The Economy of the Middle East and North Africa in 1997

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Archived from the original PDF on 11 March Retrieved 12 June Prosperity in the New Middle East: Forms of economic integration. Preferential trading area Free-trade area Economic partnership Passport-free zone Single market. Customs union Monetary union Customs and monetary union Economic and monetary union Complete economic integration. Chalk demonstrates that to provide for future generations, governments need to have a strong commitment to replace their nonrenewable resource wealth with financial assets. There has been an increased recognition in Middle Eastern and North African countries of the role played by external policies, particularly exchange rate policies, in achieving and maintaining competitiveness, and thus balance of payments viability, which is critical for sustained growth.

This has been manifested in important steps toward reform of the exchange and trade systems during the past few years, which are examined in the six chapters and two addenda of Part II. In some cases, the authors note, stability may actually not be improved by switching from a dollar peg to an SDR peg. Effective pegging to the dollar has been guided by the broad objective of minimizing exchange risks for the private sector and ensuring stable exchange rates among Gulf Cooperation Council GCC member countries.

In late , the GCC countries decided to formalize a common peg to the dollar as an initial step toward a possible common currency area in the future. They argue that misalignment, among other things, can lead to a reduction in economic efficiency, a misallocation of resources, and capital flight. Correction of the real exchange rate, combined with appropriate demand management, is required to restore macroeconomic equilibrium.

Three measures of misalignment are constructed for Egypt, Jordan, Morocco, and Tunisia to test the hypothesis. They include measures based on purchasing power parity, on a black-market exchange rate, and on a structural model. The authors note that the liberalization and economic reform policies initiated by these countries in the late s and s have resulted in major realignments of their real exchange rates, which—if pursued in a sustained fashion—could enhance their growth prospects.

The Case of the Islamic Republic of Iran," Sundararajan, Lazare, and Williams illustrate how economic policy variables and exogenous shocks affect the real exchange rate primarily through the fiscal balance and, consequently, the savings-investment gap. They note that there has been a large variability in the real exchange rate, which reflected the corresponding variability in both domestic fiscal deficits and inflation and external real price of oil and terms of trade factors.

Macroeconomic Issues and Policies in the Middle East and North Africa

The reduction in inflation is viewed by the authors of Chapter 9 as critical to sustaining competitiveness and growth. They contend that the pursuit of the dual objectives of reducing inflation and maintaining appropriate real exchange rate targets can best be achieved by a managed-peg regime or by managed fixing with a sufficiently wide band around the central parity.

Implementing such a mechanism would require eliminating multiple exchange rates, consolidating fiscal accounts within a medium-term framework, adopting more flexible market-based instruments of monetary policy that are consistent with declining inflation, and relaxing exchange controls. The proposed exchange regime should be managed by setting up indicators and operating targets by developing progressively more market-based instruments of exchange market intervention.

The number of multiple rates has been reduced, and the market-based Tehran Stock Exchange Rate TSE rate has been allowed to depreciate significantly in line with market conditions. Concurrently, fiscal and monetary policies have been tightened, laying the groundwork for successful exchange reform toward unification. Meanwhile, although apparently managed on a day-to-day basis by the Central Bank of Iran in the form of a crawling-band regime, the TSE rate has remained broadly market determined. In Chapter 10, "Export Performance and Competitiveness in Arab Countries," Nashashibi, Brown, and Fedelino note that the export performance of Arab countries since the s has been mixed.

Even though non-oil-exporting countries have improved their product diversification, their market share in world imports did not keep pace with growth in world trade during the s. Analysis based on real effective exchange rates implies some loss of competitiveness. At the same time, weaker macroeconomic policies and the adoption of fixed exchange rates in a number of countries also resulted in real effective appreciations.

Although financial stability was improved because of fixed exchange rates, the fixed rates contributed to higher real interest rates, reducing investment and diverting savings toward financial assets. In the period ahead, without significant productivity gains, the combination of the current policy stance would add further pressures on competitiveness, especially for non-oil-exporting countries.

The authors of Chapter 10 emphasize that improvement in competitiveness will depend crucially on the pace at which the economies and trade regimes are liberalized, so that market signals improve resource allocation. Accelerating privatization and creating a friendlier environment for foreign direct investment would provide the much-needed technology and managerial skills to facilitate productive growth. These initiatives would benefit from the adoption of more flexible exchange rate regimes supported by structural reforms, so as to enhance the supply responsiveness of the economy.

To expand the size of their markets and access to capital and technology, and thus promote growth, several countries of the southern and eastern Mediterranean have entered into Association Agreements with the European Union AAEUs. He argues that these AAEUs will provide a major impetus toward an open trade regime during the next 12 years and constitute a powerful catalyst for overall economic reform.

However, benefits will be forthcoming only if major supplementary reforms are implemented consistently and front-loaded. An important challenge for the authorities would be to ensure continued macroeconomic stability while overseeing a socially acceptable transformation of the production structure of their economies. The chapter stresses that the success of the AAEUs will hinge on the countries' ability to generate a critical mass of foreign direct investment in labor-intensive, export-oriented sectors.

This will require substantial further transformation, including liberal rules governing trade in services and property rights, privatization, reform of judicial and administrative practices, and a reduced role for the government. The chapter also provides preliminary estimates of static benefits for the countries under review and contends that firm macroeconomic policies with flexible exchange rates would need to be supported by well-focused EU assistance and cooperation.

Finally, in Chapter 12, "Estimating Trade Protection in Middle Eastern and North African Countries," Oliva studies the structure and evolution of trade protection in these countries during the s. She argues that conflicts between pressures for liberalization to promote growth and imperatives to maintain unsustainable macroeconomic objectives especially appreciated exchange rates have determined the direction of trade policy.

Whether the balance moved toward protectionism or liberalization depended upon the ability of the national authorities to deal with domestic imbalances and regional trading relations. It is particularly interesting that trade arrangements have so far been aimed mainly at promoting trade with industrial countries and not necessarily at encouraging intraregional trade. Oliva notes that Middle Eastern and North African countries use tariffs and nontariff barriers, and tariff dispersion and nontariff barriers, as substitute protection instruments, with tariff levels and tariff dispersion acting as complements.