraints mattered for their export discoveries. And neither did government support. Many entrepreneurs pointed out that initial supportâ&#x20AC;&#x201D;through export promotion schemes, competitiveness programs, and innovation grants, was not available to them. Almost all entrepreneurs reported difficulties in accessing capital from the domestic financial system to start a new business. Successful entrepreneurs overcame this obstacle but there were consequences including delayed investment, high personal risk and dependence on informal financial resources.

Chapter 5

What should countries do to improve nonoil export growth? What did we learn? Summary of key findings Achievements have been made in MENA in the last ten years when growth accelerated relative to the previous decade in response to intensified efforts in many countries to bolster their private sectors and diversify their sources of growth. But despite accelerated reform efforts, the growth response in developing MENA since 2000 has been modest in per capita terms relative to that of other developing regions. Oil has been and remains the primary vehicle for revenue and wealth creation for the oil exporters in the region, while the spillover effects to the oil importing countries in the region and beyond have been significant. And while the outlook for oil remains promising in the medium term due to strong demand for oil in Asia and other fast-growing markets, counting on oil will not solve the problem of fueling inclusive growth in the region. As the oil industry is capital intensive, continued reliance on oil will not address developing countries’ major issue—employment creation, and will only exacerbate the current situation. MENA needs to expand exports of nonoil goods and services in order to spur job creation for the fastest-growing labor force in the middle-income group of countries. Despite some progress, exports contributed little to regional growth in the past decade, and nonoil exports of goods and services remain below potential for the region as a whole. However, the situation differs significantly for the GCC oil exporters and the MENA oil importers whose nonoil exports of goods and

services are at potential, and the developing oil exporters whose nonoil exports are only a fifth of expected levels. Overall, MENA has made progress in achieving greater openness, diversifying its exports and export destinations. Nearly all countries increased their exports as a share of output and all oil importers made progress in reducing the concentration of their merchandise export baskets. The GCC and the oil importing countries made advances by expanding and diversifying services exports as well. Importantly, MENA has made a major shift in the destinations for its nonoil goods towards fast-growing Asia and away from slow-growing EU—a move that has been a lot less dramatic, but nevertheless substantial for the oil importers. The shift towards Asia and fast-growing BRICs is good news for MENA as South-South trade is expected to play a much more prominent role in the new post-crisis world trade order. Nonetheless, the importance of various markets will differ by country group. Europe remains the most important export destination for MENA’s nonoil products and services. This reflects largely the fact that the EU receives around half of oil importers’ exports. Nonoil exports destined to other MENA countries represents the largest share of GCC’s total nonoil exports, while for developing oil exporters Asia has become the most important nonoil export destination. The service sector appears to be an area of relative strength for MENA and a key source of export revenue and future potential growth.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

MENA expanded its share in the global nonoil export market largely due to an increase in exports of services. Only one other region in the world—South Asia—generates a higher share of output than MENA by exporting services. And the importance of services as a source of export growth is much greater for MENA’s oil importing countries than any other region in the world. By contrast, merchandise exports of other developing countries grew much faster suggesting that MENA firms producing nonoil merchandise goods are not as competitive as some of their foreign counterparts. Regional nonoil merchandise export growth was driven more by an expansion of existing products to new markets and new products to existing markets than by an increase of exports of existing products to existing markets. The latter is indicative of substantial pressures from competition with other emerging countries’ exports. Oil exporters expanded exports of industrial products, notably in Asia, while oil importers were much more successful than oil exporters in expanding exports of parts and components to the EU and Asia, and capital goods to the EU. However, export growth linked to global production sharing arrangement was weak relative to export growth of industrial products, consumer goods and food products— especially to the EU. Growth at the extensive margin is evidence of the shift toward rapidly growing product and market segments in Asia and the EU, and also of the growing importance of exports of industrial products, and to some extent, global production sharing arrangements in the electrical and motor vehicle industries in the oil importers with strong EU links. However, intra-industry trade (IIT) remains limited within MENA and with the rest of the world, and manufacturing activities in MENA appear to be mostly assembly-type operations directed at domestic markets. The only country in the region with a significant share of components in its total exports is Tunisia. MENA countries have relatively good market access for nonagricultural goods in high income countries, but overall agricultural protection in developed markets is high mainly due to non-

tariff barriers (NTBs), especially constraining oil importers with EU links. MENA countries have more restricted market access in China than in advanced markets, and oil importers with EU links encountered much higher overall protection than others because of high tariffs on specific products exported to the Chinese market. All regions face higher protection in India than elsewhere, and MENA region is not an exception. Furthermore, the region encounters higher protection on its nonoil exports to India than most other regions, largely because of high barriers on GCC’s nonoil exports. However, overall protection on oil importers’ exports was generally lower in India than in China, reflecting a product composition effect. Notably, there is no evidence that in general protection has increased substantially since 2008 when the global crisis erupted. Despite good market access developing MENA countries do not exploit well existing opportunities for nonoil export growth. Developing oil exporters such as the Republic of Yemen, Algeria, the Islamic Republic of Iran, and Syria exported their products to less than 5 percent of markets in 2005. Oil importers were more successful than them, but still most exported products to less than 7 percent of markets, and compared poorly to other countries, including Turkey which reached 27 percent of markets for its products. Furthermore, success in penetrating foreign markets varies greatly across MENA countries and cannot be explained just with differences in protection across markets, but rather reflects lack of information about markets—an area of special concern to export-oriented firms in MENA—and other constraints limiting firms’ competitiveness. MENA region has liberalized its trade considerably by lowering its tariff barriers, which are comparable to tariffs in other regions. Yet, apart from the GCC countries, the region remains one of the most protected markets for goods in the world, largely due to non-tariff measures such as, technical barriers to trade, quotas and prohibitions, import and export licenses, anti-dumping and other anti-competitive measures. Some of these measures are essential by nature and imposed to achieve objectives other than to restrict

Chapter 5: What Should Countries do to Improve Nonoil Export Growth?

trade. However, evidence exists that countries are using non-tariff measures to erect non-tariff barriers as trade agreements impose limits on the use of traditional trade policy instruments such as tariffs. Given that by the Lerner symmetry theorem, removing import restrictions is tantamount to removing restrictions on exports, there is thus a substantial nontariff agenda in developing MENA countries. Research is underway to update the information on nontariff measures in MENA and provide further knowledge on the barriers erected to protect domestic markets from competition. Intra-regional exports of non-oil merchandise have not increased as a share of total nonoil exports despite the gradual implementation of EU trade agreements, PAFTA and GCC. Some reasons for this include high nontariff barriers on intra-MENA trade, failure to exploit well opportunities to sell in regional markets, or simply low trade complementarity among MENA countries. Furthermore, when integration is limited to a PTA without common external tariffs, the rules of origin become a major determinant of the incentive regime confronting firms, and countries with high most-favored-nation tariffs such as Tunisia and Morocco are at risk of costly trade diversion. In addition, differences in the rules of origin of various regional agreements generate additional compliance costs and limit intra-regional, intra-industry trade. Wide dispersion of tariffs across MENA countries also imply that industries in these countries benefit to varying degrees from policy-generated transfers. When the costs and benefits of opening up are unevenly distributed, it becomes politically difficult to open markets among regional partners. The fact that members of PAFTA continue to limit access for specific products by using NTBs or not implementing the policies specified in the agreement is evidence of these political tensions. Another limiting factor, with a political dimension, is the lack of mechanisms to compensate losers. Despite the emergence of “credible” PTAs such as PAFTA, it is not known to what extent agreements are implemented and their impact. Finding out answers to these questions should be a priority.

MENA appears to have some of the most restrictive policies governing trade in services in the world, according to estimates measuring de jure policies in a number of services sectors. Furthermore, regional trade agreements have not helped to liberalize intraregional trade in services in developing MENA. The situation varies by country and sector. In banking and insurance, Morocco and Tunisia are among the most restrictive countries in MENA. In telecom sector, Egypt and Tunisia still lag behind others despite the very recent opening of Tunisia’s fixed line telephony to a private operator. In maritime transport, major restrictions exist in Morocco and, to a lesser degree, Egypt, while in air transport, Egypt displays highest restriction levels. The GCC countries appear to have the most restrictive service sector policies in MENA, but effective applied protection in some services industries might be lower than de jure restrictions as firms find ways to get around the restrictions. Further research is needed to link policies to outcomes of interest such as FDI or foreign presence, ideally taking into account firm characteristics or to determine to what extent current protection levels—similar to protection levels in other fastgrowing regions—inhibit growth. Restrictions that discourage FDI inflows into services are particularly harmful as they limit the potential size and productivity of these sectors, the competitiveness of firms operating in these sectors, the technology they use, the markets they choose to operate and the quality of services they provide. A range of factors impede MENA’s nonoil export growth, discourage investment, and hurt firms’ productivity. But the analysis must recognize that competitiveness and total factor productivity levels vary substantially within the region, and that there are big differences between the major obstacles to growth in the GCC oil exporters, developing oil exporters and oil importers. Firms from GCC countries are much more productive than firms from developing MENA, while developing oil exporters’ firms are least productive. In the GCC countries, limited access to finance for SMEs and distortions in labor markets

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

that discourage skill acquisition and entry into the private sector, and discriminatory policies that discourage FDI inflows into some of the services sectors are major problems. Innovation and technological readiness also appear to be areas in need of special attention as these countries are behind their peers in the developed world.76 In developing oil exporters, nonoil tariff and nontariff protection is highest in the world, taxes and corruption are the most frequentlymentioned major complaints by exporting firms, but due to the dominance of the state, other issues, especially inefficiencies in labor and goods markets, and poor financial market development, present even bigger problems for the competitiveness and growth prospects of the export-oriented sector. In oil importing countries—especially those with EU links—protection is still high largely due to nontariff barriers. Wide dispersion of tariffs across countries implies that industries in these countries benefit to varying degrees from policy-generated transfers, making the opening of markets among regional partners difficult despite PAFTA. Protection in services also remains high and beyond the scope of regional agreement such as PAFTA and the bilateral FTAs with the EU. Limited fiscal space in quite a few of the oil importers implies that macroeconomic uncertainty remains a top-most concern for firms, while the inefficient and inflexible labor market is another weakness. Furthermore, to be able to compete effectively in global markets, firms in oil importing countries must catch up with East Asian firms in terms of innovation efforts.

