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1. Economic Development of the Arab Countries: The Basic Issues

Editor(s):
Saíd El-Naggar
Published Date:
May 1993
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The prospects for Arab economic development in the nineties is a highly complex subject that does not easily lend itself to generalizations valid for all countries. As is well known, the countries of the region vary greatly. For the oil countries, development will depend to a very large extent on what happens in the oil markets. Despite intensive efforts to diversify their economies, these countries are still heavily dependent on oil as the major source of income. Other countries may not be so heavily dependent on oil, but a good part of their growth is derived from the oil countries through workers’ remittances, development assistance, and Arab investment and trade. Still another group of countries is only remotely affected by the fortunes of the oil countries and is more concerned with developments in the export markets for their principal products. In addition to variations based on oil resources, Arab countries differ a great deal with respect to levels of development, per capita incomes, whether they export or import capital, and the extent to which they follow inward-looking or export-oriented development strategies. These variations complicate the task of assessing development prospects in the current decade.

Nevertheless, it is possible to identify a set of issues that are likely to be of major importance in the context of growth and development. These include the issues covered by the papers presented at the seminar: economic reform, investment and capital flows, intra-Arab labor movements, the environment, the impact of the European Community (EC), and the development of human resources. Obviously this is not the only set of issues that affects Arab economic development in the nineties. Others could have been added to the list. Oil, for instance, is highly indicated. But oil has already been the subject of many seminars. A repeat performance would not have added much that is not already known to researchers and policymakers. At the same time a line has to be drawn on the number of issues that can fruitfully be dealt with in the time assigned for the seminar.

The goals of Arab economic development in the nineties are not difficult to define. As with all developing countries, Arab economic development should satisfy the following terms and conditions:

  • It should achieve a rate of growth of GDP exceeding that of the population to ensure a steady improvement in living standards.
  • It should provide gainful employment for all comers to the labor market and reduce the stock of existing unemployment, both open and disguised.
  • It should be consistent with the imperatives of price stability and external balance.
  • It should protect the environment so as to safeguard the quality of life of the present generation as well as the opportunities for development of future generations.
  • It should spread the fruits of growth to all segments of society and reduce income gaps both within and among Arab countries.

Development can be said to be successful if it satisfies these terms and conditions. On the basis of these criteria Arab development over the last three decades was less than satisfactory. More precisely, the picture that emerges is something of a mixed bag. A handful of countries were able to make big strides in modernization, institution building, and mobilization of resources, with impressive growth in both quantity and quality. The majority, however, was less successful. The extent to which they will improve their performance depends on their capacity to meet the challenges of the nineties.

Economic Reform

The first issue taken up in the seminar is economic reform. The nature and policy implications of the challenge are set out in the paper by Mohamed El-Erian and Shamsuddin Tareq entitled “Economic Reform in the Arab Countries: A Review of Structural Issues.” The issue was put by the authors in the following terms:

While the nature, extent, and implications of the policy challenge differ among individual Arab economies, several aspects are common to a large number of countries in the region. In this context this paper has attempted to identify a “core” group of required structural reforms. Broadly speaking, this group includes the need to rationalize a large public enterprise sector so as to concentrate its efforts in those areas where it performs most effectively and that are warranted by market failures; strengthen the structure of government budgets to render them more elastic and increase their developmental impact; improve the mobilization and allocation of loanable funds from domestic and external sectors; enhance the institutional framework for private investment and production activities; and rationalize the external trade and payments system. To be successful, these policies will need to be supported by prudent demand management, as well as an open international trading system and, for some countries, the provision of timely external financial assistance. Moreover, given the relatively low-income status of some Arab countries and their rapid population growth, the paper has referred to the importance of policies to protect the most vulnerable segments of the population during the adjustment and reform program as part of a more comprehensive approach to poverty alleviation and environmental sustainability.

It is difficult to take issue with the basic thrust of the arguments as enunciated by El-Erian and Tareq. However, a number of points were highlighted in the discussion. It was noted that in many countries that undertook to implement a comprehensive reform package in agreement with the International Monetary Fund and the World Bank, structural reform proved to be much more difficult than macroeconomic adjustment. To illustrate, little progress was made in the area of privatization and liberalization of trade regimes. In contrast, reform yielded fairly quick results as regards inflationary pressures, stabilization of the exchange rate, and budget and balance of payments deficits. The fact that adjustment of the real economy is lagging considerably behind that of the money economy, could, it was pointed out, jeopardize the whole process of reform. There is need to address this problem at both the technical and political levels. With privatization, for instance, the process was hampered by lack of expertise on the techniques of evaluation of assets, financial restructuring of heavily indebted public companies, and on how to deal effectively and equitably with the problem of redundant labor. At the political level it was pointed out that there is need to address opposition from groups whose interests are, or are perceived to be, adversely affected by privatization.

A number of participants felt reform programs supported by the IMF and the World Bank do not adequately address the impact on vulnerable and low-income groups. It was recognized that this aspect of reform programs needs to be strengthened through poverty alleviation measures, better targeting of food subsidies, and the establishment of special funds endowed with sufficient resources to help the most vulnerable groups.

