Protecting and Empowering People

The other Mideast crisis: economic decline International Herald Tribune: March 27, 2002
By Peter Sutherland and Bernard Hoekman

NEW YORK

The Arab League summit meeting beginning Wednesday in Beirut will predictably focus on the Israeli-Palestinian conflict. Unfortunately, far less attention has been paid to an equally imperative agenda item: what to do about a region increasingly mired in economic stagnation. If economic development is part of the longer-term war on terrorism, then countries in the Middle East and North Africa need to embrace a more positive approach to trade and accept a more limited role for the state in economic life.

A report we have just completed for the Council on Foreign Relations provides Middle Eastern and North African countries with the necessary road-map not only for harnessing trade but also for tackling the domestic regulatory obstacles that for too long have held back a region rich in human and natural resources.

When beginning this study, we thought external opportunities alone might serve to stimulate economic growth. A regional free trade area, together with closer ties to the European Union and the United States, was thought to be a solution to the enormous challenges facing the region. But it quickly became clear that the fundamental problems these economies face are domestic.

To be sure, trade protectionism remains part of the problem. Tariffs, on average, remain high compared to Europe and the Americas. But the domestic reform agenda is most critical.

The role of the state must be reduced and competition in service markets increased. Limits on competition and policies restricting entry into service industries such as banking, transport and telecommunications raise costs and reduce the variety and quality of service options.

Elsewhere -the European Union is a prime example- privatization and pro-competitive regulation of vital utilities and service industries has led to economic growth and increased investment.

A business survey conducted in Middle Eastern and North African countries for this study reinforced what has long been known: privileged state enterprises, bureaucracy and red tape are significant obstacles to investment and growth. Of those surveyed, 20 percent said bribes averaged 2 percent to 9 percent of the value of consignments.

The economic performance of many Middle Eastern and North African countries during the past quarter- or half-century has trailed most other regions, despite the advantage of great oil wealth. In the 1950s, per capita income in Egypt was similar to that in South Korea; today it is less than 20 percent.

Since economies in other parts of the world have weathered war and high military expenditures, these factors do not explain the relative decline of Middle East and North African economies.

One important reason for the decline is the failure of these countries to connect to the global economy through foreign investment and trade in services and goods other than oil. A second reason is that most governments in the region have made scant headway in reducing the interventionist role of the state.

A common excuse in the region is that a more rapid introduction of pro-competitive reforms would lead to massive unemployment. But our study argues that trade liberalization, coupled with service sector reform and improved public sector governance and efficiency, need not lead to greater overall unemployment.

Our study also demonstrates that international trade agreements offer great potential for implementing these domestic policy changes.

Sept. 11 was a painful reminder that U.S. and European security interests are inextricably tied to political, economic and social developments in the Middle East and North Africa. While the focus since October has been on the military side of the war against terrorism, we must not lose sight of the long-term need to increase economic opportunities and reduce the poverty that breeds resentment and extremism.

Without development and economic growth, the region will continue to fall further behind economically. The road map to a more prosperous future is plain to see. The test for Middle Eastern and North African countries, mired for too long in economic decline, is to harness the benefits of trade by embracing domestic reform agendas.

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Peter Sutherland, a former director-general of the WTO, is chairman of Goldman Sachs International and BP. Bernard Hoekman is research manager for trade at the World Bank's Development Research Group. The Council on Foreign Relations studry group's report on Middle East trade options is avail able at www.cfr.org.