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characteristics

VIEWS: 516 PAGES: 70

									   Institutional Change and
Development in the Middle East
       and North Africa

      Mustapha K. Nabli
      Senior Advisor, World Bank


        Inaugural Lecture
          CREMed
Barcelona, 7 November 2008


          CREMed. Inaugural Lecture.
           European Institute of the
       Mediterranean, November 7, 2008
Three main messages about MENA

   A development path in MENA more
    complex than commonly recognized with
    major social and human development
    achievements but daunting new labor
    market and environmental challenges
   The most critical challenge of institutional
    change: moving from an old development
    model to a new and more adapted model
    has proven very difficult
   Root causes are to be found in the
    political economy of institutional change
                CREMed. Inaugural Lecture.
                 European Institute of the
             Mediterranean, November 7, 2008
OUTLINE
I- Background and Long Run
   Development Outcomes
II- A major challenge of institutional
   change
III- Challenge #1: Employment and
   Private Sector Development
IV. Challenge #2: Education
V. Challenge #3: Water
VI. Political Economy
             CREMed. Inaugural Lecture.
              European Institute of the
          Mediterranean, November 7, 2008
I. Background and Long Run
   Development Outcomes
1.   Background: a diverse region
2.   Poverty reduction and human
     development : major gains
3.   Economic growth: mediocre, volatile
     and hesitant




              CREMed. Inaugural Lecture.
               European Institute of the
           Mediterranean, November 7, 2008
(1) A diverse region: Three Major
Country Groupings
   Resource-poor, labor-abundant (RPLA) or
    emerging economies: Egypt, Jordan, Lebanon,
    Morocco, Tunisia, West Bank and Gaza
    Population: 124 Mill. GDP: $US 225 billions
   Resource-rich, labor-abundant (RRLA) or
    transition economies: Algeria, Iran, Iraq, Syria,
    Yemen
    Population: 168 Mill. GDP: $US 400 billions
   Resource-rich, labor-importing (RRLI) or rich
    economies: GCC (Bahrain, Kuwait, Oman,
    Qatar, Saudi Arabia, UAE) +Libya
    Population: 40 Mill.   GDP: $US 666 billions
                 CREMed. Inaugural Lecture.
                  European Institute of the
              Mediterranean, November 7, 2008
     GDP per capita $ 2005


                          RPLA
GDP/Cap $ US
                               RRLA
    PPP
                                                                     RRLI



                   RPLA
GDP/Cap. $US       RRLA
                                                          RRLI


               0      5000          10000         15000      20000   25000
                        CREMed. Inaugural Lecture.
                         European Institute of the
                     Mediterranean, November 7, 2008
           GDP per capita $ PPP 2005

RPLA


                                                                 Max
RRLA                                                             Average
                                                                 Min



RRLI



       0       20000          40000            60000     80000

                          CREMed. Inaugural Lecture.
                           European Institute of the
                       Mediterranean, November 7, 2008
              (2) Dramatic poverty reduction and
              low absolute poverty
         % of Poeple living below $1.25 a day                         % of People Living Below $2 a day

                                                         70
60

                                                         60
50
                                                         50
40
                                                         40
30
                                                         30

20                                                       20

10                                                       10

0                                                         0
     1981 1984 1987 1990 1993 1996 1999 2002 2005               1981 1984 1987 1990 1993 1996 1999 2002 2005

                MENA region                 CREMed. Inaugural
                                  All regions                Lecture.
                                           European Institute of the         MENA region      All regions
                                       Mediterranean, November 7, 2008
            Huge progress in terms of health
              indicators— Fertility, infant
              mortality, life expectancy
    Fertility rate, total (births per
                                                                                                                          Life expectancy at birth, total (years)
                woman)
                                                    Mo rt a lit y ra t e , inf a nt ( pe r 1, 0 0 0 liv e
                                                                                                                   80
                                                                           birt hs )
7                                                                                                                  75
                                              138
        East                                                        MENA
6       Asia                                  118 Latin America                                                    70



