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I. IntroDUCtIon
Over the past infrastructure developmentand North Africa (MENA) region environment to lag behind other data. With amarkets 30 years, the Middle East has seemed developing even with strong and an improved socioeconomic relative to historical popula-
tion of 381 million1 and a developing economy, this region has much potential and could be quite promising to the likes of private investors, whether it be wealthy individuals or asset management firms, or multinational corporations. Additionally, this makes the region an important thing to consider for overall US foreign policy. But before these investors and companies will feel confident enough to invest in the region, as they have in Latin America and developing Asia, they will need to feel that the prospective return on the risks that they are taking is enough to enter this market. The barriers that this region must overcome to allow for impactful innovation and growth may seem insurmountable but through political and economic reform, they are possible. And so, the United States foreign policy towards the region should be adapted to take into account these issues and factors. A policy that works to stabilize and grow this region will do more for the United States and the MENA region than the current policy. The current political unrest in the region doesnt bring investors to the area, but progress to democratically elected governments that look out for their citizens interests and work on transparency and governance for local corporations as well as multinational corporations may attract more FDI. Statistics such as the Doing Business Index, Global Competitiveness Index, Real GDP growth and unemployment show that the region has made progress in the past few years but certain factors have been hampering this growth. These factors include, but arent limited to, lack of competitiveness in the global market, unattractive environments for starting businesses and stagnant growth due to dependency on the government. This is especially true since the same issues havent stalled other emerging markets as it has the MENA region. The governments of the region will require a laser-like focus on political and economic reform, and this push must be constant to attract investors and corporations. There are a few initiatives that could stimulate private investment and development to the region. First and foremost, companies and investors should ask for governance and transparency for their investments and development projects, because they need to assure that they are capable of investing in the area without having to worry about political and social risks. Another key factor which remains necessary for any developing economy is the development of capital markets. Developed capital markets will foster innovation and growth through the efficient access and utilization of funds. Lastly, the region needs to diversify out of the public sector and into more industries. This will compliment the above-mentioned initiatives in fueling innovation and growth. And all of this would lead to a more competitive MENA region.
The decline in oil prices led to a decrease of income for migrant workers from non-oil exporting countries and coincided with increased international competition, which together hampered the growth that the region had experienced prior to the 1980s.9 Along with the decline in oil revenue, the domestic policies of the region hindered private investment and FDI and prevented the economies of this region from integrating into the global market.10 All of this caused an economic slowdown, which caused public debt to skyrocket due to the public sector composing a vast majority of the economy. This led countries to look into economic reforms to stabilize the region and consider new economic models to allow their economies to be less dependent on the state as well as more resilient in the face of recessions and other economic shocks. However, some of the outcomes of the Redistributive-Interventionist model and the attempts at reform that followed could have been beneficial to the people of the region in the prospects for growth and development. The high government spending in education allowed for there to be a relatively well-educated work force, but since most of these well-educated people took public sector positions, the drive for innovation and competiveness didnt exist. Additionally, there was a lot of capital invested in infrastructure throughout the economic boom; some of which remains functional while some is in need of repair or upgrade.11 The basic groundwork has been laid, but the countries in the region will need to step up diversification and development of legal and political institutions to build stronger economic conditions off of this base.
