Economic and Political Outlook for the Middle East and North Africa

Originally published by the Carnegie Endowment for International Peace
Participants: Masood Ahmed, Marina Ottaway, Uri Dadush

Despite resilient growth in the Middle East and North Africa (MENA) throughout the Great Recession, many fundamental economic and political challenges remain. Masood Ahmed, director of the International Monetary Fund’s Middle East and Central Asia department, joined Carnegie’s Marina Ottaway to discuss the issues facing the region. Carnegie’s Uri Dadush moderated.

Economic Outlook

While MENA’s financial sector—largely insulated from other parts of the world—avoided a major financial crisis, the region experienced some economic shock as oil prices fell. This shock hurt oil exporters, but strong government spending—made possible by large oil surpluses from previous years—helped mitigate the broader effects of this downturn. Major oil-importing countries (Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia, or MENA6) were able to maintain relatively strong growth through the downturn’s residual effects thanks to spending by oil exporters and by moderate increases in their own spending.

In the coming years, Ahmed predicted that growth throughout MENA will rebound from its relatively shallow dip in 2009. After falling sharply with oil prices, oil exporters’ current account and budget surpluses are expected to rise again as the oil sector recovers.

This outlook is not without risks. Oil exporters could suffer if oil prices drop unexpectedly—Ahmed estimated that a $10 rise or fall in the price of a barrel of oil adds or subtracts approximately $90 billion from the current account of oil exporters. Oil importers, Dadush noted, could be hurt by the crisis in Europe, where they have strong trade connections, particularly to some of the most threatened economies in the South.

Challenges Facing Oil Exporters

• Diversification: Oil exporters remain heavily dependent on oil for economic growth and financial health, Ahmed said. Each has been trying to diversify for years, but models vary by country and some approaches to finance have had unanticipated pitfalls, as shown by the experience of Dubai (not an oil exporter) last year.
• Financial Markets: Financial institutions short on liquidity have been able to turn to shareholders for cash injections, but Ahmed warned that these injections also come at a cost, and argued that the oil exporters need to develop non-bank financial markets.
• International Linkages: Managing the countries’ links to the global economy—including capital and energy flows, as well as exchange rates—will remain important issues on the horizon.

Challenges Facing Oil Importers

Oil importers must now generate faster growth to bring down chronically high unemployment rates and create jobs for a rapidly expanding population.

• High Unemployment: Both the total unemployment rate and the youth unemployment rate in MENA6 countries are among the highest in the world. Ottaway noted this has social implications as well; this high unemployment has been stoking recent labor unrest.
• Rapid Population Growth: Over the next ten years, Ahmed estimated that MENA6 countries will need to create 18 million jobs to keep up with the growing workforce and bring down unemployment. Though Ottaway pointed out that the birthrate is showing signs of slowing, this slowdown will not be felt in the labor market for a number of years.
• Slow Growth: Output and export growth in MENA6 countries lags that of nearly all other developing regions, especially Asia.

To create jobs for this growing population, MENA6 countries must find a way to increase their competitiveness—which has fallen behind that of many other regions—and improve export performance. Ahmed argued that this will require education and labor market reform, as well as changes in the countries’ approach to export partners and their role in the supply chain.

• Export Reorientation: Currently, MENA6 countries depend heavily on Europe for trade. With developing countries growing three to five times faster than developed countries, MENA6 countries must reorient their export market toward these engines of growth.
• Supply Chain Integration: Rather than exporting commodities, MENA6 countries should look for ways to integrate themselves into the global supply chain. Ahmed noted that one possibility would be for these countries—given their geographic position—to import raw materials from Africa and export manufactured goods to Europe.

The Political Outlook

Despite the political uncertainty prevalent throughout the region, Ottaway stressed that no major changes appear imminent. The will for political reform looks to be, at least temporarily, dead, as regional governments openly flout calls for political change. Egyptian leaders, for example, made practically no effort to make the recent parliamentary elections even appear legitimate.

• Succession: Since change is unlikely to come through the ballot box, some analysts have suggested that the eventual death of Egyptian President Hosni Mubarak could create political turmoil. Ottaway disagreed, arguing that whoever succeeds Mubarak will have the support of the military and security forces, and the transition will be orderly. Similarly, though new leadership will likely replace the aging heads of state in Saudi Arabia and Algeria, military forces will manage these successions as well, and serious political disruptions are improbable.
• Implications: The economic implications of the lack of political reform are unclear. Ottoway noted there is little evidence that suggest how political liberalization would help or hurt economic performance. The health of the economy, however, could increase or decrease pressure for political changes. In Saudi Arabia, for example, when low oil prices forced unpopular budget cuts, leaders shared responsibility—and blame—with other groups; when prices rose, they reconsolidated their power.

The leadership transition could produce small economic changes, but it is more likely that these changes will harm long-term growth prospects rather than help them. To consolidate public support, new leaders might well slow down or reverse unpopular economic reforms that are critical to improving competitiveness.

The Effect of a Rising Iran

Since the fall of Saddam Hussein, the balance of power in the Middle East has shifted toward Iran. Countries are now being forced to choose between engaging Iran on their own or strengthening their political ties to the United States. The political alliances created by these decisions may have important consequences on trade patterns in the region, but thus far, countries’ choices are unclear.

• WikiLeaks: Some observers claim that the released WikiLeaks cables demonstrate that many Middle Eastern countries are siding with the United States. Ottaway argued that this could be misleading, since what these countries are privately telling Iran remains unknown, and many countries are reluctant to openly support or condemn either the United States or Iran.
• Sanctions: Though many countries have shown an early willingness to comply with U.S. sanctions toward Iran, there is little guarantee these sanctions are being enforced.