News Column

Poor Policies Restrain Growth in Seven Middle East & North Africa Countries

August 7, 2014



WASHINGTON, Aug. 7 -- World Bank issued the following news release:

Egypt, Tunisia, Iran, Lebanon, Jordan, Yemen and Libya are trapped in a "poor policy - poor growth" cycle, which prevents their economies from moving to a sustainable growth path, says the World Bank in the newly released Quarterly Economic Brief for the Middle East & North Africa region.

The report, titled "Predictions, Perceptions and Economic Reality - Challenges of Seven Middle East and North Africa Countries Described in 14 Charts (http://www.worldbank.org/en/region/mena/publication/mena-quarterly-economic-brief-july-2014)," finds that the situation has gotten worse after the 2011 uprisings. Despite recent signs of economic improvement in Egypt and Tunisia, growth continues to be weak and cannot generate enough jobs. Fiscal deficits are still high and public debts are growing at a faster pace than before, leaving little space for growth-promoting investment. Private sector activity is sluggish, and the few jobs that are created in the public sector are filled through connections, leaving young people frustrated. Many workers move to the informal sector, creating a large, vulnerable group exposed to external shocks.

"While the problem of high unemployment is especially pernicious in these countries, an even greater problem is that of those working in the informal sector, "says Shanta Devarajan, World Bank Chief Economist for the Middle East and North Africa region. "These people, who are not part of the unemployment statistics, are in an even worse situation, since they lack security in their earnings and often live near the poverty line."

These seven countries have the potential to move to a higher growth path but the sustainability of growth depends heavily on governments' choice of economic policies. "There is a risk of policy error if, by trusting economic forecasts that paint a positive outlook for their economies, policymakers resist needed reforms," says Lili Mottaghi, World Bank MENA Economist and the author of the brief. Studies have shown that there is an optimism bias in growth forecasts for developing regions and in particular for MENA, because these forecasts do not necessarily take into account new information that comes in at the last minute, nor the structural breaks that sometimes drive an economy.

Prompt actions are needed to promote economic activities that deliver sustainable well-being for all citizens. These actions include structural reforms - targeting of subsidies, strengthening the investment climate, improving governance, and removing rigidities in product and labor markets - that are well integrated with economic policies. These reforms are necessary whether the short-term economic prospects are rosy or gloomy. Without them, the private sector will struggle to become a growth driver and create jobs.

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