Sustaining the Recovery and Looking Beyond Middle East and North Africa Region Middle East and North Africa Region Economic Developments & Prospects, January 2011 Economic Developments & Prospects, January 2011 Sustaining the Recovery and Looking Beyond

Sustaining the Recovery and Looking Beyond

ISBN 978-0-8213-9889-0

the world bank the world bank

Middle East and North Africa Region Economic Developments & Prospects, January 2011

Sustaining the Recovery and Looking Beyond

the world bank © 2011 The International Bank for Reconstruction and Development/The World Bank 1818H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet www.worldbank.org E-mail [email protected]

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ISBN: 978-0-8213-9889-0 DOI: 10.1596/978-0-8213-9889-0 Cover photo: © Gettyimages Table of Contents

Acknowledgements...... ix

Foreword...... xi

Abbreviations...... xiii

Executive Summary...... xvii

Part I: Sustaining the recovery...... 1

Chapter 1. MENA is recovering from the crisis, but slowly...... 3 MENA’s recovery has been driven by the global rebound and, to varying degrees, by domestic stimulus...... 4 MENA labor markets remained relatively unscathed by the crisis but Impacts Differed between countries...... 8 Job losses in the GCC countries were steep but affected mainly expatriate workers...... 9 The impact of the crisis on oil importers’ labor markets was mild...... 10

Chapter 2. MENA’s recovery is proceeding in an uncertain global economic Context...... 13 Financial market volatility reflects the unusually uncertain global outlook...... 14 The outlook for GCC countries is tied to the outlook for the global economy...... 17 Most developing oil exporters are vulnerable to oil price shocks and volatility...... 25 Oil Importers’ Recovery Depends on Developments in Key Markets, Notably the EU...... 31

Part II. Looking Beyond the Recovery and Beyond Oil...... 37

Chapter 3. MENA remains uncomfortably dependent on the capital-intensive . Oil sector...... 39 MENA’s non-oil exports of goods and services are below potential due to developing oil exporters’ underperformance...... 44 MENA has opened up and diversified its exports...... 46 Services are an area of relative strength for MENA...... 49 Market access is more of an issue for oil importers than oil exporters...... 54 MENA countries are less successful than other developing economies in penetrating foreign markets...... 55

iii Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Chapter 4. What are the major constraints to MENA’s nonoil exports?...... 61 Protection in developing MENA is high, largely due to NTMs...... 61 Tariff and nontariff protection rates vary widely across MENA...... 62 Intra-regional trade stagnated and intra-industry trade remains limited...... 65 MENA’s services sector is heavily protected...... 69 Other factors hurting MENA firms’ competitiveness...... 75 Access to finance is limited, especially for small enterprises...... 79 Governance issues impede reform implementation, raise uncertainty and lead to uneven playing field...... 82 Skill shortages in the GCC states are an acute but old problem...... 83 A focus on technology is central to MENA’s efforts to improve competitiveness...... 83

Chapter 5. What should countries do to improve nonoil export growth?...... 93 What did we learn? Summary of key findings...... 93 Are reforms implemented by countries addressing the major constraints?...... 96

Statistical Annex...... 101

References...... 117

List of Boxes Box 1: The Dubai World debt restructuring...... 21 Box 2: how is the overall trade restrictiveness index calculated?...... 55 Box 3: Nontariff measures – definitions and state of knowledge...... 63 Box 4: Intra-industry trade (IIT) index...... 68 Box 5: Measuring restrictions affecting trade in services...... 72 Box 6: ’s national innovation system: achievements, challenges and vision...... 90

List of Tables Table 1: demand-side sources of growth in MENA...... 4 Table 2: MENA countries’ fiscal space in 2008...... 6 Table 3: debt restructurings in the GCC, 2008–2010...... 24 Table 4. Impact of a wheat price hike in GCC oil exporters...... 26 Table 5: MENA fiscal space in 2009...... 27 Table 6: Impact of a wheat price hike in developing oil exporters...... 29 Table 7: Impact of a wheat price hike in oil importers...... 33 Table 8: shares in world exports...... 50 Table 9: contribution of intensive and extensive margins to nonoil merchandise growth, 1998–2008...... 51 Table 10: decomposition of the intensive margin...... 52 Table 11: Index of export market penetration by country, 1995 and 2005 (percent)...... 58 Table 12: bilateral index of export market penetration of EU and US markets...... 60 Table 13: bilateral index of export market penetration of MENA markets...... 64 Table 14: Technological Achievement Index...... 84 Table 15: Index of Technological Adaptive Capacity...... 85 Table 16: Knowledge Economic Index...... 85 Table 17: Index of Technological Readiness...... 85 Table 18: FDI has grown rapidly in MENA (% of GDP, net inflows)...... 86 Table 19: Number of resident patents filing per million people...... 89

iv Table of Contents

List of Figures Figure 1: Growth outlook (real GDP growth rates in percent)...... 3 Figure 2: Growth accelerations in 2010 (percentage point change relative to 2009)...... 3 Figure 3: MENA’s annual real growth performance before, during, and after the crisis...... 5 Figure 4: Sources of external revenue, 2008...... 5 Figure 5: Global unemployment and real growth...... 9 Figure 6: Changes in number of unemployed, 2007–09 (in millions)...... 9 Figure 7: Job cuts by country and sector in GCC, 2009...... 10 Figure 8: The crisis did not affect aggregate employment in , Arab Rep...... 10 Figure 9: Crisis-related decline in real earnings and wages growth in Egypt, Arab Rep...... 11 Figure 10: Output and employment growth in ...... 11 Figure 11: Industrial production (percent difference from pre-crisis peak to June 2010)...... 13 Figure 12: Industrial production, seasonally adjusted year-on-year real growth rates...... 14 Figure 13: Output growth (real GDP, % change quarter-on-quarter)...... 14 Figure 14: Credit growth (YoY, in percent)...... 15 Figure 15: Import growth, seasonally adjusted year-on-year in volumes...... 16 Figure 16: Export growth, seasonally adjusted year-on-year basis in volumes...... 16 Figure 17: Sovereign 5-year CDS spreads (bps)...... 17 Figure 18: Stock market reaction to events in Europe...... 18 Figure 19: Risk perceptions reflecting developments in Europe...... 19 Figure 20: Crude oil average spot price (current US$ per barrel)...... 20 Figure 21: MENA fiscal outlook (percent of GDP)...... 20 Figure 22: MENA current account positions (percent of GDP)...... 21 Figure 23: Credit growth in GCC...... 22 Figure 24: Spreads over LIBOR on Global (SKBI) and GCC sukuk (GSKI) and GCC conventional bonds (SKBI)...... 24 Figure 25: Exposure to EU markets for merchandise goods...... 25 Figure 26: US wheat prices...... 26 Figure 27: Commodity volatility (standard deviations in monthly prices)...... 28 Figure 28: Some potential poverty impacts of a wheat price spike...... 29 Figure 29: Non-oil merchandise exports to EU25...... 30 Figure 30: Non-oil merchandise exports to Southern Euro Zone...... 31 Figure 31: Credit growth in oil importers...... 34 Figure 32: Rodrik’s real undervaluation index for ...... 34 Figure 33: Jordan has made a dramatic shift in export destinations...... 35 Figure 34: Population and labor force growth (%, annual averages)...... 40 Figure 35: Growth of per capita income by region (percent)...... 41 Figure 36: MENA’s oil dependence...... 42 Figure 37: Current account surpluses and deficits (US$ billions)...... 43 Figure 38: Contribution of demand components to growth in MENA...... 43 Figure 39: Export revenue by type of exports (% of GDP, 2008)...... 44 Figure 40: MENA underperformed relative to its nonoil export potential in the period 1998–2007...... 45 Figure 41: MENA countries’ nonoil export potential relative to that of other middle income countries for the period 1998–2007...... 46 Figure 42: Non-oil merchandise exports as a share of GDP (percent)...... 47 Figure 43: Export concentration in developing regions...... 47 Figure 44: MENA’s export structure, 2008...... 48 Figure 45: MENA’s non-oil merchandise export destinations...... 48 Figure 46: Import growth in major export markets...... 49 Figure 47: Non-oil merchandise export growth by region for the period 1998–2008 (in value terms)...... 50

v Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 48: Nonoil merchandise export growth by market and industry, 1998–2008...... 53 Figure 49: Market access for MENA merchandise goods, overall trade restrictiveness index...... 56 Figure 50: Market access for nonagricultural products, overall trade restrictiveness index (2008)...... 57 Figure 51: Tariff protection in ’s market (2008)...... 59 Figure 52: Overall trade restrictiveness by market and product (2008)...... 62 Figure 53: Estimated NTM-related protection rates in MENA...... 63 Figure 54: Tariff and nontariff barriers (NTBs) by MENA country...... 64 Figure 55: Protection faced by different regions and country groups in MENA...... 65 Figure 56: Intra-industry Trade index by region...... 67 Figure 57: Intra-Regional, Intra-Industry Trade index by region...... 68 Figure 58: Services value-added (% of GDP)...... 70 Figure 59: Size of service sector (% of GDP) and income per capita in MENA...... 71 Figure 60: Restrictiveness of services trade policies and share of services in GDP...... 71 Figure 61: Global Competitiveness Index (GCI) ranking by region, 2010...... 75 Figure 62: Leading constraints to export-oriented firms in MENA region (weighted average of share of firms ranking a constraint as “major” or “severe”)...... 76 Figure 63: Leading constraints to export-oriented firms in GCC oil exporting countries (share of firms ranking a constraint as “major” or “severe”)...... 76 Figure 64: Leading constraints to export-oriented firms in developing oil exporting countries (share of firms ranking a constraint as “major” or “severe”)...... 77 Figure 65: Leading constraints to export-oriented firms in oil importing countries (share of firms ranking a constraint as “major” or “severe”)...... 77 Figure 66: GCC’s Global Competitiveness Index rankings by pillar...... 78 Figure 67: Developing oil exporters’ Global Competitiveness Index rankings by pillar...... 78 Figure 68: Oil importers’ Global Competitiveness Index rankings by pillar...... 79 Figure 69: Regional ranking of ease of getting credit...... 80 Figure 70: Gross domestic saving, 2007...... 80 Figure 71: MENA countries’ FDI potential conditioned on openness, natural resources and population for the period 1998-2007 (actual to predicted net FDI inflows as % of GDP)...... 87 Figure 72: Structure of FDI, cumulative 2000–07 (percent of FDI)...... 87 Figure 73: Technological content of exports by region...... 88 Figure 74: Research and development expenditure (% of GDP)...... 89 Figure 75: Research and development expenditure in MENA (2005)...... 90

List of Appendix Tables Table A1: Macroeconomic outlook...... 102 Table A2: Trade restrictiveness in East Asia excluding China, 2008 (in percent)...... 103 Table A3: Trade restrictiveness in , 2008 (in percent)...... 104 Table A4: Trade restrictiveness in South Asia other than India, 2008 (in percent)...... 105 Table A5: Trade restrictiveness in LAC, 2008 (in percent)...... 106 Table A6: Trade restrictiveness in SSA, 2008 (in percent)...... 107 Table A7: Trade restrictiveness in ECA, 2008 (in percent)...... 108 Table A8: Trade restrictiveness in MENA, 2008 (in percent)...... 109 Table A9: Trade restrictiveness in GCC oil exporters, 2008 (in percent)...... 110 Table A10: Trade restrictiveness in developing oil exporters, 2008 (in percent)...... 111 Table A11: Trade restrictiveness in oil importers, 2008 (in percent)...... 112 Table A12: Trade restrictiveness in oil importers with GCC links, 2008 (in percent)...... 113

vi Table of Contents

Table A13: Trade restrictiveness in oil importers with EU links, 2008 (in percent)...... 114 Table A14: Trade restrictiveness in HICs, 2008 (in percent)...... 115 Table A15: Trade restrictiveness in China, 2008 (in percent)...... 116

vii

Acknowledgements

The Middle East and North Africa Economic De- rector, Middle East and North Africa), Ritva velopments and Prospects report was prepared Reinikka (former Sector Director, Social and by Elena Ianchovichina (principal author) and Group, Middle East a team comprising Lili Mottaghi, Kevin Carey, and North Africa Region) and three peer re- Julien Gourdon, Christina Wood, Hiau Looi Kee, viewers: Bernard Hoekman (Sector Director, Daniela Marotta, Ndiame Diop, Leonardo Gar- International Trade Department, Poverty Re- rido, Caroline Freund, Maros Ivanic, Alberto Be- duction and Economic Management Network), har, Julian Lampietti, Cosimo Pancaro, Subika Juan Zalduendo (Lead Economist, Office of the Farazi, Komlan Kounetsron, Augusto Clavijo, Chief Economist, Europe and Central Asia) and Michelle Battat, and Yasmine Rouai. Country- Punam Chuhan (Lead Economist, Office of the specific data were provided by country econo- Chief Economist, Sub-Saharan Africa). We also mists and analysts working in the World Bank’s appreciate useful comments on various topics Middle East and North Africa Region. The report from Ingo Borchert, Elliot Riordan, Andrew was prepared under the guidance of Shamshad Burns, Najy Benhanssine, Andrew Stone, and Akhtar (Regional Vice President, Middle East Jamus Lim. Excellent assistance with adminis- and North Africa Region). Valuable comments trative arrangements was provided by Isabelle were provided by Farrukh Iqbal (Country Di- Chaal-Dabi.

ix

Foreword

The impact of the global financial and economic been modest in per capita terms compared to crisis on the Middle East and North Africa region other developing regions, and the region has not was relatively mild. Lack of integration and a been able to make substantial progress in reduc- large public sector helped insulate the region ing persistently high unemployment rates—espe- to some extent, but now these and other factors cially among youth. The report underscores that are slowing down the speed of its economic while there are risks to the short-term economic recovery. The report Middle East and North growth outlook, including those stemming from Africa: Sustaining the Recovery and Looking debt problems and fiscal austerity measures in Beyond examines the major factors threatening key markets such as the EU; weak credit recovery the recovery and those that obstruct long-term in the GCC; and oil price volatility, the region growth—especially non-oil export growth. The re- faces much more serious long-term growth chal- port focuses on non-oil export growth as despite lenges. some progress in the past decade net exports contributed little to regional growth, and nonoil MENA continues to depend on the capital- exports of goods and services remain below po- intensive oil sector which has been and remains tential for the region as a whole. the primary vehicle for revenue and wealth creation in the region. Oil dependence however The post-crisis period provides an oppor- brings a number of challenges, and the labor- tunity for the countries in the Middle East and abundant developing oil exporters have been far North Africa to re-evaluate their trade and growth less successful than the GCC economies in deal- strategies in an attempt to increase possibilities ing with the pitfalls of oil dependence. Develop- for accelerated development and employment cre- ing oil exporters have been suffering from weak ation. The region is already undergoing multiple institutions, conflicts, macroeconomic volatility, transformations as countries launched spadework and Dutch disease which has spread beyond to catalyze industry diversification by innovating the oil exporters and become a threat to some and adopting new technologies; energy diversifi- oil importers receiving large remittances and cation by embracing aggressive renewable energy finance from theGCC markets. While the outlook exploitation plans; and export diversification by for oil remains promising in the medium-term expanding markets and the range of exported due to strong demand for oil in Asia and other products and services. The shift towards the fast- fast-growing markets, counting on oil will not growing markets of Asia has been particularly generate inclusive growth in the region. Thus, remarkable, and the services sector has emerged the report pays special attention to issues related as an area of relative strength and a key source to competitiveness and nonoil sources of growth. of export revenue and future potential growth. Although the report takes a differentiated Notwithstanding these trends, the growth look at the problems facing MENA countries, response in developing MENA since 2000 has common messages can be distilled for the region

xi Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

as a whole. The report emphasizes three major of skill shortages in a comprehensive way, and areas in need of policy makers’ attention. First, to understand the nature and extent to which it underscores the problems related to restric- regulations restrict trade and FDI in the services tive trade policies, particularly those affecting sector. In developing MENA, countries need to trade in services. Such policies distort incen- intensify efforts to strengthen institutions, im- tives, discourage foreign direct investment, and prove information gathering and dissemination limit MENA’s integration within the region and and reform implementation. A priority should with the rest of the world. Second, the report be to understand better the nature and extent to confirms that governance issues linked to dis- which nontariff barriers and regulations restrict cretion in applying rules and regulations are a trade in non-oil goods and services. Developing serious obstacle to firms’ growth, including the MENA countries should press on with financial growth of export-oriented companies. These is- market development—especially improving sues have led to stagnation, inefficiencies and financial infrastructure, while further strength- privileged access for some, but limited access ening macroeconomic management, addressing to services and information for micro and small inefficiencies in labor and goods markets, and firms. Third, the report finds that inefficient and facilitating innovation activities, knowledge and inflexible labor markets and scarcity of skills, technological acquisition. Addressing the issues innovation and technological capabilities hurt identified in this report would require resources, firms’ productivity, limit employment creation expertise and a sustained government effort. The and the technological content of MENA’s exports. World Bank is supporting MENA client counties as they press on with reforms to remove the MENA governments are implementing re- major roadblocks to inclusive growth. forms addressing some of the constraints identi- fied in this report, but in many countries in the region a lot more needs to be accomplished as Shamshad Akhtar wide policy gaps remain in some areas. In the Regional Vice President GCC, more needs to be done to address the issue MENA Region

xii Abbreviations and Acronyms

AVE Ad-valorem Equivalent Bbl barrels bop balance of Payments BP/bps basis points BRICs , , India, and China CAb current Account Balance cds credit Default Swaps CPI consumer Price Index DEcpg development Economics Prospects Group DEv developing Countries DFSF dubai Financial Support Fund DIFc dubai International Financial Center dw dubai World EAS/EAP East Asia and Pacific ECA Europe and Central Asia EMBI Emerging Market Bond Index EU European Union FDI Foreign Direct Investment FTA Free Trade Agreement G3 us, EU and gcc gulf Cooperation Council GCI global Competitiveness Index gdp gross Domestic Product GEM brazil, China, India and HIc high Income Countries HS6 harmonized Commodity Description and Coding System, 6-digit level ICT Information and Communication Technologies

xiii Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

IIT Intra-industry Trade ILO International Labor Organization IMF International Monetary Fund KEI Knowledge Economic Index LAc latin America and the Caribbean LNg liquefied Natural Gas LPI logistic Performance Index MDGs Millennium Development Goals MENA/MNA Middle East and North Africa MFN Most Favored Nation MIC Middle Income Countries NTB Non-tariff Barrier NTM Non-tariff Measure OPEc organization of the Petroleum Exporting Countries PAFTA pan-Arab Free Trade Area PIp public Investment Plan ppp public Private Partnership PTA preferential Trading Arrangement R&d research and Development Row rest of World SA South Asia SAAr seasonally Adjusted Annual Rate SEZ southern Euro Zone SME small Medium Enterprises sps sanitary and Phyto-sanitary measures SSA sub-Saharan Africa STRI services Trade Restrictiveness Indices SWF sovereign Wealth Funds TAC Technological Adaptive Capacity TAI Technological Achievement Index us of America UAE UK UNCTAd united Nations Conference on Trade and Development UNdp united Nations Development Programme UNIdo united Nations Industrial Development Organization USDA united States Department of Agriculture

xiv Abbreviations and Acronyms

VAT value-Added Tax WDI world Development Indicators WEF world Economic Forum WIpo world Intellectual Property Organization wld world WTo world Trade Organization YoY Year on Year

xv

Executive Summary

Economic activity has rebounded in most Composition of country groupings countries of the Middle East and North Africa (MENA). Growth is expected to average 4 percent GCC oil exporters: , , , , in 2010 and to reach 4.8 percent in 2011 and , and United Arab Emirates (UAE) 2012. The recovery has been driven by the global economic rebound and, to varying degrees, by Developing oil exporters: , Islamic Repub- domestic stimulus. Industrial production, which lic of , Iraq, Libya, Syrian Arab Republic, and in MENA is dominated by oil, has nearly reached its pre-crisis peak, largely due to the strong Oil importers include countries with strong GCC recovery in emerging markets, especially Asia. links (, Jordan, and Lebanon) and those However, the upturn weakened in the summer with strong EU links (the Arab Republic of Egypt, of 2010 as global growth slowed down, and seri- and Tunisia). ous concerns emerged about the sustainability For ease of exposition and analysis, this country of the global recovery. In response, many MENA classification is used consistently throughout the governments have continued to stimulate their report. Developing MENA is used to refer to the economies in 2010, and even those that did not group of developing oil exporters and oil importers. use any type of fiscal stimulus in 2009 have started implementing fiscal measures in 2010.

MENA’s economic recovery has not been spectacular. With the exception of the Gulf Part I: Sustaining the recovery Cooperation Council (GCC) economies, the region was affected much less than other The well-integrated GCC countries were hardest regions by the global financial and economic hit by the global economic and financial crisis, crisis. Lack of integration and a large public but they recovered quickly as demand for oil sector helped soften the impact of the crisis, picked up driven by the rapid recovery in emerg- but now these and other factors are limiting ing markets, and their financial sectors stabi- the pace of expansion on the upside, though lized. In 2010, economic growth of the GCC group these factors are present to a different extent in is projected to reach 4.2 percent—compared to the three major MENA groups of countries—the half a percent growth in 2009, and the expecta- GCC oil exporters, the developing oil export- tion is that growth will reach 5 percent in 2011 ers and the oil importers. Part I of the report before declining to 4.8 percent in 2012. The oil examines the short-term growth prospects of price rebound from the lows in 2009 has allowed the MENA countries and the risks to the out- GCC governments to maintain expansionary fis- look. Part II discusses long-term development cal policies in 2010, while avoiding deterioration obstacles—particularly those related to non-oil in their fiscal and current account positions. All export growth. GCC governments continued to stimulate their

xvii Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

economies as the global economy started slowing weakening dollar might stoke inflationary pres- down in the second quarter of 2010. The stimu- sures and be a cause for concern. lus has supported private consumption, and because of its large capital spending component The GCC countries have fiscal space to is expected to have facilitated these countries’ cushion the impact of a potential negative terms- economic diversification activities. of-trade shock but the systematic reliance on government spending poses a medium to long- The short-term growth outlook for the GCC term challenge. Some of the fiscal expansion will economies depends on developments in the rest be self-terminating when projects get completed, of the world, and on the extent to which they although the medium-term burden of continued affect oil markets. Global growth is expected to public spending growth could increase the cost weaken somewhat in 2011, before picking up a of capital for the private sector as public saving bit in 2012. Oil prices moved above $85 per barrel declines. It is also unclear to what extent private on a depreciating dollar, rising seasonal demand sector growth would pick up when public sector and a tight global distillate market. Support for spending declines. In the United Arab Emirates, price increases based on demand and supply there is a huge overhang of partly completed factors however is expected to be weak due to property developments, and the property price robust non-OPEC production, high inventories slump shows no signs of easing. In Qatar, the in the US, and ample spare capacity—most of it outlook is clouded by the oversupplied real estate concentrated in Saudi Arabia. However, unantici- market and weak LNG market. pated shocks to supply and other factors includ- ing price speculation might lead to price spikes. Developing oil exporters such as Algeria, the Islamic Republic of Iran, Iraq, Libya, , Tight credit conditions, particularly in and the Republic of Yemen felt the impact of the interbank markets, pose another threat to the crisis, and later the recovery largely through the economic recovery in the GCC countries. With oil channel as their financial sectors are mostly the exception of Qatar, credit growth to the state-dominated, and not linked to global finan- private sector remains anemic due to the uncer- cial markets. Real growth of the developing oil tainty arising from ongoing debt restructuring, exporters is projected to average 2.9 percent in and the effect of the Dubai World (DW) events. 2010—up by less than a percentage point from Significant government support has enabled the growth in 2009, and is expected to reach 4.2 market for large project and corporate finance percent in 2011 and 3.9 percent in 2012. While to continue functioning, despite heightened stimulus has helped the recovery, the rebound has risk aversion and uncertainty. When the GCC been weak as quite a few developing oil exporters governments have not been directly present in faced production-related problems limiting their bond markets, yields have been high. oil output. In addition, Algeria backtracked in its reform efforts by passing laws that increased pro- Given the small export exposure to the EU, tection and the discriminatory treatment of firms. the debt problems in Europe are unlikely to alter significantly the growth prospects of the GCC Developing oil exporters, especially Iraq and countries unless these problems spread beyond the Republic of Yemen, are vulnerable to a sharp Europe and affect global demand for oil. The decline in oil prices as they have much more spike in wheat prices—which nearly doubled in limited fiscal space than the GCC oil exporters. August 2010 from their lows in June 2010—has Signaling the increasing use of oil as a main- caught the GCC countries in the early stages of stream asset and OPEC’s difficulties with supply implementing food security strategies, but the management, oil price volatility has grown over impact of the price spike is expected to be small, time and is now much higher than volatility of as all GCC countries have fiscal space to respond other commodity prices. This implies that pru- to increases in the food import bill. Nevertheless, dent macroeconomic and oil revenue manage- the recent food price increases coupled with a ment have become more challenging and more

xviii Executive Summary

important than ever before. Strategies aimed at and the rest of the oil importers. How hard these diversifying the economic base and scaling up countries are hit depends on the extent of the fis- non-oil sources of growth will also help reduce cal contraction in the EU, and how quickly MENA the vulnerability of these countries to excessive countries can shift sales to markets outside the terms-of-trade volatility. EU. The impact on the oil importers with GCC links is expected to be marginal. Some developing oil exporters, most notably the Republic of Yemen, are also vulnerable to a With the recent developments in agricultural food price shock. The cuts in estimated wheat markets, the risk of a food price hike has become global production between May and August are a threat to all oil importers. Egypt and Morocco projected to have raised domestic wheat prices have the largest estimated monthly imports of in the Republic of Yemen by 26 percent. This wheat, and therefore face the largest increases price increase is likely to have raised poverty in the import bill as a percent of monthly foreign in the Republic of Yemen by slightly more than reserves. Stimulus has helped oil importers 0.3 percentage points, which represents an in- weather the crisis and support the recovery, crease in the number of the poor by an estimated but many of them are now squeezed for fiscal 80,000 people. Iraq also appears to be vulnerable space which represents a key source of long-term although slightly less than the Republic of Yemen vulnerability. due to sourcing a smaller share of its wheat con- sumption from abroad. Part II. Looking beyond the recovery and beyond oil Oil importers such as Egypt, Morocco, Tu- nisia, Lebanon, Jordan and Djibouti weathered In the last ten years MENA’s growth accelerated the effects of the global economic and financial relative to the previous decade in response to crisis better than other MENA countries, but intensified efforts in many countries to bolster developments in Europe are expected to have their private sectors and diversify their sources of dampened growth in 2010, especially of oil growth. The growth response in developing MENA importers with strong EU links. In 2010, real since 2000 however has been modest in per capita economic growth of oil importers is expected to terms compared to other developing regions. The average 4.9 percent and is unlikely to surpass capital-intensive oil sector has been and remains growth in 2009. Assuming steady progress with the primary vehicle for revenue and wealth cre- structural reforms, oil importers’ growth after ation for the oil exporters in MENA, while the 2010 is expected to surpass pre-crisis levels in spillover effects to the oil importing countries in the 2000s, and average 5.3 percent in 2011 and the region and beyond have been significant. 5.7 percent in 2012. With the benefits from oil, however, come Oil importers with EU links are likely to face serious risks as MENA remains uncomfortably some repercussions of the expected significant dependent on oil. Some of the risks of this fiscal contraction in the heavily-indebted, high- dependence are well-understood and include income European countries (EU-5), and more macroeconomic volatility, Dutch disease, envi- broadly, the Euro zone. The effects would come ronmental degradation, political instability and through the balance of payments, reflecting the conflict, and institutional weakness and cor- impacts on trade, remittances, and FDI flows.O il ruption. Other risks are less obvious and have importers with EU links have the greatest trade to do with a mismatch between the economy’s exposure to the highly-indebted countries in endowment base and its endowment use, and in the Southern Euro Zone (SEZ), and the second the future, the threat of viable alternatives to oil. highest trade exposure to the EU25, after ECA. In addition, two of the oil importers with EU links— Some MENA oil exporters have been taking Morocco and Tunisia—are much more dependent steps to minimize the potential risks and enhance on the EU for their remittance flows than Egypt the potential benefits of oil-driven growth. TheGCC

xix Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

countries, in particular, have followed prudent • Restrictive trade policies—especially those macroeconomic policies, opened up their markets in services—distort incentives, discourage for goods and labor, saved their oil revenues and foreign direct investment, and limit MENA’s used them strategically to manage volatility and integration within the region and with the finance infrastructure, technology and education world economy. investments. However, the labor-abundant devel- • Governance issues linked to discretion in oping oil exporters have been far less successful applying rules and regulations have led to than the GCC countries in dealing with some of the stagnation, inefficiencies, and privileged ac- pitfalls of oil dependence. These countries suffer cess for some, but limited access to services, from weak institutions, conflicts, macroeconomic including finance, resources and information volatility, and Dutch disease. The latter has led to for micro and small enterprises. increases in the prices of nontradeables relative • Inefficient and inflexible labor markets to tradeables, making the nonoil tradeable sector and scarcity of skills, innovation and less competitive internationally, and exacerbating technological capabilities hurt firms’ pro- the dependence on capital-intensive oil exports. ductivity, limit employment creation and the Dutch disease has also become a threat to some oil technological content of MENA’s exports. importers receiving large remittances and finance from the GCC markets. How did nonoil exports evolve during the past decade? And while the outlook for oil remains prom- ising in the medium term due to strong demand To its credit, pre-crisis MENA has made progress for oil in Asia and other fast-growing markets, in achieving greater openness, diversifying its counting on oil will not solve the problem of exports and export destinations. Countries ad- fueling inclusive growth in the region in coming opted new technologies and aggressive renewable years. As the oil industry is capital-intensive, energy exploitation plans to catalyze industry and continued reliance on oil will not address devel- energy diversification. Importantly, MENA made oping countries’ major issue—employment cre- a major shift in the destinations for its nonoil ation, and will only worsen the current situation. goods towards fast-growing Asia and away from MENA needs to expand exports of nonoil goods slow-growing EU—a move that has been a lot less and services in order to spur job creation for the dramatic, but nevertheless substantial for the oil fastest-growing labor force in the middle-income importers. The shift towards Asia and fast-growing group of countries. Despite some progress, in BRICs is good news for MENA as South-South the past decade net exports contributed little trade is expected to play a much more prominent to regional growth, and nonoil exports of goods role in the new post-crisis world trade order. and services remain below potential. However, the situation differs significantly for theGCC oil Nonetheless, the importance of various mar- exporters and the MENA oil importers whose kets differs by country group. Europe remains nonoil exports of goods and services are at po- the most important export destination for ME- tential, and the developing oil exporters whose NA’s nonoil products and services. This reflects nonoil exports are only slightly more than a fifth largely the fact that the EU receives around half of expected levels. of oil importers’ exports. Nonoil exports destined to other MENA countries represents the largest How did nonoil exports evolve during the share of GCC’s total nonoil exports, while for past decade? Do MENA countries face special developing oil exporters Asia has become the market access issues? What are the major ob- most important nonoil export destination. stacles to MENA’s nonoil export growth? Are reforms implemented by countries addressing The services sector appears to be an area the major constraints? The answers to these of relative strength for MENA and a key source questions vary by country, although common of export revenue and future potential growth. messages emerge for the region as a whole. MENA expanded its share in the global nonoil

xx Executive Summary

export market largely due to an increase in ex- developed markets is high mainly due to non- ports of services. Only one other region in the tariff barriers (NTBs), especially constraining world—South Asia—generates a higher share of oil importers with EU links. MENA countries output than MENA by exporting services. And have more restricted market access in China the importance of services as a source of export than in advanced markets, and oil importers growth is much greater for MENA’s oil importing with EU links encountered much higher overall countries than any other region in the world. protection than others because of high tariffs on specific products exported to China. By contrast, merchandise exports of other developing countries grew much faster than All regions face higher protection in India MENA’s suggesting that MENA firms producing than elsewhere, and MENA region is not an excep- nonoil merchandise goods are not as competitive tion. Furthermore, the region encounters higher as some of their foreign counterparts. Regional protection on its nonoil exports to India than nonoil merchandise export growth was driven most other regions, largely because of high bar- more by an expansion of existing products to new riers on GCC’s nonoil exports. However, overall markets and new products to existing markets protection on oil importers’ exports was generally than by an increase of existing exports to existing lower in India than in China, reflecting a product markets. The latter is also indicative of substan- composition effect. Notably, there is no evidence tial pressures from competition with other emerg- that in general protection has increased substan- ing countries’ exports. Oil exporters expanded tially since 2008 when the global crisis erupted. exports of industrial products, notably in Asia, while oil importers were much more successful Despite good market access developing MENA than oil exporters in expanding exports of parts countries do not exploit well existing opportu- and components to the EU and Asia, and capital nities for nonoil export growth. Developing oil goods to the EU. However, export growth linked exporters such as the Republic of Yemen, Algeria, to global production sharing arrangements was the Islamic Republic of Iran, and Syria exported weak relative to export growth of industrial, con- their products to less than 5 percent of markets sumer and food products—especially to the EU. in 2005. Oil importers were more successful than them, but still most exported products to Growth at the extensive margin is evidence less than 7 percent of markets, and compared of the shift toward rapidly growing product and poorly to other countries, including which market segments in Asia and the EU, and also of reached 27 percent of markets for its products. the growing importance of exports of industrial Furthermore, success in penetrating foreign products, and to some extent, global production markets varies greatly across MENA countries sharing arrangements in the electrical and mo- and cannot be explained just with differences in tor vehicle industries in the oil importers with protection across markets, but rather reflects lack strong EU links. However, intra-industry trade of information about markets—an area of special (IIT) remains limited within MENA and with the concern to export-oriented firms in MENA—and rest of the world, and manufacturing activities other constraints limiting firms’ competitiveness. in MENA appear to be mostly assembly-type op- erations directed at domestic markets. The only What are the major obstacles to country in the region with a significant share of MENA’s nonoil export growth? components in its total exports is Tunisia. A range of factors impede MENA’s nonoil export Do MENA countries face special market growth, discourage investment, and hurt firms’ access issues? competitiveness, and labor and total factor pro- ductivity levels vary substantially within the re- MENA countries have relatively good market gion. Firms from GCC countries are much more access for nonagricultural goods in high income productive than firms from developing MENA, countries, but overall agricultural protection in while developing oil exporters’ firms are least

xxi Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

productive. Accordingly, the three major groups growth identified in the report, but in many coun- of countries face different constraints to nonoil tries a lot more needs to be accomplished as wide export growth. policy gaps remain in some areas. The average number of reforms in MENA steadily increased In the GCC countries, limited access to fi- during the last 5 years. Between June 2009 and nance for small and medium enterprises (SMEs), May 2010, 11 of 18 economies in MENA adopted distortions in labor markets that discourage a total of 22 business regulation reforms to im- skill acquisition and entry into the private sec- prove the climate for doing business according tor, and discriminatory policies that discourage to the latest Doing Business report (2011). The FDI inflows into some of the services sectors top reformers in the region were Saudi Arabia are major problems. Innovation and technologi- and Egypt which were among the 15 most active cal readiness also appear to be areas in need of reformers in the last 5 years. special attention as these countries are behind their peers in the developed world. MENA governments improved macroeconomic management, simplified business regulations, In developing oil exporters, nonoil tariff reduced tariffs, and started gradual opening of and nontariff protection is highest in the world, their financial sectors. In an effort to increase ac- taxes and corruption are the most frequently- cess to finance, the IslamicR epublic of Iran, Syria, mentioned major complaints by exporting the United Arab Emirates, Jordan and Lebanon firms, but due to the dominance of the state, made improvements of their credit information other issues, especially inefficiencies in labor systems. Many of the reforms involved the applica- and goods markets, and poor financial market tion of new information technologies which would development, present even bigger problems for increase information flow and the efficiency and the competitiveness and growth prospects of the transparency of operations. Improvements were export-oriented sector. made to trade facilitation in some GCC countries including Saudi Arabia, the United Arab Emir- In oil importing countries—especially those ates, and Bahrain, as well as in the oil importers with EU links—protection is still high largely with EU links. The Republic of Yemen approved due to nontariff barriers. Wide dispersion of an amendment to its Customs law to meet WTO tariffs across countries implies that industries in membership requirements and standards, with the these countries benefit to varying degrees from aim of completing WTO accession by end of 2010. policy-generated transfers, making the opening of markets among regional partners difficult de- In the GCC, Qatar is easing restrictions on spite PAFTA. Protection in services also remains majority foreign ownership of local companies, high and beyond the scope of regional agreement while some GCC countries are preparing or al- such as PAFTA and the bilateral FTAs with the ready implementing reforms addressing issues EU. Limited fiscal space in quite a few of the related to their major competitiveness issue—skill oil importers implies that macroeconomic un- shortages and labor market regulations. Devel- certainty remains a top-most concern for firms, oping oil exporters are planning to improve the while the inefficient and inflexible labor market functioning of their financial, inputs and goods is another weakness. Furthermore, to be able to markets. As part of its ongoing financial system compete effectively in global markets, firms in reform program, Syria has initiated a new compe- oil importing countries must catch up with East tition and anti-trust law for the financial sector. Asian firms in terms of innovation efforts. Iraq has adopted an action plan to modernize its banking sector. Are reforms implemented by countries addressing the major constraints? Several developing MENA countries with lim- ited fiscal space are planning reforms to address MENA countries are implementing reforms ad- macroeconomic imbalances and uncertainty. dressing some of the constraints to nonoil export Tunisia is preparing a law to ensure financial

xxii Executive Summary

viability of pension schemes over the next 20 tion reform and reforms required to transition years without additional tax increases or budget to technology-intensive production. A lot more financing. Jordan is making a shift away from needs to be done to understand the nature and publicly funded investments towards PPP ar- extent to which regulations restrict trade and rangements. Some developing oil exporters are FDI in the GCC services. preparing improvements to their tax code and removals of costly distortions. A number of oil In developing MENA, countries need to importers are planning measures to strengthen intensify efforts to strengthen institutions, im- financial stability, improve access to finance for prove information gathering and dissemination, SMEs and remove limits on FDI in certain sectors. and reform implementation. Countries should press on with financial market development— Wide policy gaps, however, remain in a num- especially improving financial infrastructure, ber of areas where governments should step up while further strengthening macroeconomic reform efforts. In the GCC, more needs to be done management, addressing inefficiencies in labor to address the issue of skill shortages in a com- and goods markets, and facilitating innovation prehensive way. GCC governments should con- activities, knowledge and technological acquisi- tinue to invest in skills, facilitate the matching tion. Finally, it should be a priority to understand of labor supply and demand through improved better the nature and extent to which nontariff data collection, information and intermediation barriers and regulations restrict trade in non-oil services. It would be critical to coordinate migra- goods and services.

xxiii

Part I. Sustaining the Recovery

Chapter 1 MENA is recovering from the crisis, but slowly

The Middle East and North Africa (MENA) re- Figure 1: Growth outlook (real GDP growth gion is recovering from the global financial and rates in percent) economic crisis along with the global economy and with all the attendant uncertainties. MENA World Developing countries ECA was affected by the financial and economic crisis Developed countries MENA LAC 8 but to a much smaller extent than developed economies and developing regions outside Asia. 6 The economic recovery in MENA has also been 4 much less vigorous than the recovery in coun- 2 tries that suffered sharp output contractions 0 (Figure 1). The factors that helped MENA avoid –2 severe recession—a large public sector and lack of integration with the global economy—now –4 seem to be constraining the growth recovery. –6 2008 2009e 2010f 2011f 2012f Growth in MENA is expected to average 4 per- cent in 2010, an increase of slightly less than Source: World Bank, Global Economic Prospects 2010 and 2 percentage points over growth in 2009, and MENA Social and Economic Development Group. weak compared to increases of 5.6 percentage points in advanced economies and 4.5 percent- Figure 2: Growth accelerations in 2010 age points in developing nations on average (Figure 2). MENA’s output growth in 2011 and (percentage point change relative to 2009) 2012 is expected to return to the average growth 10 rates observed in the 2000s, prior to the eco- 9 nomic and financial crisis. 8 7 In the near term growth would be driven by 6 consumption and investment expansion, and 5 a recovery in exports (Table 1). Government 4 consumption is expected to remain an impor- 3 tant driver of growth in MENA although the 2 extent to which individual governments will be 1 able to stimulate their economies will depend 0 LAC on the degree of fiscal space available. Given ECA World the uncertainty about the economic prospects MENA countries countries Developed of the global economy, it is difficult to forecast Developing the extent to which exports would contribute to Source: World Bank, Global Economic Prospects 2010 and growth in MENA going forward and the extent MENA Social and Economic Development Group.

