Economics of Middle East and North Africa Research Paper

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The study of Middle East and North African economies is a relatively recent endeavor. Charles Issawi, the leading Middle East Economic historian, asserts that prior to World War II, the only Middle Eastern country whose economy had been adequately studied was Egypt (Issawi 1990). Since then the field has grown considerably but until the late 1970s, a handful of topics dominated scholarly research in the economics of the Middle East and North Africa. These included the economics of oil, the role of the state in the economy, and international labor migration, all of which are clearly interrelated. With the exception of North African migration flows to Europe, international migration flows in the region were a response to the sudden increase in labor demand in labor scarce but oil-rich countries during the oil boom era. Moreover, oil rents, which flow primarily into state coffers, centralize economic resources in the hands of the state and significantly increase its role in the economy. However, the dominant role of the state was not limited to oil-rich countries. The rise of nationalist governments throughout the region in the post independence period resulted in significant state intervention, even in countries where oil has played a minimal role, such as Turkey, Syria, and Yemen.

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Since the decline in oil prices in the 1980s and the consolidation of the so-called Washington consensus, the state-led development model pursued by most Middle Eastern and North African countries became increasingly untenable and movement toward greater economic liberalization and market-based reforms began in earnest. Accordingly, the focus of scholarly work in Middle East economics shifted to the study of economic reform and structural adjustment, privatization, and trade and financial liberalization, including the prospects for greater trade integration with the European Union through the Euro–Mediterranean partnerships. The 1993 Oslo accords and the prospects of settling the Arab–Israeli conflict brought forth a wave of research on the economics of Middle East peace, but interest in this topic fluctuates with the ebbs and flows of the Arab–Israeli conflict. Finally, the onset of the demographic transition in the region and the growing importance ascribed to human development in the international development literature has led to a renewed interest in the study of labor markets, education, human resource development, and gender.

1. The Economics Of Oil

Oil continues to play a very important role in the region’s economies, either directly through the sale of oil and gas or indirectly through the receipt of labor remittances from migrant workers in oil-rich countries. Although oil-related revenues can potentially provide the necessary resources to finance infrastructural and educational investments, they can also cause significant economic distortions that could potentially hamper the long-term development of economies receiving such revenues. Since much of the revenue from the sale of oil accrues as rent, that is the difference between the product’s market price and the opportunity costs of the resources that go into its production, they also give rise to rent-seeking behavior on the part of various social actors. When the rents accrue to the state, the focus of the political process becomes the allocation of the rent to various interest groups, rather than the creation of new wealth. Middle Eastern and North African states used their oil rents to intervene massively in their economies by setting up large-scale state-owned industries, providing highly subsidized services and consumer goods, instituting generous safety nets, expanding public employment schemes, and protecting local industries and workers from international competition (Karshenas 1990, Askari et al. 1997).

Besides its effect on the behavior of governments, the sudden increase in the flow of external resources in an economy can lead, simply through the working of market forces, to a phenomenon known as the ‘Dutch disease,’ in reference to the problems experienced by the Dutch manufacturing sector after the discovery of North Sea oil. The increase in demand brought about by the windfall leads to an increase in the price of nontradables, such as construction and services, whose supply is constrained by domestic production capacity, relative to that of tradables, such as manufactured and agricultural products, which can be imported from abroad. This shift in relative prices leads to the stagnation and diminished international competitiveness of the non-oil traded goods sectors (Corden 1984, Collier and Gunning 1999). The Dutch disease is often blamed for the contraction of agriculture throughout the region in the 1970s and the region’s increased dependence on food imports (Richards and Waterbury 1996). The effects of the Dutch disease on manufacturing were often counteracted with increased protection, making these manufacturing industries even less competitive internationally.

