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Institutional Change and Development in the Middle East and North Africa. Mustapha K. Nabli Senior Advisor, World Bank Inaugural Lecture CREMed Universitat Pompeu Fabra (UPF) Barcelona, 7 November 2008. Three main messages about MENA.

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Institutional change and development in the middle east and north africa
Institutional Change andDevelopment in the Middle East and North Africa

Mustapha K. NabliSenior Advisor, World Bank

Inaugural Lecture

CREMed

Universitat Pompeu Fabra (UPF)

Barcelona, 7 November 2008


Three main messages about mena
Three main messages about MENA

  • A development path in MENA more complex than commonly recognized with major social and human development achievements but daunting new labor market and environmental challenges

  • The most critical challenge of institutional change: moving from an old development model to a new and more adapted model has proven very difficult

  • Root causes are to be found in the political economy of institutional change


Outline
OUTLINE

I- Background and Long Run Development Outcomes

II- A major challenge of institutional change

III- Challenge #1: Employment and Private Sector Development

IV. Challenge #2: Education

V. Challenge #3: Water

VI. Political Economy


I background and long run development outcomes
I. Background and Long Run Development Outcomes

  • Background: a diverse region

  • Poverty reduction and human development : major gains

  • Economic growth: mediocre, volatile and hesitant


1 a diverse region three major country groupings
(1) A diverse region: Three Major Country Groupings

  • Resource-poor, labor-abundant (RPLA) or emerging economies: Egypt, Jordan, Lebanon, Morocco, Tunisia, West Bank and Gaza Population: 124 Mill. GDP: $US 225 billions

  • Resource-rich, labor-abundant (RRLA) or transition economies: Algeria, Iran, Iraq, Syria, Yemen

    Population: 168 Mill. GDP: $US 400 billions

  • Resource-rich, labor-importing (RRLI) or rich economies: GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE) +Libya

    Population: 40 Mill. GDP: $US 666 billions


Gdp per capita 2005
GDP per capita $ 2005




Huge progress in terms of health indicators— Fertility, infant mortality, life expectancy

Source: World Development Indicators


3 economic growth mediocre and volatile

GDP per capita growth I MENA and other regions

(percent)

8

7

6

5

1970s

4

1980s

3

1990s

2

2000s

1

0

East Asia &

Europe &

Latin America

South Asia

Sub-Saharan

Middle East &

-1

Pacific

Central Asia

& Caribbean

Africa

North Africa

-2

(3) Economic growth: mediocre and volatile


And varied across sub regions and countries

GDP per capita growth in the MENA region

6

4

2

1970s

1980s

0

1990s

RRLI

RRLA

RPLA

2000s

-2

-4

-6

…and varied across sub-regions and countries


Ii a most critical challenge of institutional change
II. A most critical challenge of institutional change

  • Started with an old development model based on an unwritten social contract, with central role of the state

  • Major achievements but breaks down in the 1980s

  • Move to a new development model with different role of the state and central role for individuals, markets, private sector

  • Changes in many policies but failure to see needed institutional change


Old social contract and central role of the state 1950s to 1970s
Old social contract and central role of the state—1950s to 1970s

Institutional and policy characteristics:

  • Widespread state ownership of assets and limited role of the private sector

  • Preference for the state and state planning rather than markets in managing economies

  • Heavy inward orientation

  • Strong redistribution and very active social agenda, with state provision of public services and safety nets

  • Limited political voice and participation

  • Dominant role of security and military establishments


Major gains but crises and collapse of old social contract mid 1980s
Major gains but crises and collapse of old social contract- mid-1980s

  • Major gains as we will see later

  • First signs of difficulties—macroeconomic crises in the 1970s/Tunisia, Egypt

  • Generalized crises in the 1980s and growth bust by the mid-1980s

  • Macro and structural adjustment programs since the early 1980s


Slow and hesitant transformation to a new social contract since the 1980s
Slow and hesitant transformation to a new social contract—since the 1980s

  • From public sector to private sector driven: Emergence of private sector

  • More open economies: slow external liberalization

  • Towards more liberalization and deregulation of markets

  • More diversified economies

  • Continuation of many old redistributive policies (subsidies)

  • Continued limited political voice and participation


Failure to meet many critical challenges requires deeper institutional change
Failure to meet many critical challenges requires deeper institutional change

  • Employment challenge

  • Higher expectations by a younger and more educated population

  • Pressures of globalization

  • Critical water and environmental challenges


Critical institutions which need to change
Critical institutions which need to change institutional change

