Economic Research Forum (ERF)

A Sherman Act-like moment is needed in Africa and the Middle East

857
With the population of Africa and the Middle East set to double by 2050, efforts to ‘demonopolise’ the economies of the region – akin to late 19th century US federal legislation that outlawed monopolistic business practices – are vital to achieve economic transformation. Collectively leveraging the rise in pent-up domestic demand will facilitate the development of domestic productive systems, transforming raw products and supporting the creation of decent jobs.

In a nutshell

Too often the blurry relationship between business and politics, whether it is linked to the presence of state-owned or private monopolies (or oligopolies), comes in the way of economic transformation.

Fair competition through private sector development will drive innovation and investment in ways that the public sector cannot outside sectors where there are natural monopolies or in presence of externalities.

The pandemic is likely to exacerbate the move away from globalisation and promote regionalisation around big economic blocs: this is an opportunity for African and Middle Eastern countries to deepen regional integration and create their own value chains.

When economists refer to ‘structural transformation’, they usually mean the shift in factors of production – such as labour and capital – from low-productivity sectors (typically agriculture) to high-productivity ones (such as manufacturing and high-quality services).

Few African and Middle Eastern economies have had success transforming structurally and many appear stuck in low-productivity mode. Indeed, while there is substantial heterogeneity in the level of income, geography, resource endowments and legal traditions, parts of eastern and southern Africa and select parts of the Middle East (Kenya, Mauritius and Dubai) have had some success in diversifying their economies.

The mega-trends in automation and digitalisation have tested the premise that developing countries like those in Africa and the Middle East can follow the traditional path of industrialisation that advanced economies and China have followed. Digitalisation removes the compartmentalisation between different sectors, making it difficult to rely on old distinctions. For example, mining and agriculture sectors are subject to a wave of technological innovation in big data and high-tech services, which blur the traditional distinction between primary and tertiary sectors.

The Covid-19 pandemic is likely to exacerbate the move away from globalisation that began early this century and promote regionalisation around big economic blocs – led by the United States, the European Union and China. Regionalisation provides an opportunity for African and Middle Eastern countries to deepen regional integration and create their own value chains.

In addition to structural change, ‘transformation’ can also refer to physical processing, which adds value to the raw materials that Africa and the Middle East have in abundance. Such a transformation entails a move up the value chain, which can help the region mitigate the vagaries of commodity price fluctuations.

Whether it is cocoa, oil, metals or wood, the lack of physical transformation is widespread, and it has frustrated the ability of Africa and the Middle East to create good jobs. Indeed, waves of mineral and hydrocarbon discoveries and an abundance of fertile land, especially in Africa, make the region a prime source of natural resources for the rest of the world. But there are too few jobs in the primary sector and many are low paid. Moreover, despite the abundance of its resources, Africa and the Middle East import billions of dollars of processed food and refined products annually.

Attracting foreign or domestic investment in the processing of raw materials will create good jobs with decent wages and result in a bigger share of the ultimate value of the raw materials staying in the region. Pro-active policies to foster local content include using tax policy design to provide incentives for value addition and limiting exports of raw products. Gabon has had some success in wood processing, Botswana in diamond cutting and Nigeria in oil extraction – all of which show that it is possible to move up that value chain and localise jobs.

Value added tax (VAT), when well designed, can be an important tool for formalisation. Informality suffers from both chronically low productivity and profitability but can be given incentives to move up the value chain. For example, adjusting the VAT threshold liability – the level at which a firm is subjected to VAT – can encourage small agriculture farmers to get rebates on their investments and hence move up the value chain.

Commodity producers have tried other approaches to maximising the value of their natural resource endowments. An important one is the cartel. In response to the unfair shake they believed they received from the exploitation of natural resources, developing countries have set up producer cartels, such as the Organization of the Petroleum Exporting Countries (OPEC).

While these cartels may get higher prices for the primary commodity and add revenue to government coffers, in practice advanced economies eventually find alternative suppliers (for example, non-OPEC producers) or develop alternative products (such as synthetic palm oil or shale oil). Moreover, cartels do not resolve either a producer’s exposure to the boom-bust price cycle in raw commodities or the need to create a large number of good jobs. Transformation appears indispensable for getting out of the development trap.

Why has it been so difficult to transform raw products in the region? Trade theory helps explains why, when transport costs are low, transformation activities cluster in advanced economies and developing countries are relegated to supplying raw materials. During the colonial era, that structure of interdependence was imposed through coercion and military might. At the onset of independence, many developing countries tried to escape that trap by adopting import substitution policies.

But policies to encourage domestic production of goods that used to be imported largely failed, in part because of lack of comparative advantage and ineffective state-owned enterprises. The paradigm has since shifted from import substitution to export promotion, which has also met with little success despite government efforts – such as establishing special zones with tax and other advantages for exporting firms.

Fostering a vibrant private sector to promote good jobs while ensuring regulation to fight anti-competitive practices is the best approach. In addition to the appropriate design of tax and trade policies, the region needs an antitrust moment like the late 19th century Sherman Act in the United States – the first federal legislation that outlawed monopolistic business practices – to leverage collectively the rise in pent-up domestic demand to facilitate the development of domestic productive systems.

