Mustapha K. Nabli

The World Bank

Presentation at the 7th AFD/EUDN Annual Conference

European Development Research Network

December 9, 2009; Paris, France

A sense of optimism in Europe despite weak economic conditions◦ Fall of the Berlin Wall and end of the Cold War◦ Prospects of a Unified Europe and larger market

A sense pessimism in the South-MED ◦ Regional/International conflicts and wars◦ Declining oil revenue with heavy oil dependence

and collapse in growth, most countries got into some macroeconomic crisis

◦ Rapid growth in labor force and unemployment in part due to delayed demographic transition

◦ Decline in poverty stalls

Falling oil prices dampen growth

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

55.00

60.00

65.00

70.00

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Crude oil price (LHS) GDP growth rate (weighted average)

Crude Oil prices and GDP growth

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

MENA-Emerging MENA - oil rich MENA-GCC MENA-13

1971-1980

1981-1990

1991-2000

2001-2007

GDP per Capita growth (Weighted Average)

Poor growth performance in 1980s

0

5

10

15

20

25

30

Jordan(1983-1995-2004)

Egypt (1984-1995-2005)

Morocco (1987-1995-2005)

Tunisia(1984-1995-2005)

Algeria (1989-1995-2005)

Syria (1984-1995-2003)

Iran(1986-1996-2005)

Kuwait (1983-1995-2004)

mid-1980s mid-1990s mid2000s

Unemployment, total (% of total labor force)

International poverty incidence, under $2/day, $ PPP 2005

Non-convergence of economic and social development outcomes

Poverty reduction continues to stall Levels of life satisfaction low.

EU-Med: Portugal, Spain, Greece EU new member states: Czech Republic,

Poland, Hungary; MENA emerging: Jordan, Egypt, Morocco,

Tunisia; MENA oil-rich, labor abundant: Algeria,

Syria, and Iran MENA-GCC: Bahrain, Kuwait, Oman, Qatar,

Saudi Arabia, and UAE.

EU-Med outperforms MENA withthe exception of GCC

Mixed picture in terms of convergence of social indicators

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

GDP per capita (relative to EU-Med)

EU new members Emerging (MENA) Oil-rich (MENA) MENA-GCC EU-Med

0.60

0.80

1.00

1.20

1.40

1.60

1990 1992 1994 1996 1998 2000

Average years of schooling - Barro Lee 2000 (relative to EU-Med)

EU new members Emerging (MENA) Oil-rich (MENA) MENA-GCC EU-Med

International poverty incidence, under $2/day, $ PPP 2005

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

2000

2006

Life Satisfaction Levels (World Values Surveys)

Low global trade and capital integration? Weak and slow domestic reforms? Weak response of the private sector to

reforms?

Positive effects of financial/trade liberalization in Europe and weakening trade ties between MENA and EU

Declining trade/investment flows in MENA until 2000s

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Capital Inflows & Outflows-to-GDP ratio Trade-to-GDP ratio

Trade-to-GDP ratio (EU-Med) Trade-to-GDP ratio (EU new members)

Trade and Capital flows (EU-27)

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Fuel imports share Non-fuel imports share (RHS) Non-fuel imports share - MENA-Emerging (RHS)

MENA-13's share in EU-27's fuel and non-fuel imports

Reform area

Resource-poor

Labor-abundant

Resource-rich

Labor-

abundant

Resource-rich

Labor-importing

Macroeconomic

Environment

0

(Lebanon: -2)

+1 +2

Trade Policies 0 -1

(Algeria: +1)

+1

Regulatory Environment 0

(Jordan: +1, Egypt:

-2)

-1 +2

Financial Sector +1

( Lebanon: +2)

-2

+2

Weight of public sector 0 -2 -2

Quality of public

administration

+1

(Egypt: -1)

-2 +1

Private investment as a share of GDP

Reform episodes and private investment response

0

5

10

15

20

t-15 t-10 t-5 Reform t+5 t+10

5-year time intervals.Pr

ivate

inve

stmen

t (%

GDP)

Latin America

South Asia

East Asia

MENA

0

5

10

15

20

t-15 t-10 t-5 Reform t+5 t+10

5-year time intervals.Pr

ivate

inve

stmen

t (%

GDP)

Latin America

South Asia

East Asia

MENA

Private investment rates 2006 versus 1990 (percent of GDP)

0

10

20

30

40

Oman

Egyp

t

UAE

Syria

Yeme

n

Tuni

sia

Jord

an

Alge

ria

Leba

non Iran

Mor

occo

Polan

d

Turk

ey

Thai

land

Mala

ysia

Chin

a

1990

2006

(1) Is it political instability and heightened political tensions? ◦ Continued Israeli-Palestinian conflict ◦ Conflicts in Lebanon, Algeria, Iraq, Yemen◦ 9/11 and the aftermathHigh uncertainty and riskHigh cost of doing business

-1.00

-0.50

0.00

0.50

1.00

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Average Polity Index (relative to EU-Med)