3 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Table 1: Demand-side sources of growth in MENA Exports of Imports of Private Government Gross Domestic Goods and Goods and GDP growth, % Consumption Consumption Investment Services Services 2007 5.6 4.4 2.5 4.3 2.2 –7.8 2008 5.3 3.2 2.1 2.8 2.7 –5.5 2009 2.0 1.4 2.0 0.6 –1.1 –1.0 2010f 4.0 2.4 1.8 1.7 1.2 –3.1 2011f 4.8 3.1 1.9 1.7 1.8 –3.7 Source: Staff calculations based on World Bank data. Data for 2010 and 2011 are forecasts.

to which private consumption and investment Governments facilitated the recovery and will pick up pace. It is important to recognize the return to stability by using monetary easing, that the outlook by country will differ depend- including lower reserve requirements of banks, ing on initial conditions and the linkages to the liquidity support from central banks or govern- global economy through the financial, oil, and ments, government guarantees on deposits and the balance-of-payments channels. debt, capital injections and, in Qatar, asset pur- chases.1 The fiscal stimulus aimed to help the MENA’s recovery has been driven by recovery, but also to enhance long-term growth the global rebound and, to varying prospects, mainly through capital expenditures degrees, by domestic stimulus concentrated on infrastructure investments. For example, ongoing large fiscal spending by Abu In MENA, the well-integrated GCC countries Dhabi has supported its long-term diversification were hardest hit by the global economic and strategy. financial crisis, but they recovered quickly as demand for oil picked up, driven by the rapid The GCC recovery has had a positive impact recovery in emerging markets, most notably Asia, on other MENA countries, and more broadly, on and the GCC financial sector stabilized. In 2010 the global economy, mainly through increased growth is projected at 4.2 percent—a strong come- outflows of remittances and capital flows. 2 back from near zero growth in 2009 (Figure 3), Remittance outflows from GCC countries re- and the expectation is that growth will acceler- mained resilient during the crisis and continued ate to 5 percent in 2011 before declining to 4.8 to grow in 2009, albeit at a smaller pace than percent in 2012. the one registered during the pre-crisis period. The investment programs part of the GCC gov- GCC governments responded quickly with ernments’ fiscal stimulus tended to be labor in- monetary and fiscal stimuli, and their accumu- tensive, although most entailed use of imported lated reserves and other assets enabled them labor, and therefore stimulated the economies to prevent a deeper deceleration in growth, and of countries supplying migrants, e.g. those in support a rebound in growth. However, economic developing MENA and South Asia. growth has been constrained by anemic credit growth, which has started inching higher only recently, and by the fact that the four GCC mem- 1 These share common elements with the support measures bers of OPEC have restrained output of crude oil introduced in the US, EU and Eastern Europe. to support oil prices, in the face of large stock 2 The GCC states are an important source of remittances, and overhang and rising non-OPEC supply. At present, increasingly foreign investments. These countries generate more than 10 percent of global annual remittance flows, while their nearly two thirds of OPEC ample spare capacity of estimated accumulated reserves and assets in sovereign wealth 6 million barrels per day has been in Saudi Arabia. funds exceed US$1.5 trillion.

4 Chapter 1: MENA is Recovering from the Crisis, but Slowly

Developing oil exporters such as Algeria, the Figure 3: MENA’s annual real growth Islamic Republic of Iran, Iraq, Libya, Syria and performance before, during, and after the Republic of Yemen also felt the impact of the the crisis crisis, and later the recovery largely through the oil channel as their financial sectors are mostly MENA region Developing oil exporters GCC oil exporters Oil importers state-dominated, and not linked to global financial 8 markets. The strong rebound in oil prices during 7 the past 12 months improved the fiscal and growth 6 outlooks (Figure 21 and Figure 3) for this highly 5 dependent on oil country group (Figure 4). Real growth is projected to be 2.9 percent in 2010, up 4 Percent from 2.1 percent in 2009, and accelerate to 4.2 3 percent in 2011, and 3.9 percent in 2012. Public 2 spending of developing oil exporters is typically 1 pro-cyclical, but during the recent crisis govern- 0 2006 2007 2008 2009 2010e 2011p 2012p ments in a number of these countries responded with counter-cyclical fiscal policies, in addition Source: National agencies and World Bank staff estimates (e) to monetary easing and financial sector support for 2010, and projections (p) for 2011 and 2012. measures. Monetary easing measures included lower reserve requirements in Algeria, the Is- lamic Republic of Iran, and Syria, interest rate ernment passed a supplementary budget law reductions in Syria and drawdown of reserves in which banned credit to consumers, except for Algeria, while financial sector measures covered mortgages, as well as supplier credits to finance government guarantees on deposits, liquidity imports—only letters of credit may now be used. support and asset purchases. Debt relief measures The law aims to protect consumers from exces- were adopted in Algeria, where they benefited sive debt and restrain importation of durable mostly farmers and SOEs, and in Syria. consumer goods. The measures form part of a package of regulatory reform measures passed Unlike other governments which eased in 2009 in favor of domestic over foreign opera- liquidity constraints in 2009, Algeria’s gov- tors, including minimum local ownership of 51

Figure 4: Sources of external revenue, 20081

Goods exports (non oil) Oil exports Services exports Remittances 70%

60%

50%

40%

30% Share of GDP Share 20%

10%

0% SSA EAP ECA LAC SAS MENA Oil Other Oil GCC Importer Exporters

Source: COMTRADE data and IMF. Note: Other oil exporters are developing oil exporters in MENA. Oil importers are MENA’s oil importing countries. 1 See statistical appendix for country-specific macroeconomic information.

5 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Table 2: MENA countries’ fiscal space in 2008 Reserves Current (including account Government Reserves in SWF) in Fiscal balance balance as % debt as % of months of months of as % of GDP of GDP GDP imports imports Oil exporters GCC Bahrain 4.9 10.6 15.2 2.9 13.6 Kuwait 19.9 40.7 5.3 6.3 86.6 Oman 13.9 9.1 5.0 5.5 6.4 Qatar 10.9 33.0 15.0 3.8 23.1 Saudi Arabia 32.5 27.8 13.3 27.4 45.4 United Arab Emirates 20.4 8.5 15.1 1.8 16.7 Developing oil exporters Algeria 7.7 20.2 8.2 34.5 45.1 Iran, Islamic Republic of 0.0 7.2 16.1 8.0 9.2 Iraq –3.3 12.8 108.5 14.6 Libya 24.6 40.7 0.0 42.6 65.7 Syrian Arab Republic –2.8 –1.9 30.2 9.4 — Yemen, Rep. –4.5 –4.6 36.4 7.5 — Oil importers Oil importers with GCC links Djibouti 1.3 –27.6 60.2 3.0 — Jordan –8.8 –9.6 62.3 5.6 — Lebanon –8.8 –19.8 157.1 18.7 — Oil importers with EU links Egypt, Arab Rep. –6.8 0.5 76.6 6.6 — Morocco 0.4 –5.2 47.2 6.3 — Tunisia –1.0 –3.8 47.5 4.0 — Source: World Bank data, Government debt and SWF data are from IMF

Fiscal balance Larger than 2% of GDP –2% to +2% of GDP Less than –2% of GDP Current account balance Larger than 3% of GDP –3% to +3% of GDP Less than –3% of GDP Government debt 0 to 30% of GDP 30% to 80% of GDP Larger than 80% of GDP International reserves in months of imports More than 6 months Between 3–6 months Less than 3 months

percent on foreign investment, and policies to (Table 2). Unlike the GCC countries, developing restrict imports to encourage domestic produc- oil exporters implemented their stimulus mainly tion. The law included a 400% increase in the through increases in current expenditures, 3 cap on government guarantees for SME loans.

The extent to which governments were able to 3 Indeed, only one of the 6 developing oil exporters (Syria) use fiscal stimulus depended on their fiscal space increased capital spending by 40% in 2009 relative to 2008.

6 Chapter 1: MENA is Recovering from the Crisis, but Slowly

especially subsidies and transfers, but also public in 2011 and 5.7 percent in 2012. Despite the wages, and therefore could hurt, not enhance challenges brought by the global economic and their long-term growth prospects. In Algeria, the financial crisis, with a few exceptions,4 reforms fiscal stimulus involved increases of 25 percent have broadly remained on track, while in some in transfers and social subsidies, including milk cases countries have steamed ahead with reforms and wheat subsidies, and housing support. While started before the crisis. Examples of such re- a portion of this spending, such as aid to students forms include pension and social welfare reform from poor families or those living in remote areas, in Egypt and trade liberalization and economic targeted the poor, some of it supported special integration in Tunisia. groups. For example, a new public investment fund was created to invest in SMEs created by Fiscal policy of oil importers with EU links young Algerian entrepreneurs, subsidies for has been expansionary, as countries launched down payment and interest were extended to various measures to stimulate demand, and in low-income households and tax exemptions were some cases the private sector. This expansionary granted to homeowners renting housing to low- stance will make it harder for these countries to income families, but also mortgages were granted improve fiscal space and reduce macroeconomic to public servants at a subsidized interest rate of vulnerabilities. In addition to easing liquid- one percent. ity constraints on banks and firms,5 so far the response has focused on mitigating the short- In Syria, the stimulus was a mix of spending term impact of the crisis on the real economy, measures and tax cuts. The government increased although some measures including tax cuts wages by 23 percent, investment by 40 percent, and investment expenditure would promote and implemented measures to compensate for ris- sustained growth. In Tunisia and Morocco, fis- ing fuel prices and mitigate the impacts of drought. cal stimulus through increased current expen- Tax incentives included tax breaks for farmers ditures included measures to support private and tax incentives to encourage companies to consumption, in the form of public sector wage contribute to strategic objectives such as locating increases, and measures to help SMEs cope production in remote areas, creating jobs and par- with the decline of external demand, includ- ticipating in initial public offerings. The Republic ing guarantees of working capital loans, easing of Yemen had limited fiscal space and provided few of regulation, and debt rescheduling facilities. interventions. Social security interventions for the Assistance to firms, irrespective of size, was most vulnerable were implemented with financing provided in Egypt through transfers supporting from the Crisis Response Facility provided by the exporters, industrial zones in the Delta region, World Bank. In Iraq, where the fall in oil prices and logistic areas for internal trade. severely affected public finances, theW orld Bank provided financial support through a development Stimulus through capital expenditure in- policy loan, working closely with the IMF. creases went into job-creating infrastructure investments in Egypt and Tunisia. In addition, Oil importers such as Egypt, Morocco, Tu- Egypt increased investments in rural and nisia, Lebanon, Jordan and Djibouti, were least social sectors. A range of tax measures were affected by the global economic and financial crisis, but growth in 2010 is expected to average 4.9 percent and is unlikely to surpass growth in 4 For example, Egypt halted the energy subsidy reform. It ad- 2009 (Figure 3), largely due to the weak growth opted a one-year freeze of the energy subsidy phase-out plan expected in developed markets, and the fact for non-intensive industrial users, and extended the freeze for another six months to June 2010. that growth will moderate from relatively high 5 Liquidity support was pursued in Tunisia and Morocco, while levels in Lebanon and Djibouti. Assuming steady government deposits in the banking sector were increased in progress with structural reforms, oil importers’ Egypt. Monetary easing, particularly reduction in reserve re- quirements, was employed in all three countries. Interest rates growth in 2010 is expected to surpass pre-crisis were lowered in Tunisia and Egypt, and international reserves levels in the 2000s, and average 5.3 percent declined in Egypt.

7 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

introduced in Egypt, including cuts in customs Djibouti and Lebanon registered only minor duties on selected industrial inputs and capi- declines in growth during the same period, with tal goods, temporary suspension of the sales both economies growing at 5 and 9 percent, tax on selected capital goods, introduction of respectively, in 2009. Lebanon grew at a much import tariffs on steel, and imposition of anti- faster pace than other oil importers with GCC dumping duties on sugar to protect domestic links, reflecting a post-conflict recovery boom production. aided by strength in certain sectors—tourism and real estate—and vibrant private investment. The economies of oil importers with strong Policy interventions in Lebanon helped fuel GCC links such as Lebanon, Jordan and Djibouti the post-conflict recovery boom, but strained were relatively unaffected by the crisis and man- further the fiscal outlook. Public sector wages aged to grow at a robust pace of 6.5 percent per increased, and a daily compensation fee was in- year in 2009. Growth slowed down substantially troduced for low-income public school students. only in Jordan, where it fell from 7.6 percent in Other policies were introduced to ensure access 2008 to 2.3 percent in 2009. This sharp slow- to finance, including subsidized interest rates down prompted authorities to respond with a extended to all sectors, except construction and combination of financial, monetary and fiscal trade, and strengthen macroeconomic funda- measures, the latter reflecting a mix of tax cuts mentals such as an increase in international and spending increases. Financial measures reserves. included full guarantees provided on all bank deposits, initially through the end of 2009, and MENA labor markets remained subsequently extended through the end of 2010; relatively unscathed by the crisis the provision of guarantees for private sector but impacts differed between borrowing, targeting listed industrial and real countries estate companies with sound credit record facing temporary difficulties obtaining financing;6 and Even though economic recovery has been under a scale back of operations to soak up liquidity way, global unemployment has been lagging by the Central Bank of Jordan. Monetary mea- behind and the specter of a jobless recovery sures included lower reserve requirements and has been observed in many countries. Globally, interest rates, and an increase in international unemployment is estimated to have risen in reserves. 2010 with an increase of more than 30 million since 2007 (Figure 5). Three-quarters of this To mitigate the impact of the crisis on the increase has occurred in the advanced econo- poor, the government of Jordan used largely a mies and the remainder among developing combination of tax cuts and exemptions, and capi- economies. Within the advanced countries, the tal spending increases that are likely to enhance problem is particularly severe in , where the country’s growth prospects. Jordan increased the unemployment rate increased by nearly 10 public investment by 52 percent between 2008 and percentage points, and the United States which 2009 in order to tackle infrastructure bottlenecks in the road and water sectors, and granted tax re- lief for a number of sectors. The government grant- 6 The proposed scheme covers 35 percent of the value of the ed tax exemptions to the tourism sector, extended loan, requires security of at least 125 percent of the financ- tax exemptions on some imported construction ing value and targets projects that are more than 25 percent materials in response to signs of contraction in key complete. 7 sectors, full exemptions from income taxes in the These included full exemption from income taxes of income arising from the agriculture sector, as well as for households agriculture sector and for households with income with income up to JD24,000; full exemption from corporate up to a certain level, corporate tax exemptions or tax for agribusinesses, for the first JD75,000 in income; and reductions in a number of sectors.7 Jordan used corporate tax reduction for industrial companies (from 15 to 14 percent), for trade and tourism companies (from 25 to 14 subsidies sparingly extending a subsidy only on percent), and for financial and telecommunications companies gas cylinders used for cooking. (from 35 to 30 percent).

8 Chapter 1: MENA is Recovering from the Crisis, but Slowly

Figure 5: Global unemployment and real growth

Unemployment GDP growth (right axis) 215 5

205 4 3 195 2 185 1 Percent Millions 175 0 165 –1 155 –2 145 –3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: World Bank data and ILO. Note: Data for 2010 is a forecast. has seen the highest increase in the number of Figure 6: Changes in number of unemployed. Among developing economies, unemployed, 2007–09 (in millions) China and the Russian Federation had the largest increases in the number of unemployed Total number of unemployed in Developing countries: (Figure 6). The export sectors were hardest 8 millions hit in terms of jobs, and informal employment expanded implying that the number of workers with little or no social protection increased. Russian Federation, 1.9 The economic crisis triggered dramatic re- China, 3 ductions in activity in sectors that had expanded Other substantially during the upswing and were at the developing countries, center of the crisis—such as financial services, 1.2 Turkey, real estate and construction. In response, many , 1.1 advanced economies put in place mechanisms 0.9 to stimulate labor demand including direct job subsidies, wage subsidies or reductions in payroll taxes targeting specific groups in the labor force Source: IMF, World Economic Outlook. that are most vulnerable to joblessness such as the long-term unemployed and the youth.

Job losses in the GCC countries were based on labor surveys of professionals shows steep but affected mainly expatriate that a total of 10% of professional jobs in the Gulf workers were cut down over the 12-month period up to August 2009. Small firms registered steeper job Job losses in the GCC countries were steep be- losses (14 percent) than larger firms (8 percent). cause of their high exposure to credit financing Moves by some GCC governments to restrict and global markets. Labor markets were hardest termination of Gulf nationals have helped se- hit in the United Arab Emirates (Figure 7), most cure their jobs in the short run. However, with notably Dubai, where the labor-intensive real termination not an option, some employers have estate sector contracted sharply. Recent analysis become more cautious in hiring nationals.

9 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 7: Job cuts by country and sector in GCC, 2009

Retail 7% Oman 6% Health care 8% Saudi Arabia 7% Oil & gas 10%

Construction 10% Qatar 9% Education 11% Kuwait 10% Advertising 12% 12% Telecom & IT Bahrain 12% Banking 13% United Arab Real estate 15% Emirates 18%

Source: Survey based on Gulftalent.com

The job cuts have disrupted the lives of Figure 8: The crisis did not affect aggregate many expatriates as they typically lack social employment in Egypt, Arab Rep. security or unemployment benefits, and most are required by local immigration laws to depart Labor force Linear (Labor force participation participation) within 30 days of termination. With new vacan- Unemployment Linear (Unemployment cies few and extremely competitive, many have rate (RHS) rate (RHS)) relocated from Dubai to Abu Dhabi,8 and other 53 14 GCC countries or have returned home. Across 52 12 the region, some firms took advantage of the 51 greater supply of candidates to get rid of under- 10 50 performing employees, and to replace them with 8 49 higher-skilled professionals who had previously 6 been either unavailable or unaffordable. It is 48 4 estimated that in 2010 further job cuts are likely, 47 albeit at a slower pace than the one witnessed 46 2 over the past 12 months. 45 0 The impact of the crisis on oil importers’ labor markets was mild 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 Source: Population Council (2010). Note: RHS stands for right-hand side. The impact of the crisis on the labor markets in Egypt and Jordan was mild, according to recent analyses, based on a unique set of labor force sur- veys conducted in the two countries before and of the crisis on hours worked, informality of after the crisis.9 In Egypt, opposite to expecta- employment and sectoral labor shifts have been tions, there was a mild decline in unemployment (Figure 8), combined with a slight increase in 8 both labor force participation and employment- Survey data show that, among expatriates living in Dubai, the percentage who work in Abu Dhabi has tripled over the last year to-population ratios during the period from 2006 from 1% to 3%. Most of those who relocated from Dubai to Abu to 2009. This decline in unemployment was Dhabi are high-income professionals. 9 observed in rural and urban areas, and affected The report presents analysis of the impact of the crisis on labor markets only for Egypt and Jordan as data are not available for both men and women. Additionally, the effects any other developing MENA country.

10 Chapter 1: MENA is Recovering from the Crisis, but Slowly minimal. However, the crisis-related decline in Figure 9: Crisis-related decline in real real earnings growth and, hence in the wage bill earnings and wages growth in Egypt, Arab Rep. growth have been substantial (Figure 9).10 The young, old, unskilled and female workers were Wagebill growth Employment growth more likely to be vulnerable than other groups Monthly real earnings growth in the workforce. 40 30

The crisis slowed down employment growth 20 in Jordan (Figure 10), but changes in labor-force participation, employment and unemployment 10 were small in magnitude. Unlike Egypt, the 0 segments of the labor force hit hardest by the –10 crisis included those with tertiary levels of change Percentage education or above. Indeed, men with tertiary –20 degrees were the only group that experienced –30 increases in unemployment rates following the crisis. People in urban areas suffered more from Q1Yr07 Q2Yr07 Q3Yr07 Q4Yr07 Q1Yr08 Q2Yr08 Q3Yr08 Q4Yr08 Q1Yr09 Q2Yr09 Q3Yr09 Q4Yr09 the crisis than those in rural areas. Among men, Source: Population Council (2010). older workers tended to be somewhat more negatively affected than younger ones, whereas among women, the middle-aged group was the Figure 10: Output and employment growth in worst affected. Jordan

Unemployment remains on an upward trend Employment growth GDP growth in Tunisia, although the measures adopted by 16% the government during the crisis to support dis- 14% tressed firms helped contain the impact of the 12% economic slowdown on employment. To achieve 10% Tunisia’s medium-term objectives of boosting 8% employment-generating growth and lowering 6% unemployment, the authorities are developing an 4% export promotion strategy that seeks to diversify 2% target markets and products.11 The authorities 0% have also identified a number of reforms of la- –2% –4% bor market policies, the education system, and public employment services that will serve to Q1Yr07 Q2Yr07 Q3Yr07 Q4Yr07 Q1Yr08 Q2Yr08 Q3Yr08 Q4Yr08 Q1Yr09 Q2Yr09 Q3Yr09 Q4Yr09

Source: Population Council (2010). 10 The real wage bill is defined as the product of total employ- ment and median real earnings. 11 The government of Tunisia signed a preferential trade agree- ment with the West African Economic and Monetary Union, and facilitate labor mobility and reduce mismatches is currently negotiating free trade agreements with the Central between demand and supply in the labor market. African Economic and Monetary Community. Bilateral negotia- The implementation of these reforms will be tions with the European Union are also under way to extend the FTA beyond industrial products to services, agricultural supported by several World Bank Development products, and processed food. Policy Loans.

11

Chapter 2 MENA’s recovery is Proceeding in an uncertain Global economic context

The Middle East and North Africa (MENA) region duction growth rates declined, with almost all of is recovering in an uncertain global environ- the decrease occurring in developing countries. ment. Industrial production, which in MENA But latest information suggests that industrial is dominated by oil, has nearly returned to its production in emerging economies is beginning pre-crisis peak (Figure 11), largely due to the to pick up, while deceleration continues in high strong recovery in emerging markets, especially income countries. Asia (Figure 12). However, the upturn weakened in the summer of 2010 as global growth slowed Persistently high unemployment rates, weak down (Figure 13) and serious concerns emerged housing data, anemic credit growth, especially to about the sustainability of the global recovery. SMEs in the US, and a deceleration of growth in The pace of recovery decelerated as the impact of developing countries (Figure 12), notably China, rebound factors, including inventory restocking have added to concerns about the sustainability and government stimuli, faded. Industrial pro- of the global recovery. Credit growth in China

Figure 11: Industrial production (percent difference from pre-crisis peak to June 2010)

35 30 25 20 15 10 5 0 –5 –10 –15 India China World Brazil MENA Russian Federation Federation SAS x India Dev x China Dev EAP x China LAC x Brazil LAC High income ECA x Russian ECA

Source: World Bank based on data from Datastream.

13 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 12: Industrial production, seasonally has slowed down but the rates at which credit is adjusted year-on-year real growth rates expanding remain higher than in other emerging markets. However, GCC countries other than fast- DEV WLD HIY MENA growing Qatar are exceptions. Credit growth in EAP ECA LAC SAS these countries slowed down rapidly in response 25 to the crisis and has started inching higher only 20 recently (Figure 14). 15 10 5 Growth in global trade volumes has decelerat- 0 ed (Figure 15, Figure 16) as developing countries, –5 adjusted the pace of importing goods from the –10 rest of the world, likely in response to the end to –15 inventory re-stocking. However, import demand –20 of high income countries appears to be reviving –25 after recent lows, in line with the increase in do- mestic demand in the US and EU. The persistent Jul–09 Jul–08 Jan–09 Jan–08 Jan–10 Sep–09 Sep–08 Nov–09 Nov–08 Mar–09 Mar–08 Mar–10 May–09 May–08 May–12 lack of jobs growth in the US constrains consumer spending, which is a major driver of US output Source: World Bank based on data from Datastream. growth on the expenditure side.

Figure 13: Output growth (real GDP, % Strong external demand for European, and change quarter-on-quarter) especially German capital goods and motor ve- hicles, has been supported by the depreciation of World Advanced economies Emerging and developing economies the euro against the dollar and other currencies 15 since the start of the year. The surge in exports strengthened considerably the growth outlook 10 in the EU in the second quarter of 2010, while the opposite was the case in the US, where im- 5 ports surged in response to strong domestic final demand.12 In Japan, the strong contribution of 0 exports to growth in the first quarter of this year is likely to have moderated substantially in the –5 second quarter due to the appreciation of the yen against the dollar and the weakened import –10 demand in China and elsewhere.

2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 Financial market volatility reflects Source: IMF. the unusually uncertain global outlook

continues to moderate and is approaching pre- Financial markets have been unsettled since crisis rates, but credit growth in other emerging the end of April when equity markets reached markets is picking up pace (Figure 14). It in- their peak during the last 12-month period. creased steadily in Latin America and Caribbean Sentiments changed often based on news about (LAC) since end-2009, and it turned positive the global recovery, Europe’s debt problems, the even in Eastern Europe and Central Asia (ECA) passage of new financial reform legislation and in the second quarter of 2010. In developed countries, large firms have had good access to

corporate debt markets but credit growth re- 12 In July, however, the US trade deficit contracted sharply as mains anemic in the US. Credit growth in MENA export of airplanes surged and imports fell across the board.

14 Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Figure 14: Credit growth (YoY, in percent)

Credit Growth (YoY, in percent) – Emerging Regions

Asia excl. China ECA LAC China

45

35

25

15

5

–5 Jul–09 Jul–08 Jul–07 Jul–06 Jan–10 Jan–09 Jan–08 Jan–07 Jan–06 Sep–09 Sep–08 Sep–07 Sep–06 Nov–09 Nov–08 Nov–07 Nov–06 Mar–10 Mar–09 Mar–08 Mar–07 Mar–06 May–10 May–09 May–08 May–07 May–06

Credit Growth (YoY, in percent) – MENA

GCC Non-GCC Emerging Non-GCC State-dominated

60

50

40

30

20

10

0 Jul–09 Jul–08 Jul–07 Jul–06 Jan–10 Jan–09 Jan–08 Jan–07 Jan–06 Sep–09 Sep–08 Sep–07 Sep–06 Nov–09 Nov–08 Nov–07 Nov–06 Mar–10 Mar–09 Mar–08 Mar–07 Mar–06 May–10 May–09 May–08 May–07 May–06

Source: Datastream. fiscal austerity measures in a number of devel- refinancing of 1.6 trillion euro-denominated debt oped economies. The move of many European by 2012. governments toward fiscal austerity, combined with well-publicized outcomes of stress tests on Financial markets reflected the debt dif- the largest European banks, appeared to have ficulties in Europe with a pullback in equity increased confidence13 and is expected to be helpful to medium-term growth in the euro area. Indeed, EU confidence surveys were sharply 13 The EU stress test covered 91 European banks and focused up in July. But the shift in market sentiment on how they would cope with another economic downturn has not been dramatic and sovereign default and losses on trading portfolios of government bonds. Results revealed that seven EU banks, including a group of fiveS panish remains a concern in Europe as the real test for unlisted savings banks, ‘s Hypo Real Estate and the the European banking sector will be the expected Agricultural Bank of , failed the test.

15 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 15: Import growth, seasonally adjusted year-on-year in volumes

EAP DEV HIY ECA LAC SAS WLD MENA

100 80 60 40 20 0 –20 –40 –60 Jul–08 Jul–09 Oct–08 Oct–09 Apr–08 Apr–09 Apr–10 Jan–08 Jan–09 Jan–10 Feb–08 Feb–09 Feb–10 Jun–08 Jun–09 Jun–10 Sep–08 Sep–09 Dec–08 Dec–09 Nov–08 Nov–09 Aug–08 Aug–09 Mar–08 Mar–09 Mar–10 May–08 May–09 May–10

Source: World Bank, DECPG.

Figure 16: Export growth, seasonally adjusted year-on-year basis in volumes

EAP DEV HIY ECA LAC SAS WLD MENA

80

60

40

20

0

–20

–40

–60 Jul–08 Jul–09 Oct–08 Oct–09 Apr–08 Apr–10 Apr–09 Jan–08 Jan–10 Jan–09 Feb–08 Feb–10 Feb–09 Jun–08 Jun–09 Jun–10 Sep–08 Sep–09 Dec–08 Dec–09 Nov–08 Nov–09 Aug–08 Aug–09 Mar–08 Mar–10 Mar–09 May–08 May–09 May–10

Source: World Bank, DECPG.

markets worldwide, a widening of sovereign ceived as safe havens. Since then equity mar- CDS and bond spreads for some countries kets have recovered some of the recent losses (Figure 17), and corporate bond and CDS (Figure 18), but in most regions they remain spreads in Europe. European interbank lend- below levels prevailing in the first quarter of ing rates diverged to their highest levels since 2010 and volatility remains high. their inception as stress built up in the Euro zone banking system. Investors reduced their GCC stock markets, which are more globally tolerance for risk and channeled funds into US integrated than markets in other MENA coun- treasuries and gold—assets traditionally per- tries, have followed global trends, while non-

16 Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Figure 17: Sovereign 5-year CDS spreads ity for further declines in the short term, serious (bps) concerns remain about the ability of companies, especially those in Europe, to refinance a large Greece Ireland stock of leveraged loans due for repayment in Spain the next few years. 1200

1000 The outlook for GCC countries is tied to the outlook for the global 800 economy 600 The sustainability of the recovery in GCC econo- 400 mies (Figure 3) depends on developments in the rest of the world, and on the extent to which 200 they affect oil markets. In September, oil prices 0 were around $80 per barrel and the average for the year up to beginning of September stood at around $77 per barrel—an increase of 24 percent 1/2/2010 2/2/2010 3/2/2010 4/2/2010 5/2/2010 6/2/2010 7/2/2010 8/2/2010

11/2/2009 12/2/2009 over the 2009 average price of $62 per barrel Source: Bloomberg and DECPG, World Bank. (Figure 20). Since then oil prices moved above $85 per barrel on a depreciating dollar, rising seasonal demand and a tight global distillate mar- ket. China has been a key driver of oil demand, GCC stock markets reacted less to these global accounting for 30–40 percent of the projected developments (Figure 18). Tunisia’s stock index incremental increase in oil consumption. China’s continued its climb, proving for yet another time crude oil imports grew at a fast pace reflecting its resilience during difficult times. This perfor- overall rapid economic growth, plans to add 280 mance, attributed to good fundamentals and million barrels of strategic petroleum reserves by strong demand for equity by domestic investors, 2011 and a sizable refining expansion program. is less impressive when compared with other non-MENA emerging countries. While OPEC expanded its previous “ideal” price band of $70–80 per barrel to $70–90 per MENA’s risk premiums and CDS spreads barrel, support for further price increases based have declined somewhat and are below those on demand and supply factors is expected to for ECA, but remain higher than those in East be weak. Following production cuts to support Asia and Latin America, even when Iraq is prices, OPEC’s space capacity has nearly reached excluded (Figure 19). This is because many 2002 levels when oil prices were $25 per barrel, countries in the region, especially oil import- inventories in the US remain high, and oil de- ers with EU links, are dependent on European mand is expected to grow in the medium term markets where uncertainty about future growth only slowly, while non-OPEC output continues prospects remains high. In addition, a few coun- to rise modestly. tries—most notably Lebanon—have limited fiscal space, and remain sensitive to negative shocks The positive terms-of-trade shock from the which push their credit spreads higher than oil price rebound has allowed GCC governments those of their peers. to keep their expansionary fiscal policies while maintaining or improving fiscal and current ac- Further movements in the markets will count positions14 (Figure 21 and Figure 22). All depend on evidence that private sector growth GCC governments continued to stimulate their in consumption and investment has started to pick up globally. Despite a sharp decline in 14 See statistical annex for a complete set of macroeconomic global corporate default rates, and the possibil- indicators by country in MENA region.

17 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 18: Stock market reaction to events in Europe

Stock Market Indices – Global

BRIC High Income GCC Non-GCC

180

160

140

120

100

80

60

40 Jul–09 Jul–10 Jul–08 Jul–07 Jan–10 Jan–09 Jan–08 Jan–07 Sep–09 Sep–08 Sep–07 Nov–09 Nov–08 Nov–07 Mar–10 Mar–09 Mar–08 Mar–07 May–09 May–10 May–08 May–07

Stock Market Indices – Non-GCC

Egypt, Arab Rep. Jordan Lebanon Morocco Tunisia

220 200 180 160 140 120 100 80 60 40 Jul–09 Jul–10 Jul–08 Jul–07 Jan–10 Jan–09 Jan–08 Jan–07 Sep–09 Sep–08 Sep–07 Nov–09 Nov–08 Nov–07 Mar–10 Mar–09 Mar–08 Mar–07 May–09 May–10 May–08 May–07

Source: Datastream.

economies as the global economy started slow- ment stimulus through direct capital spending, ing down in the second quarter of 2010. Even and in some cases through guarantees on private Kuwait, which was the only GCC country without financing. The stimulus supports these coun- a fiscal stimulus in 2009 and suffered the worst tries’ economic diversification strategies, and recession in the region, started implementing a in the meantime is helping the revival of non-oil fiscal stimulus in the summer of this year. economic activities. Saudi Arabia continued to implement its $400 billion public investment Private consumption in all GCC countries stimulus program. Abu Dhabi stimulus spending was stimulated by increases in current spending has encouraged investment and consumption. and freezes on cuts of public sector employment Despite rapid growth in Qatar, the government and subsidies. All GCC governments kept invest- kept spending on projects and revived private

18 Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Figure 19: Risk perceptions reflecting developments in Europe

EMBI Global – Spread (bp)

LAC ECA East Asia MENA MENA excl. Iraq

800 700 600 500 400 300 200 100 0 Jul–09 Jul–10 Jul–08 Jul–07 Jan–10 Jan–09 Jan–08 Jan–07 Sep–09 Sep–08 Sep–07 Nov–09 Nov–08 Nov–07 Mar–10 Mar–09 Mar–08 Mar–07 May–09 May–10 May–08 May–07

Sovereign 1 yr Credit Default Swap

LAC ECA East Asia GCC Non-GCC

600

500

400

300

200

100

0 Jul–09 Jul–10 Jul–08 Jul–07 Jan–10 Jan–09 Jan–08 Jan–07 Sep–09 Sep–08 Sep–07 Nov–09 Nov–08 Nov–07 Mar–10 Mar–09 Mar–08 Mar–07 May–09 May–10 May–08 May–07

Source: Datastream.

investment by extending large-scale government tion and Iraq-related logistics fared considerably financing or implicit guarantees. better. Steady export-led recovery in Bahrain’s downstream energy-related sectors, including Saudi Arabia’s stimulus spending supported aluminum and petrochemicals, and government- domestic non-oil growth, and more broadly the driven construction have been the major sources global recovery because of its large size and high of economic growth. In Qatar, LNG has been the import content.15 In the United Arab Emirates, key driver of growth, while in Oman the main re-export trade held up much better than ex- pected due to steady regional growth and strong growth in Asia. Growth in most non-oil sectors in 15 Saudi Arabia‘s fiscal package is the largest as a share ofGDP Kuwait remained depressed although consump- of any G-20 country.

19 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 20: Crude oil average spot price (current US$ per barrel)

140

120

100

80

60

40

20

0 1995M02 1995M09 1996M04 1996M11 1997M06 1998M01 1998M08 1999M03 1999M10 2000M05 2000M12 2001M07 2002M02 2002M09 2003M04 2003M11 2004M06 2005M01 2005M08 2006M03 2006M10 2007M05 2007M12 2008M07 2009M02 2009M09 2010M04 2010M11 1194M07

Source: World Bank, DECPG.

non-oil source of growth has been construction lenge. Some of the fiscal expansion will be self- which benefitted from government spending. terminating when projects get completed, but the medium-term burden of continued public A number of risks cloud GCC countries’ spending growth could increase the cost of growth prospects. The outlook for the global capital for the private sector as public saving economy remains uncertain, although the risk declines. Furthermore, in some countries, it of a negative terms-of-trade shock remains would be difficult to cut public spending due to remote. The GCC countries have fiscal space political considerations. to cushion the impact of an unlikely negative oil price shock but the systematic reliance on It is also unclear to what extent private sector government spending poses a long-term chal- growth would pick up when public sector spend- ing declines. In the United Arab Emirates, there is a huge overhang of partly completed property Figure 21: MENA fiscal outlook (percent of developments, some stalled for two years and the property price slump shows no sign of eas- GDP) ing. In order to revive the construction sector, 2009 2010e 2011p 2012p the emirate of Dubai put substantial new funds 8.0 into Nakheel—its flagship property developer, 6.0 and paid trade creditors. It is too soon to say whether these measures have had the desired ef- 4.0 fect. Furthermore, Abu Dhabi’s property market 2.0 has not remained immune to the effects of the 0.0 crisis and has entered a downturn with a lag. In –2.0 Qatar, where the property market, especially for –4.0 commercial real estate, is oversupplied, and the –6.0 banking sector has had significant exposure to domestic property loans, the construction sector –8.0 Oil Exporters Developing Oil Importers is expected to grow at a slow pace in the coming Oil Exporters years. More importantly, the outlook for the LNG Source: National agencies and World Bank staff estimates (e) market has been weakened significantly given for 2010, and projections (p) for 2011 and 2012. developments in the US and EU LNG markets.