Are reforms implemented by countries addressing the major constraints? MENA countries are implementing reforms addressing some of the constraints to nonoil export growth identified in the report, but in many countries a lot more needs to be accomplished as wide policy gaps remain in some areas. The average number of reforms in MENA steadily increased during the last 5 years. Between June 2009 and May 2010, 11 of 18 economies in MENA adopted

a total of 22 business regulation reforms to improve the climate for doing business according to the latest Doing Business report (2011). The top reformers in the region were Saudi Arabia and Egypt which were among the 15 most active reformers in the last 5 years. MENA governments improved macroeconomic management, simplified business regulations, reduced restrictions to trade and investment, and opened up their financial sectors. In the past year, many of the business regulation reforms in the region involved the application of new information technologies which is expected to increase efficiency and transparency, thereby addressing to some extent governance concerns linked to nontransparent and corrupt practices. Improvements were made to trade facilitation in some GCC countries including Saudi Arabia, the United Arab Emirates, and Bahrain, as well as some oil importers such as Egypt, Morocco, and Tunisia. Morocco launched a national strategy for development of trade logistics, aimed at enhancing competitiveness and trade growth over the next 5 years. Interventions will promote optimal management of goods flows to reduce logistics costs from 20 to 15 percent of GDP by 2015. Egypt approved a PPP law in May 2010 to facilitate implementation of PPPs and accelerate plans to expand Egypt’s infrastructure. Commencement of the first phase of development of seven trade zones and logistical centers between private sector and government has been announced for implementation through end 2011.77 the Republic of Yemen approved an amendment to its Customs law in July 2010 to meet WTO membership requirements and standards, with the aim of completing WTO accession by end 2010. In the GCC, Qatar is addressing one of the major constraints to growth of its services indus-

76 Countries that used successfully their natural resources typically established strong institutional and organizational structures, knowledge networks and aggressive human capital policies (De Ferranti et al. 2002). 77 Bidding for the 2nd and 3rd phases, which include establishment of commercial centers in 22 governorates, will be initiated by end 2010.

Chapter 5: What Should Countries do to Improve Nonoil Export Growth?

tries by easing restrictions on majority foreign ownership of local companies—considered to be a significant liberalization measure, following simplification of the tax regime for foreign companies at a flat 10% rate. Still, its services sector trade restrictiveness remains high even by Arab country standards with noteworthy restrictions in banking, insurance, telecommunications and transport. Bahrain and Qatar are planning to actively monitor the implications from the Basel III process and the Financial Stability Board for its financial sector business models. Tunisia plans to equalize, from 2012 onward, the fiscal incentives offered to offshore and onshore FDI and raise the limit on foreign ownership in certain sectors from 49 to 60 percent. Some GCC countries are planning or already implementing reforms addressing issues related to their major competitiveness issue—skill shortages. Bahrain has taken a first step toward narrowing the wage gap between foreign immigrants and domestic workers while funding active labor market programs and training for nationals to enhance their competitiveness. Kuwait is implementing tentative, non-controversial labor market reforms—allowing immigrants already working in Kuwait to change their visa sponsors without notice to the incumbent sponsor, and a draft law abolishes the sponsorship system entirely, in addition to other limited reforms, although this law faces resistance from many employers. In Morocco, new funding mechanisms under the Crédit Agricole bank for the Green Morocco Plan would be aimed at helping small farmers to access finance and technical assistance for productivity-improving investments. Other countries are planning measures to strengthen financial stability. Tunisia plans to raise the minimum capital requirement for banks to 100 million dinars, and lower the NPL ratio to less than 7 percent by 2014. For this purpose, banks are urged to increase the efficiency of their loan recovery efforts and to take vigorous actions on their portfolio of non-performing loans. The authorities have also decided to implement the Basel II framework, starting with the standardized approach, and to establish a deposit guarantee fund financed by the banks.

A number of developing oil exporters are planning reforms to address inefficiencies in input and goods markets stemming from state control. In Syria, a new telecommunications law was passed in June 2010 authorizing the separation of regulatory and operator functions currently handled by the state-owned Syrian Telecommunications Establishment, and paving the way for possible entry of a third mobile operator. Regulatory functions will be carved out to a new entity and the Syrian Telecommunications Establishment will be restructured to become a more commercially driven institution. The government is committed to further reforms in the sector and in the medium term is looking to possibly end Syrian Telecommunications Establishment’s monopoly over fixed line services. The latest activity of the Islamic Republic of Iran’s ongoing privatization program comprised reduction in government’s stake in the country’s two biggest automotive manufacturers from 49 to 31 percent. The government plans to privatize some 200 firms in 2010–11. With a substantial share of transfers going to other public entities, however, many question the effectiveness of this privatization program. Some developing oil exporters are planning much needed improvements to the functioning of their financial market systems. Two developing oil exporters (the Islamic Republic of Iran and Syria), the United Arab Emirates, Jordan and Lebanon made much needed improvements of their credit information systems—one of the areas identified as a major constraint to firms in the region. Other MENA countries need to follow suit and strengthen not only credit information systems, but also creditor rights and collateral infrastructure. As part of its ongoing financial system reform program, Syria has initiated a new competition and anti-trust law for the financial sector. The law is aimed at prohibiting monopolies and anti-competitive practices. Public and private banks and enterprises, however, do not yet compete on a level playing field. Iraq has adopted an action plan to modernize the banking sector, taking into account the findings and recommendations presented in recently completed audit reports of the two main stateowned commercial banks and addressing the benchmarks of the IMF Stand-By Agreement.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Several of the developing oil exporters with more limited fiscal space are planning improvements to their tax code and removals of other costly distortions. Syria’s government is planning to streamline the substantial quasi-fiscal operations currently conducted by public sector banks and enterprises as well as to advance preparations for the launch of the value-added tax (VAT).78 In January 2010 the Islamic Republic of Iran’s parliament passed a comprehensive subsidy removal bill that was implemented in December 2010. The bill targets subsidies on fuel, water, sewage, food, postal, airline and rail services and is expected to yield savings amounting to $100 billion. A significant portion of the resources saved under the reform program will be transferred to low-income families and business firms as cash or non-cash payments. With the reduction in expenditures on subsidies and transfers, the government expects to lessen domestic fuel demand and vulnerability to international sanctions. The Republic of Yemen has begun implementation of a series of tax reforms. It plans to apply the General Sales Tax legislation to widen the tax base and enhance tax revenues. The government has approved a new Income Tax law to reduce the corporate income tax rate from 35 to 20 percent, the personal tax rate from 20 to 15 percent, and eliminate many tax exemptions and petroleum price subsidies over the next three years. It has approved a new investment law to eliminate indirect exemptions and introduce international best practices. the Republic of Yemen also plans a reform of the social welfare fund with the objective of improving targeting of the cash transfer system according to income criteria. Many of the oil importers with limited fiscal space are implementing reforms to address the issue and respond to one of the major concerns of the private sector—macroeconomic uncertainty. Tunisia is preparing a law to ensure financial viability of pension schemes over the next 20 years without additional tax increases or budget financing. Egypt raised natural gas and electricity prices in June 2010 to different levels by industry.79 Subsidized food prices under the ration card system were unified in May 2010 in order to eliminate the opportunity for trading

subsidized goods on the black market and to simplify administration of the food subsidy system. Jordan has responded to its fiscal pressures by setting aside all new capital projects and shifting from publicly-funded investments towards public-private partnership (PPP) arrangements. A PPP regulatory framework is established and successful PPPs have already been conducted. Wide policy gaps, however, remain in a number of areas where MENA governments should step up reform efforts. In the GCC, more needs to be done to address the issue of skill shortages in a comprehensive way. GCC governments should continue to invest in skills, facilitate the matching of labor supply and demand through improved data collection, information and intermediation services. It would be critical to coordinate migration reform and reforms required to transition to technology intensive production. A lot more needs to be done to understand the nature and extent to which regulations restrict trade and FDI in the GCC services. In developing MENA, countries need to intensify efforts to strengthen institutions, improve information gathering and dissemination, and reform implementation. Countries should press on with financial market development— especially improving financial infrastructure. This will entail expanding the range of movable assets that can be used as collateral, improving registries for movables and enforcement and sales procedures for different types of collateral, upgrading public credit registries, and more importantly, introducing private credit bureaus capable of significantly expanding coverage and the depth of credit information. Developing MENA countries should also strengthen macroeconomic management, address inefficiencies in labor and goods markets, and facilitate innovation activities, knowledge and technological acquisition. There is evidence

The drafting of the VAT law and tax procedures code is proceeding in order to enable introduction of a VAT planned for 2011. 79 Increases for gas used by the chemical and processed glass industries will be effective starting fiscal year 2011. 78

Chapter 5: What Should Countries do to Improve Nonoil Export Growth?

that the existing labor market rigidities—especially the high firing costs—have played a role in reducing the impact of the crisis on unemployment. However, these rigidities are now limiting job creation, and the ability of the economy to pick up speed post crisis. Finally, it should be a priority to understand better the nature and extent to which nontariff barriers restrict trade in non-oil goods and services. Some countries such as Algeria have backtracked in their efforts to open up their economies to trade after the crisis. Algeria’s 2010–14 public investment plan (PIP) focuses on diversification and job creation. Yet, in contrast

to the requirements of an effective diversification program that requires increased attention to competitiveness and more open trade regime, several of Algeria’s policies indicate a shift in the direction of greater state control of the economy and greater restrictions on foreign trade. Notably, new 2010 FDI rules add to policies adopted in 2009 to restrict options for foreign investment and consumer imports. Potential foreign investors face new requirements designed to limit profit taking and repatriation. Public firms are being strengthened and privatizations are delayed, while steps toward liberalizing external trade have slowed since 2008, including the halting of activities toward WTO accession.