EU new members Emerging (MENA) Oil-rich (MENA) MENA-GCC EU-Med

Leading constraints to MENA firms.(simple average of a country's share of firms ranking a constraint as "Major or severe")

47.6%44.9% 43.0% 42.4% 41.4%

33.4% 33.2% 33.1%

27.2% 26.6%23.4%

46%

35%

0%

10%

20%

30%

40%

50%

Mac

roeco

nomi

cun

certai

nty

Tax r

ates

Corru

ption

Acces

s or c

ost o

ffin

ancin

g

Infor

mal/u

nfair

comp

etitio

n

Regu

lator

y poli

cyun

certai

nty

Elect

ricity

Skills

and

educ

ation

Tax a

dmini

strati

on

Acces

s to l

and

Licen

sing/o

pera

ting

perm

its

Custo

ms an

d tra

dereg

ulatio

ns

Lega

l sys

tem /

conf

lict r

esolut

ion

y = -0.2502x + 2.9261R² = 0.0468

y = 0.2902x2 - 2.89x + 4.3825R² = 0.5556

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

-2 0 2 4 6 8 10 12

Net exports of petroleum per worker (000s USD, annual average 1980-2005)

GDP P

er ca

pita (

cons

tant

LCU

) Gro

wth R

ate

Oman

S. Arabia

U.A.E.

Kuwait

y = -0.0148x + 1.4414R² = 0.0013

y = 0.0682x2 - 0.698x + 1.7751R² = 0.2329

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

-2 0 2 4 6 8 10 12 14

Net exports of petroleum per worker (000s USD, annual average 1980-2005)

GDP P

er ca

pita (

cons

tant

LCU

) Gro

wth R

ate

Oman

S. Arabia

Kuwait

Qatar

U.A.E.

y = 0.3082x + 2.4459R² = 0.0478

y = -0.1622x2 + 1.8115x + 1.7908R² = 0.1314

-5.00

0.00

5.00

10.00

15.00

20.00

-2 0 2 4 6 8 10 12

Net exports of petroleum per worker (000s USD, annual average 1980-2005)

GDP

Per

capi

ta (c

onst

ant c

onst

antL

CU) G

row

th R

ate

S. Arabia

Kuwait

y = -0.6453x + 0.0259R² = 0.5085

y = -0.0594x2 - 0.0509x - 0.2645R² = 0.5435

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

-2 0 2 4 6 8 10 12 14

Net exports of petroleum per worker (000s USD, annual average 1980-2005)

GDP P

er ca

pita (

cons

tant

LCU

) Gro

wth R

ate

Oman

S. ArabiaKuwait

Qatar

U.A.E.

1961-1970

1971-1980

1981-1990

1991-2000

Limited success of the model can be inferred from the successive attempts to adapt and change it: ◦ from Barcelona and Euro-Med ◦ to EU Neighborhood Policy ◦ to Union for the Mediterranean

Trade agreements in 1990 Trade agreements in 2008

Morocco

Tunisia

Libya

Egypt

Jordan

Lebanon

WBG

Syria

Algeria

Iraq

Kuwait

Bahrain

Qatar Saudi Arabia

UAE Oman

Yemen

AMU

GCC

MENA

Eastern and South African PTA (COMESA in 1994) (1)

Djibouti Angola, Burundi, Comoros, D.R. Congo, Ethiopia, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Rwanda, Sudan, Swaziland, Tanzania, Uganda, Zambia, Zimbabwe

United States EFTA-4 European Union-12(4)

Mauritania

EFTA (3) Austria Finland Sweden

Bulgaria, Czech Republic, Estonia Hungary, Latvia, Lithuania, Poland Romania, Slovakia, Slovenia

CEE (2)

AMU: Arab Maghreb Union (5) GCC: Gulf Cooperation Council (6) COMESA: Common Market for Eastern and Southern Africa (20) EFTA-4: European Free Trade Association (4), includes Iceland, Switzerland, Norway, and Liechtenstein

Potential complementarities: Declining labor force in Europe vs. Increasing labor force in MENA But the “politics” are opposed

Status quo in education and participation rates: changes in labor force with some or completed secondary

education 2005-2050 (millions)

Significant policy changes*: changes in labor force with

some or completed secondary education, 2005-2050 (millions)

-15

-10

-5

0

5

10

15

2005-2010 2010-2020 2020-2030 2030-2040 2040-2050

EU net decline MENA net increase

-15

-10

-5

0

5

10

15

2005-2010 2010-2020 2020-2030 2030-2040 2040-2050

EU net decline MENA net increase

Replacing people and medium-level skills over time

High degree of heterogeneity and fragmentation in the Euro-Med space in terms of development outcomes and levels of life satisfaction:

◦ Between EU and South-Med/MENA◦ Within MENA between GCC and non-GCC◦ Within non-GCC between emerging and natural

resource dependent countriesThe institutional framework for economic exchange is

highly fragmented, with major fault lines regarding:o agriculture and services tradeo energy tradeo migration and security

The political environment both domestically and regionally remains a big handicap for progress in the South-Med

The instruments used by the EU in its relationship with the South have not been successful in creating a common area of peace and prosperity.