Next Economic Miracle in the Middle East?

11.04.2016

MENA countries have definitely many crucial ingredients of economic growth – natural resources, human capital, low inequalities and most important – strong state institutions, ensuring low crime and shadow economy rates.

Why some countries grow faster than others? How do we engineer an economic miracle? Economists believe that manufacturing growth is like cooking a good dish—all needed ingredients should be in the right proportion; if only one is under- or overrepresented, the ‘chemistry of growth’ will not happen. Fast economic growth can materialize in practice only if several necessary conditions are met at the same time.

Rapid growth is a complicated process that requires a number of crucial inputs— infrastructure, human capital, relatively low income and wealth inequalities, even land distribution in agrarian countries, strong state institutions, economic stimuli among other things. Once one of these crucial necessary ingredients is missing, the growth just does not take off. Experts talk about ‘binding constraints’ that hold back economic growth; finding these constraints is the task of ‘growth diagnostics’. In some cases, these constraints are associated with the lack of market liberalization, in others, with the lack of state capacity or human capital or infrastructure.

MENA countries have quite a number of needed ingredients of growth. Inequalities in MENA region are lower than in other countries with similar level of economic development. Controlling for many factors (size, population density, per capita income, urbanization, democracy, communist past, government effectiveness index) it turns out that Moslem countries have Gini coefficient of income distribution that are 5 percentage points lower than in other countries.

But the most important advantage of MENA countries that is very often lacking in other parts of developing world is the strength of the state institutions – a crucial prerequisite for stable and strong economic growth. State institutional capacity is defined here as the ability of the state to enforce rules and regulations. Subjective measures of the state capacity – indices of government effectiveness, rule of law, corruptions, etc. – have a number of shortcomings, but there are objective indicators, such as crime rate, murder rate, the share of shadow economy – the ability of the state to enforce its monopoly on violence and monopoly on taxation.

The general rule is that developed countries, East Asia, South Asia and MENA countries have murder rates of 1-10 murders per 100,000 inhabitants and shadow economy of less than 30% of GDP, whereas in Sub Sahara Africa, Latin America and some former Soviet Union republics (Baltics, Belarus, Kazakhstan, Moldova, Russia, Ukraine) the murder rate is higher by the order of magnitude (10-100 murders per 100,000) and the shadow economy is way over 30% of GDP. Economic growth in large regions of the Global South correlates strongly with the murder rate and shadow economy (negative correlation – the higher the murder rate and the shadow economy, the lower is growth). East Asia is ahead of everyone in terms of growth, followed by South Asia and MENA, while Latin America, Sub Sahara Africa and former Soviet Union are falling behind.

In fact, the murder rate and the share of the shadow economy – the objective indicators of the institutional capacity of the state – turn out to be the best institutional predictors of the long term growth rates of GDP per capita. The negative relationship between growth rate and state institutional capacity as measured by the murder rate and the share of shadow economy can be observed with a naked eye at the chart. And countries with high income and wealth inequalities usually have higher murder rate and shadow economy.

In MENA countries these rates in the peacetime were normally in the range of 1 to 5 per 100,000 inhabitants (Algeria, Tunisia, Egypt, Qatar, Oman, Bahrain – less than 1.5). No wonder, such strong institutional capacity contributed to relatively strong economic performance and exceptional increases in life expectancy and educational attainments in recent decades, especially in periods with no wars and civil conflicts. In the postwar period, for over half a century before the Arab Spring, growth rates of per capita GDP in MENA countries were certainly well below that in East Asian tigers and dragons, and a bit below South Asia, but they were higher than in other regions of the Global South – Sub Sahara Africa, Latin America, and former Soviet Union. Three countries of the region – Israel, Oman, and Tunisia – were among 20 fastest growing countries of the world in 1950-2010.

In terms of social progress – education and life expectancy – the achievements of MENA were even more spectacular. Many MENA countries increased their life expectancy greatly in 1960-2010, in most of them it exceeded 70 years (in Russia – 72 years in 2015). Human Development Index (HDI) – an average of calibrated indicators of per capita income, educational levels (enrolment and years of schooling) and life expectancy – increased by 65% in Arab countries in 1970-2010, which is more than in any other region of the world except for East Asia (96%) and South Asia (72%). The increase in life expectancy in 1970-2010 in Arab countries was the highest in the world, whereas the increase in school enrolment and literacy was higher than in all other regions of the world with the exception of Sub Sahara Africa that started at a very low base level.

Out of 22 countries that increased their HDI most in 1980-2010, 6 are Arab countries, 7 are MENA countries and 11 are Moslem countries. And among 10 countries with the greatest increase in HDI in 1970-2010 there are 5 MENA counries (Oman, Saudi Arabia, Tunisia, Algeria, Morocco). 6 out of 10 leaders in the improvement of non-income HDI (education and life expectancy) are from MENA – Oman, Saudi Arabia, Lybia, Algeria, Tunisia, Iran.

To put it differently, in terms of economic progress MENA countries in 1950-2010 were not the leaders, but also not the laggers – somewhere in between rapidly growing East and South Asia and more slowly growing Latin America, OECD countries, Sub-Sahara Africa and Former Soviet Union. But in terms of social progress in the period of several decades before the Arab Spring (1970-2010) MENA regions did better than all the other regions of the developing world.

Looking into the future, MENA countries have definitely many crucial ingredients of economic growth – natural resources, human capital, low inequalities and most important – strong state institutions, ensuring low crime and shadow economy rates. They were making rapid economic and social progress in 1960-2010 and have many necessary pre-conditions to become growth miracles in the future, provided that ethnic and religious conflicts are brought to an end and peace prevails.

This article was presented at the Valdai Discussion Club conference titled "The Middle East: From Violence to Security"  in partnership with the Institute of Oriental Studies (Russian Academy of Sciences). Extended version of the article is at http://www.rusisworld.com/
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.

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