Institutional Change and
Development in the Middle East
and North Africa
Mustapha K. Nabli
Senior Advisor, World Bank
Inaugural Lecture
CREMed
Universitat Pompeu Fabra (UPF)
Barcelona, 7 November 2008
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
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
I. Background and Long Run
Development Outcomes
1.
2.
3.
Background: a diverse region
Poverty reduction and human
development : major gains
Economic growth: mediocre, volatile
and hesitant
(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
GDP per capita $ 2005
RPLA
GDP/Cap $ US
PPP
RRLA
RRLI
RPLA
GDP/Cap. $US
RRLA
RRLI
0
5000
10000
15000
20000
25000
GDP per capita $ PPP 2005
RPLA
Max
RRLA
Average
Min
RRLI
0
20000
40000
60000
80000
(2) Dramatic poverty reduction and
low absolute poverty
% of Poeple living below $1.25 a day
% of People Living Below $2 a day
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
1981 1984 1987 1990 1993 1996 1999 2002 2005
MENA region
All regions
1981 1984 1987 1990 1993 1996 1999 2002 2005
MENA region
All regions
Huge progress in terms of health
indicators— Fertility, infant
mortality, life expectancy
Fertility rate, total (births per
woman)
Life expectancy at birth, total (years)
Mo rt a lit y ra t e , inf a nt ( pe r 1, 0 0 0 liv e
80
birt hs )
7
75
138
6
5
4
East
Asia
Latin
Americ
a
MENA
118
70
Lati n Amer i ca
98
65
MENA
Lat in America
78
60
58
MENA
East Asi a
3
55
East Asia
38
50
18
2
1960 1970 1980 1990 2000 2004
Source: World Development Indicators
1960
1970
1980
1990
2000
2004
45
1960
1970
1980
1990
2000
2004
(3) Economic growth: mediocre and volatile
GDP per capita growth I MENA and other regions
(percent)
8
7
6
5
4
3
2
1
0
-1
-2
1970s
1980s
1990s
2000s
East Asia &
Pacific
Europe &
Central Asia
Latin America
& Caribbean
South Asia
Sub-Saharan
Africa
Middle East &
North Africa
…and varied across sub-regions and
countries
GDP per capita growth in the MENA region
6
4
2
1970s
1980s
0
RRLI
-2
-4
-6
RRLA
RPLA
1990s
2000s
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
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
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
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
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
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
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:

Making the Most of Scarcity :
Education Reform in the MENA Region (2008)
Accountability for Better Water Management
Results in the Middle East and North Africa
(2007)
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
Demographics: surge in population
growth followed by steep decline
Population Trends in MENA, 1950-2050
3.5
600.0
Population
3
500.0
2.5
400.0
2
300.0
1.5
200.0
1
100.0
0.5
0
0.0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Population (in millions)
Average Annual Growth (percent)
Population grow th
… a delayed demographic transition
leading to major surge in labor force
growth in MENA …
Dynamics of Labor Supply in MENA Countries, 1950-2020 (percent) - NEW
4
64
Participation rate (end of
decade, left axis)
62
Working age population
growth (right axis)
60
Labor force growth
(right axis)
3.5
3
58
2.5
56
54
2
52
1.5
50
48
1
1950s
1960s
Source: ILO 1996 (pre-1980), ILO 2005.
1970s
1980s
1990s
2000s
2010s
Average annual growth
Participation rate (percent)
66
Three major periods
Period I
1960s to
Mid-1980s
Period II
Mid-1980s to
Early-2000s
Period III
Since 2000s
Labor force
growth
Low
High
High
Economic growth
High
Low
High
Migration
High
Low
Low
Employment
creation
Large in
public
Low
High in
private
Unemployment
Low
High (youth, Lower
female)
Recent improvements in labor
markets, MENA 2000-2005
Includes: Algeria, Bahrain, Egypt, Iran, Jordan, Kuwait, Morocco, Qatar, Saudi Arabia, Tunisia, United
Arab Emirates, West Bank and Gaza.
6.0
5.1
5.0
4.5
3.6
4.0
3.0
2.8
2.0
1.0
0.0
WAP
LF
JOBS
GDP
Unemployment rates have fallen but
remain high
16
2000
14.3
2005
14
12.2
12
10.8
11.3
10.3
10
9.9
8
6
4
2
0
MENA
Excl Alg
Excl Alg, Eg, Irn
Need to create better quality jobs
7
6
Agriculture
Industry
5
Services
Work at home
4
0.1
2.5
3
1.5
2
1
0.8
2.1
0.9
3.6
0.8
0.5
1.9
1.9
0.6
0.3
-1.4
1.4
1.9
0.4
0.4
0
-1
2.5
1.4
0.0
ALG
JOR
EGY
IRN
TUN
MOR
WBG
-2
…at the same time labor force
growth will continue to be high for
the next 15-20 years (new numbers)
4.0
3.5
% growth per year
3.0
SSA
MENA
2.5
2.0
SA
LAC
1.5
1.0
0.5
EAP
0.0
ECA
-0.5
2000-2005
2005-2010
2010-2020
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
Private Sector Performance (1) weak
compared to other regions
1985-89
Middle-East
North Africa
1990-94
1995-99
2000-04
2005-07
Sub-Saharan
Africa
Latin America
& Caribbean
Europe and
Central Asia
South Asia
East Asia
* Or most recent available year.
0%
5%
10%
15%
20%
25%
30%
Private Sector Performance (2) low
growth of private investment
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
EAP (4)
1981-05
SAS (4)
1985-05
SSA (30)
1995-04
ECA (18)
1982-04
MENA (6)
1980-03
LAC (14)
Private Sector Performance (3)
varied across sub-groups of
countries
Figure 2. Private Investment in MENA
19
percent of GDP
17
15
13
11
9
7
5
1995
1996
1997
1998
1999
RPLA
2000
RRLA
2001
2002
RRLI
2003
MENA
2004
2005
2006
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.
Progress on Reforms for Private
Sector Development (2) Summary
Reform area
Macroeconomic Environment
Resource-poor
Resource-rich
Resource-rich
Labor-abundant
Labor-abundant
Labor-importing
0
+1
+2
-1
+1
(Lebanon: -2)
0
Trade Policies
(Algeria: +1)
0
Regulatory Environment
-1
+2
-2
+2
0
-2
-2
+1
-2
+1
(Jordan: +1,
Egypt: -2)
Financial Sector
+1
( Lebanon: +2)
Weight of public sector
Quality of public
administration
(Egypt: -1)
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.
As evidenced by the lack of trust
between public and private sectors
…
Governments and a private sector that do not trust
each other.
How would you rate the respective roles of the government and the
private sector in your country's development?
5
4.2
3.7
4
Average score
government
respondants
3
2
1
1.3
Average score
private sector
respondants
1.2
0
On the role of the private sector.
On the role of the government.
Source: survey of 103 government officials and 114 private
sector representatives at various conferences (2006/2007).
…the concerns of the private sector
about policy uncertainty ….
Policy uncertainty and the unequal implementation of rules are leading constraints to
businesses
Leading constraints to MENA firms.
(simple average of country's share of firms ranking a constraint as "Major or severe ")
60%
49.8%
50%
46.2%
43.7%
42.5%
35.9%
33.6%
30.7%
30.1%
Skills and
education of
workers
35.9%
Business
licensing/operating
permits
37.2%
40%
30%
20%
10%
Access to land
Tax rates
Tax administration
Regulatory policy
uncertainty