Statistical Annex

101

102 3.8 5.2 3.6 6.8

Libya

Syrian Arab Republic

Yemen, Rep.

Oil Importers

3.1

4.5

Tunisia

Source: World Bank data.

4.7 4.9

4.6

7.2

6.5

Oil importers with EU links

9.0

2.3

5.6

9.3

Lebanon

Egypt, Arab Rep.

7.6

Jordan

5.0

6.5

4.9

3.9

4.0

2.1

4.2

1.4

2.4

2.1

9.0

3.6

Morocco

5.8

Djibouti

8.6

9.5

Oil importers with GCC links

2.3

3.0

Iraq

5.1

United Arab Emirates

Developing oil exporters

Iran, Islamic Republic of

4.2

Saudi Arabia

2.4

–1.0

15.8

Qatar

Algeria

0.6

12.3

Oman

–4.4

5.6

Kuwait

2.6

0.5

1.1

2.0

3.8

3.5

5.1

4.6

8.0

4.0

4.5

6.5

4.9

8.0

5.0

5.4

2.6

1.5

2.4

2.9

1.0

3.7

18.5

4.8

1.9

3.5

4.2

3.7

4.0

4.8

4.4

5.5

5.1

7.0

5.0

5.4

6.3

5.3

4.1

5.5

6.2

11.5

3.0

4.1

4.2

3.1

4.2

14.3

4.7

4.5

3.9

5.0

4.7

4.8

(Annual percentage change)

6.1

6.0

4.9

5.3

2012 Proj. 2008

5.0

5.1

6.0

5.7

6.0

5.5

6.0

5.8

5.7

4.2

5.6

3.9

11.0

3.0

4.1

3.9

4.0

4.4

9.2

3.9

5.0

4.9

4.8

4.5

4.8

–1.0

0.4

–6.8

–3.9

–8.8

1.3

–8.6

–4.6

–4.5

–2.8

24.6

–3.3

0.0

7.7

4.1

20.4

32.5

10.9

13.9

19.9

4.9

24.2

16.1

12.8

2011 Proj.

–3.0

–2.2

–6.9

–5.1

–8.1

–10.3

–4.9

–8.9

–5.7

–10.2

–5.5

10.6

–14.2

–2.7

–6.6

–3.9

0.4

–6.1

13.0

2.2

19.3

–8.7

0.8

–1.2

–2.1

–3.0

–5.0

–8.2

–6.6

–8.5

–7.4

–0.5

–7.9

–6.8

–5.6

–4.4

15.8

–12.2

0.4

–8.0

–1.5

9.9

–0.8

9.4

6.9

16.5

–5.2

5.4

2.4

0.6

–2.8

–3.3

–7.9

–6.0

–8.7

–5.0

0.0

–7.1

–6.2

–5.0

–3.4

17.7

–8.2

2.3

–7.0

0.3

13.4

2.7

12.2

7.6

17.2

–2.4

8.3

5.0

2.8

(In percentage of GDP)

2009

2010 Est.

2011 Proj.

2010 Est.

2009

Fiscal balance

Real GDP growth

Bahrain

GCC oil exporters

Oil exporters

MENA region

2008

Table A1: Macroeconomic outlook

–2.6

–2.4

–7.3

–5.4

–7.5

–4.0

0.0

–6.0

–5.5

–4.7

–3.5

12.1

3.3

2.0

–3.4

1.5

15.0

3.3

14.3

6.5

20.9

–0.3

9.7

6.3

3.9

2012 Proj.

–3.8

–5.2

0.5

–1.8

–19.8

–9.6

–27.6

–15.8

–3.9

–4.6

–1.9

40.7

12.8

7.2

20.2

13.7

8.5

27.8

33.0

9.1

40.7

10.6

23.9

19.8

16.1

2008

2010 Est.

2011 Proj.

–2.9

–5.0

–2.3

–3.2

–15.5

–5.1

–17.3

–11.5

–4.4

–10.7

–2.4

16.8

–25.7

2.6

0.3

–0.4

–2.7

6.1

15.7

–2.2

29.2

1.6

6.7

3.6

2.0

–4.5

–5.3

–2.0

–3.2

–15.4

–9.5

–14.5

–13.1

–4.8

–5.2

–2.3

23.5

–13.5

6.7

5.6

5.1

7.3

6.7

22.7

2.6

29.3

3.6

10.8

8.4

5.8

–4.1

–4.4

–1.7

–2.7

–15.2

–6.5

–19.4

–11.9

–4.1

–4.8

–3.5

19.7

–9.2

7.2

5.4

5.2

7.7

5.6

38.0

3.3

30.2

6.1

12.7

9.6

6.9

(In percentage of GDP)

2009

Current account balance

–3.7

–3.9

–1.3

–2.3

–15.1

–6.6

–25.4

–12.0

–3.8

–4.6

–3.6

20.4

–3.0

7.3

5.9

6.1

10.7

7.2

34.9

3.6

31.7

7.4

14.0

10.8

7.8

2012 Proj.

Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

41.4 12.3

26.5

9.2

13.4

23.0

India

SAS excl India

LAC

SSA

14.0 41.1

12.9

6.0

4.9

1.8

12.2

14.9

7.2

5.5

1.8

6.6

15.0

6.0

10.1

7.2

4.8

5.1

China

MENA

GCC oil exporters

Other oil exporters

Oil importers

Oil importers w/ GCC links

Oil importers w/ EU links

Maghreb

Algeria

Egypt, Arab Rep.

Jordan

Lebanon

Morocco

Oman

Saudi Arabia

Tunisia

5.2

4.7

7.1

10.0

3.7

15.0

6.0

1.8

5.5

6.7

14.9

12.2

1.8

4.9

5.9

12.4

11.1

8.8

6.6

9.4

8.4

22.8

9.5

5.1

24.6

33.4

10.1

6.0

15.0

6.6

4.2

7.5

7.1

14.9

12.2

4.2

25.4

16.7

13.0

12.7

9.8

27.1

13.4

9.2

27.7

13.8

1.9 4.7

0.0

3.9

8.2

2.1

0.1

1.5

0.1

3.9

3.0

0.1

1.1

0.1

2.1

1.9

6.8

5.9

4.3

15.2

5.0

5.3

5.9

5.0

All

2.6

3.3

0.0

20.6

0.0

20.4

0.0

20.4

0.0

2.7

10.4

8.9

5.8

0.7

20.4

20.9

6.9

2.9

Oil

Source: Staff estimates using tariff data for 2008 and latest official NTB data.

3.5

33.3

31.7

26.8

92.0

1.8

8.3

13.2

82.3

13.6

1.8

32.7

17.3

24.1

23.6

9.1

12.2

ECA

HICs

22.7

14.0

38.4

32.1

12.7

EAS excl China

Agriculture Manufactures Nonoil

All

Exporting country

Overall trade restrictiveness

3.5

12.3

26.2

7.7

57.1

2.8

7.2

1.7

4.4

6.8

46.7

7.1

1.7

17.3

9.0

8.6

9.2

10.9

31.0

11.1

10.9

16.3

8.8

4.9

1.9

3.8

8.2

0.6

0.1

1.1

0.1

3.9

2.8

0.1

1.0

0.1

2.0

1.9

6.7

5.6

3.6

1.1

2.4

4.4

2.7

4.3

4.7

2.8

7.6

8.2

2.1

0.1

1.5

0.2

5.3

3.0

0.1

1.1

0.2

3.3

1.9

6.7

5.9

4.1

17.9

5.0

5.3

6.3

5.2

Agriculture Manufactures Nonoil

Tariffs

Table A2: Trade restrictiveness in East Asia excluding China, 2008 (in percent)

