Policy Innovations Digital Magazine (2006-2016): Commentary: Successful Globalization Needed in Arab World

May 23, 2007

The Arab world faces the immense challenge of creating jobs for its large cohort of young people who are reaching working age. Over the next decade or so, the region may experience population growth of 150 million people—the equivalent of adding two Egypts. Such rapid labor force growth has contributed to despair among young people regarding their job prospects, and, by extension, concerns about political stability.

Yet there is reason for hope. Underpinned by relatively high oil and gas prices, the region as a whole has exhibited steady growth in income and employment as of late. But the current level of energy prices may not be sustained, and the windfall is not felt evenly across the Arab world, where some of the most populous states have less oil.

Unemployment is decreasing, but the net increase in employment over the past five years is accounted for entirely by women. This increase in opportunities for women is encouraging, but the stagnation of male employment is not. Moreover, in some countries, including Jordan and the oil-exporters of the Gulf, most of the newly created jobs have been filled by foreigners. This phenomenon is even more acute if one looks at private sector employment. With a few exceptions, employment has not grown in industries where productivity is increasing—that is, it does not appear to reflect an expansion of activity in rising dynamic sectors.

One method of rapidly creating a sustainable increase in employment is through an expansion of labor-intensive manufacturing or services exports. The region's track record is inauspicious outside the petroleum sector, and the entry of China and India into the global markets is intensifying the competitive threat. The Arab world risks being left behind at precisely the moment it needs to accelerate job growth.

The Arab world risks being left behind at precisely the moment it needs to accelerate job growth.

Achieving that goal is inhibited by two factors, one institutional, the other political. The Arab countries score poorly on a nexus of indicators relating to cross-border economic integration and technological knowledge and innovation. Outside of the extractive industries and tourism, where geology or special attractions like the pyramids confer unique and irreproducible advantages, the Arab countries as a group have weak links to the global economy—whether measured by cross-border trade and investment, integration into global supply networks, technology licensing, or internationally recognized intellectual achievements. Strengthening such links presents a formidable challenge.

Unlike issues of macroeconomic policy management—where policy change can be implemented by a relatively small number of centrally placed technocrats and is subject to relatively straightforward feedback mechanisms—addressing the institutional weaknesses requires a much more prolonged and uncertain path. Models for possible emulation abound in other nations, from Chile to Korea to, most recently, India. A more receptive environment to globalization would help, including improved intellectual property rights, and a more open attitude toward foreign direct investment. These factors would have to be supported by an improved education system.

The hesitancy to undertake such reforms stems from concerns more fundamental than mere special-interest politics. Although the region's contemporary economic performance may not be distinctive, its enduring political authoritarianism is. This lack of political dynamism in the face of underlying social change, together with the increasingly religious orientation of the political opposition, paradoxically raises the possibility of abrupt transitions. Such deep political uncertainty discourages investment and a reversal of the brain drain, creating the possibility of a self-reinforcing downward spiral.

Yet substantial intraregional variation in achievement suggests that these outcomes are not determined by intrinsic cultural factors. The influence of Islam or the anthropology of Arab culture may have many effects on local institutions and practices, but they cannot explain why it takes 15 times as long to enforce a contract in Egypt as it does in Tunisia. Significant improvements in economic outcomes could be achieved simply by matching the best-practice standard established by others within the region. Egypt need not turn into Norway.

The international community has no real alternative but to engage. Both Europe and the United States have offered trade incentives and considerable foreign aid. But it may be helpful to create a more sympathetic atmosphere for globalization, as emphasized by a notable group of Arab academics in the widely cited Arab Human Development Reports. Relative to the magnitude of the problems in the Arab nations, the potential impact of changes in U.S. policy may be small, but it is worth the effort.

A policy to support constructive engagement between the United States and the Arab world would have four parts. The first component is regulatory and macroeconomic. As long as the United States runs current account deficits, it will require capital inflows from abroad. The U.S. deficits are mirrored by oil-fueled surpluses in the Gulf, and quite naturally Arabs will be prominent among investors in U.S. assets, with attendant frictions such as the Dubai Ports World deal or the acquisition of publicly traded companies. The U.S. trade deficit has many unintended consequences such as this. One way of attenuating investment disputes would be through fiscal policy adjustment to reduce U.S. reliance on foreign finance, which is of course intrinsically important quite apart from its effects on foreign investors.

The second component would be public diplomacy aimed at both improving the image of the United States and strengthening democratic political forces in the Arab world. One possibility would be to redirect resources from the U.S. government–sponsored satellite television channel Al Hurra, which has failed to attract a significant audience, and apply these resources to increasing the availability of Western news sources in the Arab world. Evidence suggests that there are not only profound divergences in opinion between Arabs and the West but also deep differences regarding the underlying facts linked to sources of news and information.

A complementary approach would be to expand two-way exchanges of opinion leaders to facilitate Arab exposure to nonofficial American opinion leaders. The United States also needs to reconsider Department of Homeland Security policies that significantly impede the issuance of visas to legitimate Arab scholars and opinion-makers. To be clear, mere familiarity will not engender love—but what is being communicated today is so negative that almost any kind of serious engagement would represent an improvement over the status quo.

The third component could be preferential trade agreements. Unfortunately, the way that the United States has negotiated these agreements has created a "hub-and-spoke" system in which individual Arab governments have strong bilateral agreements with the United States but weak or nonexistent agreements among themselves. In part, this reflects differences in both capacity and orientation across the Arab governments, and, in the specific cases of militarily vulnerable oil-exporters, a particular interest in deepening ties with strategic partners.

The bilateral agreements themselves are inconsistent, however, which makes it difficult to incorporate them into a single region-wide accord. The problem is exacerbated by the fact that the agreements that the United States and the European Union reached with the Arab countries are also inconsistent. These agreements would all benefit from coordination.

A renewed emphasis on multilateral coordination should be the fourth component of U.S. policy toward the region. Much of what is needed in the Arab world amounts to institutional reform and capacity building. The United States as a national government obviously has a role to play in providing technical assistance and support—its U.S. Agency for International Development (USAID) mission in Cairo is the largest in the world.

The United States should also make use of the whole panoply of international institutions, including the World Trade Organization, International Monetary Fund, and World Bank. They are suited for a patient process of engagement with the countries of the region. In essence, one is buying an option on reform: maintaining contact and a local knowledge base in anticipation of the day when the host government will be ready to move forward.

Marcus Noland is a Senior Fellow at the Peterson Institute of International Economics and Howard Pack is Professor of Business and Public Policy at the Wharton School at the University of Pennsylvania. This commentary draws from their newly published book, Arab Economies in a Changing World.

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