Economic Research Forum (ERF)

The construction industry and economic growth in MENA countries

2369
Does the construction industry still lead economic growth in countries in the Middle East and North Africa? This column reports evidence on the relationship between construction investments and economic development for the ten biggest economies in the region over nearly half a century. The results indicate that the relative importance of construction in these countries has started to decline as GDP per capita grows.

In a nutshell

Increasing GDP per capita no longer corresponds to a relative increase in construction volume in MENA economies; these countries have become so mature that the relative importance of the construction activity has started to decline.

To continue to play its important role in the development strategy of countries, it would be an option for the construction sector to adjust to contemporary frameworks that promote innovative technologies, the green economy, smart cities and the like.

Such structural changes would inevitably require constraints on the construction industry’s production factors being removed, promoting easier access to financial markets and facilitating doing business in a more competitive environment.

Due to its effects on employment and supply chains, the construction industry is a central component of the economy as one of the main drivers of growth. Activities within the industry are also of importance for attaining particular development goals of a nation such as housing and infrastructure. This is true particularly for developing economies where the industry acts as an engine or stimulus that contributes to national income more than other industries do (World Bank, 1984; Ofori, 1990).

The relationship between a country’s development status and its level of construction activity has been explored by many researchers. Early studies, which date back to late 1960s and early 1970s, argue that there is a significant positive relationship between the two. In other words, the share of construction in gross domestic product (GDP) increases as GDP per capita increases (Turin, 1969), while the contribution of construction eventually starts to decline at some point when a sufficient level of national income is achieved (Strassmann, 1970) or when a stable rate of economic growth can be attained by a sufficient level of construction activity (Wells, 1986).

Following these preliminary findings, Bon (1992) articulates one of the most interesting hypotheses in construction economics, suggesting that the nexus between construction and economic development has an inverted U-shape profile. The main aspect of the proposition is that the share of construction in GDP increases in the early stages of economic development, but it slows down in the following stages as it starts to lose its significance in the overall economy.

This series of ‘stages’ has different facets of economic development represented by three types of economies: least developed countries; newly industrialised countries; and advanced industrial countries.

While this non-linear relationship, known as the ‘Bon curve’, is later confirmed by Crosthwaite (2000), Yiu et al (2004) and Girardi and Mura (2014), related research has not produced a consensus of convincing evidence supporting the hypothesis, particularly for developing economies. For example, Ruddock and Lopes (2006) find that the Bon curve holds only for the share of construction in the economy. Looking at 75 countries between 1994 and 2000, the authors reveal that construction activity does not switch from relative to absolute decline in further stages of economic development.

Wong et al (2008) complement these findings for Hong Kong. In addition, Choy (2011), using a sample of 205 economies from 1970 to 2009, states that the inverted U-shaped relationship is observable mainly within most developed countries.

Despite their mixed outcomes, these studies are unequivocal in the sense that the Bon curve may still provide an important paradigm for demonstrating the role of the construction sector in economic development. In a new study, we aim to verify the validity of the Bon curve with data on the ten biggest economies in the MENA region – namely, Saudi Arabia, Turkey, Iran, the United Arab Emirates, Egypt, Iraq, Qatar, Algeria, Kuwait and Morocco – between 1970 and 2018.

Figures 1 and 2 show the average progress in GDP and CVA among countries and the share of construction in GDP over those years.

 

Figure 1. Average GDP and construction values across countries from 1970 to 2018

Note: This figure shows the average improvement in GDP (on the right side) and CVA (on the left side) values among countries. Data are reported in millions and are denominated in US dollars at current prices.

 

Figure 2. Average construction share in GDP across countries from 1970 to 2018

Note: This figure shows the average improvement in construction share in GDP among countries.

 

Our research uses advanced panel data models to confirm the existence of the Bon curve: there is an inverted U-shaped pattern in the relationship between construction and economic development. Put alternatively, increasing GDP per capita no longer corresponds to a relative increase in construction volume in the economies of MENA countries in our sample. It seems that these countries have become so mature that the relative importance of the construction activity has started to decline.

Hence, the leading role of the construction industry in the economic growth of MENA countries is somewhat obscured. To continue to play its important role in the development strategy of countries, it would be an option for the construction sector to adjust to contemporary frameworks that promote innovative technologies, green economy, smart cities and the like.

Such structural changes would inevitably require constraints on the construction industry’s production factors being removed. Moreover, these countries should develop strategies to create a more institutionalised sector that has easy access to financial markets and should facilitate doing business in a more competitive environment. Governments should also carefully consider their monetary and fiscal policies in order not to distort factor prices.

 

Further reading

Bon, R (1992) ‘The future of international construction: secular patterns of growth and decline’, Habitat International 16(3): 119-28.

Choy, CF (2011) ‘Revisiting the “Bon curve”’, Construction Management and Economics 29(7): 695-712.

Crosthwaite, D (2000) ‘The global construction market: a cross-sectional analysis’, Construction Management and Economics 18(5): 619-27.

Girardi, D, and A Mura (2014) ‘The Construction-Development Curve: Evidence from a New International Dataset’, The IUP Journal of Applied Economics 13(3).

Ofori, G (1990) ‘The construction industry: aspects of its economics and management’, NUS Press.

Ruddock, L, and J Lopes (2006) ‘The construction sector and economic development: the “Bon curve”’, Construction Management and Economics 24(7): 717-23.

Strassmann, WP (1970) ‘The construction sector in economic development’, Scottish Journal of Political Economy 17(3): 391-409.

Turin, DA (1969) ‘The Construction Industry: Its Economic Significance and Its Role in Development’, University College Environmental Research Group.

Wells, J (1986) ‘The construction industry in developing countries: Alternative strategies for development’, Taylor & Francis.

Wong, JM, YH Chiang and TS Ng (2008) ‘Construction and economic development: the case of Hong Kong’, Construction Management and Economics 26(8): 815-26.

World Bank (1984) ‘The Construction Industry: Issues and Strategies in Developing Countries’.

Yiu, CY, XH Lu, MY Leung and WX Jin (2004) ‘A longitudinal analysis on the relationship between construction output and GDP in Hong Kong’, Construction Management and Economics 22(4): 339-45.

Tags: , , , ,

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.

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.

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.

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