It was further pointed out that developing countries are being pressured to liberalize their trade regimes whereas the industrial countries, which are far more able to shoulder the burden of adjustment, are adopting a protectionist stance. In assessing the merit of this argument it is important to keep in mind that the goal of reform programs is by no means the attainment of completely free trade in developing countries; rather it is to shift from a highly restrictive trade regime that all but eliminates foreign competition to moderate protectionist policies. This shift is realized through the elimination of import bans except for health or security reasons, reduction of extensive quantitative restrictions and other nontariff barriers, and greater reliance on price-based protectionist measures. Once liberalization is so defined, it becomes more or less symmetrical with current trade policies in most industrial countries. The argument that asymmetry largely depends on what happens in the Uruguay Round of Trade Negotiations was also mentioned. If successful, there is every reason to expect a more open international trading system all round. Otherwise, a reversal of policies toward a greater measure of protectionism will probably occur in both developed and developing countries.

Another issue that was raised in the discussion revolved around the role of the state in a market-based economy. The fear was expressed that liberalization, privatization, and deregulation are sometimes construed to mean a virtual absence of the state from the economic arena. The fear is clearly groundless. What is at issue in reform programs is not the principle of state intervention but its nature and extent. Under the dirigiste-socialist model that characterized development strategy for a long time, the state became directly involved in the production of goods and services. As a consequence the public sector came to dominate an extremely wide range of activities, which could not possibly be justified on developmental grounds. The reverse side of the coin was the total absence of the private sector from all important fields. At the same time public sector companies (or most of them) were operating at a low level of efficiency, which impaired the capacity of the economy to grow at rates commensurate with the rate of population growth. Going hand in hand with a dominant public sector was an overregulation of economic activities, which stifled initiative, suppressed innovation, and invited mismanagement and corruption. Under these circumstances it is hardly surprising that reform programs call for privatization and deregulation of the economy. The state is required to withdraw from the production of goods and services except in cases of market failure. But that leaves a great number of functions for the state to perform. Under a market-based economy the state is the organizer, the regulator, and the arbiter. In addition to the traditional functions in defense, security, and the judiciary, the government has an important role to play in education, health, housing, poverty alleviation, and the provision of a social safety net for vulnerable groups. No less important is the regulatory function, including prevention and control of monopolies and monopolistic practices as well as the setting and enforcing of standards in numerous fields.

Finally, it was recognized that the process of economic reform is neither costless nor painless. But a proper assessment of the negative impact of adjustment cannot be made without reference to the situation that would have obtained without adjustment. Before implementation of a reform program the situation is typically characterized by accelerating, if not galloping, inflation, a high rate of unemployment, unsustainable budget and external deficits, and loss of creditworthiness. The situation would probably have grown worse without the reform program. To judge whether it is worth-while to swallow the bitter pill of reform, the point of reference should not be an ideal situation free from inflation, unemployment, and deficits. If that were so, there would have been no reason to seek the help of the Bretton Woods institutions. A proper comparison should be between the post-reform situation and a hypothetical one, which is the one that would have prevailed without adjustment measures. It is most likely that the post-reform situation would be decidedly superior on all counts.

Investment and Capital Flows

The issue of investment and capital flows is covered by two papers, one by Ghassan El-Rifai, “Investment Policies and Major Determinants of Capital Flows to Arab Countries,” the other by Ahmed Abisourour, “Arab Capital Flows: Recent Trends and Policy Implications.” It should be noted that the two papers are different as to the scope of inquiry. El-Rifai’s paper is devoted to foreign direct investment (FDI) to the exclusion of other types of financial flows. Abisourour’s paper is broader in scope, as it covers not only FDI but also portfolio investment in both equities and bonds as well as long-term and short-term capital flows. With respect to FDI, which is common to both papers, there is a wide discrepancy between the figures on the flow to the Arab countries. The discrepancy is hardly surprising in view of differences on the source of data, the number of Arab countries covered, and on whether oil investments and intra-Arab flows are included or not.

The starting point in El-Rifai’s paper is the growing importance of FDI as a source of external financing for developing countries. Over the last decade, it was pointed out, FDI has turned from being a rather small and marginal source of foreign capital in developing countries to becoming a large and significant source replacing the more traditional ones such as official grants and loans and commercial bank borrowing. According to the latest World Bank statistics, net long-term resource flows from industrialized to developing countries increased only marginally, from an annual average of $68.6 billion during 1982–86 to $72.9 billion during 1987–91. During the same periods, FDI to developing countries more than doubled, from under $10 billion, to nearly $23 billion. As a result, the share of FDI in the total net resource flow increased from 14.3 percent to 31.5 percent.

In spite of a significant expansion, the Arab countries were not particularly successful in attracting FDI. This conclusion is substantiated by data on seven Arab countries: Algeria, Egypt, Jordan, Morocco, Oman, Saudi Arabia, and Tunisia. Excluding investments by foreign oil companies, the inflow of FDI to these countries during 1986–90 averaged about $4.7 per capita per annum in 1990 prices, compared with $5.5 for developing countries as a whole. Among major regions, only Africa south of the Sahara had a lower FDI during this period ($2.7), whereas in South America it was substantially higher ($18–19 per capita).

As is to be expected, performance in attracting FDI varied considerably among the seven countries. Average annual FDI inflow ranged from only $0.30 in Algeria to nearly $14 in Saudi Arabia. The two best performers among the seven countries (Saudi Arabia and Tunisia) were successful enough to join the group of 20 top performing developing countries.