0.0

1.8

3.3

0.0

0.1

0.0

0.1

0.0

0.1

0.0

1.9

10.2

5.6

5.3

0.7

0.2

0.1

0.6

2.6

Oil

0.3

2.8

3.3

2.0

3.9

14.9

5.1

1.7

1.6

4.1

14.8

11.1

1.7

2.9

4.1

6.2

6.3

4.9

7.8

8.4

3.8

20.5

7.7

All

0.0

21.0

5.6

19.1

35.0

38.3

6.8

0.0

4.0

6.4

35.6

6.5

0.0

15.5

8.3

15.5

14.4

1.3

10.4

11.6

3.1

22.1

23.3

0.4

2.8

3.3

1.8

3.1

14.9

4.9

1.7

1.6

4.0

14.8

11.2

1.7

2.9

4.0

5.7

5.5

5.2

5.5

7.0

4.0

20.0

5.1

0.3

21.7

25.8

2.0

3.9

14.9

5.0

4.0

2.2

4.1

14.8

11.1

4.0

22.1

14.8

6.3

6.8

5.8

9.2

8.3

3.8

21.4

8.5

Agriculture Manufactures Nonoil

Ad-valorem equivalents (AVEs) of NTBs

0.0

0.8

0.0

20.5

0.0

20.3

0.0

20.3

0.0

0.8

0.2

3.3

0.4

0.0

20.2

20.8

6.3

0.4

Oil

Statistical Annex

103

104

7.6

26.7

39.2

30.3

24.9

56.2

28.1

19.4

0.0

25.1

20.9

55.4

22.0

0.0

33.5

25.4

50.9

26.2

32.5

17.4

7.6

7.2

27.8

4.9

9.2

11.6

13.7

16.6

10.8

11.5

11.0

16.6

9.1

9.8

14.3

16.4

14.8

6.9

6.6

15.0

13.7

7.6

12.5

34.1

4.9

10.1

12.1

21.1

49.7

11.9

12.7

12.0

12.4

6.5

17.9

16.6

14.6

16.8

13.9

14.0

15.8

22.6

0.0

5.5

6.7

0.0

5.0

7.0

9.1

7.0

5.0

6.9

9.1

5.5

5.8

9.2

9.3

5.3

5.0

2.4

6.0

Oil

6.4

5.8

7.9

4.9

6.4

5.6

8.4

8.6

6.9

7.3

5.6

6.8

8.6

6.0

6.3

9.0

8.1

8.5

5.9

9.9

All

24.4

30.0

29.6

21.8

28.4

26.7

17.5

0.0

22.1

18.7

28.4

19.0

0.0

29.7

22.2

42.4

20.6

32.2

37.8

30.5

9.9

31.2

6.4

5.8

7.9

4.8

6.0

5.6

8.3

8.6

6.9

7.2

5.6

6.8

8.6

6.0

6.3

8.8

7.9

7.1

6.0

5.5

4.7

7.5

6.4

6.9

8.3

4.9

6.4

5.7

9.8

6.5

5.6

7.4

5.7

6.8

6.5

7.3

7.1

9.0

8.1

8.4

11.6

10.9

6.0

10.4

Agriculture Manufactures Nonoil

Tariffs

0.0

5.5

6.7

0.0

5.0

7.0

9.1

7.0

5.0

6.9

9.1

5.5

5.8

9.2

9.3

5.3

5.0

2.4

6.0

Oil

1.2

1.4

19.9

0.1

3.7

6.0

5.4

8.0

3.9

3.6

5.9

4.2

8.0

3.1

3.5

5.5

8.4

7.4

1.1

1.8

9.7

11.0

All

2.3

9.2

0.8

3.1

27.8

1.4

1.9

0.0

3.0

2.2

27.0

3.0

0.0

3.7

3.2

8.5

5.6

0.3

3.7

6.3

7.4

52.6

1.2

1.4

19.9

0.1

3.2

6.0

5.4

8.0

3.9

3.6

5.9

4.2

8.0

3.1

3.5

5.5

8.4

7.7

0.9

1.2

10.4

6.2

1.2

5.6

25.8

0.1

3.7

6.4

11.3

43.2

6.3

5.3

6.3

5.7

0.0

10.7

9.5

5.5

8.7

8.3

2.3

3.0

9.8

12.2

Agriculture Manufactures Nonoil

Ad-valorem equivalents (AVEs) of NTBs

0.0

Oil

Source: Staff estimates using tariff data for 2008 and latest official NTB data. Note: The estimates exclude restrictive NTBs imposed by India on natural gas imports from Algeria. These are high and distort the protection rates levied by India on nonoil exports of developing oil exporters.

Tunisia

13.7

Egypt, Arab Rep.

7.2

16.6

Algeria

Saudi Arabia

10.9

Maghreb

27.8

10.8

Oil importers w/ EU links

Oman

11.6

Oil importers w/ GCC links

4.9

11.0

Oil importers

Morocco

16.6

Other oil exporters

11.6

9.1

GCC oil exporters

10.1

9.8

MENA

Lebanon

14.5

China

Jordan

16.5

HICs

41.6

9.2

15.5

SSA

10.4

LAC

ECA

36.8

15.6

SAS excl India

83.8

20.9

EAS excl China

Agriculture Manufactures Nonoil

All

Exporting country

Overall trade restrictiveness

Table A3: Trade restrictiveness in India, 2008 (in percent)

â&#x20AC;&#x192; Sustaining the Recovery and Looking Beyond â&#x20AC;&#x201C; A Regional Economic Developments and Prospects Report

2.5

Tunisia

3.3

23.7

11.3

13.0

18.7

17.9

8.6

0.0

10.7

8.7

18.0

8.9

0.0

20.3

14.7

14.5

11.0

7.7

12.0

18.8

11.7

12.5

47.6

2.5

4.4

3.4

5.1

13.2

2.2

6.2

4.4

5.0

5.2

8.5

5.4

4.4

4.3

4.5

11.7

11.8

10.7

3.6

4.1

9.8

9.0

14.0

2.4

4.8

3.1

5.1

13.2

2.3

6.3

4.4

5.0

5.3

8.6

5.4

4.4

4.9

11.8

11.7

9.1

5.2

11.8

10.3

8.7

24.9

Agriculture Manufactures Nonoil

4.3 1.7

13.8

3.5

5.1

13.2

2.3

6.1

4.4

5.0

5.2

8.6

5.4

4.4

4.3

4.5

10.2

10.5

7.2

5.0

4.8

9.6

8.8

14.5

All

4.3

13.8

0.0

13.7

0.0

13.8

13.7

0.0

13.7

0.0

4.3

13.4

11.3

19.2

13.8

11.9

21.7

14.7

16.5

Oil

Source: Staff estimates using tariff data for 2008 and latest official NTB data.

4.4

6.3

Egypt, Arab Rep.

Saudi Arabia

4.4

Algeria

3.5

5.0

Maghreb

Oman

5.3

Oil importers w/ EU links

5.1

8.6

Oil importers w/ GCC links

Morocco

5.4

Oil importers

2.3

4.4

Other oil exporters

13.2

4.3

GCC oil exporters

Lebanon

4.5

MENA

Jordan

11.8

5.4

SSA

China

11.8

LAC

9.1

10.3

SAS excl India

11.7

9.5

India

HICs

24.8

EAS excl China

ECA

All

Exporting country

Overall trade restrictiveness

3.3

19.1

11.3

13.0

18.7

17.9

8.6

0.0

10.7

8.7

18.0

8.9

0.0

16.9

13.0

11.1

9.6

7.6

12.0

5.5

11.5

11.1

16.8

1.7

4.3

3.4

5.1

13.2

2.2

6.0

4.4

5.0

5.2

8.5

5.3

4.4

4.3

4.4

10.2

10.7

6.7

3.2

4.0

8.8

8.4

13.4

1.6

4.4

3.1

5.1

13.2

2.3

6.0

4.4

5.0

5.2

8.6

5.4

4.4

4.1

4.7

10.2

10.5

7.2

4.9

4.8

9.5

7.8

14.5

Agriculture Manufactures Nonoil

Tariffs

Table A4: Trade restrictiveness in South Asia other than India, 2008 (in percent)

13.8

4.3

13.8

0.0

13.7

0.0

13.8

13.7

0.0

13.7

0.0

4.3

13.4

11.3

19.2

13.8

11.9

21.7

14.7

16.5

Oil

0.7

0.1

0.0

0.2

0.0

0.1

0.0

0.1

0.0

0.1

1.5

1.2

1.9

0.3

7.0

0.8

0.7

10.3

All

0.0

4.7

0.0

3.4

1.7

3.4

1.4

0.2

0.0

13.3

0.2

1.4

30.9

0.7

0.1

0.0

0.2

0.0

0.1

0.0

0.1

0.0

0.1

1.5

1.2

4.0

0.4

0.1

1.0

0.6

0.5

0.7

0.4

0.0

0.2

0.0

0.1

0.0

0.1

0.0

0.3

0.2

1.5

1.3

1.9

0.3

7.0

0.8

10.4

Agriculture Manufactures Nonoil

Ad-valorem equivalents (AVEs) of NTBs

0.0

Oil

Statistical Annex

105

106

10.4

12.0

7.1

Oil importers w/ EU links

Maghreb

Algeria

57.8

8.2

8.9

84.5

28.5

35.1

40.7

6.2

79.3

57.3

29.3

52.6

6.2

8.3

51.8

33.2

24.6

45.9

16.0

24.7

30.1

29.4

20.6

27.3

2.8

22.2

15.5

28.6

11.8

6.2

7.1

11.8

10.1

16.5

10.3

7.1

2.8

7.1

18.9

14.2

3.6

9.8

45.7

13.0

13.7

27.7

5.2

21.8

16.6

28.6

11.9

6.4

44.7

22.1

10.6

17.0

10.8

44.7

5.2

11.4

19.1

17.0

16.8

9.9

12.4

43.4

16.8

14.2

Agriculture Manufactures Nonoil

5.9

1.5

0.0

0.2

0.0

2.9

0.1

1.8

0.0

1.8

0.1

1.5

1.0

4.8

1.3

1.8

0.0

2.3

0.0

0.2

3.7

Oil

Source: Staff estimates using tariff data for 2008 and latest official NTB data.

27.4

17.0

Oil importers w/ GCC links

Tunisia

10.6

Oil importers

2.8

7.1

Other oil exporters

Saudi Arabia

2.8

GCC oil exporters

21.8

7.3

MENA

Oman

19.1

China

16.0

15.4

HICs

Morocco

14.3

ECA

28.6

4.7

SSA

Lebanon

11.7

LAC

6.4

43.4

SAS excl India

11.9

13.6

India

Jordan

14.2

EAS excl China

Egypt, Arab Rep.

All

Exporting country

Overall trade restrictiveness

Table A5: Trade restrictiveness in LAC, 2008 (in percent)

7.3 11.9

5.1

8.9

10.3

11.6

25.4

26.3

6.2

10.3

19.9

13.3

18.8

6.2

7.5

18.6

12.2

4.3

13.5

10.3

3.1

3.8

8.0

8.2

5.1

1.3

12.2

3.6

3.5

0.8

1.0

0.1

1.8

2.0

1.6

2.0

0.1

1.3

1.4

10.1

4.4

2.4

1.5

1.3

25.6

8.0

7.9

5.1

0.8

12.1

3.7

4.4

1.0

1.1

0.1

3.3

2.1

2.0

2.1

0.1

0.8

1.8

10.1

4.8

2.6

4.8

1.4

22.4

9.8

7.9

Agriculture Manufactures Nonoil

1.3

12.1

3.6

4.4

1.0

1.2

0.1

1.9

2.1

2.0

2.1

0.1

1.3

1.5

10.1

4.4

2.5

2.3

1.5

22.4

8.0

7.9

All

Tariffs

5.9

1.5

0.0

0.2

0.0

2.9

0.1

1.8

0.0

1.8

0.1

1.5

1.0

4.8

1.3

1.8

0.0

2.3

0.0

0.2

3.7

Oil

22.3

1.5

9.7

12.4

24.2

10.9

5.2

7.0

10.2

8.3

15.0

8.5

7.0

1.5

5.8

9.0

11.0

11.9

2.4

10.2

21.0

5.6

6.3

All

45.8

0.9

0.0

74.2

16.9

9.6

14.3

0.0

69.0

37.4

16.0

33.8

0.0

0.8

33.2

20.9

20.4

32.4

5.6

21.6

26.3

21.4

12.4

22.2

1.5

10.0

11.9

25.1

10.9

5.2

7.0

10.0

8.1

15.0

8.3

7.0

1.5

5.7

8.8

9.8

11.7

2.1

8.5

20.1

5.1

5.9

22.6

4.3

9.7

12.8

24.2

10.9

5.3

44.6

18.7

8.5

15.0

8.7

44.6

4.3

9.6

9.0

12.3

14.2

5.1

11.0

21.0

7.0

6.3

Agriculture Manufactures Nonoil

Ad-valorem equivalents (AVEs) of NTBs

0.0

Oil

â&#x20AC;&#x192; Sustaining the Recovery and Looking Beyond â&#x20AC;&#x201C; A Regional Economic Developments and Prospects Report

69.3 108.7 16.2

14.8

19.0

20.9

24.5

23.1

24.9

27.8

21.9

22.8

31.0

20.2

30.9

13.1

20.2

23.3

MENA

GCC oil exporters 20.1

21.9

China

Other oil exporters

Oil importers

Oil importers w/ GCC links

Oil importers w/ EU links

Maghreb

Algeria

Egypt, Arab Rep.

