Economic Research Forum (ERF)

Transparency for a time of crisis and beyond

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In times of crisis like the current pandemic, citizens turn to their governments for action and reliable information – but in many countries of the Middle East and North Africa, the state has lost much of its credibility. This column summarises a new report on the region’s notable lack of transparency and how that relates to the challenges of low growth, macroeconomic fragility and stagnant labour markets.

In a nutshell

The grievances that sparked protests across the Middle East and North Africa long before the current crisis can only be addressed by rebuilding trust.

A new social contract starts with transparency and accountability – which could, in turn, lead to growth, more robust analyses of fiscal sustainability and improved policies for tackling substantial macroeconomic and employment challenges.

Through transparency, prosperity with social trust can be achieved across the region in the years and decades to come.

As the coronavirus pandemic sweeps across the Middle East and North Africa (MENA), uncertainty and fear are gripping the streets. While citizens have turned to their governments to act, decades of lack of transparency has bred distrust and undermined the credibility of the state. People cannot be certain if daily reporting and updates are true. As one citizen in the region aptly described the leadership response to the coronavirus: ‘When you lose people’s trust, even when you tell the truth, people won’t believe you.’

As if the spread of a global pandemic during a time of social unrest were not enough, more than any other region of the world, MENA is confronting two distinct but related shocks. Alongside the spread of the virus, oil prices have collapsed as a direct result of the global pandemic, putting pressure on incomes and fiscal accounts of oil exporters, and indirectly affecting the developing economies of the region that rely on worker remittances, foreign direct investment and transfers from their high-income neighbours in the Gulf Cooperation Council.

Lack of transparency

In a new research report, my co-authors and I bring attention to one of the root causes of social frustration that was apparent in the streets of MENA well before the arrival of Covid-19: lack of transparency (Arezki et al, 2020).

We equate transparency with the regular publication of credible information by the state. The state has the responsibility of not only maintaining and regularly updating micro and macroeconomic data, but it must also make data accessible to the public on a regular and predictable timetable.

What’s more, the data and related indicators should meet minimum accepted international standards regarding definitions of key economic and social indicators, so that they can be compared internationally and interpreted appropriately not only by academics and experts but, in most circumstances, by independent media.

Our study provides technical analyses of the region’s notable lack of transparency and how it relates to the challenges of low growth, macroeconomic fragility and stagnant labour markets.

Lack of transparency hurts even more when systems are under stress by potent threats such as the Covid-19 pandemic. The ramifications of the lack of trust, forged by limited transparency, come into stark relief when citizens are confused about what to believe.

Losing credibility during a crisis such as a pandemic can be deadly. The lack of transparency across MENA has taken several forms – from a dearth of overall data, to a lack of accessibility and questionable accuracy of data that does exist. The situation has become deeply embedded in various institutions within the region. Now, it may have severe consequences.

Economic growth

One area where we are likely to see the effects of Covid-19 is economic growth, at least in 2020 and even well into 2021. Due to the dual shock, as of 1 April 2020, World Bank economists expected MENA output to decline in 2020. This is in sharp contrast to the growth forecast of 2.6% published in October 2019.

The difference of 3.7 percentage point growth downgrade is arguably a measure of the expected costs associated with the dual shocks of Covid-19 and the oil price collapse. Moreover, such estimates of the costs are highly uncertain and likely to change as new information comes to light.

One contribution of our study is thus an analysis of recent growth forecasts by both private sector and World Bank economists. It shows that between mid-March and 1 April, the World Bank expected economic losses doubled, from roughly 2.1% of the region’s 2019 GDP to 3.7%. These estimates remain highly uncertain: indeed, economic forecasts tend to be more uncertain during periods of severe economic slowdowns than during tranquil times.

Perhaps more importantly, since the beginning of the century, growth of output per capita across MENA has been lower than typical growth for economies with the same levels of development. Had MENA’s growth of output per capita been the same as that of a typical (median) peer economy over the past two decades, the region’s real output per capita would be at least 20% higher than what it is today.

