Economic Development of Arab Countries (Review Note)

THIS BOOK*(1) consists of papers presented by different authors at a seminar held in Bahrain, February 1-3, 1993. The papersdiscuss issues related to economic development of the Arab countries in the nineties. In each paper the author outlines the keyproblems affecting Arab countries, followed by recommendations. Comments by discussants are appended to the papers. It isgenerally felt that the issues are of great importance for Arab countries and thoroughly discussed.From the outset the authors caution against generalizations. Differences in natural resources among Arab countries, levels of percapita income, development levels, and the extent to which they follow different development strategies militate againstover-generalization.Arab economic development is largely determined by what happens in the oil markets. Even those countries that do not produce oilare affected by oil via income derived from worker remittances, development assistance, investment and trade.In part one of the book the editor gives an overview of the basic issues covered in papers. In part two the authors stress thestructural reforms necessary to cope with the changing global environment. These include rationalization and restructuring publicsector enterprises to enhance their competitiveness and liberalise production and investment regulations. Fiscal sector reformrequires improving the budgetary revenue and expenditure to be more elastic and increase developmental impact. This can beachieved by tax reform and broadening the domestic tax base and reducing unproductive expenditure e.g. wages and salaries.Financial sector reform includes improving the mobilization and allocation of loanable funds. The reform challenges thereforeinclude rationalizing the rates of return structure, deepening money and capital markets in the formal sector, and strengtheningprudential regulation and supervision. Other measures involve price liberalization and putting an end to administered pricing,enhancing the institutional framework for private investment, rationalizing the external trade and payments system, and enhancingthe inflow of foreign direct investment. Given the relatively low-income status of some Arab countries, it has been referred to theimportance of poverty alleviation and environmental sustainability.In the discussion it was pointed out that the privatization process, for example

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was hampered by lack of expertise on the techniques of evaluating assets, financial restructuring of heavily indebted publiccompanies, and on how to deal effectively and equitably with the problem of redundant labour. At the political level it was arguedthat there was need to address opposition from groups whose interests were adversely affected by privatization. It was also notedthat reform programmes needed to be strengthened through poverty alleviation measures, better targeting of food subsidies, andthe establishment of special funds provided with sufficient resources to help the most vulnerable and low-income groups. It wasfurther pointed out that developing countries were being pressured to liberalize their trade regimes while industrial countries able tobear the burden of adjustment were increasing a protection. Attention was also given to the question of the role of the state in, amarket-based economy. The fear was expressed that liberalization and privatization were sometimes construed to mean a virtualabsence of the state from the economic arena.Part three deals with the issue of Foreign Direct Investment (FDI). It has been pointed out that despite the increasing importance ofFDI for developing countries, Arab countries have not been successful in attracting FDI. Different factors affect foreign investmentin different directions. While economic policies might be attractive, the political situation might not, and even if both are positive,lack of economic resources might discourage the inflow of capital. It is important to guarantee and encourage the market-basedeconomy, increase the role of the private sector, encourage exports of non-traditional goods and services, improve the training andefficiency of the domestic labour force, provide adequate infrastructure, and pursue all these policies in a steady, stable andpredictable manner.Part four discusses investment policies and major determinants of capital flows to Arab Countries. In addition to FDI, it deals withportfolio investment and long and short-term capital flows. The brief analysis of recent development in Arab capital flows revealsthe weakness of Arab financial intermediation and the structural imbalance in the nature of Arab capital flows, as well as their size,composition, direction, and geographic distribution. The three revolutions in the world financial markets-deregulation,internationalization, and innovation - have not as yet had any significant positive impact on Arab capital markets. As a resultinternational financial markets continue to offer more attractive investment opportunities to Arab savers, thereby reducingintra-Arab capital flows. With a business environment burdened by administrative restrictions and price distortions, andunattractive financial market intermediation, there is little room for channelling Arab or foreign capital into direct or portfolioinvestment opportunities in most Arab countries. Arab private capital is thought to be frequently driven by speculative motives inthe financial and real estate markets. It has not been able to flow as freely within the Arab region. It was suggested therefore thatthe major challenge for the region during the 1990s is the development and integration of Arab financial markets with a clearstrategic objective to foster and facilitate the free movement of

