Survey of Economic and Social Developments in the ESCWA Region 2009-2010 United Nations Economic and Social Commission for Western Asia SURVEY OF ECONOMIC AND SOCIAL DEVELOPMENTS IN THE ESCWA REGION 2009-2010 The designations employed and the presentation of the material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the status of any country, territory, city or area, or of its authorities, or concerning the delimitation of its frontiers or boundaries. Mention of company names and commercial products does not imply the endorsement of the United Nations. References have, wherever possible, been verified. Symbols of United Nations documents are composed of capital letters combined with figures. Mention of such a symbol indicates a reference to a United Nations document. E/ESCWA/EDGD/2011/1 ISSN. 0255-5123 ISBN. 978-92-1-128344-0 e-ISBN. 978-92-1-054815-1 11-0036 UNITED NATIONS PUBLICATION Sales No. E.11.II.L.6 SURVEY OF ECONOMIC AND SOCIAL DEVELOPMENTS IN THE ESCWA REGION 2009-2010 PREFACE Preface The 2008 financial crisis of the United States of America, which started in the subprime market, has developed into the most severe global economic crisis since the Great Depression of 1929. What prevented an even more serious downturn was the introduction of unprecedented, coordinated fiscal and monetary stimulus packages in the more developed economies. However, the price tag for the crisis still remains at a record-breaking high. In addition to its severe effects in North America and the European Union countries, the crisis has put pressure on emerging markets worldwide, contributing to fast declines in their stock markets, gross domestic product (GDP) growth rates, oil prices and revenues, commodity exports, portfolio investment, foreign direct investment (FDI), tourism revenues and workers’ remittances. While certain developed countries and a number of large emerging market countries are now showing some signs of recovery, the effect of the crisis on the member countries of the Economic and Social Commission of Western Asia (ESCWA) has not yet fully unfolded. It is possible that the negative economic and social consequences of the crisis, for example on employment, poverty, health, education, gender and growth will be felt for some time to come, especially given that, so far, the link between growth and employment generation and poverty alleviation in ESCWA member countries has remained weak, despite the recent oil boom period and related spectacular GDP growth performance prior to the crisis. Weaknesses in the macroeconomic policies pursued, as well as still weak regional trade and financial integration linkages and heavy dependence on external resources to finance development in ESCWA member countries have channelled the global financial crisis into economies of the ESCWA region, severely undermining recent regional and international efforts to integrate those countries with the rest of the world. Moreover, lower growth prospects in more advanced economies, higher financing costs and a decrease in capital inflows are leading to soaring current account and budget deficits and may constitute further impediments to the sustainability of the public debt of ESCWA member countries and current exchange rate regimes in several of them. Certain ESCWA member countries still suffer from the absence of bond markets, a combination of inadequate financial sector supervision, poor assessment and management of financial risk and the maintenance of fixed exchange rates. These factors, among others, have accentuated the effects of the crisis in the region. Although trade and globalization issues and the integration of financial systems of ESCWA countries with the more mature financial markets of the European Union and the United States were among the main reasons why the effects were felt, it was accentuated by domestic macroeconomic, fiscal, monetary, financial and social issues, notably the lack of economic diversification and heavy reliance on oil exports and revenues for growth and development, persistently high unemployment rates, the existence of poverty and low levels of human development (mainly education, health and gender inequality) and limited fiscal space, due to accumulated public debt, in certain ESCWA member countries. The global financial crisis has directly affected the ESCWA region, via trade and capital flow channels, as well as through declines in world oil prices and revenues. v SURVEY OF ECONOMIC AND SOCIAL DEVELOPMENTS PREFACE IN THE ESCWA REGION 2009-2010 Certain ESCWA member countries have experienced a sharp decline in world demand for their exports and decline in both domestic and international liquidity coupled with other aftershocks of the financial crisis, such as lower oil prices and revenues, have contributed to further macroeconomic imbalances. Non-oil export revenues declined by about US$75 billion between the years 2008 and 2009 in all ESCWA member countries, with related declines in remittances, portfolio and foreign direct investments. Thus, in addition to its temporary impact, the crisis may also cause a widening of the income gap between the more advanced economies and the ESCWA region and may subsequently slow the speed of the integration process. However, the low degree of financial integration with global capital markets achieved so far, limited exposure of the banking system of ESCWA member countries to derivative financial assets and spillover from increased public spending in the Gulf Cooperation Council (GCC) countries have helped prevent substantial fallout from the crisis. The response of ESCWA to the global financial crisis was steadfast. The Damascus Forum on responding to the International Financial Crisis in the ESCWA Region, which was held on 7 May 2009, recommended adopting sustainable fiscal policy for boosting domestic demand; targeting infrastructure, agriculture, industry, health, education, environment and social protection mechanisms; encouraging the provision of liquidity to member countries facing its shortage; enhancing the regulatory framework in the financial sector; promoting greater regional integration, particularly in monetary and financial affairs; encouraging investment of the sovereign wealth funds of ESCWA member countries in the real economy; pursuing diversification to reduce dependency on the oil sector; facilitating intraregional flows of trade in goods and services, people and capital; promoting South-South cooperation; strengthening employment and social protection policies and ensuring more active participation of developing countries in managing the global economy. Given sufficient fiscal space and independent monetary policies, certain ESCWA member countries have relied on monetary and fiscal adjustment measures to dampen the effects of the crisis on the region. A huge build up of foreign exchange reserves prior to the crisis in the less diversified economies L( DEs) during the oil boom period of 2002 to 2008 constituted the first line of defence.T he second line was the introduction of colossal fiscal stimuli packages in LDEs, with potential for further fiscal and monetary interventions when warranted. Where there was exposure to global financial markets, especially in the GCC countries and limited fiscal space as in Lebanon, Jordan, the Sudan and Yemen, monetary authorities had to intervene directly, with the exception of Lebanon, in financial markets, to stabilize money and capital markets and actively protect the financial sector by such measures as capital injections and share purchases. Even though certain ESCWA member countries have recently undertaken some financial reforms and pursued sound macroeconomic policies, the current exogenous financial crisis is disproportionately penalizing them and creating an additional hurdle that will have to be surmounted in the near future, as short-term capital may once again start flowing out of their financial markets back to those that are more mature. Recent financial data indicate that capital outflows have been registered as a result of recent political and social turmoil vi SURVEY OF ECONOMIC AND SOCIAL DEVELOPMENTS IN THE ESCWA REGION 2009-2010 PREFACE in Egypt and Tunisia. ESCWA member countries need to exert further intensive efforts to raise their share of global FDI and portfolio inflows, which have remained relatively low. Measures that could be taken, in addition to adequate macroeconomic policies to respond to the current financial crisis, include the acceleration of South-South economic, financial and trade integration efforts, coupled with enhanced reform programmes and stressing institutional and governance aspects in particular. Moreover, the unstable political environment and past and recent political and social turmoil in Egypt, Lebanon, Palestine, Tunisia and Yemen and the aftermath and implications of the global financial crisis have not been conducive to attracting capital and enhancing and improving the growth performance of ESCWA member countries. Capital accumulation and all types of FDI or portfolio investments have, until now, failed to bring any significant growth benefits to the area. The unstable political environment and conflicts that have plagued the ESCWA region have been a deterrent to investment, capital accumulation and the improvement of labour market conditions. The growth outlook for 2011 remains relatively robust with forecast GDP growth rates averaging 4.2 per cent for the GCC countries