                                              98                                                                   65
5      Latin                                                                                                             Lat in America
                              MENA
      Americ                                  78
                                                                                                                   60
4        a
                                              58                                                                                            MENA
                                                        East Asia                                                  55
                                                                                                                        East Asia
3                                             38
                                                                                                                   50
                                              18
2
                                                     1960      1970        1980        1990     2000        2004   45
    1960 1970 1980 1990 2000 2004                                                                                         1960       1970    1980   1990   2000     2004
                                                       CREMed. Inaugural Lecture.
       Source: World Development Indicators             European Institute of the
                                                    Mediterranean, November 7, 2008
       (3) Economic growth: mediocre and volatile


                         GDP per capita growth I MENA and other regions
                                           (percent)


 8
 7
 6
 5
                                                                                             1970s
 4
                                                                                             1980s
 3
                                                                                             1990s
 2
                                                                                             2000s
 1
 0
     East Asia &    Europe &      Latin America   South Asia   Sub-Saharan   Middle East &
-1     Pacific     Central Asia    & Caribbean                    Africa     North Africa
-2
                                     CREMed. Inaugural Lecture.
                                      European Institute of the
                                  Mediterranean, November 7, 2008
     …and varied across sub-regions and
     countries
              GDP per capita growth in the MENA region

6

4

2                                                          1970s
                                                           1980s
0
       RRLI                  RRLA                   RPLA   1990s
-2                                                         2000s

-4

-6
                     CREMed. Inaugural Lecture.
                      European Institute of the
                  Mediterranean, November 7, 2008
II. A most critical challenge of
institutional change

   Started with an old development model based
    on an unwritten social contract, with central
    role of the state
   Major achievements but breaks down in the
    1980s
   Move to a new development model with
    different role of the state and central role for
    individuals, markets, private sector
   Changes in many policies but failure to see
    needed institutional change

                CREMed. Inaugural Lecture.
                 European Institute of the
             Mediterranean, November 7, 2008
Old social contract and central role
of the state—1950s to 1970s

Institutional and policy characteristics:
 Widespread state ownership of assets and limited
   role of the private sector
 Preference for the state and state planning rather
   than markets in managing economies
 Heavy inward orientation
 Strong redistribution and very active social
   agenda, with state provision of public services
   and safety nets
 Limited political voice and participation
 Dominant role of security and military
   establishments Inaugural Lecture.
                 CREMed.
                European Institute of the
            Mediterranean, November 7, 2008
Major gains but crises and collapse
of old social contract- mid-1980s

   Major gains as we will see later
   First signs of difficulties—macroeconomic
    crises in the 1970s/Tunisia, Egypt
   Generalized crises in the 1980s and
    growth bust by the mid-1980s
   Macro and structural adjustment
    programs since the early 1980s


               CREMed. Inaugural Lecture.
                European Institute of the
            Mediterranean, November 7, 2008
Slow and hesitant transformation to
a new social contract—since the
1980s
   From public sector to private sector driven:
    Emergence of private sector
   More open economies: slow external
    liberalization
   Towards more liberalization and deregulation
    of markets
   More diversified economies
   Continuation of many old redistributive
    policies (subsidies)
   Continued limited political voice and
    participation
                CREMed. Inaugural Lecture.
                 European Institute of the
             Mediterranean, November 7, 2008
Failure to meet many critical
challenges requires deeper
institutional change

   Employment challenge
   Higher expectations by a younger
    and more educated population
   Pressures of globalization
   Critical water and environmental
    challenges



              CREMed. Inaugural Lecture.
               European Institute of the
           Mediterranean, November 7, 2008
Critical institutions which need to
change