One of the important conclusions the author reaches is that for a country to attract meaningful amounts of FDI the investment climate has to be attractive, stable, and predictable. With respect to stability and predictability, the author points out that “FDI is not like a water tap that a government can turn on and off at its convenience; it is more like a fruit tree that needs to be tended and watered carefully for years before it will bear fruit. If in the meantime, the owner loses interest, the young tree will die and the process will have to be started all over again.” As to attractiveness, empirical investigation shows that a sound macroeconomic environment is perhaps the most important single factor in the calculations of the foreign investor. High rates of inflation, an overvalued currency, sudden and sharp devaluation, administratively fixed interest rates, or a weak banking system are not the kinds of conditions that attract foreign investment. Some countries, including Arab countries, have tried to compensate for the absence of sound macroeconomic policies by offering special incentives and exemptions. Not infrequently, foreign investors are exempt from all forms of taxes, duties, and fees for periods extending up to 10 and sometimes 20 years. Experience shows, however, that the quality of macroeconomic policies is far more important than tax holidays and the like. Some countries that offer very few or no special incentives have nevertheless succeeded in attracting a considerable volume of foreign investment. In this category belong countries such as Hong Kong, Singapore, Taiwan Province of China, and the Republic of Korea. In contrast a large number of developing countries have failed to attract any significant amount of FDI despite excessively generous incentives and privileges. In both categories the operative factor was the quality of macroeconomic policies.

It should be remembered, however, that until recently, FDI was viewed with suspicion in many parts of the developing world. For most of the period after World War II developing countries resorted to foreign borrowing rather than foreign direct investment to meet their external financing requirements. Newly independent countries that had just emerged from a long period of colonial domination were anxious to maintain control over their own economic and political affairs. Foreign direct investment being in the majority of cases closely associated with multinational corporations was perceived to be incompatible with this goal. There was also a tendency to discount the presumed advantages of FDI compared with other forms of financing. Multinational corporations were frequently not interested in developing export-oriented industries but rather in displacing national producers as suppliers of the local market behind high walls of protection. The impact on employment was seen as minimal in view of the capital-intensive techniques imported from the home country; the transfer of technology was deemed to be a mirage, as multinational corporations tend to be highly secretive about their techniques of production while the training of local personnel was kept within the narrowest possible limits. Equally important was the concern about the distribution of benefits between the host country and the investing corporations in terms of tax revenue, value added, and reinvestment of profits. The prevailing view in many developing countries was that through dubious methods and practices such as transfer pricing, multinational corporations arrogate to themselves the lion’s share of the benefits from investment.

But it is important to realize that in contrast to the sixties and seventies, the decade of the eighties saw a vigorous revival of interest in FDI. Underlying the change in attitude toward FDI are recent developments in the international financial system. The debt crisis of the early eighties underscored the serious limitations of heavy dependence on foreign borrowing. A heavy debt-service burden combined with variable interest rates on a large proportion of their debt made the heavily indebted countries particularly vulnerable to external shocks. A protracted recession in the industrial countries, in addition to the high cost of energy and the collapse of the prices of principal export commodities, have conspired to undermine their payment capacity. The result was a debt crisis of unprecedented severity, which inflicted untold hardships on the indebted countries and jeopardized their growth prospects—not to mention the integrity of the international credit system.

In contrast, remittances of dividends and profits on FDI are much more responsive to changes in business conditions. By their very nature they increase with prosperity and fall with recession. They are more in tune with changes in the payment capacity of host countries. More important, the debt crisis has had a profound impact on the international sources of finance available to developing countries. Commercial bank lending, which played such a significant role in the seventies, has all but dried up except in the context of adjustment programs supported by the International Monetary Fund or with ironclad collateral and guarantees. Other sources of finance have also become subject to severe constraints. The tight budgetary situation in most industrial countries has been a serious obstacle to expanding bilateral sources of finance whether concessional or nonconcessional. Also, recent developments in the former Soviet Union and the socialist countries of Central and Eastern Europe are certain to give rise to an enormous increase in the demand for financing from the industrial countries, which could easily impinge on the resources available to developing countries.

Such dim prospects for alternative sources of finance have heightened the importance of FDI and induced a significant change in the attitude of developing countries. Multinational corporations made an effort to establish standards for acceptable business conduct. They have become more sensitive to the concerns of host countries and more flexible in the particular forms of investment. There is now greater willingness to accept innovative arrangements such as joint ventures, turnkey projects, build-own-transfer (BOT) arrangements, and licensing agreements rather than the traditional wholly owned subsidiaries. Developing countries, on the other hand, became more experienced and confident in dealing with multinationals. Moreover, they can, if they so wish, receive technical assistance and advice in negotiations with foreign investors from institutions established within the framework of the United Nations and its specialized agencies such as the International Finance Corporation (IFC), the UN Center on Transnational Corporations, and the Investment Promotion Service (IPS) of the United Nations Industrial Development Organization (UNIDO).

This is not to argue in favor of an open-door policy for FDI with no criteria or control. Every country has the right and duty to regulate and make transparent the conditions under which foreign investment is admitted. Some industries may well be closed to foreign investment for security or strategic considerations. Others may be subject to a minimum participation of national capital. Foreign investors may also be required to report to the capital market authority the size of their holdings in any single company once a certain threshold is exceeded.