  • Transition to institutions with less prevalence of “personal exchange” both in the political and economic domains

  • Economic institutions with strong private property rights, less rent-seeking, more open markets, rules-based government regulation and intervention

  • Political institutions with greater voice and accountability


Three case studies to illustrate
Three case studies to illustrate institutional change

Three recent major flagship reports by the World Bank:

  • Policies, Institutions and Credibility of Market Governance in MENA: Breaking through Barriers of Private-Led growth (forthcoming)

  • The Road Not Traveled: Education Reform in the MENA Region (2008)

  • Making the Most of Scarcity : Accountability for Better Water Management Results in the Middle East and North Africa(2007)


Iii challenge 1 employment and private sector development
III. institutional changeChallenge #1: Employment and Private Sector Development

  • Slow/delayed demographic transition, surge in labor force growth, and job creation as the most critical challenge

  • Private sector development is the key to job creation and facing the labor market pressures

  • Private sector has not been up to the challenge yet



A delayed demographic transition leading to major surge in labor force growth in mena

Dynamics of Labor Supply in MENA Countries, 1950-2020 (percent) - NEW

66

4

Participation rate (end of

decade, left axis)

64

Working age population

3.5

growth (right axis)

62

Labor force growth

(right axis)

60

3

58

2.5

Average annual growth

Participation rate (percent)

56

54

2

52

1.5

50

48

1

1950s

1960s

1970s

1980s

1990s

2000s

2010s

Source: ILO 1996 (pre-1980), ILO 2005.

… a delayed demographic transition leading to major surge in labor force growth in MENA …


Three major periods
Three major periods (percent) - NEW


Recent improvements in labor markets, MENA 2000-2005 (percent) - NEWIncludes: Algeria, Bahrain, Egypt, Iran, Jordan, Kuwait, Morocco, Qatar, Saudi Arabia, Tunisia, United Arab Emirates, West Bank and Gaza.


Unemployment rates have fallen but remain high

16 (percent) - NEW

2000

2005

14.3

14

12.2

11.3

12

10.8

10.3

9.9

10

8

6

4

2

0

MENA

Excl Alg

Excl Alg, Eg, Irn

Unemployment rates have fallen but remain high



At the same time labor force growth will continue to be high for the next 15 20 years new numbers
(percent) - NEWat the same timelabor force growth will continue to be high for the next 15-20 years (new numbers)


Private sector is key for job creation
Private Sector is Key for Job Creation (percent) - NEW

  • Challenge of : Quantity of jobs, Quality, and Flexibility and Adaptation to globalization

  • But performance has been weak

  • Progress on reforms mixed

  • Credibility of policies and reforms and accountability remain critical issues


Private sector performance 1 weak compared to other regions

1985-89 (percent) - NEW

1985-89

Middle-East

Middle-East

1990-94

1990-94

North Africa

North Africa

1995-99

1995-99

2000-04

2000-04

2005-07

2005-07

Sub-Saharan

Sub-Saharan

Africa

Africa

Latin America

Latin America

& Caribbean

& Caribbean

Europe and

Europe and

Central Asia

Central Asia

South Asia

South Asia

East Asia

East Asia

0%

0%

5%

5%

10%

10%

15%

15%

20%

20%

25%

25%

30%

30%

Private Sector Performance (1) weak compared to other regions

* Or most recent available year.


Private sector performance 2 low growth of private investment

Private Investment Growth (percent) - NEW

(per annum - weighted average)

14%

13.14%

12%

10%

8.62%

8%

6%

3.66%

4%

3.01%

2.80%

2.47%

2%

0%

1984-06

1981-05

1985-05

1995-04

1982-04

1980-03

EAP (4)

SAS (4)

SSA (30)

ECA (18)

MENA (6)

LAC (14)

Private Sector Performance (2) low growth of private investment


Private sector performance 3 varied across sub groups of countries

Figure 2. Private Investment in MENA (percent) - NEW

19

17

15

13

percent of GDP

11

9

7

5

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

RPLA

RRLA

RRLI

MENA

Private Sector Performance (3) varied across sub-groups of countries


Progress on reforms for private sector development 1
Progress on Reforms for Private Sector Development (1) (percent) - NEW

  • during the last 20-25 years efforts to increase the role of the private sector in the economies of the region

  • all countries of the region undertook to reform their policies and institutions and made progress in shifting their economic systems to be more private sector market driven.

