Regional highlights: Middle East and North Africa
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The Middle East and North Africa region continues to experience significant instability in geopolitical and economic terms as spillover effects from the conflicts in Libya, Syria, and Yemen are undermining economic progress in the entire region.
Instability is also being created by the uncertain future of energy prices after recent falls, which affect the region’s countries in different ways. Oil-exporting countries—which include Algeria (87th), Bahrain (48th), the Islamic Republic of Iran (76th), Kuwait (38th), Oman (66th), Qatar (18th), Saudi Arabia (29th), the United Arab Emirates (16th), and Yemen (138th)—are experiencing lower growth, higher fiscal deficits, and rising concerns about unemployment. Growth in Gulf Cooperation Council (GCC) economies averaged 5.2 percent between 2000 and 2012, but fell to 2.5 percent in 2015. The forecast for 2016 is also 2.5 percent,16 and rising oil supplies are expected to keep prices low and limit growth expectations for the coming years.
With a growing youth population, creating employment opportunities in the private sector is crucial to ensuring a prosperous future: the United Nations estimates that 3.8 million people will enter the labor force in the region by 2021.17 This creates pressure for structural economic reform in order to diversify and increase productivity.
Although the region’s oil-exporting countries are diverse in terms of their competitiveness (see Figure 17), two commonalities can be observed. First, despite recent privatization efforts, most national economies remain state-dominated (in particular in the extractive industries) and not sufficiently diversified. In Saudi Arabia, for example, the state’s stake in state-owned enterprises amounts to 19.8 percent of GDP; in the UAE, this is 21.8 percent; and in Qatar, 23.1 percent. The oil sector remains predominant in many countries, with the oil GDP as share of total GDP ranging from 19.5 percent in Yemen to 62.9 percent in Kuwait.18 Competition remains constrained throughout the region: the level of domestic competition and openness to foreign trade and investment remains below OECD levels for most countries. Efficiency and productivity could be improved by continued privatization, reducing regulatory barriers to entry for domestic companies, and making business environments more welcoming for foreign direct investment and more conducive to the growth of small- and medium-sizes enterprises.
Second, as the Fourth Industrial Revolution gathers pace, putting in place innovation, technological readiness, and health and primary education will be increasingly important. Oil-exporting countries in the Middle East and North Africa region have room for improvement in these areas, which should go hand in hand with diversification away from the energy sector. The most competitive economy in this group, the United Arab Emirates, is also the most diversified and has made great strides toward improving technological readiness and innovation since 2011, moving from 30th to 18th and from 28th to 25th on the related pillars of the GCI, respectively.
Growth in the region’s oil-importing Arab economies—Egypt (GCI rank of 115th), Jordan (63rd), Lebanon (101st), Morocco (70th), and Tunisia (95th)—has also slowed, down from 5.4 percent on average between 2000 and 2012 to 1.9 percent in 2015, often as a result of spillover effects from regional conflict.19 Key priorities for these countries continue to be fostering employment and making economies more inclusive to meet the population’s demands for higher living standards and economic opportunities. This will require reforms that aim to strengthen the private sector: promoting competition, reducing red tape, and making labor markets more flexible are key challenges across all countries. The drop in oil prices creates a window of opportunity to tackle long-standing energy subsidies, which would allow for more competitiveness-enhancing investments and help to stabilize the macroeconomic environment, which remains strained in most countries. Although most of the oil-importing countries in the region are facing declining or stagnating competitiveness, Israel (24th) improves by three positions as it continues to build on its positioning as one of the most innovative economies in the world (2nd).