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Failing the Arab people

UN report highlights how Arab states have let poverty and unemployment flourish

by Zak Brophy

Arab states have failed to successfully translate their material wealth into human welfare, according to a new study by the United Nations (UN). Were it a school report card it may well have read: “Has great potential, but must try harder.”

Taking 1970 as the base year, the Arab Development Challenges Report 2011 found that the Arab region made some considerable gains in human development throughout the 1970s and 1980s. This was due both to the very low starting point and the large investment in social services undertaken by most Arab governments. However, the rate of progress on human development has slowed considerably since 1990.

While the usual culprits of poor governance and ineffective accountability frameworks receive their share of the blame, the report also lays bare structural defects and policy blunders that have contributed to the reality that “the region has patently failed to transform its wealth into a commensurate improvement in human welfare.”

Poverty is an important indicator in assessing human development and, at least on the surface, the Arab region has managed respectably. On the human poverty index — the UN's measure of living standards in a country — the Arab region as a whole improved 24 percent in the decade between 1997 and 2007, while, perhaps unsurprisingly, Gulf Cooperation Council countries registered a 45 percent improvement over the same period.

However, measuring poverty is notoriously complex and initial impressions can be deceptive. In 2009, 36 percent of the population across all Arab states were living on between the $1.25 per day and $2.75 per day. The implication of this is that any small shock to disposable income levels or income distribution could have a massive impact on more than a third of the region. This precarious existence for such a large proportion of the Arab world means, while the Middle East and North Africa has so far remained relatively unscathed by the global financial crisis it, “may suffer more than any other region if growth falters,” the report stated.

Afloat on oil, if nothing else

A structural weakness within the economies of the Arab region is that their vitality is dependent on the vagaries of the oil markets. Following peak oil prices in 1980, average real gross domestic product per capita in the MENA hobbled along at 0.1 percent. Conversely, the uptrend in oil prices since the early 1990s has resulted in relatively high and stable average GDP growth per capita of 2.4 percent. 

The report outlined, however, how oil dependent growth has retarded the structural transformation processes that normally occurs during sustained increases in per capita real GDP. It may be a cliché to say oil is both a blessing and a curse, but it still rings true, for while black gold may have bought exorbitant wealth to some Arab states and driven growth numbers across the whole region, it has also propagated a service led path of economic development at the expense of the productive sectors, such as agriculture and manufacturing.

Today, the Arab world is now the least industrialized among the developing regions, including sub-Saharan Africa, increasingly becoming import orientated and service based. What is more, the UN says the nature of most services found in Arab countries are at the lower end of the value chain, such as travel and transport, whereas services that use and advance the knowledge base of the societies, such as communications and financial services have, for the most part, made little progress.

Structurally retarded

Trade is pivotal to the economies of the Arab region and the meager developments realized in industry, along with the relatively low quality but high quantity of services emerging from its economies, has resulted in a somewhat primitive export structure compared to a relatively diversified import structure. The UN report concludes that the very slow rate of increase in high value-added exports is, “a reflection of the structural retardation of the region.”

Considering that, according to data from the World Bank and United Nations Statistics Divison, trade accounted for 84 percent of the Arab world’s GDP in the 2000s, this is a cause for concern. The study goes further in stating that for much of the region, “the transition to indiscriminate premature liberalization at a time of low productivity levels has rendered manufacturing uncompetitive and exports concentrated in primitive products and natural resources.” 

Lining up for work

The tumultuous upheavals across the Arab world this past year and a half have cast an unforgiving light on the lack of opportunity for huge swathes of the region’s youth. This is in a large measure due to an unhappy confluence of economics and demographics: the Arab world is at a relatively early stage of its demographic transition, meaning it can expect a sustained increase in its working age population.

Although Arab countries managed impressive average annual growth in employment between 1991 and 2009 of 3.3 percent, the region still maintains one of the highest unemployment rates in the world. The burden is highest among the youth, with data from the International Labor Organization and the UN indicating rough a quarter of all Arab youth were out of work between 2005 to 2011, more than double the world average of 11.9 percent.

The distortion of the Arab economies away from the productive sectors results in a failure to stimulate “job creating” growth, the report states. Moreover, the education system and vocational training available are creating a divergence between educational outcomes and market demand.

The UN report put the price tag on the investment needed for the MENA (excluding the GCC) to reach “full and productive employment” by 2030 at an ominous $4.4 trillion (in 2005 constant prices). This entails an average annual investment bill of $220 billion for the region outside the GCC, or roughly half these countries' collective GDP in 2009. This is in contrast to their actual average investment-to-GDP ratio of 27.8 percent for 2004 to 2009. 

Finding new revenue

According to the report Arab states have “fiscal space” to contribute to the necessary “employment centered transformation” and certain policy choices can increase the margin for stimulus. However, Jordan, Egypt and Lebanon are singled out as having to “urgently address the budgetary burden of their subsidies and interest payments in order to free up meaningful fiscal space for needed capital investments.”

 The UN also suggested that the Arab world could benefit from considerable tax revenue expansion. Comparing the Arab world with Latin America, the Caribbean and South East Asia, the UN concluded that the taxes to per capital income were still much lower on average. The argument follows that the Arab states could undertake fiscal reform to increase tax revenues to facilitate “positive structural transformation and at the same time reduce distortions inherent to excessive dependence on non-tax revenues.” Of course, with higher taxes would come greater implicit obligations to the public, something policy makers may be weary of in a region that has shown itself ripe for unrest.

The massive task at hand

While a failing of the study is that it does not factor in the huge upheavals that have shaken the economic, social and political strata of the Arab world over the past year and a half, its findings help give insight into the economic dysfunctions and societal malaise that precipitated the uprisings. What it does most, however, is illustrate the magnitude of the task ahead that cannot be met without serious, and long overdue, structural reforms.

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Zak Brophy

Zak Brophy was Executive's Economics and Policy Editor from 2011 until 2013.
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