Ten years of competitiveness in the Arab world
The past decade opened with the collapse of the financial sector in the United States and other advanced economies, followed by a sharp decline in global trade, 10 years of extremely lax monetary policies, and slow economic and productivity growth across the globe. Oil prices reflected the uncertainty of the crisis as well as the long-term changes in both the supply (the shale-oil revolution in North America) and the demand (the shift toward renewable energies) of the market. The quotation of one barrel spiked to an average of over US$94 in 2008, dropped to US$64 the following year, bounced back to US$90 in 2012 and stayed above that mark until 2014, before falling again to US$46 in 2016. Prices partially recovered over the course of 2017 thanks to production cuts in some of the main exporting countries, and reached above US$60 per barrel at the beginning of 2018.
Figure 3 shows how the gap in competitiveness between resource-rich and resource-poor economies reached its maximum when oil prices were at their peak, between 2011 and 2013, to shrink again in recent years as macroeconomic conditions converged with spillovers on investment and on many other competitiveness factors. Although lower oil prices had a negative effect on resource-rich countries’ competitiveness, they had a positive impact on the performance of resource-poor economies, as explained below.
Changing food, energy, and commodities prices played a key role for resource-poor economies that are dependent on imports of food and, in many cases, subsidize food and energy. Lower food and energy prices improved the fiscal situations of these countries. High food prices contributed to triggering protests and political instability, which led to uncertainty and economic slowdowns in many countries in the region. The most resilient ones have navigated through this period with only minor consequences or none at all, but in many cases support from international institutions was provided to protect the stability of the economies. Morocco received a 24-month precautionary loan—a loan that could be used if needed—of US$6.2 billion from the International Monetary Fund (IMF) in 2012. This precautionary loan was renewed twice (in 2014 and 2016, but for smaller amounts) and, while it served to secure public finances, it was never actually drawn on by the government. Also in 2012, Jordan received a precautionary loan of US$2 billion from the IMF, and more recently—in 2016—a smaller financing of US$700 million through the Extended Fund Facility (EFF), which was only partially used. Egypt was also supported in 2016 through the EFF with a three-year US$12 billion loan, and Tunisia requested a Stand-By Arrangement of US$1.7 billion in 2013.2
Although it has served to moderate the gap among countries in the region, the fall in oil prices has widened differences between Organisation of Economic Co-operation and Development (OECD) members and resource-rich economies of the Gulf. These differences were smallest in 2011 but are now at levels similar to those of 2008 (Figure 4).3 We observe a comparable trend for the Arab world as a whole.
Lower prices for oil and gas imports have benefitted resource-poor countries in the short term but not significantly improved their macroeconomic performance in the long term because additional challenges have emerged. On one hand, the reduction in employment opportunities and real salaries in the Gulf Cooperation Council (GCC) countries (the result of slower growth and increased taxes to offset the fall in oil revenues) has reduced the flow of remittances into the rest of the region as well as lessening import volumes from neighboring countries. For example, in 2014, Jordanian workers abroad sent back home savings equivalent to 10.3 percent of the country’s GDP, of which almost half (4 percent of GDP) came from Saudi Arabia.4 On the other hand, countries such as Jordan and Lebanon (and to a lesser extent Egypt) have had to accommodate large inflows of refugees from Syria and other neighboring countries in recent years, with large implications for their fiscal budgets. The improvement in competitiveness of the past two years shown in Figure 4 is therefore mostly attributable to better infrastructure and technological readiness.
Figure 5 shows the comparative and relative strengths of the Arab world in 2007 and 2017, as well as the increase or decrease (delta) in score across the 12 pillars of competitiveness over the same decade. The comparative strength measures the difference in percentage between the Arab world and the OECD averages, while the relative strength measures the percentage difference for the Arab world between the pillar’s observed contribution to competitiveness and its expected contribution, in light of the countries’ stage of development.
The macroeconomic environment and labor market efficiency are the only areas where the gap between the Arab countries and the OECD economies has widened over the past decade. This pattern is constant across both subgroups and highlights some of the key challenges that the region will need to face in order to develop in a sustainable and inclusive way in the near future. In the first case, the sharp and prolonged fall in oil prices is prompting resource-rich and resource-poor countries to profoundly rethink their fiscal policies, cutting subsidies and introducing standard forms of taxation such as the value-added tax (VAT). In the second case, the result is mostly driven by the Gulf economies and other resource-rich countries in the region, which have been able to postpone reforming their labor markets thanks to the conspicuous resources that the oil and gas industry was providing.
Financial market development is the only other driver of competitiveness that has deteriorated in the region over the past decade. However, the consequences of the global financial crisis were less acute in the Arab world than in most developed countries and, on average, the gap between the OECD and these countries in financial market development shrank during this period.
Infrastructure and technological readiness used to be among the region’s relative weaknesses; they are now relative strengths. They are also the factors where the distance from the OECD was shortened the most. When it comes to technological readiness, growth over the past decade is a trend that occurred globally, but the Arab countries experienced on average the fastest improvement in the world, with an increase in pillar score of 1.15 points.
In spite of the improvements that allowed the region to reduce its gap with respect to developed countries, innovation remains the biggest challenge for the Arab world in relative terms. Comparing the innovation and technological readiness performances highlights the fact that the investments and efforts made in past years to improve connectivity and digital uptake have paid off and the region, especially its most-advanced economies, is now ready to generate more innovation domestically.5
Over the past decade, GCC countries have led the Arab world in investing heavily in infrastructure and technology in order to diversify their economies and create the conditions for more innovation-driven and high-value-added businesses (Figure 5b). In 2017, in spite of the decrease in oil revenues, the total value of projects either in the planning stage or in the delivery stage across the GCC amounted to US$2.7 trillion.
