MENA’s Economic Background

Despite the MENA region being rich in oil, gas and other natural resources, it still falls far behind other developing regions, especially Latin America and South East Asia, in terms of economic development (Wilson and Munawar, 1995). During the past 25 years, the MENA has shown an overall weakness in economic performance, being less economically attractive compared to other developing regions, including Brazil, India and China as examples of rapidly growing countries.

The MENA economy falls between two major sectors: oil production and the service sector. The region is unique in that the larger proportion of income is not driven from production performed inside the economy but comes from sale of oil and gas. This significant role that oil plays in the region comes from the fact the reserves form more than 65 per cent for the world oil reserves.

Oil exporters comprise 12 countries: the six countries of the Gulf Cooperation Council (GCC) and Algeria, Iran, Iraq, Libya, Sudan, and Yemen. Together, they account for 65 per cent of global oil reserves and 45 per cent of natural gas reserves (IMF, 2009). Eight of the MENA countries are members of the Organization of the Petroleum Exporting Countries (OPEC) out of 13 oil producing and exporting members. OPEC accounts for 79 per cent of the world’s total proven crude oil reserves (OPEC, 2009).

The regional service sector includes many sections, such as the financial sector, tourism, health, education, entertainment, transportation, communication and other activities. This sector was ranked as the most important contributor to the MENA GDP during 1995-2005, however, given the huge rise in oil prices since 2005, this was surpassed by the extractive industry (World Bank, 2007, p. 111).

Economic Growth and FDI

Economic growth rates for the MENA countries throughout the 1980s and 1990s remained fairly low. However, the sharp rise in oil prices gave way to a remarkable growth rate over the last four years. The annual real GDP growth rates range from 2.3 in the Middle East countries to 3.2 in the North African countries, while the world and developing countries are rated to be -1.3 and -3.6 respectively. For the last ten years, the GDP growth rate for MENA countries (averaged more than 5) was equal or above global rates. However, the GDP growth rate contrasts sharply with East Asia that averaged more than 9 and in some parts paralleled that of Latin America and the Caribbean.

MENA GDP Growth Rate %

The data is derived from WDI (2009)

 

As highlighted in Figure 6, the average level of income per capita (USD 8,100 in 2008) places the MENA well above the level of middle-income countries (USD 6,154), although there are huge income gaps among different MENA countries. The level of income per capita ranges from over USD 20,000 in Gulf countries (US$ 76,000 in Qatar for example), Turkey and Israel (only topped by the high-income OECD countries) to only about US$ 1,200 in Djibouti and Yemen (the lowest per-capita income after Sub-Saharan Africa).

MENA GNI per Capita (PPP, USD).

The data is derived from WDI (2009)

In comparison with other regions, MENA countries have the lowest levels of foreign direct investment (FDI), attracting less than five per cent of worldwide FDI (WDI, 2009). Despite a gradual increase of FDI net-inflows, the level (FDI) is significantly below other developing regions. Even Sub-Saharan Africa performs better. It is worth noting that the GCC countries massively export FDI. The UNECTAD reports that 94 per cent of the FDI outflow during the year 2007 in West Asia came from OPEC Gulf countries Kuwait, Saudi Arabia, the United Arab Emirates, Qatar, Bahrain and Oman (UNCTAD, 2008).

The Labour Market

In comparison with many other developing regions, the MENA has one of the most problematic labour markets. It has the fastest labour-force growth rate, the lowest female labour-force participation rate, and by far the largest share of employment in the public sector and the second highest unemployment rate (Aubert, 2004; Abu-Qarn and Abu-Bader, 2007; World Bank, 2007; Rivlin, 2009).

The ILO indicates that the annual regional labour-force growth rates between 2000 and 2005 averaged 3.7 per cent faster than any other region. However, the World Bank reported that between 2006 and 2010 the average annual increase in the MENA labour-force would decrease to reach 3.1 per cent, annually adding 4 million new workers to the labour market. These high rates will bring the labour force to more than 150 million people by the end of 2010 across the MENA region (ILO, 2009).

The high growth rates in labour force are also associated with high levels of unemployment growth. The ILO 2009 Annual Global Employment Trends report (GET) notes that in 2008 the MENA, compared with other regions, had the highest unemployment rates at 10.3 and 9.4 per cent respectively. Similarly, the MENA has the lowest employment in relation to population rates in the world. In 2008, the employment to population rate in the Middle East was 46.6 per cent and 45.7 per cent in North Africa, with these rates only increasing by around 2 per cent in the past ten years. In both regions, the low employment to population rate is associated with low participation of women and youth in the work force. From the total labour force, only around 31 per cent is composed of female employees, mainly working in agriculture, education and the health sector (ILO, 2009). Nonetheless, the percentage of women in paid employment has increased from about 25 per cent in 1980 to about 30 per cent in 2006. If this participation continues to increase towards the world average of 52 per cent, women will constitute a huge potential pool of workers in the MENA (ILO, 2009).

