Press Release No. 06/294

Press Release: IMF Statement at the Conclusion of the Joint IMF/AMF High Level Seminar on Institutions and Economic Growth in the Arab Countries

December 20, 2006

A high-level seminar "Institutions and Economic Growth in the Arab Countries," jointly organized by the International Monetary Fund (IMF) and the Arab Monetary Fund (AMF), was held in Abu Dhabi, The United Arab Emirates (UAE) on December 19-20, 2006, with the participation of Mr. Mohamed Khalfan Bin Kharbash, Minister of Finance and Industry of the UAE, Mr. Jassem Al Mannai, Director General Chairman of the Board of the AMF, and Mr. Takatoshi Kato, Deputy Managing Director of the IMF.

The seminar, which brought together ministers, central bank governors, as well as other high ranking policymakers and economists from the region and around the globe, focused on how stronger institutions could enhance growth in the region. Participants agreed that the extraordinary demographics of the region—a young and rapidly growing labor force—made growth and job creation an economic, social, and political imperative. With the labor force projected to reach 185 million in 2020—80 percent higher than in 2000—the region would need a substantial real growth rate of 6 to 7 percent annually, double the trend rate of the late 1990s, to prevent a dire unemployment problem. With this development challenge facing the MENA region, the seminar participants focused on:

· Identifying the institutional challenges facing the MENA region and their sources;

· Measuring the impact of the quality of institutions and governance on economic growth in the region, and identifying the channels through which they affect growth;

· Discussing strategies to enhance the quality of institutions in the region and reduce the impediments to more rapid economic progress.

There was general agreement among seminar participants that a governance gap exists between MENA countries and other countries at similar income levels. The gap covers a wide set of indicators including bureaucratic performance, rule of law, and accountability, among other aspects of institutional quality. Many participants thought the gap could be attributed chiefly to weak facilitating institutions for private enterprise and an excessively large public sector focused on guaranteeing economic security and on the public provision of social services. Intrusive government crowded out private sector investment and employment, and poor institutional quality dampened growth through its negative impact on productivity and capital accumulation. These two factors, which precluded the development of a vibrant private sector, explained the lack-luster growth performance of the region over the last two decades.

There was broad consensus, however, that the region's governance gap was not a permanent condition. Participants discussed a number of mechanisms that could spur institutional change, including trade liberalization, openness to information, and external anchoring. Together, these factors—by ensuring a robust and competitive private sector—would help create a vocal domestic constituency who would demand and expect good institutions. As some participants argued, accountability and political will are key if these demands and expectations are to be heard and met.