Institutional Change and Development in the Middle East and North Africa

1. Institutional Change andDevelopment in the Middle East and North Africa Mustapha K. NabliSenior Advisor, World Bank Inaugural Lecture CREMed Universitat Pompeu Fabra (UPF) Barcelona, 7 November 2008

2. Three main messages about MENA • A development path in MENA more complex than commonly recognized with major social and human development achievements but daunting new labor market and environmental challenges • The most critical challenge of institutional change: moving from an old development model to a new and more adapted model has proven very difficult • Root causes are to be found in the political economy of institutional change

3. OUTLINE I- Background and Long Run Development Outcomes II- A major challenge of institutional change III- Challenge #1: Employment and Private Sector Development IV. Challenge #2: Education V. Challenge #3: Water VI. Political Economy

4. I. Background and Long Run Development Outcomes • Background: a diverse region • Poverty reduction and human development : major gains • Economic growth: mediocre, volatile and hesitant

5. (1) A diverse region: Three Major Country Groupings • Resource-poor, labor-abundant (RPLA) or emerging economies: Egypt, Jordan, Lebanon, Morocco, Tunisia, West Bank and Gaza Population: 124 Mill. GDP: $US 225 billions • Resource-rich, labor-abundant (RRLA) or transition economies: Algeria, Iran, Iraq, Syria, Yemen Population: 168 Mill. GDP: $US 400 billions • Resource-rich, labor-importing (RRLI) or rich economies: GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE) +Libya Population: 40 Mill. GDP: $US 666 billions

6. GDP per capita $ 2005

7. GDP per capita $ PPP 2005

8. (2) Dramatic poverty reduction and low absolute poverty

9. Huge progress in terms of health indicators— Fertility, infant mortality, life expectancy Source: World Development Indicators

10. GDP per capita growth I MENA and other regions (percent) 8 7 6 5 1970s 4 1980s 3 1990s 2 2000s 1 0 East Asia & Europe & Latin America South Asia Sub-Saharan Middle East & -1 Pacific Central Asia & Caribbean Africa North Africa -2 (3) Economic growth: mediocre and volatile

11. GDP per capita growth in the MENA region 6 4 2 1970s 1980s 0 1990s RRLI RRLA RPLA 2000s -2 -4 -6 …and varied across sub-regions and countries

12. II. A most critical challenge of institutional change • Started with an old development model based on an unwritten social contract, with central role of the state • Major achievements but breaks down in the 1980s • Move to a new development model with different role of the state and central role for individuals, markets, private sector • Changes in many policies but failure to see needed institutional change

13. Old social contract and central role of the state—1950s to 1970s Institutional and policy characteristics: • Widespread state ownership of assets and limited role of the private sector • Preference for the state and state planning rather than markets in managing economies • Heavy inward orientation • Strong redistribution and very active social agenda, with state provision of public services and safety nets • Limited political voice and participation • Dominant role of security and military establishments

14. Major gains but crises and collapse of old social contract- mid-1980s • Major gains as we will see later • First signs of difficulties—macroeconomic crises in the 1970s/Tunisia, Egypt • Generalized crises in the 1980s and growth bust by the mid-1980s • Macro and structural adjustment programs since the early 1980s

15. Slow and hesitant transformation to a new social contract—since the 1980s • From public sector to private sector driven: Emergence of private sector • More open economies: slow external liberalization • Towards more liberalization and deregulation of markets • More diversified economies • Continuation of many old redistributive policies (subsidies) • Continued limited political voice and participation

16. Failure to meet many critical challenges requires deeper institutional change • Employment challenge • Higher expectations by a younger and more educated population • Pressures of globalization • Critical water and environmental challenges

17. Critical institutions which need to change • Transition to institutions with less prevalence of “personal exchange” both in the political and economic domains • Economic institutions with strong private property rights, less rent-seeking, more open markets, rules-based government regulation and intervention • Political institutions with greater voice and accountability

18. Three case studies to illustrate Three recent major flagship reports by the World Bank: • Policies, Institutions and Credibility of Market Governance in MENA: Breaking through Barriers of Private-Led growth (forthcoming) • The Road Not Traveled: Education Reform in the MENA Region (2008) • Making the Most of Scarcity : Accountability for Better Water Management Results in the Middle East and North Africa(2007)

19. III. Challenge #1: Employment and Private Sector Development • Slow/delayed demographic transition, surge in labor force growth, and job creation as the most critical challenge • Private sector development is the key to job creation and facing the labor market pressures • Private sector has not been up to the challenge yet

20. Demographics: surge in population growth followed by steep decline

21. Dynamics of Labor Supply in MENA Countries, 1950-2020 (percent) - NEW 66 4 Participation rate (end of decade, left axis) 64 Working age population 3.5 growth (right axis) 62 Labor force growth (right axis) 60 3 58 2.5 Average annual growth Participation rate (percent) 56 54 2 52 1.5 50 48 1 1950s 1960s 1970s 1980s 1990s 2000s 2010s Source: ILO 1996 (pre-1980), ILO 2005. … a delayed demographic transition leading to major surge in labor force growth in MENA …

22. Three major periods

23. Recent improvements in labor markets, MENA 2000-2005Includes: Algeria, Bahrain, Egypt, Iran, Jordan, Kuwait, Morocco, Qatar, Saudi Arabia, Tunisia, United Arab Emirates, West Bank and Gaza.