20 Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Figure 22: MENA current account positions nomic recovery in the GCC countries. With the (percent of GDP) exception of Qatar, credit growth to the private sector remains anemic (Figure 23) due to the 2009 2010e 2011p 2012p uncertainty arising from ongoing debt restructur- 15.0 ing, and the spillovers from Dubai World (DW) events (see Box 1). The DW case has highlighted 10.0 the complexity of out-of-court debt restructurings in the context of GCC countries’ lack of experi- 5.0 ence with modern insolvency procedures, the central role of government-related enterprises, 0.0 and the complicated financing mix of many com- –5.0 panies, including Islamic finance and working capital funded from purchaser deposits. –10.0 GCC Oil Developing Oil Importers Nonetheless, DW would be a relatively quick Exporters Oil Exporters restructuring by GCC standards, where some Source: National agencies and World Bank staff estimates for cases have taken 2 years to resolve. The direct 2010, and projections for 2011 and 2012. engagement of the emirate’s government via the Dubai Financial Support Fund has been a major reason for the relatively quick progress Tight credit conditions, particularly in in- made with this restructuring (Table 3). The terbank markets, pose another threat to the eco- government has been able to use a mixture of

Box 1: The Dubai World debt restructuring

The Dubai World (DW) restructuring is close to comple- re-engage with its trade creditors. The latter group is tion on terms very similar to those outlined in the April receiving cash payments (totaling US$680 million so far) 2010 Regional Economic Update. A formal offer was equal to 40 percent of outstanding obligations, with the made to creditors in July 2010, with the terms outlined remaining 60 percent to be settled by a sukuk whose by the companies in March 2010 providing the basis terms will be finalized shortly. Notably, Nakheel has for negotiations. As was clear when the terms were been making these payments without having final agree- announced, DW’s property development subsidiary ment on its restructuring package, indicating an objec- Nakheel has been separated from the rest of the DW tive of keeping activity flowing as smoothly as possible. restructuring and is proceeding on a parallel track. As for DW, virtually all creditors accepted its propos- Nakheel has indicated that it is close to final agree- al by the deadline of September 10, 2010. Although the ment with its bank creditors on a 5-year extension of its terms of the DW offer are not as severe as some initial loans. The extension would be at an interest rate that is predictions, due to the extension of maturities at below 4 percentage points above the relevant interbank rate. commercial interest rates they represent a substantial This rate is significantly better than the one DW is offer- haircut in net present value terms (on the order of 25 ing its creditors. Nevertheless, Nakheel’s bonds coming percent). There were indications during the summer due in future years are yielding around 15 percent, well that some creditors were balking at these terms, lead- above the rate on the restructured bank facilities. ing the company to reiterate its option to force a deal From the perspective of the Dubai government, via the special insolvency tribunal established in Dubai Nakheel is essential to restarting stalled construction International Financial Center (DIFC) last year. As the activity in the emirate, and so funds have been provided creditors became convinced that no better deal was to enable it to redeem sukuk as it comes due and to possible, DW’s offer was able to go through.

Source: Compiled by World Bank, MNSED.

21 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 23: Credit growth in GCC

Credit Growth (YoY, in percent) – GCC

Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates

80 70 60 50 40 30 20 10 0 –10 Jul–09 Jul–08 Jul–07 Jul–06 Jan–10 Jan–09 Jan–08 Jan–07 Jan–06 Sep–09 Sep–08 Sep–07 Sep–06 Nov–09 Nov–08 Nov–07 Nov–06 Mar–10 Mar–09 Mar–08 Mar–07 Mar–06 May–10 May–09 May–08 May–07 May–06

Source: Datastream.

persuasion and authority to move things along. creditors of the latter are thus forced to pursue It has promised new funds for viable entities and cross-border claims. The experience of purchas- the prospect for financial institutions’ continued ers of off-plan Dubai property has made clear engagement with the Dubai business model, but their lack of recourse when things go wrong. has reserved the right to move the restructuring These investors have been faced with the conun- to a special insolvency tribunal in the Dubai drum of whether to provide further funds into a International Financial Center16 if a consensual distressed entity in order to get its developments restructuring could not be reached. closer to completion. On the other hand, secured lenders and asset-based financiers (as in Islamic Not all parties to the GCC debt restructuring finance) have been in a somewhat stronger posi- have been satisfied. Some creditors have found tion, although the unraveling of various claims themselves in particularly weak positions as a on specific assets could also pose difficulties. result of this process. Creditor bargaining power has varied with the type of obligation. The credi- Significant government support has enabled tors in the weakest position vis-à-vis distressed the market for large project and corporate debtors have been lenders at the holding com- finance to continue functioning, despite height- pany level and purchasers of yet-to-be-delivered ened risk aversion and uncertainty. Although assets. Lenders to the holding company level of private sector bank credit availability remains a corporate entity have been vulnerable to the tight throughout the GCC, GCC firms have been problem of co-mingled finances and lack of clar- able to conduct large funding operations. In ity about which assets they could pursue in the Saudi Arabia, major financing has been carried event of default, whereas subsidiary companies out by key government-related enterprises such typically offer clearer outcomes in both respects. as the petrochemicals giant Sabic and the electric

A further complication is evident in the 16 case of the Saad and al-Gosaibi groups in Saudi The DIFC tribunal was created specifically forDW and there has been no indication that the government intends broadening Arabia, where the holding companies were its scope to other “Dubai Inc.” debt distress situations, such as managing financial operations in Bahrain and that of Dubai Holding.

22 Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Table 3: Debt restructurings in the GCC, 2008–2010 Involves Company Country Initiated Amount Current status sukuk (Y/N) Kuwait Finance & Kuwait 2008 (early) $0.5 bn Concluded June 2010 N Investment Co. Global Investment Kuwait Dec-08 $1.7 bn Creditor agreement obtained Dec 2009 Y House Investment Dar Kuwait Jan-09 $3.5 bn Creditor agreement (tentative) obtained Dec Y 2009. Some litigation continues. Restructur- ing terms will have to be approved by court since the company is in court protection. Gulf Invest Kuwait Apr-10 $0.05 bn Loan guarantee called from United Arab N Emirates’ bank. International In- Kuwait Apr-10$ 0.2 bn Ongoing “business review”; sukuk being Y vestment Group dissolved; 2nd missed payment in July. Saad & al-Gosaibi Saudi Arabia/ May-09 $15-20bn Partial local settlement in Saudi Arabia. Y groups Bahrain Ongoing negotiation and legal actions elsewhere. Dubai Holding plus United Arab May-10$ 1-3 bn Loan extensions sought at holding company ? subsidiaries Emirates and subsidiary level. No formal default. National Central United Arab Apr-10 $1 bn Ongoing Y Cooling Emirates Dubai World United Arab Nov-09 $26 bn Virtually all creditors accepted offer in Sep- N Emirates tember 2010. Finalization expected shortly. Nakheel United Arab Nov-09 $10 bn On parallel track to the above but with Y Emirates larger sukuk and trade credit elements. Blue City Oman NA $0.6 bn Project not viable as originally conceived; N bonds bought at 33% discount by an Abu Dhabi fund (June 2010) Gulf Finance Bahrain/Ku- Feb-10 $0.3 bn + Rollover granted but strains continue. No Y House wait formal restructuring request. Source: Staff compilation from media reports. utility Saudi Electric, while the government has Three significant bond issues without a govern- also been a direct lender to both of these compa- ment guarantee have seen near double-digit nies and to other large projects with mixed public yields, and other potential issues have been and private participation. In Qatar, the central postponed in the wake of market uncertainties government and a unit of the sovereign wealth which were particularly pronounced during the fund have raised billions of dollars through bond height of concerns about Greece’s debt crisis. issues. The bonds provide a safe asset for risk- Nevertheless, two United Arab Emirates’ banks averse banks, and the funds allow the govern- have successfully tapped the Malaysian sukuk ment to play a more direct role as a financier of market at attractive yields, but these banks major projects, especially in real estate, at a time benefit from their implicit government backing. when other players withdrew. The government For many other borrowers, all indications are of Bahrain has also used bond sales to support that conditions are very tight. macroeconomic stimulus efforts. DW restructuring has had a long-lasting ef- When the government has not been directly fect on the market for GCC sukuk. The amount present in bond markets, yields have been high. of GCC sukuk issuance has declined from 2009

23 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 24: Spreads over LIBOR on Global (SKBI) and GCC sukuk (GSKI) and GCC conventional bonds (SKBI)

GSKI GCBI SKBI

700

600

500

400

300

200

100

0 6-Jul-10 5-Jan-10 2-Feb-10 8-Jun-10 8-Dec-09 3-Aug-10 2-Mar-10 20-Jul-10 13-Apr-10 27-Apr-10 19-Jan-10 16-Feb-10 22-Jun-10 22-Dec-09 24-Nov-09 17-Aug-10 31-Aug-10 16-Mar-10 30-Mar-10 11-May-10 25-May-10

Source: HSBC/Nasdaq Dubai Indices.

levels. Furthermore, yields on new issues have cial sectors came through the crisis relatively been high, at around 10 percent, and yield spreads well. GCC banks were well positioned in terms of on existing securities over the LIBOR benchmark liquidity and capital adequacy in the run-up to have not returned to their November 2009 levels the crisis. Nevertheless, central banks are placing prior to the first DW announcement, and are increased emphasis on stability in sources of fund- higher than East Asian sukuk spreads. GCC sukuk ing. For example, the Central Bank of the United spreads are about 120 basis points above their No- Arab Emirates is placing heightened emphasis vember level, while GCC conventional spreads are on a long-standing prudential rule requiring that, about 30 basis points lower than their November for each bank, the ratio of loans and advances to level, and global sukuk spreads are about 30 basis stable resources equals one.17 The Central Bank of points above their November level (Figure 24). Kuwait, which had taken a relatively hands-off ap- proach to investment companies prior to the crisis, The state of the sukuk market is not surpris- is now directly monitoring their leverage, liquidity, ing because the DW debt standstill crystallized and external borrowing. And the Central Bank of concerns about two aspects of sukuk financing in Bahrain has imposed limits on real estate lending the GCC: (i) the lack of clarity about procedures as a proportion of banks’ total lending portfolio. in the event of a default, and (ii) the use of real estate as the underlying asset in sukuk transac- Other than through financial markets, the tions. Sukuk markets have been illiquid prior to debt problems in Europe are unlikely to alter sig- the defaults and became more illiquid since then nificantly economic growth prospects of theGCC as spreads widened. Clarity on asset recovery in countries. A very small share of GCC exports goes the event of default could boost activity in sukuk trading and lower yields.

17 As is to be expected, tighter supervision of Stable resources consist of free capital and reserves, interbank deposits with a remaining maturity of more than six months and banks and other financial institutions is a key 85 percent of customer deposits. This rule is currently binding outgrowth of the crisis, even though GCC finan- for several UAE banks.

24 Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

to EU25 (Figure 25). Given the dominance of hy- by just 0.05 percent of GDP in the GCC coun- drocarbon exports in total merchandise exports tries. And although wheat price increases might and gross domestic product (GDP), growth in transmit to other products, at the macro-level all the GCC economies will depend mostly on how GCC countries still have fiscal space to respond the debt problem in Europe evolves, whether to increases in the food import bill (Table 5). it spreads beyond Europe and slows down the However, food price increases coupled with a global recovery and global demand for oil. Recent weakening dollar, might stoke inflationary pres- developments suggest that the possibility of con- sures, and be a cause for concern in countries tagion has become a much less likely scenario. like Saudi Arabia where inflationary pressures are a special problem. In 2007–08 rises in wheat The recent spike in wheat prices—which prices led to a rise in overall food inflation, which nearly doubled in August 2010 from their lows outpaced overall inflation. in June 2010—has caught the GCC countries in the early stages of implementing food security Most developing oil exporters are strategies. Wheat reserve levels in all GCC coun- vulnerable to oil price shocks and tries except Saudi Arabia are low, at less than one volatility month of consumption, and these countries are highly dependent on wheat imports (Table 4). Developing oil exporters are expected to have According to recent data, the GCC countries benefited from increases in oil exports and oil import 87 percent of their wheat consumption prices in 2010 (Figure 3). Fiscal and current ac- with all but Saudi Arabia producing no wheat count balances are expected to have improved domestically and relying 100 percent on imports. (Figure 21 and Figure 22) due to an increase in oil revenue in 2010 compared to 2009. Developing The impact of the price spike on the GCC oil exporters however are vulnerable to a sharp countries however is expected to be negligible decline in oil prices as they are dependent on oil (Table 4). An increase of 50 percent in the price and have much more limited fiscal space than of wheat is estimated to increase the import bill GCC oil exporters to respond to terms-of-trade

Figure 25: Exposure to EU markets for merchandise goods

Total Exports over GDP Exports to EU 25 over Total Exports Exports to EU 25 over GDP

70

60

50

40

30

20

10

0 SA SSA LAC ECA EAP GCC MENA

Developing Oil Exporters with EU links Oil Importers Oil Importers with GCC links

Source: Data source: WDI, World Bank and Comtrade.

25 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Table 4. Impact of a wheat price hike in GCC oil exporters Change in import bill Net Imports Wheat Change in import bill due to increase due to a 50% (% of reserves a 50% in wheat prices increase in wheat prices consumption) (months) (% of GDP) (% of foreign reserves) Bahrain 100 0 0.05 n/a Kuwait 100 0 0.02 1.12 Oman 100 0 0.06 1.41 Saudi Arabia 81 11 0.06 1.68 United Arab Emirates 100 0 0.05 n/a GCC oil exporters 87 8 0.05 n/a Source: Staff calculations based on USDA and World Bank data for 2009 GDP in ‘000s and 2008 monthly foreign reserves data.

Figure 26: US wheat prices

450 400 350 300 250 200 US$/mt 150 100 50 0 Jul-10 Jul-99 Oct-07 Oct-96 Apr-02 Jan-05 Jan-94 Feb-04 Jun-00 Sep-08 Sep-97 Dec-05 Dec-94 Nov-06 Nov-95 Aug-09 Aug-98 Mar-03 May-01

Source: World Bank.

shocks. Most developing oil exporters have used management and oil revenue management have some of their fiscal resources to cushion the im- become more challenging and more important pact of the crisis in 2009 (Table 2 and Table 5). than ever before. Strategies aimed at diversifying the economic base and scaling up non-oil sources Excessive volatility in oil prices is one of the of growth will also help reduce the vulnerability major problems facing developing oil exporters of these countries to excessive oil price volatility. going forward. Oil prices dropped $20 per barrel in May 2010, before recovering to trade back close Several developing oil exporters including to OPEC’s target range of $70–$90 per barrel. Sig- Iraq and the Republic of Yemen are especially naling the increasing use of oil as a mainstream vulnerable to this volatility due to their limited asset and OPEC’s difficulties with supply man- fiscal space (Table 5). In theR epublic of Yemen, agement, volatility in oil markets has grown over where the government obtains 60 percent of time and is now much higher than the volatility fiscal revenue from oil exports and distribution, of other commodity prices (Figure 27). Volatil- and fiscal and current account deficits were ity of oil prices is expected to be present going above 10 percent as a share of GDP in 2009, forward implying that prudent macroeconomic the goal of the government is to reduce the fis-

26 Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Table 5: MENA fiscal space in 2009 Reserves Current (including account Government Reserves in SWF) in Fiscal Balance balance as % debt as % of months of months of as % of GDP of GDP GDP imports imports Oil exporters GCC Bahrain –8.7 1.6 27.1 4.1 19.2 Kuwait 19.3 29.2 6.9 6.8 88.9 Oman 2.2 –2.2 6.7 6.2 7.3 Qatar 13.0 15.7 39.5 7.6 27.3 Saudi Arabia –6.1 6.1 16.3 25.8 44.2 United Arab Emirates 0.4 –2.7 26.4 2.2 20.4 Developing oil exporters Algeria –6.6 0.3 15.0 33.6 43.5 Iran, Islamic Republic of –2.7 2.6 16.2 9.3 10.7 Iraq –14.2 –25.7 141.6 12.9 — Libya 10.6 16.8 0.0 41.8 64.8 Syrian Arab Republic –5.5 –2.4 29.1 10.7 — Yemen, Rep. –10.2 –10.7 39.9 9.2 — Oil importers Oil importers with GCC links Djibouti –4.9 –17.3 60.3 2.9 — Jordan –10.3 –5.1 66.1 8.4 — Lebanon –8.1 –15.5 148.0 24.0 — Oil importers with EU links Egypt, Arab Rep. –6.9 –2.3 76.2 6.3 — Morocco –2.2 –5.0 46.9 7.8 — Tunisia –3.0 –2.9 47.2 4.9 — Source: World Bank data, Government debt and SWF data are from IMF.

Fiscal balance Larger than 2% of GDP –2% to + 2% of GDP Less than –2% of GDP Current account balance Larger than 3% of GDP –3% to + 3% of GDP Less than –3% of GDP Government debt 0 to 30% of GDP 30% to 80% of GDP Larger than 80% of GDP International reserves in months of imports More than 6 months Between 3–6 months Less than 3 months

cal deficit by containing current expenditures the poor and vulnerable for the increase in do- and slashing energy subsidies, but to protect mestic energy prices as a consequence of the investment and priority spending. Development energy subsidy cuts, and sustain the progress spending, including social transfers to the poor- towards meeting the Millennium Development est households and basic education and health, Goals (MDGs). To accelerate non-oil growth and are projected to increase in order to compensate employment opportunities, the government has

27 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 27: Commodity volatility (standard deviations in monthly prices)

Jan-94-feb 04 Mar-04-Aug10

Coffee Steel Wheat Gold Tin Natural Gas Copper Crude Oil

0 20 40 60 80 100 120 140 160

Source: Staff calculations based on World Bank data.

put in place an incentive system for private in- versifying its economic base. Its non-oil exports vestment in line with international best practice. grew rapidly in the 2000s but so did imports of goods and services. The government is taking In Iraq, the government has aimed to contain measures to boost exports further and tighten its current expenditures while protecting priority fiscal stance in 2010 compared to 2009, although public investments, and to commit to a medium- fiscal and current account deficits are expected term-oriented approach to oil revenue manage- to persist in the near term. ment. Despite these efforts Iraq’s fiscal deficit is expected to decline only modestly and remain Algeria is much less vulnerable to oil price close to 12 percent of GDP in 2010. Agriculture shocks than other developing oil exporters. The is the second engine of growth in Iraq but since government of Algeria has used its fiscal space to 2002 its contribution has eroded as infrastructure launch an ambitious public investment program and productivity have deteriorated significantly. over the next 4 years. This investment stimulus In addition, oil price risks are compounded by po- is $100 billion larger than its 2005–09 plan and litical risks in Iraq. A prolonged political vacuum intends to diversify the economy, promote pri- or the formation of a government that excludes vate investment and reduce unemployment. So part of the electorate could result in a worsening far the stimulus has had a positive impact on the of the security situation. This could also put at construction, infrastructure and energy sectors. risk the development of new oil fields by interna- However, manufactures remain uncompetitive tional oil companies, which could limit projected due to the poor investment climate and restric- increases in oil production, and can put at risk tive policies toward FDI. the growth outlook presented here. Some developing oil exporters are also vul- Syria’s economy is much less vulnerable nerable to a food price shock stemming from the to oil price shocks than the economies of other recent increases in wheat and food prices. The Re- developing oil exporters. Syria is a lot less de- public of Yemen in particular stands out as the pendent on oil exports than other developing oil most vulnerable in the region (Table 6). It is one exporters, and a substantial share of its non-oil of the poorest countries in MENA, relies on wheat exports go to the GCC, and other countries. Given imports to meet 82 percent of its consumption, has expectations that Syria’s recoverable oil reserves reserves that would cover less than a month of its will be depleted by 2030, Syria has started di- average monthly wheat consumption and has a

28 Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Table 6: Impact of a wheat price hike in developing oil exporters Change in import bill Change in import bill due to a 50% increase due to a 50% increase Net Imports (% of Wheat reserves in wheat prices in wheat prices (% of Consumption) (months) (% of GDP) foreign reserves) Algeria 57 3 0.4 — Iran 9 2 0 — Iraq 65 1 0.6 10 Syrian Arab Republic 38 10 0.4 — Yemen, Rep. 82 0 0.9 20 Developing oil exporters 37 3 0.2 — Source: Staff calculations based on USDA and World Bank data for 2009 GDP in ‘000s and 2008 monthly foreign reserves data.

weak fiscal position. A 50 percent increase in the wheat production in the Republic of Yemen is wheat price would translate into an estimated limited and its sales among the poor represent increase in the import bill of nearly 1 percent of less than 0.5 percent of their income, the poverty GDP or more than 20 percent of foreign reserves. impact of higher wheat prices is dominated by the The cuts in estimated global production between rising costs to the poor consumers who spend on May and August are projected to have raised the average 12.5 percent of their income on wheat and domestic wheat price in the Republic of Yemen wheat-related products. by 26 percent. This price increase is likely to have raised poverty in the Republic of Yemen by slightly Iraq also appears to be vulnerable although more than 0.3 percentage points (Figure 28), slightly less than the Republic of Yemen largely which represents an increase in the number of due to sourcing a smaller share of its wheat con- the poor by an estimated 80,000 people. Because sumption from abroad (Table 6). Algeria reacted

Figure 28: Some potential poverty impacts of a wheat price spike

2009/10–August 2010 2009/10–August 2010 + embargo May 2010–August 2010 May 2010–August 2010 + embargo 1.0% 0.9% 0.8% 0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% CIV TJK NIC NIG IDN TLS BLZ LKA PAK ALB PER ECU PAN YEM UGA MWI NEP NGA BGD GTM ARM VNM RWA

Source: Staff estimations, World Bank. Note: Simulations of poverty impacts in response to wheat price changes due to the decline in world wheat production over different periods and the impacts of embargoes by Russia, and . The assumption is that only half of the increase in the price would be transmitted to the domestic markets of each country. The names of economies follow the UN 3 letter code system.

29 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 29: Non-oil merchandise exports to EU25

Total Exports over GDP Exports to EU 25 over Total Exports Exports to EU 25 over GDP

50 45 40 35 30 25 20 15 10 5 0 SA SSA LAC ECA EAP GCC MENA

Developing Oil Exporters with EU links Oil Importers Oil Importers with GCC links 70

60

50

40

30

20

10

0 Qatar Oman Kuwait Jordan Tunisia Algeria Bahrain Morocco Lebanon Yemen, Rep. Yemen, Saudi Arabia Egypt, Arab Rep. Egypt, Arab Iran, Islamic Rep. Iran, Syrian Arab Republic Syrian Arab United Arab Emirates Arab United

Data source: WDI, World Bank and Comtrade.

to the Russian wheat export ban by purchasing A possible future slowdown in Europe, extra wheat on the spot market. The impact of triggered by fiscal compression in the highly a 50 percent price hike on its import bill would indebted parts of the EU and combined with however be very small. Among the developing oil financial sector instability, is expected to have exporters, Syria seems to be most prepared to face marginal effect on developing oil exporters the jump in wheat prices as its wheat reserves can as their shares in non-oil exports to the EU25 cover roughly 10 months of consumption. In addi- and the Southern Euro Zone18 are small and tion, Syria is far less dependent on wheat imports their financial sectors are not exposed to global than other developing oil exports. The Islamic financial markets (Figure 29 and Figure 30). Republic of Iran is not vulnerable as it imports only a tiny share of its annual wheat consumption. 18 Southern Euro Zone includes Portugal, Italy, Greece and Spain.

30 Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Figure 30: Non-oil merchandise exports to Southern Euro Zone

Total Exports over GDP Exports to SEZ over Total Exports Exports to SEZ over GDP

45 40 35 30 25 20 15 10 5 0 SA SSA LAC ECA EAP GCC MENA

Developing Oil Exporters with EU links Oil Importers Oil Importers with GCC links

Data source: WDI, World Bank and Comtrade.

Only one country—Algeria—appears to be highly expected slow growth in the EU. The effects exposed to the EU 25 through trade. Its exports would come through the balance of payments, to the EU25 account for more than 50 percent reflecting the impacts on trade, remittances of its merchandise exports. This high exposure and FDI flows. is due mostly to oil exports which can easily be redirected to other markets. Among developing Oil importers with EU links, such as Tuni- oil exporters, Syria is the country with the high- sia, Morocco and Egypt, have the greatest trade est non-oil trade exposure to the EU25 market. exposure to the highly-indebted countries in Still with a non-oil merchandise export share the Southern Euro Zone (SEZ) and the second to the EU25 of around 8 percent, the impact on highest trade exposure to the EU25, after ECA Syria’s economy is expected to be small. (Figure 29 and Figure 30). The share of these countries’ exports to the SEZ exceeds ECA’s Oil Importers’ Recovery Depends share by such a wide margin that even these on Developments in Key Markets, countries’ lower openness does not diminish Notably the EU the impact of this exposure on income. In this group of countries, Tunisia is the most Oil importers weathered the effects of the global vulnerable to shocks in the EU25 and the SEZ economic and financial crisis better than other (Figure 29), followed by Morocco and Egypt. MENA countries, but developments in Europe How hard these countries are hit depends on are expected to have dampened growth in the extent of the fiscal contraction in the EU, 2010, especially the growth of those countries and how quickly they can shift sales to markets with strong EU links (Figure 3). Even though outside the EU. at present a resolution of the fiscal issues in high-income Europe is a likely scenario, oil im- In addition, two of the oil importers with porters with strong EU links are likely to face EU links—Morocco and Tunisia—are much more some repercussions of the expected significant dependent on the EU for their remittance flows fiscal contraction in the heavily-indebted, high- 19 income European countries (EU-5), and the 19 This group includes Portugal, Italy, Island, Greece and Spain.

31 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

than Egypt and the rest of the oil importers. Ac- number of measures, including the provision of cording to data for 2000, 72 percent of Morocco’s guarantees on working capital loans; finance for emigrants and 75 percent of Tunisia’s migrants promotion campaigns and market surveys; debt were located in the EU27, compared to just 10 rescheduling; insurance coverage for exports; percent for Egypt’s.20 Demand for migrants in training and logistics in partnerships with busi- the GCC countries is expected to grow at a much ness associations; removal of some types of im- faster pace than that in the EU as the GCC coun- port restrictions; and public contribution to the tries have fiscal space and long-term investment payment of social insurance by employers in eli- plans that will fuel demand for imported labor, gible categories. Specific programs have been de- while fiscal space in EU is extremely limited and signed for firms operating in Morocco’s tourism many large EU members have plans for large sector and for the remittances and investments fiscal contractions. According to the IMF fiscal of Moroccan workers residing abroad. As of June consolidations in the range of 9.2 and 4.8 per- 2010, 443 firms requested social insurance relief, cent of GDP, respectively, are needed in Greece 129 firms benefited from loan guarantees, 134 and Italy to reduce the debt burdens in these benefited from training. The majority of firms countries to 60 percent of GDP. that sought these types of support operate in the textile industry, while the remaining are in Compared to ECA, the oil importers are a lot automotive equipment and electronics sectors. less likely to be affected through the financial In addition, the government continues to extend channel as their financial sectors are much less tax relief, wage increases and social expenditures integrated into the EU and global financial mar- for selected groups. kets than ECA’s financial sector. Indeed according to a recent report prepared by the Arab Monetary These measures, along with a much higher Fund and the World Bank, a sizable share of capi- public investment program kept domestic tal flows in MENA is intra-regional suggesting that demand high, but those expenses related to the MENA countries have a buffer insulating them Morocco’s food and fuel subsidy system consti- to some degree from turmoil in global markets. tute a key macroeconomic risk in the event of an unexpected increase of oil and food prices. In anticipation of a prolonged slowdown in With the recent droughts in a number of coun- the EU, most oil importers with strong EU links tries and the wheat export ban in Russia, the extended or implemented new fiscal stimulus.21 risk of a food price hike has become real. All Tunisia has chosen to maintain its expansionary oil importing countries are vulnerable to the fiscal policy to support growth and delay fiscal effects of a sharp increase in food and wheat consolidation until at least 2011, as well as initi- prices. Egypt, Jordan and Lebanon rely heavily ate additional reforms aimed at improving the on wheat imports, especially from Russia, and business climate and foster foreign investment. the grain harvests in Morocco and Tunisia are The government remains vigilant of the situation expected to be smaller this year compared to in the Euro Zone and has set aside in the budget last year. To head this off Egypt—the world’s big- an unallocated expenditure cushion of around gest importer of wheat, as well as Tunisia and 1.5 percent of GDP that could be used if the situ- ation prevailing in European partner countries worsens in the second half of 2010. 20 Source: World Bank (2010). 21 In Egypt, the fiscal deficit is expected to have widened due to The government of Morocco implemented the economic slowdown and the fiscal stimulus implemented by the government of Egypt during the past fiscal year from July several measures to help affected firms cope 2009 to March 2010. Although the stimulus package adds up with the decline of external demand well before to 1.5 percent of GDP, 40 percent of it was spent in the fourth recent months, but in June 2010 the govern- quarter of the fiscal year. At the time this report was written ment decided to extend the implementation of the government had no plans for additional fiscal stimulus packages. Furthermore, the government plans fiscal measures the stimulus package until the end of 2010. The aimed at reducing the fiscal deficit to 3 percent of GDP over support costs 0.2 percent of GDP and includes a the next 5 years.

32 Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Table 7: Impact of a wheat price hike in oil importers Net Imports Wheat Change in import bill due Change in import bill due (% of reserves to a 50% increase in wheat to a 50% increase in wheat consumption) (months) prices (% of GDP) prices (% of foreign reserves) Egypt, Arab Rep. 51 3 0.5 17 Morocco 42 2 0.4 9 Tunisia 56 4 0.4 7 Jordan 93 4 0.4 6 Lebanon 83 0 0.1 2 Oil importers 51 3 0.4 2 Source: Staff calculations based on USDA and World Bank data for 2009 GDP in ‘000s and 2008 monthly foreign reserves data.

Jordan, reacted quickly by buying extra wheat of the high expected growth in Lebanon, where on the spot market at higher prices than those credit to the private sector has been growing at prevailing before the ban announcement. Egypt the highest pace among oil importing econo- and Morocco have the largest estimated monthly mies (Figure 31). Strong regional demand fu- imports, and therefore face the largest increases eled by oil wealth and inflows of capital into in the import bill as a percent of monthly foreign Lebanon’s real estate and banking sectors—con- reserves (Table 7). sidered a safe haven in times of crisis by the Lebanese Diaspora and some GCC nationals— Strong domestic demand supported growth has been driving the boom in the construction in all oil importers. In Egypt economic activ- and trade sectors. Sectors producing tradable ity in 2010 is expected to average 5.1 percent, goods and high value-added services however driven by private consumption and investment, remained weak due to structural bottlenecks in on the demand side, and strong expansions in infrastructure, and the loss in competitiveness construction, services and non-oil manufactur- associated with the continued real exchange ing, on the supply side. By contrast, Morocco and rate appreciation (Figure 32), driven by the Tunisia—the two economies most heavily depen- massive inflows of financial resources into the dent on trade and remittances from Europe—are Lebanese economy. expected to grow at a much slower pace than Egypt and other oil importers.22 On the demand Management of large financial inflows has side, growth in Morocco is expected to be driven been one of Lebanon’s key macroeconomic chal- by expansion of consumption and private invest- lenges. In 2009, deposits in the banking sector ment, as the rebound in exports will not offset increased by 23 percent—an increase equivalent the surge in imports. On the supply side, growth to 54 percent of GDP, and by 4.5 percent between is expected to be driven by an expansion of in- December of 2009 and June of 2010. In addition dustry and services, while agricultural output to the appeal of Lebanon as a safe haven, the is expected to have contracted following an ex- country has attracted financial resources by of- ceptionally successful year. In Tunisia, internal fering large spreads between interest rates on demand is driving the recovery too as import deposits in Lebanese banks and international growth has outstripped export growth due to a rates. The spreads widened substantially in the strong inflow of imports of capital and interme- course of the financial crisis, but in 2010 have diate goods. Manufacturing output expanded, narrowed down. The Central Bank of Lebanon while most services expanded only modestly.

The growth outlook for oil importers with 22 See statistical appendix for country-specific macroeconomic GCC links continues to be strong largely because information.

33 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 31: Credit growth in oil importers

Credit Growth (YoY, in percent) – MENA Emerging

Egypt Jordan Lebanon Morocco Tunisia

40

30

20

10

0

–10

–20 Jul–09 Jul–08 Jul–07 Jul–06 Jan–10 Jan–09 Jan–08 Jan–07 Jan–06 Sep–09 Sep–08 Sep–07 Sep–06 Nov–09 Nov–08 Nov–07 Nov–06 Mar–10 Mar–09 Mar–08 Mar–07 Mar–06 May–10 May–09 May–08 May–07 May–06

Source: Datastream.

Figure 32: Rodrik’s real undervaluation the deceleration of foreign inflows in the first index for Lebanon half of 2010, and the deceleration of growth compared to 2009. 1.6 1.4 Limited fiscal space—defined by large twin 1.2 1.0 deficits and government debt above 145 percent 0.8 of GDP—is a key source of long-term vulnerabil- 0.6 ity in Lebanon. It constrains the ability of the 0.4 government to respond to unexpected adverse 0.2 shock, including the one related to the recent 0 wheat price spike. Most importantly, over the –0.2 Real undervaluation index Real undervaluation –0.4 long-run, a failure to implement structural re- –0.6 forms aimed at increasing the competitiveness 1972 1977 1982 1987 1992 1997 2002 2007 of the economy and addressing the fiscal risks Source: Staff calculations. could erode further the country’s growth outlook Note: The Rodrik’s (2008) real undervaluation index is a mea- and debt servicing capacity. sure of the deviation of the actual real exchange rate from the PPP real exchange rate which takes into account the Balassa- Annual growth in Jordan is expected to in- Samuelson effect, i.e. it takes into account the fact that the relative price of non-tradable goods are higher in countries crease relative to 2009 but remains far below its with higher income per capita. pre-crisis level as credit to the private sector ex- panded at the lowest pace among the oil import- ing countries in the region (Figure 31). Jordan has already initiated a new interest rate policy continues to rely on remittances and financial aiming to gradually reduce the spread on deposi- flows from the GCC countries, but its exports tor’s rates between Lebanon and the interna- have become a lot more dependent on the US tional market. The spread has already declined and Asian markets and a lot less dependent on by 81 basis points between October 2009 and the EU and the GCC (Figure 33). June 2010. This has been a key factor behind

34 Chapter 2: MENA’s Recovery is Proceeding in an Uncertain Global Economic Context

Figure 33: Jordan has made a dramatic shift in export destinations

1998 2008

Africa 3% Africa 3%

Other USA 2% Other MNA MNA 10% 10% Asia 33% RoW 9% Asia 42% LAC 0% USA 20%

GCC 28% ECA 2% RoW EU 13% 6% GCC EU LAC 1% 9% 7% ECA 2%

Source: COMTRADE data.

The government of Jordan has decided to A pronounced global economic slowdown in tackle the country’s main source of vulnerabil- the second half of the year is the key near term ity—its limited fiscal space, by tightening the fis- risk to Jordan’s outlook, although for now the cal policy stance in 2010 and adopting measures chance of this happening has receded. Weaken- to rationalize government consumption. At the ing political support for the medium term reform same time the government has taken measures agenda adopted by the government is another to stimulate investment and economic activity. risk that the government will need to take into These measures include income tax exemptions account as it decides to balance the need for stim- on export activities, reduction in land and ulus with the need to improve its fiscal stance. property registration fees, and the provision of public lands for production, tourism and ser- The main effect of the financial and eco- vices projects. Hoping to encourage lending to nomic crisis in Djibouti was felt in the form of the private sector, the government has started a significant slowdown in FDI flows as a conse- providing guarantees to SME’s borrowing for quence of the financial difficulties in Dubai. In productive projects. The government has also 2010, transport and port-related activities have approved a new debt strategy emphasizing fur- been areas of strength, but growth is expected ther reliance on external borrowing in order to have decelerated to 4.5 percent on weakness to reduce any potential crowding out effects of in agriculture and manufacturing. With limited government borrowing. For this purpose, the fiscal space—including very small reserves—the government has announced the first Eurobond government has not extended any fiscal stimu- issuance in the history of Jordan. This issuance lus this year. Instead, the government adopted is expected to serve as a benchmark for future a fiscal stability plan in addition to a multiyear operations. payment schedule to partly cover domestic pay- ment arrears accumulated in 2009.

35

Part II. Looking Beyond the Recovery and Beyond Oil

Chapter 3 MENA remains uncomfortably dependent on the capital-intensive oil sector

MENA felt the impact of the financial and ments, and by construction do not open trade in economic crisis to a much lesser extent than goods produced domestically.23 Annual per capita developed economies and emerging markets growth of developing MENA countries advanced outside Asia, but the economic recovery in on average only modestly in the period between MENA has also lacked vigor. By 2011–12 MENA 2000 and 2008 and averaged just 2.5 percent per is expected to return to growth observed in the annum—a rate that compares poorly with the mean period 2000–06, but growth rates in the range of of 4.6 percent for the developing world (Figure 35). 4.8 percent are not high enough to address the key challenges facing the region. These include The capital-intensive oil sector has been high unemployment rates—especially for young and remains the primary vehicle for revenue people, low labor force participation rates—nota- and wealth creation for the oil exporters in the bly for women, one of the world’s lowest formal region, while the spillover effects to the oil im- employment rates, and the highest population porting countries in the region and beyond have and labor force growth rates among middle- been significant. Governments in oil exporting income economies (Figure 34). countries have relied on oil revenues to provide public services and infrastructure, and budget- In the last ten years MENA’s growth acceler- ary support in times of crisis, and some—especial- ated relative to the previous decade in response ly the GCC countries—have used their oil wealth to intensified efforts in many countries to bolster to pursue state-led economic diversification their private sectors and diversify their sources strategies. MENA oil importers also benefitted of growth. Governments improved macroeco- from the oil wealth as they supplied labor to the nomic management, simplified business regula- oil-rich MENA economies and absorbed invest- tions, reduced restrictions to trade and invest- ments coming from these countries. ment, and opened up their financial sectors. Indeed, the average number of reforms in MENA Going forward the outlook for oil remains has steadily increased during the last 5 years. promising, but there is significant uncertainty in the projections. There is a consensus that crude Achievements related to external barriers oil prices will remain high in the next decade due to trade however have been more limited, and to rapid demand growth in developing countries, per capita growth in developing MENA has been declining production from mature fields and modest. Governments have relied frequently on higher costs for new production in remote areas “positive list” trade agreements which liberalize and unstable regions. Indeed, the International trade for specific “listed” products and grant a tariff preference to the signatories of these agree- 23 For more information see Hoekman and Sekkat (2009).

39 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 34: Population and labor force growth (%, annual averages)

Population growth rates

1990–99 2000–2008

3.0

2.5

2.0

1.5

1.0

0.5

0.0 EAP SSA SAS ECA LAC MNA

Labor force growth rates

2005–10 2010–20

3.5

3

2.5

2 Percent 1.5

1

0.5

0 Low income EAS LAC SSA SAS MENA

Source: World Bank, WDI. Note: Labor force growth rates are projection based on estimations presented in Koettl (2008) and assum- ing constant participation rates.

Energy Agency (IEA 2008) announced that “the With the benefits from oil however come era of cheap oil is over”. China and India are ex- serious risks as MENA remains uncomfortably pected to account for just over half of the increase dependent on the capital-intensive oil sector. In in global primary energy demand between 2006 2008, 55 percent of MENA’s population lived in and 2030. However, climate change and policies MENA’s oil exporting countries, oil accounted to mitigate green house gas emissions could for nearly 90 percent of these countries’ exports push energy prices lower by 2030, and increase (Figure 36), and nearly 50 percent of these demand for low-carbon bio-fuels (IEA 2008). Not countries’ GDP. In 2007 twenty-two countries surprisingly, a number of MENA oil exporters received at least 90 percent of their merchan- are actively engaged in energy diversification dise export earnings from commodities,24 and through the adoption of an aggressive renewable approximately one third of them were MENA energy exploitation plans based on untapped sources, innovative technology, use of private capital and energy trading. 24 Source: Mitchell and Aldaz-Carroll (2010).