But certain institutional requirements need to be satisfied if the Arab countries are to compete effectively for foreign investment, whether direct or portfolio. In his paper on Arab capital flows, Abisourour refers to the need to develop a securities market, fairly complete with a range of financial institutions and competent intermediaries as well as a well-structured regulatory framework. Also, it is necessary to establish appropriate accounting standards and financial disclosure rules to improve credibility in the information available from enterprises. Furthermore, it is essential to ensure the protection of minority investors and to promote a more balanced financial system between equity investment and bank deposits. In many Arab countries interest income from bank deposits is tax free while dividends and profits are subject to high rates of income or corporate taxes. Such discriminatory treatment creates a bias by investors in favor of bank deposits to the detriment of equity investment. Finally, attempts should be made to establish country funds that invest in a large number of companies in a specific country or group of countries. As pointed out by Abisourour, this seems to be a logical first step, as the task of selecting companies in which investments are to be made is left to the professional managers, whereas investors themselves do not need to have detailed knowledge of the various companies in each country. Regional or multi-country funds could also prove instrumental in encouraging inter-Arab capital flows.

Inter-Arab Labor Movements

It is recognized that inter-Arab labor movements have played an important role in the economic development of both labor-surplus and labor-deficit countries. From the viewpoint of the former, migrant labor has been a significant source of foreign exchange earnings, particularly since the increase in oil prices in 1973. Workers’ remittances reached their peak in the early eighties when the annual oil revenue of the Gulf Cooperation Council (GCC) countries hit a high of over $250 billion. According to a study by the International Monetary Fund, workers’ remittances amounted to $10 billion annually from 1980 to 1984 and to $6 billion thereafter. In his paper on inter-Arab labor movements, Tayseer Abdel Jaber puts the combined workers’ remittances to four labor-sending countries during the eighties at some $57.7 billion, of which $32 billion went to Egypt, $11.8 billion to the Republic of Yemen, $9.9 billion to Jordan, and $4 billion to the Syrian Arab Republic. Being based on remittances reported by banks in the labor-sending countries, these figures significantly underestimate the size of the flow. A good part of the transfer was effected outside the banking system whereas another part took the form of goods exported from the host countries. When most of the labor-sending countries were suffering from a severe foreign exchange shortage, a certain proportion of imports was financed by expatriates. If account is taken of these types of transfers the amount of workers’ remittances would be some 30–50 percent more than the figures reported in balance of payments statistics. Thus adjusted, remittances would easily constitute the primary source of foreign exchange earnings for most of the labor-sending Arab countries. As for the labor-receiving countries the period since the advent of the oil boom in the early seventies has been one of intensive development, which could not have been sustained without calling on the labor resources—both skilled and unskilled—of the labor-surplus countries.

Although inter-Arab labor flows played an important role in the last two decades, it is far from certain that they will continue on the same scale in the years to come. The Middle East war dealt a heavy blow to this particular form of inter-Arab cooperation. According to Abdel Jaber, as many as 1.5 million Arab workers were forced to return to their home countries as a result of the Iraqi occupation of Kuwait on August 2, 1990 and the subsequent outbreak of hostilities. It is estimated that 732,000 Yemeni workers had to return, mostly from Saudi Arabia. Other returnees included 250,000 Palestinian/Jordanian workers returning mostly from Kuwait, and 390,000 Egyptians returning mostly from Iraq. Other Arab workers, though in much smaller numbers, included Sudanese, Syrians, and Lebanese. It is highly doubtful that movement of inter-Arab labor will be restored in the foreseeable future to the situation that prevailed before the war. Apart from strained political relations between the GCC countries and some of the labor-sending countries caused by the war, there are long-term trends that are likely to have a negative impact on inter-Arab labor movement.

During the seventies and eighties the demand for labor by the oil countries was driven by the requirements of large-scale construction and infrastructure projects as well as by institution-building at all levels. Most of these projects tend to be highly labor intensive, which meant demand for large numbers of skilled and unskilled workers and for professionals of various categories. This is no longer so. Practically all the oil countries are past that stage. Most of the large infrastructure projects have been completed, and institutions have already been set up. At the present stage of their development the process of capital formation is mostly taking place in the industrial, agricultural, and service sectors. Compared with the earlier stage, projects are less labor intensive and more skill oriented. This is likely to affect both the quantity and composition of the demand for labor. A given increase of GDP will probably be associated with a smaller number of wage earners and a larger component of technical and professional skills.

At the same time a process of substitution of nationals for expatriates was under way well before the war. The process was given impetus at the managerial and professional levels with the steady increase in the number and variety of highly qualified nationals. In addition, there appears to be a new concern about the national identity of some of the thinly populated oil countries. Before the war the proportion of nonnationals in the total labor force was high enough to call into question the original identity of the country. Estimates by Abdel Jaber put the number of nonnationals in the GCC countries in 1975 at 1.1 million or about 46 percent of the total labor force. In 1990 the figure rose to 5.2 million, representing 67.7 percent. According to the same source the percentage was considerably higher in some individual countries: 92 percent in Qatar, 89 percent in the United Arab Emirates, and 86 percent in Kuwait. Following the departure of large numbers of expatriates during and after the war, some of the GCC countries are apparently reassessing their labor importation policies to forestall the recurrence of the previous situation in which nationals were perceived to be overwhelmed by nonnationals. This is particularly true in Kuwait and, to a lesser extent, in Saudi Arabia, where only a small number of former expatriates are allowed back and more stringent requirements are enforced with respect to the issue of new work permits.