Anti-competitive or
informal practices
Corruption
Access or cost of
financing
Macroeconomic
uncertainty
0%
…and the negative perceptions about
the consistency and predictability in the
application of rules and regulations.
Perceptions about the consistency and predictability of rules and regulations as
they are applied in MENA countries
Interpretations of regulations are consistent and predictable.
(% of respondents disagreeing)
80
60
41.2
42.3
Ye me n
Jordan
57.7
60
Alge ria
Morocco
66.2
66.6
We st Bank
and Gaz a
Le banon
40
21.5
20
0
Saudi
Arabia
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
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
Major gains in access to education
Average Years of Schooling in MENA of the
Population Aged 15 and Above
Gross Enrollment Rates in MENA (19702003)
(%)
100
8
90
Primary
80
7
6
70
5
60
Seco nd ary
50
4
40
3
30
2
20
East Asia
MENA
1
10
0
Latin
America
T ert iary
Source: Statistical Appendix
1970
1980
1990
0
Source: Barro and Lee (2000)
2000
2003
1960
1980
2000
Good achievements in terms of the
quality of human capital
Adult Illite racy Rate s, 1980 and 2003
TIMSS score (math and science)
1998 and 2003
60
Top country
Int'n'l avg.
50
Lebanon
40
Jordan
Iran
2
30
Tunisia
Egypt
20
Bahrain
10
WBG
Morocco
0
MENA
Ea st Asia
1980
2000
La t in Ame ric aSaudi Arabia
0
100
Math
Science (1998)
Source: UNESCO Statistical Yearbook 1998 and UIS
database.
Source: TIMSS 2003 Highlights
200
300
Science
400
Math
500
600
But very low economic returns
Pri vate Rate s of Re tu rn , 1970-1998
(vari ou s ye ars s u bje ct to data avai l abi l i ty)
25
20
15
10
5
0
P rimary
MENA
Source: Source: Allen, 2001; CRESUR, 2004.
Secondary
East Asia
T ert iary
Lat in America
Despite very heavy investments by
governments (and private sector).
Public Expenditure as a % of GDP
6
5
Public Spending as a % of Government Budget,
most recent year during 2000-2004
35
MENA
30
25
Latin
America
4
3
20
15
East Asia
10
5
2
0
Source: World Development Indicators
0
1965
1975-84
1985-94 1995-2002
MENA
Yemen
Tunisia
Syria
Qatar
Oman
Morocco
Libya
Lebanon
Kuwait
Jordan
Iran
UAE
Egypt
Djibouti
West
Bahrain
Saudi
Algeria
1
Source: World Development Indicators, UNESCO Institute for Statistics,
UNICEF, National Sources and Author’s Calculations,
..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
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
more aligned incentives.
The better performers engage the private sector in
providing education to a larger extent, especially at
higher levels of instruction
Countries with higher public accountability
produced better education outcomes
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
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
Situation is already critical: lowest
water availability in the world
Annual renewable water resources per capita
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
1000 m^3 / year
30
40
The region has already stored
almost all of the water it can store
Proportion of regional surface freshwater resources stored in reservoirs
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
id
dl
e
E
lo
b
al
A
ve
ra
g
e
ca
Af
ri
th
G
as
t
&
N
or
th
N
or
A
m
er
ic
a
/N
Z
Au
s
M
ca
ar
a
n
Af
ri
si
a
Su
b
-S
ah
tr a
lA
e
op
Eu
r
op
e
&
te
C
en
rn
&
W
es
tA
si
a
Ea
s
Eu
r
P
As
ia
th
an
So
u
C
ar
ib
be
&
ic
a
m
er
A
tin
La
ac
ifi
c
0%
Deterioration of water quality is
already costly
Cost of Environmental Degradation of Water
2.5
2
1.5
1
0.5
Tu
ni
sia
ia
Sy
r
co
or
oc
M
on
ba
n
Le
rd
an
Jo
Ir a
n
pt
Eg
y
ria
0
Al
ge
Share of GDP
3
Growing population will recue per capita water
availability by half by 2050 and climate change
likely to reduce rainfall by at least 20%
MENA countries are spending
heavily on water
S
au
di
A
lg
e
ria
a
ni
si
Tu
n
Ira
em
en
Y
A
ra
b
ia
o
oc
c
M
or
gy
pt
4
3.5
3
2.5
2
1.5
1
0.5
0
E
percent
Public spending on water as share of
GDP (various years)
Not getting full benefits from public
investment
Algeria : Underexploitation of water stored in dams
'000 ha
600
500
400
300
200
100
0
Area that could be irrigated with
stored water
Area equipped for irrigation
source: Min Agriculture
Need to Reduce consumption to
sustainable levels and achieve sustainable
water management at minimal social cost
From….
To….
Additional resources
• Conventional
• Non-conventional
• Reduce losses
Consomm
actuelle
Ress
renouv
actuelles
Consomm
future
Ress
renouv
futures
1) Through better water policies

