Front Matter

Front Matter

Author(s):
International Monetary Fund
Published Date:
November 1996
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    Building on progress

    Reform and Growth in the Middle East and North Africa

    MIDDLE EASTERN DEPARTMENT

    International Monetary Fund

    1996

    © 1996 International Monetary Fund

    Cataloging-in Publication Data

    Building on progress : reform and growth in the Middle East and

    • North Africa—[Washington, DC] : International Monetary Fund, Middle Eastern Dept., [1996]

      • p. cm.

    • “Papers on important areas for structural reform in the region—investment performance, fiscal reform, financial sector reform, and trade liberalization”—Foreword.

    ISBN 1-55775-625-2

    1. Middle East—Economic policy. 2. Africa, North—Economic policy. I. International Monetary Fund. Middle Eastern Dept. HC415.15. B84 1996

    Design: IMF Graphics Section

    Composition: Alicia Etchebarne-Bourdin

    Photographs: cover and pages 4, 9, 19, 27, 30, 46, and 62, World Bank; page 16, United Nations;

    pages i, 21, 34, 48, 55, and 60, Nora Korc-Baum

    Price: US$15.00

    Address orders and inquiries to:

    International Monetary Fund, Publication Services

    700 19th Street, N.W., Washington, D.C. 20431, U.S.A.

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    Internet: publications@imf.org

    Foreword

    The countries of the Middle East and North Africa (MENA) region share a number of common economic goals—the achievement of sustainable high economic growth and improved living standards, a reduction in unemployment, the creation of additional employment opportunities for the rapidly growing population, and an improvement in the provision of social services. Governments in the region have either formulated or are formulating policy packages to meet these goals. Participation in and understanding of the issues by a broad spectrum of players in the domestic and international economic and business arena—policymakers, investors, entrepreneurs, and citizens—will facilitate the broadest possible base of support for implementation of the needed policies.

    As input to this dialogue, the staff of the Middle Eastern Department of the International Monetary Fund has issued a number of papers in recent years analyzing the economic changes facing the region. This study presents four papers on important areas for structural reform in the region—investment performance, fiscal reform, financial sector reform, and trade liberalization. In a sense, the papers come to a common conclusion; namely, that action on only one front will not be sufficient to ensure that MENA achieves its economic potential. Indeed, a broad range of policy measures is a prerequisite for success in any of the areas discussed.

    I am confident that an enabling macroeconomic environment together with stepped up structural reforms will ensure that MENA is well placed to take advantage of the remarkable opportunities presented by the evolving globalization of the world economy. Success on this front will, in turn, provide a strong foundation for the achievement of the goals of MENA governments, including the establishment of a secure and prosperous outlook for future generations.

    Michel Camdessus

    Managing Director

    International Monetary Fund

    Acknowledgments

    The authors are grateful for valuable comments from colleagues in the Middle Eastern Department and in other departments of the Fund, as well as from colleagues in the World Bank. They are indebted to Ilse-Marie Fayad and Peter Kunzel for research assistance, and Maureen Burke for secretarial assistance. Special thanks are due to Esha Ray of the External Relations Department, who edited the publication and coordinated the production process. The views expressed in this study are the sole responsibility of the authors and do not necessarily reflect the views of the Executive Directors of the IMF or other members of IMF staff.

    Summary

    • 1 The Middle East and North Africa (MENA) region is presented with a number of unprecedented opportunities: prospects for continued rapid expansion of trade; increasing globalization of world financial markets; closer economic links to the European Union; and possibilities for greater regional stability and closer integration. The potential benefits to the region are large but are not automatic. The MENA countries themselves must establish the conditions that will enable them to reap those benefits.

    • 2 The performance of the MENA countries in recent years was disappointing in terms of growth, and the region failed to take sufficient advantage of the opportunities presented by increased globalization and integration of the economy. While unfavorable exogenous factors affected performance, insufficient domestic policies also contributed to the outcome.

    • 3 Preliminary indications are that 1996 will witness an improvement in the economic and financial conditions of the MENA economies. Economic growth is expected to pick up, with a consequent increase in per capita GDP; inflation is projected to decline; and external financial balances will improve. While the magnitude of the economic and financial improvement and the reasons for it vary from country to country, accelerated policy reform in some countries and a more favorable external environment—in terms of both international oil prices and weather conditions—have had an important impact.

    • 4 Looking forward, as policymakers recognize, the region cannot depend on favorable external factors to sustain a high growth rate and further improve financial balances. Domestic policies will have to take the lead. This means consolidating the financial stabilization gains and deepening and widening structural reforms on a broad front. This volume focuses on four of the structural issues that need to be addressed: (1) an enhancement of the region’s investment performance; (2) fiscal reform; (3) financial sector reform; and (4) trade liberalization.

    • 5 Following an introductory chapter outlining recent macroeconomic developments in MENA, Chapter 2 argues that improving the region’s investment performance is critical to achieving a higher economic growth rate. This means changing the nature of investment in MENA as a whole, which has been too heavily tilted toward the public sector, is highly dependent on external influences, and has been less productive than in many other regions. It also means attracting higher inflows of foreign direct and portfolio investments which, until recently, have been relatively limited. The chapter outlines the policy priorities needed to improve the level, composition, and efficiency of the region’s investment in human and physical resources, and thereby strengthen the basis for rapid and sustained economic growth.

    • 6 Chapter 3 deals with fiscal reform—a key determinant of countries’ ability to maintain the stable macroeconomic environment required for sustained higher growth and employment creation. It describes the fiscal structure of the MENA countries and reviews the implications for the economies of the region of the dominant role played by the public sector and efforts made in recent years to improve the quantitative and structural aspects of public sector involvement. The chapter concludes with a discussion of the main elements of the fiscal reform policy agenda aimed at further reducing fiscal deficits and enhancing the effectiveness of government intervention.

    • 7 Chapter 4 considers the role of the financial sector in mobilizing savings and allocating them to the most productive uses. Noting the gradual shift away from public-sector-driven development strategies that emphasized government ownership of financial intermediaries and control of resource allocation and prices, the chapter reviews the implementation of reforms seeking to improve the financial intermediation process. It argues that the remaining reform agenda needs to increase reliance on competition and market forces, deepen markets and broaden instruments, and strengthen prudential regulation and supervision.

    • 8 Chapter 5 addresses concerns related to the slow progress toward trade liberalization in the region—with the exception of the member countries of the Cooperation Council for the Arab States of the Gulf. The protectionist policy stance has had a negative impact on production efficiency and consumer welfare, and, given the process of globalization and integration of the world economy, will increasingly undermine the region’s ability to attract foreign investment, Indeed, the region has yet to take sufficient advantage of the remarkable growth in international trade and risks missing out on the added opportunities presented by the current multilateral trade liberalization arrangements—the Uruguay Round and the European Union’s Mediterranean Basin Initiative. The chapter concludes by highlighting the key steps that MENA countries will need to take to benefit from these trade-enhancing initiatives.

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