The demand for Arab labor is further eroded by competition from Asian labor. Available fragmentary data point to a significant decline in the share of Arab labor. It is believed that the trend, observed during the first half of the eighties, continued during the rest of the decade. It should be realized, however, that competition between the two groups is limited to certain types of employment. Some jobs, such as nursing and domestic service, are not coveted by Arab labor, whereas others, such as those in which knowledge of the Arabic language is necessary, are not available to Asian labor. For jobs open to both groups, preference for Asian employment is largely a function of wage differentials. According to Abdel Jaber, the wage paid to an Arab worker in the private sector in institutions employing 100 employees and more in Saudi Arabia was about twice that paid to an Asian worker in 1987 and rose to three times as much in 1989.

In spite of the setback caused by the war and some adverse long-term trends, the inter-Arab labor movement will continue to play an important role in the economic development of both labor-surplus and labor-deficit countries. The experience of the last two decades points clearly to the need to improve the conditions of work—especially of unskilled workers in the private sector—and to eliminate certain practices that seem to be inconsistent with international and inter-Arab conventions. This is the joint responsibility of both labor-sending and labor-receiving countries.

Environment and Development

Recent years have witnessed a growing concern about the interaction between the environment and development—more precisely about the extent to which both environmental constraints may put a limit on development and development may cause environmental damage and degradation to the point of jeopardizing the quality of life as well as the opportunities for growth for present and future generations. The nature and policy implications of this relationship and their relevance to the Arab world are explored in the paper by Mostafa Tolba, “Environmental Policies and Sustainable Development in the Arab World.” The author sums up the increased concern about environment in the following terms:

The studies by the Club of Rome, the establishment of the United Nations Environment Program (UNEP) following the Stockholm conference of 1972, the reports of the Willy Brandt, the Olaf Palme, and the Gro Harlem Brundtland Commissions, the Charter of Nature, the two World Conservation Strategies, the Global Strategy for the Conservation of Biodiversity, and several other efforts were all steps toward responding to these [environmental] problems and toward establishing a firm link between the environment and development and toward giving real operational meaning to the term sustainable development that was coined by the Governing Council of UNEP 17 years ago. All this culminated in the Rio Conference on Environment and Development in June 1992. Agenda 21 was adopted at that conference by almost all governments of the world, including more than 100 heads of state and government. Agenda 21 puts under one roof the whole effort of the past 20 years. It covers almost every aspect of human endeavor and puts it within the context of what makes it environmentally sound and sustainable. Most of Agenda 21 is directed to governments, and it sets the tone for what needs to be done.

A number of points were raised in the discussion of this issue:

  • That the environment is an important part of human patrimony, on the same footing as man-made capital, and should not be treated as a free resource. This is not to say that natural resources have a sanctity and that human society is an intruder to be prevented from using the environment for its own benefit. What it does mean is that the exploitation of the biosphere should be based on full and prior knowledge of its real cost to society. It also means that excessive use of the environment could cause irreparable damage to growth and development prospects.
  • That the real cost of exploiting nonrenewable natural resources is not fully reflected in market prices as it does not take into account the fact that, after a certain number of years, income derived from this source will cease to exist. By the same token, the national income of countries, which is heavily dependent on this kind of resource, does not represent real income in its entirety as it includes a certain element that is more akin to the sale of capital assets. There can be an income illusion similar to the money illusion under inflationary conditions. The real wealth of some countries may be significantly less than is suggested by conventional national accounts. This calls for reconsideration of the methodology by which the national income is calculated.The point at issue is of particular significance in the context of the Arab region, where a major part of income is derived from oil and natural gas, both of which are nonrenewable resources. The degree by which the conventional methods of accounting overstate the level of income varies greatly from one country to another depending on several factors, including the relative importance of nonrenewable resources in income structure, the length of time to elapse before depletion, and the rate at which the future stream of income is discounted. The 1992 World Development Report of the World Bank refers to a pilot study on Mexico. Although it includes some renewable as well as nonrenewable resources, it is indicative of the orders of magnitude. When an adjustment was made for the depletion of oil, forests, and ground-water, Mexico’s net national product was almost 7 percent lower. A further adjustment for the costs of avoiding environmental degradation, particularly air and water pollution and soil erosion, brought the national product down by another 7 percent. In his comment on Tolba’s paper, El-Serafy, whose contribution in the field is widely recognized, refers to formidable efforts to change the United Nations System of National Accounts so that environmental change is incorporated in economic measurement of income and wealth. This initiative was sustained for many years by UNEP under Tolba’s leadership, jointly with the World Bank, on whose behalf El-Serafy played an important role. The new United Nations System of National Accounts, to be enunciated later this year, will contain a set of national satellite accounts in which adjustment to the national accounts can be made to reflect environmental degradation.
  • That economic activity—whether in the form of production or consumption—is sometimes associated with environmental pollution. In most cases the cost of pollution falls, not on the polluter, but on a third party. These cases are known as external diseconomies. The polluter pays principle (PPP) is intended to internalize the external diseconomies so that the cost of pollution is carried by the polluter. PPP is supposed to serve a double purpose: to penalize the culprit as a matter of equity and to equalize the private with the social cost of production or consumption. The equalization of private and social costs, it should be pointed out, is a condition for an optimum allocation of resources wherever externalities are involved. The principle has been widely accepted as a guide for environmental policymaking by governments and aid agencies. It is, however, capable of two interpretations: as requiring polluters to pay only the costs of pollution control and cleanups (standard PPP) or, in addition, to compensate citizens for the damages they suffer from pollution (extended PPP)—an interpretation that gives citizens an entitlement to a clean environment. Also, where environmental effects spill over national borders and jurisdictions, it may be necessary to pay polluting or resource-using countries to cooperate in implementing cost-effective solutions.The World Development Report mentions the example of biodiversity losses owing to tropical deforestation and sulfur dioxide emissions that contribute to acid rain outside the originating country. These inducements or side-payments convert the polluter pays principle into the victim pays principle, but without them there may be little or no incentive to cooperate in improving environmental quality.
  • That there is a close link between population growth, poverty, and environmental degradation. At the global level world population is now growing by about 1.7 percent a year. During 1990–2030 the world’s population is likely to grow by 3.7 billion—an increase much greater than in any previous generation. Ninety percent of this increase will occur in developing countries. Over the next four decades sub-Saharan Africa’s population is expected to rise from 500 million to 1.5 billion, Asia’s from 3.1 billion to 5.1 billion, Latin America from 450 million to 750 million, and the Arab world from 200 million to 350 million. Unless there is a change in current policies and practices, such a rate of population growth is likely to result in damage to the environment. A larger population means a greater volume of economic activity, a more intensive demand on land and other natural resources, higher levels of air and water pollution, more encroachment on biodiversity, and more wastes produced, thereby threatening local health conditions and taxing the earth’s assimilative capacity.Environmental problems are exacerbated by the fact that most of the increase in population will be living in urban centers. According to the World Bank, most people in 1990 lived in rural areas. By the year 2030 the opposite will be true: urban populations will be twice the size of rural populations. Developing country cities as a group will grow by 160 percent over this period, whereas rural populations will grow by only 10 percent. By the year 2000 it is estimated that there will be 21 cities in the world with more than 10 million inhabitants, and 17 of them will be in developing countries. Urban congestion and degradation of the environment go hand in hand. Given the limited capacity of most developing countries in running huge cities, air, water, and noise pollution, in addition to sprawling slums, are likely to characterize the urban environment.Although high rates of population growth pose a serious threat to the the environment at the global level, this is not necessarily so at the country level. A great deal depends on the size of the population in relation to available resources. In the Arab region there is a world of difference between the demographic situation in countries like Saudi Arabia or Kuwait on the one hand and that in a country like Egypt on the other. In view of the rich endowment of the first two countries in oil resources and the relatively small populations, there is still much room for growth before the carrying capacity of land and biosphere is reached. The situation is quite different in Egypt where the population of Cairo alone is well over that of the other two countries combined.Along with population pressure, poverty is perhaps the worst enemy of the environment. Poor families often lack the resources to avoid degrading their environment. If they live in rural areas they are driven to cultivate poor and semiarid land where soil degradation is rapid. Struggling on the edge of subsistence with fragile and limited resources and preoccupied with day-to-day survival, they are in no position to invest as much as is needed to protect the environment. The situation is even worse in urban areas where the poor are crowded in slums and shantytowns that lack the essential sanitary facilities. For these reasons poverty alleviation becomes not only a moral imperative but a prerequisite for sustainable development.
  • That there is a wide gap between environmental concepts, which are widely accepted, and their translation into workable policies. This is as true of the Arab countries as it is of developing countries at large. Policies have lagged considerably behind concepts, and implementation behind policies. This is due to the fact that environmental policies frequently clash with deeply entrenched vested interests. Stopping environmental damage often involves taking rights away from people who have long been accustomed to polluting and exploiting resources without being held accountable for their actions. Not infrequently the biggest polluter is the government itself or the public sector. As producers of goods and services, public sector companies are interested only in reducing their cost even if that means shifting the cost of pollution to others. As a regulator with responsibility to prevent and control pollution, the government issues laws and regulations and sets health and technical standards. However, its own public companies are often the first to break the laws and ignore the standards with impunity. In this respect there is a basic conflict of interest between government involvement in the production of goods and services and its function as protector of the environment. It is not by accident that the worst cases of pollution are found in the former Soviet Union and in the former socialist countries of Eastern Europe. In the words of the World Development Report. “Being both poacher and gamekeeper does not work.”There is no simple solution to the gap between intentions and performance. The problem needs to be attacked on all fronts. There is need for a greater separation between the regulator and the regulated, better information about the high cost of environmental degradation, a stronger commitment to the goal of environmental protection, more realistic standards together with better-equipped and more effective enforcement agencies, and, finally, greater cooperation at both the regional and international levels.

Human Resources Development

The term human development is used by Stephen Heyneman to mean improvement in the quality of the population through education, health, nutrition, housing, a social safety net, and meeting basic needs. Special emphasis is, however, placed on basic education as the most important element in the development of human resources. Enhancing the quality of human capital, it is well recognized, is essential for both efficiency and equity. By improving the productivity of labor, countries are made more competitive in the home market as well as internationally. This is particularly important in a world economy that has become characterized by a high degree of interdependence, spectacular technological progress, and giant trading blocs in Europe and North America. To gain a foothold in today’s world economy requires a literate, well-trained, and educated labor force. Recent studies of factors underlying the success story of the four tigers (the Republic of Korea, Hong Kong, Taiwan Province of China, and Singapore) indicate that a high literacy rate together with high-quality education have been one of the major determinants. Development of human resources is also important from the viewpoint of bridging the gap between rich and poor. Experience shows that one of the most effective ways of reducing income inequality is by raising the productivity of the poor by providing better access to basic services.