The public sector is inherently the largest employing body in the MENA region.  Public sector employment accounts for 32 per cent of the total employment in the region compared to 27 per cent worldwide and only 13.5 per cent in the OECD (World Bank, 2005). In the absence of a dynamic private sector, high labour market pressures were met with more public sector jobs, especially for the rapidly increasing number of highly educated young people whose expectations for remuneration and career options could not be met elsewhere (World Bank, 2007).  As a result, government employment expanded rapidly, producing an unusually large and costly public sector by international standards.

Industry and Agriculture

Craft industries have been widespread throughout the MENA region for centuries, particularly metal working – an ancient tradition that continues in modern workshops today. Among the better known traditional industries is the textiles industry that is prevalent still in Turkey, Egypt and Iran. Recently added industries include food processing and petrochemical industries as is the case in the GCC.  Currently, there is a new outward-looking industrial strategy seen in the diversification of the regions markets, through the development of new projects (Anderson and Fisher, 2000, p. 197). The share of manufacturing in GDP in the MENA region hovered around 13 to 15 per cent for most of the 1965 to 2007 period (UNIDO, 2009), which is mainly attributed to the increase of oil prices and demand for raw materials.

Despite this trend, the agricultural sector continues to dominate the economies of most MENA countries, being an important vehicle for economic growth. In 2006, it represented 12 per cent of the region’s GDP, amounting to USD 88 billion. The agricultural sector accounts for around 34 per cent of the labour force with a little over 40 per cent of the total regional population living in rural areas (Rivilin, 2009, p. 30; Siam, 2009, p. 235). Agricultural exports are the main source of raw materials for industry, and as much as two-thirds of manufacturing value added in most of the MENA countries is based on agricultural raw materials (Siam, 2009).

During the last decade, the performance of the Arab industrial sector has witnessed continuous growth, with the manufacturing value exceeding more than USD 800 billion in 2008 (AIDMO, 2009). However, there has been a continuous decline over the past few years in the contribution of processing manufacturing to the GDP despite the boost in the processing manufacturing movement. This is apparent in the decreasing rate of 11.2 per cent in 2002 down to 9.8 per cent in 2007, occurring due to the increase in oil prices which has led to a domination of the extractive manufacturing sector over the total local product whereas the share of which increased from 27 per cent in 2001 to 41 per cent in 2007 (AIDMO, 2009).

The processing manufacturing sector in the Arab states has also been marked by its weakness in utilising technology, as the export rate of highly used technological products does not exceed 5 per cent in the overall industrial exports in the Arab states. This percentage, however, reached 58 per cent in Singapore, 40 per cent in China, and 32 per cent in South Korea in 2006. The weakness of this percentage clarifies the difficulties that interrupt the process of development the Arab manufacturing sector (AIDMO, 2009).

Comparing with the other countries in the region, Turkey is considered the leading manufacturing country (UNIDO, 2009). The industrial sector in Turkey has been the primary focus of government policies since the early 1950s. Until the late 1970s, Turkey adopted an import substitution industrialisation strategy, followed by a structural adjustment program and liberal economic policies (Uygur, 1991; Ozcelik and Taymaz, 2004).

By the end of 1990’s, the Turkish industrial sector contributed to 30 per cent of GDP and employed 27 per cent of the labour force.  In 2005, manufactured exports per capita had grown annually at 21 per cent since 2000 and accounted for more than 90 per cent of Turkey’s total exports (UNIDO, 2009).

As for Iran and Israel, more than 16 and 15 per cent of GDP is respectively generated by the manufacturing sector, giving them a share of 0.34 per cent of the world’s manufacturing value added (MVA). The manufacturing sector employs 32 per cent of Iran’s total employment and 22 per cent of Israel’s total employment.[1]  The main manufacturing activities in Iran include basic iron and steel, non-metallic mineral products, refined petroleum products, basic chemicals and motor vehicles, representing around 52 per cent  of the total manufacturing industry in 2005. Meanwhile, the main manufacturing activities in Israel include chemicals and plastics products, medical appliances and instruments representing around 40 per cent of the total manufacturing industry in 2005 (UNIDO, 2009).


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