2. International Labor Migration

Research on international labor migration in the region was most active from the mid 1970s to the late 1980s, the period when migration flows to the oil-rich countries increased significantly. The primary focus of the research was the investigation of the determinants of migration and migrant remittances (Adams 1993, Wahba 1991, El-Sakka and McNabb 1999) and the assessment of the effects of international migration on the economies of sending countries (Fergany 1988, Adams 1991, Roy 1991). Arguments for the positive impact of migration and remittances include the obvious effects on foreign exchange earnings, as well as its effects on lowering unemployment rates, increasing per capita income and savings rates, and improved skill levels of returning migrants. Arguments against include its effects on skill shortages, increased conspicuous consumption, higher income inequality, and increased dependency on a risky source of foreign exchange. However, the evidence presented on either side of the arguments can generally be characterized as weak. With a few exceptions (Fergany 1988, Adams 1991, 1993), most studies rely on aggregate figures from official sources rather than microdata from household surveys.

3. The Dominant Role Of The Middle Eastern State

Although oil clearly contributed to the expanding role of the state in the region’s economies, the dominant role of the state in economic affairs preceded, in many countries, the oil boom era. Like states elsewhere in the developing world, the post-colonial Middle Eastern state took upon itself the task of inducing the structural transformation of the economy from agriculture to industry through direct state intervention. The accession to power of modernizing nationalist leaders, mostly with a military background, in Turkey, Egypt, Iraq, Syria, Libya, Tunisia, Yemen, and Algeria led to massive state intervention in the form of nationalization of large private firms as well as some entire sectors, such as utilities, banking, and insurance. Governments in the region also invested in heavy industry, erected high trade barriers, and sought to control agricultural prices and delivery systems. This state-led import substitution industrialization model was first instituted in Turkey, without an explicitly socialist ideology, and then adopted and expanded upon in a number of Arab countries and justified by a home-grown brand of socialism that came to be known as Arab Socialism (Richards and Waterbury 1996, Hopfinger 1996). An excellent comparison of Turkey’s and Egypt’s development trajectories during the twentieth century is offered by Hansen (1991).

The statist model of development resulted in some early successes in raising per capita income and achieving a structural transformation toward more industrialized economies. However, it soon ran into the usual bottlenecks that haunt import substitution industrialization regimes, namely the shortage of foreign exchange and excessively high capital-output ratios. The 1967 Arab–Israeli war diverted attention to the military buildup in Egypt and Syria and temporarily suspended the economic development agenda in these countries.

4. Structural Adjustment And Economic Liberalization

The first and second oil shocks of 1973 and 1979 forced many developing countries to abandon the state-led import substitution industrialization model and undertake far-reaching economic liberalization programs. Oil rents allowed most countries in the Middle East and North Africa to avoid instituting painful structural reforms. The earliest reformers, Jordan, Morocco, Tunisia, and Turkey, were all countries with limited oil revenues. The collapse of oil prices in the 1980s forced the other countries of the region to introduce drastic cuts in public investments, reduce public sector hiring, and curtail safety nets, with a few, such as Egypt and Algeria, adopting wideranging macroeconomic stabilization, structural adjustment, and privatization programs (Hopfinger 1996, Harik and Sullivan 1992, Harik 1997, Niblock and Murphy 1993, Celasun 2000).

A further impetus for pursuing economic reforms comes from prospects for greater trade liberalization and exposure to international competition as a result of accession to the World Trade Organization and the implementation of the Euro–Mediterranean partnership agreements. These agreements that 12 countries in the region have either negotiated or are in the process of negotiating with the European Union, emerge from a Euro–Mediterranean conference held in Barcelona in 1995. The partnership aims at creating free trade areas for all industrial products between the countries of the region and the European Union. The partnership agreements would also significantly increase aid flows to the region to facilitate the introduction of structural reforms. The prospects of intensified international competition and more open economies in the region has spawned an active literature on the consequences of these developments on the region’s economies (Galal and Hoekman 1997, Handoussa and Reiffers 2000).

5. The Economics Of Middle East Peace

A stream of research that investigates the economic consequences of Middle East peace on the region’s economy has ebbed and flowed since the early 1990s with the vagaries of Arab–Israeli peace negotiations. An influential collection that brings together authors from both sides of the conflict was published in 1993, just before the signing of the Oslo Peace accords (Fischer et al. 1993). The authors investigated the likely size of a peace dividend that would result from lower military spending in the region, the impact of increased intra-regional trade flows and the possibility of greater foreign direct investment made possible by open borders and communications links. More recent reassessments (Roy 1999, Diwan and Shaban 1999) show the adverse consequences of an incomplete settlement on the fledgling Palestinian economy.

