By Massoud Derhally
If it wants to attract investment, create jobs and increase the flow of trade, the Arab world needs to pursue reform now more than ever, says the World Bank's chief economist for the region, Mustapha Nabli
|~||~||~|AB: What’s the most pressing issue for the Arab world when it comes to economic reform? MN: It’s different from country to country but there is an overwhelming and overarching issue in the Arab world, which is the unemployment problem, and I like to see the reform agenda from that perspective. What is it that should allow these economies to create the jobs for the young and increasingly educated population? You ask yourself what is it that you need to create the jobs because the economies are not creating the jobs and unemployment is increasing, and the young educated population don’t see good prospects in their life. There are fundamental changes that have to take place. There are two or three main areas that should be the focus. What are the reforms that would allow investment to grow to create the new firms and activities for the young people to be employed? The environment for business has to be central to the reform agenda. This is a wide agenda: it goes from eliminating red tape facilitating the creation of firms, to good judicial systems, to good enforcement of property rights, financial systems, and a good infrastructure.The second set of reforms is related to trade. The markets of the Arab countries are small, even if you take them by their aggregate size. You need to expand trade; you need to expand exports, so the trade agenda is very important in order to go forward.
Different countries have been doing this at different stages, but what is needed is a fundamental shift. You have to move in a determined way in these areas; moving slowly can only take you so far. AB: You mentioned the issue of unemployment. A lot of Arab countries have the issue of trying to convince their nationals to do jobs. A lot of countries have been trying to encourage Gulfisation. Do you have any ideas on how these countries can overcome their dependence on expatriates and encourage nationals to take up jobs?MN: The basic idea is not to look at it as simply substituting national labour for expatriate labour. We are talking about different skills. The expatriate labour has some skills or low skills and the national has an education. But the problem is that the education they have been receiving is not adequate for the market, is not adequate for the businesses that they need to be employed in. So the solution is work on building the skills of nationals and at the same time creating the business environment for the right businesses to be created for them to be employed. Fundamentally, the basic way to do it is through the education system, and the building of skills so that you have higher skills that give you higher incomes. The problem in the Gulf States is that nationals have been used to high wages in the public sector, so if you try to push them into the private sector with lower wages they’re not going to go and remain unemployed. You have to provide them with opportunities to upgrade their skills, to be able to earn more in the private sector, and to allow the private sector to develop the enterprise and firms where they’ll be employed. It’s not a simple agenda, it’s very complex, but it has to be done.AB: The UNDP Arab Human Development Report and the WEF World Competitiveness report on the Arab World have both indicated the low level of intra-Arab trade and the weak economic integration that exists. What are some of the ways in terms of how these countries can be more in sync and integrate their economies together? MN: Expanding exports in general is fundamental and necessary for the Arab countries to create the jobs and increase the standards of living. It’s part of the solution but not the only solution. I don’t believe that intra-Arab trade is the whole solution, but it’s part of the solution. The people have to decide what is the most effective [type of trade.] There is scope for expanding trade in the Arab world. But the World Bank has just completed a major study on trade and it shows that by any standard the Arab countries are under-trading. It’s not trading with the rest of the world and it’s not trading within itself as it should be. It’s losing opportunities for creating wealth and jobs and that’s where we encourage the countries to think about the issues and develop reforms. AB: For the Gulf, which has been fortunate to have an abundance of resources, there is the element of the oil curse. How big of a problem do you see this as in terms of lessening its dependency and diversifying its income?MN: That is a very important issue. The oil revenue has been very important, it has allowed the countries of the Gulf to improve lots of social indicators. They have improved health, services, life expectancy and in a way the oil wealth has been used. On the other hand, two problems exist now. One is that, overall, this oil wealth, when you measure it per capita given the population growth, is declining. So the countries don’t have as much per person as they did twenty years ago. Secondly, you cannot count on this oil wealth for this increasing population; you have to create new sources of income, new sources of wealth. It’s important to diversify. [Getting away from the oil curse] requires leadership, looking far into the future, and making decisions to bring about this [economic] diversification. We see some countries have been successful, like Dubai and Oman. But others have to follow. It is critical in the future that the countries in the Gulf try to reduce their dependency on oil. AB: In the bigger scheme of things, now that the US has proposed a free trade area, what do you think are the factors or essentials for it to succeed?MN: My view is that trade, whether it’s within a free trade area or EU or intra-regional or with the US, whatever it is, will not succeed, will not be effective unless you have a good thriving domestic environment for investment. If you don’t have a domestic environment that is good for this private sector to work in and create activities and be able to export, the free trade area alone is not the solution. It’s part of the solution, but the basic condition for it is the internal economy. The business environment and the investment climate have to be adequate and good enough for activities to be created and innovation to take place. AB: How much of a factor do you think politics plays in the region?MN: It plays a lot. To improve the investment climate and to be export oriented, requires major reforms. It’s not simple and for these reforms to happen there needs to be consensus within the countries and for the consensus to happen you need to have good political development, openness, the stakeholders in the countries need to participate in the dialogue, in the decision making and in the framing of the development strategy. Regional stability is also very important.AB: When you look at the region, does anything make you optimistic?MN: What I see are countries that are trying to deal with those issues at different speeds with different [levels] of determination. There is a lot that is happening but more needs to happen. It’s important that the countries of the region focus on the reform agenda. If they focus on job creation, that will help a lot, and make young people optimistic and look at the future in a positive way. If you create these dynamics, then you are going forward, but if you don’t then there may be risks.