It is important to note that Heyneman’s study does not cover all Arab countries. It covers Algeria, Egypt, Jordan, Tunisia, Yemen, and, occasionally, Iraq, the Syrian Arab Republic, Lebanon, and the Libyan Arab Jamahiriya. These are referred to as MENA countries, using the World Bank jargon for countries in the Middle East and North Africa. GCC Arab countries are not included in the study, nor are some other countries that belong geographically to the Middle East and North Africa. When the term Arab region is used in the context of this study it is in this special and limited sense. However, generalizations made with respect to this sample of countries are probably valid for the rest of the region except for the rich GCC countries.

Development of human resources in these countries is influenced by a variety of factors. The dynamics of demographic change, in particular, play a major role. Most countries of the region share the common characteristic of being in the low mortality/high fertility transitional phase, with total fertility rates between 4 and 6 per woman. Despite recent dramatic declines in fertility, the overall rate of population growth is not likely to fall below 2 percent in the foreseeable future. According to Heyneman, no country’s population will be stationary (replacement-level fertility and constant-age composition) before about the year 2025. As a result the age structure of the population displays an exceptionally high dependency ratio. Approximately one person in three is of school age. The combination of high rates of population growth and high dependency ratios imposes a heavy burden in terms of providing basic services and infrastructural facilities.

Another common feature pointed out by the author is that MENA countries invest relatively heavily, but achieve only modest returns, in human development. The proportion of public expenditure directed at human development—amounting on average to about 6–8 percent of GDP—is in fact comparable to the average in Organization for Economic Cooperation and Development (OECD) countries. However, the proportion of military expenditure is strikingly higher for MENA countries as a whole—about 15 percent of GDP compared with 6 percent in countries of the OECD—suggesting that a decline in regional tensions could have a significant impact on human resource investments in the aggregate. The problem with human development expenditure in the Arab region is not the overall average but its intersectoral distribution, illustrated by the distribution of public expenditures between primary education on the one hand and higher education on the other. Morocco, for instance, spends about 14 percent more on an elementary school student than it spends on a student in tertiary education, Jordan spends about 12 percent, Tunisia, 8 percent. In contrast, Japan spends the same amount on a primary school student as on a student in tertiary education, whereas the average for OECD countries is about 49 percent.

This is not the only kind of imbalance, however, in the allocation of resources devoted to human development. There are imbalances with respect to the distribution of facilities between rural and urban areas, capital and recurrent expenditure, salaries and equipment, and finally, between girls and boys as to availability of educational facilities. These shortcomings are not peculiar to the Arab region. They tend to be characteristic of the situation in most developing countries and are ascribable to a combination of financial, political, and, in some instances, cultural pressures. The result has been a poor rate of return on investments in human development as reflected in the state of some social indicators. As pointed out by the author, only two countries—Jordan and Iraq—have brought adult illiteracy below 40 percent. In some countries the illiteracy rate is well over 50 percent, with a much higher rate among females. A number of countries have failed to attain universal primary education. Only Jordan, Tunisia, and Syria have infant mortality below 50 per thousand.

A third characteristic of human development in the region is the existence of wide gaps in the fulfillment of basic needs and in the social safety net. In theory, most countries have an extensive network of social services, including guaranteed employment, unlimited free access to basic education, free higher education, and free preventive and curative medical services in addition to subsidization of basic consumers’ goods and services as well as essential elements of a social safety net. However, the resources needed to fund such a far-flung welfare system exceed by far the financial capacity of the state. As a consequence certain types of services were more or less left unattended while others were maintained at less than satisfactory levels.

The fourth characteristic is the heavy involvement of the state in the provision of human development services. The overwhelming proportion of schools and hospitals are owned and managed by the public sector. Private provision of social services is still rare, except for general practitioners and some educational establishments catering to the urban elites. In some countries the situation has recently been moving toward a greater role for the private sector. This is particularly so in countries that entered into agreements with the Bretton Woods institutions aimed at liberalization, privatization, and deregulation of the economy. But progress has been rather slow in the face of deep-rooted tradition of statism especially in the area of social services. University education in Egypt is a case in point. For a long time university education has been virtually a state monopoly. Except for the American University, all establishments of higher education belong to the Government and are almost completely financed from the state budget. Recently, attempts have been launched to establish two private universities. So far, however, little has been accomplished and the final result of these efforts is still very much in question.

The extent to which the Arab countries are able to improve the condition of human development services will largely depend on the availability of financial resources, better allocation among and within sectors, wider application of the cost-recovery principle, a precise definition of target groups that need special help from the government, and a larger role for the private sector. In some countries a fair amount of resources could be redirected from the military budget to human resource development once tensions in the region are reduced and peace is established. No less important is the implementation of comprehensive reform programs designed to eliminate rigidities and distortions and to ensure more efficient utilization of resources. With higher growth rates, the economy can generate enough resources to support human development at an acceptable level.

European Economic Integration

As the foremost trading partner, the European Community (EC) is of special importance for the growth and development of the Arab countries. This is particularly so for the Maghreb countries where the share of the Community in their export structure is more than 50 percent. But it is also true with respect to other countries that depend on the European market for an average of about 30 percent of their exports. On the import side, the EC occupies a position of more or less equal importance.