6. Demography, Labor Markets And Human Resources

A combination of demographic forces, human resource and labor market policies, and external economic conditions has saddled the region with some of the highest unemployment rates in the world, with most of the unemployed being concentrated among educated youths. The rapid decline in mortality with continued high fertility, characteristic of the early stages of the demographic transition, has contributed to very high rates of growth in the youth population. Although fertility has begun to decline fairly rapidly in many countries of the region, the number of young job seekers will continue to grow for some time. While educational attainment has increased significantly during the oil boom period, the educational systems of the region were primarily oriented to preparing workers for careers in the civil service. Such careers were virtually guaranteed for workers attaining a secondary level of education. Moreover, because public sector jobs provided compensation levels and working conditions superior to those obtainable in the private sector, educated new entrants had an incentive to queue for them, driving up unemployment rates (Shaban et al. 1995, Assaad 1997). The slowdown in government hiring in the 1980s simply resulted in longer queues and sent unemployment rates soaring. In the Gulf countries, the situation was exacerbated by the fact that public sector employment was used as a mechanism to distribute the oil rents to nationals, with the private sector relying exclusively on foreign workers. These dualistic labor markets resulted in the paradoxical situation of having high unemployment rates in economies that suffer from severe labor shortages (Al-Qudsi 1985, Askari et al. 1997). As a result of these developments, labor and human development issues have moved to center stage on the region’s policy agenda.

Research on labor market and human resource issues in the region has been hampered by the severe limitations of access by researchers to the micro-data sets that have become indispensable for undertaking state-of-the-art empirical research in this field. Although the general rule is still that survey data sets collected by statistical agencies are off limits to researchers, some improvement in data availability is occurring in Egypt, Turkey, Iran, Morocco, Tunisia, and the West Bank and Gaza. The improved availability of microdata has allowed a significant research agenda to develop on gender issues in the labor market, determinants of fertility decline, the impact of the demographic transition, human capital accumulation and returns to schooling, youth labor market trajectories, poverty, and the optimal targeting of social assistance.

7. Developments In The Institutional Support For Economic Research In The Region

The support system for undertaking economic research on the region and for regional researchers has greatly improved in recent years with the founding of the Economic Research Forum for the Arab Countries, Iran and Turkey (ERF). ERF is a regional nongovernmental organization based in Cairo, Egypt, which was established in 1993 to produce quality research, inform the policy debate, and build research capacity through conferencing, research competitions, dissemination of interim research results, and publication. The ERF publishes an annual volume entitled Economic Trends in the MENA Region, a working paper series, and a regular newsletter and maintains a record of economic research on the region. It also sponsors the publication of edited volumes on specific issues, such as trade liberalization, human development strategies, population issues, and the privatization of state-owned enterprises. Finally, with funding from the World Bank and the European Union, ERF administers regular peer-reviewed competitions for research funds. Besides the ERF, a number of countryspecific non-governmental research centers have become increasingly active in economic research in the region, including the Egyptian Center for Economic Studies, the Royal Scientific Society in Jordan, the Lebanese Center for Policy Studies, the Arab Planning Institute in Kuwait, and the Centre de Recherche en Economie Applique pour le Developpement in Algeria. In North America, the Middle East Economic Association, which is affiliated to the American Economic Association, continues to hold its annual meetings, whose proceedings are published electronically. It also publishes Research in Middle East Economics, an annual periodical.

8. Conclusion

In response to developments in the region and in the world economy, the scope of scholarship in Middle East economics has broadened considerably in recent years. Although the longstanding interest in the role of the state, oil, and international migration remains, there is a growing interest in issues relating to structural adjustment, trade liberalization, and financial reform in the context of greater integration with Europe, in particular, and the rest of the world economy, in general. Demographic forces related to the fertility transition and the increased focus on human development worldwide have led to expanded interest in labor market analysis, human resource development, and poverty. This trend is being further encouraged by the greater availability of microdata from household surveys in some of the countries of the region. Finally, there are indications that governance and institutional reform will be the next set of issues to attract significant attention from researchers working on the economics of the region.


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