  • progress with reform has been mixed and varied significantly across areas of reform, and across individual countries and country groupings.



What are the possible explanations for this lack of progress and weak response
What are the possible explanations for this lack of progress and weak response?

  • Incomplete reform agenda; need just to do more? Need to overcome resistance of special interests?

  • Long lags in response; just wait?

  • More fundamental institutional problems? As suggested by some pieces of evidence to follow.



The concerns of the private sector about policy uncertainty
sectors …the concerns of the private sector about policy uncertainty ….


sectors …and the negative perceptions about the consistency and predictability in the application of rules and regulations.


Reforms and progress of private sector hinge on major institutional changes
Reforms and progress of private sector hinge on major institutional changes

  • Rules based and less discretion in the business environment

  • Less room for rent-seeking and more for innovation and entre

  • Greater credibility of commitment to respect of property rights and respect of rules and regulations


Iv education
IV. Education institutional changes

  • Another major challenge linked to the demographics and employment challenge

  • Received high priority by governments and major progress in terms of access

  • But problems with quality and weak results in terms of efficiency

  • Reforms hinge on progress in accountabilities


Major gains in access to education
Major gains in access to education institutional changes

Source: Statistical Appendix

Source: Barro and Lee (2000)


Math institutional changes

Science (1998)

Good achievements in terms of the quality of human capital

TIMSS score (math and science)

1998 and 2003

Source: TIMSS 2003 Highlights

Source: UNESCO Statistical Yearbook 1998 and UIS database.


But very low economic returns institutional changes

Source: Source: Allen, 2001; CRESUR, 2004.


Despite very heavy investments by governments (and private sector).

Source: World Development Indicators, UNESCO Institute for Statistics, UNICEF, National Sources and Author’s Calculations,

Source: World Development Indicators


And a host of other problems going forward
..and a host of other problems going forward sector).

  • MENA countries need to deal with a youth bulge not seen elsewhere

  • The challenge of globalization and the knowledge economy

  • The challenge of financing education


Based on experience in the region and elsewhere three key factors:

  • Successful reformers have better engineering and morealigned incentives.

  • The better performers engage the private sector in providing education to a larger extent, especially at higher levels of instruction

  • Countries with higherpublic accountability produced better education outcomes


Countries need to consider the following several critical reform perspectives
Countries need to consider the following several critical reform perspectives

  • From Engineering Inputs to Engineering for Results

  • Promoting More and “Smarter” Non public Provision of Education

  • From Hierarchical Control to Incentive-Compatible Contracts for the Teachers

  • Greater Accountability to the State versus Accountability to the Public

  • Greater School Autonomy and Accountability

  • Effective Information Dissemination Systems to Promote Accountability

  • Quality Assurance Mechanisms

  • Promoting Reforms in Migration and Labor Polices to Maximize Returns on Education


V water
V. Water reform perspectives

  • One of the most critical challenges in the region

  • Becoming even more critical with impact of climate change

  • Meeting the challenges illustrates the role of institutions and institutional change


Situation is already critical lowest water availability in the world

Australia & New Zealand reform perspectives

Latin America & Caribbean

North America

Europe & Central Asia

Sub-Saharan Africa

East Asia & Pacific (incl. Japan&Koreas)

Western Europe

South Asia

Middle East & North Africa

0

10

20

30

40

1000 m^3 / year

Situation is already critical: lowest water availability in the world

Annual renewable water resources per capita


The region has already stored almost all of the water it can store
The region has already stored almost all of the water it can store

Proportion of regional surface freshwater resources stored in reservoirs



Growing population will recue per capita water availability by half by 2050 and climate change likely to reduce rainfall by at least 20%


Mena countries are spending heavily on water
MENA countries are spending heavily on water by half by 2050 and climate change likely to reduce rainfall by at least 20%


Not getting full benefits from public investment
Not getting full benefits from public investment by half by 2050 and climate change likely to reduce rainfall by at least 20%


Need to Reduce consumption to sustainable levels and achieve sustainable water management at minimal social cost

From….

To….