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Arab capital between Arab countries. This challenge can be achieved by policies conducive to a stable macro-economicfoundation, healthy financial structure, and improved investment environment.Paper five analyses inter-Arab labour movements. It argues that inter-Arab labour migration has played an important role in theeconomic development of both labour deficit and labour surplus countries. For the former it enabled rapid infrastructuraldevelopment and institutional building at all levels, for the latter it provided foreign exchange earnings in the form of remittances.Migration increased mainly after 1973 and reflected developments in oil markets. Despite the role played by inter-Arab labourmovements in the past two decades, it is far from certain that this will continue on the same scale in the future. There are long-termtrends that are likely to have a negative impact on inter-Arab labour movements. These include: the decline in oil revenues, most oflarge-scale construction projects which are highly labour intensive in labour-receiving countries have been completed; conflict andwar; preference of Asian labour over Arab labour due to wage differentials; and assertion of national identity in labour-receivingcountries. In spite of al these factors, inter-Arab labour movement will continue to play an important role in the economicdevelopment of both labour-surplus and labour-deficit countries. However, this will depend on oil revenues and the percentage ofthese revenues allocated to development activities; security and political stability in the labour-receiving countries (the Gulfregion); peace between Arabs and Israelis; and policies of the labour-receiving countries towards the nationality composition ofexpatriate labour.Paper six is concerned with Environmental Policies and Sustainable Development in the Arab World - the relationship betweenenvironment and development. The nature and policy implications of this relationship and its relevance to the Arab world areexplored. The author argues that signs of irreparable damage to the environment have caused a great concern over the environmentover the past two decades. It was argued that environment should be placed on an equal footing with manufactured resources andshould not be treated as a free resource. Its exploitation should be based on full and prior knowledge of real cost to society. It waspointed out that market prices did not reflect the social costs of exploiting non-renewable resources.This is of particular importance to Arab countries, where a major part of national income is derived from non-renewable resources,oil and natural gas. Environmental policy planning should be based on the "polluter pays" principle to bring private costs in linewith social costs. The greatest threat to environment are population growth and poverty. A larger population means a greatervolume of economic activity, a more intensive demand for land and other natural resources, higher levels of air and water pollution.Poverty is perhaps the worst enemy of the environment. Poor families often lack the resources to avoid degrading theirenvironment. Poverty alleviation is a prerequisite for sustainable development.The issue of the conflict between the regulator and regulated was also

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raised. As a regulator, the government issues laws and regulations to prevent and control pollution. However, its own publiccompanies are often the first to break the laws and ignore standards. In this respect there is conflict of interests between thegovernment as producer and as protector of the environment. The gap between intentions and performance needs to be attackedon all fronts. There should be a stronger separation between the regulator and the regulated, better information about the high costof environmental degradation, a stronger commitment to environmental protection, more realistic standards together withbetter-equipped and more effective enforcement agencies, and greater co-operation at both the regional and international levels.There is also a paper on Human Development in the Middle East and North Africa (MENA). It covers only Algeria, Egypt, Jordan,Tunisia, Yemen, and occasionally Iraq, Syria, Lebanon, and Libya. Human development is used to mean improvement in the qualityof the population. Education is however stressed as the most important factor in this respect. The author argues that the quality ofhuman capital is fundamental to both efficiency and equity. However, the development of human resources is greatly influenced bydemographic trends; the combination of a high population growth and high dependency ratios places a heavy burden on theprovision of basic needs.It is pointed out that MENA countries invest relatively heavily in the development of human resources but reap only modestreturns. There is also a great disparity between expenditure on primary and tertiary education in those countries. In addition, thereare imbalances with respect to the distribution of facilities between rural and urban areas, capital and recurrent expenditure, andsalaries and equipment. Also some still have a large primary school gender gap. There is also a wide gap in the fulfilment of basicneeds and the social safety but the resources needed to fund such objectives exceed by far the financial capacity of the State.These countries are also characterized by heavy involvement of the State in the provision of human development services. Theimprovement in the conditions of human development will largely depend on availability of resources, better allocation ofresources, wider application of the cost recovery principle, a precise definition of target groups, reducing military expenditure, theimplementation of economic reform to ensure more efficient utilization of resources, and enhancing the role of the private sector.The final paper examines the effects of the European economic integration on Arab countries. The European Community (EC) is of

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special importance for the growth and development of Arab countries. This is particularly so for the Maghreb countries where theshare of the community in their export structure is more than 50 per cent. Other Arab countries also depend on the European marketfor about 30 per cent of their exports. However, the position of Arab countries as importers from the EC is different. The share ofthe Arab market in the total experts of the EC averaged about 12,5 per cent for 1988-91. Excluding oil, the share of the Arabcountries in the total imports of the EC would be a modest 2,5 per cent. The paper attempts to analyze the possible

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effects of recent developments in the EC on Arab countries. This has been more difficult assessing because of a process ofdeepening integration (the single market program or EC-1992) and also the development in Eastern and Central Europe. In addition,the relationship between Arab countries and the EC is defined by special preferential arrangements. These agreements offered freeaccess to EC markets for manufactured goods and some special provisions for selected agricultural products on a nonreciprocalbasis, plus financial aid and improved social security for Maghreb and Mashreq workers in the Community. Considering all thesefactors, the author concluded that (1) during the three years preceding EC-1992 the Arab countries failed to capture a larger sharein EC imports. The poor performance of the Arab countries can be explained by the fact that the trade structure of Portugal, Greeceand Spain is similar to that of Arab suppliers, and trade performance was adversely affected by macro-economic distortions andimbalances, (2) Arab countries have failed up to now to attract substantial capital from EC member countries, (3) migration willprobably become the most controversial issue in the Euro-Arab dialogue if the single market attracts more migrants than the past.Especially the East and Central European exporters of migrants still attract more political interest in EC circles than do the Arabcountries, and finally integration widening toward Eastern and Central Europe puts all Arab countries in a less favourable positionwith respect to access to EC markets. Taking these conditions into consideration, the paper called for EC assistance (open itsmarket multilaterally, expand adjustment assistance, and refrain from any policy that would give rise to polarization effects at itssouthern borders) to restore macro-economic stability in Arab countries.

M.M. El ToukhyDepartment of Economics,University of NamibiaWindhoek

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Endnotes1Review of Economic Development of the Arab Countries, Selected Issues. ME, Publication Services, Washington, D.C. 1993,edited by Said El-Nagar.

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