40 Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

Figure 35: Growth of per capita income by region (percent)

1990–99 2000–2008

9 8 7 6 5 4 3 2 1 0 –1 –2 SA SSA LAC ECA EAP GCC World MENA MENA economies Developing Developing

Source: World Bank WDI. countries. Dependence on oil carries serious different types of foreign investments in an effort risks to growth sustainability. Some of the risks to diversify their domestic and foreign sources of dependence are well-understood and include of revenue. The United Arab Emirates’s service- volatility, Dutch disease, environmental degrada- driven model of economic diversification and tion, political instability and conflict, and insti- Saudi Arabia’s model of developing its oil-based tutional weakness and corruption. Other risks petrochemical industry are two widely cited are less obvious and have to do with a mismatch examples of diversification success stories. And between the economy’s endowment base and its increasingly, the oil wealth of GCC and other endowment use, and in the future, the threat of oil exporters is reaching other countries in the viable alternatives to oil. The latter should also region and beyond through FDI and remittances. not be discounted just because at present Asia has a tremendous appetite for commodities. Techno- However, the labor-abundant developing oil logical advances would likely offer a low-carbon exporters have been far less successful than the emitting alternative to fossil fuels in the future. labor-importing GCC countries in dealing with some of the pitfalls of oil dependence. These Some MENA oil exporters have been taking countries suffer from weak institutions, conflicts, steps to minimize their potential risks and en- macroeconomic volatility, and Dutch disease. hance the potential benefits of oil-driven growth. The latter has led to increases in the prices of The GCC countries, in particular, have followed nontradeables relative to tradeables, making the prudent macroeconomic policies and manage- tradeable sector less competitive internationally, ment of oil revenues, and accumulated large and exacerbating the dependence on oil exports. savings in the form of reserves and sovereign Between 1975 and 2008 oil exports grew in wealth funds. Indeed, during the period between importance as a source of export revenue and 1997 and 2007, the group of GCC countries be- growth in the developing oil exporting countries. came the fourth largest exporter of capital after By contrast, during the same period oil exports China, Germany and Japan (Figure 37). Over the declined in importance in the GCC countries. years, GCC oil exporters have used their sover- eign oil wealth funds to finance infrastructure, GCC oil exporters improved their competi- technology and education, as well as to acquire tiveness as they implemented successfully pru-

41 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 36: MENA’s oil dependence

Oil exports (% of total exports)

1975 2008

100 90 80 70 60 50

Percent 40 30 20 10 0 GCC oil exporters Non GCC oil exporters Oil importers

Oil exports (% of GDP)

1975 2008

70

60

50

40

Percent 30

20

10

0 GCC oil exporters Non GCC oil exporters Oil importers

Source: World Bank, WDI. Note: Non-GCC oil exporters are the developing oil exporters.

dent macroeconomic and structural reforms. dress developing oil exporters’ major issue—em- Real exchange rate overvaluation became much ployment creation, and will only exacerbate the less of a problem in most GCC countries as they current situation. opened labor and goods markets and blocked two important channels through which “Dutch” dis- Dutch disease has also become a threat to ease operates. Real exchange rate overvaluation those MENA oil importers receiving large re- however remains a problem in most developing mittances and finance from the GCC markets. oil exporters.25 This is unfortunate because these Young people in oil importing countries, espe- countries are labor abundant and need rapid job cially those with GCC links, prefer not to work growth to accommodate the second fastest grow- ing labor force in the world after Sub-Saharan

Africa (Figure 4). As the oil industry is not labor 25 Yemen is a special case which reflects dwindling oil reserves intensive, continued reliance on oil will not ad- in a country that has not adjusted its aggregate demand.

42 Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

Figure 37: Current account surpluses and deficits (US$ billions)

1997 2002 2007

400

200

0

–200

–400

–600

–800 USA UK MENA EU Oil EA X GCC Japan Germany China Oil exporters China importers ( X GCC)

Source: World Bank, WDI.

Figure 38: Contribution of demand components to growth in MENA

Net Exports Gross Domestic Investment Government Consumption Private Consumption GDP growth, %

14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 –2.0 –4.0 –6.0 –8.0 2003 2004 2005 2006 2007 2008 2009 2010f 2011f

Source: Staff estimates based on World Bank data and projections for 2010 and 2011.

in their home countries due to good prospects concerns about potential restrictions on MENA of finding a high-paying job in the GCC coun- investments in other parts of the world.26 Much tries and elsewhere. This has increased wages of this investment has gone into the nontrade- for some occupations in the oil importing coun- able sectors, notably real estate, and has been tries. The oil boom in 2000s also triggered an less likely to help firms boost productivity or get increase in investment flows from theGCC and access to new technologies and integrate into other developing oil exporters into the oil im- global production networks than investment porting countries in the region. The magnitude derived from a more diverse set of countries. of these flows was boosted perhaps because of Indeed, net exports contributed little to growth an increase in “home-bias,” or preference to retain oil wealth in the region after 2001 on 26 See for detail Noland and Pack (2008).

43 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

in MENA in the past decade (Figure 38), while and institutional environment, information and the contribution of gross exports was compa- coordination issues. On the cost of capital side, rable in size to the contribution of the govern- these include access to domestic and foreign sav- ment sector. ings, and financial intermediation issues. The re- port does not discuss all the factors in depth, but Given this imperative, the second part of focuses on those that are likely to be of special this report looks at non-oil export growth trends concern for non-oil export growth. Furthermore, and the obstacles facing MENA’s nonoil export- some of the topics such as labor market issues oriented firms in the context of the challeng- and governance are not discussed in depth in ing, post-crisis global economic environment. this report as they have been presented in detail The analysis is structured around four sets of in other regional studies. questions. How did nonoil exports evolve in the past decade? Do MENA countries face special MENA’s non-oil exports of goods market access issues? What are the major con- and services are below potential straints to MENA’s nonoil export growth? Are due to developing oil exporters’ reforms implemented by countries addressing underperformance these major constraints? The answers to these questions vary by country, although common Exports of non-oil goods and services play messages emerge for the three major types of a much smaller role in MENA than in other MENA countries—the GCC, developing oil ex- regions. In 2008, MENA’s share of exports of porters and oil importers. non-oil goods and services in GDP was just 16 percent compared to 44 percent in East The analysis is guided by a diagnostic frame- Asia and 22 percent in South Asia, and lower work which evaluates the relative importance even compared to the shares of LAC and SSA of factors affecting returns to investment and (Figure 39). However, the regional average cost of financing investments in nonoil export- hides big differences in the contribution of oriented activities. On the rate of return side, non-oil exports of goods and services within these include factors such as market access, MENA—in particular, between oil importing infrastructure, human capital, technology, policy and oil exporting countries. In the oil import-

Figure 39: Export revenue by type of exports (% of GDP, 2008)

Nonoil goods and services Oil and gas Remittances

70%

60%

50%

40%

30%

20%

10%

0% SSA EAP ECA LAC SAS MENA Oil Non GCC Importers GCC oil exporters

Data source: Comtrade for goods, UN Services Trade Statistics for services, and World Bank for remittances.

44 Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector ing countries, non-oil exports of goods and Figure 40: MENA underperformed relative services accounted for 38 percent of GDP—a to its nonoil export potential in the period ratio slightly lower only than East Asia’s, yet 1998–2007 they are insignificant as a share of total out- put in the GCC countries, and especially in 1.2 the developing oil exporters. Furthermore, 1 the temporary movement of people to deliver services abroad27 is of particular importance 0.8 in oil importing countries where remittances 0.6 account for a high share of income. 0.4 The analysis can be conducted more care- fully by comparing the performance of MENA 0.2 countries with their estimated potential to 0 export nonoil goods and services. This export Oil GCC Developing MENA 15 potential is estimated with the help of a model Importers countries Oil Exporters that conditions per capita exports of nonoil Source: Staff calculations of export potential is based on goods and services on per capita natural re- the following estimated regression: PCNOX =-181.09+0.2* source endowments, measured by the value of PCGDPPPP-0.185*PCNatRes, sample size is 71, Adj R2=0.54, where PCNOX stands for per capita exports of nonoil goods resource-based exports as a share of population. and services, PCGDPPPP is the value of the PPP GDP in per For a cross-section of 71 middle-income coun- capita US$, PCNatRes is the value of per capita resource-based tries including 15 MENA countries for which exports in US$. The data has been adjusted for re-exports. data were available for the ten year period between 1998 and 2007,28 the results indicate a strong positive association of per capita ex- Other studies explore MENA’s potential to ports of nonoil goods and services with income export nonoil merchandise goods only, and come per capita which controls for skills, technology up with the finding that overall MENA underex- and institutional endowments indicative of the ports such products. Using cross-section data for capacity to export; and a negative association the period 2005–09, Behar and Freund (2010) with per capita natural resource exports which find that the typical MENA country exports tend to be associated with rents that discourage around 30 percent of its potential, conditioning non-natural resource exports. on size distance and other covariates. Miniesy and Nugent (2002) also find that the typical Nonoil exports of goods and services of the oil MENA country exports only 30–36 percent of importers and the GCC countries are found to be its potential. Similarly, Bhattacharya and Wolde at potential, while the situation for the developing (2010) estimate that the average MENA country oil exporters is significantly weaker than for the exports 30 percent of potential. These results other two groups (Figure 40). Developing oil ex- suggests that overall MENA underexports nonoil porters’ non-oil exports are, on average, only one fifth of predicted levels. The weak performance of this group pulls down the overall MENA average 27 This is part of Mode 4 of trade in services. Mode 1 refers to to 80 percent of predicted levels. The two middle- cross-border trade, consumption abroad as Mode 2, and estab- income countries with weakest export perfor- lishment abroad is Mode 3. mance among the 71 middle-income countries in 28 The sample includes all middle income countries with per the sample are Algeria and the Islamic Republic of capita income lower than US$11,456 and greater than US$935 in 2007, except for small economies with population less than Iran, while those with strong performance include 1 million. It also includes GCC countries and Yemen that are the United Arab Emirates, Bahrain, Jordan, Tuni- not middle-income countries, but belong to MENA. The group sia and Morocco (Figure 41). The rest of the fifteen of GCC countries includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates. Developing oil exporters refer MENA countries appear to be underperforming to Algeria, Iran, Syria and Yemen, while oil importers include relative to their predicted potential. Lebanon, Jordan, Egypt, Morocco and Tunisia.

45 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 41: MENA countries’ nonoil export potential relative to that of other middle income countries for the period 1998–2007

3.0

2.5

2.0 Good performers Good performers 1.5

1.0 Underperformers 0.5

0 India Qatar China Oman Turkey Kuwait Jordan Mexico Tunisia Algeria Ukraine Bahrain Morocco Lebanon Indonesia Costa Kazakhstan Yemen, Rep. Yemen, Saudi Arabia , RB Venezuela, Egypt, Arab Rep. Egypt, Arab Iran, Islamic Rep. Iran, Russian Federation Russian Syrian Arab Republic Syrian Arab United Arab Emirates Arab United

Source: Staff calculations of export potential is based on the following estimated regression: PCNOX =-181.09+0.2* PCGDPPPP- 0.185*PCNatRes, sample size is 71, Adj R2=0.54, and PCNOX stands for per capita exports of nonoil goods and services, PCGDPPPP is the value of the PPP GDP in per capita US$, PCNatRes is the value of per capita resource-based exports in US$.

merchandise goods, but the degree to which it in diversifying their exports by expanding and underexports declines after exports of services diversifying services exports.29 Oil exporting are included in the analysis. The econometric countries export mostly processed industrial results above suggest that the typical MENA products, as well as primary and processed country exports around 80 percent of its poten- food items. Capital goods such as machinery tial when both nonoil goods and services exports and equipment represent a tiny share of their are considered. merchandise exports. By contrast, oil importers have a more diverse export basket (Figure 44). MENA has opened up and They export a mix of industrial, food and other diversified its exports consumer items, including some parts and com- ponents, and to a smaller extent, capital goods During the past decade most MENA countries such as machinery and equipment. Tourism increased their openness and the average MENA and transport are the main sources of export share of nonoil exports in GDP rose from 7.5 revenue in MENA’s service sector. In the GCC percent in 1996–99 to 9.2 percent in 2006–08 countries the communication sector features as (Figure 42). All MENA oil importers also made another major source of export revenue. progress in reducing the concentration of their merchandise export baskets (Figure 43). Only MENA has made a major shift towards the the GCC oil exporters seem to have made virtu- fast-growing markets of Asia. In 1998, 14 percent ally no progress in diversifying their merchan- of MENA’s non-oil merchandise exports went to dise exports. They export primarily processed Asia, but by 2008 this share nearly doubled and industrial goods such as chemicals, fertilizers reached 25 percent (Figure 45). The switch has and other processed goods (Figure 44), al- though some GCC countries such as the United Arab Emirates and Qatar have made advances 29 Note that exports of services are not captured in Figure 43.

46 Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

Figure 42: Non-oil merchandise exports as a share of GDP (percent)

1996–1999 2006–2008

40 35 30 25 20 15 10 5 0 Iran Qatar Oman MENA Kuwait Jordan Tunisia Algeria Bahrain Morocco Lebanon Yemen, Rep. Yemen, Saudi Arabia Egypt, Arab Rep. Egypt, Arab Syrian Arab Republic Syrian Arab United Arab Emirates Arab United

Source: COMTRADE data and World Bank MENA region, GDP data. Note: The rise in export-to-GDP ratios is robust to data sources and types of exports.

Figure 43: Export concentration in developing regions

FDI inflows Herfindahl

5,000 0.35 4,500 0.30 4,000 3,500 0.25 3,000 0.20 2,500 2,000 0.15 1,500 0.10 1,000 FDI Inflows (millions $US) FDI Inflows

0.05 on Exports Herfindhal Index 500 0 0 1995 2000 2005 1995 2000 2005 1995 2000 2005 1995 2000 2005 1995 2000 2005 1995 2000 2005 1995 2000 2005 Africa Asia ECA Latin Oil Developing GCC oil America importers oil exporters exporters

2 Source: Gourdon (2009). Herfindahl index is a flow-weighted concentration indexH = (∑(sk) –1/n)/(1–1/n), where sk is the share of export line k in total exports, and n is the number of export lines. A drop in the index indicates a decline in the degree of export concentration. Numbers for Asia exclude China and the newly industrializing economies. been particularly dramatic for the developing 12 percent in 1998 to 35 percent in 2008. The oil exporters, whose share nearly tripled from move towards a greater reliance on Asia was a

47 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 44: MENA’s export structure, 2008

Export of nonoil goods Export of services Food Industrial Parts & components Transport Travel Communication Capital Consumer Insurance & finance Other business Gov services

Other oil Other oil exporters exporters

Oil Oil importers importers

GCC GCC countries countries

0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100%

Source: Comtrade data for goods and UN Services Trade Statistics for services.

Figure 45: MENA’s non-oil merchandise export destinations

MENA GCC countries 1998 2008 1998 2008

RoW USA 3% RoW RoW RoW 11% 15% USA 4% MENA 10% MENA MENA 9% 29% USA 27% 44% USA MENA 6% 8% 41% Asia Asia EU 14% Asia Asia 25% EU 20% 34% 41% EU 19% 29% EU 11%

Developing oil exporters Oil importers 1998 2008 1998 2008

RoW RoW RoW MENA RoW 13% MENA 19% USA 9% 14% 17% USA MENA 24% 1% 6% 37% USA USA Asia 1% MENA 6% Asia 12% 12% Asia EU EU EU 13% 37% Asia 8% 21% 35% EU 50% 65%

Source: Comtrade data.

48 Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector lot less dramatic for the oil importing countries. Figure 46: Import growth in major export Their share increased from 8 percent in 1998 to markets 13 percent in 2008. Freund (2010) also finds that MENA and other developing countries increased 2009 2010e 2011p exports to the four growing emerging markets30 20 (GEMs) that did not experience import collapses 15 during the crisis in 2008–09. 10 5 The shift towards Asia and the GEM (Brazil, 0 China, India and Indonesia) is good news for MENA as these markets are well positioned to 5 drive trade growth in the future (Figure 46). –10 Indeed, a new post-crisis world trade order is –15 emerging in which South-South trade will play a –20 prominent role (Hanson 2010). Large and growing East Asia EU25 South Asia USA emerging markets are absorbing capital and goods Source: World Bank, DECPG. from the rest of the world, and developing coun- tries from MENA, SSA and SAS are shifting ex- ports towards BRICs and low and middle-income countries. The GEMs appear to be among the most percent of their nonoil exports were destined for promising markets. They remained remarkably re- MENA countries—a share equal in size to their EU silient during the crisis of 2008–09 despite sizable nonoil export share (Figure 45). In 2008, their exchange rate depreciation in Brazil and Indone- MENA and EU shares declined substantially to sia, and without extensive fiscal support inB razil, just a quarter and a fifth of their nonoil merchan- India and Indonesia (Freund 2010). In the past dise exports, respectively. decade, the GEMs increased import demand for a variety of industrial goods—in particular, chemical Services are an area of relative products in Brazil, light manufactures in China strength for MENA and Indonesia, and machinery and transport in India (Freund 2010). Overall, however, import In 2008, MENA’s share in world exports of nonoil growth in the GEMs has been largely at the inten- goods and services was just 1.2 percent, up from sive margin, i.e. import growth has been driven by 1 percent in 1998 (Table 8), and the share grew an increase in the volume of existing imports from at a pace comparable to the average for middle existing sources. There has been some growth at income countries (MICs) excluding China, largely the extensive margin, especially in Indonesia. because of the expansion of services exports. Thirty percent of Indonesia’s imports in 2007/08 During the period from 1998 to 2008, MENA’s came from new exporters (Freund 2010). share in world exports of services grew by nearly 30 percent compared to just 15 percent for the Despite the shift away from the old conti- MICs excluding China. However, when it comes nent, Europe remains the most important export to exports of nonoil goods, the situation reverses destination for MENA’s nonoil goods (Figure 45). with MENA’s share of exports of nonoil goods This reflects largely the fact that the EU received growing by just 17 percent compared to 26 per- 31 half of the oil importing countries’ exports in cent for the MICs other than China (Table 8). 2008. For the GCC oil exporters, nonoil exports These results suggest that MENA firms exporting destined to other MENA countries represented nonoil goods remain less competitive than firms the largest share, while for developing oil export- ers, Asia became the most important destination for their nonoil merchandise exports. The market 30 The four countries are Brazil, China, India and Indonesia. shift experienced by the developing oil export- 31 In this comparison we allow other MICs to benefit from exports ers has been particularly striking. In 1998, 37 of commodities other than petroleum.

49 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Table 8: Shares in world exports Exports of nonoil goods & services Exports of nonoil goods Exports of services 1998 2008 Change 1998 2008 Change 1998 2008 Change MENA 1.0 1.2 20.0 0.6 0.7 16.7 2.4 3.1 29.2 MICs without 13.2 16.3 23.5 13.3 16.7 25.6 13.0 15.0 15.4 China China 3.1 8.6 177.4 3.5 10.0 185.7 1.7 3.7 117.6 Source: COMTRADE data. Note: Change is percentage change in the share between 1998 and 2008.

Figure 47: Non-oil merchandise export growth by region for the period 1998–2008 (in value terms)

Exports of new products to new markets Exports of new products to exisiting markets Exports of existing products to new markets Exports of existing products to existing markets

400% 350% 300% 250% 200% 150% 100% 50% 0% SSA SAS LAC ECA EAP GCC MENA Exporter Other Oil Oil Importer

Source: Staff calculations based on Comtrade data.

in other MICs, but the opposite is true for MENA than in other regions. This was especially true in firms exporting services. the case of the developing oil exporters, whose ex- tensive margin accounted for 82 percent of nonoil MENA nonoil merchandise goods exports export growth during the period 1998–2008—an grew at a slower pace than exports of other de- outcome consistent with the spectacular shift in veloping countries. MENA’s nonoil merchandise their nonoil export destinations. export growth was around 60 percent of growth in East Asia and ECA, and two thirds of growth in The dominance of the extensive margin can South Asia (Figure 47). Regional export growth be explained partly by the decline or disappear- was driven more by an expansion of existing prod- ucts to new markets and new products to existing markets than by an increase of exports of existing 32 The extensive margin captures the expansion of existing products to existing markets. Growth at the exten- products to new markets and new products to existing and sive margin32 played a much bigger role in MENA new markets.

50 Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

Table 9: Contribution of intensive and extensive margins to nonoil merchandise growth, 1998–2008 Exports of existing Exports of existing Exports of new Exports of new products to existing products to new products to exisiting products to new markets markets markets markets GCC 45% 40% 14% 1% Developing oil exporters 20% 57% 20% 3% Oil importers 53% 38% 9% 0% MENA 45% 41% 13% 1% SSA 44% 43% 6% 7% SAS 58% 40% 1% 1% EAP 82% 17% 0% 0% ECA 61% 37% 2% 0% LAC 77% 22% 2% 0% Source: Staff calculations based on COMTRADE. Note: Intensive margin refers to exports of existing products to existing markets or column (1). Extensive margin refers to exports of existing products to new markets, exports of new products to existing markets and exports of new products to new markets, or columns (2) through (4).

ance of exiting flows to some existing markets, seemed to have withstood competition better notably Europe.33 MENA’s exports of existing than those from oil exporting countries,34 but products declined or disappeared at the highest they were less successful in shifting existing rate in the developing world. Some of the reasons products to new markets, perhaps because they behind these outcomes might be linked to pres- were constrained by existing preferential trade sures associated with increased competition from arrangements. Consequently, merchandise ex- China and other emerging economies in specific port growth of oil importers lagged behind that markets such as the EU. China and other East of non-GCC oil exporters and other emerging Asian developing countries were able to scale up regions, except Latin America and Sub-Saharan in a big way their existing exports in the EU and Africa (Figure 47). elsewhere. Indeed, East Asia’s intensive margin accounted for 82 percent of export growth in the During the past ten years oil importers grew past decade, compared to 45 percent in MENA their exports in EU markets mostly by increas- (Table 9). Had MENA countries been able to ing exports of existing products (Figure 48), maintain the level of existing export flows that but they also managed to expand on a smaller actually declined or disappeared, export growth scale some types of merchandise exports to would have been 50 percent higher in MENA, Asia. MENA oil importers had much greater 59 percent higher in the GCC and developing oil success than MENA oil exporters in expanding exporters, and 39 percent higher in oil import- exports of parts and components to EU and ers (Table 10). For East Asia, the decline and Asia (Figure 48). They were also more success- disappearance of existing exports reduced export ful than oil exporters in expanding exports of growth by just 30 percent (Table 10). capital goods to the EU. However, export growth

Behind MENA’s weak nonoil merchandise export growth performance might have been shifts in demand or intense competition be- 33 Source: Brenton, Shui and Walkenhorst (2010). 34 tween MENA firms and firms from other emerg- The intensive margin of oil importers was affected to a much smaller degree by the decline or disappearance of existing ing markets. Firms from oil importing countries products to existing markets.

51 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Table 10: Decomposition of the intensive margin Exctinction in Exports of existing Increase in export of Fall in export of exports products to existing exisiting products to exisiting products to exisiting products to markets exising markets exising markets exising markets GCC 80% 139% –30% –29% Other oil exporter 54% 114% –26% –33% Oil importer 116% 154% –20% –19% MENA 92% 143% –25% –25% SSA 89% 137% –21% –27% SAS 178% 213% –20% –15% EAP 290% 321% –21% –9% ECA 213% 255% –25% –17% LAC 139% 171% –22% –11% Source: Staff calculations based on COMTRADE.

linked to global production sharing arrange- to which Tunisia exports this product.35 Perhaps ments was weak relative to export growth of in response to greater competition, in many industrial products, consumer goods and food countries, in sectors with differentiated products, products—especially to the EU. there were substantial within-industry adjust- ments as firms switched production to exports of Developing oil exporters’ nonoil export similar goods within the same product class. For growth was driven by an export expansion of example, the decline in “men’s and boy’s cotton industrial products in Asia (Figure 48), followed trousers” has been compensated by an expansion by much smaller increases in Europe, MENA and of “women’s and girl’s cotton trousers”. the rest of the world. This group faced serious competition in the EU markets for consumer Growth at the extensive margin is evidence and capital goods. Exports of capital goods to of the growing importance of global production nontraditional markets grew more relative to sharing arrangements in the electrical and motor exports of these goods to other regions, but vehicle industries of oil importers with strong EU the expansion was insignificant in quantitative links, and the increasing importance of chemicals terms. The export growth of the GCC oil export- and chemical products for a number of countries, ers could be attributed to a strong expansion of including the GCC oil exporters. Finally, for a industrial exports to Asia, and within the MENA number of products that have driven export region. GCC oil exporters lost some ground in all growth in MENA, China’s share in the world other industries in the EU (Figure 48). market has increased significantly, suggesting a complicated picture of export growth. In the EU, Important information is hidden behind the MENA’s export expansion was limited by the margin indicators. In a number of countries, the expansion of China and other emerging market key products that have driven growth to certain exporters in the EU market, but MENA firms markets have also driven the decline to other mar- appear to have reallocated toward more rapidly kets. For example, in Tunisia, the same product growing product and market segments of the group “men’s and boy’s cotton trousers” is at the European Union and Asia. top of the lists of existing products with increased exports to existing markets and decreased exports to existing markets. This is an indication of the considerable change in the structure of markets 35 For further analysis see Brenton, Shui and Walkenhorst (2010).

52 Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

Figure 48: Nonoil merchandise export growth by market and industry, 1998–2008

Exports of new products to new markets Exports of existing products to new markets Exports of new products to existing markets Exports of existing products to existing markets

Capital goods Parts & components 4% 5% 4% 3% 3% 2% 2% 1% 1% 0% 0% –1% –1% –2% –2% –3% EU EU EU EU EU EU USA USA USA USA USA USA Asia Asia Asia Asia Asia Asia RoW RoW RoW RoW RoW RoW MENA MENA MENA MENA MENA MENA GCC Oil importer Other oil exporter GCC Oil importer Other oil exporter

Industrial primary & processed Consumer goods 45% 14% 40% 12% 35% 10% 30% 8% 25% 6% 20% 4% 15% 2% 10% 0% 5% –2% 0% –4% EU EU EU EU EU EU USA USA USA USA USA USA Asia Asia Asia Asia Asia Asia RoW RoW RoW RoW RoW RoW MENA MENA MENA MENA MENA MENA GCC Oil importer Other oil exporter GCC Oil importer Other oil exporter

Food primary & processed 8% 7% 6% 5% 4% 3% 2% 1% 0% –1% EU EU EU USA USA USA Asia Asia Asia RoW RoW RoW MENA MENA MENA GCC Oil importer Other oil exporter

Source: Staff calculations based on COMTRADE.

53 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Market access is more of an issue MENA countries have more restricted mar- for oil importers than oil exporters ket access in China than in advanced markets. Overall nonoil protection in China averaged 10.2 Do MENA countries face any special market percent for imports from MENA and 15.6 percent access issues? To answer this question, this sec- for imports from MENA’s oil importing countries tion discusses estimates of overall protection by (Figure 49). MENA oil importers with EU links type of merchandise goods such as agricultural encountered much higher overall protection goods, manufactures, nonoil and oil products, than others (Figure 50 and Figure 49) because and by region, including MENA, its three major of high tariffs on specific products exported to subgroups—the GCC oil exporters, the develop- China. Indeed, China’s protection rate on nonoil ing oil exporters and oil importers, and other imports from these countries was around 11 per- key regions. It is important to note that only in cent, and approximately 3 to 4 times higher than this section, non-oil goods are a subcategory protection imposed on imports from other parts of manufactured products, while in all other of Asia, and the rest of the world. By contrast, sections of the report, non-oil goods refer to all China’s overall barriers on nonoil goods exported merchandise goods other than petroleum prod- by MENA’s oil exporters and oil importers with ucts. The estimation required a split of products GCC links are much lower than the ones imposed at the HS6 level into two mutually exclusive on oil importers with EU links and other regions sets of agricultural and manufactured products. (Figure 50). The relatively low trade barriers Manufactured products were then split again into appear to have facilitated the rapid growth of another two mutually exclusive sets comprised these countries’ exports to China and other of oil products and non-oil products. Appendix parts of Asia in the period between 1998 and tables A2 through A15 present the complete set 2008. Tariff protection on MENA’s agricultural of estimates of overall protection, tariffs and exports to China was steep compared to other ad-valorem equivalents (AVEs) of NTMs. Box 2 regions (Figure 51), reflecting high tariffs on elaborates on the methodology for computing the specific products. different types of protection rates. All regions face higher protection in India MENA countries have relatively good market than elsewhere, and MENA region is not an ex- access for nonagricultural goods in high income ception (Figure 50). However, the overall protec- countries. The average protection encountered tion on MENA’s nonoil exports to India is among by MENA’s exports in advanced countries’ mar- the highest in the world, largely because of high kets, measured by the overall restrictiveness in- barriers on GCC’s nonoil exports. Protection dex (see Box 2), was less than 1.9 percent in 2008 on oil importers’ exports was generally lower (Figure 49). This low average protection reflects in India than in China largely due to product mainly low or zero tariffs on oil exports, which composition effects as the simple average tar- dominate MENA oil exporting countries’ export iff in India was 18% vs. 10% in China in 2008. baskets, as well as tariff and quota free access to Tariffs in China and India vary substantially by the EU and the US for manufactured goods com- product line, with more than 100 tariff peaks ing from some oil importers.36 MENA’s average each. In China, these peaks affect agricultural nonoil protection rate is higher at 5.2 percent and industrial products in equal proportions. In but this rate is in line with nonoil protection on India, four fifths of all peaks fall on agricultural exports of firms from other regions (Figure 49). goods (Pigato 2009). However, overall agricultural protection is high, reflecting restrictive NTBs and constraining exports, especially for oil importers with EU 36 links. Overall protection on agricultural goods is Within the group of oil importing countries, Morocco, Tunisia, Egypt, Lebanon, and Jordan have signed bilateral FTAs with the highest for Tunisia (51.1%), followed by Morocco EU, while Morocco, Jordan and Lebanon have signed bilateral FTAs (37%) (Appendix Table A14). with the US. See for further detail Hoekman and Sekkat (2009).

54 Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

Box 2: How is the overall trade restrictiveness index calculated?

The trade policy instruments of a country typically ing the estimated AVEs of the NTBs with tariffs for include both tariffs and non-tariff barriers (NTBs). each product in each country gives us the overall trade While tariffs are mostly expressed in terms of a certain policy restriction of each country at tariff line level. percentage of the custom value of an imported prod- To obtain the overall trade restrictiveness index of uct, NTBs are sometimes hard to quantify. Examples a country, the weighted average of the overall trade of NTBs include quotas, non-automatic licensing, policy restriction of each country at tariff line level is antidumping duties, technical regulations, monopolistic calculated with weights reflecting the import share and measures, and subsidies. Thus, to adequately measure import demand elasticity of the each tariff line product. the restrictiveness of the trade policies of a country, one For more details please refer to Kee, Nicita and Olar- needs to combine the different forms of trade policies in reaga (2009). a meaningful way. The question is how to combine a 10% For the estimations presented in this report we tariff, with a 1000 ton quota, a complex non-automatic relied on tariff data for 2008 and latest NTB data. How- licensing procedure and a $1 million subsidy? ever, for the MENA countries the information refers to To achieve this objective, Kee, Nicita and Olarreaga the period prior to 2005 as more recent information on (2009) first estimate the quantity-impact of NTBs on NTBs was not available for these countries at the time imports in a good level regression, conditioning on the of writing. GCC oil exporters are represented by Oman existing tariff level of each product in each country. The and Saudi Arabia, and developing oil exporters by Al- estimated quantity impacts of NTBs on trade imports geria, due to lack of data on other GCC and developing of the good is then converted to price effects using oil exporters. Thus, the results for the GCC countries the import demand elasticities of the product in each and developing oil exporters should be interpreted with country from Kee, Nicita and Olarreaga (2008). These caution. Oil importers include countries with strong are the estimated ad-valorem equivalents (AVEs) of GCC links (Jordan, and Lebanon) and those with strong NTBs for each country at the tariff-line level. Combin- EU links (Egypt, Morocco and Tunisia).

There is no evidence that protection has export market penetration. The index is calcu- increased substantially since 2008 when the lated by dividing the number of export bilateral global crisis erupted. Indeed, a study by Bown flows by the number of bilateral flows that would and Kee (2010) underscore the limited role of occur if the country were to export its products trade barriers in the global trade collapse at the to all the markets that import such products.38 end of 2008.37 They find evidence that much of Developing oil exporters such as the Republic of the new post-crisis protectionism is in the form Yemen, Algeria, the Islamic Republic of Iran, and of “South-South” trade barriers such as anti- Syria exported their products to less than 5 per- dumping that one developing economy imposes cent of markets in 2005 (Table 11). Oil importers on the imports of other developing economies. were more successful than them despite facing This phenomenon has not been new but has been trending in this direction long before 2008–09, 37 There are a number of hypotheses about what caused the and was accentuated during the crisis. collapse and why it became so widespread and deep. Some ar- gue that the collapse in trade was the result of a synchronized MENA countries are less successful postponement of purchases, especially of durable consumer and than other developing economies in investment products. Others insist that the collapse in trade was a consequence of the sudden financial arrest, which froze global penetrating foreign markets credit markets and spilled over to the specialized financial in- struments that finance international trade.S till others note that Despite good market access developing MENA with the globalization of supply-chains, a fall in manufactures could lead to an outsized fall in total trade, particularly if supply countries underexploit existing opportunities chains are disrupted. For more detail see Haddad et al. (2010). for export growth as measured by the index of 38 For more details see Brenton and Newfarmer (2009).

55 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 49: Market access for MENA merchandise goods, overall trade restrictiveness index

All products Agriculture Manufactures Nonoil products Oil

High income markets 40% 35% 30% 25% 20% 15% 10% 5% 0% MENA GCC oil Other oil Oil importers Oil importer Oil importers exporters exporters with GCC links with EU links

China 40% 35% 30% 25% 20% 15% 10% 5% 0% MENA GCC oil Other oil Oil importers Oil importer Oil importers exporters exporters with GCC links with EU links

Source: Staff estimates based on tariff data for 2008 and latest official NTBs data. Note: (1) Agriculture includes primary and pro- cessed agricultural products and food items. Note: The estimates exclude restrictive NTBs imposed by China on natural gas imports from Algeria. These are extremely high and distort the average protection rates faced by developing oil exporters in China. (2) The estimations exclude quotas on manufactured exports from Algeria, Morocco, Tunisia, Lebanon, Jordan, and Egypt to the EU as these countries have FTAs with EU.

in many cases higher barriers in world markets, much greater extent than in others EU countries. but still most of them exported to less than Morocco, for example, takes advantage of nearly 7 percent of markets, and compared poorly to 60 percent of opportunities to sell its export other countries, including Turkey which reached products in and Spain, but just 20 percent 27 percent of markets that import its products. of its export opportunities in the and Portugal. Tunisia has much greater success Furthermore, success in penetrating foreign in France and Italy than in Spain and Portugal. markets varies greatly across MENA countries By contrast, the variability of Turkey’s index (Table 12) and cannot be explained just with was much smaller than that of MENA countries differences in protection in these markets. For suggesting that Turkey’s firms market their prod- instance, MENA countries take advantage of ucts successfully and consistently in different market opportunities in some EU countries to a country contexts.

56 Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

Figure 50: Market access for nonagricultural products, overall trade restrictiveness index (2008)

Nonoil products Manufactures

High income markets 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% SSA LAC ECA India China MENA GCC oil Other oil exporters exporters High income with EUlinks SAS w/o IND Oil importers Oil importers Oil importers EAS w/o CHN with GCC links China 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% SSA LAC ECA India MENA GCC oil Other oil exporters exporters High income with EUlinks SAS w/o IND Oil importers Oil importers Oil importers EAS w/o CHN with GCC links World 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% SSA LAC ECA India China MENA GCC oil Other oil exporters exporters High income with EUlinks SAS w/o IND Oil importers Oil importers Oil importers EAS w/o CHN with GCC links (continued on next page)

57 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 50: Market access for nonagricultural products, overall trade… (continued)

Nonoil products Manufactures

India 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% SSA LAC ECA China MENA GCC oil Other oil exporters exporters High income with EUlinks SAS w/o IND Oil importers Oil importers Oil importers EAS w/o CHN with GCC links

Source: Staff estimates based on tariff data for 2008 and latest official NTBs data. Notes: (1) The estimates exclude restrictive NTBs imposed by China and India on natural gas imports from Algeria. These are extremely high and distort the protection rates faced by developing oil exporters in China and India. (2) The external trade barrier on nonoil products in EAS excluding China averages slightly more than 20 percent.

Table 11: Index of export market penetration by country, 1995 and 2005 (percent) 1995 2005 Algeria 2.1 2.4 Egypt, Arab Rep. 6.6 11.3 Iran, Islamic Rep. 4.6 6.9 Jordan 2.9 4.9 Lebanon 4.1 7.6 Morocco 6.0 8.8 Syrian Arab Republic 4.3 7.2 Tunisia 4.4 7.7 Yemen, Rep. 1.5 2.0 Turkey 13.5 27.1 Source: Brenton, Shui and Walkenhorst (2009).

58 Chapter 3: MENA Remains Uncomfortably Dependent on the Capital-Intensive Oil Sector

Figure 51: Tariff protection in China’s market (2008)

Agriculture Manufactures Nonoil products

14%

12%

10%

8%

6%

4%

2%

0% EAS w/o CHN India SAS w/o IND LAC SSA ECA MENA High income

14%

12%

10%

8%

6%

4%

2%

0% MENA GCC oil Other oil Oil Oil importers with Oil importers exporters exporters importers GCC links with EU links

Source: Staff estimates based on tariff data for 2008. Note: The estimates exclude restrictive NTBs imposed by China on natural gas imports from Algeria. These are extremely high and distort the average protection rates faced by developing oil exporters in China.

59 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Table 12: Bilateral index of export market penetration of EU and US markets Exporters Iran, Syrian Egypt, Islamic Arab Yemen, Importer Algeria Arab Rep. Rep. Jordan Lebanon Morocco Republic Tunisia Rep. Turkey Europe and the United States 9.0 17.3 6.3 4.6 12.9 25.9 9.6 28.1 1.2 52.0 France 32.5 26.6 17.7 6.1 21.8 57.3 18.5 61.3 2.6 57.0 Germany 7.4 33.2 32.9 11.5 16.7 33.5 18.7 36.2 6.6 71.8 Greece 1.0 22.0 3.4 3.6 9.1 7.1 11.8 6.2 0.2 61.7 Italy 18.3 34.0 18.2 9.8 18.8 36.9 17.8 50.4 2.6 62.5 Netherlands 4.2 18.4 13.0 7.5 7.7 20.8 7.1 15.6 1.2 51.4 Portugal 3.4 7.1 3.0 1.6 2.1 19.4 0.7 11.0 — 32.2 Spain 19.9 27.1 15.3 11.2 19.1 57.0 12.9 29.5 0.6 54.3 United 8.6 29.4 16.5 13.3 16.0 28.1 14.6 19.7 7.6 64.1 Kingdom United 3.8 27.2 5.8 20.6 19.5 26.1 13.1 17.2 4.0 52.0 States Source: Brenton, Shui and Walkenhorst (2009).

