Keep all eyes on the macro
I was in the taxi on my way to the 8th Mediterranean Economic Rendezvous in Marseille. Without much sleep on the plane and with little time to gather my thoughts (I was scheduled to speak as soon as I arrived on site), I struggled to concentrate on the key points I was going to make at this event an hour later. We had just finished the annual Economic Development and Prospects report which this year focused on the experience of the post-revolutionary economies in the Middle East and North Africa (MENA). The report also looked more broadly at the developments and prospects for the region after a year in transition.
I arrived just in time and as I took my spot on the panel I looked at the audience which was diverse and included policy makers, academics and businessmen from the region. There were also representatives from major multilateral organizations and diplomatic missions. I spoke last so by the time my turn came I had the benefit of hearing the other panelists who spoke about the structural issues plaguing their countries and the political challenges during the transition period. These are no doubt critical issues for inclusive growth, but they are also not the full picture. In particular, the long-run gains that might be expanded if these are handled well could be postponed indefinitely if current macroeconomic vulnerabilities are not addressed.
So I took the opportunity to turn to a discussion of macroeconomic developments in the region and the near-term outlook. I started with an account of the experience of the post-revolutionary economies – Egypt, Tunisia, Libya and Yemen — which our recent report also focuses on. Their recovery, following a period of growth decelerations during the Arab Spring turmoil, was relatively quick and, in some cases, the growth declines in 2011 were less dramatic than those observed around the year of regime change during previous transitions elsewhere in the world. In sum, things are improving. But there are a number of challenges going forward. Macroeconomic fundamentals overall have weakened in most developing MENA countries in 2011-2012 as growth slowed relative to previous years and governments responded to social pressures with expansionary fiscal policies. As a result, fiscal deficits widened, the governments’ debt burden rose, and real interest rates increased. In a move by governments to avoid currency depreciations, official reserves declined, in some cases steeply. High oil prices helped exporters, but exacerbated current account and fiscal deficits in the oil importing ones, especially in places where energy is heavily subsidized.
A key point I wanted the audience to take away was that attention to macroeconomic fundamentals should not be overlooked as political players try to sort out power sharing arrangements and put in place rules of engagement. Sadly, this is precisely what happened in my own country during transition and we suffered for many years as a result. Bulgaria paid a dear price for letting the macroeconomic situation get out of hand in the years following the regime change in 1989. Subsidies to loss-making state enterprises and lack of fiscal adjustment led to escalating internal and foreign debts and surging inflation, as a string of governments failed to stop the extraction of state resources. There was unwillingness to close down unprofitable firms for fear of increasing unemployment, so bad debts kept rising and state-owned banks kept lending to them, while the central bank, which was not independent, kept subsidizing the government.
Fortunately, the transition economies of MENA have more experience with markets than we did so such an extreme situation should be avoidable. But it shows how rapidly economic woes can spiral out of control if left unattended.
My final point was about the role of uncertainty. Although regional economic activity is expected to accelerate in 2012, growth is expected to retreat slightly in 2013, owing to the rebound abating in transition countries, some moderation in oil exporters, and a weak external environment. The single biggest risk to this forecast is prolonged political and policy uncertainty, which is a key constraint to private investment and trade, particularly trade in services, while political and social unrest are serious downside risks to the outlook. So while we need to keep our eyes on the macro, the political challenges, which the other panelists had focused on, are of course inextricably linked.
For more information on the subject read the latest Economic Developments and Prospects report.