Conclusion
The MENA region possesses abundant human and natural resources, accounts for a large share of total world petroleum production and exports, and by international standards enjoys on average a reasonable standard of living. Countries of the region differ considerably in economic size, population, standards of living, public/private sector balance, natural resource endowments, external indebtedness, and trade and financial links with the rest of the world. At the same time, intra-regional interaction is small, being heavily weighted toward labor flows between certain countries, with rather limited trade in goods, and inadequate integration of capital markets.
The review of developments in the MENA economy during 1989-94 paints a mixed picture. On the positive side, overall GDP has grown and domestic financial imbalances have been reduced, reflecting efforts to lower budget deficits and enhance private savings. Financial sectors have been reformed, as have exchange rate regimes in a number of countries. Foreign assets, while reduced by recent drawdowns, are still significant.
Nevertheless, with a rapidly growing population, the region's per capita income has stagnated. Unemployment and underemployment have been insufficiently addressed, thereby aggravating social problems. Domestic saving remains low and constrains higher investment. Meanwhile, because the region's economy remains highly exposed to changes in its external environment, considerable fluctuations in the external terms of trade have been superimposed on a sharp deterioration of the terms.
As widely recognized by policymakers in the region, two basic issues ought to be addressed: long-standing structural weaknesses that have inhibited the economy's growth responsiveness and diverted productive resources out of the region and a poorly diversified economic and export base that has rendered most countries vulnerable to exogenous shocks.
Developments in the external environment will continue to affect the economies of the region. While growth of the world economy is expected to remain fairly robust, the indications are that MENA countries face an uncertain overall environment, with significant downside risks. The sensitivity of the region to international prices of oil and food is clear. The effects of the trade liberalization within the context of the Uruguay Round are more difficult to predict. It is clear, however, that policy changes are needed if potentially dynamic gains are to offset the static losses. Prospects for increased labor migration to Europe, as well as for intra-regional labor flows, are less favorable than in the past. Furthermore, recent developments in emerging capital market financing suggest that the countries of the region that have not yet attracted significant capital inflows may well have to compete in a more cautious investor climate.
To reduce the downside risks associated with the external environment and to strengthen their potential for achieving sustainable economic growth, the MENA countries will need to address rapidly their policy challenges. In view of this need, it is not surprising that structural reform is on the top of the economic policy agenda of virtually all countries in the region.
With these factors in mind, MENA's policy challenge may be thought of as consisting of eight items:
The policy challenges come at a time of renewed emphasis on integration efforts--within the region as well as with the EU. These efforts can help MENA economies to become more competitive internationally and exploit complementarities. They can contribute to improved resource allocation and boost investor confidence, but important qualifications must be kept in mind. First, regional integration efforts should support rather than substitute for multilateral trade liberalization. Second, integration schemes should be consistent and mutually reinforcing. Third, the rewards of integration will take some time to materialize and will materialize only if they are supported by appropriate domestic policy reforms.
For several countries in the MENA region--particularly the low-income economies--determined policy implementation needs to be accompanied by significant external assistance. Such assistance facilitates adjustment and reform provided it is available on a timely basis and on appropriately concessional terms.
With the combination of forceful domestic policies and external financial assistance to certain countries, MENA can look forward to reinvigorated growth and development. It would thus have a better opportunity to benefit from globalization and integration of the world economy while minimizing associated risks. Given the economic links in the region--through labor flows and, looking forward, more trade and private capital transactions--the beneficial impact of a generalized reform is substantial as individual country developments are augmented by welfare-enhancing region-wide effects. As a result, all countries in the region would be in a better position to exploit their considerable economic potential and meet the legitimate aspirations of their growing populations.
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