  • Additional resources:

  • Conventional

  • Non-conventional

  • Reduce losses


1) sustainable water management at minimal social costThrough better water policies

  • Policies to limit consumption, especially in agriculture

    • Investments to reduce losses

    • Limit consumption

    • Strong enforcement of limits

  • Compensate farmers for reduced consumption with help to improve water productivity

  • Mobilize additional water sources

  • Better tariff policy


2 through other interventions in non water sectors
2) sustainable water management at minimal social costThrough other interventions in “non-water” sectors

Employment

opportunities

Energy prices

Public finance

Trade policies


1.0 sustainable water management at minimal social cost

0.9

0.8

Countries with

0.7

accountability below

0.6

Index of quality of service

MENA avg

0.5

Countries with

0.4

accountability above

MENA avg

0.3

0.2

0.1

0.0

Access

Urban utility

1-Urban

Water use in

cost recovery

water losses

agric

3) Through improved public accountability


Greater accountability helps all aspects of water management

Improves water supply services sustainable water management at minimal social cost

Provides information necessary for making and enforcing decisions that reflect everyone’s needs

Ensures that governments and service providers see consequences of actions

Helps improve how well public money is spent

Greater accountability helps all aspects of water management


The region has history of adapting to water scarcity but needs major adaptation now

Societies developed over millennia institutions to deal with scarcity

More recently public institutions led investments in large infrastructure systems

Institutions need to adapt now to new realities

The region has history of adapting to water scarcity but needs major adaptation now


Vi the political economy of reform
VI. scarcity The Political Economy of Reform

A theory of political economy has to explain why this slow and hesitant pace of reforms and inability to achieve major required institutional changes:

  • Reforms have failed to tackle the central challenges

  • Reforms have mostly relied on top down decree-type measures, and do not threaten the political equilibrium

  • Reforms which require institutional changes in public accountability mechanisms slow and hesitant


The political economy of reform in mena countries shaped by 3 major factors
The political economy of reform in MENA countries shaped by 3 major factors:

  • Large oil revenues and rents

  • Pervasiveness and persistence of conflict and violence

  • Authoritarian political systems


Large natural resource wealth and revenues
Large natural resource wealth and revenues 3 major factors:

  • Reduces incentives of rulers to seek broad-based economic growth

  • Creates soft budget constraints which allow continuation of unsustainable policies for a long while

  • Creates a disconnect of accountability between rulers and the public


Conflicts are pervasive
Conflicts are pervasive 3 major factors:

  • Reinforce authoritarian regimes

  • Lead to allocation of large resources to security

  • Creates risk aversion to reforms


Authoritarian regimes

Figure 5. Democracy Trends in MENA 3 major factors:

(Average Index Polity IV 1960-2006)

10

8

6

4

2

0

1960

1966

1972

1978

1984

1990

1996

2002

-2

-4

-6

-8

-10

OECD

MENA

Other Developing

Authoritarian Regimes


Governance gap indicators of governance are well below potential in mena

Governance and Per Capita Income in MENA 3 major factors:

2

MENA

Rest of the world

MENA trend

1

Rest of the world trend

0

Index of Governance Quality

-1

MENA gap in quality

of governance

-2

6

8

10

Log of Per Capita GDP

Source: Per capita GDP, WDI 2002; Governance quality, World Bank 2003a.

Governance gap: Indicators of governance are well below potential in MENA.


Authoritarian regime dilemma
Authoritarian Regime Dilemma 3 major factors:

  • Benefits from stronger private sector: more growth, greater wealth base to tax, ability to redistribute and satisfy supporters, minimize contestation

  • Accrual of these benefits requires: inclusive broad-based private sector, limits on ruler discretion

  • Risks to rulers: greater ability of private sector to organize and revolt against ruler if reneges on guarantees


Implications 1 weak demand for reforms
Implications (1): Weak Demand for Reforms 3 major factors:

  • Collective action more costly under non-democratic regimes

  • Prevalence of influence of privileged insiders

  • Weak processes of internal and external accountability: more risk aversion to reforms


Implications 2 reforms are supply driven and lack credibility
Implications (2) Reforms are supply driven and lack credibility

  • Reforms are shaped to maximize the benefits to the ruling groups, including staying in power

  • Lack of credibility of commitments to reform and respect of promises



Implication improving governance will be critical to move forward on more difficult reforms
Implication: improving governance will be critical to move forward on more difficult reforms.

  • Region’s inability to tackle deeper and more complex reforms points to limitations of top-down approach of reform by decree

  • Deeper economic reform cannot proceed without reform of incentive structures in which reforms are embedded

  • Governance reforms cannot be viewed as a separate agenda, to be pursued at its own pace, but integral to all other reforms.


The most crucial and critical institutions to focus on are
The most crucial and critical institutions to focus on are forward on more difficult reforms.

  • institutions of public accountability

  • institutions for the enhancement of credibility of commitments


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