Institutional Change and Development in the Middle East and North Africa

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Institutional Change andDevelopment in the
Middle East and North Africa

• Mustapha K. NabliSenior Advisor, World Bank
• Inaugural Lecture
• CREMed
• Barcelona, 7 November 2008

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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

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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

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I. Background and Long Run Development Outcomes

• Background a diverse region
• Poverty reduction and human development major
  gains
• Economic growth mediocre, volatile and hesitant

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(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

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GDP per capita 2005
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GDP per capita PPP 2005
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(2) Dramatic poverty reduction and low absolute
poverty
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• Huge progress in terms of health indicators
  Fertility, infant mortality, life expectancy

Source World Development Indicators
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(3) Economic growth mediocre and volatile
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and varied across sub-regions and countries
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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

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Old social contract and central role of the
state1950s 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

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Major gains but crises and collapse of old social
contract- mid-1980s

• Major gains as we will see later
• First signs of difficultiesmacroeconomic 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

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Slow and hesitant transformation to a new social
contractsince 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

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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

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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

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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)

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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

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Demographics surge in population growth followed
by steep decline
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a delayed demographic transition leading to
major surge in labor force growth in MENA
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Three major periods
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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.
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Unemployment rates have fallen but remain high
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Need to create better quality jobs
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at the same time labor force growth will
continue to be high for the next 15-20 years (new
numbers)
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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

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Private Sector Performance (1) weak compared to
other regions
Or most recent available year.
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Private Sector Performance (2) low growth of
private investment
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Private Sector Performance (3) varied across
sub-groups of countries
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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.

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

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As evidenced by the lack of trust between public
and private sectors
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the concerns of the private sector about policy
uncertainty .
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and the negative perceptions about the
consistency and predictability in the application
of rules and regulations.
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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

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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

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Major gains in access to education
Source Statistical Appendix
Source Barro and Lee (2000)
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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.
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But very low economic returns
Source Source Allen, 2001 CRESUR, 2004.
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• Despite very heavy investments by governments
  (and private sector).

Source World Development Indicators, UNESCO
Institute for Statistics, UNICEF, National
Sources and Authors Calculations,
Source World Development Indicators
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..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

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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

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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

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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

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Situation is already critical lowest water
availability in the world
Annual renewable water resources per capita
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The region has already stored almost all of the
water it can store
Proportion of regional surface freshwater
resources stored in reservoirs
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Deterioration of water quality is already costly
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Growing population will recue per capita water
availability by half by 2050 and climate change
likely to reduce rainfall by at least 20
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MENA countries are spending heavily on water
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Not getting full benefits from public investment
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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

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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

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2) Through other interventions in non-water
sectors
Employment opportunities
Energy prices
Public finance
Trade policies
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3) Through improved public accountability
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Greater accountability helps all aspects of water
management

• Improves water supply services
• Provides information necessary for making and
  enforcing decisions that reflect everyones needs
• Ensures that governments and service providers
  see consequences of actions
• Helps improve how well public money is spent

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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

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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
• Reforms have failed to tackle the central
  challenges
• Reforms have mostly relied on top down
  decree-type measures, and do not threaten the
  political equilibrium
• Reforms which require institutional changes in
  public accountability mechanisms slow and
  hesitant

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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

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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

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Conflicts are pervasive

• Reinforce authoritarian regimes
• Lead to allocation of large resources to security
• Creates risk aversion to reforms

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Authoritarian Regimes
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Governance gap Indicators of governance are
well below potential in MENA.
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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

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Implications (1) Weak Demand for Reforms

• Collective action more costly under
  non-democratic regimes
• Prevalence of influence of privileged insiders
• Weak processes of internal and external
  accountability more risk aversion to reforms

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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

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Political Economy Calculus of Incumbent Rulers
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Implication improving governance will be
critical to move forward on more difficult
reforms.

• Regions 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.

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The most crucial and critical institutions to
focus on are

• institutions of public accountability
• institutions for the enhancement of credibility
  of commitments