market slowdown caused by the financial crisis in 2008. In 2009, the MENA region lagged behind developing Asia by 4.9%, but surpassed Latin America & the Caribbean by 3.7%.22 Latin America & the Caribbean had negative growth in 2009, of -1.7%.23 But in 2010 the MENA region, at 4.1%, lagged both developing Asia and Latin America & the Caribbean by 5.3% and 1.6%, respectively.24 This is especially interesting, as the MENA region had out-grown Latin America & the Caribbean region prior to the financial crisis. And so the fact that the MENA region hasnt bounced back as quickly after the crisis, points to flaws in its economic structure. The major flaw is a lack of resilience, which is required of a developing economy for it to continue to grow and become a more advanced economy, through economic cycles. This lack of resilience is caused by lack of diversification/privatization of industries, innovation, and new technologies and the persistence of high unemployment.ii The above indicators are seen as more conventional measures of economies. The Global Competitiveness Index, the Doing Business report, and the Human Development Index allow for a more qualitative analysis, still using quantitative data. They also assist in understanding how development is progressing. These indicators also show where economies and countries are performing well and where they are lagging. The Global Competitiveness Index model rests on the belief that the determinants of competitiveness are numerous and interact with each other in a complex manner.26 There are 12 categoriesiii that make up these determinants. These are: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, market size, business sophistication and innovation.27 Additionally, countries are grouped into three different groups, each reflecting different levels of growth. The three are: factor-driven stage, efficiency-drive stage and innovative-driven stage.28 The 12 categories are then allocated to the three groups based upon recommended conditions for economic growth in that group. For example, the institutions, infrastructure, macroeconomic environment, health and primary education categories are considered basic requirements for the factor-driven economies.29 Algeria, Egypt, Kuwait, Libya, Morocco, Qatar, Saudi Arabia and Syria are placed in transition between factor-driven and efficiency driven. This means their factors of success in being competitive should be focused 40% to 60% on basic requirements and 35% to 50% on efficiency enhancers.30 Jordan, Lebanon and Tunisia are placed in the efficiency-driven stage, which means that 40% should be focused on basic requirements and 50% efficiency enhancers.31 Bahrain and Oman are stated as being in transition between efficiencydriven and innovation-driven; they need to focus between 20% and 40% on basic requirements, 50% on efficiency enhancers and 10% to 30% on innovative factors.32 The United Arab Emirates is considered an innovation-driven economy, along with the United States, Germany, and other developed economies. The UAE should focus 20% on basic requirements, 50% on efficiency enhancers and 30% on innovation factors.33 What these data classifications show is that none of the countries in the Middle East are considered solely factor-driven economies.iv This means that the countries are well above basic economies and are in the process of developing their economies to be competitive in the global marketplace. Of the stated 12 categories, the categories most hampering the Arab countries competitiveness are the institutions, labor market efficiency, financial market development, technological readiness and innovation. Some countries, such as the UAE have done a good job of bringing multinational corporations to their countries to stimulate innovation and improve technological readiness; other countries should attempt to follow this. The best way for other countries in the region to do this is to improve their performance in the categories where the UAE improved. In general, this would include systematic development and investments in infrastructure as well as improving the legal framework to create an environment for growth. Lastly, this is an analysis of the region as a whole, and so certain countries may be lagging or excelling in specific categories.v The Doing Business report presents quantitative indicators on business regulation and that protection of property rights that can be compared across 183 economies.34 These are measured through the following indicators: starting a business, dealing with construction permits, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business.35 The report says that these indicators are used to analyze economic outcomes and identify what reforms have worked, where, and why.36 Diving into a few of these categories will allow for a deeper understanding of where the MENA region is lagging relative to other emerging economies. In the starting a business category, the region has the second highest number of procedures to start a business and average time (in days).37 The area is also the most expensive place to start a business with cost at 38% and paid in minimum capital at 104% (of income).38 The MENA region could be stopping entrepreneurs and multinationals from opening businesses there just because of the cost of starting that business. Starting and expanding businesses is a key aspect of a developing economy, because it helps drive private sector job growth and innovation. The depth of information required to get credit in the region is relatively low but the strength of legal rights is the lowest amongst all regions.39 The relaxed standards on mandatory information that needs to be provided could be seen as a good thing for businesses, but more importantly, such standards may cause increased risk. These relaxed standards could lead to default, because borrowers may not be as extensively checked prior to lending and their ability to pay back the loans
ii. See Annex A for complete breakdown. iii. See Annex B for complete breakdown. iv. There is no similar data for North Africa. v. See Annex A for complete breakdown.
