A JOINT ERF/FDL report
by the MENA Commission on Stabilization and Growth
Much has been written about the weaknesses of the Middle East and North Africa (MENA) economies: their low level of innovation and labour productivity, the lack of dynamism of their private sector and large informality, the decay of the capacity of the state and of the quality of its services. The social impact of these weaknesses is also well understood: rising poverty, high unemployment, and increased inequality. There is a heavy sense of stagnation and unhappiness in the region. The resulting social discontent had led to the Arab Spring of 2011, and to repeated eruptions of anger, before Covid-19 put a temporary halt to social mobilization. But this has not spurred efforts for fundamental renewal, and economic performance continues to stagnate.
What is less understood is that the financial situation is about to become much worse in the oil importing countries of the MENA region. In these countries, political stability was only preserved in the past decade through expansionary public spending financed by debt. This process has by now largely run out its course. Lebanon and Sudan are in the midst of a severe economic and political crisis. In the other oil importing countries (such as Egypt, Jordan, Morocco, and Tunisia), public debt levels have become very large. This is putting extra pressure on budgets, making it difficult to refinance debt, and increasing the risk of a financial blow-up.
A regional commission of experts, working under the auspices of the Economic Research Forum (ERF), and the Finance for Development Lab (FDL), was asked to evaluate the macro-economic risks ahead, and to make recommendations on the best course correction to avoid them. There exist many useful reports by national, regional, and international organizations on similar issues. But they tend to be technical in style and diplomatic in tone. The responsibility of the Commission was to not shy away from the very political choices that confront MENA societies at this historic juncture. As a result, the report is meant to convey coherent and comprehensive messages about the risks and opportunities of the region’s development path.
After a process of analysis, consultation, and deliberation, the Commission came up with four sets of recommendations, which are developed in their report:
Four key recommendations
First, the recent macroeconomic shock waves are making an already weak economic situation catastrophic. Public debts are rising fast towards unsustainable levels. The challenge ahead is stark: inaction would lead to a financial crisis; but austerity alone could stabilize debt only in the very short term and at the cost of high social tensions. Economic growth is already falling, poverty rising, and the middle-class further weakened, all threatening a rise of social unrest. Failing to develop a convincing response raises the threat of a vicious cycle of economic, social, and political declines, including a retreat into populism, and destructive social polarization.
Second, the immediate debt challenge forces countries to adopt painful decisions. While some reduction in government expenditure is unavoidable, much of the political capital invested in adjusting to high indebtedness should go towards improving growth prospects. Public expenditure should be reoriented to safety nets and pro-growth spending. Debt restructuring can only go so far, and countries should not expect too much from it. IMF support will be necessary. It needs to be more generous, but it also need to be made conditional on launching credible national revival strategies, as opposed to the austerity-only based approaches of the past.
Third, a pro-growth macroeconomic framework is necessary to ignite growth. But it is not sufficient. In order to achieve a shift in expectation, structural reforms are needed. The reform agenda not only includes the “old” challenges of improving growth prospects and modernizing the state, it should also address the new challenges of re-localization and climate change. On all these fronts, the medium term reform agenda needs to be initiated in credible ways to create a major expectation shock that can affect the short-term - to encourage the private sector into initiating a supply response, and to encourage citizens into starting to rebuild social trust.
The fourth recommendation is to recognize that the economic reforms are eminently political exercises that need to mobilize the political elites to work. The political elite needs to believe that the risks ahead are catastrophic, but that a better future is possible, and to convey these messages to citizen with brutal honesty. Politically, they need to organize an open dialogue with the private sector and civil society to find new mutually beneficial arrangements - political, social, and economic - that can unlock countries' true potential. A gradual process if it starts in earnest is possible - improved trust in institutions and confidence about the future support collective action and generate a virtuous process of progress on all fronts. In addition, there are enormous new opportunities to expand regional and global cooperation that can and should be mobilized in support of reformist national programs.
MENA COMMISSION MEMBERS:
- Leila Baghdadi is a Professor of Economics at the University of Tunis. She is an executive board member of the Central Bank of Tunisia, a Board member of the Economic Research Forum, and an Associate Editor of the Middle East Development Journal.
- Nesreen Barakat is the head of the Jordan Strategy Forum. She is a member of the Central Bank of Jordan Board of Directors, and of the Board of Trustees of Jordan's National Center for Human Rights. Earlier, she served as a Minister of Social Development, Minister of Public Sector Development, and General Director of the National Aid Fund. She was also a City Council Member of Greater Amman Municipality.
- Ishac Diwan teaches at the Ecole Normale Superieure in Paris, is the Research Director of the Finance for Development Lab at the Paris School of Economics, and is in charge of the Political Economy program of the Economic Research Forum.
Karim El Aynaoui is the President of the Policy Center for the New South, and the Dean of the Faculty of Economics and Social Sciences of the Mohammed VI Polytechnic University. He serves as a board member of the OCP Foundation.
- Ibrahim Elbadawi is the Managing Director of the Economic Research Forum, and is Professor Emeritus, University of Khartoum. He was during 2019-220 the Minister of Finance and Economic Planning of Sudan.
- Alia El Mahdi is Professor of Economics in Faculty of Economics and Political Sciences, Cairo University, and CEO of Egypt.
Nada Eissa is Associate Professor of Public Policy and Economics at Georgetown University, Research Associate of the National Bureau of Economic Research, and policy advisor to the International Growth Centre's State Fragility Initiative.
- Mahmoud Mohieldin is the UN Climate Change High-Level Champion for Egypt in charge of the organizaion of the COP27, and an Executive Director at the International Monetary Fund. He has been the United Nations Special Envoy on Financing the 2030 Sustainable Development Agenda since February 2020.
- Mustapha K. Nabli has served as Governor of the Central Bank of Tunisia during 2011-2012. He was the World Bank Chief Economist for the Middle East and North Africa region, and earlier, Minister of Planning and Economic Development in the Government of Tunisia.
- Omar Razzaz was the Prime Minister of Jordan from 2018 to 2020, and Minister of Education in 2017.
Maha Yahia is director of the Malcolm H. Kerr Carnegie Middle East Center, where her research focuses on citizenship, pluralism, and social justice in the aftermath of the Arab uprisings.