Why economic growth has been weak in Arab countries: The role of exogenous shocks, economic policy failure and institutional deficiencies

The gap between the per capita income of most Arab countries and that of advanced industrial countries has widened since the early 1990s. The economic growth performance of the Arab world has been weak by developing country standards, too. Yet, the diversity of growth patterns within this group defies easy generalizations on the reasons underlying the disappointing performance. In some cases, country-specific shocks played a role, notably for relatively high growth in Sudan (discovery of oil) and the poor performance of Jordan (embargo on neighboring Iraq). On the whole, however, influences beyond the immediate control of Arab policymakers contribute surprisingly little to the explanation of growth patterns. The relation between terms-of-trade developments and economic growth turns out to be extremely weak. Moreover, the IMF and the World Bank are hardly to blame for imposing ineffective policy conditionality on Arab countries, if only because the leverage of international financial institutions has remained limited in the region. Economic policy failure in Arab countries appears to be a more important reason for poor growth. Even though the region has partly fallen into line with the Washington Consensus, various Arab countries lag behind other developing countries when it comes to trimming the interventionist role of the state and integrating themselves into the global division of labor through trade and foreign direct investment (FDI). Nevertheless, the relation between macroeconomic conditions, factor accumulation as well as trade and FDI liberalization on the one hand and economic growth on the other hand remains elusive. This may be because reforms have not gone far enough and have remained fragmentary even in Arab countries with a relatively favorable growth performance. It can neither be ruled out, however, that some elements of the Washington Consensus have been less effective than widely expected in promoting growth. For example, the enclave character of FDI in some Arab countries is rather unlikely to spur per capita income growth. This implies that country-specific conditions deserve close attention when designing economic policy reforms. In Arab countries with low per capita income, domestic resource mobilization appears to be more important than attracting FDI. Even in more advanced countries such as Egypt and Tunisia, continued efforts towards human capital formation are key to sustainable growth. Furthermore, policy-related variables and economic growth depend on more deeply rooted institutional deficiencies. Institutions in many Arab countries are less advanced than their income level would suggest. The experience of several oil exporters in the region supports the proposition that the abundance of oil encourages rent-seeking and exerts a negative impact on economic growth via its deleterious impact on institutional development. As a consequence, economic policy reforms along the lines of the Washington Consensus are not sufficient to improve the growth prospects of Arab countries. The call for institutional reforms mainly applies to resource-rich countries such as Algeria, Saudi Arabia and Sudan, notwithstanding their different growth performance in the past. It may prove difficult for these countries to overcome the natural resource curse, but the successful transformation of a country like Mexico from an oildependent to a highly diversified economy with more advanced institutions may show Arab countries the way.