Unsurprisingly, the fall in oil prices has hit this group of countries the most, with a decrease in the macroeconomic environment pillar score of almost one full point. Most economies had a sufficient buffer to navigate through the crisis and calibrate fiscal and financial reforms to stabilize public finances and the economy in general. A stable macroeconomic environment remains one of the relative strengths of these countries, although they lost ground with respect to the OECD.
Reinforced by a stable economic outlook, institutions in GCC countries are the only ones in the region to have improved over the past decade, in line with the overall progress in competitiveness. This was driven exclusively by improved perceptions of public institutions, while the perceived ethics and accountability of the private sector have stalled or decreased, respectively. In particular, the strength of investor protection—measured by the World Bank’s Doing Business indicators—decreased significantly after 2011, and GCC countries, while they are the best performers within the Arab world, are on average among the worst globally, followed only by Sub-Saharan Africa.6
Boosting the accountability of the private sector will also be a key determinant for deepening the financial market and improving its efficiency. Over the past decade, some of the oil-rich economies in the region have experienced investment booms and subsequent slow-downs, which often caused a misallocation of resources. The efficiency of their financial markets has been affected by the 2008 financial crisis—though less than in many developed countries—as well as by the real estate bubble and more recently the decrease in oil prices. A relative strength of these countries in 2007, the financial market is today their third biggest weakness, after innovation and the functioning of the labor market.
A more inclusive labor market and a better education and training system are key to ensuring that talent is adequately rewarded and businesses can find workers with the set of skills they are looking for and high-quality graduates. At only half the rate of men, the participation of women in the labor market is better than in the rest of the Arab world, but still far from the levels of OECD countries.
A mismatch between the competences developed by local students and those demanded by the private sector persists, due both to the low attractiveness of vocational training programs and to the quality of academic education, in spite of recent improvements and efforts made to attract top international universities to the region. These factors weigh heavily on the countries’ capacity to create thriving innovation ecosystems. Governments’ focus in the past years has been stronger on infrastructure and information and communication technology (ICT) connectivity, with considerable progress being made in both areas. However, innovation performance has not followed automatically, and it remains the biggest challenge for the most-advanced economies in the Arab world.
The dynamics of the past 10 years for resource-poor countries has been somewhat different from that of GCC and other oil-exporting economies in the Arab world. Their competitiveness has stagnated throughout most of decade, with a small recovery made only in the last year, but overall these countries stood still with respect to both the OECD and their oil-exporting neighbors. There were significant improvements only in five pillars out of twelve: infrastructure, health and primary education, goods market efficiency, technological readiness, and market size (Figure 5c).
Infrastructure has become one of the relative strengths of these countries, with large improvements especially in terms of seaport connectivity. In Jordan, the capacity of the container terminal in Aqaba was doubled in 2013 and additional projects are underway for general cargo. Egypt inaugurated the new Suez Canal in 2015 and invested in the expansion and modernization of both the Suez and Port Said ports. In Morocco, the Tangier-Med port, opened in 2007, has been attracting growing traffic and is now one of the main gateways to the Mediterranean; the Tangier Med II expansion project scheduled to be completed in 2019 will triple its capacity and make it one of the largest ports in the world. Morocco has also been investing in its railroad infrastructure, with the first high-speed train connection of the African continent scheduled for inauguration in 2018.
Technological readiness has also improved rapidly, partially reducing the gap with the OECD economies, but at a slower pace than in the GCC and other oil-exporting countries in the region. In parallel, these countries’ innovation and business sophistication performances were disappointing, with no improvements over the decade and, in the case of innovation, a growing gap with respect to both OECD and GCC countries. Innovation also remains the biggest relative weakness of the region.
Health and primary education, goods market efficiency, and market size are, on average, areas of relative strength for the resource-poor countries in the region.7 The perceived quality of public and private institutions is also a positive factor, although over the past decade this has slightly deteriorated in Jordan and Egypt and improved in Morocco.
The macroeconomic environment in these countries has experienced a smaller deterioration than in oil-driven economies but, starting from a less comfortable position 10 years ago, it is now on average among their biggest weaknesses in relative terms. Egypt had to face higher inflation and fiscal budget deficits together with a worsening of country credit rating. Jordan experienced a rise in public debt, partly as a consequence of the support given to the millions of refugees it is currently hosting from neighboring countries, and its balance of payments was negatively impacted by the decrease in remittances from the Gulf economies as well as the slowdown in tourism. Morocco showed significantly different dynamics and benefitted from greater stability, reducing debt and inflation and increasing national savings.
Finally, labor market efficiency in this group remains hindered by a number of rigidities and cultural factors that exclude large portions of women and youth. The participation of women in the labor market is less than one-third the participation of men, the worst of both subgroups of countries in the Arab world. This keeps practically half of the talent pool available in the countries out of the economic system, in spite of the increasing participation of women in the academic system, which has been at par with that of men in the past decade. Historically one of the weaknesses of these countries, labor market efficiency has further deteriorated over the past decade and exhibits a growing gap with respect to OECD economies—making it now these countries’ second biggest relative weakness after innovation.