The same cannot be said with respect to the relative position of the Arab countries in the foreign trade of the EC. This is hardly surprising, since the EC accounts for more than one-fourth of total world exports and imports. Nevertheless, the share of the Arab market in the total exports of the EC averaged about 12.5 percent for 1988—91. As to imports by the EC from the Arab countries, oil represents the main component of this trade flow. Excluding oil, the share of the Arab countries would be a modest 2.5 percent of total imports. However, trade is not the only channel through which the EC has an impact on the growth of the Arab countries. It figures prominently in financial flows, development assistance, and labor migration.

In his paper, “European Economic Integration and the Arab Countries,” Rolf Langhammer offers an analysis of the possible effect of recent developments in the EC on the Arab countries. He rightly refers to the difficulty of assessing the impact because a process of integration deepening has recently coincided with one of integration widening. Integration deepening means the completion of the single market program—or EC-1992—involving the removal of all barriers to intra-Community trade as well as all sorts of border controls and liberalization of factor movements. At the same time a process of integration widening has been under way in two directions. The first is the establishment of the so-called European Economic Space (EES), which extended the free movement of goods and services to member countries of the European Free Trade Association (EFTA) without the benefit of a common external tariff. In the author’s view, this is not particularly significant. Much more important from the viewpoint of assessing the impact on developing countries, including the Arab countries, is integration widening through the so-called Europe Agreements negotiated in December 1991 with the former Czech and Slovak Federal Republic, Poland, and Hungary. These are association agreements that could eventually lead to full membership. In the interim they provide for basically free trade arrangements in manufactures to be achieved over ten years. Concessions are given first by the EC to be followed by concessions by the other party.

In addition to integration deepening and integration widening, the position of Arab countries in the European market is defined by special preferential arrangements. In 1976 and 1977, the EC concluded cooperation agreements with the Maghreb and Mashreq countries, respectively. These agreements offered free access to EC markets for manufactured goods and some special provisions for selected agricultural products on a nonreciprocal basis, plus financial aid and improved social security for Maghreb and Mashreq workers in the Community.

Taking all these factors into account, the author does not seem to be particularly sanguine about the prospects for the Arab countries in EC markets. His conclusions can be summed up as follows:

  • During the three years preceding EC-1992 the Arab countries failed to capture a larger share in EC imports even though it was a period of rapid economic growth. Gains in trade shares in specific sectors like textiles, clothing, and agricultural goods could not compensate for the weak competitive position of the Arab countries in labor-intensive products—the most rapidly growing import sector. Similarly, the gains scored by the Maghreb countries in non-oil imports were offset by the losses suffered by the members of the Organization of the Petroleum Exporting Countries (OPEC). The poor performance of the Arab countries is explained by the author in terms of both demand and supply factors. On the demand side, the second enlargement of the EC by the accession of some countries (Portugal, Greece, and Spain) whose export structure is similar to that of Arab suppliers was responsible for a certain measure of trade diversion. On the supply side, trade performance was adversely affected by macroeconomic distortions and imbalances.
  • As to the probable impact of EC-1992, the author bases his conclusions on studies by Michael Davenport and Sheila Page. Following the Vinerian tradition, a distinction is made between trade diversion caused by changes in relative prices of different suppliers and trade creation arising from higher growth rates. The basic finding is that Arab suppliers of primary commodities are likely to gain through the trade creation effect. But this again is going to be outweighed by the losses endured by exporters of manufactured goods through unfavorable trade diversion effects. The outlook for textiles and clothing under the Multifiber Arrangement (MFA) is anything but optimistic. The protection extended to Mediterranean suppliers is likely to be eroded once national quotas are dropped in the context of EC-1992. Their problem in the EC market will be compounded if MFA is completely phased out.
  • With respect to foreign direct investment, it is concluded that the Arab countries neither succeeded in attracting FDI from EC member states nor have they suffered a significant outflow in that direction. According to the author, the poor performance of the Arab countries in this sector is consonant with the general observation that developing countries have increasingly been bypassed by OECD investors except for a very few newly industrializing countries. It is rightly pointed out that the major portion of FDI tends to flow toward the industrial countries on account of important advantages in terms of macroeconomic stability and low transaction costs.
  • In the relationship between the Maghreb countries and the EC, labor migration has always played an important role. It is estimated that the number of migrants from the Maghreb countries residing in the EC amounted in 1989 to some 1.9 million, or about one-fourth of total migrants from all origins. It is argued that, given the widening income gaps between Europe and its southern and eastern neighbors, and the rapidly rising number of migrants and refugees, it is most likely that defensive measures to control and contain migration will be one of the early effects of EC integration.

Looking at the picture as a whole it is important to keep in mind that the assessment of the EC impact on trade, investment, and migration is subject to a high degree of uncertainty. Indeed the author himself was careful to refer to this difficulty at the outset of his study. The conclusions outlined above could be significantly modified by a host of factors. Most of the countries in the Arab region, for instance, are undertaking comprehensive reform programs with far-reaching implications for international competitiveness and macroeconomic stability. Also, the last decade has witnessed a rising trend toward the regionalization of the world economy. It is not clear how far the dynamics of the situation will give impetus to parallel integration efforts in the Arab region. Presently, all integration schemes except for the Gulf Cooperation Council are either dormant or ineffective. But there is no reason to rule out a revival of interest in closer inter-Arab cooperation that could have a profound impact on Arab-European relations. Finally, the Uruguay Round of Trade Negotiations is still hanging in the balance. Whether it succeeds or fails could exercise a powerful influence on the international trading system as well as on the world economy. Any one of these factors, or a combination of them, could upset conclusions reached under quite different assumptions.

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