Jordan

Lebanon

Morocco

Oman

Saudi Arabia

Tunisia

19.3

17.1

11.9

24.6

19.2

31.6

22.8

23.2

22.9

22.6

22.9

23.2

17.0

18.0

18.5

14.2

15.4

7.5

8.5

28.0

14.1

10.2

27.1

40.5

29.2

27.4

20.8

31.0

23.3

29.0

27.6

24.6

23.7

24.4

29.0

40.4

35.0

19.0

14.5

17.7

10.9

13.5

30.8

16.2

14.2 7.6

8.6

All

7.7

8.1

6.4

7.9

17.9

1.0 13.5

14.7

11.1

15.0

6.9

11.6

12.0

9.9

15.0

10.4

11.6

12.5

11.5

16.0

10.5

19.1

13.1

10.9

17.8

15.6

10.5

12.5

2.9

8.9

7.3

4.5

3.5

5.7

9.1

5.6

6.5

5.8

5.7

2.5

3.1

Tariffs

12.6

2.1

2.5

7.9

6.6

3.8

3.1

4.3

8.1

4.7

5.9

5.0

4.3

2.1

2.6

11.0

7.4

7.2

4.3

6.3

18.0

7.2

7.6

15.7

2.9

7.7

8.9

7.3

4.5

3.5

7.4

9.9

5.7

6.5

5.9

7.4

3.0

4.0

11.1

7.9

8.6

7.2

8.2

18.4

8.7

Agriculture Manufactures Nonoil

2.5

4.1

6.9

62.2

6.5

1.4

18.4

0.5

28.9

26.8

6.5

25.5

0.5

4.2

5.0

10.7 11.1

21.1

9.6

5.7

3.7

10.0 18.0

9.3

2.1

Oil

Source: Staff estimates using tariff data for 2008 and latest official NTB data.

42.2

109.6

53.3

44.4

32.5

20.2

22.2

16.2

40.2

35.0

29.8

34.4

35.7

20.6

31.9

16.5

21.4

HICs

13.1

LAC

40.8

9.6

29.8

SAS excl India

31.8

16.7

14.9

India

21.5

ECA

14.0

EAS excl China

Agriculture Manufactures Nonoil

Overall trade restrictiveness

SSA

All

Exporting country

Table A6: Trade restrictiveness in SSA, 2008 (in percent)

1.0

2.1

1.0

8.8

6.5

1.4

3.3

0.5

4.4

4.3

6.5

4.5

0.5

2.1

10.4

4.2

4.8

3.8

0.6

10.0

2.6

2.0

Oil

9.7

17.7

10.2

22.0

13.0

26.5

19.3

16.1

18.6

19.3

16.6

18.7

16.1

17.6

17.8

7.9

7.1

8.6

3.2

5.2

11.8

7.4

5.4

All

24.3

97.1

38.6

33.3

17.5

5.2

15.3

4.6

28.2

25.1

14.8

24.0

4.6

96.2

57.9

19.7

10.1

12.9

3.4

10.5

23.1

16.2

11.0

6.7

15.0

9.4

16.7

12.6

27.8

19.7

18.9

15.1

18.2

16.8

17.9

18.9

14.9

15.4

7.5

6.8

8.2

3.2

2.2

9.9

6.9

2.6

11.4

37.6

21.4

18.4

13.5

26.5

19.8

21.5

17.7

18.9

17.1

18.5

21.5

37.4

31.0

7.9

6.6

9.1

3.6

5.2

12.4

7.5

5.5

Agriculture Manufactures Nonoil

Ad-valorem equivalents (AVEs) of NTBs

0.0

2.1

5.9

53.3

0.0

15.1

0.0

24.5

22.5

0.0

21.0

0.0

2.2

2.9

0.3

16.9

4.8

2.0

3.2

0.0

6.6

0.1

Oil

Statistical Annex

107

108

17.3

12.8

16.2

29.7

7.0

5.0

17.5

18.4

2.2

1.0

0.1

7.1

4.4

7.3

1.5

0.1

7.5

7.4

3.4

6.7

4.5

0.9

7.9

EAS excl China

India

SAS excl India

LAC

SSA

ECA

HICs

China

MENA

GCC oil exporters

Other oil exporters

Oil importers

Oil importers w/ GCC links

Oil importers w/ EU links

Maghreb

Algeria

Egypt, Arab Rep.

Jordan

Lebanon

Morocco

Oman

Saudi Arabia

Tunisia

8.4

25.5

19.6

6.4

5.8

21.5

22.0

3.1

6.6

13.6

12.1

13.6

3.1

25.3

13.4

30.5

23.2

19.3

11.4

44.7

50.8

29.0

23.7

7.9

0.9

4.4

6.8

3.3

5.9

3.1

0.1

1.2

5.1

3.9

5.0

0.1

0.9

1.4

18.1

16.5

4.1

5.6

9.8

6.5

10.1

15.4

7.9

3.2

2.5

6.7

3.4

7.4

7.7

0.1

1.6

7.4

4.4

7.2

0.1

3.1

2.7

18.4

17.7

6.2

7.0

29.7

16.2

13.1

17.3

Agriculture Manufactures Nonoil

0.8 4.9

2.3

4.3

5.8

2.0

5.0

4.4

0.0

1.2

4.9

2.8

4.8

0.0

0.9

1.5

7.2

8.5

1.3

2.3

12.2

5.9

6.9

All

0.0

6.7

0.0

5.0

0.1

0.0

0.1

5.0

0.1

0.0

0.1

4.6

4.0

0.2

0.0

1.6

0.0

0.1

4.9

Oil

Source: Staff estimates using tariff data for 2008 and latest official NTB data.

All

Exporting country

Overall trade restrictiveness

Table A7: Trade restrictiveness in ECA, 2008 (in percent)

6.1

23.8

14.5

5.5

4.5

15.8

12.3

2.7

5.5

8.6

9.0

8.6

2.7

23.4

8.6

11.0

16.0

4.0

4.3

18.0

8.9

13.4

9.9

4.7

0.8

4.2

6.0

1.9

3.8

2.0

0.0

0.9

3.7

2.4

3.5

0.0

0.8

1.0

7.1

7.2

1.1

1.6

4.4

5.1

4.6

6.1

4.9

2.9

2.0

5.9

2.0

5.0

4.5

0.0

1.2

5.0

2.8

4.8

0.0

2.9

1.9

7.2

8.6

1.5

2.3

12.2

5.9

6.0

6.9

Agriculture Manufactures Nonoil

Tariffs

2.3

0.0

6.7

0.0

5.0

0.1

0.0

0.1

5.0

0.1

0.0

0.1

4.6

4.0

0.2

0.0

1.6

0.0

0.1

4.9

Oil

3.0

0.1

0.2

0.8

1.4

2.4

3.1

0.1

0.4

2.4

1.6

2.3

0.1

0.7

11.2

9.0

3.8

4.7

17.6

10.3

6.9

10.4

All

2.2

1.7

5.2

0.9

1.3

5.7

9.7

0.4

1.1

5.0

3.0

5.0

0.4

1.8

4.8

19.4

7.2

15.3

7.1

26.7

42.0

15.6

13.8

3.2

0.1

0.2

0.7

1.4

2.1

1.2

0.1

0.3

1.4

1.5

0.1

0.4

10.9

9.3

3.0

4.0

5.4

1.5

5.5

9.4

3.0

0.3

0.5

0.8

1.4

2.4

3.2

0.1

0.4

2.4

1.6

2.3

0.1

0.3

0.8

11.2

9.1

4.7

17.6

10.3

7.1

10.4

Agriculture Manufactures Nonoil

Ad-valorem equivalents (AVEs) of NTBs

0.0

Oil

â&#x20AC;&#x192; Sustaining the Recovery and Looking Beyond â&#x20AC;&#x201C; A Regional Economic Developments and Prospects Report

16.3

16.6

21.1

43.5

28.4

16.1

16.9

22.0

13.3

7.8

27.2

18.2

12.0

20.3

25.5

27.2

19.5

11.1

13.4

26.3

3.1

8.0

20.5

EAS excl China

India

SAS excl India

LAC

SSA

ECA

HICs

China

MENA

GCC oil exporters

Other oil exporters

Oil importers

Oil importers w/ GCC links

Oil importers w/ EU links

Maghreb

Algeria

Egypt, Arab Rep.

Jordan

Lebanon

Morocco

Oman

Saudi Arabia

Tunisia

28.0

26.6

2.8

42.2

22.1

16.7

27.2

117.3

39.1

29.4

20.2

27.9

117.3

18.9

25.7

39.9

48.2

21.8

45.3

61.0

24.6

25.5

30.2

18.9

7.3

3.3

18.5

11.3

10.7

17.4

26.6

24.0

17.7

10.9

15.8

26.6

7.2

11.9

21.5

12.5

14.5

22.1

15.3

18.2

13.7

12.4

21.5

17.4

3.1

26.8

13.4

11.1

20.0

27.6

26.0

20.9

12.0

18.6

27.6

16.3

18.9

22.0

17.0

17.1

29.1

43.5

21.1

17.4

16.3

Agriculture Manufactures Nonoil

0.3 4.6

2.0

0.5

7.2

1.0

0.3

2.8

3.4

4.2

3.5

0.6

2.8

3.4

0.3

1.5

8.9

7.7

7.4

6.6

8.7

7.0

7.3

All

0.2

0.0

5.3

15.7

0.1

8.1

5.3

3.7

6.9

6.7

6.9

5.3

0.2

0.4

22.3

5.0

7.9

10.0

7.0

0.0

8.5

5.7

Oil

Source: Staff estimates using tariff data for 2008 and latest official NTB data.

