Middle East and North Africa Reform: Rooted in Economic and Political Ground Paper at a glance

Friday 22 February 2008 14:07
Bangkok--22 Feb--cipe
The key to successful reforms in the Middle East and North Africa (MENA) region is building on the linkages between democratic governance and market economies.
Demographic pressures, an inefficient public sector, and the need for economic diversification led by the private sector are some of the top challenges facing MENA countries.
Meaningful reforms require moving away from entrenched state monopolies on political and economic power.
MENA governments should focus on creating an enabling environment for the private sector to lead sustainable economic growth and job creation.
Through institutions of democratic governance, grassroots private sector voices can provide invaluable guidance on the design and implementation of reforms.
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Executive Summary
An intensifying demographic transition in the Middle East and North Africa (MENA) region calls for creating as many as 100 million new jobs in the next decade in order to accommodate the increasing number of entrants into the labor force. The shortcomings of past economic reforms foreshadow a massive labor crisis and potential social instability as the rising wave of youth unemployment sweeps through the region. But MENA may also have at hand a unique window of opportunity for sustained growth and development, provided that long-overdue institutional reforms — both economic and political — are introduced.
CIPE’s extensive experience around the world suggests that the key to successful reforms lies in understanding the profound interconnections between well-functioning markets and democratic governance. They both rely on the same set of core values and require good, inclusive governance structures that facilitate the engagement of the broader business community in reforms. A majority of legitimate business interests are not often represented in the political process. This is the case in MENA, where a handful of powerful elites monopolize access to the government while the plight of smaller firms and informal entrepreneurs goes largely unheard. The challenge — and opportunity — is to empower those long-neglected segments of MENA societies and build more productive economies capable of capitalizing on the region’s changing demographics.
Recent GDP growth in the MENA region was over 6 percent, the strongest in more than a decade, prompting some to consider MENA’s economic reforms a success and the lack of political reforms as something unrelated that should be considered on its own terms. But market economies cannot exist without democratic systems that protect property rights and enable participation in the economy, open to all on equal terms. Democracy cannot in turn be achieved in the absence of free markets because market-based economic order and democratic governance complement each other and share the same core values: rule of law, competition, participation, transparency, accountability, freedom, equality, and responsiveness. Therefore, reforms that help build market economies also help foster democratic institutions.
The recent spike in the region’s macroeconomic indicators does not mean that such institutional reforms have been implemented; the spike is fueled by the oil price boom rather than rising productivity or better governance. But these reforms are crucial going forward in order to change the region’s decades-old social contract, in which the state dominates the economy and limits political liberties in exchange for jobs and welfare. The ongoing demographic transition renders this rentier state model ineffective and incapable of absorbing the burgeoning workforce.
Yet MENA’s population growth can be turned into an unprecedented opportunity for sustained economic growth, provided that the new entrants become productively employed. For that to happen, the region’s explosive mix needs to be addressed.
Demographic pressures. MENA’s labor force is predicted to soar to 185 million by 2020. Unemployment currently stands at 10.9 percent in North Africa and 11.8 percent in the Middle East according to the ILO, and is the highest in the world. Unemployment among women and young people is even greater, generating wide-spread discontent.
Inefficient public sector. Traditionally, MENA governments have been employers of first and last resort. Today, however, they are unable to keep up with their growing populations and can no longer ensure sufficient public sector employment levels to manage social expectations. Government wages in MENA — unlike anywhere else in the world — are higher than in the private sector. This trend skews labor market incentives and unproductively traps much of the region’s human capital.
Constrained private sector. MENA’s state-centered economic model has severely stunted the private sector, which remains concentrated in a small number of large firms benefiting from governmental protection. The region’s corporatist legacy makes the state the most important player in the economy rather than an impartial, arm’s-length regulator. Large firms with connections to state officials are able to manipulate the rules to their advantage, but smaller firms face an unequal playing field and must resort to bribes or informality.
Daunting as the task of in-depth reforms may seem, there is no reason to assume that MENA is not up to the task. There is nothing intrinsic about the current political and economic arrangements, and arguments about supposedly insurmountable cultural reasons for the persistence of the rentier model are misplaced. The missing linchpin is better democratic governance that could provide needed reforms with a sense of social ownership and grassroots participation.
Any successful course of reforms must capitalize on MENA’s demographic transition. The change from high to low mortality and fertility creates a one-time “demographic bonus:” as the working-age population increases relative to younger and older dependents, the potential for economic growth peaks. The necessary precondition is sufficient job creation, and this can only be achieved in an environment of open and responsive governance.
MENA needs a new social contract that will make better governance possible. Past reform efforts were not only selective and incomplete, but above all lacked participatory quality. Top-down policies were pursued by the ruling elites and foreign technocrats, which contributed to the feeling of disconnect between the reformers and society at large. A more effective reform approach can be based on the following tenets:
In-depth economic and political reforms are inextricably intertwined and should be pursued simultaneously.
Top-down reforms are not viable because they lack the benefits of broader societal involvement, local knowledge, and ownership.
If engaged in the policymaking process, the private sector (beyond crony firms) can provide solutions to MENA’s employment challenge.
The private sector can offer crucial insights into economic policymaking. After all, local entrepreneurs can best identify constraints to doing business and can formulate policy recommendations. One way to empower these local entrepreneurs is through public policy advocacy conducted by independent business associations, chambers of commerce, and economic think tanks. When a larger business community openly and transparently supports policies that benefit a broad spectrum of entrepreneurs, such policies are good for the economy as a whole and foster democratic governance.
Meaningful reforms require moving away from the state monopoly on political and economic power toward a system where the state creates an enabling environment for the private sector to lead economic growth. These reforms are difficult because they ultimately threaten the established elites. Until now, MENA leaders preferred not to “rock the boat,” and instead preserved the unsustainable status quo with only superficial changes. But today, this stability may be threatened even more by not reforming.
There are no shortcuts and quick fixes here; reforms take time. Introducing good laws is not enough if the values behind them are not internalized by those to whom they pertain. At the same time, a chance to form broad social coalitions interested in the success of institutional reform has never been greater. For the private sector to become an active, credible, and informed participant in reforms, improvements are needed in:
Building market institutions
Developing political institutions
Strengthening the rule of law
Empowering women and youth
Creating space for the private sector
Improving access to information
Enabling private sector input
Combating corruption
As a first step, various parts of civil society — including private sector organizations — need to become involved in the public debate over reforms. This is already happening in many places, as illustrated by CIPE’s work with the Egyptian Business Association, the Arab Institute of Business Leaders, and many other organizations in the region. These groups represent grassroots voices and seek local solutions. They involve broad segments of the private sector in the design and implementation of economic reforms. They engage in a democratic, public-private dialogue on policy issues with an understanding that successful economic reforms require political will. Finally, their successes inspire confidence that similar initiatives can be successful elsewhere and that the broader private sector can help drive positive change throughout the region.