60 Chapter 4 What are the major constraints to MENA’s nonoil exports?

Protection in developing MENA is around 50 percent in developing MENA, while high, largely due to NTMs protection on manufactured goods reaches 35 percent in developing oil exporters, and 28 MENA region has liberalized its trade consider- percent in developing oil importers. Given that ably by lowering its tariff barriers, which are now by the Lerner symmetry theorem, removing comparable to tariffs in other regions (Figure 52). import restrictions is tantamount to removing In the GCC oil exporters, tariffs on agricultural restrictions on exports, there is thus a substantial products averaged around 10 percent in 2008, nontariff agenda in developing MENA countries. while tariffs on manufactured goods were less than 3 percent on average (Figure 52). Overall In a set of MENA countries for which NTM trade restrictiveness was also low—lower even information is available,39 more than 19,000 than the restrictiveness in high incomes coun- tariff lines were affected by some type of NTB tries. By contrast, tariffs in developing MENA at the HS6 digit product level. This implies that countries were higher than in most other regions. of all 5,200 existing product lines at the HS6 For manufactured products they were 10 percent digit product level, most products are affected in the developing oil exporters and around 7 per- by NTMs and many of these are affected by more cent in oil importers. For agricultural products, than one NTM. In MENA, technical barriers ac- tariffs were comparable to those in high income count for 60 percent of the product lines affected countries and ECA, and were much lower than by some type of NTM, followed by quotas and tariffs in India. Within MENA, agricultural tariff prohibitions which cover just 25 percent of the protection was higher in the oil importers with product lines and licenses—18 percent. EU links than in all other regional subgroups. Estimates produced for this report suggest Overall protection in developing MENA is that NTM-related protection rates on nonoil goods much higher than tariff protection due to restric- range from 12 percent in MENA (Figure 53), LAC tive nontariff measures (NTMs) (See Box 3). and EAS outside China, to around 5 percent in Nonoil NTMs which act as nontariff barriers developed economies and China. Nonoil NTM- (NTBs) are estimated to be extremely large in related protection rates in other developing coun- developing MENA, especially in the non-GCC oil tries fall within this range and average 10 percent exporters (Figure 53). When nontariff barriers in ECA, 9 percent in SSA, 8 percent in India and are included the rate of overall protection on 6 percent in other South Asia. Within MENA, the nonoil goods in developing MENA more than range of NTM-related protection rates widens dra- triples and reaches 35 percent in developing oil matically, from 2 percent in the GCC countries, to exporters and 28 percent in oil importers. The increase is more dramatic for agricultural goods which are much more heavily protected than 39 The countries include Egypt, Jordan, Lebanon, Morocco, manufactures. Agricultural protection averages Tunisia, Algeria, Bahrain and Oman.

61 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 52: Overall trade restrictiveness by market and product (2008)

All goods Agriculture Manufactures Nonoil

Tariff and nontariff barriers 60%

50%

40%

30%

20%

10%

0% SSA LAC ECA India China MENA GCC oil Other oil exporters exporters High income with EUlinks SAS w/o IND Oil importers Oil importers Oil importers EAS w/o CHN with GCC links

Tariffs only 60%

50%

40%

30%

20%

10%

0% SSA LAC ECA India China MENA GCC oil Other oil exporters exporters High income with EUlinks SAS w/o IND Oil importers Oil importers Oil importers EAS w/o CHN with GCC links

Source: Staff estimates based on tariff data for 2008 and latest official NTBs information. In MENA latest official NTB data reflects information for different years between 1999 and 2003 in different countries.

19 percent in the oil importers, and to 26 percent their trade, while Lebanon and, to a large extent, for developing oil exporters (Figure 53). Morocco have opened their markets for manufac- tured imports. Tariffs on manufactures are low Tariff and nontariff protection rates in Jordan, but NTBs substantially increase the vary widely across MENA rate of protection there (Figure 54). In Tunisia tariffs on manufactures are above 10 percent, and Tariff and nontariff barriers on agricultural and are high relative to the world average, whereas manufactured imports vary widely across MENA in Egypt and Algeria protection is high largely countries. The GCC oil exporters have liberalized due to NTBs (Figure 54). In agriculture protec-

62 Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

Box 3: Nontariff measures – definitions and state of knowledge

Nontariff measures (NTMs) include a wide array of Given these caveats, the estimates of overall pro- instruments such as sanitary and phytosanitary mea- tection inclusive of NTMs should be interpreted with sures (SPS), technical barriers to trade (TBT), quotas caution and considered indicative of the restrictions and prohibitions, import and export licenses, custom created by NTMs prevailing in the set of countries on surcharges, financial, anti-competitive, and anti-dump- which data are available. The tariff-only protection ing measures and others. Some of these measures are rates provide lower bounds to protection discussed in essential by nature and imposed to achieve objectives the report. NTMs typically affect a very large share of other than to restrict trade. Evidence exists however that imports and technical barriers, including SPSs and countries are using NTMs to erect NTBs as trade agree- TBTs, which are the most prevalent form of NTM. Es- ments impose limits on the use of traditional trade policy timates of NTM coverage range from 34 to 54 percent instruments such as tariffs. NTBs are difficult to mea- for industrial countries’ imports from the developing sure since there is no comprehensive and continuously world (Nogues et al. 1986, Kee et al. 2009). Kee et al. updated information on NTMs. The most comprehensive estimate that NTMs result in protection rates of 9.2 source of NTMs information—the UNCTAD Trade Analy- percent in simple average terms and 7.8 percent in sis and Information System (TRAINS) database used in trade-weighted terms. Similar to trade logistics bar- this study—has not been updated regularly since 2001 riers, NTMs have a trade-reducing impact. Hoekman and does not have adequate and accurate country cover- and Nicita (2008) find that cutting NTMs in half from age and coverage of new forms of non-tariff measures. around 10% to 5% would boost trade by 2–3 percent.

Figure 53: Estimated NTM-related In most MENA countries other than the GCC protection rates in MENA oil exporters NTM barriers on manufactured goods are estimated to raise protection substan- 30% tially. And these barriers appear to be higher for exports coming from within MENA. Indeed, oil 25% importers with EU links, and developing oil ex- 20% porters such as Algeria encounter much higher overall protection rates on manufactured goods 15% in MENA than the developed countries, India, 10% Latin America, Europe and Central Asia, and East Asia except China (Figure 55). Furthermore, 5% MENA countries do not exploit well opportunities 0% to sell their exports in other MENA countries. MENA GCC oil Other oil Oil Turkey has a better export penetration in the exporters exporters importers MENA region than the MENA countries them- Source: Staff estimates based on tariff data for 2008 and latest selves (Table 13). official NTBs data. In MENA latest official NTB data reflects information for different years between 1999 and 2003 in differ- ent countries. Within the group of oil importers, those with GCC links have better access to MENA markets than those with EU links (Figure 55). Overall pro- tection rates on manufactured goods exported by tion is high mostly because of substantial NTBs, the oil importers with GCC links within MENA except in Jordan where markets for agricultural averaged slightly over 10 percent, while the goods are opened to imports. Only Tunisia and protection on corresponding products exported Morocco use tariffs above 20 percent to protect by importers with EU links averaged close to 18 agriculture (Figure 54). percent (Figure 55). In addition, political tension

63 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 54: Tariff and nontariff barriers (NTBs) by MENA country

NTBs Tariffs

Manufactures Agriculture

Tunisia Tunisia

Morocco Morocco

Lebanon Lebanon

Jordan Jordan Egypt, Egypt, Arab Rep. Arab Rep. Algeria Algeria

0% 5% 10% 15% 20% 25% 30% 0% 10% 20% 30% 40% 50% 60%

Source: Staff estimates based on tariff data for 2008 and NTBs in different countries for different years between 1999 and 2003.

Table 13: Bilateral index of export market penetration of MENA markets Exporters Egypt, Iran, Islamic Syrian Arab Yemen, Importer Algeria Arab Rep. Rep. Jordan Lebanon Morocco Republic Tunisia Rep. Turkey Middle East and North Africa Algeria — 29.9 4.9 12.5 13.7 17.0 34.2 38.4 0.8 57.2 Egypt, Arab 2.6 — 4.2 26.6 18.3 2.9 19.8 4.7 10.2 431.0 Rep. of Jordan 1.0 38.4 8.7 — 32.5 1.6 40.5 2.9 3.8 51.8 Morocco 15.5 25.2 4.9 4.4 10.7 — 17.8 23.6 40.6 Syrian Arab 0.8 19.8 6.4 16.2 19.2 1.1 — 1.3 0.9 28.3 republic Tunisia 11.0 18.3 2.3 4.3 6.9 24.2 14.5 — 0.8 38.2 Yemen, 0.4 26.6 7.5 18.7 12.9 1.0 29.3 1.3 — — Rep. of Turkey 9.8 19.6 25.8 10.8 6.5 16.5 12.2 14.5 0.2 Saudi Arabia 5.8 69.9 34.2 56.3 56.1 23.2 72.5 18.7 39.0 62.1 Source: Brenton, Shui and Walkenhorst (2009).

between Algeria and Morocco has limited trade trade more than 3 percent of total imports and between the two countries. Not surprisingly, oil exports with the other three partners, and except importers with GCC links trade a lot more within for Tunisia, the same is true for the five members the region than those with EU links. In 2007, a of the Arab Maghreb Union.42 third of Jordan’s trade and a fifth of Lebanon’s trade in goods was intra-regional, compared to 40 3 percent for the countries in the Maghreb.40,41 Source: Rouis (2010). 41 The Maghreb includes Algeria, Libya, , Morocco, None of the members of the Agadir Agreement, and Tunisia. including Egypt, Jordan, Morocco and Tunisia, 42 Source: World Bank (2008a).

64 Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

Figure 55: Protection faced by different regions and country groups in MENA

Nonoil products Manufactures

Tariff and nontariff protection 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% SSA LAC ECA India China MENA GCC oil Other oil exporters exporters High income with EUlinks SAS w/o IND Oil importers Oil importers Oil importers EAS w/o CHN with GCC links

Tariffs only 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% SSA LAC ECA India China MENA GCC oil Other oil exporters exporters High income with EUlinks SAS w/o IND Oil importers Oil importers Oil importers EAS w/o CHN with GCC links

Source: Staff estimates based on tariff data for 2008 and NTBs in different countries for different years between 1999 and 2003.

Intra-regional trade stagnated 2008 (Figure 45). GCC and developing oil export- and intra-industry trade remains ers shifted their nonoil exports away from MENA limited and EU towards Asia and rest of the world, while intra-regional exports of oil importers increased The Pan-Arab Free Trade Agreement (PAFTA) slightly as a share of their total nonoil exports and the Free Trade Agreements (FTAs) with the (Figure 45). EU were driving forces behind the opening up of MENA markets. However, intra-regional exports Low trade complementarity places natural remained approximately the same as a share of limits on intra-regional trade. The dominance of MENA’s total nonoil exports between 1998 and oil in more than two thirds of the countries in the

65 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

region, and the similarity of industrial policies and Wide dispersion of tariffs across MENA cultural characteristics imply that trade comple- countries complicates matters further as it im- mentarity is low among MENA countries. The plies that industries in these countries benefit to degree of complementarity between two countries varying degrees from policy-generated transfers. can be measured with the bilateral complementar- When the costs and benefits of opening up are ity index which captures the similarity between unevenly distributed, it becomes politically dif- the export basket of one country and the import ficult to open markets among regional partners. basket of another country.43 The index ranges from The fact that members of PAFTA continue to 0 to 100, with higher values indicating greater limit access for specific products by using NTBs complementarity. Typically, the complementarity or not implementing the policies specified in the indexes between partners in successful regional agreement is evidence of these political tensions. agreements are above 50, while for moderately MENA countries have generally failed to seri- successful ones, they are between 25 and 30. In ously implement most PTAs. Fawzy (2003) ar- MENA, bilateral complementarity indexes are gues that, on the political front, concerns over almost always below 20, with a large share of the the distribution of gains from integration across numbers in single digits. The non-oil complemen- and within countries, issues of national sov- tarity indexes tell a similar story. ereignty and the cost of adjustment resulting from increased competition, all constrained Thus, unlike East Asia, Europe and North intra-MENA PTAs. Another limiting factor, with America, there is no natural hub or anchor coun- a political dimension, was a lack of mechanisms try in MENA and no equals, i.e. large countries to compensate losers. Despite the emergence of with interests in cooperating. Outside MENA, the “credible” PTAs such as PAFTA, the GCC and the EU could serve as a hub for developing MENA, FTAs with the EU and the US, it is not known while Turkey could serve as an intermediate link to what extent these are implemented and their in the production network. Complementarity impact. Finding out answers to these questions indexes of MENA countries with the North are is a research priority in MENA. greater than those between MENA countries. There is also evidence that Turkey has started When a country both exports to and imports the process of moving operations to low-cost from another country in the same industry, it locations in the Mashreq,44 for instance Syria. does so either because it trades differentiated The challenge would be to build momentum and products or because it participates in interna- to address the barriers to trade, including those tional supply chains. When measured at the created by existing preferential arrangements. product level, one is more likely to find that When integration is limited to a PTA without intra-industry trade occurs because of differen- common external tariffs, the rules of origin tiation, while when measured at the industry become a major determinant of the incentive level, it can be a result of both effects. Traditional regime confronting firms. adjustment effects of trade liberalization are less likely to be felt when trade is intra-industry since Countries with high most-favored-nation resources do not have to move across industries (MFN) tariffs, for instance Tunisia and Morocco, where retraining and retooling is necessary, are exposed to high risk of costly trade diversion. rather they need to move across firms within a Opening toward selected partners in the region given sector. However, as seen during the recent or outside the region can divert trade flows from crisis countries engaged in intra-industry trade more efficient third-country producers to less because of their participation in global produc- efficient partner country producers, resulting in tion networks are vulnerable to external shocks a loss of tariff revenues without the benefits of affecting these networks. lower purchasing costs. The risk of trade diver- sion is higher if the intensity of trade between 43 Source: See Yeats (1998) and Khandelwal (2004). partners before bilateral liberalization is low as 44 Mashreq includes Iraq, Jordan, Lebanon, Syria, and West is the case in MENA. Bank and Gaza.

66 Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

Intra-industry trade within MENA and intra-industry trade surged reflecting the shift with the rest of the world is measured by the of supply chains to Asia over this period. In the intra-industry trade (IIT) index. The IIT index Middle East and North Africa, growth in intra- represents the share of intra-industry trade in industry trade also appears to have been sharper country’s total trade (Box 4), and varies between within the region than globally during the same 0 when there is no intra-industry trade and 1 period (Figure 57). when trade is completely balanced across sec- tors and countries. Behar and Freund (2010) Consistent with low protection on manu- calculate the IIT index for MENA and other factured trade in GCC countries and oil import- regions in a background paper commissioned ers with strong GCC links, a study by Brulhart for this report. They find that MENA’s aggre- (2009) suggests that intra-industry trade has gate intra-industry trade is much more limited grown more rapidly within the block of GCC and than that of other regions (Figure 56)—a finding Mashreq countries than within Maghreb, where similar to that presented in a paper by Brulhart it has stagnated. Still the increase in IIT within (2009). However, the aggregate index obscures a the GCC-Mashreq block remains small in com- significant variation among countries. The typi- parison to the increase of IIT in other regions. cal MENA country is not too different from the The IIT linkages between MENA and LAC, SSA typical country in SSA, SAS and LAC in terms and ECA were weakest among all pairs of world of intra-industry trade when measured with the regions represented in the paper. IIT linkages average index of intra-industry trade (Figure 56). between MENA and the high income countries, They all have low levels of intra-industry trade, and MENA and South Asia were stronger, but but the aggregate regional results in SSA, SAS still very weak compared to those between ECA, and LAC are affected by large IIT flows in large LAC, SAS, EAS and the high income economies. economies like South Africa, India, Mexico and Brazil. In East Asia, aggregate intra-industry Differences in the rules of origin of various trade remained constant at about one-third of regional agreements generate additional compli- total trade from 1995 to 2007, while average ance costs and limit intra-regional, intra-industry

Figure 56: Intra-industry Trade index by region

1995 2007 1995 2007

Aggregate Intra-Industry Trade Average Intra-Industry Trade 0.50 0.40

0.40 0.30 0.30 0.20 0.20 0.10 0.10

0.00 0.00 Africa Africa Europe Europe East Asia East Asia East South Asia South Asia Middle East Middle Middle East Middle Sub Saharan Sub Saharan Latin America Latin America

Source: Behar and Freund (2010). Note: Middle East stands for Middle East and North Africa.

67 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Box 4: Intra-industry trade (IIT) index

The IIT index measures the share of intra-industry in industry i. The numerator is the total trade between trade in the country’s total trade. For example, if a country and its partners that qualifies as intra-indus- exports from country A to country B in a sector are try. The denominator is a country’s total trade. 100 and imports are 50, then intra-industry trade The index can be aggregated up for a region as in the sector between country A and B is 100 in that n j k sector (50 of exports and 50 of imports). If all trade is 2min()xm, ∑ ∑ ∑ ∗ pi pi (2) IIT = c=1 p=1 i=1 , completely balanced across sectors and countries, i.e. R n j k ()xm+ imports are equal to exports in every sector in every ∑c=1∑p=1∑i=1 pi pi country the index takes the value of one. In contrast, if where c are the n countries in region R. The numera- a country’s exports to all trade partners are in differ- tor is the total trade between the countries in a region ent sectors from its imports, then the index will take with the world that qualifies as intra-industry. Note a value of zero. Specifically, the index for a country is that intra-industry trade is still at the bilateral level. calculated as It is the sum of trade among all country pairs that is

j k intra-industry, where one partner is in a given region. 2min()xm, ∑ ∑ ∗ pi pi (1) IIT p=1 i=1 . The denominator is the region’s total trade. c = j k ()xm+ The average of the countries’ IITs in region R is calcu- ∑p 1∑i 1 pi pi = = lated as follows:

Where p is partner, and there are j partners; i is j IIT industry and there are k industries; x is export to ∑ c pi (3) AVEIIT c=1 R = partner p in industry i and mpi is import from partner p n

Source: Behar and Freund (2010).

Figure 57: Intra-Regional, Intra-Industry Trade index by region

1995 2007 1995 2007

Intraregional Aggregate Intraregional Average Intra-Industry Trade Intra-Industry Trade 0.50 0.50

0.40 0.40

0.30 0.30

0.20 0.20

0.10 0.10

0.00 0.00 Africa Africa Europe Europe East Asia East East Asia East South Asia South Asia Middle East Middle East Middle Sub Saharan Sub Saharan Latin America Latin America

Source: Behar and Freund (2010). Note: Middle East stands for Middle East and North Africa.

68 Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

trade. Most of the intraregional agreements ad- components exports in total exports grew from here to a 40 percent value-added rule to confer less than 4 percent in 1985 to 10 percent in 2006. origin, they differ with respect to cumulation rules. PAFTA allows the use of inputs from other MENA’s services sector is heavily member countries toward the value-added tar- protected get, but the Arab Maghreb Union and the Agadir Agreement do not (Wippel 2005). In addition, The region relies heavily on exports of ser - the intra-regional rules of origin are markedly vices which generated revenue equivalent to different from those pertaining to Euro-Med, so 6 percent of GDP in 2008 (Figure 4). Only one that companies need to run parallel procurement other region—South Asia—has a higher share of and production processes to satisfy the respec- export revenue from services than MENA. The tive requirements or be limited in their choices importance of services as a source of export of input suppliers. growth is much greater for MENA’s oil importing countries, even compared to South Asia. Indeed, Cross-country networks of suppliers can be oil importers’ exports of services accounted for major drivers of integration and intra-industry a fifth of their combined GDP in 2008—slightly trade. Over the past two decades, such networks more than the revenue from their exports of have become prominent in ECA and EAS. In merchandise nonoil goods. Unlike many other these regions, systems of interrelated suppliers developing countries, most developing MENA have taken advantage of wage differentials across countries are net exporters of services,50 and countries, geographic proximity and economies rank better in terms of net rather than gross of scale from specialization.45 The success of positions. these networks and the intra-regional trade volumes have depended on demand for the final During the past ten years, MENA’s share in goods outside the region and good logistics. In world exports of services grew at a much faster MENA, logistics performance varies substantially pace than that of the MICs outside China. Indeed, across countries, with GCC and oil importers international exports of commercial services scoring close to expected levels for their income more than doubled between 1996 and 2006, and groups, and nearly all developing oil exporters outpaced by a substantial margin export growth scoring significantly below the average for their of agricultural and manufactured goods. Services income group.46 Given the evidence that good are an area of relative strength for MENA and a logistics performance and other trade facilita- key source of future potential growth and export tion measures are associated with increased revenue. Rapid advances in information and com- exports,47 improving logistics should be a prior- munication technologies (ICT) and the ongoing ity area, especially for developing oil exporters.

But, MENA countries have long lagged in net- 45 See Haddad (2007) for more information. 46 work trade,48 although some Maghreb countries The report measures logistics performance using the Logistic Performance Index (LPI), which ranks logistics quality on scale have been catching up in recent years. Tunisia has from 1 (worst) to 5 (best). The logistics performance index sur- been most successful in integrating into produc- veys logistics professionals about a number of factors affecting tion networks. Tunisia has the highest share of IIT logistics in over 150 countries, including customs clearance, infrastructure quality, facility of international shipments, local (40 percent), followed by Morocco and the United logistics competence, the ability to track and trace shipments Arab Emirates, and IIT has grown rapidly in and the timeliness with which shipments arrive. The report Egypt49 and Jordan. Given the high ratio of imports benchmarks the performance of MENA countries against oth- to exports of components, manufacturing appears ers by regressing LPI on the logarithm of 2009 GDP per capita expressed in 2005 PPP$. to be mostly an assembly-type activity directed at 47 See Behar et al. (2009) and Hoekman and Nicita (2008). domestic markets as opposed to integration into 48 Source: Yeats and Ng (2000). 49 global supply chains. The only country in the Egypt however needs to improve logistics as it has a low LPI score relative to the score expected for its income level. region with a significant share of components in 50 Developed oil exporters run trade services deficits due to the its total exports is Tunisia. Its share of parts and structure of their economies.

69 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 58: Services value-added (% of GDP)

Oil-rich countries By region By country within MENA 80 90.0 70 80.0 60 70.0 60.0 50 50.0 40 40.0 30 30.0 20 20.0 10 10.0 0 0.0 MNA Libya OECD MNA* Africa Jordan Tunisia Algeria Morocco Lebanon Djibouti* & Pacific East Asia East Europe & Europe Caribbean South Asia Central Asia Central Saudi Arabia Sub-Saharan Latin America & Latin America Egypt, Arab Rep. Egypt, Arab Iran, Islamic Rep.* Iran, Syrian Arab Republic Syrian Arab United Arab Emirates* Arab United

Source: Staff calculations.

global liberalization of trade and investment in Figure 59: Size of service sector (% of GDP) services have increased opportunities for trade and income per capita in MENA in many service activities and created new kinds of tradable services. Thus, services have offered a 5.0 vehicle for many MENA countries to diversify and modernize their economies. Recent trends point 4.0 to the growing importance of telecommunications in Kuwait, health services in Tunisia, port and 3.0 ICT services in Dubai, call centers in Morocco and Tunisia. 2.0

Beyond being sources of economic diversi- (Log) Real GDP per Capita 1.0 fication, services are also core inputs into most economic activities, and therefore determine 0.0 0.0 20.0 40.0 60.0 80.0 100.0 production costs and firms’ competitiveness. Telecommunications are crucial to the dissemi- Services Value Added (% GDP) nation and diffusion of knowledge; transport Source: Staff calculations. services affect the cost of shipping goods and the movement of workers within and between coun- tries; business services are channels through which innovations are transmitted across firms; In MENA region, services account for just 46 distribution services connect producers and percent of GDP—one of the lowest in the world consumers; basic services, such as electricity (Figure 58). Only East Asia has a lower share and water, are key inputs into the production of than MENA, but this outcome reflects the impor- manufactures, and health and education services tance and dynamic nature of the manufacturing are key inputs into—and determinants of—the and agricultural sectors in the East Asian econo- quality of human capital. mies. In MENA, the low share is due to the large

70 Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

Figure 60: Restrictiveness of services trade policies and share of services in GDP

Share services in GDP (%) STRI

80 70 70 60.6 60.8 60 53.5 54.6 50 48.2 46.4 40.9 39.4 39.3 41.6 40 30 29.6 30 20.7 19.9 20 18.9 10

STRI and share of services in GDP of services STRI and share 0 GCC EAP MENA SAR SSA LAC ECA OECD

Source: Global Services Policy Restrictiveness database. Regional scores are simple averages of constituent country scores.

size of the oil sectors in oil exporting countries. tional wisdom growth rates would have been Indeed, the small share of services in total GDP even higher had services regulation been more in oil exporting countries makes MENA the only liberal. In the case of East Asia, growth rates region in the world where the share of services have been driven by merchandise exports, so is inversely correlated with per capita income firms might have been shielded to some extent (Figure 59). In other regions of the world, the from the adverse effects of services barriers. higher the GDP per capita, the higher the share For South Asia, it is harder to explain the co- of services in GDP. existence of high services trade restrictiveness in most sectors including professional services, The Services Trade Restrictiveness Indices transport, and telecoms that have higher STRIs (STRI) from the Global Services Policy Restric- that MENA and other regions, and remarkable tiveness database compiled by the World Bank growth of South Asia’s services exports. More shows that restrictive policies are observed in research is needed to link the applied policy MENA in the five key sectors—financial services, data to outcome data of interest such as FDI or telecommunications, retail distribution, trans- foreign presence, ideally taking into account portation and professional services—covered by firm characteristics, or to determine to what the survey which provides information for the extent current protection levels—similar to STRI (see Box 5 for detail on methodological is- protection levels in other fast-growing regions— sues). Indeed, the STRIs by region suggest that inhibit growth. applied policies governing trade in services in the MENA region are more restrictive than those The high restrictiveness index for the GCC in other regions except East and South Asia. group of countries also appears as a puzzle. Generally, high income countries tend to have The fact that the fastest-growing regions lower barriers to trade in services as shown seem to exhibit restrictive services policies has by Gootiiz and Mattoo (2009).51 And while the been recognized as a puzzle. On the one hand, GCC telecom sector is highly protected, the unlike tariffs, services regulation could be pru- GCC countries export communication services dential, so one cannot conclude a priori that less is always “better”. On the other hand, the answer depends on the proper counterfactual, 51 Gootiiz, B. and A. Mattoo (2009) “Restrictions in Service Trade and it might well be that in line with conven- and FDI in Developing Countries.” Mimeo.

71 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Box 5: Measuring restrictions affecting trade in services

Two different approaches have been used in the lit- latter are submitted to regulators, administration and erature to assess the magnitude and impact of policy private sector in order to collect qualitative information barriers to trade in services (Francois and Hoekman on entry, competition and business conduct barriers in 2010). The first one requires collection of information services sectors. on applied policies, converting these into coverage/ A number of steps need to be followed. First, one frequency indicators and using the resulting indices collects qualitative information about regulatory to explain observed measures of prices or costs. The restrictions affecting services delivery in a particular second one uses indirect methods including calcula- country. Then, one converts it into a quantitative index tion of price-cost margins by sector across countries (or indexes) using weights that reflect the relative or gravity regressions to estimate what trade flows severity of the different restrictions. The general ap- “should be” and obtain an estimate of the tariff equiva- proach in Findlay and Warren (2000)—used in many lent of policies from the difference between estimated studies—is to convert qualitative information about and observed flows. With this second approach it is regulatory restrictions into a quantitative index, using impossible to attribute price-cost margins or differ- a priori judgments about the relative restrictiveness of ences in trade volumes to specific policies. For this different barriers (i.e., the weighs of the restrictiveness reason, most of the literature uses the first approach, index components). This is generally less conten- although researchers are increasingly using gravity tious within a given category of barriers than between. estimations whenever they have access to bilateral For example, it makes sense to score a regime that trade in services data. restricts foreign ownership to 25 percent or less as Under the first approach of measuring services being twice as restrictive as one that restricts foreign trade restrictiveness, the quantification of barriers to ownership to 50 percent or less. What is less obvi- trade in services must be preceded by a collection of ous is how to weigh the scores on foreign ownership information on a sector-by-sector basis, relying on restrictions together with those on licensing require- government documents and the expertise of sector ments, or those on restrictions on lines of business. specialists (Mattoo, Stern, & Gianni, 2008). Many stud- Nevertheless, some of the inherent arbitrariness of ies are based on “regulation” questionnaires developed the weighting procedures can be tested empirically. by the OECD and the Productivity Commission of Aus- Finally, the information on barriers should be captured tralia that attempt to capture all the regulations that following the 4 modes of services deliveries recognized can affect significantly entry, competition and trade in by the WTO—cross-border trade (Mode 1), movement services. The Services Trade Restrictiveness Indices of customer to the country of the provider (Mode 2), (STRI) from the Global Services Policy Restrictive- sales of services through an offshore affiliate (Mode 3) ness database, compiled by the Bank and used in this and the (temporary) movement of persons to provide report, is also based on this type of questionnaires. The services (Mode 4).

successfully. The GCC countries also appear re- transport, tourism, real estate, and hold profes- markably open to trade in services under mode sional positions in banking, education and other 4. The total number of foreign workers in the service industries. GCC was estimated at 12.5 million or nearly 40 percent of the population in 2007, compared to Furthermore, while de jure policies indicate 70 million migrants in Europe (or 10 percent of high obstacles to FDI in services, observed flows the population) and 50 million in North America have been substantial. For example, FDI from (or 14.2 percent of the population). While many Asia into the Gulf has increased at a breath- of these foreign workers do not work in services taking pace, and not all of it has gone into the but in agriculture and industry, a very large oil and gas sector but instead has flown into share are employed as service workers in retail, transport and tourism infrastructure, and

72 Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

other services industries.52 This situation might In banking, Morocco and Tunisia display reflect the fact that de facto policies could be many restrictions, in particular cross-border relaxed and rendered ineffective as foreign and consumption abroad restrictions linked to investors have sought to involve GCC nationals their capital account regime which is only par- as partners in their business ventures to avoid tially open. Egypt has an intermediate level of the high minimum employment requirement openness driven by mode 2, whereas restrictions of nationals and other discriminatory policies. span across modes 1, 3 and 4. Jordan’s banking Unfortunately, there is no way to measure the sector is relatively open, with restrictions only magnitude of the bias. Alternatively, the STRI in modes 1 and 4, whereas Lebanon’s banking index might be biased upward as it excludes sector is the most open in the region, with nearly tourism and real estate which might be less no restrictions across modes 1, 2, and 3. protected. It is clear that more work is needed to understand the effective protection in services In insurance, Egypt is among the least re- in the GCC group. strictive countries in non-GCC MENA, reflecting the liberalization of the sector in recent years. Regional trade agreements have not helped However, specific restrictions apply on com- to liberalize intraregional trade in services mercial presence, namely the Economic Needs in developing MENA. A recent study by the Test. On the other end of the spectrum, Morocco World Bank shows that restrictions on trade and Tunisia are among the most restrictive in the five sectors surveyed are much steeper due mainly to restrictions on cross-border and in the PAFTA member countries than in the consumption abroad. For Morocco, important rest of the world (Borchert at al. 2010).53 In non-discriminatory concessions have been made reality, many services sectors in the region as part of its FTA with the United States,55 and are liberalized, but only to a limited extent once effective, the provisions in that agreement and governments tend to retain control, which will significantly open the sector. leads to lack of transparency and discretion in how restrictions are applied.54 Foreign equity MENA has been ranked as the most restric- limits, for example, have been relaxed in most tive region for trade in fixed telecom services MENA countries in recent years, yet many among a group of Asian and transition econo- service markets remain dominated by state- mies.56 However, in line with recent reforms, the owned or domestic enterprises. High levels sector is opening up to trade and foreign pres- of state control persist in such cases through ence. Morocco and Jordan have the most open conflicting regulations that protect current telecom sectors in the region, whereas Egypt and market structures. Tunisia still lag behind despite the very recent opening of Tunisia’s fixed line telephony to a Restrictions that discourage FDI inflows private operator. into services are particularly harmful as they have a negative impact on the potential size and In maritime transport, major restrictions productivity of firms, the technology used by exist in Morocco and, to a lesser degree, Egypt. firms, the markets firms choose to operate and In contrast, Tunisia and Jordan have fairly open the quality of services. For example, Algerian maritime sectors. Across the MENA countries, service companies are frequently informal and it is common to award preferential treatment inward-oriented (Cattaneo, Ighilahriz, Lopez- Calix and Walkenhorst 2010), and in a number of 52 Asian countries signed contracts worth $500 billion to com- countries some services sectors are dominated by plete infrastructure projects in the Middle East (Kemp 2010). SMEs that do not have the means or incentives 53 The sectors are financial and insurance, retail, telecommuni- to expand operations. Such is the situation in cations, transportation, and professional services. 54 Tunisia’s legal, and information and communi- Source: Case studies conducted in Morocco, Tunisia, Egypt, Jordan and Lebanon. cation technologies sectors (Cattaneo, Diop and 55 Morocco’s FTA with the USA was signed in 2004. Walkenhorst 2010). 56 Source: Dihel & Shepherd (2007).

73 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

to ships flying the national flag. Jordanian and sia in medical tourism, back office outsourcing Egyptian flag carriers, for instance, are given and information technology enabled services. discounts on prices such as port services. Egypt also gives flag carriers priority access to the cabo- To sustain the growth momentum, however, tage market. In Morocco, regular shipping line Tunisia needs to (i) increase competition in services established in the country must fly the fixed-line telecommunications and ease restric- national flag.W hile open to foreign carriers, non- tions on foreign entry into professional services liner shipping is also restricted. Foreign shippers so as to lower service provision costs; (ii) improve need to contract Moroccan liner intermediaries payment discipline of public procurement ser- who have the exclusivity of chartering foreign vices to avoid exacerbating financial difficulties vessels. However, it is expected that Morocco will facing SMEs; and (iii) strengthen selected areas remove this restriction as it strives to converge of education and training such as nursing and with European maritime legislation under the managerial education so as to ease staffing bottle- EU Action Plan. Finally, in air transport, Egypt necks for aspiring exporters (Cattaneo, Diop and displays high restriction levels in modes 1 and Walkenhorst 2010). Furthermore, Tunisia’s tele- 2. On the other hand, Morocco, the most open in com reforms need to extend from liberalization modes 1 and 4, has recently introduced many air of private mobile market to include competition service reforms in an effort to promote growth in other segments of the sector with potential in the tourism industry, but it remains more impact on trade, such as internet service provi- closed than Jordan which overall has the most sion and land line to reduce cost of international open sector. communications.

Converting services trade into an engine In Morocco, a gradual regulatory alignment for growth requires emphasis on quality and with the EU in the context of the European efficiency. Reputation is a key to success in Neighborhood Policy arguably offers the country services trade, and competitiveness could be the opportunity to anchor productivity-enhanc- increased through improved efficiency at same ing reforms, particularly in air transport, road or higher quality output (Pigato 2009). Assessing transport and energy (Diop 2010). This would the potential exposure of the different service require convergence of Morocco’s policy frame- sectors to international competition and adopt- work with EU rules pertaining to competition ing nondiscriminatory, accompanying measures and state aid. would help maximize the benefits of opening and minimize the costs. In Algeria, current policies that promise to boost the further development of service Impediments vary by sector and country, trade include: (i) the privatization program; and so do the specific reforms needed. In Tuni- (ii) the tourism development strategy;57 (iii) an sia, growth in services exports has been aided enhanced regulatory regime for services aimed by among other strengths, the large pool of at expanding the domestic market and promot- skilled engineers willing to work at relatively ing improved efficiency of domestic producers; low wages and the geographical and cultural and (iv) international trade agreements that proximity to Europe. Tunisia’s heavy investment may play a complementary role by serving as in human and physical capital, especially higher anchors for the reform process and shielding the education and telecommunication networks, has government from domestic lobbies. International enabled substantial expansion over recent years experience and research supported by local data of knowledge-based sectors, notably medical and interviews indicate that more openness in services, which attract substantial number of foreign patients; engineering and architecture; 57 accounting; legal services, and ICT-enabled ser- The tourism development strategy aims at better exploiting the country‘s natural and cultural endowments, improving the vices supplied by telecom and internet providers. quality of services and reputation of the country and rehabilitat- Substantial growth potential still exists for Tuni- ing tourism infrastructure.

74 Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

Figure 61: Global Competitiveness Index (GCI) ranking by region, 2010

120

100

80

60

40

20

0 SA Oil HIC SSA LAC ECA EAP GCC MENA Dev. oil Dev. countries exporters importers

Source: World Economic Forum (2010).

private services resulting from Algeria’s privati- A number of factors have hurt the productiv- zation program is essential to attract sufficient ity of export-oriented firms and have discouraged know-how and investment capital from domestic private investment, in the process muting the and foreign sources (Cattaneo, Ighilahriz, López- investment response to reforms in the region.59 Cálix and Walkenhorst 2010). Analysis conducted for this report relies on both subjective and objective data, capturing different Other factors hurting MENA firms’ aspects of the investment climate in order to competitiveness identify the major obstacles for private sector growth. Recent enterprise surveys for 10 MENA Beyond trade distortions, numerous other fac- countries60 suggest that corruption, taxes, infor- tors impede export growth and hurt the produc- mal competition and access to finance are among tivity of export-oriented firms.58 A recent report the top concerns of the average MENA firm, and on private sector development in the region these rank as top concerns for export-oriented estimates that MENA’s average total factor firms in the region as well (Figure 62). productivity lags behind the productivity in fast- growing developing countries. It was assessed However, there are major differences be- at less than half of the total factor productivity tween the top concerns of export-oriented firms in Brazil and 62 percent of the productivity in the GCC oil exporters, developing oil exporters level in China, according to data from recent and oil importers. In the GCC countries, access enterprise surveys. The region’s ranking in the to finance and shortage of skills are cited as top Global Competitiveness Index is higher than concerns for export-oriented firms (Figure 63). those of most other regions except East Asia and the advanced economies (Figure 61), but competitiveness and total factor productivity levels vary substantially within MENA. Firms 58 Export-oriented firms are defined as those with at least 10 percent of sales destined for foreign markets. from GCC countries are much more produc- 59 Source: World Bank (2009). tive than firms from developing MENA, while 60 Survey data were available for the following GCC countries, developing oil exporters’ firms are least produc- including Oman (2003) and Saudi Arabia (2005), developing tive. Assessments based on labor productivity oil exporters, including Algeria (2007), Syria (2003) and Ye- men (2005), and oil importers, including Egypt (2006), Jordan measures confirm these findings. (2006), Lebanon (2006) and Morocco (2007).