   Transition to institutions with less
    prevalence of “personal exchange” both
    in the political and economic domains
   Economic institutions with strong private
    property rights, less rent-seeking, more
    open markets, rules-based government
    regulation and intervention
   Political institutions with greater voice
    and accountability
               CREMed. Inaugural Lecture.
                European Institute of the
            Mediterranean, November 7, 2008
Three case studies to illustrate
Three recent major flagship reports by the
  World Bank:
 Policies, Institutions and Credibility
  of Market Governance in MENA:
    Breaking through Barriers of Private-Led
    growth (forthcoming)
   The Road Not Traveled:
    Education Reform in the MENA Region (2008)
   Making the Most of Scarcity :
    Accountability for Better Water Management
    Results in the Middle East and North Africa
    (2007)

                CREMed. Inaugural Lecture.
                 European Institute of the
             Mediterranean, November 7, 2008
III. Challenge #1: Employment and
Private Sector Development

   Slow/delayed demographic transition,
    surge in labor force growth, and job
    creation as the most critical challenge
   Private sector development is the key to
    job creation and facing the labor market
    pressures
   Private sector has not been up to the
    challenge yet

               CREMed. Inaugural Lecture.
                European Institute of the
            Mediterranean, November 7, 2008
                                         Demographics: surge in population
                                         growth followed by steep decline

                                                                          Population Trends in MENA, 1950-2050



                                  3.5                                                                                                              600.0



                                                                                                                     Population
                                   3
                                                   Population grow th                                                                              500.0
Average Annual Growth (percent)




                                  2.5




                                                                                                                                                           Population (in millions)
                                                                                                                                                   400.0


                                   2

                                                                                                                                                   300.0

                                  1.5


                                                                                                                                                   200.0
                                   1



                                                                                                                                                   100.0
                                  0.5



                                   0                                                                                                               0.0
                                        1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
                                                                           CREMed. Inaugural Lecture.
                                                                            European Institute of the
                                                                        Mediterranean, November 7, 2008
                                     … a delayed demographic transition
                                     leading to major surge in labor force
                                     growth in MENA …
                                        Dynamics of Labor Supply in MENA Countries, 1950-2020 (percent) - NEW
                                66                                                                                      4
                                         Participation rate (end of
                                64       decade, left axis)
                                         Working age population                                                         3.5
                                62       growth (right axis)
 Participation rate (percent)




                                         Labor force growth




                                                                                                                              Average annual growth
                                60       (right axis)                                                                   3

                                58
                                                                                                                        2.5
                                56

                                54                                                                                      2

                                52
                                                                                                                        1.5
                                50

                                48                                                                                      1
                                       1970s
                                      1950s        1980s
                                                    1960s        1990s                             2000s        2010s
                                      CREMed. Inaugural Lecture.
Source: ILO 1996 (pre-1980), ILO 2005. European Institute of the
                                  Mediterranean, November 7, 2008
       Three major periods
                   Period I            Period II      Period III
                   1960s to            Mid-1980s to   Since 2000s
                   Mid-1980s           Early-2000s

Labor force        Low                 High           High
growth
Economic growth    High                Low            High

Migration          High                Low            Low

Employment         Large in            Low            High in
creation           public                             private
Unemployment                             High
                   Low Inaugural Lecture. (youth, Lower
                    CREMed.
                     European Institute of the
                  Mediterranean, Novemberfemale)
                                          7, 2008
Recent improvements in labor
markets, MENA 2000-2005
 Includes: Algeria, Bahrain, Egypt, Iran, Jordan, Kuwait, Morocco, Qatar, Saudi Arabia, Tunisia,

United Arab Emirates, West Bank and Gaza.
 6.0
                                                                               5.1
 5.0                                                      4.5

 4.0                                 3.6

 3.0             2.8

 2.0

 1.0

 0.0
               WAP                    LF                JOBS                 GDP
                               CREMed. Inaugural Lecture.
                                European Institute of the
                            Mediterranean, November 7, 2008
Unemployment rates have fallen but
remain high

16
     14.3                 2000           2005
14
                         12.2
12                                               11.3
            10.8
                                  10.3                     9.9
10

 8

 6

 4

 2

 0
       MENA                  Excl Alg
               CREMed. Inaugural Lecture.       Excl Alg, Eg, Irn
                European Institute of the
            Mediterranean, November 7, 2008
     Need to create better quality jobs
7

