Middle East and North Africa - Economic Developments and Prospects : Investing in Turbulent Times

The political and social upheavals that followed the Arab Spring of 2011 continue to dominate economic activity and near term prospects in the Middle East and North Africa (MENA). Prior to the Arab Spring, aggregate investment and foreign direct investment (FDI) flows to MENA followed the rest of the world. This report shows that political turbulence since the early 2000s has affected not only the level of FDI in MENA, but also its composition. It has skewed towards activities that create the least jobs or that create jobs in non-resource tradable manufacturing and services needed for export upgrading and diversification. By hurting these efficiency-seeking investments, shocks to political stability exacerbate the clustering of FDI in the extractive industries and non-resource tradable sectors. The findings of the report outline several policy challenges and priorities. The report argues that MENA countries may find themselves in a resource trap unless they strengthen institutions and improve the investment climate, especially political and macroeconomic stability. Protecting the rule of law and property rights, and committing to stable and transparent policies will encourage investment, especially foreign investment in the labor-intensive non-oil manufacturing and service sectors of MENA, and thus job creation, growth, and structural transformation. Structural reforms address privileged businesses, macroeconomic imbalances, expensive subsidies, inadequate provision of infrastructure services, problems with education, and poorly functioning labor markets. These structural issues constrain growth with grim consequences for the unemployment problem, especially among youth and women. Achieving a consensus on political reforms is a necessary pre-requisite for sustainable, high growth in developing MENA.