75 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 62: Leading constraints to export-oriented firms in MENA region (weighted average of share of firms ranking a constraint as “major” or “severe”)

50 45 40 35 30 25 20 15

as Major or Severe 10 5

% Firms Identifying Constraint 0 Tax Land Skills Uncert. Finance Licenses Tax Rates Tax Electricity Corruption Regulatory Legal System Macro Uncert. Macro Administration Cust Trade Reg. Trade Cust Informal Compet. Informal

Source: Staff estimates based on recent enterprise survey data for 9 MENA countries. Note: Individual country outcomes were weighed with the relative sizes of countries’ labor forces. Results do not change when population numbers are used as weights instead.

Figure 63: Leading constraints to export-oriented firms in GCC oil exporting countries (share of firms ranking a constraint as “major” or “severe”)

70 60 50 40 30 20 as Major or Severe 10

% Firms Identifying Constraint 0 Land Skills Trade Uncert. Finance Licenses Tax Rates Tax Electricity Corruption Regulatory Tax Admin. Tax Regulations Legal System Macro Uncert. Macro Informal Compet. Informal

Source: Staff estimates based on recent enterprise survey data for 2 GCC countries – Saudi Arabia and Oman. Note: Individual country outcomes were weighed with the relative sizes of countries’ labor forces. Results do not change when population numbers are used as weights instead.

61 Other sources confirm that access to finance 61 Source: background papers for the upcoming MENA finance is a particular problem for SMEs in the GCCs, flagship. while employability concerns linked to basic

76 Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

Figure 64: Leading constraints to export-oriented firms in developing oil exporting countries (share of firms ranking a constraint as “major” or “severe”)

50 45 40 35 30 25 20 15 as Major or Severe 10 5 % Firms Identifying Constraint 0 Land Skills Trade Uncert. Finance Licenses Tax Rates Tax Electricity Regulation Corruption Regulatory Tax Admin. Tax Legal System Macro Uncert. Macro Informal Compet. Informal

Source: Staff estimates based on recent enterprise survey data for Algeria, Yemen and Syria. Note: Individual country outcomes were weighed with the relative sizes of countries’ labor forces. Results do not change when population numbers are used as weights instead.

Figure 65: Leading constraints to export-oriented firms in oil importing countries (share of firms ranking a constraint as “major” or “severe”)

60

50

40

30

20 as Major or Severe 10

% Firms Identifying Constraint 0 Land Skills Trade Uncert. Finance Licenses Tax Rates Tax Electricity Regulation Corruption Regulatory Tax Admin. Tax Legal System Macro Uncert. Macro Informal Compet. Informal

Source: Staff estimates based on recent enterprise survey data for Egypt, Jordan, Lebanon, and Morocco. Note: Individual country outcomes were weighed with the relative sizes of countries’ labor forces. Results do not change when population numbers are used as weights instead.

and advanced skill acquisition are two areas in 62 Market size is cited as the biggest obstacle to realizing efficien- which GCC countries rank lowest, according to cies, but the GCC countries have taken measures to address this the Global Competitiveness Index (Figure 66).62 constraint by opening their markets for goods. Still, protection in services remains high and more work is needed to understand Innovation and technological readiness also ap- the complexities of such protection and the rules constraining pear to be areas in need of special attention in firms in the service sector.

77 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 66: GCC’s Global Competitiveness Index rankings by pillar

GCC HIC EAP

70 60 50 40 30 20 10 0 Higher market primary Business Financial efficiency efficiency readiness education education Innovation Health and Institutions Market size Market and training environment development Labor market Technological sophistication Infrastructure Goods market and innovation Macroeconomic

Source: Global Competitiveness Report 2010.

Figure 67: Developing oil exporters’ Global Competitiveness Index rankings by pillar

Developing oil exporters HIC EAP

140 120 100 80 60 40 20 0 Higher market primary Business Financial efficiency efficiency readiness education education Innovation Health and Institutions Market size Market and training environment development Labor market Technological sophistication Infrastructure Goods market and innovation Macroeconomic

Source: The Global Competitiveness Report 2010.

the GCC countries as these countries score much ent even bigger problems for the competitive- lower than their peer HIC group (Figure 66). ness of export-oriented firms (Figure 67). In oil importers, corruption and macroeconomic In developing oil exporters, taxes and cor- uncertainty top the list of major constraints to ruption are the most frequently-mentioned ma- growth (Figure 66). Macroeconomic stability is jor complaints by exporting firms (Figure 65), but due to state dominance other issues, espe- 63 The developing oil exporters are mostly state-dominated 63 cially inefficiencies in input and goods markets economies in which market inefficiencies are expected to be and poor financial market development, pres- pronounced.

78 Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

Figure 68: Oil importers’ Global Competitiveness Index rankings by pillar

Oil Importers HIC EAP

120 100 80 60 40 20 0 Higher market primary Business Financial efficiency efficiency readiness education education Innovation Health and Institutions Market size Market and training environment development Labor market Technological sophistication Infrastructure Goods market and innovation Macroeconomic

Source: The Global Competitiveness Report 2010.

indeed an area of concern as suggested by the exporters and most developing oil exporters have low ranking of oil importers on this pillar of the ample domestic savings so access issues reflect Global Competitiveness Index (Figure 68), but barriers linked to widespread state ownership of an even bigger weakness is the inefficient and banks and financial market underdevelopment, inflexible labor market. Firms in oil importing especially in developing oil exporters, and poor countries also appear to fall behind East Asia access to finance forS MEs in the GCC countries. in terms of innovation efforts (Figure 68). The According to the global competitiveness index, next few sections provide an in-depth discus- financial market development is an area of rela- sion of the major stumbling blocks to firms’ tive strength in the GCC countries (Figure 66). competitiveness.64 Low transparency in bank operations and Access to finance is limited, especially high informality in the enterprise sector are for small enterprises linked to high collateral requirements, fairly high levels of nonperforming loans, and low Access to finance is a top concern for export- rates of access to bank loans. Banks often use oriented firms in theGCC oil exporters and the collateral requirements as a credit-rationing fourth major concern for exporters in the region tool rather than to allocate credit based on risk (Figure 63 and Figure 62). Analysis presented analysis. Furthermore, the required collateral is in MENA’s private sector flagship report (World among the highest in the world, indicating that Bank 2009) confirms that credit rationing is high collateral legislation is inefficiently enforced among MENA countries, especially the develop- and not trusted by lenders. Most importantly, ing oil exporters which rank extremely low in state-owned banks have traditionally served as terms of access to credit, according to the World channels of political patronage and have sup- Bank’s Doing Business indicators (Figure 69) ported state-owned firms or channeled credit to and World Economic Forum’s Global Competi- well-connected private enterprises. And private tiveness Index (Figure 67). banks in the region have not remained immune

The problem of access to finance in MENA 64 Labor markets issues are the topic of an upcoming MENA reflects financial intermediation issues rather report titled Opening up Job Opportunities for All: Employ- than low savings (Figure 70). Indeed, all GCC oil ability in the Middle East and North Africa Region.

79 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 69: Regional ranking of ease of getting credit

160 140 120 100 80 60 40 20 0 Oil SA HIC SSA LAC ECA EAP GCC MENA Dev. oil Dev. countries exporters importers

Source: World Bank, Doing Business Indicators (2010).

Figure 70: Gross domestic saving, 2007

70 Kuwait Qatar 60 Algeria Bahrain Saudi Arabia 50 Iran, Islamic Rep. 40 United Arab Emirates Oman 30 Yemen, Rep. Morocco 20 Tunisia Syrian 0 Arab Egypt, Arab Rep. Republic 10 Lebanon –10 Jordan Gross domestive saving as % of GDP domestive Gross –20 3 3.5 4 4.5 5 LN GDP pc

Source: World Bank.

to the problems of public banks as supervision small enterprises are twice as likely to be credit and regulation of credit markets is open to politi- constrained as large firms, and only one in five cal interference and discretionary enforcement firms have a loan or a line of credit. Loans to (World Bank 2009). SMEs account for only 8 percent of total lending in the region. Entrepreneurs report difficulties Small enterprises face greater difficulties in accessing capital from the domestic financial accessing finance than large enterprises because system to start a new business, and finance ex- banks perceive them as less financially transpar- port discoveries (Nassif 2009). ent. Small firms are also less capable of meeting the collateral requirements of banks, and face Access to finance for SMEs appears to be higher transaction costs per loan. In MENA more constrained in MENA than in any other

80 Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

region in the world, and there are significant doing business. MENA has the lowest legal rights differences between GCC and developing MENA index among all the regions, and even though countries, according to work conducted as the credit information index has improved in part of World Bank’s upcoming MENA finance recent years, the coverage of credit reporting flagship report.65 The average share of SME systems is still very limited. Collateral regimes lending in the GCC group of countries is only are also considered weak and inefficient by banks 2 percent,66 while the share of SME lending in in MENA. While a relatively low share of banks developing MENA is 14 percent.67 The low share reports serious problems with the registration of SME lending in the GCC oil exporters reflects of fixed collateral, a high share of banks reports to a large extent the structure of oil-based that registries of movables remain very deficient. economies. They are less diversified than the Enforcement of collateral is an even bigger prob- oil importers, dominated by large enterprises, lem, especially for movables, but also for fixed and characterized by relatively small non-oil collateral in the case of banks in developing traded sectors. Moreover, GCC countries tend to MENA. Finally, an even larger share of banks have small populations, and the nationals tend reports problems in selling the seized collateral. to find attractive positions in the public sector, Again, this is true for both GCC banks and banks which may also discourage risk-taking in the in other MENA countries, and applies to all types SME sector. These factors set “natural” limits of collateral. Thus, creditors perceive high risks to the size of the SME sector of the GCC coun- in SME lending that can only be partially offset tries, especially in the non-oil sectors producing through greater reliance on relationship lending, traded goods. By contrast, in developing MENA or through the use of other lending techniques there is scope for SME growth across a wider such as leasing and factoring, or still through range of economic sectors, including traded access to a guarantee scheme. sectors, and also as part of supply chains linked to large enterprises. Several MENA countries have introduced credit guarantee schemes and other policy inter- Even though the actual SME lending in the ventions such as interest subsidies, and exemp- region is low, there is substantial room for further tions on reserve requirements to compensate lending as shown by banks’ long-run targets for for these weaknesses in financial infrastructure. SME lending. The drivers that encourage banks These interventions may be well justified, but to engage in SME lending include the potential they should not be the main components of the profitability of theS ME market, the saturation of architecture of SME finance in the MENA region. the large corporate market, the need to enhance Improving financial infrastructure should be returns, and the desire to diversify risks. Targets the priority item in the policy agenda of MENA are significantly lower in the GCC group (about countries. This will entail expanding the range 12% of total lending), revealing that the banks of movable assets that can be used as collateral, themselves have concluded that there are “natu- ral” limits to profitableS ME lending in oil-based economies. In the case of developing MENA, the 65 In order to understand the supply of SME finance in MENA, a long-run target is much higher and around 29% bank-level survey was conducted as part of the upcoming MENA of total lending. This suggests that if constraints financial flagship report. The survey covered the following themes: i) strategic approach to SME lending; ii) main products can be eased access to finance for SMEs can offered to SMEs; iii) risk management techniques employed; improve significantly. and iv) SME lending data. The response rate for the survey was high as 139 banks from 16 of the 18 MENA countries sent in Banks identify two major constraints to SME responses. These banks account for about half of MENA banks and almost two thirds of the banking system loans. lending including the lack of SME transparency 66 The share of SME lending is consistently low across all GCC and the weak financial infrastructure, in particu- countries. 67 lar weak credit information, weak creditor rights The survey included the following countries in developing MENA: Egypt, Iraq, Jordan, Lebanon, Libya, Morocco, Palestine, and collateral infrastructure. MENA compares Syria, Tunisia and Yemen. There is more variation in the share poorly with other regions on these aspects of of SME lending across countries within developing MENA.

81 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

improving registries for movables, and improving and factor market regulations. The way policies enforcement and sales procedures for different are prepared and announced by governments types of collateral. It also entails upgrading also raises policy uncertainty. Lack of consulta- public credit registries, and more importantly, tion with the business community and opacity introducing private credit bureaus capable of in reform design lead to unpredictability and dis- significantly expanding coverage and the depth courage investors. Furthermore, policy reversals of credit information. are common in some countries and reduce the credibility of reforms. Policy changes are often Competition policy can also contribute to unannounced creating confusion about the rules further SME lending. Survey results suggest that governing business operations for managers, there are private banks that have more effective government administrators and investors. lending technologies, and that are able to gener- ate and manage a significantS ME portfolio, even Regulatory ambiguity expands the opportu- within weak enabling environments. The entry nity for discretion in public agencies and enables of these banks in other MENA countries could harassment, sometimes in the form of frequent contribute to more SME lending, both directly inspections, difficulties in obtaining licenses, and through spillover effects. In this case, the clearing customs, resolving conflicts or obtain- policy implication is to ensure that entry re- ing permits to use land and other resources quirements are not overly restrictive and that and inputs. Discretionary implementation of banking markets remain contestable.68 Lastly, it the rules can impose a burden on firms in any is important to recognize that the potential for area in which they interact with the state and SME finance is also a function of the structure regulatory agencies. of the economy and the size of the SME sector. In the case of developing MENA, there is huge Regulatory opacity could also lead to politi- potential for expanding SME finance, with large cal capture as the influential and powerful ben- numbers of smaller enterprises underserved and efit from discretion and preferential access to low levels of bank competition to serve them. In public benefits while the rest develop a sense of the case of GCC countries, the size of the SME unfairness. Export-oriented firms in oil import- sector may remain more constrained by the na- ing countries consider this issue a top concern ture of oil economies, but there is also scope for (Figure 65). They are concerned that privileged further expansion of SME finance, especially if large competitors evade the burden of taxes access is also extended to resident non-nationals. and regulations or get favorable treatment and access to privileges. In Lebanon, entrepreneurs Governance issues impede reform identify several types of privileged firms, includ- implementation, raise uncertainty and ing firms receiving government subsidies, firms lead to uneven playing field with favored access to credit, infrastructure or customers, firms that conspire to limit access to Governance issues top the list of major concerns markets and supplies for other firms, firms that of export-oriented firms in developing MENA. violate copyrights, patents or trademarks, and A serious problem is the discretion available to avoid different types of taxes and regulations. bureaucrats in implementing regulations. This Formal firms are concerned that small informal creates an unlevel playing field and encour- enterprises pay few taxes and get an unfair ad- ages the pursuit of privileged access. Coupled vantage over them. with barriers to entry and exit, this has created an environment of private sector stagnation. Macroeconomic uncertainty is a top Furthermore, unequal, discretionary, and pref- concern for export-oriented firms in the oil erential implementation of announced policies importing countries (Figure 65), which rank are important sources of uncertainty in policy implementation affecting many areas including 68 Anzoategui et al. (2010) show that there is a higher rejection trade policy, entry and exit regulations, product of banking licenses in MENA than in other regions.

82 Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

low in terms of macroeconomic environment who would be interested in obtaining the same in the World Economic Forum’s (WEF) Global jobs at much lower wages. Thus, public sector Competitiveness Index (GCI). The low rank- jobs have remained an attractive alternative. On ing reflects the fact that oil importers in the the demand side, firms have had to compete with sample have had limited fiscal space in the each other for the few skilled domestic workers past decade. Consequently, these countries most companies are eager to hire in an effort to have been vulnerable to external shocks, de- promote skilled nationals. Firms have avoided spite relatively diversified economic bases and recruiting and training nationals, as these are favorable macroeconomic environment. By not expected to stay long in the same company. contrast, GCC oil exporters, and some of the So, firms have preferred to import skilled foreign developing oil exporters in the sample have workers even at the cost of dealing with layers had ample fiscal space to soften the impact of of bureaucracy. external shocks on their economies. The GCC countries demonstrated their commitment to There are no quick solutions to the prob- macro and financial stability during the past lem of skill shortages. In the short term, GCC financial and economic crises, including the countries could continue investing in skills, on most recent one. Indeed, the GCC’s rank in the supply side, and in improved enforcement terms of macroeconomic environment is high of employment targets for nationals in the pri- both compared to other components of the GCI vate sector, on the demand site. Governments and the ranking of HICs and EAS on this com- could facilitate the matching of labor supply ponent (Figure 66). Thus, it is not surprising to and demand through improved information find out that only slightly more than 20 percent and intermediation services by strengthening of export-oriented firms consider macroeco- the collection and use of labor market statis- nomic instability as a major or severe constraint tics, and employment services across the GCC to their business operations, compared to 50 countries. In the long term, the goal could be to percent in oil importing countries. gradually transform the economy away from the current low-wage, low-productivity equilibrium Skill shortages in the GCC states are an dependent on expatriate workers towards a high- acute but old problem productivity one in which employers offer wages sufficiently high to attract nationals through eco- GCC export-oriented firms cite skills as one of nomic incentives. It would be critical however to the top constraints to their business operations coordinate the migration reform and the reforms (Figure 63)—an area of particular weakness for required to transition to technology intensive the GCC countries according to the WEF’s Global production that relies on fewer but highly quali- Competitiveness Report (Figure 66). However, fied workers, and modernized equipment. the problems faced by firms as they search for qualified labor are not new and have existed for A focus on technology is central more than 30 years. The regional labor markets to MENA’s efforts to improve have been characterized by heavy reliance on competitiveness expatriate labor, high unemployment among nationals, huge wage differentials between na- Technology has been central to both economic tional workers and expatriate workers, and a growth and many elements of social welfare that strong preference by nationals for work in the are only partly captured by standard measures public sector. of GDP, including health, education, and gender equality. A broad definition of technology en- On the supply side, the large wage differ- compasses the techniques by which goods and entials have discouraged GCC nationals from services are produced, marketed, and made avail- acquiring skills. Even if they had the skills to able to the public. Thus, technological progress obtain private sector jobs, they would be compet- at the national level can occur through scientific ing in the labor markets with foreign nationals innovation and invention, through the adoption

83 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

and adaptation of preexisting, but new-to-the- on TAI are available, MENA countries, with a few market, technologies, and through the spread of exceptions, have scored below their peers in the technologies across firms, individuals, and the same income group (Table 14). public sector within the country. Total factor productivity, which is one measure of technologi- As shown in World Bank (2008b), the higher cal progress,69 explains much of the differences the underlying level of technological absorptive in both the level and rate of growth of incomes capacity, the higher the level of technological across countries (Easterly and Levine 2001; achievement to which a country is converging Hall and Jones 1999; King and Levine 1994). over time. The low level of technological achieve- Simon Kuznets, among others, argued that the ment in MENA is therefore directly correlated rapid economic growth in developed nations had with the low level of technology absorption, stemmed from the systematic application of sci- which depends on the quality of macroeconomic ence and technology to the production process. and financial management, skills and institu-

The level of technology achieved by a country is in general positively correlated with income levels.70 However, there is considerable Table 14: Technological Achievement Index variation in countries’ technological achieve- 1990 2000 ment within income groups because of differ- East Asia & Pacific 0.14 0.19 ences in the nature of production processes, the Europe & Central Asia 0.13 0.20 extent to which governments have given prior- Latin America & Caribbean 0.11 0.15 ity to and succeed in delivering services with a strong technological component, and the ease South Asia 0.10 0.13 with which technologically sophisticated firms Sub-Saharan Africa 0.08 0.11 have been able to grow and expand their weight Middle East & North Africa 0.10 0.14 in the overall economy. These factors, which Egypt, Arab Rep. 0.10 0.13 are summarized by the concept of technological Tunisia 0.12 0.16 absorptive capacity, determine to a significant degree the level of technological achievement Syrian Arab Republic 0.09 0.12 to which a country is converging. Differences in Kuwait 0.11 0.18 absorptive capacity help explain why countries Source: World Bank (2008b) at similar income levels can have such different levels of technological achievement. 69 Total factor productivity reflects factors other than pure tech- MENA, despite some progress in the past two nical change such as increasing returns to scale, markups due to imperfect competition, and sectoral reallocations. decades, lags behind other developing regions, 70 See World Bank (2008b). such as EAS, ECA and LAC in terms of exposure 71 Technological achievement is measured indirectly since to external technology, penetration of old and technology does not have easily counted physical presence (see Burns 2009). TAI, published by the United Nations Development new technologies and scientific innovation, as Programme (UNDP) is an index that incorporates information measured by the technological achievement index on the diffusion of technologies and indicators of innovation (TAI).71 Regional averages however hide a great such as the number of patents. Some other indexes measuring technological achievement emphasize inputs into technological heterogeneity between countries. For instance, advances, such as educational levels, the numbers of scientists Tunisia, which is among the most diversified econ- and engineers, R&D expenditures or R&D personnel. One ex- omies in the region, has been scoring consistently ample of such an index is the Index of Innovation Capability better than other countries in the same group. of the United Nations Conference on Trade and Development (UNCTAD, 2005). Still others focus on outputs, such as the share The GCC countries, such as Kuwait or Qatar and of high-technology activities in manufacturing value added and Bahrain, score closer to the level of technological exports. The Index of Competitive Industrial Performance, achievement their income levels would predict, published by the United Nations Industrial Development Orga- nization (UNIDO) is such an index. The National Innovative and therefore higher than the regional average. Capacity Index focuses on the mechanisms by which techno- Overall, up to the year 2000 when the latest data logical progress is achieved (Porter and Stern 2004).

84 Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

Table 15: Index of Technological Adaptive Table 17: Index of Technological Readiness Capacity 2005 2010 1990 2000 Oil exporters 3.17 3.36 East Asia & Pacific 0.45 0.49 Bahrain 4.60 4.90 Europe & Central Asia 0.44 0.49 Kuwait 4.20 3.50 Latin America & Caribbean 0.40 0.43 Qatar 4.40 4.40 South Asia 0.35 0.39 United Arab Emirates 5.30 5.20 Sub-Saharan Africa 0.33 0.36 Algeria 2.70 3.00 Middle East & North Africa 0.39 0.42 Oil importers 3.53 3.42 Jordan 0.46 0.49 Jordan 4.30 3.70 Tunisia 0.40 0.44 Egypt, Arab Rep. 3.70 3.30 Egypt, Arab Rep. 0.39 0.42 Morocco 2.80 3.50 Syrian Arab Republic 0.35 0.39 Tunisia 4.10 3.90 Iran, Islamic Rep. 0.33 0.38 Source: Staff calculations based on a sub-index of World Eco- Source: World Bank (2008b). nomic Forum’s Global Competitiveness Index. Note: Population numbers are used as weights in country group indexes.

Table 16: Knowledge Economic Index 2000 2009 tions. The index of Technological Adaptive Ca- GCC countries 5.01 5.61 pacity (TAC) offers one way to measure technol- ogy absorption.72 According to this index, during Bahrain 6.73 6.04 the period 1990 to 2000, MENA made significant Kuwait 6.24 5.85 progress in terms of expanding its technological Oman 5.16 5.36 capacity (Table 15), mostly thanks to improve- Qatar 6.06 6.73 ments in macroeconomic management and edu- Saudi Arabia 4.56 5.31 cational achievement as many of the non-GCC countries in developing MENA continue to lag United Arab Emirates 5.96 6.73 other developing regions in terms of government Developing oil exporters 3.06 3.30 effectiveness and institutional quality. Algeria 2.73 3.22 Iran, Islamic Rep. 3.56 3.75 One way to assess progress since 2000 in Syrian Arab Republic 2.96 3.09 the absence of updated TAC and TAI indexes is Yemen, Rep. 2.03 2.20 to look at the World Bank Institute’s Knowledge Economic Index (KEI). It corresponds closely to Oil importers 4.21 4.05 the Technological Adaptive Capacity index since Oil importers with GCC links 5.00 4.95 Djibouti 1.70 1.47

Jordan 5.62 5.54 72 TAC is computed based on a set of measures including: Lebanon 4.78 4.81 macroeconomic environment; general government balance as percentage of GDP; annual CPI inflation rate; real exchange rate Oil importers with EU links 4.14 3.97 volatility; financial structure and intermediation; liquid liabilities Egypt, Arab Rep. 4.31 4.08 percent of GDP; private credit percent of GDP; financial system deposits percent of GDP; human capital; primary educational Morocco 3.72 3.54 attainment percent of population aged 15 and over; secondary Tunisia 4.12 4.42 educational attainment percent of population aged 15 and over; tertiary educational attainment percent of population aged 15 Source: Staff estimates based on World Bank data. and over; voice and accountability; political stability; govern- Note: Population numbers are used as weights in country ment effectiveness; regulatory quality; rule of law and control group indexes. of corruption.

85 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Table 18: FDI has grown rapidly in MENA (% of GDP, net inflows) 1990 1995 2000 2005 2008 EAP 1.57 3.9 2.64 3.46 3.33 ECA — 1.06 2.16 3.07 4.44 LAC 0.74 1.73 3.93 2.74 3.01 SAS 0.14 0.63 0.72 1.08 3.31 SSA 0.41 1.4 2 2.94 3.47 MIC 0.78 1.97 2.71 2.88 3.51 World 0.99 1.13 4.83 2.55 3.04 MENA 0.22 0.31 1.22 2.57 4.57 Source: World Bank, WDI

it takes into account whether the environment is GDP were highest in MENA compared to other conducive for knowledge to be used effectively regions in the world (Table 18), and FDI appears for economic development, in addition to factors to be above its estimated potential in the oil indicating the overall potential of knowledge importing countries and some developed oil ex- development in a given country.73 According to porters (Figure 71). However, except for tourism, this index, during the past 10 years GCC and FDI outside the energy sector was directed to developing oil exporters made progress in their nontradables with little going to export-oriented capacity to absorb and use capacity, while oil manufacturing or high-tech services (Figure 72). importers except for Tunisia and Lebanon did There is little evidence of job creation or technol- not (Table 16). ogy and knowledge transfers via FDI from parent companies to local affiliates.74 This assessment is consistent with the find- ings based on the technological readiness index MENA countries’ efforts to improve the (Table 17). It offers an alternative way to measure technological content of their nonoil merchan- the agility with which an economy adopts exist- dise exports have had mixed results. During the ing technologies to enhance the productivity period between 2000 and 2008, oil importers’ of its industries, with specific emphasis on its share of high technology exports in total nonoil capacity to fully leverage information and com- merchandise exports declined, while oil export- munication technologies in daily activities and ers’ shares stagnated (Figure 73). Developing production processes for increased efficiency MENA countries were much more successful in and competitiveness. The issue of whether a increasing the presence of medium-high tech- technology used in a country has or has not been nology products in their nonoil merchandise developed within national borders is irrelevant basket during the same period (Figure 73). GCC for a country’s ability to enhance productivity. countries’ progress however was negligible. The index captures the central point that the firms operating in the country have access to The ability of MENA firms to discover new advanced products and blueprints and the abil- products is further limited by the modest do- ity to use them.

73 The Knowledge Economic Index (KEI) is computed based on Foreign Direct Investment (FDI) plays a key the average of the normalized performance scores of a country role in the process of technological acquisition or region on all 4 pillars related to the knowledge economy— and learning-by-doing in developing countries. economic incentive and institutional regime, education and human resources, the innovation system and Information and In MENA, FDI started increasing at a rapid pace Communication Technology (ICT). after 2000. Indeed, net FDI inflows as a share of 74 Source: Pigato (2009).

86 Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

mestic knowledge generation than can partly GDP, compared to other middle-income regions substitute for foreign technology. Two reliable (Figure 74). MENA residents receive very few indicators of domestic innovation activity are patents. Egyptians were granted fewer than R&D expenditures and patenting activity. Arab seven U.S. patents per year on average between nation’s R&D spending is low as a percentage of 2001 and 2005, whereas Malaysians received

Figure 71: MENA countries’ FDI potential conditioned on openness, natural resources and population for the period 1998-2007 (actual to predicted net FDI inflows as % of GDP)

Kuwait Iran, Islamic Rep. Yemen, Rep. Developing Oil Exporters Syrian Arab Republic Morocco Algeria Oman Saudi Arabia GCC Countries MENA 13 Tunisia Egypt, Arab Rep. Oil Importers Bahrain Jordan Lebanon 0 0.5 1.0 1.5 2.0 2.5 3.0

Source: Staff calculations of export potential is based on the following estimated regression: FDI/GDP = –0.077+0.033*NOX/GDP- 0.007*NatRes/GDP-0.003*log(POP), sample size is 69, R2=0.1, and FDI/GDP stands for net foreign direct investment inflows as a percent of GDP, NOX/GDP defines the value of nonoil exports of goods and services as a percent of GDP, NatRes/GDP defines the value of resource-based exports as a share of GDP,a POP stands for population. aThe value of resource-based exports is given by the sum of the value of exports of oil, mineral, food and agricultural raw products.

Figure 72: Structure of FDI, cumulative 2000–07 (percent of FDI)

Manufacturing Telecoms Finance Tourism & Construction Energy High Tech Services

90 80 70 60 50 40 30 20 10 0 China Union Egypt, Turkey Jordan Tunisia Algeria Morocco Lebanon Republic European Arab Rep. Arab Syrian Arab

Sources: United National Conference on Trade and Development, World Development Indicators, national accounts.

87 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

5 times more per year and Koreans and - quality of Tunisian research institutions is among ese each earned thousands (Table 19). the best in MENA region, according to the Global Competitiveness Report (World Economic Forum Still, some MENA countries are vastly more 2010). Education absorbs 7 percent of GDP, and successful than others in their use of technology. the system produces a large number of university One such country is Tunisia whose R&D expen- graduates in general fields as well as in sciences diture as a share of GDP doubled between 2000 and technologies. The country is rated 7th in the and 2005, when it became more than double world in terms of availability of scientists and the average for MENA region (Figure 75). The engineers—well ahead of MENA and even the EU country has a complex innovation infrastructure average (World Economic Forum 2010). Despite and a large number of public programs aimed at these successes, Tunisia faces serious challenges providing incentives for R&D and innovation. The in its quest for a gradual transformation of tradi-

Figure 73: Technological content of exports by region

High technology

EAP ECA LAC Oil importers Developing oil exporters GCC oil exporters

40% 35% 30% 25% 20% 15% 10% 5% Share in Exports of Nonoil Goods Share 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Medium-High technology

EAP ECA LAC Oil importers Developing oil exporters GCC oil exporters

60%

50%

40%

30%

20%

10% Share in Exports of Nonoil Goods Share 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: COMTRADE data.

88 Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

Figure 74: Research and development expenditure (% of GDP)

2000 2005

3.0

2.5

2.0

1.5

% of GDP 1.0

0.5

0.0 EAP ECA LAC SAS MENA OECD MIC World

Source: World Bank, WDI. Note: No data were available for MENA region in 2000. MIC stands for Middle Income Countries.

Table 19: Number of resident patents filing per million people Country of Origin 2000 2001 2002 2003 2004 2005 2006 GCC oil exporters Saudi Arabia 4 2 3 3 4 5 5 Developing oil exporters Algeria 1 2 1 1 2 2 2 Syrian Arab Republic 15 11 11 12 11 6 6 Yemen, Rep. 0 0 0 1 0 1 1 Oil importers with EU links Egypt, Arab Rep. 8 7 9 7 5 6 Morocco 4 3 5 6 Tunisia 5 2 5 4 5 6 Chile 16 16 25 21 24 22 18 Malaysia 9 11 13 15 21 20 20 Philippines 2 2 2 2 2 2 3 United States of America 584 623 640 651 646 703 742 Republic of Korea 1549 1557 1608 1887 2191 2538 2598 Source: WIPO and World Bank, WDI. tional sectors into high-value-added, knowledge- more than 100 interviews structured around 23 intensive sectors (see Box 6). case studies in five MENA countries. Although

Innovations, technological adaptation, cus- tomization or licensed production of foreign- owned products can all lead to export discov- 75 Export discoveries were defined as products that had not been sold abroad, or sold only in very limited amounts, at the eries. A paper by Nassif (2010) discusses six beginning of the period (1989) and were consistently exported possible triggers for export discovery75 based on in large quantities by the end of the period (2004).

89 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Figure 75: Research and development expenditure in MENA (2005)

1.2

1.0

0.8

0.6

0.4 Percent of GDP Percent

0.2

0 Algeria Egypt, Iran, Kuwait Saudi Arabia Tunisia MENA EAP Arab Rep. Islamic Rep.

Source: WDI

Box 6: Tunisia’s national innovation system: achievements, challenges and vision

Over the last decades, Tunisia has emerged as one Limited technology spillovers from FDI of the regional leaders in science, technology and in- The energy sector absorbs the bulk of FDI in Tunisia, novation in the region and abroad. The government’s while FDI inflows into manufacturing go predominantly ambition is to further accelerate the rate of investment to low value-added sectors. Furthermore, FDI is largely in R&D in the years to come, and become a regional located in the offshore sector disconnected from the innovation hub and a destination of choice for high- rest of the economy. In these circumstances, while tech FDI. However, Tunisia has to address a number of industrial upgrading may occur, technological spillover important challenges to convert the country’s consid- effects are limited. erable R&D capacity and human capital into an asset Inefficiencies in public R&D expenditures for an innovation-driven economy. Public R&D spending is scattered around a large Human capital is underutilized number of themes and public institutions without As shown in a 2010 Tunisia’s Development Policy Re- clear alignment with national priorities. The objectives view conducted by the World Bank, the economy is still of a large number of R&D programs overlap and the largely dominated by low-skilled activities, only 15% performance criteria for distributing R&D spending of currently employed people have a university degree. are unclear. As a result, budgets received by individual This explains the high and growing unemployment laboratories are limited, and so are production and its rate of this category of job-seekers. At the same time, economic relevance. Tunisian firms struggle to find adequately educated Government’s vision workforce to accompany their development (World In light of the above, the government’s new strategy Economic Forum 2010). is to promote a gradual transformation of traditional Private sector innovation capacity is limited sectors into high-value-added, knowledge-intensive Tunisia’s productive sectors have limited innovation sectors as well as increase investments in emerging capacity. Business spending on R&D constituted only technology-intensive sectors. As highlighted by the 0.15% of GDP in 2009, and the number of patents recent Tunisia Development Policy Report of the World submitted in the United States and the EU remains Bank, to achieve this goal Tunisia has to (i) enhance the negligible. There is also little collaboration between efficiency and effectiveness of public R&D spending; (ii) research centers and the private sector. Among those improve supply of adequate skills and competencies; firms that do invest in R&D, only 15% collaborate with and (iii) strengthen private financing of innovation. universities.

90 Chapter 4: What are the Major Constraints to MENA’s Nonoil Exports?

the results should be treated with caution as the investors. The high cost of gathering the required methodology is open to selection bias, and the information is the greatest hurdle in initiating sample of firms is not representative, they are new export activity (Klinger 2007). indicative of the factors that mattered to the pro- cess of export discovery by existing MENA firms. According to the survey, MENA entrepre- These factors included external unanticipated neurs overcame these uncertainties by partner- shocks; market evolution; research; information ing with firms with the required knowledge; about new business opportunity; capacity to some benefited from subsidies from input produce in excess of domestic market; and ran- suppliers; many accepted the higher risks and dom events. The paper found that in many cases absorbed the costs; a few benefited from export more than one trigger was at play. Information promotion, technical assistance or knowledge about a new business opportunity obtained by an transfer. Except for access to finance, survey entrepreneur willing to take high risks and invest participants did not think policy-induced busi- in new technologies and management techniques ness constraints mattered for their export dis- was shown to be decisive. coveries. And neither did government support. Many entrepreneurs pointed out that initial Technology can be used to gather and dis- support—through export promotion schemes, seminate information needed by entrepreneurs to competitiveness programs, and innovation make export discoveries. Entrepreneurs identified grants, was not available to them. Almost all insufficient information about demand in specific entrepreneurs reported difficulties in access- markets, prices of new products or services, and ing capital from the domestic financial system the methods for producing quality goods and ser- to start a new business. Successful entrepre- vices efficiently as the key obstacle to the discov- neurs overcame this obstacle but there were ery of new export activities. Lack of information consequences including delayed investment, about these processes increases uncertainty and high personal risk and dependence on informal raises risk perceptions, which in turn discourage financial resources.

91

Chapter 5 What should countries do to improve nonoil export growth?

What did we learn? Summary of services are at potential, and the developing oil key findings exporters whose nonoil exports are only a fifth of expected levels. Achievements have been made in MENA in the last ten years when growth accelerated relative Overall, MENA has made progress in achiev- to the previous decade in response to intensified ing greater openness, diversifying its exports efforts in many countries to bolster their private and export destinations. Nearly all countries sectors and diversify their sources of growth. But increased their exports as a share of output and despite accelerated reform efforts, the growth all oil importers made progress in reducing the response in developing MENA since 2000 has concentration of their merchandise export bas- been modest in per capita terms relative to kets. The GCC and the oil importing countries that of other developing regions. Oil has been made advances by expanding and diversifying and remains the primary vehicle for revenue services exports as well. Importantly, MENA and wealth creation for the oil exporters in the has made a major shift in the destinations for its region, while the spillover effects to the oil im- nonoil goods towards fast-growing Asia and away porting countries in the region and beyond have from slow-growing EU—a move that has been a been significant. lot less dramatic, but nevertheless substantial for the oil importers. The shift towards Asia and And while the outlook for oil remains prom- fast-growing BRICs is good news for MENA as ising in the medium term due to strong demand South-South trade is expected to play a much for oil in Asia and other fast-growing markets, more prominent role in the new post-crisis world counting on oil will not solve the problem of trade order. fueling inclusive growth in the region. As the oil industry is capital intensive, continued reliance Nonetheless, the importance of various on oil will not address developing countries’ markets will differ by country group. Europe major issue—employment creation, and will remains the most important export destination only exacerbate the current situation. MENA for MENA’s nonoil products and services. This re- needs to expand exports of nonoil goods and flects largely the fact that the UE receives around services in order to spur job creation for the half of oil importers’ exports. Nonoil exports fastest-growing labor force in the middle-income destined to other MENA countries represents the group of countries. Despite some progress, ex- largest share of GCC’s total nonoil exports, while ports contributed little to regional growth in the for developing oil exporters Asia has become the past decade, and nonoil exports of goods and most important nonoil export destination. services remain below potential for the region as a whole. However, the situation differs signifi- The service sector appears to be an area of cantly for the GCC oil exporters and the MENA relative strength for MENA and a key source of oil importers whose nonoil exports of goods and export revenue and future potential growth.