Policies to limit consumption, especially in
agriculture






Investments to reduce losses
Limit consumption
Strong enforcement of limits
Compensate farmers for reduced
consumption with help to improve water
productivity
Mobilize additional water sources
Better tariff policy
2) Through other interventions in “nonwater” sectors
Energy prices
Public finance
Employment
opportunities
Trade policies
3) Through improved public accountability
1.0
0.9
Index of quality of service
0.8
Countries with
accountability below
MENA avg
Countries with
accountability above
MENA avg
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Access
Urban utility
cost recovery
1-Urban
water losses
Water use in
agric
Greater accountability helps all
aspects of water management




Improves water supply services
Provides information necessary for making
and enforcing decisions that reflect everyone’s
needs
Ensures that governments and service
providers see consequences of actions
Helps improve how well public money is spent
The region has history of adapting
to water scarcity but needs major
adaptation now



Societies developed over millennia
institutions to deal with scarcity
More recently public institutions led
investments in large infrastructure systems
Institutions need to adapt now to new
realities
VI. The Political Economy of Reform
A theory of political economy has to explain why
this slow and hesitant pace of reforms and
inability to achieve major required institutional
changes:
1.
Reforms have failed to tackle the central
challenges
2.
Reforms have mostly relied on top down
decree-type measures, and do not threaten
the political equilibrium
3.
Reforms which require institutional changes in
public accountability mechanisms slow and
hesitant
The political economy of reform in
MENA countries shaped by 3 major
factors:

Large oil revenues and rents

Pervasiveness and persistence of
conflict and violence

Authoritarian political systems
Large natural resource wealth and
revenues



Reduces incentives of rulers to seek
broad-based economic growth
Creates soft budget constraints which
allow continuation of unsustainable
policies for a long while
Creates a disconnect of accountability
between rulers and the public
Conflicts are pervasive



Reinforce authoritarian regimes
Lead to allocation of large resources to
security
Creates risk aversion to reforms
Authoritarian Regimes
Figure 5. Democracy Trends in MENA
(Average Index Polity IV 1960-2006)
10
8
6
4
2
0
-2
1960
1966
1972
1978
1984
1990
1996
-4
-6
-8
-10
OECD
MENA
Other Developing
2002
Governance gap: Indicators of
governance are well below potential
in MENA.
Governance and Per Capita Income in MENA
2
MENA
Index of Governance Quality
Rest of the world
MENA trend
1
Rest of the world trend
0
-1
MENA gap in quality
of governance
-2
6
8
Log of Per Capita GDP
Source: Per capita GDP, WDI 2002; Governance quality, World Bank 2003a.
10
Authoritarian Regime Dilemma



Benefits from stronger private sector: more
growth, greater wealth base to tax, ability to
redistribute and satisfy supporters, minimize
contestation
Accrual of these benefits requires: inclusive
broad-based private sector, limits on ruler
discretion
Risks to rulers: greater ability of private
sector to organize and revolt against ruler if
reneges on guarantees
Implications (1): Weak Demand for
Reforms



Collective action more costly under nondemocratic regimes
Prevalence of influence of privileged
insiders
Weak processes of internal and external
accountability: more risk aversion to
reforms
Implications (2) Reforms are supply
driven and lack credibility


Reforms are shaped to maximize the
benefits to the ruling groups, including
staying in power
Lack of credibility of commitments to
reform and respect of promises
Political Economy Calculus of
Incumbent Rulers
Initial conditions/resistance
to reforms by existing
interest groups
Incentives for rulers (1):
Availability of Large rents
Incentive for rulers (2):
higher growth and more
“taxation”
Incentives for rulers (3):
higher growth and
employment
Incentives for rulers (4):
threat of contestation
Conflict
Total (1) Expected progress
on reforms
Total (2) Credibility of
reforms
RPLA/
emerging
RRLA/
transition
RRLI
-
--
++
0
-
-
++
0
0
++
++
+
--
--
0
+
---
0
++
-
--
++
Implication: improving governance will
be critical to move forward on more
difficult reforms.



Region’s inability to tackle deeper and
more complex reforms points to
limitations of top-down approach of
reform by decree
Deeper economic reform cannot proceed
without reform of incentive structures in
which reforms are embedded
Governance reforms cannot be viewed
as a separate agenda, to be pursued at
its own pace, but integral to all other
reforms.
The most crucial and critical
institutions to focus on are


institutions of public accountability
institutions for the enhancement of
credibility of commitments