All

Exporting country

Overall trade restrictiveness

Table A8: Trade restrictiveness in MENA, 2008 (in percent)

4.1

0.2

0.9

8.4

0.4

1.4

4.1

70.7

9.2

4.7

0.7

4.1

70.7

0.4

3.4

15.8

19.3

10.2

13.6

10.0

8.5

8.7

10.3

4.7

0.3

0.2

6.6

1.2

0.2

2.5

2.9

3.7

3.2

0.5

2.4

2.9

0.3

1.2

8.7

6.1

6.6

4.1

6.7

8.9

6.5

4.8

0.5

7.2

1.0

0.3

2.6

3.3

4.3

3.4

0.6

2.6

3.3

0.5

1.9

8.9

7.8

7.3

6.5

8.7

6.9

7.3

Agriculture Manufactures Nonoil

Tariffs

0.6

0.2

0.0

5.3

4.4

0.1

8.0

5.3

3.0

6.5

1.9

6.5

5.3

0.2

0.4

9.7

4.7

7.8

10.0

5.9

0.0

8.5

5.7

Oil

16.0

7.7

2.6

19.1

12.4

10.8

16.7

23.9

21.2

16.8

11.4

15.4

23.9

7.5

11.8

13.1

9.1

8.7

21.8

34.8

12.4

9.6

8.9

All

23.8

26.4

2.0

33.8

21.7

15.3

23.1

46.6

29.9

24.7

19.4

23.9

46.6

18.5

22.4

24.1

28.9

11.6

31.7

51.0

16.1

16.8

19.8

14.2

6.9

3.1

11.9

10.1

10.5

14.9

23.7

20.3

14.6

10.4

13.4

23.7

6.9

10.7

12.8

6.4

7.9

18.1

8.6

9.3

7.2

5.9

16.7

16.9

2.6

19.6

12.4

10.8

17.4

24.2

21.7

17.5

11.4

15.9

24.2

15.8

17.0

13.1

9.3

9.8

22.6

34.8

12.4

10.5

9.0

Agriculture Manufactures Nonoil

Ad-valorem equivalents (AVEs) of NTBs

1.5

0.0

11.4

0.0

0.2

0.0

0.7

0.4

4.8

0.4

0.0

12.6

0.3

0.1

0.0

1.1

0.0

Oil

Statistical Annex

109

110

0.6

0.1

7.3

0.3

Morocco

Oman

Saudi Arabia

Tunisia

1.8

55.9

0.1

2.5

8.5

9.1

10.8

0.0

2.4

9.8

8.8

9.7

0.0

18.3

12.7

17.5

37.9

1.6

18.1

8.1

5.6

21.5

19.6

0.1

0.2

0.1

0.8

10.3

1.1

5.5

0.4

1.0

7.1

3.1

5.5

0.1

2.4

4.3

4.9

5.1

4.8

4.5

5.0

3.7

0.3

7.6

0.1

0.6

2.0

10.2

3.4

5.4

0.8

3.0

7.2

4.3

5.4

5.0

4.5

7.2

4.2

8.2

6.2

5.3

8.1

5.8

Agriculture Manufactures Nonoil

0.0 0.0

0.0

4.3

0.2

0.0

4.3

0.0

3.9

6.2

4.0

6.7

3.8

3.3

5.9

3.9

All

0.0

5.0

0.0

5.0

Oil

Source: Staff estimates using tariff data for 2008 and latest official NTB data.

2.0

Lebanon

5.4

Algeria

3.4

0.8

Maghreb

10.2

3.0

Oil importers w/ EU links

Egypt, Arab Rep.

7.2

Oil importers w/ GCC links

Jordan

4.3

Oil importers

4.5

MENA

4.9

4.5

China

5.4

7.1

HICs

Other oil exporters

4.2

ECA

GCC oil exporters

6.2

5.3

SAS excl India

8.2

8.0

India

LAC

5.8

EAS excl China

SSA

All

Exporting country

Overall trade restrictiveness

Tariffs

0.0

3.5

33.0

1.1

13.5

3.0

2.0

11.4

6.0

0.0

4.3

0.3

0.0

4.3

0.0

3.9

4.2

5.0

4.4

4.2

4.7

3.5

0.0

4.3

0.2

0.0

4.3

0.0

3.9

6.2

4.0

6.7

3.8

3.3

5.9

3.9

Agriculture Manufactures Nonoil

Table A9: Trade restrictiveness in GCC oil exporters, 2008 (in percent)

0.0

5.0

0.0

5.0

Oil

0.3

7.3

0.1

0.6

2.0

10.2

3.4

1.1

0.5

3.0

7.2

4.3

1.1

4.9

4.5

0.6

1.0

0.2

1.5

2.4

2.0

2.1

2.0

All

1.8

55.9

0.1

2.5

8.5

9.1

10.8

0.0

2.4

9.8

8.8

9.7

0.0

18.3

12.7

14.0

4.9

0.5

4.6

5.0

3.5

10.0

13.6

0.1

0.2

0.1

0.8

10.3

1.1

0.1

1.0

7.1

3.1

1.1

0.1

2.3

0.4

0.7

0.1

0.4

0.1

0.8

0.3

0.2

0.3

7.6

0.1

0.6

2.0

10.2

3.4

1.1

0.5

3.0

7.2

4.3

1.1

5.0

4.5

0.6

1.0

0.2

1.5

2.4

2.0

2.1

2.0

Agriculture Manufactures Nonoil

Ad-valorem equivalents (AVEs) of NTBs

0.0

Oil

â&#x20AC;&#x192; Sustaining the Recovery and Looking Beyond â&#x20AC;&#x201C; A Regional Economic Developments and Prospects Report

94.2 123.9 93.2

36.0

49.3

62.5

40.6

35.7

35.5

42.0

39.6

14.8

44.4

42.7

46.8

6.3

41.1

48.9

74.9

36.0

40.4

8.0

20.5

SAS excl India

LAC

SSA

ECA

HICs

China

MENA

GCC oil exporters 36.6

40.0

India

Other oil exporters

Oil importers

Oil importers w/ GCC links

Oil importers w/ EU links

Egypt, Arab Rep.

Jordan

Lebanon

Morocco

Oman

Saudi Arabia

Tunisia

Saudi Arabia

Tunisia

18.9

7.3

34.1

35.1

32.2

44.4

40.8

6.3

43.8

36.8

39.8

15.0

36.1

35.1

36.0

41.4

31.7

22.9

35.5

22.1

49.9

34.1

37.4

21.5

17.4

40.3

35.8

74.9

48.9

41.0

6.3

46.7

42.6

44.3

14.8

39.9

36.4

39.5

42.0

35.5

35.6

40.6

62.5

49.3

36.0

45.5

0.3 4.6

2.0

11.9

7.5

20.3

13.5

12.4

0.5

15.3

12.3

13.6

3.4

12.1

7.7

11.5

14.9

9.7

16.7

22.1

8.2

14.5

12.8

13.5

All

0.2

80.3

0.0

80.3

0.0

80.3

0.0

80.3

Oil

Source: Staff estimates using tariff data for 2008 and latest official NTB data.

28.0

26.6

121.7

113.9

145.7

105.1

46.6

5.9

91.7

117.3

107.4

12.2

64.1

51.9

57.8

42.2

72.7

36.9

46.3

68.7

45.5

EAS excl China

Agriculture Manufactures Nonoil

All

Exporting country

Overall trade restrictiveness

4.1

0.2

25.8

28.3

30.0

28.5

27.8

4.8

20.2

26.5

24.1

8.3

21.7

28.8

22.0

22.6

6.9

25.8

26.2

8.1

24.1

17.5

18.5

4.7

0.3

10.8

7.3

14.4

12.3

11.7

0.2

15.0

11.2

12.8

3.1

11.4

7.3

10.8

14.7

10.4

11.5

9.1

8.7

14.1

11.9

11.8

4.8

0.5

11.9

7.5

20.3

13.5

12.4

0.5

15.3

12.3

13.6

3.4

12.1

7.6

11.5

14.9

9.7

16.7

22.1

8.2

14.5

12.8

13.5

Agriculture Manufactures Nonoil

Tariffs

Table A10: Trade restrictiveness in developing oil exporters, 2008 (in percent)

0.6

0.2

22.3

0.0

22.3

0.0

22.3

0.0

22.3

Oil

16.0

7.7

28.5

54.7

35.4

28.6

5.7

31.5

30.3

30.8

11.3

27.9

28.9

28.0

27.1

25.8

18.9

18.5

54.3

34.8

23.2

31.9

All

23.8

26.4

95.9

85.7

115.7

76.6

18.8

1.1

71.5

90.8

83.3

3.8

71.5

95.1

72.3

41.5

44.9

32.1

16.0

64.7

12.8

28.8

50.2

14.2

6.9

23.3

27.8

17.8

32.1

29.1

6.1

28.8

25.6

27.0

11.9

24.7

27.7

25.1

26.7

21.3

11.3

26.3

13.4

35.8

22.1

25.7

16.7

16.9

28.4

54.7

35.4

28.6

5.7

31.4

30.3

30.8

11.3

27.9

28.7

28.0

27.1

25.8

18.9

18.5

54.3

34.8

23.2

31.9

Agriculture Manufactures Nonoil

Ad-valorem equivalents (AVEs) of NTBs

1.5

0.0

57.9

0.0

57.9

0.0

57.9

0.0

57.9

Oil

Statistical Annex

111

112

25.3

27.4

28.0

13.3

21.5

35.0

17.9

7.7

9.8

Maghreb

Algeria

Egypt, Arab Rep.