could be hampered by excessive risk-taking, by both lender and borrower, or the inability of the borrower to turn a profit. For example, one of the causes of the US subprime mortgage crisis was that banks were lending to individuals with no documented incomes or documentation of any sorts for that matter. And this inherently caused many borrowers to default on their loans. Additionally, the lack of legal rights in accessing credit isnt good for most businesses attempting to start up in the area, as loans are usually required to start or expand a business, and companies may be hesitant to borrow in places where they arent entirely protected. In trading across borders, the regions numbers are competitive with all of the emerging markets when it comes to exports and imports. But an important note to touch on here is that the regions countries should work to grow the amount of intraregional trade. This would be extremely helpful to the regional economy as a whole, and allow for collaboration and innovation, which would be extremely helpful in growing the economy and the private sector. Innovation is more plausible when many individuals are working on things independently of one another and then come together. Many companies have set up websites and programs where inventors and thought leaders in a specific industry can come together to solve a problem that company may be having. Returning to the issue of legal complications, enforcing contracts in the MENA region is essentially on par with most other emerging economies,40 but this is an area where the region can work to differentiate itself. As stated earlier, the recovery from the financial crisis in 2008 has gained traction much quicker for emerging economies, drastically increasing the amount of investments in these emerging economies in 2009 and 2010. But the MENA region has not experienced this trend to the extent of other developing markets.41 In protecting investors, the MENA region is the lowest in ease of shareholder suits and tied for last with Latin America in strength of investor protection.42 This is one of the biggest institutional factors that keep investors from making investments in a region that is considered to have immense potential. And this is one of the key areas the regions governments should be working to improve, especially since the region has been plagued by private wealth net outflows for many years.43 This net outflow implies that the investors in the region would rather invest in other parts of the globe than in their home countries and region. Additionally, institutional improvements in protecting investors and enforcing contracts would make the region a much more appealing investment as the region is around average in most other categories. This makes differentiation in institutional efficiency a key driver of growth relative to other developing markets. And so, the Doing Business report shows that the MENA region needs to work on differentiating itself through the development of legal institutions that protect businesses and institutions.vi The Human Development Index (human centered development) works like the GNP but takes into account all the different factors impacting the GNP value.44 The report is a composite measure of health, education and income.45 It assesses the levels and progress using a concept of development much broader than that allowed by income alone. The Human Development index is made up of three dimensions which are broken down into four indicators. The three dimensions are healthy, education and living standards. And the four indicators are life expectancy at birth (flows into health), mean years of school and expected years of schooling (flows into education), and gross national income per capita (flows into living standards).46 The Human Development Report breaks down the HDI statistics into the four indicators as well as calculating a hybrid HDI.vii The Arab States Hybrid HDI at 0.66 is above that of the average developing countries value, but below almost all economies when they are broken down per region.47 Of the four indicators, the Arab States lag in literacy in 2010, but have made immense improvements when looking at change (in percent) from 1970 to 2010 and 1990 to 2010.48 The Arab States gross enrolment is slightly below the developing economies average and improvement would allow for a higher valued workforce into the future.49 All in all the Arab States are well positioned to compete with other developing countries but there is much room for improvement. One important area that the HDR says all of the emerging economies are dealing with is income inequality. And a widening gap between the upper and lower class, as well as the shrinking of the middle class, may lead to instability, if it already hasnt. The HDR goes on to say that health and education improvement arent necessarily correlated to growth in income.50 Nonetheless, for job growth and private sector development and investment, health and education improvement are helpful.
