Arab economies have become addicted to “unearned income streams” including fuel exports, foreign aid, and remittances. This fragile social contract has led countries across the Middle East and North Africa to increase subsidies on fuel and food at times of social unrest.
This is their “original sin” and is fast becoming a liability, say economists Adeel Malik and Bassem Awadallah in this important paper for the World Development journal recently made available to the public.
“External revenues—whether derived from oil, aid, or remittances—profoundly shape the region’s political economy” which only serves to “stiﬂe economic and political incentives, turning economies away from production to patronage”.
So as a result, on a per capita basis, the Middle East and North Africa received the highest overseas development assistance in 2008 ($73 compared to $49 in sub-Saharan Africa), the paper says. North Africa has consistently been the largest recipient of net aid per capita since 1960s (see table). These aid ﬂows are largely driven by geo-political considerations.
The authors point out that despite the differences in cultures, economies and geographies across the Middle East and North Africa (Algeria to Syria for example), there are “at least ﬁve common denominators that cut across commonly recognized conceptual boundaries—for example, whether an Arab state is a monarchy or a republic, labor-scarce or labor abundant, resource-rich or resource-poor”. One of these is the dependance on exports and aid. They spell out the other connecting factors:
First, all across the Arab world both economic and political power is concentrated in the hands of a few.
Second, the typical Arab state can be characterized as a security state; its coercive apparatus is both ﬁerce and extensive.
Third, the broad contours of demographic change and the resulting youth bulges are fairly common across the region.
Fourth, Arab countries are mostly centralized states with a dominant public sector and, with few exceptions, weak private enterprise.
So what went wrong?
Malik and Awadallah go back to the Ottoman empire where centralized bureaucratic rule worked hard to prevent the emergence of autonomous social groups, and therefore valuable and profitable connections across the region and a strong private sector:
The Arab world has inherited an unfavorable and divisive legacy. The roots of a weak private sector run deep in history. Merchants were politically weak under the Ottomans.
A robust private sector was more feared than favored. When business thrived, it remained eﬀectively in the hands of foreign merchants and local minorities. This was politically expedient: foreign merchants beneﬁted from the economic privileges granted by rulers, but
seldom challenged their authority.
The break-up of the Ottoman Empire into a multitude of independent states created new political boundaries, but, over time, these became permanent economic boundaries.
The consequence of this divide meant that when globalisation was unavoidable, Arab economies did not integrate with one another but only with global structures of trade and finance. It’s no surprise then that trade agreements in the Mena region are well below the global average.
The key concluding questions is: can the region harness its natural geographic strengths to build a future based on trade and production, or does it fall back on the geography of rents and patronage? Access to the coast, Europe and a large labour force are attractive opportunities that emerging markets would jump at. So why has the Arab world failed to integrate?
Revolutions across the region are an “apt reminder that the prevailing model has reach its expiry date”, they say.
“This model built on oil and aid fortunes—and a leviathan state—is fast becoming a liability.”
A huge underestimated investment opportunity for Egypt is Africa, a continent The Economist aptly describes as having a land mass equivalent to that of China, India, Japan, America, Mexico and Europe combined.[caption id="attachment_874" align="aligncenter" width="580"] The Economist[/caption]
Some headway has been made in this direction, with Egyptian companies looking to Africa for potential. Citadel Capital for instance said earlier this month it is considering investing in Uganda’s proposed $2.5 billion oil refinery. Uganda is east Africa’s third-largest economy.
But it’s not enough. North African neighbours such as Morocco and Algeria are tapping into the sub-saharan Africa story, leaving Egypt behind to cope with a mass of political and economic troubles.
Traditional markets, particularly in advanced economies such as Europe and the US look bleak and extremely difficult to penetrate based on competitiveness. For Egypt, the emphasis in those countries should be on building trade agreements to provide an edge and expand exports.
Instead, Egypt has a prospect to boost trade flows based on competitiveness in emerging markets, where global growth is likely to be centred in the future.
In recent years investors have been piling into Lagos and Nairobi as if they were Frankfurt and Tokyo of old. Anaemic growth in the rich world has made sub-Saharan Africa an attractive destination for money and its managers. Foreign direct investment has increased by about 50% since 2005. Once regarded as casinos, local capital markets now seem less risky.
New funds will pay for so far non-existent infrastructure on the continent.
Even the sceptics accept that the latest outlook for Africa is good. The IMF says the continent’s GDP will grow by 5% this year, down from a predicted 5.4% but still much faster than almost anywhere else. In 2013 growth may nudge up to 5.7%. Further economic problems in the rich world could hit South Africa, but countries to its north are still likely to do well.
Egypt is to China and Japan, what Pick ‘n’ Mix is to an eager child.
The North African nation has a diverse selection of attractions for Asia, such as its proximity to Europe and the rest of Africa, its huge labour force and access to the Suez Canal. All of that comes at a relatively good price and with a favourable tax climate.
That is why, during the revolution, Asian countries (especially China) continued to pour money into the country while others were wary.
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Yesterday Angola’s president Jose Eduardo dos Santos said the country’s plans to invest more than $17 billion in electricity generation and distribution by 2016 will boost social justice by giving low-income classes better access to energy.
But this optimism is often met with suspicion. Dos Sontos, in power since 1979, is accused 0f doing too little to fight poverty since winning the war against rebel group UNITA in Africa’s second-largest oil producer.
A 27-year civil war that ended a decade ago devastated Angola, destroying most of its infrastructure, including energy plants and networks, meaning many goods, including food, have to be imported. It begs the question of when the bubbling anger of the people will ferment itself into the latest of the region’s revolutions. The calls for Dos Sontos to quit after 32 years in power are growing louder.
It has created one of the most frightening contrasts in the world. Angola is simultaneously the richest country in the world (on paper Luanda, the capital of Angola, is the most expensive city for expatriates in the world) and the poorest (of the around one third of Angolans live in Luanda, 57% live in poverty).
Huge sovereign wealth fund-like companies dominate the economy. Sonangol, the state-owned oil company, commands multibillion dollar borrowing facilities that stretch over a decade. Respected abroad, its critics are wary of the group’s dominance.
“It’s not a state-owned oil company: it’s like an oil company that owns the state,” says one international official in Luanda, the FT’s Tom Burgis reports.
Angola is also one of the world’s top diamond-producing countries, but “a visit to Angola’s diamond heartland reveals that plenty of blood still spills over those precious stones”, writes Michael Allen in the Wall Street Journal.
The wide gap between the rich and the poor is summed up in the United Arab Emirate’s latest inbound tourism figures, which show Angola was the sixth biggest spender in the UAE last year.
Angolans spent $166.1 million in 2011, up 89.1% from a year earlier, moving up four places on the league table.
In a country where a normal expat needs $300,000 to live normally for a year, it is no surprise that citizens are splashing their money elsewhere.