Jordan

Lebanon

Morocco

Oman

Saudi Arabia

Tunisia

11.4

18.2

29.6

51.6

29.3

30.4

37.2

117.8

36.7

35.4

29.6

34.6

117.8

18.7

30.9

45.5

53.7

20.0

72.1

78.3

41.4

27.0

33.5

9.2

7.4

13.9

16.6

18.8

12.1

25.2

26.7

24.1

22.4

14.7

20.5

26.7

7.4

12.4

34.3

24.7

17.4

36.0

23.6

29.0

23.5

28.1

10.8

18.4

18.7

36.8

21.5

13.3

29.6

27.7

26.0

27.4

16.9

24.9

27.7

18.4

22.5

34.6

31.9

20.2

46.9

59.3

35.1

27.5

30.0

Agriculture Manufactures Nonoil

0.3 0.1

0.0

2.9

9.6

0.9

0.6

3.1

3.4

3.2

0.7

2.6

3.4

0.3

1.2

12.4

10.2

7.1

4.8

11.7

13.7

7.8

12.3

All

0.2

0.0

5.3

0.0

0.1

8.4

5.3

2.8

6.7

0.1

6.7

5.3

0.2

0.4

14.9

4.5

7.8

10.0

28.0

0.0

9.3

14.0

Oil

Source: Staff estimates using tariff data for 2008 and latest official NTB data.

25.8

13.8

MENA

Oil importers w/ EU links

34.6

China

16.9

30.7

HICs

Oil importers w/ GCC links

17.8

ECA

23.8

44.3

SSA

Oil importers

59.3

LAC

7.8

35.1

SAS excl India

27.4

24.6

India

Other oil exporters

30.0

EAS excl China

GCC oil exporters

All

Exporting country

Overall trade restrictiveness

Tariffs

0.2

0.1

10.0

9.9

0.3

2.4

6.5

71.0

8.9

6.1

0.8

5.3

71.0

0.6

4.7

20.1

13.4

9.8

9.0

13.4

14.2

6.6

12.4

0.1

0.3

0.4

9.3

1.2

0.5

2.1

2.9

2.8

2.2

0.7

1.8

2.9

0.3

0.9

12.2

9.3

6.6

3.6

8.4

13.2

8.3

12.2

0.1

0.4

3.0

9.9

0.9

0.6

2.7

3.3

3.4

2.9

0.7

2.4

3.3

0.4

1.7

12.4

10.4

6.9

4.4

11.7

13.7

7.5

12.3

Agriculture Manufactures Nonoil

Table A11: Trade restrictiveness in oil importers, 2008 (in percent)

0.0

0.2

0.0

5.3

0.0

0.1

8.4

5.3

2.8

6.7

0.1

6.7

5.3

0.2

0.4

14.9

4.5

7.8

10.0

28.0

0.0

9.3

14.0

Oil

9.7

7.5

15.0

25.4

20.6

12.7

24.8

24.0

21.9

22.6

16.2

21.1

24.0

7.5

12.6

22.2

20.6

10.7

39.4

47.6

21.4

16.9

17.7

All

11.3

18.1

19.6

41.8

29.1

28.0

30.6

46.8

27.8

29.4

28.8

29.3

46.8

18.2

26.2

25.5

40.3

10.3

63.0

64.8

27.3

20.4

21.1

9.2

7.1

13.4

7.2

17.6

11.6

23.1

23.9

21.3

20.2

14.0

18.6

23.9

7.2

11.5

22.1

15.4

10.8

32.4

15.3

15.7

15.1

15.9

10.7

18.0

15.7

26.9

20.6

12.7

26.9

24.4

22.6

24.5

16.2

22.5

24.4

18.0

20.9

22.2

21.5

13.3

42.5

47.6

21.4

20.0

17.7

Agriculture Manufactures Nonoil

Ad-valorem equivalents (AVEs) of NTBs

0.0

Oil

â&#x20AC;&#x192; Sustaining the Recovery and Looking Beyond â&#x20AC;&#x201C; A Regional Economic Developments and Prospects Report

7.3

Tunisia

18.5

19.0

12.3

48.7

6.3

33.4

30.8

102.6

45.7

33.4

14.4

30.6

102.6

18.8

26.3

51.7

51.4

50.6

21.8

23.5

6.2

3.5

16.4

17.0

21.4

4.3

37.9

4.5

7.8

35.6

12.8

32.1

4.5

3.6

10.3

24.7

13.7

11.1

4.3

23.7

31.8

14.7

21.2

16.3

13.3

16.7

42.7

16.4

9.4

36.2

4.6

32.7

36.1

13.2

32.5

4.6

13.4

23.5

25.7

19.9

11.8

23.3

42.9

26.0

17.4

22.8 6.5

8.4

All

0.0 0.0

0.0

1.4

0.1

0.0

1.4

0.0

8.4

5.5

5.3

5.4

8.7

0.0

12.5

4.5

7.0

0.0

3.4

0.0 13.9

21.6

5.4

Oil

Source: Staff estimates using tariff data for 2008 and latest official NTB data.

4.5

36.1

Egypt, Arab Rep.

Saudi Arabia

4.6

Algeria

15.1

24.4

Maghreb

Oman

35.0

Oil importers w/ EU links

42.7

13.2

Oil importers w/ GCC links

Morocco

31.7

Oil importers

9.4

4.6

Other oil exporters

16.4

4.6

GCC oil exporters

Lebanon

12.3

MENA

Jordan

25.7

China

10.0

10.8

23.3

SSA

17.3

42.9

LAC

ECA

26.0

SAS excl India

HICs

46.9

17.7

India

26.6

22.8

EAS excl China

Agriculture Manufactures Nonoil

All

Exporting country

Overall trade restrictiveness

0.0

15.7

0.0

15.7

0.0

11.2

6.5

3.3

10.1

9.9

15.6

7.9

10.2

0.0

1.4

0.1

0.0

1.4

0.0

8.3

5.4

5.9

1.5

5.9

11.5

5.9

7.6

0.0

1.4

0.1

0.0

1.4

0.0

8.4

5.7

4.8

5.4

8.7

13.9

5.4

8.4

Agriculture Manufactures Nonoil

Tariffs

Table A12: Trade restrictiveness in oil importers with GCC links, 2008 (in percent)

0.0

12.5

4.5

7.0

0.0

3.4

0.0

21.6

5.4

Oil

7.3

4.5

15.1

42.7

16.4

9.4

36.1

3.2

24.3

35.0

13.2

31.7

3.2

4.6

12.3

17.3

11.8

5.5

18.0

34.2

12.1

11.1

14.4

All

18.5

19.0

12.3

48.7

6.3

33.4

30.8

86.9

45.7

33.4

14.4

30.6

86.9

18.8

26.3

40.5

44.9

6.7

36.8

40.8

6.1

15.6

16.4

6.2

3.5

16.4

17.0

21.4

4.3

37.9

3.2

7.7

35.6

12.8

32.1

3.2

3.6

10.3

16.4

8.2

5.2

2.8

17.8

20.3

8.9

13.6

16.3

13.3

16.7

42.7

16.4

9.4

36.2

3.2

32.6

36.1

13.2

32.5

3.2

13.4

23.5

17.3

14.1

7.0

18.0

34.2

12.1

12.0

14.4

Agriculture Manufactures Nonoil

Ad-valorem equivalents (AVEs) of NTBs

0.0

Oil

Statistical Annex

113

114

25.3

27.5

15.9

14.6

24.9

31.1

20.3

9.9

10.3

Maghreb

Algeria

Egypt, Arab Rep.

Jordan

Lebanon

Morocco

Oman

Saudi Arabia

Tunisia

11.0

15.8

52.0

54.7

53.7

23.5

50.6

117.8

33.3

38.0

48.8

39.5

117.8

18.6

37.8

43.0

54.0

23.7

76.9

83.6

77.7

27.9

35.3

10.0

9.8

12.0

16.5

17.4

14.4

8.1

26.8

24.7

9.3

15.4

11.3

26.8

9.8

13.5

37.3

29.2

18.8

38.0

23.6

26.6

25.7

30.6

10.3

20.8

20.3

33.5

24.9

14.6

17.5

27.8

25.7

17.2

18.7

17.7

27.8

20.8

22.1

37.5

35.4

22.2

49.2

62.2

46.1

30.4

32.3

Agriculture Manufactures Nonoil

0.4 0.1

0.0

5.4

14.5

1.5

0.8

7.8

3.4

3.6

6.5

1.1

5.0

3.4

0.5

1.9

13.7

11.7

7.5

4.8

12.2

13.4

8.1

13.6

All

0.3

0.0

5.3

0.0

5.3

8.7

5.3

8.5

5.3

8.5

5.3

0.3

0.7

26.1

4.6

8.0

10.0

32.9

0.0

8.1

27.9

Oil

Source: Staff estimates using tariff data for 2008 and latest official NTB data.