posed by one nation upon any other.51 In the context of the speech, he was saying that the US is pushing for democracy but will not impose it on any government. While the administration is attempting to not impose anything on other governments, its still pushing for democracy. This is a poor approach as the rhetoric of the speech and the actions of the administration are quite different. Additionally, President Bushs declaration of the three pillars of American foreign policy: defense, diplomacy and development, imply the use of military-led development, which has been relatively ineffective in the MENA region. Any development or aid that directly involves the military being on the ground in a certain country will cause some conflict or dislike between the locals and soldiers, as these are foreign military personnel. Finally, past administrations have been inconsistent in their policy stance towards the MENA region, partially because of different stances, but additionally to specific countries for strategic purposes. For example, the US has supported the Al Saud family, ruling family of Saudi Arabia. The Saudi government is an Islamic absolute monarchy, but regardless the United States works with this government. Presently, the US foreign policy creates and doesnt address many constraints that are hampering MENA region growth and the development of US relations in the region. There are clear trends that emerge and we can identify numerous binding constraints on the regions economies that hamper growth and impact US foreign policy. The constraints can be broken up between political and societal constraints, and economic ones. Within the political and societal constraints the major areas are: oppressive governments and societies, the role that religion plays in society and politics, and general instability in the region. The economic constraints are: the dependency on the public sector, a lack of private sector growth and development, income inequality and poverty, and private wealth net cash outflows. An additional constraint that falls under both categories is the lack of legal security and institutions in the region, which arises from socio-political and economic conditions and also leads to adverse outcomes in those areas. These constraints hamper growth and development in the region as well as create an environment that is tough to navigate from a policy perspective. The sensitive nature of the United States relationship with the region also makes it challenging to push any particular policy as people of the region may see it as being forced upon them. The aforementioned political constraints have numerous implications on the regions development. The United States has been focusing on partnering with countries for strategic reasons, which is necessary, but it is also important that the US partner and ally itself with governments and regimes that arent oppressive and/or not working in the best interests of its citizens, because it would seem to be more inline with American philosophy to support governments that provide their citizens with civil liberties. Additionally, if the US aligns itself with oppressive regimes now and there is regime change further down the road, this could be detrimental to sentiment towards the US by those citizens. This can especially be seen now with the political unrest in the region. Along with this, the United States intervening directly in the region doesnt help as much as giving the region the tools it needs. The trouble the US is having in Iraq and Afghanistan with their development is proof of this. The conventional policies being applied in both countries through strategic interventions neither stimulate the economy nor stabilize the region. The US needs to work to help create longterm stability and strong partnerships by showing the region what may help and letting people of the region do it. Among the economic constraints is the issue of underutilization of infrastructure. As evidenced earlier, the region invested a lot into developing infrastructure during a period of high oil profits, but the return on this investment has been hampered by unrest and such factors as high unemployment and public sector dependence. Additionally, the region doesnt utilize its infrastructure to innovate and collaborate on projects and ideas through interregional initiatives and trade. Effectively, the physical groundwork has been laid out but people and governments arent using it to grow or expand. All of this leads to a less competitive MENA region relative to other emerging economies, evidenced, in part, by the Competitive Index. After considering these constraints, where the MENA region may be able to differentiate itself by building and providing legal institutions that protect investors and inventors. Innovation and trust, two key drivers of economic and productivity growth, are thusly discouraged by the failure to adequately protect patent rights and investor contracts. Copyright infringement is a big issue in many developing economies, such as Developing Asia.52 This doesnt necessarily decrease innovation, but it diminishes the drive and motive to innovate by punishing those who invest in research and development by diffusing the profit. Stricter laws and an efficient legal system will create an environment to innovate as well as draw multinational corporations to the region. In addition to this, another area