A large part of MENA’s low growth is arguably due to a lack of data and transparency. Many MENA countries have either lagged in their capacity to generate data or have prevented access to data, both of which lead to poor policies. Just as lack of data about the spread of a virus hampers public policy and social responses, lack of data and imprecise indicators of public debt and unemployment hamper policy actions to deal with these longstanding development challenges.

Our report argues that reliable data and transparency can help to improve public policies and enhance people’s trust in the state. In fact, since 2005, we find a strong empirical association between statistical capacity – including the regular publication of microeconomic and macroeconomic information – and growth. Moreover, the evidence from five models suggests that an observed decline in MENA’s transparency between 2005 and 2018 is associated with an expected loss of the region’s income per capita ranging from 7% to 14%.

Macroeconomic challenges

MENA’s macroeconomic fragility has also come to the forefront during recent years. Our report presents a battery of tests of current account and fiscal account vulnerabilities in the region and the rest of the world. But the credibility of these analyses critically depends on data transparency.

MENA countries generally do not report net public debt, a crucial metric for assessing debt sustainability. Even for gross public debt, MENA countries vary greatly in their reporting standards. World Bank economists and other external analysts do not have access to vital information about many types of public debt. Thus, any assessment of the sustainability of the region’s public debt needs to be interpreted with a grain of salt.

With that in mind, considering the lack of transparency in debt indicators, the analyses presented in our report suggest that MENA countries continue to face notable macroeconomic challenges:

  • First, three developing MENA economies appear to have unsustainable current account deficits, which in turn are due to low GDP per working age population. In other words, low growth has brought external macroeconomic fragility to some MENA economies.
  • Second, in 2019, 11 MENA countries appeared to be on unsustainable fiscal paths – that is, the primary fiscal balances were insufficient to stabilise their reported gross debt-to-GDP ratios.

On the other hand, we do find some encouraging evidence (also imperfect, due to data constraints) to suggest that MENA’s developing countries have been on a more sustainable fiscal path than the rest of the world, on average, in recent years. Either way, for good or for bad, the lack of transparency of debt indicators in MENA limits our ability to reach firm conclusions about the region’s fiscal vulnerabilities.

The labour market

The labour market is another area where MENA faces both notable challenges and constraints imposed by lack of transparency in the form of imprecise indicators of labour market outcomes.

Among the challenges are persistently high reported unemployment rates and low rates of female labour force participation. These issues are related to countries’ unsustainable current account imbalances and fiscal paths because the low employment of the working age population is associated with both external imbalances and inadequate revenue bases.

One of the chief constraints regarding labour markets is the lack of uniformity in the definition of ‘employment’. A review of MENA’s standards and definitions of labour market outcomes shows that countries rely on varying and often uncertain definitions of employment, which in turn affect indicators of unemployment and informality – with little harmonisation – either across the region, or with respect to international standards.

In fact, for countries with independent sources of nationally representative labour force data for recent years (Egypt, 2018; Jordan, 2016; and Tunisia, 2014), we are not able to replicate the official reported unemployment rates. We argue that the differences are not innocuous because the discrepancies disproportionately distort the role of women and rural areas in national labour markets. It would be desirable to have access to all countries’ official labour force surveys to have an informed dialogue about definitions and methods.

The need to rebuild trust

The grievances that sparked protests across the region long before the current crisis can only be addressed by rebuilding trust. A new social contract starts with transparency and accountability, which could, in turn, lead to growth, more robust analyses of fiscal sustainability, and improved policies for tackling the macroeconomic and employment challenges that have been allowed to fester for years – if not decades. Through transparency, prosperity with social trust can be achieved across MENA in the years and decades to come.

Further reading

Arezki, Rabah, Daniel Lederman, Amani Abou Harb, Nelly El-Mallakh, Rachel Yuting Fan, Asif Islam, Ha Nguyen and Marwane Zouaidi (2020) Middle East and North Africa Economic Update, April 2020: How Transparency Can Help the Middle East and North Africa, World Bank.

Register to attend our upcoming live webinar on How Transparency Can Help The Middle East and North Africa on May 5, 2020 at 4:00 pm Cairo Local Time.

 

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