93 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

MENA expanded its share in the global nonoil tariff barriers (NTBs), especially constraining oil export market largely due to an increase in ex- importers with EU links. MENA countries have ports of services. Only one other region in the more restricted market access in China than in world—South Asia—generates a higher share of advanced markets, and oil importers with EU output than MENA by exporting services. And links encountered much higher overall protec- the importance of services as a source of export tion than others because of high tariffs on spe- growth is much greater for MENA’s oil importing cific products exported to the Chinese market. countries than any other region in the world. All regions face higher protection in India By contrast, merchandise exports of other than elsewhere, and MENA region is not an excep- developing countries grew much faster suggest- tion. Furthermore, the region encounters higher ing that MENA firms producing nonoil mer- protection on its nonoil exports to India than chandise goods are not as competitive as some most other regions, largely because of high bar- of their foreign counterparts. Regional nonoil riers on GCC’s nonoil exports. However, overall merchandise export growth was driven more protection on oil importers’ exports was generally by an expansion of existing products to new lower in India than in China, reflecting a product markets and new products to existing markets composition effect. Notably, there is no evidence than by an increase of exports of existing prod- that in general protection has increased substan- ucts to existing markets. The latter is indicative tially since 2008 when the global crisis erupted. of substantial pressures from competition with other emerging countries’ exports. Oil exporters Despite good market access developing MENA expanded exports of industrial products, notably countries do not exploit well existing opportu- in Asia, while oil importers were much more suc- nities for nonoil export growth. Developing oil cessful than oil exporters in expanding exports exporters such as the Republic of Yemen, Algeria, of parts and components to the EU and Asia, and the Islamic Republic of Iran, and Syria exported capital goods to the EU. However, export growth their products to less than 5 percent of markets linked to global production sharing arrangement in 2005. Oil importers were more successful was weak relative to export growth of industrial than them, but still most exported products to products, consumer goods and food products— less than 7 percent of markets, and compared especially to the EU. poorly to other countries, including Turkey which reached 27 percent of markets for its products. Growth at the extensive margin is evidence Furthermore, success in penetrating foreign of the shift toward rapidly growing product and markets varies greatly across MENA countries market segments in Asia and the EU, and also of and cannot be explained just with differences in the growing importance of exports of industrial protection across markets, but rather reflects lack products, and to some extent, global production of information about markets—an area of special sharing arrangements in the electrical and mo- concern to export-oriented firms in MENA—and tor vehicle industries in the oil importers with other constraints limiting firms’ competitiveness. strong EU links. However, intra-industry trade (IIT) remains limited within MENA and with the MENA region has liberalized its trade consid- rest of the world, and manufacturing activities erably by lowering its tariff barriers, which are in MENA appear to be mostly assembly-type op- comparable to tariffs in other regions. Yet, apart erations directed at domestic markets. The only from the GCC countries, the region remains one country in the region with a significant share of of the most protected markets for goods in the components in its total exports is Tunisia. world, largely due to non-tariff measures such as, technical barriers to trade, quotas and prohibi- MENA countries have relatively good market tions, import and export licenses, anti-dumping access for nonagricultural goods in high income and other anti-competitive measures. Some of countries, but overall agricultural protection in these measures are essential by nature and im- developed markets is high mainly due to non- posed to achieve objectives other than to restrict

94 Chapter 5: What Should Countries do to Improve Nonoil Export Growth?

trade. However, evidence exists that countries MENA appears to have some of the most are using non-tariff measures to erect non-tariff restrictive policies governing trade in services barriers as trade agreements impose limits on in the world, according to estimates measuring the use of traditional trade policy instruments de jure policies in a number of services sectors. such as tariffs. Given that by the Lerner sym- Furthermore, regional trade agreements have metry theorem, removing import restrictions is not helped to liberalize intraregional trade in tantamount to removing restrictions on exports, services in developing MENA. The situation there is thus a substantial nontariff agenda in de- varies by country and sector. In banking and veloping MENA countries. Research is underway insurance, Morocco and Tunisia are among the to update the information on nontariff measures most restrictive countries in MENA. In telecom in MENA and provide further knowledge on the sector, Egypt and Tunisia still lag behind others barriers erected to protect domestic markets despite the very recent opening of Tunisia’s fixed from competition. line telephony to a private operator. In maritime transport, major restrictions exist in Morocco Intra-regional exports of non-oil merchan- and, to a lesser degree, Egypt, while in air trans- dise have not increased as a share of total nonoil port, Egypt displays highest restriction levels. exports despite the gradual implementation of EU trade agreements, PAFTA and GCC. Some The GCC countries appear to have the most reasons for this include high nontariff barriers restrictive service sector policies in MENA, but on intra-MENA trade, failure to exploit well op- effective applied protection in some services in- portunities to sell in regional markets, or simply dustries might be lower than de jure restrictions low trade complementarity among MENA coun- as firms find ways to get around the restrictions. tries. Furthermore, when integration is limited Further research is needed to link policies to out- to a PTA without common external tariffs, the comes of interest such as FDI or foreign presence, rules of origin become a major determinant of ideally taking into account firm characteristics or the incentive regime confronting firms, and to determine to what extent current protection countries with high most-favored-nation tariffs levels—similar to protection levels in other fast- such as Tunisia and Morocco are at risk of costly growing regions—inhibit growth. Restrictions that trade diversion. In addition, differences in the discourage FDI inflows into services are particu- rules of origin of various regional agreements larly harmful as they limit the potential size and generate additional compliance costs and limit productivity of these sectors, the competitiveness intra-regional, intra-industry trade. of firms operating in these sectors, the technology they use, the markets they choose to operate and Wide dispersion of tariffs across MENA coun- the quality of services they provide. tries also imply that industries in these countries benefit to varying degrees from policy-generated A range of factors impede MENA’s nonoil transfers. When the costs and benefits of opening export growth, discourage investment, and up are unevenly distributed, it becomes politi- hurt firms’ productivity. But the analysis must cally difficult to open markets among regional recognize that competitiveness and total factor partners. The fact that members of PAFTA con- productivity levels vary substantially within tinue to limit access for specific products by the region, and that there are big differences using NTBs or not implementing the policies between the major obstacles to growth in the specified in the agreement is evidence of these GCC oil exporters, developing oil exporters and political tensions. Another limiting factor, with oil importers. Firms from GCC countries are a political dimension, is the lack of mechanisms much more productive than firms from develop- to compensate losers. Despite the emergence of ing MENA, while developing oil exporters’ firms “credible” PTAs such as PAFTA, it is not known are least productive. to what extent agreements are implemented and their impact. Finding out answers to these In the GCC countries, limited access to fi- questions should be a priority. nance for SMEs and distortions in labor markets

95 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

that discourage skill acquisition and entry into a total of 22 business regulation reforms to im- the private sector, and discriminatory policies prove the climate for doing business according that discourage FDI inflows into some of the ser- to the latest Doing Business report (2011). The vices sectors are major problems. Innovation and top reformers in the region were Saudi Arabia technological readiness also appear to be areas and Egypt which were among the 15 most active in need of special attention as these countries reformers in the last 5 years. are behind their peers in the developed world.76 MENA governments improved macroeco- In developing oil exporters, nonoil tariff nomic management, simplified business regula- and nontariff protection is highest in the world, tions, reduced restrictions to trade and invest- taxes and corruption are the most frequently- ment, and opened up their financial sectors. In mentioned major complaints by exporting the past year, many of the business regulation firms, but due to the dominance of the state, reforms in the region involved the application of other issues, especially inefficiencies in labor new information technologies which is expected and goods markets, and poor financial market to increase efficiency and transparency, thereby development, present even bigger problems for addressing to some extent governance concerns the competitiveness and growth prospects of the linked to nontransparent and corrupt practices. export-oriented sector. Improvements were made to trade facilitation In oil importing countries—especially those in some GCC countries including Saudi Arabia, with EU links—protection is still high largely the United Arab Emirates, and Bahrain, as well as due to nontariff barriers. Wide dispersion of some oil importers such as Egypt, Morocco, and tariffs across countries implies that industries in Tunisia. Morocco launched a national strategy for these countries benefit to varying degrees from development of trade logistics, aimed at enhanc- policy-generated transfers, making the opening ing competitiveness and trade growth over the of markets among regional partners difficult de- next 5 years. Interventions will promote optimal spite PAFTA. Protection in services also remains management of goods flows to reduce logistics high and beyond the scope of regional agreement costs from 20 to 15 percent of GDP by 2015. Egypt such as PAFTA and the bilateral FTAs with the approved a PPP law in May 2010 to facilitate imple- EU. Limited fiscal space in quite a few of the mentation of PPPs and accelerate plans to expand oil importers implies that macroeconomic un- Egypt’s infrastructure. Commencement of the certainty remains a top-most concern for firms, first phase of development of seven trade zones while the inefficient and inflexible labor market and logistical centers between private sector and is another weakness. Furthermore, to be able to government has been announced for implementa- compete effectively in global markets, firms in tion through end 2011.77 the Republic of Yemen oil importing countries must catch up with East approved an amendment to its Customs law in Asian firms in terms of innovation efforts. July 2010 to meet WTO membership requirements and standards, with the aim of completing WTO Are reforms implemented by accession by end 2010. countries addressing the major constraints? In the GCC, Qatar is addressing one of the major constraints to growth of its services indus- MENA countries are implementing reforms ad- dressing some of the constraints to nonoil export growth identified in the report, but in many coun- 76 Countries that used successfully their natural resources tries a lot more needs to be accomplished as wide typically established strong institutional and organizational policy gaps remain in some areas. The average structures, knowledge networks and aggressive human capital number of reforms in MENA steadily increased policies (De Ferranti et al. 2002). 77 Bidding for the 2nd and 3rd phases, which include establish- during the last 5 years. Between June 2009 and ment of commercial centers in 22 governorates, will be initiated May 2010, 11 of 18 economies in MENA adopted by end 2010.

96 Chapter 5: What Should Countries do to Improve Nonoil Export Growth?

tries by easing restrictions on majority foreign A number of developing oil exporters are plan- ownership of local companies—considered to be ning reforms to address inefficiencies in input and a significant liberalization measure, following goods markets stemming from state control. In simplification of the tax regime for foreign com- Syria, a new telecommunications law was passed panies at a flat 10% rate.S till, its services sector in June 2010 authorizing the separation of regu- trade restrictiveness remains high even by Arab latory and operator functions currently handled country standards with noteworthy restrictions by the state-owned Syrian Telecommunications in banking, insurance, telecommunications and Establishment, and paving the way for possible transport. Bahrain and Qatar are planning to ac- entry of a third mobile operator. Regulatory func- tively monitor the implications from the Basel III tions will be carved out to a new entity and the process and the Financial Stability Board for its Syrian Telecommunications Establishment will financial sector business models. Tunisia plans be restructured to become a more commercially to equalize, from 2012 onward, the fiscal incen- driven institution. The government is committed tives offered to offshore and onshore FDI and to further reforms in the sector and in the medium raise the limit on foreign ownership in certain term is looking to possibly end Syrian Telecom- sectors from 49 to 60 percent. munications Establishment’s monopoly over fixed line services. The latest activity of the Islamic Some GCC countries are planning or already Republic of Iran’s ongoing privatization program implementing reforms addressing issues related comprised reduction in government’s stake in the to their major competitiveness issue—skill short- country’s two biggest automotive manufacturers ages. Bahrain has taken a first step toward nar- from 49 to 31 percent. The government plans to rowing the wage gap between foreign immigrants privatize some 200 firms in 2010–11. With a sub- and domestic workers while funding active labor stantial share of transfers going to other public market programs and training for nationals to entities, however, many question the effectiveness enhance their competitiveness. Kuwait is imple- of this privatization program. menting tentative, non-controversial labor market reforms—allowing immigrants already working Some developing oil exporters are planning in Kuwait to change their visa sponsors without much needed improvements to the functioning notice to the incumbent sponsor, and a draft law of their financial market systems. Two develop- abolishes the sponsorship system entirely, in ad- ing oil exporters (the Islamic Republic of Iran dition to other limited reforms, although this law and Syria), the United Arab Emirates, Jordan faces resistance from many employers. and Lebanon made much needed improvements of their credit information systems—one of the In Morocco, new funding mechanisms under areas identified as a major constraint to firms the Crédit Agricole bank for the Green Morocco in the region. Other MENA countries need to Plan would be aimed at helping small farmers follow suit and strengthen not only credit in- to access finance and technical assistance for formation systems, but also creditor rights and productivity-improving investments. Other collateral infrastructure. As part of its ongoing countries are planning measures to strengthen financial system reform program,S yria has initi- financial stability. Tunisia plans to raise the ated a new competition and anti-trust law for the minimum capital requirement for banks to 100 financial sector. The law is aimed at prohibiting million dinars, and lower the NPL ratio to less monopolies and anti-competitive practices. Pub- than 7 percent by 2014. For this purpose, banks lic and private banks and enterprises, however, are urged to increase the efficiency of their loan do not yet compete on a level playing field. Iraq recovery efforts and to take vigorous actions on has adopted an action plan to modernize the their portfolio of non-performing loans. The au- banking sector, taking into account the findings thorities have also decided to implement the Ba- and recommendations presented in recently sel II framework, starting with the standardized completed audit reports of the two main state- approach, and to establish a deposit guarantee owned commercial banks and addressing the fund financed by the banks. benchmarks of the IMF Stand-By Agreement.

97 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report

Several of the developing oil exporters with subsidized goods on the black market and to sim- more limited fiscal space are planning improve- plify administration of the food subsidy system. ments to their tax code and removals of other Jordan has responded to its fiscal pressures by costly distortions. Syria’s government is planning setting aside all new capital projects and shift- to streamline the substantial quasi-fiscal opera- ing from publicly-funded investments towards tions currently conducted by public sector banks public-private partnership (PPP) arrangements. and enterprises as well as to advance preparations A PPP regulatory framework is established and for the launch of the value-added tax (VAT).78 In successful PPPs have already been conducted. January 2010 the Islamic Republic of Iran’s par- liament passed a comprehensive subsidy removal Wide policy gaps, however, remain in a num- bill that was implemented in December 2010. The ber of areas where MENA governments should bill targets subsidies on fuel, water, sewage, food, step up reform efforts. In the GCC, more needs postal, airline and rail services and is expected to be done to address the issue of skill short- to yield savings amounting to $100 billion. A sig- ages in a comprehensive way. GCC governments nificant portion of the resources saved under the should continue to invest in skills, facilitate the reform program will be transferred to low-income matching of labor supply and demand through families and business firms as cash or non-cash improved data collection, information and inter- payments. With the reduction in expenditures on mediation services. It would be critical to coordi- subsidies and transfers, the government expects nate migration reform and reforms required to to lessen domestic fuel demand and vulnerability transition to technology intensive production. to international sanctions. A lot more needs to be done to understand the nature and extent to which regulations restrict The Republic of Yemen has begun implemen- trade and FDI in the GCC services. tation of a series of tax reforms. It plans to apply the General Sales Tax legislation to widen the tax In developing MENA, countries need to base and enhance tax revenues. The government intensify efforts to strengthen institutions, im- has approved a new Income Tax law to reduce the prove information gathering and dissemination, corporate income tax rate from 35 to 20 percent, and reform implementation. Countries should the personal tax rate from 20 to 15 percent, and press on with financial market development— eliminate many tax exemptions and petroleum especially improving financial infrastructure. price subsidies over the next three years. It has This will entail expanding the range of movable approved a new investment law to eliminate assets that can be used as collateral, improving indirect exemptions and introduce international registries for movables and enforcement and best practices. the Republic of Yemen also plans sales procedures for different types of collateral, a reform of the social welfare fund with the objec- upgrading public credit registries, and more tive of improving targeting of the cash transfer importantly, introducing private credit bureaus system according to income criteria. capable of significantly expanding coverage and the depth of credit information. Many of the oil importers with limited fiscal space are implementing reforms to address the Developing MENA countries should also issue and respond to one of the major concerns strengthen macroeconomic management, ad- of the private sector—macroeconomic uncer- dress inefficiencies in labor and goods markets, tainty. Tunisia is preparing a law to ensure and facilitate innovation activities, knowledge financial viability of pension schemes over the and technological acquisition. There is evidence next 20 years without additional tax increases or budget financing. Egypt raised natural gas and electricity prices in June 2010 to different levels 78 The drafting of the VAT law and tax procedures code is by industry.79 Subsidized food prices under the proceeding in order to enable introduction of a VAT planned for 2011. ration card system were unified in May 2010 in 79 Increases for gas used by the chemical and processed glass order to eliminate the opportunity for trading industries will be effective starting fiscal year 2011.

98 Chapter 5: What Should Countries do to Improve Nonoil Export Growth?

that the existing labor market rigidities—espe- to the requirements of an effective diversifica- cially the high firing costs—have played a role in tion program that requires increased attention reducing the impact of the crisis on unemploy- to competitiveness and more open trade regime, ment. However, these rigidities are now limiting several of Algeria’s policies indicate a shift in the job creation, and the ability of the economy to direction of greater state control of the economy pick up speed post crisis. and greater restrictions on foreign trade. Notably, new 2010 FDI rules add to policies adopted in Finally, it should be a priority to understand 2009 to restrict options for foreign investment better the nature and extent to which nontar- and consumer imports. Potential foreign inves- iff barriers restrict trade in non-oil goods and tors face new requirements designed to limit services. Some countries such as Algeria have profit taking and repatriation. Public firms are backtracked in their efforts to open up their being strengthened and privatizations are de- economies to trade after the crisis. Algeria’s layed, while steps toward liberalizing external 2010–14 public investment plan (PIP) focuses on trade have slowed since 2008, including the halt- diversification and job creation. Yet, in contrast ing of activities toward WTO accession.

99

Statistical Annex

101 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report 7.3 5.9 6.1 7.2 3.6 7.4 7.8 –1.3 –2.3 –6.6 –3.8 –4.6 –3.6 20.4 –3.0 10.7 34.9 31.7 14.0 10.8 –3.7 –3.9 Proj. 2012 –15.1 –25.4 –12.0 7.2 5.4 5.2 7.7 5.6 3.3 6.1 9.6 6.9 –1.7 –2.7 –6.5 –4.1 –4.8 –3.5 19.7 –9.2 38.0 30.2 12.7 –4.1 –4.4 Proj. 2011 –15.2 –19.4 –11.9 6.7 5.6 5.1 7.3 6.7 2.6 3.6 8.4 5.8 Est. –2.0 –3.2 –9.5 –4.8 –5.2 –2.3 23.5 22.7 29.3 10.8 –4.5 –5.3 2010 –15.4 –14.5 –13.1 –13.5 2.6 0.3 6.1 1.6 6.7 3.6 2.0 (In percentage of GDP) (In percentage –2.3 –3.2 –5.1 –4.4 –2.4 16.8 –0.4 –2.7 15.7 –2.2 29.2 –2.9 –5.0 2009 Current account balance account Current –15.5 –17.3 –11.5 –10.7 –25.7 0.5 7.2 8.5 9.1 –1.8 –9.6 –3.9 –4.6 –1.9 40.7 12.8 20.2 13.7 27.8 33.0 40.7 10.6 23.9 19.8 –3.8 16.1 –5.2 2008 –19.8 –27.6 –15.8 0.0 3.3 2.0 1.5 3.3 6.5 9.7 6.3 3.9 –7.3 –5.4 –7.5 –4.0 –6.0 –5.5 –4.7 –3.5 12.1 –3.4 15.0 14.3 20.9 –0.3 –2.6 –2.4 Proj. 2012 0.0 2.3 0.3 2.7 7.6 8.3 5.0 2.8 –7.9 –6.0 –8.7 –5.0 –7.1 –6.2 –5.0 –3.4 17.7 –8.2 –7.0 13.4 12.2 17.2 –2.4 –2.8 Proj. –3.3 2011 0.4 9.9 9.4 6.9 5.4 2.4 0.6 Est. –8.2 –6.6 –8.5 –7.4 –0.5 –7.9 –6.8 –5.6 –4.4 15.8 –8.0 –1.5 –0.8 16.5 –5.2 –3.0 –5.0 2010 –12.2 Fiscal balance Fiscal 0.4 2.2 0.8 (In percentage of GDP) (In percentage –6.9 –5.1 –8.1 –4.9 –8.9 –5.7 –5.5 10.6 –2.7 –6.6 –3.9 –6.1 13.0 19.3 –8.7 –1.2 –3.0 –2.1 –2.2 2009 –10.3 –10.2 –14.2 1.3 0.0 7.7 4.1 4.9 0.4 –6.8 –3.9 –8.8 –8.8 –8.6 –4.6 –4.5 –2.8 24.6 –3.3 20.4 32.5 10.9 13.9 19.9 24.2 16.1 –1.0 12.8 2008 6.0 5.7 6.0 5.5 6.0 5.8 5.7 4.2 5.6 3.9 3.0 4.1 3.9 4.0 4.4 9.2 3.9 5.0 4.9 4.8 4.5 5.0 4.8 5.1 11.0 Proj. 2012 5.5 5.1 7.0 5.0 5.4 6.3 5.3 4.1 5.5 6.2 3.0 4.1 4.2 3.1 4.2 4.7 4.5 3.9 5.0 4.7 4.8 4.8 4.4 11.5 14.3 Proj. 2011 5.1 4.6 8.0 4.0 4.5 6.5 4.9 8.0 5.0 5.4 2.6 1.5 2.4 2.9 1.0 3.7 4.8 1.9 3.5 4.2 3.7 3.8 4.0 3.5 Est. 18.5 2010 Real GDP growth 4.7 4.6 9.0 2.3 5.0 6.5 4.9 3.9 4.0 2.1 4.2 1.4 2.4 2.1 0.6 9.0 3.6 2.6 0.5 1.1 3.1 2.0 4.9 –1.0 –4.4 2009 (Annual percentage change) (Annual percentage 7.2 6.5 9.3 7.6 5.8 8.6 6.8 3.6 5.2 3.8 9.5 2.3 2.4 3.0 5.1 4.2 5.6 6.1 6.0 4.9 4.5 5.3 5.6 15.8 12.3 2008 : World Bank data. : World Egypt, Arab Rep. Egypt, Arab Lebanon Jordan Djibouti Yemen, Rep. Yemen, Syrian Arab Republic Syrian Arab Libya Iraq Iran, Islamic Republic of Iran, Algeria United Arab Emirates Arab United Saudi Arabia Qatar Oman Kuwait Bahrain Tunisia Morocco Oil importers with EU links Oil importers Oil importers with GCC links Oil importers Developing oil exporters Developing GCC oil exporters Oil Importers Oil exporters MENA region

Macroeconomic outlook A1: Macroeconomic Table Source

102 Statistical Annex 0.4 6.3 0.0 0.4 3.3 0.2 0.8 0.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.8 0.0 Oil 20.8 20.2 20.3 20.3 20.5 8.5 3.8 8.3 9.2 5.8 6.8 6.3 4.0 4.1 2.2 4.0 5.0 3.9 2.0 0.3 21.4 14.8 22.1 11.1 14.8 14.9 25.8 21.7 Nonoil 5.1 4.0 7.0 5.5 5.2 5.5 5.7 4.0 2.9 1.7 4.0 1.6 1.7 4.9 3.1 1.8 3.3 2.8 0.4 20.0 11.2 14.8 14.9 Manufactures 3.1 1.3 8.3 0.0 6.5 6.4 4.0 0.0 6.8 5.6 0.0 23.3 22.1 11.6 10.4 14.4 15.5 15.5 35.6 38.3 35.0 19.1 21.0 Agriculture Ad-valorem equivalents (AVEs) of NTBs (AVEs) equivalents Ad-valorem 7.7 3.8 8.4 7.8 4.9 6.3 6.2 4.1 2.9 1.7 4.1 1.6 1.7 5.1 3.9 2.0 3.3 2.8 0.3 All 20.5 11.1 14.8 14.9 2.6 0.6 0.1 0.2 0.7 5.3 5.6 1.9 1.9 0.0 0.1 0.0 0.1 0.0 0.0 0.1 0.0 0.0 0.0 3.3 1.8 0.0 Oil 10.2 5.2 6.3 5.3 5.0 4.1 5.9 6.7 1.9 3.3 0.2 1.1 0.1 3.0 5.3 0.2 1.5 0.1 2.1 8.2 7.6 2.8 4.7 17.9 Nonoil 4.3 2.7 4.4 2.4 1.1 3.6 5.6 6.7 1.9 2.0 0.1 1.0 0.1 2.8 3.9 0.1 1.1 0.1 0.6 8.2 3.8 1.9 4.9 Tariffs Manufactures 8.8 9.2 8.6 9.0 1.7 7.1 6.8 4.4 1.7 7.2 2.8 7.7 3.5 16.3 10.9 11.1 31.0 10.9 17.3 46.7 57.1 26.2 12.3 Agriculture 5.0 5.9 5.3 5.0 4.3 5.9 6.8 1.9 2.1 0.1 1.1 0.1 3.0 3.9 0.1 1.5 0.1 2.1 8.2 3.9 1.9 4.7 All 15.2 2.9 6.9 0.7 5.8 8.9 2.7 2.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.3 2.6 0.0 Oil 20.9 20.4 10.4 20.4 20.4 20.6 9.2 9.8 4.2 7.1 7.5 4.2 6.6 6.0 5.1 13.8 27.7 13.4 27.1 12.7 13.0 16.7 25.4 12.2 14.9 15.0 10.1 33.4 24.6 Nonoil 9.5 8.4 9.4 6.6 8.8 5.9 4.9 1.8 6.7 5.5 1.8 6.0 3.7 7.1 4.7 5.2 22.8 11.1 12.4 12.2 14.9 15.0 10.0 Manufactures 1.8 8.3 1.8 3.5 Overall trade restrictiveness trade Overall 32.1 38.4 14.0 22.7 41.4 12.3 23.6 24.1 17.3 32.7 13.6 82.3 13.2 14.0 41.1 92.0 26.8 31.7 33.3 Agriculture 9.2 9.1 6.0 4.9 1.8 7.2 5.5 1.8 6.6 6.0 7.2 4.8 5.1 All 12.7 26.5 13.4 23.0 12.2 12.9 12.2 14.9 15.0 10.1 : Staff estimates using tariff data for 2008 and latest official NTB data. 2008 and latest for data using tariff estimates : Staff EAS excl China EAS excl Exporting country India SAS excl India SAS excl LAC SSA ECA HICs China MENA GCC oil exporters Other oil exporters Oil importers Oil importers w/ Oil importers GCC links Oil importers w/ Oil importers EU links Maghreb Algeria Egypt, Arab Rep. Egypt, Arab Jordan Lebanon Morocco Oman Saudi Arabia Tunisia

Trade restrictiveness in East Asia excluding China, 2008 (in percent) Asia excluding in East restrictiveness A2: Trade Table Source

103 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report Oil 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9.8 3.0 2.3 8.3 8.7 5.5 9.5 0.0 5.7 6.3 5.3 6.3 6.4 3.7 0.1 5.6 1.2 12.2 10.7 43.2 11.3 25.8 Nonoil 6.2 1.2 0.9 7.7 8.4 5.5 3.5 3.1 8.0 4.2 5.9 3.6 3.9 8.0 5.4 6.0 3.2 0.1 1.4 1.2 10.4 19.9 Manufactures 7.4 6.3 3.7 0.3 5.6 8.5 3.2 3.7 0.0 3.0 2.2 3.0 0.0 1.9 1.4 3.1 0.8 9.2 2.3 52.6 27.0 27.8 Agriculture Ad-valorem equivalents (AVEs) of NTBs (AVEs) equivalents Ad-valorem 9.7 1.8 1.1 7.4 8.4 5.5 3.5 3.1 8.0 4.2 5.9 3.6 3.9 8.0 5.4 6.0 3.7 0.1 1.4 1.2 All 11.0 19.9 Oil 6.0 2.4 5.0 5.0 5.3 9.3 9.2 5.8 5.5 9.1 6.9 5.0 7.0 9.1 9.1 7.0 5.0 0.0 0.0 6.7 5.5 0.0 6.0 8.4 8.1 9.0 7.1 7.3 6.5 6.8 5.7 7.4 5.6 6.5 9.8 5.7 6.4 4.9 8.3 6.9 6.4 10.4 10.9 11.6 Nonoil 7.5 4.7 5.5 6.0 7.1 7.9 8.8 6.3 6.0 8.6 6.8 5.6 7.2 6.9 8.6 8.3 5.6 6.0 4.8 7.9 5.8 6.4 Tariffs Manufactures 9.9 0.0 0.0 31.2 30.5 37.8 32.2 20.6 42.4 22.2 29.7 19.0 28.4 18.7 22.1 17.5 26.7 28.4 21.8 29.6 30.0 24.4 Agriculture All 9.9 5.9 8.5 8.1 8.1 8.1 9.0 6.3 6.0 8.6 6.8 5.6 7.3 6.9 8.6 8.4 5.6 6.4 4.9 7.9 5.8 6.4 Oil 6.0 2.4 5.0 5.0 5.3 9.3 9.2 5.8 5.5 9.1 6.9 5.0 7.0 9.1 9.1 7.0 5.0 0.0 0.0 6.7 5.5 0.0 6.5 4.9 7.6 22.6 15.8 14.0 13.9 16.8 16.8 14.6 16.6 17.9 12.4 12.0 12.7 11.9 49.7 21.1 12.1 10.1 34.1 12.5 Nonoil 6.6 6.9 9.8 9.1 9.2 4.9 7.2 7.6 13.7 15.0 14.8 16.4 14.3 16.6 11.0 11.5 10.8 10.8 16.6 13.7 11.6 27.8 Manufactures 0.0 0.0 Overall trade restrictiveness trade Overall 83.8 17.4 36.8 41.6 32.5 26.2 50.9 25.4 33.5 22.0 55.4 20.9 25.1 19.4 28.1 56.2 24.9 30.3 39.2 26.7 Agriculture 9.2 9.8 9.1 4.9 7.2 7.6 All 20.9 15.6 10.4 15.5 16.5 14.5 16.6 11.0 11.6 10.8 10.9 16.6 13.7 11.6 10.1 27.8 : Staff estimates using tariff data for 2008 and latest official NTB data. official NTB data. 2008 and latest for data using tariff estimates : Staff - of develop by India on nonoil exports levied rates the protection high and distort Algeria. These are gas imports from NTBs imposed by India on natural restrictive exclude : The estimates EAS excl China EAS excl SAS excl India SAS excl LAC SSA ECA HICs China MENA GCC oil exporters Other oil exporters Oil importers w/ Oil importers GCC links Oil importers w/ Oil importers EU links Maghreb Algeria Egypt, Arab Rep. Egypt, Arab Jordan Lebanon Morocco Oman Saudi Arabia Tunisia Exporting country Trade restrictiveness in India, 2008 (in percent) restrictiveness A3: Trade Table Source Note ing oil exporters.

104 Statistical Annex 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Oil 0.7 0.4 0.0 0.0 0.0 0.0 0.2 0.0 0.0 0.1 0.0 0.1 0.0 0.3 0.2 1.5 1.3 1.9 0.3 7.0 0.8 0.8 10.4 Nonoil 0.7 0.1 0.0 0.0 0.0 0.0 0.2 0.0 0.0 0.1 0.0 0.1 0.0 0.1 0.1 1.5 1.2 4.0 0.4 0.1 1.0 0.6 0.5 Manufactures 0.0 4.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.4 1.7 3.4 1.4 0.2 0.0 0.2 1.4 13.3 30.9 Agriculture Ad-valorem equivalents (AVEs) of NTBs (AVEs) equivalents Ad-valorem 0.7 0.1 0.0 0.0 0.0 0.0 0.2 0.0 0.0 0.1 0.0 0.1 0.0 0.1 0.1 1.5 1.2 1.9 0.3 7.0 0.8 0.7 All 10.3 4.3 0.0 0.0 0.0 0.0 0.0 0.0 4.3 4.3 Oil 13.8 13.8 13.7 13.8 13.7 13.7 13.4 11.3 19.2 13.8 11.9 21.7 14.7 16.5 1.6 4.4 3.1 5.1 2.3 6.0 4.4 5.0 5.2 8.6 5.4 4.4 4.1 4.7 7.2 4.9 4.8 9.5 7.8 13.2 10.2 10.5 14.5 Nonoil 1.7 4.3 3.4 5.1 2.2 6.0 4.4 5.0 5.2 8.5 5.3 4.4 4.3 4.4 6.7 3.2 4.0 8.8 8.4 13.2 10.2 10.7 13.4 Tariffs Manufactures 3.3 8.6 0.0 8.7 8.9 0.0 9.6 7.6 5.5 19.1 11.3 13.0 18.7 17.9 10.7 18.0 16.9 13.0 11.1 12.0 11.5 11.1 16.8 Agriculture 1.7 4.3 3.5 5.1 2.3 6.1 4.4 5.0 5.2 8.6 5.4 4.4 4.3 4.5 7.2 5.0 4.8 9.6 8.8 All 13.2 10.2 10.5 14.5 4.3 0.0 0.0 0.0 0.0 0.0 0.0 4.3 4.3 Oil 13.8 13.8 13.7 13.8 13.7 13.7 13.4 11.3 19.2 13.8 11.9 21.7 14.7 16.5 2.4 4.8 3.1 5.1 2.3 6.3 4.4 5.0 5.3 8.6 5.4 4.4 4.4 4.9 9.1 5.2 8.7 13.2 11.8 11.7 11.8 10.3 24.9 Nonoil 2.5 4.4 3.4 5.1 2.2 6.2 4.4 5.0 5.2 8.5 5.4 4.4 4.3 4.5 3.6 4.1 9.8 9.0 13.2 11.7 11.8 10.7 14.0 Manufactures 3.3 8.6 0.0 8.7 8.9 0.0 7.7 23.7 11.3 13.0 18.7 17.9 10.7 18.0 20.3 14.7 14.5 11.0 12.0 18.8 11.7 12.5 47.6 Overall trade restrictiveness trade Overall Agriculture 2.5 4.4 3.5 5.1 2.3 6.3 4.4 5.0 5.3 8.6 5.4 4.4 4.3 4.5 9.1 5.4 9.5 All 13.2 11.8 11.7 11.8 10.3 24.8 : Staff estimates using tariff data for 2008 and latest official NTB data. 2008 and latest for data using tariff estimates : Staff Tunisia Saudi Arabia Oman Morocco Lebanon Jordan Egypt, Arab Rep. Egypt, Arab Algeria Maghreb Oil importers w/ Oil importers EU links Oil importers w/ Oil importers GCC links Oil importers Other oil exporters GCC oil exporters MENA China HICs ECA SSA LAC SAS excl India SAS excl India EAS excl China EAS excl Exporting country

Trade restrictiveness in South Asia other than India, 2008 (in percent) restrictiveness A4: Trade Table Source

105 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Oil 4.3 9.7 5.3 8.5 8.7 4.3 9.6 9.0 5.1 7.0 6.3 10.9 24.2 12.8 44.6 18.7 15.0 44.6 14.2 12.3 21.0 11.0 22.6 Nonoil 1.5 5.2 7.0 8.1 8.3 7.0 1.5 5.7 8.8 2.1 9.8 5.1 8.5 5.9 22.2 10.0 10.9 25.1 11.9 10.0 15.0 11.7 20.1 Manufactures 0.9 0.0 9.6 0.0 0.0 0.8 5.6 45.8 14.3 16.9 74.2 37.4 69.0 33.8 16.0 33.2 20.9 32.4 20.4 21.4 26.3 21.6 12.4 Agriculture Ad-valorem equivalents (AVEs) of NTBs (AVEs) equivalents Ad-valorem 1.5 9.7 5.2 7.0 8.3 8.5 7.0 1.5 5.8 9.0 2.4 5.6 6.3 All 22.3 10.9 24.2 12.4 10.2 15.0 11.9 11.0 21.0 10.2 Oil 5.9 1.5 0.0 0.0 0.2 0.0 2.9 0.1 0.1 0.0 1.8 1.8 0.1 1.5 1.0 1.8 1.3 4.8 0.0 2.3 0.0 0.2 3.7 5.1 0.8 1.0 4.4 3.7 1.1 3.3 0.1 2.0 2.1 2.1 0.1 0.8 1.8 2.6 4.8 1.4 4.8 9.8 7.9 12.1 10.1 22.4 Nonoil 5.1 1.3 0.8 3.5 3.6 1.0 1.8 0.1 1.6 2.0 2.0 0.1 1.3 1.4 2.4 4.4 1.3 1.5 8.0 7.9 12.2 10.1 25.6 Tariffs Manufactures 7.3 8.9 6.2 6.2 7.5 4.3 3.8 3.1 8.0 8.2 11.9 25.4 11.6 10.3 26.3 10.3 13.3 19.9 18.8 18.6 13.5 12.2 10.3 Agriculture 5.1 1.3 1.0 4.4 3.6 1.2 1.9 0.1 2.0 2.1 2.1 0.1 1.3 1.5 2.5 4.4 1.5 2.3 8.0 7.9 All 12.1 10.1 22.4 5.9 1.5 0.0 0.0 0.2 0.0 2.9 0.1 0.1 0.0 1.8 1.8 0.1 1.5 1.0 1.8 1.3 4.8 0.0 2.3 0.0 0.2 3.7 Oil 5.2 6.4 5.2 9.9 27.7 11.9 28.6 16.6 21.8 22.1 44.7 17.0 10.6 10.8 44.7 11.4 16.8 17.0 19.1 43.4 12.4 16.8 14.2 Nonoil 2.8 6.2 7.1 7.1 2.8 7.1 9.8 3.6 27.3 11.8 28.6 15.5 22.2 11.8 16.5 10.1 10.3 14.2 14.2 18.9 45.7 13.0 13.7 Manufactures 8.2 8.9 6.2 6.2 8.3 57.8 35.1 28.5 84.5 40.7 79.3 29.3 57.3 52.6 51.8 45.9 24.6 33.2 30.1 24.7 16.0 29.4 20.6 Overall trade restrictiveness trade Overall Agriculture 2.8 6.4 7.1 7.1 2.8 7.3 4.7 All 27.4 11.9 28.6 16.0 21.8 12.0 17.0 10.4 10.6 14.3 15.4 19.1 43.4 11.7 13.6 14.2 : Staff estimates using tariff data for 2008 and latest official NTB data. 2008 and latest for data using tariff estimates : Staff Tunisia Saudi Arabia Jordan Lebanon Morocco Oman Egypt, Arab Rep. Egypt, Arab Maghreb Algeria Oil importers w/ Oil importers GCC links w/ Oil importers EU links Oil importers Other oil exporters GCC oil exporters MENA ECA HICs China SAS excl India SAS excl LAC SSA India EAS excl China EAS excl Exporting country

Trade restrictiveness in LAC, 2008 (in percent) in LAC, restrictiveness A5: Trade Table Source

