Economic Research Forum (ERF)

The new normal in the global economy: challenges for MENA

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ERF’s annual conference has become the premier regional event for economists of the Middle East. This column previews the 2018 conference, to be held in Cairo in July, where the main theme will be the challenges for the region of the likelihood of a relatively sustained period of low oil prices as well as disruptive cyclical movements around the long-term price trend – the so-called ‘new normal’ in the global economy. Special sessions will also discuss the challenges of inequality; climate change and environmental damage; and solidarity, economy and social justice.

In a nutshell

A new growth strategy for low oil prices or even a post-oil era is in order.

As the MENA region adjusts to the new normal, policy-makers are faced with critical policy dilemmas playing out in numerous dimensions – monetary, fiscal and external.

Moreover, as social turbulence and conflict persist in several MENA countries, policy-makers must reconcile short-term social and economic concerns with long-term growth and reform efforts.

The MENA region has experienced several episodes of short-term commodity and capital booms throughout its recent history, but they have had a relatively limited effect in boosting sustained growth. Booms are typically associated with large inflows of foreign currency in the form of natural resource exports for oil exporters that are then redistributed to oil importers through remittances and short-term capital flows.

The latest boom between 2003 and 2008 was coupled with a favourable global environment that led to unprecedented growth in a number of MENA countries. Since then, the MENA region has been hit by three crises:

  • First, the global financial crisis, which began in late 2007 led to a global slowdown in economic activity and trade, causing a temporary dip in growth.
  • Second, though a sustained recovery from the effects of the first crisis was already an elusive goal, the political and social uprisings have effectively made it out of reach.
  • Third, the unexpected plunge in oil prices – a 50% drop since their peak in mid-June 2014 – marked the end of the commodity super-cycle that began in the early 2000s.

Though it has time and time again defied expectations, most of the research community seems to believe that relatively low oil prices are here to stay. Triggers include supply factors, such as the rapid expansion in unconventional oil sources like shale gas, as well as weakening global demand resulting from the anticipated shift of China’s growth agenda towards inward non-tradable domestic economic activities; and the possible advent of an episode of secular stagnation of major industrial economies, coupled with an appreciation of the US dollar.

The dramatic decline in oil prices is expected to have wide-ranging consequences on the whole region’s growth and development prospects. MENA oil exporters and importers alike have already started to experience the impact of this emerging oil market situation, but their initial policy responses leave a lot to be desired.

To be sure, accommodating the oil price decline of the massive scale experienced since 2014 is not an easy task, even for well-managed economies. Nothing short of a drastic rethinking of the social contracts prevailing in both MENA oil exporters and importers would be adequate. Therefore, a new growth strategy for low oil prices or even a post-oil era is in order.

As the region adjusts to the new normal, policy-makers need to draw lessons to take advantage of the restructuring of the economic order. In doing so, they are faced with critical policy dilemmas playing out in numerous dimensions – monetary, fiscal and external.

Moreover, as social turbulence and conflict persist in several MENA countries, policy-makers must reconcile short-term social and economic concerns with long-term growth and reform efforts.

Three conference plenaries will address these issues:

  • First, what do MENA countries need to do to lay the foundation for sustained growth under the new normal and what are the lessons from the East Asian experience?
  • Second, what is the most appropriate macroeconomic framework for absorbing extended shocks associated with the new normal?
  • Third, what is the growth agenda for the MENA region under the new normal, especially with regards to the seemingly secular oil price bust?

Laying the foundation for sustained growth under the new normal: lessons from the East Asian experience?

Structural change constitutes one of the main ingredients of economic development since the reallocation of resources is expected to generate higher overall productivity and, therefore, higher incomes.

Despite the importance of structural transformation in the process of economic development, there is no consensus on how to achieve this objective and the appropriate role of government – from import substitution and state economic planning, to increased openness and trade specialisation, sophistication as well as technological spillovers and joining global value chains.

The recent wave of post-financial crisis interventionism has reinforced the argument that the state could play an active role in facilitating the process of structural change and transformation.

More recently, and taking account of the evolving economic structure of factor endowments and varying levels of development, new structural economics argues that policies targeting activities that are not ‘comparative advantage defying’ (CAD) are the most likely to contribute to structural transformation.

Policies should thus be of the ‘comparative advantage facilitating’ (CAF) type, helping to solve and overcome the problems of coordination and externalities that beset processes of structural transformation and innovation.

This plenary will explore which industrial policies can be derived from the new structural economics, the optimal role of the state in achieving effective structural change in MENA countries, and explanations for the lack of structural transformation.

In particular, the plenary will draw lessons from East Asian success in escaping the ‘middle-income trap’, and stress the role of the state in promoting the acquisition and adaptation of new technologies in achieving catch-up growth and structural transformation.

A macroeconomic framework for growth under the new normal

In the context of the macroeconomic framework of dealing with shocks and secular global developments, there are important lessons to be learned by contrasting the experiences of the MENA region and Latin America, another major commodity and mineral-dependent region.

The combination of commitment to flexible exchange rate regimes and inflation targeting have created favourable macroeconomic and political economy prerequisites for steady real exchange rate depreciation, which in turn allowed the agricultural and industrial sectors of several Latin American countries to act as a shock absorber in the face of declining oil, mineral and commodity prices.

Against this backdrop, this plenary will examine how normal the new normal is likely to be, the optimal macroeconomic framework for dealing with secular commodity price decline, and the likely growth consequences of different approaches?

Towards a growth agenda for MENA under the new normal in the global economy

The MENA region is diverse, comprised of highly endowed small population countries of the Gulf Cooperation Council; populous oil-exporting economies – Algeria, Iran and Iraq; middle-income oil importers – North Africa, Turkey and Lebanon; and a low and lower middle-income group – Sudan, Mauritania, and Yemen.

Nonetheless, all countries are affected by developments in the global oil markets accounting for a variety of factors and issues, such as the new normal in global oil markets; fundamental versus structural transformation growth; manufacturing and unconditional convergence; and the challenges and prospects of the new industrial revolutions.

This plenary session will ask some fundamental questions as to whether the era of growth miracles is over, the implications for the region, and the growth agenda for the diverse MENA-plus region under the new normal.

Rethinking inequality in the Arab world

ERF and the Economic and Social Commission for Western Asia (ESCWA) are collaborating on a research report on inequality in Arab states, the extent of the problem and what can be done.

Subsidies reforms and social justice

ERF’s annual conference is held in Egypt every other year, and typically features a special session with the Egyptian Center for Economic Studies (ECES). This year, the session will address the critical issue of subsidies and social justice as a partial mitigating policy response to the consequences of global and other external shocks.

Environmental challenges in MENA: better research for better policy outcomes

Environmental concerns in MENA are taken very little into consideration in the design of public policy although most countries in the region now have specific ministries or entities with a specific focus on the environment. This neglect is not justified. The region is exhausting its natural resources at rates well above sustainable levels.

The environmental challenges facing the region are deep and varied, ranging from local to global pollution problems, water scarcity, degradation of arable land, solid waste problems, and/or illegal or over harvesting problems due to the lack of or slack regulation.

One reason why environmental problems tend to receive less attention than necessary in the region is the lack of systematic knowledge about the magnitude of these problems, their causes and possible remedies as well as weak research capacity in the area of environmental economics.

A special session will present research initiatives efforts by ERF and other collaborators to fill this knowledge gap, the current research agenda and proposed research, as well as the most important challenges and issues of priority in the region.

Conference description and papers.

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