Economic Research Forum (ERF)

Rethinking the state’s role in Arab economies

The Arab world's state-led development model may be set to reach a breaking point, as hundreds of millions of young people prepare to enter the labour market in the coming decades. This Project Syndicate column argues that with the public sector unlikely to be able to absorb these new workers, there is an urgent need to create a dynamic and competitive private sector.

In a nutshell

Since achieving independence, many Arab countries have adopted state-led development models that have left their economies overly reliant on the government: this is unsustainable.

Achieving the Sustainable Development Goals will require the involvement of dynamic private sectors that are capable of producing technological solutions and willing to provide critical financing.

Building a dynamic private sector capable of providing opportunities to the Arab world’s young workers will require vigilant and effective regulators, operating within a smart regulatory framework.

The Arab world has a long tradition of commerce and enterprise. Yet since achieving independence, many Arab countries have adopted state-led development models that have left their economies overly reliant on the government. This is unsustainable.

The Arab world’s economic model has endured, despite major setbacks in the 1990s, largely because the state employs a large share of workers and provides universal subsidies. This eliminates risk from citizens’ economic lives, entrenching their dependence on the government and stifling entrepreneurship and innovation. It also undermines the delivery of public services, stoking mistrust of the very government on which populations depend so heavily.

Now, the Arab world’s state-led development model may be set to reach a breaking point, as hundreds of millions of young people prepare to enter labour markets in the coming decades. With the public sector unlikely to be able to absorb these new workers, there is an urgent need to create a dynamic private sector that not only adopts, but also generates technological innovations that empower workers and deliver durable and inclusive growth.

This approach is in line with the demands of the Sustainable Development Goals (SDGs), which were approved by all United Nations member states – including all Arab countries – in 2015. Achieving the SDGs – which range from eliminating hunger and poverty to protecting the environment – will require the involvement of dynamic private sectors that are capable of producing technological solutions and willing to provide critical financing.

Private-sector financing – say, of the infrastructure projects demanded by SDG9 – is particularly important in the Arab world, where many governments are already burdened by debt. To help mobilise that financing, the World Bank Group has launched the Maximizing Finance for Development programme.

Of course, governments must also maximise their own resources. In the past, abundant investment and energy revenues limited the incentive to mobilise tax revenues. But, as government coffers are depleted, Arab countries – among the least efficient tax collectors in the world – are under growing pressure to pursue meaningful reform.

Arab governments must also boost the efficiency of their spending. As it stands, while most Arab countries spend a fair amount relative to their income levels, they achieve relatively poor outcomes, especially in health and education.

To improve the state’s functioning and regain citizens’ trust – developments that could facilitate tax collection – Arab governments should apply the concept of ‘value for money’ to public administration. Such a framework for assessing cost-effectiveness of public sector activities requires that data about those activities be collected, assessed and disclosed in a transparent way. Mechanisms such as information feedback loops would then enable authorities to identify quality issues and make improvements quickly.

Here too, the World Bank Group is taking steps to help. Because investing in human capital is the most important long-term action a government can take, the Human Capital Project focuses on identifying the factors that are undermining the efficiency of investments in this area.

Even before comprehensive data are available, however, some approaches for improving the efficiency of public spending and administration stand out. In particular, Arab countries can emphasise the localisation of development. By improving the capacity of local governments to plan, finance and deliver key services, including health and education, countries could boost value for money, build confidence among citizens and make significant strides toward achieving the SDGs.

A final area where reform is imperative is regulation. In many Arab countries, incumbent public and private firms – especially in critical sectors like financial services, telecommunication, and energy – enjoy significant advantages, including outright protection, onerous regulations that deter market entry by new players and inadequate limits on natural monopolies. This impedes competition and contestability, undermines the diffusion of general purpose technology and blocks the type of adaptation and evolution that a dynamic private sector requires.

Rather than control the economy outright, Arab governments should foster the emergence of independent yet accountable regulators that can help ensure improved economic outcomes. Of course, if history is any indication, the shift from a dirigiste state to a regulatory one will not be easy. But past experience offers useful lessons to guide this process. In any case, the regulatory status quo – which will condemn Arab youth to unemployment and disenfranchisement – is not an option.

This is all the more true at a time when tech giants like Facebook, Amazon, Tencent, and Alibaba – with matchmaking-based business models turbo-boosted by digital technology – are propelling a shift toward ‘ultra-concentration’. In this context, building a dynamic private sector capable of providing opportunities to the Arab world’s young workers will require even more vigilant and effective regulators, operating within a smart regulatory framework that addresses issues relating to the collection and use of data.

It is often said that private sector-led innovation is the key to enabling developing countries to leapfrog their way into the future. But this narrative should not be allowed to obscure the paramount importance of smart and innovative regulations to support such progress. The state’s role in Arab economies must improve, not diminish.

This article was originally published by Project Syndicate. Read the original article.

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