Declining Competitiveness

If George Antonius, author of The Arab Awakening, the first major work in English to tell the story of the modern renaissance of the Arabs (1939), were alive today, he may contemplate writing a book about the decline of the Arabs.

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By  Massoud Derhally Published  October 6, 2002

|~||~||~|If George Antonius, author of The Arab Awakening, the first major work in English to tell the story of the modern renaissance of the Arabs (1939), were alive today, he may contemplate writing a book about the decline of the Arabs.

If the UNDP Arab Human Development Report and the ESCWA survey published this summer were wake up calls, the first Arab World Competitiveness Report published by the World Economic Forum (WEF) on Sept. 9, 2002 is ‘a bigger wake up call’, says Ibrahim Dabdoub, CEO of National Bank of Kuwait, who attended the two day mini summit in Geneva.

The Report, which was presented to Arab business and political leaders, including the secretary-general of the Arab League, Amr Mussa, echoed some of the findings of the two previous reports; namely that if the region continued to limit access to information, failed to improve the quality of education, fight corruption and empower women—there would be little hope for a brighter future.
While twenty-two Arab countries in the MENA region account for two thirds of the world oil reserves, private investment in the Arab world has been “insufficient and inefficient,” the report said.

But it does not stop there. “The broad conclusion is that the region has a long way to go in terms of providing the macro-institutional structure necessary for growth,” says Florence Eid, a professor at the American University of Beirut and one of the contributors to the report.

Given the traditional history of protective economic polices in the Arab world, the region has remained the least attractive market for foreign capital.

“The level of foreign direct investment (FDI) flows to and out the region are the lowest of the world and they constitute 1% of global flows. There has been initial but fairly timid effort to reform the institutional structures necessary to attract FDI and those amount to preferential customs duty treatment, labour requirements, repatriation restriction, and privatisation,” says Eid.

The highest level of FDI flows has gone to Saudi Arabia. From 1981-1984 alone, Saudi Arabia had net FDI flows of US $27.4 billion and, in 1997 and 1998, it had flows of US $3.0 and 4.3 billion, according to the report. But all of that has gone into the hydrocarbon sector and that, according to Eid, “does not necessarily result in economic growth because it is an extractive sector."

In order to increase levels of FDI flows to the Arab world a new generation of institutions needs to be created that focuses mostly on financial market legislation. This, according to the report, means that the financial markets of the Arab world need to become more sophisticated, primarily through the activation of stock markets and, more importantly, through the creation of instruments that have led to high levels of growth in the west.
These instruments include private equity funds, venture capital and seed funds. The appeal of these mediums, says Eid, “is that they create investment opportunities for people outside the Arab world that can flow directly to privately held firms in the Arab world. The conditions that have kept the inflow of capital to the region low are not likely change any time soon and this leads to the obvious conclusion that what we need to do is create new sets of instruments that facilitate financial flows to the region and for that there is a lot of demand.”

Ostensibly, the region has no option but to go down the path of liberalisation. If countries wish to revitalise their sluggish economies and lure investors, the environment must be conducive to innovation and should harness technology. “The Arab world has suffered a 20-year growth slowdown,” concluded the report, firmly blaming governments rather than outside influences. The Arab World Competitiveness Report, which focused on 16 countries, said the Arab world has relied excessively on capital accumulation to be the catalyst for growth and consequently has been left behind by globalisation.

In 1981, the region accounted for 10.7 percent of world exports. In 2001, that was down to 3.5 percent. “The export structure of the region as a whole is still primarily based either on its absolute advantage in petroleum products, as in the case of the major oil-producing countries like Kuwait and Qatar, or on its comparative advantage in labor-intensive manufactures, as in the case of Morocco and Tunisia,” said the report.

The WEF report did commend Egypt, Oman, Syria, and Tunisia on achieving sustainable levels of productivity growth. However, at the same time, the report cast a dim light on the remainder of Arab world, which has seen negative growth. “Thanks to improved macroeconomic management, several countries have made encouraging progress in bringing inflation down to sustainable levels,” the report said.

That said the WEF report stressed the need to move away from natural resource based production, especially when considering the rapid rate of population growth in the region that is expected to double to approximately 600 million in 30 years. To date, women in most Arab countries lag behind in education compared to men.

“Over and above the imperative to fulfil girls’ basic rights to education, the social and economic benefits of educating girls provide a compelling motivation to pursue strategies to close the gender gap in the Arab countries,” said the report. “In recent years, the delicate political climate in the Middle East has often overshadowed critical discussions related to economic and social development in the Arab world,” observes Professor Klaus Schwab, president of the World Economic Forum.

“This Report focuses on the challenges facing these countries in improving their competitiveness at a particularly critical time.” When asked how he would characterise the two day summit in Geneva, a prominent banker in the Middle East said, ‘sombre, makes you think just where exactly are we heading?” ||**||

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