16.1

14.7

MENA

Oil importers w/ EU links

37.5

China

18.7

35.3

HICs

Oil importers w/ GCC links

19.5

ECA

16.8

46.2

SSA

Oil importers

62.2

LAC

9.9

46.1

SAS excl India

27.5

26.4

India

GCC oil exporters

32.3

EAS excl China

Other oil exporters

All

Exporting country

Overall trade restrictiveness

0.2

0.6

23.0

20.4

0.5

8.0

20.4

71.0

12.2

13.6

1.7

11.9

71.0

2.3

11.8

23.7

14.3

12.1

8.8

14.1

11.5

6.3

13.0

0.1

0.4

0.8

10.8

1.8

0.6

5.0

2.9

4.4

1.0

3.3

2.9

0.4

1.4

13.4

10.9

6.7

3.7

8.7

14.6

9.0

13.9

0.1

0.6

5.4

15.3

1.5

0.8

7.6

3.3

3.5

6.3

1.1

4.6

3.3

0.6

2.5

13.7

11.7

7.4

4.3

12.2

13.4

8.1

13.6

Agriculture Manufactures Nonoil

Tariffs

Table A13: Trade restrictiveness in oil importers with EU links, 2008 (in percent)

0.0

0.3

0.0

5.3

0.0

5.3

8.7

5.3

8.5

5.3

8.5

5.3

0.3

0.7

26.1

4.6

8.0

10.0

32.9

0.0

8.1

27.9

Oil

10.2

9.5

14.9

16.7

23.3

13.8

8.1

24.1

21.7

9.6

17.6

11.9

24.1

9.5

12.8

23.8

23.6

12.0

41.4

50.0

32.7

18.3

18.7

All

10.8

15.3

29.0

34.3

53.2

15.5

30.2

46.8

21.1

24.4

47.1

27.6

46.8

16.3

26.0

19.3

39.7

11.6

68.1

69.4

66.2

21.6

22.3

10.0

9.4

11.2

5.7

15.6

13.8

3.1

23.9

21.8

5.0

14.4

8.0

23.9

9.4

12.2

24.0

18.3

12.1

34.2

14.9

12.0

16.7

10.2

20.3

14.9

18.2

23.3

13.8

9.9

24.5

22.1

11.0

17.6

13.0

24.5

20.2

19.6

23.8

23.6

14.8

44.9

50.0

32.7

22.3

18.7

Agriculture Manufactures Nonoil

Ad-valorem equivalents (AVEs) of NTBs

0.0

Oil

â&#x20AC;&#x192; Sustaining the Recovery and Looking Beyond â&#x20AC;&#x201C; A Regional Economic Developments and Prospects Report

9.4

6.1

17.2

6.3

5.6

4.0

7.1

7.4

1.9

0.7

0.3

7.2

6.3

7.3

3.2

0.3

7.0

10.3

1.2

10.7

1.0

0.7

4.5

EAS excl China

India

SAS excl India

LAC

SSA

ECA

HICs

China

MENA

GCC oil exporters

Other oil exporters

Oil importers

Oil importers w/ GCC links

Oil importers w/ EU links

Maghreb

Algeria

Egypt, Arab Rep.

Jordan

Lebanon

Morocco

Oman

Saudi Arabia

Tunisia

51.1

1.6

4.7

36.9

7.2

21.5

21.3

16.8

39.4

35.4

12.7

33.2

16.8

2.4

25.8

34.0

34.7

25.9

39.0

30.9

19.7

16.0

41.3

0.8

0.7

0.8

1.2

0.2

9.5

5.4

0.2

0.5

2.7

5.6

3.1

0.2

0.7

1.0

6.6

4.1

3.1

1.6

2.4

17.1

4.9

5.2

5.3

1.7

1.4

11.0

1.2

10.3

8.9

0.4

6.7

8.5

6.3

8.2

0.4

1.6

5.2

7.4

7.6

6.1

8.2

7.3

17.3

6.4

10.2

Agriculture Manufactures Nonoil

0.2

0.6

0.7

0.5

0.0

3.3

0.8

0.2

0.6

1.3

0.6

0.2

0.6

0.5

0.8

0.5

0.3

0.1

0.2

3.6

1.5

0.6

Oil

1.5

0.6

0.8

0.2

2.1

1.6

0.2

0.6

1.3

0.2

0.6

0.7

3.1

2.7

1.0

1.4

1.5

2.5

2.2

3.5

All

17.7

0.8

1.2

2.7

1.0

16.3

7.1

1.5

5.8

6.2

6.8

6.3

1.5

0.9

5.0

18.6

15.1

8.6

4.0

7.8

2.5

3.7

19.7

0.2

0.6

0.8

0.2

0.0

1.0

0.2

0.5

0.6

0.5

0.2

0.6

0.5

2.6

1.3

0.7

1.1

0.5

2.5

2.0

1.4

1.7

0.6

0.9

0.2

2.1

1.9

0.1

1.0

1.5

1.3

1.4

0.1

0.6

1.0

3.1

2.8

1.4

2.0

1.7

2.5

2.3

3.8

Agriculture Manufactures Nonoil

Tariffs

0.2

0.6

0.7

0.5

0.0

3.3

0.8

0.2

0.6

1.3

0.6

0.2

0.6

0.5

0.8

0.5

0.3

0.1

0.2

3.6

1.5

0.6

Oil

3.0

0.2

9.9

1.0

8.2

5.3

0.1

2.6

6.0

5.0

5.9

0.1

0.2

1.2

4.3

4.4

3.0

4.2

4.8

14.8

3.9

5.9

All

33.5

0.7

3.6

34.2

6.2

5.3

14.2

15.3

33.6

29.1

5.8

26.9

15.3

1.5

20.8

15.5

19.6

17.3

35.0

23.1

17.2

12.3

21.6

0.6

0.1

0.0

1.1

0.2

8.4

4.4

0.0

0.3

2.2

5.0

2.5

0.0

0.1

0.5

4.0

2.8

2.4

0.6

1.9

14.6

2.9

3.8

0.0 0.0

3.6

0.0

Oil

1.1

0.5

10.2

1.0

8.2

7.0

0.3

5.7

7.1

5.0

6.8

0.3

1.0

4.2

4.3

4.8

4.7

6.2

5.6

14.8

4.2

6.4

Agriculture Manufactures Nonoil

Ad-valorem equivalents (AVEs) of NTBs

Source: Staff estimates using tariff data for 2008 and latest official NTB data. Note: The estimations exclude quotas on manufactured exports from Algeria, Morocco, Tunisia, Lebanon, Jordan, and Egypt to the EU as these countries have FTAs with EU.

All

Exporting country

Overall trade restrictiveness

Table A14: Trade restrictiveness in HICs, 2008 (in percent)

Statistical Annex

115

116

16.4

Egypt, Arab Rep.

11.0

5.4

12.1

11.8

21.1

13.6

14.0

13.0

13.8

5.4

13.0

14.0

11.8

12.8

13.3

7.6

5.6

21.2

9.6

22.0

10.0

21.1

1.7

0.1

15.0

1.6

2.8

16.4

6.8

11.1

16.6

2.7

15.0

6.8

1.2

1.7

12.7

8.9

2.9

9.6

7.8

7.5

10.0

10.3

20.3

9.0

2.9

15.1

1.6

2.8

18.1

0.5

23.7

17.3

2.7

15.6

0.5

8.4

10.2

13.2

12.9

4.1

13.2

8.0

7.9

10.9

0.0

0.1

0.0

5.6

0.0

5.6

0.0

5.6

0.0

0.1

5.2

1.7

0.0

1.8

0.0

5.0

3.0

Oil

0.1

19.5

1.0

0.1

15.0

1.1

2.8

5.4

0.0

7.2

11.1

2.6

10.2

0.0

0.7

1.0

7.8

2.8

1.4

2.8

5.2

3.3

4.2

All

0.2

5.4

12.1

11.6

21.1

13.6

5.3

18.7

14.0

13.0

13.8

5.4

13.0

14.0

11.8

12.8

9.0

7.3

5.5

5.0

9.6

4.4

9.3

0.1

20.2

1.0

0.1

14.9

1.1

2.8

5.3

0.0

7.1

11.1

2.6

10.1

0.0

0.7

1.0

7.8

2.6

1.2

2.3

4.8

3.3

3.6

0.1

19.5

5.0

2.3

15.0

1.1

2.8

5.4

0.5

15.2

11.5

2.6

10.4

0.5

4.8

5.7

8.0

3.4

1.9

3.0

5.2

3.3

4.3

Agriculture Manufactures Nonoil

Tariffs

0.0

0.1

0.0

5.6

0.0

5.6

0.0

5.6

0.0

0.1

5.2

1.7

0.0

1.8

0.0

5.0

3.0

Oil

10.2

0.8

0.7

0.0

0.1

0.5

0.0

11.0

6.8

4.0

5.5

0.1

4.9

6.8

0.5

0.7

4.9

6.1

1.6

9.1

2.8

4.6

6.3

All

10.8

0.0

0.1

0.0

0.1

0.0

4.4

0.3

0.1

16.2

0.0

17.6

5.9

10.0

0.9

0.7

0.0

0.1

0.5

0.0

11.1

6.8

4.0

5.6

0.1

4.9

6.8

0.5

0.7

4.9

6.3

1.7

7.3

3.0

4.2

6.4

10.2

0.8

3.9

0.6

0.1

0.5

0.0

12.7

0.0

8.4

5.8

0.1

5.1

0.0

3.6

4.5

5.2

9.5

2.2

10.2

2.8

4.6

6.6

Agriculture Manufactures Nonoil

Ad-valorem equivalents (AVEs) of NTBs

0.0

Oil

Source: Staff estimates using tariff data for 2008 and latest official NTB data. Note: The estimates exclude restrictive NTBs imposed by China on natural gas imports from Algeria. These are extremely high and distort the average protection rates faced by developing oil exporters in China.

10.3

6.8

Algeria

Tunisia

11.1

Maghreb

20.3

16.6

Oil importers w/ EU links

Tunisia

2.7

Oil importers w/ GCC links

1.7

15.0

Oil importers

Saudi Arabia

6.8

Other oil exporters

0.1

1.2

GCC oil exporters

Oman

1.7

MENA

15.1

12.7

HICs

Morocco

5.3

8.9

ECA

2.8

3.0

SSA

1.6

12.0

LAC

Jordan

8.0

SAS excl India

Lebanon

18.7

7.9

India

15.2

10.5

EAS excl China

Agriculture Manufactures Nonoil

All

Exporting country

Overall trade restrictiveness

Table A15: Trade restrictiveness in China, 2008 (in percent)

â&#x20AC;&#x192; Sustaining the Recovery and Looking Beyond â&#x20AC;&#x201C; A Regional Economic Developments and Prospects Report

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Sustaining the Recovery and Looking Beyond

Middle East and North Africa Region Economic Developments & Prospects, January 2011

Sustaining the Recovery and Looking Beyond

Middle East and North Africa Region Economic Developments & Prospects, January 2011

Sustaining the Recovery and Looking Beyond ISBN 978-0-8213-9889-0

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