The World Economy and Implications for the Middle East and North Africa Region, 1995-2010

This paper examines recent developments and likely longer-term trends in the external environment facing the MENA region. Underlying historical factors supporting key sources of export revenue, as well as important financial and commodity-market exposures are analyzed. Prospects for MENA's real export earnings are developed, and based on projections found in Global Economic Prospects and the Developing Countries 1995 published recently by the World Bank, these are placed within the general context of 'globalization'. This trend is reflected in widening and intensifying international linkages in trade and finance, and by technological change that is eroding barriers to the tradability of goods and services and the mobility of capital. The paper argues that MENA has been largely excluded from the globalization process thus far and, on current policies, will become increasingly marginalized. The region's current account earnings per capita are on a gradually declining trend, primarily because of reliance on oil and oil-related revenue sources (such as worker remittances from the Gulf countries and dividends on fast-depleting expatriate capital). And trends towards export diversification are, with few exceptions, very weak. Non-primary exports will suffer disproportionately from the rise of China and other low-income manufactures exporters and the accelerated transition of countries in Eastern Europe. Furthermore, the volatility of export earnings is the highest of any region, developed and developing. Low growth, together with perceived high economic and political risk, account for the fact that the region suffers from low levels of private and foreign direct investment. The current favorable external environment provides a 'window of opportunities' for MENA countries that choose to accelerate structural reforms that will underpin their growth prospects in the long run; and several specific aspects of the international context offer the potential for export and investment led growth. A solid foundation has been afforded by the EU's Mediterranean Initiative, which offers the potential for expanded free trade and foreign investment, increased official finance from the EU and enhanced regional integration among the EU and MENA countries themselves. At the same time, the possible consolidation of the peace process could serve to reduce risk perceptions, and by so doing encourage higher levels of capital flow in support of private sector activity. Against this background, and that of expected robust growth in world trade, the region's potential to expand exports of selected non-oil goods and commodities may be more fully realized. Moreover, several areas of promise to develop selected 'niches' within the region exist, particularly in the area of commercial services. And these favorable developments could find further support through the gradual repatriation of MENA's substantial stock of 'flight capital'.