As the population of Africa and the Middle East is set to double by 2050, efforts to ‘demonopolise’ economies of the region are vital to achieve economic transformation. Too often the blurry relationship between business and politics, whether it is linked to the presence of state-owned or private monopolies (or oligopolies), comes in the way of economic transformation. Indeed, fair competition through private sector development will drive innovation and investment in ways that the public sector cannot outside sectors where there are natural monopolies or in presence of externalities.

Africa has embarked on an ambitious African Continental Free Trade Area (AfCFTA) to stimulate trade in the continent. To promote a deep agreement that fosters investment in transformation, the agreement will have to coordinate trade, competition and tax policies to ensure that there are no loopholes. The agreement should leverage the rising demand from the African consumer to stimulate investment in the continent to serve that demand.

Yet the experience of the European Union, which started with a coal and steel community to promote narrow and deep agreement and eventually blossomed into a full-throated confederation, demonstrates the importance of avoiding shallow and broad agreements. Deepening the AfCFTA by focusing on transformation of agriculture products is the best way to start. Indeed, agribusiness could be as pivotal for Africa as coal and steel for Europe because of the benefits of food security and jobs for the continent.

Similarly, it is high time for countries in the Middle East to deepen their regionalisation efforts, including in regionally traded services such as electricity and telecoms, by relying on the rising power of their collective domestic demand. That should be done through strengthening their competition apparatus to support the development of a more genuine domestic private sector, in turn creating decent jobs. Opportunities for the Middle East and Africa to deepen their economic ties through trade and investment is a no-brainer provided the walls of vested interest can be torn down.

Most read

EU climate policy: potential effects on the exports of Arab countries

The carbon border adjustment mechanism aims to ensure that Europe’s green objectives are not undermined by the relocation of production to parts of the world with less ambitious climate policies – but it could impose substantial costs on developing countries that export to the European Union. This column examines the potential impact on exporters in the Arab world – and outlines possible policy responses that could mitigate the economic damage.

Financial development, corruption and informality in MENA

Reducing the extent of informality in the Middle East and North Africa would help to promote economic growth. This column reports evidence on how corruption and financial development influence the size of the informal economy in countries across the region. The efficiency of the financial sector in MENA economies reduces the corruption incentive for firms to seek to join and stay in the formal sector.

Green hydrogen production and exports: could MENA countries lead the way?

The Arab region stands at the threshold of a transformative opportunity to become a global leader in green hydrogen production and exports. But as this column explains, achieving this potential will require substantial investments, robust policy frameworks and a commitment to technological innovation.

Climate change threats and how the Arab countries should respond

The Arab region is highly vulnerable to extreme events caused by climate change. This column outlines the threats and explores what can be done to ward off disaster, not least moving away from the extraction of fossil fuels and taking advantage of the opportunities in renewable energy generation. This would both mitigate the potential for further environmental damage and act as a catalyst for more and better jobs, higher incomes and improved social outcomes.

Child stunting in Tunisia: an alarming rise

Child stunting in Tunisia seemed to have fallen significantly over the past two decades. But as this column reports, new analysis indicates that the positive trend has now gone dramatically into reverse. Indeed, the evidence is unequivocal: the nutritional health of the country’s youngest citizens is rapidly deteriorating and requires immediate and decisive action.

Freedom: the missing piece in analysis of multidimensional wellbeing

Political philosophy has long emphasised the importance of freedom in shaping a meaningful life, yet it is consistently overlooked in assessments of human wellbeing across multiple dimensions. This column focuses on the freedom to express opinions, noting that it is shaped by both formal laws and informal social dynamics, fluctuating with the changing cultural context, particularly in the age of social media. Data on public opinion in Arab countries over the past decade are revealing about how this key freedom is perceived.

Exchange rate undervaluation: the impact on participation in world trade

Can currency undervaluation influence participation in world trade through global value chains (GVC)? This column reports new evidence on the positive impact of an undervalued real exchange rate on the involvement of a country’s firms in GVCs. Undervaluation acts as an economy-wide industrial policy, supporting the competitiveness of national exports in foreign markets vis-à-vis those of other countries.

New horizons for economic transformation in the GCC countries

The countries of the Gulf Cooperation Council (GCC) have historically relied on hydrocarbons for economic growth. As this column explains ahead of a high-level ERF policy seminar in Dubai, emerging technologies like artificial intelligence, blockchain and robotics – what some call the fourth industrial revolution – present a unique opportunity for the region to reduce its dependence on oil and make the transition to a knowledge-based economy.

Shifting public trust in governments across the Arab world

The Arab Spring, which began over a decade ago, was driven by popular distrust in governments of the region. The column reports on how public trust has shifted since then, drawing on survey data collected soon after the uprising and ten years later. The findings reveal a dynamic and often fragile landscape of trust in Arab governments from the early 2010s to the early 2020s. Growing distrust across many countries should raise concerns about future political and social instability.

Corruption in Iran: the role of oil rents

How do fluctuations in oil rents influence levels of corruption in Iran? This column reports the findings of new research, which examines the impact of increases in the country’s oil revenues on corruption, including the mechanisms through which the effects occur – higher inflation, greater public spending on the military and the weakness of democratic institutions.




LinkedIn