where the MENA region is lacking is in income inequality. There is a huge gap between the rich and the poor, and this creates unrest, which can lead to political instability.53 This is another important area that the region can improve, through creating jobs that would be for the middle class, and through creating/adjusting legislation and laws to be beneficial classes. All of this would help the region grow and prosper, while making it more competitive. From a policy perspective, the US needs to offer the tools and guidance to the MENA region and be less involved in the physical work. The US needs to work to align itself with helping the societies of these countries, and not necessarily the governments. And along with this, the United States needs to work with governments in the region to improve political and economic institutions and policy to help their citizens by growing the economy and creating jobs, specifically in the private sector. Specific economic reforms should be the creation of jobs through the development of the private sector, and decrease in public sector dominance. This can be done by taking steps to attract multinational corporations. These steps would include improving legal institutions and rights, implementing new technologies and creating an environment of innovation. A great example of this is the United Arab Emirates, which has taken immense steps in opening their doors to multinational corporations and creating jobs for their citizens. This along with further developing the capital markets by having stricter lending policies and legal protection for investors, which would bring 6
in more capital, will help fix the economic constraints currently in the reasons. As for reforms, to policy, to address the political and social constraints, the US should work to improve the legal system for citizens, which can be a first step in greater civil liberties for citizens, especially in the more oppressive countries. The overall US foreign policy should have less political reforms and more economical/social reforms, because political reform hasnt worked well in the past, partially because governments and citizens dont want to be told how to run their countries. The above reforms should be the basis of the US foreign policy towards the MENA region. This guidance and aid would include: assisting in implementations of new technologies, pushing for institutions to help incubate and foster growth and innovation, stronger legal institutions and pushing for the public sector to play a smaller role in the overall economy. The US needs to work to solve problems in the region, while not imposing on the governments and people of the region. The development and growth of the region should be organic and untouched by outsiders, as this is the best way to sustain growth and create a stable society A more competitive MENA region, would allow for a more competitive global marketplace, which in turn leads to higher amounts of collaboration and innovation. All of which are positive externalities to the MENA region as well as the entire world. The path to democracy is a gradual process that each country needs to go through on its own. There are no fast lanes to a stable democracy, and so the US should work to help lay the groundwork for this.
references
1. CIA World Factbook 2. Aysan, Ahmet. How to Boost Private Investment in the MENA Countries: The Role of Economic Reforms. 2002. 3. Ibid 4. Ibid 5. Ibid 6. Ibid 7. Ibid 8. Mitha, Farooq A. Economic Reform in the Middle East and North Africa (MENA). 2007. 9. Ibid 10. Aysan, 2002. 11. Noumba Um, Paul. Infrastructure and Economic Growth in the Middle East. 2009. 12. Hanouz, Margareta Drzeniek. The Arab World Competitiveness Review 2010. 2010. 13. Kapsos, Steven. The Global Employment Trends 2011 : The challenege of jobs recovery. 2011. 14. Ibid 15. Ibid 16. Ibid 17. Ibid 18. Ibid 19. International Monetary Fund. World Economic Outlook 2010: Recovery, Risk and Rebalancing. 2010. 20. Ibid 21. Ibid 22. Ibid 23. Ibid 24. Ibid 25. Ibid 26. Hanouz, 2010. 27. Ibid 28. Ibid 29. Ibid 30. Ibid 31. Ibid 32. Ibid 33. Ibid 34. The World Bank and the International Finance Corporation. Doing Business 2011: Middle East and North Africa, Making a Difference for Entrepreneurs. 2011. 35. Ibid 36. Ibid 37. Ibid 38. Ibid 39. Ibid 40. Ibid 41. Elliott, Dominic. Rise of Emerging Markets Triggers Alarm. Wall Street Journal. 2009. 42. The World Bank and the International Finance Corporation, 2011. 43. Hanouz, 2010. 44. Klugman, Jeni. Human Development Report 2010, The Real Wealth of Nations: Pathway to Human Development. 2010. 45. Ibid 46. Ibid 47. Ibid 48. Ibid 49. Ibid 50. Ibid 51. Obama, Barrack. Cairo Speech Transcript. New York Times. 2009 52. The World Bank and the International Finance Corporation, 2011. 53. Klugman, 2010.
annexes
Contents
Annex A: Employment/Labor Statistics...........................................................................................8 Annex B: Global Competitiveness Index.........................................................................................13 Annex C: Doing Business Indicies.......................................................................................................14 Annex D: Human Development Index................................................................................................20
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