24. 16 2000 2005 14.3 14 12.2 11.3 12 10.8 10.3 9.9 10 8 6 4 2 0 MENA Excl Alg Excl Alg, Eg, Irn Unemployment rates have fallen but remain high

25. Need to create better quality jobs

26. …at the same timelabor force growth will continue to be high for the next 15-20 years (new numbers)

27. Private Sector is Key for Job Creation • Challenge of : Quantity of jobs, Quality, and Flexibility and Adaptation to globalization • But performance has been weak • Progress on reforms mixed • Credibility of policies and reforms and accountability remain critical issues

28. 1985-89 1985-89 Middle-East Middle-East 1990-94 1990-94 North Africa North Africa 1995-99 1995-99 2000-04 2000-04 2005-07 2005-07 Sub-Saharan Sub-Saharan Africa Africa Latin America Latin America & Caribbean & Caribbean Europe and Europe and Central Asia Central Asia South Asia South Asia East Asia East Asia 0% 0% 5% 5% 10% 10% 15% 15% 20% 20% 25% 25% 30% 30% Private Sector Performance (1) weak compared to other regions * Or most recent available year.

29. Private Investment Growth (per annum - weighted average) 14% 13.14% 12% 10% 8.62% 8% 6% 3.66% 4% 3.01% 2.80% 2.47% 2% 0% 1984-06 1981-05 1985-05 1995-04 1982-04 1980-03 EAP (4) SAS (4) SSA (30) ECA (18) MENA (6) LAC (14) Private Sector Performance (2) low growth of private investment

30. Figure 2. Private Investment in MENA 19 17 15 13 percent of GDP 11 9 7 5 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 RPLA RRLA RRLI MENA Private Sector Performance (3) varied across sub-groups of countries

31. Progress on Reforms for Private Sector Development (1) • during the last 20-25 years efforts to increase the role of the private sector in the economies of the region • all countries of the region undertook to reform their policies and institutions and made progress in shifting their economic systems to be more private sector market driven. • progress with reform has been mixed and varied significantly across areas of reform, and across individual countries and country groupings.

32. Progress on Reforms for Private Sector Development (2) Summary

33. What are the possible explanations for this lack of progress and weak response? • Incomplete reform agenda; need just to do more? Need to overcome resistance of special interests? • Long lags in response; just wait? • More fundamental institutional problems? As suggested by some pieces of evidence to follow.

34. As evidenced by the lack of trust between public and private sectors …

35. …the concerns of the private sector about policy uncertainty ….

36. …and the negative perceptions about the consistency and predictability in the application of rules and regulations.

37. Reforms and progress of private sector hinge on major institutional changes • Rules based and less discretion in the business environment • Less room for rent-seeking and more for innovation and entre • Greater credibility of commitment to respect of property rights and respect of rules and regulations

38. IV. Education • Another major challenge linked to the demographics and employment challenge • Received high priority by governments and major progress in terms of access • But problems with quality and weak results in terms of efficiency • Reforms hinge on progress in accountabilities

39. Major gains in access to education Source: Statistical Appendix Source: Barro and Lee (2000)

40. Math Science (1998) Good achievements in terms of the quality of human capital TIMSS score (math and science) 1998 and 2003 Source: TIMSS 2003 Highlights Source: UNESCO Statistical Yearbook 1998 and UIS database.

41. But very low economic returns Source: Source: Allen, 2001; CRESUR, 2004.

42. Despite very heavy investments by governments (and private sector). Source: World Development Indicators, UNESCO Institute for Statistics, UNICEF, National Sources and Author’s Calculations, Source: World Development Indicators

43. ..and a host of other problems going forward • MENA countries need to deal with a youth bulge not seen elsewhere • The challenge of globalization and the knowledge economy • The challenge of financing education

44. Reforming Incentives and Institutions • of Accountability is key Based on experience in the region and elsewhere three key factors: • Successful reformers have better engineering and morealigned incentives. • The better performers engage the private sector in providing education to a larger extent, especially at higher levels of instruction • Countries with higherpublic accountability produced better education outcomes

45. Countries need to consider the following several critical reform perspectives • From Engineering Inputs to Engineering for Results • Promoting More and “Smarter” Non public Provision of Education • From Hierarchical Control to Incentive-Compatible Contracts for the Teachers • Greater Accountability to the State versus Accountability to the Public • Greater School Autonomy and Accountability • Effective Information Dissemination Systems to Promote Accountability • Quality Assurance Mechanisms • Promoting Reforms in Migration and Labor Polices to Maximize Returns on Education

46. V. Water • One of the most critical challenges in the region • Becoming even more critical with impact of climate change • Meeting the challenges illustrates the role of institutions and institutional change

47. Australia & New Zealand Latin America & Caribbean North America Europe & Central Asia Sub-Saharan Africa East Asia & Pacific (incl. Japan&Koreas) Western Europe South Asia Middle East & North Africa 0 10 20 30 40 1000 m^3 / year Situation is already critical: lowest water availability in the world Annual renewable water resources per capita

48. The region has already stored almost all of the water it can store Proportion of regional surface freshwater resources stored in reservoirs

49. Deterioration of water quality is already costly

50. Growing population will recue per capita water availability by half by 2050 and climate change likely to reduce rainfall by at least 20%