IV. The Next Step Forward
- Mohamed El-Erian, and Susan Fennell
- Published Date:
- November 1997
Despite the improvements in economic prospects in many MENA countries outlined above, much remains to be done in terms of consolidating progress achieved and extending the benefits of macroeconomic stabilization and reform more deeply and widely.
The extent of the challenge facing countries in the region should not be underestimated: there are hurdles that must be overcome and opportunities to be seized.
- First, many countries in the region are attempting to overcame years of economic underperformance, with entrenched vested interests and deep-rooted structural weaknesses.
- Second, the external environment, while relatively favorable to many MENA countries in the past two years, cannot and should not be relied upon to generate the windfall gains recently experienced by some countries
- Third, the world economy is evolving structurally at an accelerating pace, generating large rewards for reforming economies. As a result, MENA countries face a stark choice: they must either move rapidly to restructure their economies so as to participate in the evolving globalization and reap the rewards such a process offers, or maintain the status quo and risk missing out on the potential to generate the wealth-enhancing effects that will bring greater affluence to their people.
- Finally, recent setbacks to the establishment of a comprehensive, just, and durable peace continue to undermine potentially positive region-wide economic activities.
As a result of these factors, the onus of comprehensive adjustment and reform falls squarely on the MENA countries themselves. They must create the conditions for sustainable growth if they are to be able to meet the needs of their rapidly–growing populations.
Given the different starting points of individual MENA economies—in terms of both policies and initial income and wealth conditions—there is no single set of recommendations that fit all countries in the region. However, for presentational purposes—and at the risk of some overgeneralization—it is possible to think of MENA countries as being classified into two groups.
In the first group, we find countries that have advanced in macroeconomic stabilization and structural reforms, and that are being increasingly recognized by domestic, regional, and international investors. These countries must maintain their policy efforts, especially in deepening and widening structural reforms which, in international comparison terms, are still lagging. This is critical if they are to succeed in raising savings and investment rates, improve total factor productivity and, thereby, sustain a high rate of economic growth. This will require, in addition to intensifying the reform efforts outlined above, the move to a second generation of reforms that would further advance the transformation of the role of the state in the economy and increase the transparency of government economic operations.
These countries also face the challenge of “managing their growing success” in an increasingly rewarding but complex world economy. This year’s financial and economic turbulence in Southeast Asia serves as an important reminder of the complexity and stakes of the challenge. The rapid and sizable capital flows that are an important feature (and benefit) of globalization also present countries with a need to maintain a consistently vigilant approach to policymaking. While capital inflows reinforce and reward good policies, policy slippages can generate rapid and destabilizing capital outflows, creating unsustainable exchange rate pressures and exposing weaknesses in the financial system. Countries can also be subject to contagion effects—the transmission to the domestic economy of shocks occurring elsewhere in the international economy.
There are important lessons to be drawn from other countries’ experience with greater integration into the international financial system: there is no room for complacency, even—or perhaps especially—when economic conditions are good. MENA countries will need to manage carefully the risks that accompany the enormous advantages associated with globalization. Diligence in monitoring risks is crucial. In this regard, efforts to increase transparency in financial and government operations and to disseminate to the public timely and comprehensive data on all aspects of the economy will be key to ensuring successful monitoring by both the private and public sectors and to facilitating rapid policy response by the authorities concerned.
Outlined above are the challenges facing those countries that have already progressed down the road of economic reform. For the second group of countries, those that have yet to embark decisively on this journey, the path is even clearer. Determined action is needed in the short term if they are to set a sound foundation for growth and avoid being marginalized in the rapidly globalizing economy. For some countries, the immediate challenge is to reverse unfavorable macroeconomic and debt dynamics. For others, there is a need to tackle longstanding weaknesses in the structural aspects of their economies, starting with the exchange and payments system, the financial sector, and the regulatory structures.10
While the initial adjustment is likely to be difficult, the payoff will be large in terms of providing for the basic needs of, and ensuring employment opportunities for, the rapidly growing populations in these countries. Indeed, these countries should draw encouragement from the experience of other economies in MENA. The speed with which the latter have benefited from improvements in investor sentiment—domestic, regional, and international—provides an important demonstration effect as to what is both possible and desirable.