Monday, December 18,  2017

Economy

Finding the trend in transition

By Caroline Freund

Economic pressures are mounting in the oil importers.  We are seeing rising fiscal deficits and growing government debt, in line with an expansion in government expenditures on subsidies and public wages, and also a decline in government revenues as income growth slows. 


Twice a year, we put together an economic outlook for Middle East and North Africa (MENA) as part of the economic analysis we do at the World Bank.  Over the last two years, a series of political and financial shocks have made the regional economic trends and turning points that we are looking for in these reports difficult to identify. 


On the political side, there have been elections with sharp winners and losers and referendums that have challenged prior assumptions. The new space in which citizens have been able to organize and speak out has yielded a vibrant civil society. But in this same contested space, the assassination of an opposition figure changed the course of history. All the while constitutions are being written and rewritten; and all-out conflict in one state is having devastating consequences internally and repercussions throughout the region.

Unemployment is high and rising in a number of countries.  The structural economic issues that plagued MENA in the past, leading to insufficient opportunities for young people and fueling frustration prior to the Arab Spring, have not abated
On the financial side, tourists shunned a number of countries in the aftermath of the Arab Spring only to return and depart again.  More public sector jobs and higher government wages supported the livelihood of those that got them, but left less funds to support the rest of the people.  High oil prices eased transitions in oil exporters but raised financing concerns in oil importers; and sadly, the global economy has not been able to moderate regional volatility, with the Eurozone crisis restraining global demand and resources.


Identifying trends and turning points amid this much volatility is difficult. But, three things are clear:


One, MENA is more diverse now.  
In the past, we discussed the outlook for oil exporters (developing and developed) and oil importers.  Now we also have various stages of transition.  This includes post-revolutionary countries, evolving democracies, fragile states, and states in conflict.  The political and policy uncertainty that prevails to varying degrees in countries around the region has important implications for economic growth, job opportunities, and poverty of which we must remain cognizant.

Expenditures on fuel subsidies and the government wage bill have swelled in the transition countries since 2010.  A macro plan that brings these in check, coinciding with the development of a strong social safety that protects the most vulnerable would be a first and necessary step. 
Two, economic pressures are mounting in the oil importers.  
We are seeing rising fiscal deficits and growing government debt, in line with an expansion in government expenditures on subsidies and public wages, and also a decline in government revenues as income growth slows.  Current account deficits have also worsened, as exports, especially of tourism, contracted; while expenditures on imports, buoyed by high oil prices, rose.  Reserves are being depleted as countries have relied on them to support declining demand for local currencies.  These macro trends cannot continue indefinitely, something has to give.


Three, unemployment is high and rising in a number of countries.  
The structural economic issues that plagued MENA in the past, leading to insufficient opportunities for young people and fueling frustration prior to the Arab Spring, have not abated.  Unfortunately, the political and policy uncertainty that has accompanied transition has brought a halt to investment, compounding an already weak labor market and making it even harder to find work.  The very sectors that provide jobs: manufacturing, construction, and tourist-related services are the ones that took the biggest hit in transition.  Getting these sectors back on track is critical to generate a jobs recovery and reduce poverty.
 

Tourists shunned a number of countries in the aftermath of the Arab Spring only to return and depart again.Going forward, the outlook depends on how and when macro imbalances are addressed and whether a sufficient level of policy predictability and political inclusiveness is achieved to bring investors and tourists back.  Expenditures on fuel subsidies and the government wage bill have swelled in the transition countries since 2010.  A macro plan that brings these in check, coinciding with the development of a strong social safety that protects the most vulnerable would be a first and necessary step.  This would also bring confidence to investors, supporting stronger growth and more jobs. But a solid macro plan is not enough.  In the short run, the growth and jobs situation needs political clarity and policy predictability to encourage foreign investment and tourism, and also confidence builders such as public works and training.