106 Statistical Annex 0.0 5.9 2.1 0.0 0.0 0.0 0.0 0.0 2.9 2.2 0.3 4.8 3.2 2.0 0.0 6.6 0.1 Oil 53.3 15.1 22.5 24.5 21.0 16.9 7.9 9.1 6.6 5.2 3.6 7.5 5.5 11.4 21.4 37.6 13.5 18.4 26.5 21.5 19.8 17.1 18.9 17.7 21.5 18.5 31.0 37.4 12.4 Nonoil 6.7 9.4 7.5 8.2 6.8 2.2 3.2 9.9 6.9 2.6 15.0 12.6 16.7 27.8 18.9 19.7 16.8 18.2 15.1 18.9 17.9 15.4 14.9 Manufactures 5.2 4.6 4.6 3.4 24.3 38.6 97.1 17.5 33.3 15.3 14.8 25.1 28.2 24.0 57.9 96.2 19.7 12.9 10.1 10.5 23.1 16.2 11.0 Agriculture Ad-valorem equivalents (AVEs) of NTBs (AVEs) equivalents Ad-valorem 9.7 7.9 8.6 7.1 5.2 3.2 7.4 5.4 All 10.2 17.7 13.0 22.0 26.5 16.1 19.3 16.6 19.3 18.6 16.1 18.7 17.8 17.6 11.8 1.0 1.0 2.1 6.5 8.8 1.4 0.5 3.3 6.5 4.3 4.4 0.5 4.5 2.1 2.1 4.8 4.2 0.6 3.8 2.6 2.0 Oil 10.4 10.0 2.9 7.7 8.9 7.3 4.5 3.5 7.4 5.7 9.9 6.5 5.9 7.4 3.0 4.0 7.9 8.6 7.2 8.2 8.7 8.7 15.7 11.1 18.4 Nonoil 2.1 2.5 7.9 6.6 3.8 3.1 4.3 4.7 8.1 5.9 5.0 4.3 2.1 2.6 7.4 7.2 4.3 6.3 7.2 7.6 12.6 11.0 18.0 Tariffs Manufactures 6.9 9.9 17.9 12.5 14.7 11.1 15.0 15.0 11.6 12.0 15.0 10.4 11.6 12.5 11.5 16.0 10.5 19.1 13.1 10.9 17.8 15.6 10.5 Agriculture 2.5 2.9 8.9 7.3 4.5 3.5 5.7 5.6 9.1 6.5 5.8 5.7 2.5 3.1 7.7 8.1 6.4 7.9 7.6 8.6 All 13.5 11.1 18.0 1.0 4.1 6.9 6.5 1.4 0.5 6.5 0.5 4.2 5.0 9.6 5.7 3.7 9.3 2.1 Oil 62.2 18.4 26.8 28.9 25.5 21.1 10.7 10.0 27.1 40.5 27.4 29.2 20.8 23.3 31.0 24.6 27.6 29.0 24.4 23.7 29.0 40.4 35.0 14.5 19.0 17.7 10.9 13.5 30.8 16.2 14.2 Nonoil 7.5 8.5 19.3 17.1 24.6 11.9 19.2 22.8 31.6 22.9 23.2 23.2 22.9 22.6 23.2 17.0 18.0 14.2 18.5 15.4 28.0 14.1 10.2 Manufactures Overall trade restrictiveness trade Overall 42.2 44.4 53.3 32.5 22.2 20.2 35.0 40.2 16.2 34.4 29.8 16.2 69.3 20.6 35.7 31.9 16.5 21.4 40.8 31.8 21.5 109.6 108.7 Agriculture 9.6 All 20.2 23.3 30.9 13.1 20.2 22.8 31.0 24.9 27.8 21.9 24.5 23.1 20.1 21.9 20.9 14.8 19.0 16.7 13.1 29.8 14.9 14.0 : Staff estimates using tariff data for 2008 and latest official NTB data. 2008 and latest for data using tariff estimates : Staff Saudi Arabia Tunisia Morocco Oman Lebanon Egypt, Arab Rep. Egypt, Arab Jordan Oil importers w/ Oil importers EU links Maghreb Algeria Oil importers w/ Oil importers GCC links GCC oil exporters Other oil exporters MENA HICs China SSA ECA LAC SAS excl India SAS excl India EAS excl China EAS excl Exporting country

Trade restrictiveness in SSA, 2008 (in percent) in SSA, restrictiveness A6: Trade Table Source

107 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report Oil 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 7.1 4.7 4.7 9.1 0.8 0.3 0.1 2.3 1.6 2.4 0.4 0.1 3.2 2.4 1.4 0.8 0.5 0.3 3.0 10.4 10.3 17.6 11.2 Nonoil 9.4 5.5 1.5 5.4 4.0 3.0 9.3 0.4 0.1 0.1 1.5 1.5 1.4 0.3 0.1 1.2 2.1 1.4 0.7 0.2 0.1 3.2 10.9 Manufactures 7.1 7.2 4.8 1.8 0.4 5.0 3.0 5.0 1.1 0.4 9.7 5.7 1.3 0.9 5.2 1.7 2.2 13.8 15.6 42.0 26.7 15.3 19.4 Agriculture Ad-valorem equivalents (AVEs) of NTBs (AVEs) equivalents Ad-valorem 6.9 4.7 3.8 9.0 0.7 0.1 0.1 2.3 1.6 2.4 0.4 0.1 3.1 2.4 1.4 0.8 0.2 0.1 3.0 All 10.4 10.3 17.6 11.2 4.9 0.1 0.0 1.6 0.0 0.2 4.0 4.6 0.1 0.1 0.0 0.1 5.0 0.1 0.0 0.0 0.1 5.0 5.0 0.0 6.7 0.0 2.3 Oil 6.9 6.0 5.9 2.3 1.5 8.6 7.2 1.9 2.9 0.0 4.8 2.8 5.0 1.2 0.0 4.5 5.0 2.0 5.9 2.0 2.9 4.9 12.2 Nonoil 6.1 5.1 4.6 4.4 1.6 1.1 7.2 7.1 1.0 0.8 0.0 3.5 2.4 3.7 0.9 0.0 2.0 3.8 1.9 6.0 4.2 0.8 4.7 Tariffs Manufactures 9.9 8.9 4.3 4.0 8.6 2.7 8.6 9.0 8.6 5.5 2.7 4.5 5.5 6.1 13.4 18.0 16.0 11.0 23.4 12.3 15.8 14.5 23.8 Agriculture 6.9 5.9 5.9 2.3 1.3 8.5 7.2 1.5 0.9 0.0 4.8 2.8 4.9 1.2 0.0 4.4 5.0 2.0 5.8 4.3 0.8 4.9 All 12.2 4.9 0.1 0.0 1.6 0.0 0.2 4.0 4.6 0.1 0.1 0.0 0.1 5.0 0.1 0.0 0.0 0.1 5.0 5.0 0.0 6.7 0.0 2.3 Oil 7.0 6.2 2.7 3.1 0.1 7.2 4.4 7.4 1.6 0.1 7.7 7.4 3.4 6.7 2.5 3.2 7.9 17.3 13.1 16.2 29.7 17.7 18.4 Nonoil 6.5 9.8 5.6 4.1 0.1 1.2 0.1 3.3 6.8 7.9 1.4 0.9 5.0 3.9 5.1 3.1 5.9 4.4 0.9 15.4 10.1 16.5 18.1 Manufactures 3.1 6.6 3.1 5.8 6.4 8.4 Overall trade restrictiveness trade Overall 23.7 29.0 50.8 44.7 23.2 11.4 19.3 30.5 13.4 25.3 13.6 12.1 13.6 22.0 21.5 19.6 25.5 Agriculture 7.0 5.0 2.2 1.0 0.1 7.1 4.4 7.3 1.5 0.1 7.5 7.4 3.4 6.7 4.5 0.9 7.9 All 17.3 12.8 16.2 29.7 17.5 18.4 : Staff estimates using tariff data for 2008 and latest official NTB data. 2008 and latest for data using tariff estimates : Staff EAS excl China EAS excl India SAS excl India SAS excl LAC SSA ECA HICs China MENA GCC oil exporters Other oil exporters Oil importers w/ Oil importers GCC links w/ Oil importers EU links Maghreb Algeria Rep. Egypt, Arab Jordan Lebanon Morocco Oman Saudi Arabia Tunisia Exporting country

Trade restrictiveness in ECA, 2008 (in percent) in ECA, restrictiveness A7: Trade Table Source

108 Statistical Annex 1.5 0.0 0.0 0.0 0.0 0.2 0.0 0.7 0.4 4.8 0.4 0.0 0.0 0.0 0.3 0.1 0.0 1.1 0.0 0.0 0.0 Oil 11.4 12.6 2.6 9.3 9.8 9.0 16.7 16.9 19.6 12.4 10.8 17.4 24.2 21.7 17.5 11.4 15.9 24.2 15.8 17.0 13.1 22.6 34.8 12.4 10.5 Nonoil 6.9 3.1 6.9 6.4 7.9 8.6 9.3 7.2 5.9 14.2 11.9 10.1 10.5 14.9 23.7 20.3 14.6 10.4 13.4 23.7 10.7 12.8 18.1 Manufactures 2.0 23.8 26.4 33.8 21.7 15.3 23.1 46.6 29.9 24.7 19.4 23.9 46.6 18.5 22.4 24.1 28.9 11.6 31.7 51.0 16.1 16.8 19.8 Agriculture Ad-valorem equivalents (AVEs) of NTBs (AVEs) equivalents Ad-valorem 7.7 2.6 7.5 9.1 8.7 9.6 8.9 All 16.0 19.1 12.4 10.8 16.7 23.9 21.2 16.8 11.4 15.4 23.9 11.8 13.1 21.8 34.8 12.4 0.6 0.2 0.0 5.3 4.4 0.1 8.0 5.3 3.0 6.5 1.9 6.5 5.3 0.2 0.4 9.7 4.7 7.8 5.9 0.0 8.5 5.7 Oil 10.0 4.8 0.5 0.5 7.2 1.0 0.3 2.6 3.3 4.3 3.4 0.6 2.6 3.3 0.5 1.9 8.9 7.8 7.3 6.5 8.7 8.7 6.9 7.3 Nonoil 4.7 0.3 0.2 6.6 1.2 0.2 2.5 2.9 3.7 3.2 0.5 2.4 2.9 0.3 1.2 8.7 6.1 6.6 4.1 6.7 8.9 6.5 6.5 Tariffs Manufactures 4.1 0.2 0.9 8.4 0.4 1.4 4.1 9.2 4.7 0.7 4.1 0.4 3.4 8.5 8.7 70.7 70.7 15.8 19.3 10.2 13.6 10.0 10.3 Agriculture 4.6 0.3 0.5 7.2 1.0 0.3 2.8 3.4 All 4.2 3.5 0.6 2.8 3.4 0.3 1.5 8.9 7.7 7.4 6.6 8.7 8.7 7.0 7.3 2.0 0.2 0.0 5.3 0.1 8.1 5.3 3.7 6.9 6.7 6.9 5.3 0.2 0.4 5.0 7.9 7.0 0.0 8.5 5.7 Oil 15.7 22.3 10.0 3.1 21.5 17.4 26.8 13.4 11.1 20.0 27.6 26.0 20.9 12.0 18.6 27.6 16.3 18.9 22.0 17.0 17.1 29.1 43.5 21.1 17.4 16.3 Nonoil 7.3 3.3 7.2 18.9 18.5 11.3 10.7 17.4 26.6 24.0 17.7 10.9 15.8 26.6 11.9 21.5 12.5 14.5 22.1 15.3 18.2 13.7 12.4 Manufactures 2.8 28.0 26.6 42.2 22.1 16.7 27.2 39.1 29.4 20.2 27.9 18.9 25.7 39.9 48.2 21.8 45.3 61.0 24.6 25.5 30.2 Overall trade restrictiveness trade Overall 117.3 117.3 Agriculture 8.0 3.1 7.8 All 20.5 26.3 13.4 11.1 19.5 27.2 25.5 20.3 12.0 18.2 27.2 13.3 22.0 16.9 16.1 28.4 43.5 21.1 16.6 16.3 : Staff estimates using tariff data for 2008 and latest official NTB data. 2008 and latest for data using tariff estimates : Staff Tunisia Saudi Arabia Oman Morocco Lebanon Jordan Egypt, Arab Rep. Egypt, Arab Algeria Maghreb Oil importers w/ Oil importers EU links Oil importers w/ Oil importers GCC links Oil importers Other oil exporters GCC oil exporters MENA China HICs ECA SSA LAC SAS excl India SAS excl India EAS excl China EAS excl Exporting country

Trade restrictiveness in MENA, 2008 (in percent) restrictiveness A8: Trade Table Source

109 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report Oil 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.0 2.1 2.0 2.4 1.5 0.2 1.0 0.6 4.5 5.0 1.1 4.3 7.2 3.0 0.5 1.1 3.4 2.0 0.6 0.1 7.6 0.3 10.2 Nonoil 0.2 0.3 0.8 0.1 0.4 0.1 0.7 0.4 2.3 0.1 1.1 3.1 7.1 1.0 0.1 1.1 1.1 0.8 0.1 0.2 0.1 0.1 10.3 Manufactures 3.5 5.0 4.6 0.5 4.9 0.0 9.7 8.8 9.8 2.4 0.0 9.1 8.5 2.5 0.1 1.8 13.6 10.0 14.0 12.7 18.3 10.8 55.9 Agriculture Ad-valorem equivalents (AVEs) of NTBs (AVEs) equivalents Ad-valorem 2.0 2.1 2.0 2.4 1.5 0.2 1.0 0.6 4.5 4.9 1.1 4.3 7.2 3.0 0.5 1.1 3.4 2.0 0.6 0.1 7.3 0.3 All 10.2 Oil 5.0 5.0 0.0 5.0 5.0 5.0 5.0 5.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.9 5.9 3.3 3.8 6.7 4.0 6.2 3.9 0.0 0.0 4.3 0.0 0.0 0.0 0.2 4.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Nonoil 3.5 4.7 4.2 4.4 4.4 5.0 4.2 3.9 0.0 0.0 4.3 0.0 0.0 0.0 0.3 4.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Tariffs Manufactures 6.0 2.0 3.0 1.1 3.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 11.4 13.5 33.0 Agriculture 3.9 5.9 3.3 3.8 6.7 4.0 6.2 3.9 0.0 0.0 4.3 0.0 0.0 0.0 0.2 4.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 All 5.0 5.0 0.0 5.0 5.0 5.0 5.0 5.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Oil 5.8 8.1 5.3 6.2 8.2 4.2 7.2 4.5 4.5 5.0 5.4 4.3 7.2 3.0 0.8 5.4 3.4 2.0 0.6 0.1 7.6 0.3 10.2 Nonoil 3.7 5.0 5.0 4.5 4.8 5.1 4.9 4.3 2.4 0.1 5.5 3.1 7.1 1.0 0.4 5.5 1.1 0.8 0.1 0.2 0.1 0.1 10.3 Manufactures 5.6 8.1 1.6 0.0 9.7 8.8 9.8 2.4 0.0 9.1 8.5 2.5 0.1 1.8 Overall trade restrictiveness trade Overall 19.6 21.5 18.1 37.9 17.5 12.7 18.3 10.8 55.9 Agriculture 5.8 8.0 5.3 6.2 8.2 4.2 7.1 4.5 4.5 4.9 5.4 4.3 7.2 3.0 0.8 5.4 3.4 2.0 0.6 0.1 7.3 0.3 All 10.2 : Staff estimates using tariff data for 2008 and latest official NTB data. 2008 and latest for data using tariff estimates : Staff EAS excl China EAS excl India India SAS excl LAC SSA ECA HICs China MENA GCC oil exporters Other oil exporters Oil importers Oil importers w/ Oil importers GCC links Oil importers w/ Oil importers EU links Maghreb Algeria Egypt, Arab Rep. Egypt, Arab Jordan Lebanon Morocco Oman Saudi Arabia Tunisia Exporting country

Trade restrictiveness in GCC oil exporters, 2008 (in percent) in GCC oil exporters, restrictiveness A9: Trade Table Source

110 Statistical Annex 0.0 0.0 0.0 0.0 0.0 1.5 Oil 57.9 57.9 57.9 57.9 57.9 57.9 57.9 57.9 57.9 57.9 57.9 57.9 57.9 57.9 57.9 57.9 57.9 5.7 11.3 31.9 23.2 34.8 54.3 18.5 18.9 25.8 27.1 28.0 28.7 27.9 30.8 30.3 31.4 28.6 35.4 54.7 28.4 28.4 16.9 16.7 Nonoil 6.1 6.9 11.9 25.7 22.1 35.8 13.4 26.3 11.3 21.3 26.7 25.1 27.7 24.7 27.0 25.6 28.8 29.1 32.1 17.8 27.8 23.3 14.2 Manufactures 3.8 1.1 50.2 28.8 64.7 16.0 32.1 44.9 41.5 72.3 71.5 83.3 71.5 18.8 12.8 95.1 90.8 76.6 85.7 95.9 26.4 23.8 115.7 Agriculture Ad-valorem equivalents (AVEs) of NTBs (AVEs) equivalents Ad-valorem 5.7 7.7 All 31.9 23.2 54.3 18.5 18.9 25.8 27.1 28.0 27.9 11.3 30.8 31.5 28.6 34.8 28.9 30.3 35.4 54.7 28.5 28.5 16.0 0.0 0.0 0.0 0.0 0.2 0.6 Oil 22.3 22.3 22.3 22.3 22.3 22.3 22.3 22.3 22.3 22.3 22.3 22.3 22.3 22.3 22.3 22.3 22.3 8.2 9.7 3.4 7.6 0.5 7.5 0.5 4.8 13.5 12.8 22.1 16.7 14.9 11.5 12.1 13.6 15.3 12.4 14.5 12.3 13.5 20.3 11.9 Nonoil 8.7 3.1 9.1 7.3 0.2 7.3 0.3 4.7 11.8 11.9 11.5 10.4 14.7 10.8 11.4 12.8 15.0 11.7 14.1 11.2 12.3 14.4 10.8 Tariffs Manufactures 8.1 6.9 8.3 4.8 0.2 4.1 18.5 24.1 17.5 26.2 25.8 22.6 22.0 21.7 20.2 27.8 24.1 28.8 26.5 28.5 30.0 28.3 25.8 Agriculture 8.2 9.7 3.4 7.7 0.5 7.5 0.3 4.6 All 13.5 13.6 12.8 22.1 16.7 14.9 11.5 12.1 15.3 12.4 14.5 12.3 13.5 20.3 11.9 0.0 0.0 0.0 0.0 0.2 2.0 Oil 80.3 80.3 80.3 80.3 80.3 80.3 80.3 80.3 80.3 80.3 80.3 80.3 80.3 80.3 80.3 80.3 80.3 6.3 45.5 44.3 36.0 49.3 62.5 40.6 35.6 35.5 42.0 39.5 39.9 14.8 46.7 41.0 36.4 42.6 48.9 74.9 35.8 40.3 17.4 21.5 Nonoil 6.3 7.3 39.8 37.4 34.1 49.9 22.1 35.5 22.9 31.7 41.4 36.0 36.1 15.0 43.8 40.8 35.1 36.8 44.4 32.2 35.1 34.1 18.9 Manufactures 5.9 Overall trade restrictiveness trade Overall 68.7 46.3 36.9 72.7 42.2 57.8 51.9 64.1 94.2 93.2 12.2 91.7 46.6 26.6 28.0 107.4 123.9 117.3 105.1 145.7 113.9 121.7 Agriculture 6.3 8.0 All 44.4 45.5 36.0 49.3 62.5 40.6 35.7 35.5 42.0 39.6 36.6 40.0 14.8 42.7 46.8 41.1 48.9 74.9 36.0 40.4 20.5 : Staff estimates using tariff data for 2008 and latest official NTB data. 2008 and latest for data using tariff estimates : Staff Oil importers w/ Oil importers GCC links EAS excl China EAS excl India India SAS excl LAC SSA ECA HICs China MENA GCC oil exporters Other oil exporters Oil importers w/ Oil importers EU links Rep. Egypt, Arab Jordan Lebanon Morocco Oman Saudi Arabia Tunisia Saudi Arabia Tunisia Exporting country

Trade restrictiveness in developing oil exporters, 2008 (in percent) oil exporters, in developing restrictiveness A10: Trade Table Source

111 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report 0.0 0.0 0.0 0.0 0.0 0.0 Oil 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 10.7 18.0 15.7 26.9 20.6 12.7 26.9 24.4 22.6 24.5 16.2 22.5 24.4 18.0 20.9 22.2 21.5 13.3 42.5 47.6 21.4 20.0 17.7 Nonoil 9.2 7.1 7.2 7.2 13.4 17.6 11.6 23.1 23.9 21.3 20.2 14.0 18.6 23.9 11.5 22.1 15.4 10.8 32.4 15.3 15.7 15.1 15.9 Manufactures 11.3 18.1 19.6 41.8 29.1 28.0 30.6 46.8 27.8 29.4 28.8 29.3 46.8 18.2 26.2 25.5 40.3 10.3 63.0 64.8 27.3 20.4 21.1 Agriculture Ad-valorem equivalents (AVEs) of NTBs (AVEs) equivalents Ad-valorem 9.7 7.5 7.5 All 15.0 25.4 20.6 12.7 24.8 24.0 21.9 22.6 16.2 21.1 24.0 12.6 22.2 20.6 10.7 39.4 47.6 21.4 16.9 17.7 0.0 0.2 0.0 5.3 0.0 0.1 8.4 5.3 2.8 6.7 0.1 6.7 5.3 0.2 0.4 4.5 7.8 0.0 9.3 Oil 14.9 10.0 28.0 14.0 0.1 0.4 3.0 9.9 0.9 0.6 2.7 3.3 3.4 2.9 0.7 2.4 3.3 0.4 1.7 6.9 4.4 7.5 12.4 10.4 11.7 13.7 12.3 Nonoil 0.1 0.3 0.4 9.3 1.2 0.5 2.1 2.9 2.8 2.2 0.7 1.8 2.9 0.3 0.9 9.3 6.6 3.6 8.4 8.3 12.2 13.2 12.2 Tariffs Manufactures 0.2 0.1 9.9 0.3 2.4 6.5 8.9 6.1 0.8 5.3 0.6 4.7 9.8 9.0 6.6 10.0 71.0 71.0 20.1 13.4 13.4 14.2 12.4 Agriculture 0.1 0.3 2.9 9.6 0.9 0.6 3.1 3.4 3.4 3.2 0.7 2.6 3.4 0.3 1.2 7.1 4.8 7.8 All 12.4 10.2 11.7 13.7 12.3 0.0 0.2 0.0 5.3 0.0 0.1 8.4 5.3 2.8 6.7 0.1 6.7 5.3 0.2 0.4 4.5 7.8 0.0 9.3 Oil 14.9 10.0 28.0 14.0 10.8 18.4 18.7 36.8 21.5 13.3 29.6 27.7 26.0 27.4 16.9 24.9 27.7 18.4 22.5 34.6 31.9 20.2 46.9 59.3 35.1 27.5 30.0 Nonoil 9.2 7.4 7.4 13.9 16.6 18.8 12.1 25.2 26.7 24.1 22.4 14.7 20.5 26.7 12.4 34.3 24.7 17.4 36.0 23.6 29.0 23.5 28.1 Manufactures Overall trade restrictiveness trade Overall 11.4 18.2 29.6 51.6 29.3 30.4 37.2 36.7 35.4 29.6 34.6 18.7 30.9 45.5 53.7 20.0 72.1 78.3 41.4 27.0 33.5 117.8 117.8 Agriculture 9.8 7.7 7.8 All 17.9 35.0 21.5 13.3 28.0 27.4 25.3 25.8 16.9 23.8 27.4 13.8 34.6 30.7 17.8 44.3 59.3 35.1 24.6 30.0 : Staff estimates using tariff data for 2008 and latest official NTB data. 2008 and latest for data using tariff estimates : Staff Tunisia Saudi Arabia Oman Morocco Lebanon Jordan Egypt, Arab Rep. Egypt, Arab Algeria Maghreb Oil importers w/ Oil importers EU links Oil importers w/ Oil importers GCC links Oil importers Other oil exporters GCC oil exporters MENA China HICs ECA SSA LAC SAS excl India SAS excl India EAS excl China EAS excl Exporting country

Trade restrictiveness in oil importers, 2008 (in percent) in oil importers, restrictiveness A11: Trade Table Source

112 Statistical Annex 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Oil 9.4 3.2 3.2 7.0 16.3 13.3 42.7 16.7 16.4 36.2 36.1 32.6 32.5 13.2 13.4 23.5 14.1 17.3 34.2 18.0 12.1 14.4 12.0 Nonoil 6.2 3.5 4.3 3.2 7.7 3.2 3.6 5.2 8.2 2.8 8.9 17.0 16.4 21.4 37.9 35.6 32.1 12.8 10.3 16.4 17.8 20.3 13.6 Manufactures 6.3 6.7 6.1 18.5 19.0 48.7 12.3 33.4 86.9 30.8 33.4 45.7 30.6 14.4 86.9 18.8 26.3 44.9 40.5 40.8 36.8 16.4 15.6 Agriculture Ad-valorem equivalents (AVEs) of NTBs (AVEs) equivalents Ad-valorem 7.3 4.5 9.4 3.2 3.2 4.6 5.5 All 15.1 42.7 16.4 36.1 24.3 35.0 13.2 31.7 12.3 11.8 17.3 34.2 18.0 12.1 14.4 11.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.5 7.0 3.4 0.0 0.0 5.4 Oil 12.5 21.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.4 0.1 0.0 0.0 0.0 1.4 0.0 0.0 5.7 4.8 8.4 8.7 5.4 8.4 5.4 13.9 Nonoil 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.4 0.1 0.0 0.0 0.0 1.4 0.0 0.0 5.4 5.9 8.3 5.9 1.5 7.6 5.9 11.5 Tariffs Manufactures 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.5 3.3 9.9 7.9 15.7 15.7 11.2 10.1 15.6 10.2 Agriculture 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.4 0.1 0.0 0.0 0.0 1.4 0.0 0.0 5.5 8.4 5.3 8.7 5.4 8.4 6.5 All 13.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.5 7.0 3.4 0.0 0.0 5.4 Oil 12.5 21.6 9.4 4.6 4.6 16.3 13.3 16.7 42.7 16.4 36.2 32.7 36.1 13.2 32.5 13.4 23.5 19.9 25.7 11.8 42.9 23.3 26.0 22.8 17.4 Nonoil 6.2 3.5 4.3 4.5 7.8 4.5 3.6 4.3 16.4 17.0 21.4 37.9 35.6 12.8 32.1 10.3 13.7 24.7 11.1 23.7 31.8 21.2 14.7 Manufactures 6.3 Overall trade restrictiveness trade Overall 18.5 19.0 12.3 48.7 33.4 30.8 45.7 33.4 14.4 30.6 18.8 26.3 51.4 51.7 10.0 50.6 46.9 21.8 26.6 23.5 102.6 102.6 Agriculture 7.3 4.5 9.4 4.6 4.6 4.6 All 15.1 42.7 16.4 36.1 24.4 35.0 13.2 31.7 12.3 17.3 25.7 10.8 42.9 23.3 26.0 17.7 22.8 : Staff estimates using tariff data for 2008 and latest official NTB data. 2008 and latest for data using tariff estimates : Staff Tunisia Saudi Arabia Oman Morocco Lebanon Egypt, Arab Rep. Egypt, Arab Jordan Algeria Maghreb Oil importers w/ Oil importers EU links Oil importers w/ Oil importers GCC links Oil importers Other oil exporters GCC oil exporters MENA HICs China ECA LAC SSA SAS excl India SAS excl India EAS excl China EAS excl Exporting country

Trade restrictiveness in oil importers with GCC links, 2008 (in percent) in oil importers restrictiveness A12: Trade Table Source

113 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Oil 9.9 20.3 10.2 23.3 18.2 14.9 13.8 24.5 11.0 22.1 13.0 17.6 24.5 20.2 19.6 23.8 14.8 23.6 44.9 50.0 22.3 32.7 18.7 Nonoil 9.4 5.7 3.1 5.0 8.0 9.4 10.0 15.6 11.2 13.8 23.9 21.8 14.4 23.9 12.2 24.0 12.1 18.3 34.2 14.9 16.7 12.0 16.7 Manufactures 15.3 10.8 53.2 34.3 29.0 15.5 46.8 30.2 24.4 21.1 27.6 47.1 46.8 16.3 26.0 19.3 11.6 39.7 68.1 69.4 21.6 66.2 22.3 Agriculture Ad-valorem equivalents (AVEs) of NTBs (AVEs) equivalents Ad-valorem 9.5 8.1 9.6 9.5 All 10.2 23.3 16.7 14.9 13.8 24.1 21.7 11.9 17.6 24.1 12.8 23.8 12.0 23.6 41.4 50.0 18.3 32.7 18.7 0.3 0.0 0.0 5.3 0.0 5.3 5.3 8.7 8.5 5.3 8.5 5.3 5.3 0.3 0.7 8.0 4.6 8.1 0.0 Oil 26.1 10.0 32.9 27.9 0.6 0.1 5.4 1.5 0.8 7.6 3.3 3.5 6.3 1.1 4.6 3.3 0.6 2.5 7.4 4.3 8.1 15.3 13.7 11.7 12.2 13.4 13.6 Nonoil 0.4 0.1 0.8 1.8 0.6 5.0 2.9 2.9 4.4 1.0 3.3 2.9 0.4 1.4 6.7 3.7 8.7 9.0 10.8 13.4 10.9 14.6 13.9 Tariffs Manufactures 0.6 0.2 0.5 8.0 1.7 2.3 8.8 6.3 23.0 20.4 20.4 71.0 12.2 13.6 11.9 71.0 11.8 23.7 14.3 12.1 14.1 11.5 13.0 Agriculture 0.4 0.1 1.5 5.4 0.8 7.8 3.4 3.6 6.5 1.1 5.0 0.5 3.4 1.9 7.5 4.8 8.1 All 14.5 13.7 11.7 12.2 13.4 13.6 0.3 0.0 0.0 5.3 0.0 5.3 8.7 5.3 5.3 8.5 5.3 8.5 0.3 5.3 0.7 4.6 8.0 8.1 0.0 Oil 26.1 10.0 32.9 27.9 20.8 10.3 24.9 33.5 20.3 14.6 17.5 27.8 25.7 17.2 18.7 17.7 20.8 27.8 22.1 35.4 37.5 22.2 49.2 30.4 46.1 62.2 32.3 Nonoil 9.8 8.1 9.3 9.8 10.0 17.4 16.5 12.0 14.4 26.8 24.7 15.4 11.3 26.8 13.5 29.2 37.3 18.8 38.0 25.7 26.6 23.6 30.6 Manufactures Overall trade restrictiveness trade Overall 11.0 15.8 53.7 54.7 52.0 23.5 50.6 33.3 38.0 48.8 39.5 18.6 37.8 54.0 43.0 23.7 76.9 27.9 77.7 83.6 35.3 117.8 117.8 Agriculture 9.9 9.9 All 10.3 24.9 31.1 20.3 14.6 15.9 27.5 25.3 16.1 18.7 16.8 27.5 14.7 35.3 37.5 19.5 46.2 26.4 46.1 62.2 32.3 : Staff estimates using tariff data for 2008 and latest official NTB data. 2008 and latest for data using tariff estimates : Staff Saudi Arabia Tunisia Lebanon Morocco Oman Jordan Egypt, Arab Rep. Egypt, Arab Algeria Maghreb Oil importers w/ Oil importers EU links Oil importers w/ Oil importers GCC links Oil importers GCC oil exporters Other oil exporters MENA HICs China ECA SSA India India SAS excl LAC EAS excl China EAS excl Exporting country

Trade restrictiveness in oil importers with EU links, 2008 (in percent) in oil importers restrictiveness A13: Trade Table Source

114 Statistical Annex Oil 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.4 4.2 5.6 6.2 4.7 4.8 4.3 4.2 1.0 0.3 6.8 5.0 7.1 5.7 0.3 7.0 8.2 1.0 0.5 1.1 3.6 14.8 10.2 Nonoil 3.8 2.9 1.9 0.6 2.4 2.8 4.0 0.5 0.1 0.0 2.5 5.0 2.2 0.3 0.0 4.4 8.4 0.2 1.1 0.0 0.1 0.6 14.6 Manufactures 1.5 5.8 5.3 6.2 3.6 0.7 21.6 12.3 17.2 23.1 35.0 17.3 19.6 15.5 20.8 15.3 26.9 29.1 33.6 15.3 14.2 34.2 33.5 Agriculture Ad-valorem equivalents (AVEs) of NTBs (AVEs) equivalents Ad-valorem 5.9 3.9 4.8 4.2 3.0 4.4 4.3 1.2 0.2 0.1 5.9 5.0 6.0 2.6 0.1 5.3 8.2 1.0 9.9 0.2 0.2 3.0 All 14.8 0.6 1.5 3.6 0.2 0.1 0.3 0.5 0.8 0.5 0.6 0.2 0.6 1.3 0.6 0.2 0.2 0.8 3.3 0.0 0.5 0.7 0.6 0.2 Oil 2.3 3.8 2.5 1.7 2.0 1.4 2.8 1.0 0.6 3.1 0.1 1.4 1.3 1.5 1.0 0.1 1.9 2.1 0.2 0.9 0.9 0.6 1.7 Nonoil 2.0 1.4 2.5 0.5 1.1 0.7 1.3 0.5 0.6 2.6 0.2 0.5 0.6 0.5 0.2 0.2 1.0 1.0 0.0 0.2 0.8 0.6 0.2 Tariffs Manufactures 3.7 2.5 7.8 4.0 8.6 5.0 0.9 1.5 6.3 6.8 6.2 5.8 1.5 7.1 1.0 2.7 1.2 0.8 19.7 15.1 18.6 16.3 17.7 Agriculture 2.2 3.5 2.5 1.5 1.4 1.0 2.7 3.1 0.7 0.6 0.2 1.3 1.3 1.3 0.6 0.2 1.6 2.1 0.2 0.8 0.8 0.6 1.5 All 1.5 0.6 3.6 0.2 0.1 0.3 0.5 0.8 0.5 0.6 0.2 0.6 1.3 0.6 0.2 0.2 0.8 3.3 0.0 0.5 0.7 0.6 0.2 Oil 6.4 7.3 8.2 6.1 7.6 7.4 5.2 1.6 0.4 8.2 6.3 8.5 6.7 0.4 8.9 1.2 1.4 1.7 5.3 10.2 17.3 10.3 11.0 Nonoil 4.9 5.2 2.4 1.6 3.1 4.1 6.6 1.0 0.7 0.2 3.1 5.6 2.7 0.5 0.2 5.4 9.5 0.2 1.2 0.8 0.7 0.8 17.1 Manufactures 2.4 7.2 4.7 1.6 Overall trade restrictiveness trade Overall 16.0 19.7 41.3 30.9 39.0 25.9 34.7 34.0 25.8 16.8 33.2 12.7 35.4 39.4 16.8 21.3 21.5 36.9 51.1 Agriculture 6.1 9.4 6.3 5.6 4.0 7.1 7.4 1.9 0.7 0.3 7.2 6.3 7.3 3.2 0.3 7.0 1.2 1.0 0.7 4.5 All 17.2 10.3 10.7 : Staff estimates using tariff data for 2008 and latest official NTB data. 2008 and latest for data using tariff estimates : Staff : The estimations exclude quotas on manufactured exports from Algeria, Morocco, Tunisia, Lebanon, Jordan, and Egypt to the EU as these countries have FTAs with EU. FTAs have the EU as these countries and Egypt to Lebanon, Jordan, Tunisia, Algeria, Morocco, from exports on manufactured quotas exclude : The estimations India India SAS excl EAS excl China EAS excl LAC SSA ECA HICs China MENA GCC oil exporters Other oil exporters Oil importers w/ Oil importers GCC links w/ Oil importers EU links Maghreb Algeria Rep. Egypt, Arab Jordan Lebanon Morocco Oman Saudi Arabia Tunisia Exporting country

Trade restrictiveness in HICs, 2008 (in percent) restrictiveness A14: Trade Table Source Note

115 Sustaining the Recovery and Looking Beyond – A Regional Economic Developments and Prospects Report Oil 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.9 0.8 0.6 0.5 0.1 0.0 0.0 8.4 0.0 5.1 0.1 5.8 3.6 4.5 6.6 4.6 2.8 2.2 9.5 5.2 10.2 12.7 10.2 Nonoil 0.7 0.9 0.0 0.5 0.1 6.8 0.0 4.0 6.8 4.9 0.1 5.6 0.5 0.7 6.4 4.2 3.0 7.3 1.7 6.3 4.9 10.0 11.1 Manufactures 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 5.9 0.0 0.1 0.3 4.4 10.8 17.6 16.2 Agriculture Ad-valorem equivalents (AVEs) of NTBs (AVEs) equivalents Ad-valorem 0.7 0.8 0.0 0.5 0.1 6.8 0.0 4.0 6.8 4.9 0.1 5.5 0.5 0.7 6.3 4.6 2.8 9.1 1.6 6.1 4.9 All 10.2 11.0 Oil 0.1 0.0 0.0 0.0 5.6 0.0 0.0 0.0 0.0 0.0 0.0 5.6 0.0 5.6 0.1 0.1 3.0 5.0 0.0 1.8 0.0 1.7 5.2 0.1 5.0 2.3 5.4 1.1 2.8 0.5 2.6 0.5 4.8 5.7 4.3 3.3 5.2 3.0 1.9 3.4 8.0 19.5 15.0 15.2 10.4 11.5 Nonoil 0.1 1.0 0.1 5.3 1.1 2.8 0.0 7.1 2.6 0.0 0.7 1.0 3.6 3.3 4.8 2.3 1.2 2.6 7.8 20.2 14.9 10.1 11.1 Tariffs Manufactures 5.4 0.2 5.3 5.4 9.3 4.4 9.6 5.0 5.5 7.3 9.0 12.1 11.6 21.1 18.7 13.6 14.0 13.0 13.0 13.8 14.0 11.8 12.8 Agriculture 0.1 1.0 0.1 5.4 2.8 1.1 0.0 2.6 7.2 0.0 0.7 4.2 3.3 5.2 2.8 1.4 2.8 7.8 1.0 All 19.5 15.0 10.2 11.1 Oil 0.0 0.0 0.1 0.0 0.0 5.6 0.0 0.0 0.0 5.6 0.0 5.6 0.0 0.0 0.1 3.0 5.0 0.0 1.8 0.0 1.7 5.2 0.1 9.0 2.9 2.8 1.6 0.5 2.7 0.5 8.4 7.9 8.0 4.1 20.3 10.3 15.1 18.1 15.6 17.3 23.7 10.9 13.2 12.9 13.2 10.2 Nonoil 1.7 0.1 2.8 1.6 6.8 2.7 6.8 1.2 7.5 7.8 2.9 8.9 1.7 9.6 21.1 10.0 15.0 16.4 15.0 16.6 11.1 10.0 12.7 Manufactures 5.4 5.3 5.4 9.6 5.6 7.6 Overall trade restrictiveness trade Overall 11.0 12.1 11.8 21.1 13.6 18.7 14.0 13.0 13.8 13.0 14.0 11.8 22.0 12.8 15.2 21.2 13.3 Agriculture 1.7 0.1 2.8 1.6 6.8 2.7 6.8 1.2 7.9 8.0 3.0 8.9 1.7 All 20.3 10.3 15.1 16.4 15.0 16.6 11.1 12.0 12.7 10.5 : Staff estimates using tariff data for 2008 and latest official NTB data. official NTB data. 2008 and latest for data using tariff estimates : Staff : The estimates exclude restrictive NTBs imposed by China on natural gas imports from Algeria. These are extremely high and distort the average protection rates faced by developing oil by developing faced rates protection the average high and distort extremely Algeria. These are gas imports from NTBs imposed by China on natural restrictive exclude : The estimates Tunisia Tunisia Saudi Arabia Morocco Oman Egypt, Arab Rep. Egypt, Arab Jordan Lebanon Algeria Oil importers w/ Oil importers GCC links w/ Oil importers EU links Maghreb Other oil exporters GCC oil exporters India India SAS excl LAC SSA ECA HICs MENA EAS excl China EAS excl Exporting country Trade restrictiveness in China, 2008 (in percent) restrictiveness A15: Trade Table Source Note in China. exporters

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119 Sustaining the Recovery and Looking Beyond Middle East and North Africa Region Middle East and North Africa Region Economic Developments & Prospects, January 2011 Economic Developments & Prospects, January 2011 Sustaining the Recovery and Looking Beyond

Sustaining the Recovery and Looking Beyond

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