Reforms and External Imbalances: The Labor-Productivity Connection in the Middle East and North Africa

Abstract

World Bank economists expect economic growth in the Middle East and North Africa (MENA) to continue at a modest pace of about 1.5 to 3.5 percent during 2019-2021, with some laggards and a few emerging growth stars. In late 2018, The World Bank called on the leaders of the Middle East and North Africa (MENA) to aim high. This report argues that the economics are clear and the evidence strong for such a link. While some MENA economies have maintained what this Update calls ‘unexplained’ current account balances for several years, fiscal policy has lost some of its historical role as a driver of the current account. The rest of this report is organized as follows. Chapter one summarizes the World Bank’s latest growth forecasts for MENA during 2019-2021. It also puts these projections in perspective by comparing the implied Gross Domestic Product (GDP) per capita growth rates to the region’s performance since 2011 and relative to the typical growth rates of economies with similar levels of development. In turn, the chapter assesses the role of external factors as determinants of the region’s growth rates, arguing that the key risks are associated with a global growth slowdown that could cause declining growth in the demand for the region’s exports. Oil prices are unlikely to play a major role, although oil-price forecasts remain uncertain. From a long-term perspective, however, evidence from MNACE’s new model of potential growth driven by external factors suggests that external factors explain less than 30 percent of MENA’s (average) growth performance, although in some oil economies this share rises to 60 percent. Consequently, growth needs to come from within the region in the years ahead. Structural reforms are needed. Chapter two turns to the fundamental drivers of current account deficits around the world and in MENA. The international evidence from another new MNACE model indicates that both demographic changes and (relative) aggregate labor productivity are fundamental drivers of an economy’s current account balance. However, current forecasts of aggregate labor productivity growth and demographic changes are unlikely to help close excess current account deficits in affected MENA economies when the region’s capacity to recirculate savings across regional borders is being tested. Thus, structural reforms capable of raising aggregate labor productivity in MENA are urgent, along with the Digital Moonshot. Chapter three concludes by discussing an agenda of structural reforms in the context of the Moonshot challenge. It covers areas of economic policy associated with potential gains in growth and productivity, but in which MENA’s experience and current circumstances are unique from an international perspective. More specifically, the chapter discusses reforms in fiscal policies, trade related policies, social protection and labor markets, and state-owned enterprises (SOEs) in network industries. The time for structural reforms in MENA has arrived.