6       Agriculture                   Industry
5       Services                      Work at home               2.5
4                                        0.1
3                                                  2.5           1.4
                                        1.5
                                                           3.6
2                  0.8         1.9                               0.8
       2.1
1                        0.4
                                        1.9        1.9           1.4
                   0.9         0.5
             0.4                                           0.6
0
                               0.3                         0.0
      -1.4
-1

-2
                               TUN



                                         IRN




                                                           JOR
                   MOR




                                                                 ALG
       WBG




                                                    EGY

                            CREMed. Inaugural Lecture.
                             European Institute of the
                         Mediterranean, November 7, 2008
                       …at the same time labor force
                       growth will continue to be high for
                       the next 15-20 years (new numbers)
                    4.0

                    3.5

                    3.0
% growth per year




                    2.5                                                  SSA
                                                                         MENA
                    2.0
                                                                         SA
                    1.5                                                  LAC

                    1.0

                    0.5                                                  EAP
                    0.0
                                                                         ECA
                    -0.5
                           2000-2005          2005-2010             2010-2020
                                     CREMed. Inaugural Lecture.
                                      European Institute of the
                                  Mediterranean, November 7, 2008
Private Sector is Key for Job
Creation

   Challenge of : Quantity of jobs, Quality,
    and Flexibility and Adaptation to
    globalization
   But performance has been weak
   Progress on reforms mixed
   Credibility of policies and reforms and
    accountability remain critical issues


                CREMed. Inaugural Lecture.
                 European Institute of the
             Mediterranean, November 7, 2008
                 Private Sector Performance (1) weak
                 compared to other regions
                                                                                1985-89
           Middle-East                                                          1990-94
          North Africa                                                          1995-99
                                                                                2000-04
                                                                                2005-07
         Sub-Saharan
                 Africa




       Latin America
        & Caribbean




           Europe and
          Central Asia




              South Asia




                  East Asia
                                           CREMed. Inaugural Lecture.
                                            European Institute of the
                                        Mediterranean, November 7, 2008
* Or most recent available year.   0%        5%        10%        15%     20%      25%    30%
      Private Sector Performance (2) low
      growth of private investment
                    Private Investment Growth
                            (per annum - weighted average)


14%    13.14%

12%


10%
                  8.62%
8%


6%


4%                                3.66%
                                                    3.01%     2.80%
                                                                         2.47%
2%


0%
        1984-06   1981-05         1985-05           1995-04    1982-04   1980-03
        EAP (4)   SAS (4)CREMed. Inaugural Lecture.
                                 SSA (30)      ECA (18)       MENA (6)   LAC (14)
                          European Institute of the
                      Mediterranean, November 7, 2008
                      Private Sector Performance (3)
                      varied across sub-groups of
                      countries
                                Figure 2. Private Investment in MENA

                 19

                 17

                 15
percent of GDP




                 13

                 11

                  9

                  7

                  5
                      1995   1996   1997    1998   1999   2000   2001   2002   2003   2004   2005   2006
                                              CREMed. Inaugural Lecture.
                                               European Institute of the
                                               RPLA        RRLA        RRLI    MENA
                                           Mediterranean, November 7, 2008
Progress on Reforms for Private
Sector Development (1)

   during the last 20-25 years efforts to increase
    the role of the private sector in the economies of
    the region
   all countries of the region undertook to reform
    their policies and institutions and made
    progress in shifting their economic systems to
    be more private sector market driven.
   progress with reform has been mixed and
    varied significantly across areas of reform, and
    across individual countries and country
    groupings.
                 CREMed. Inaugural Lecture.
                  European Institute of the
              Mediterranean, November 7, 2008
           Progress on Reforms for Private
           Sector Development (2) Summary
Reform area                   Resource-poor          Resource-rich     Resource-rich
                              Labor-abundant         Labor-abundant    Labor-importing
Macroeconomic Environment              0                      +1              +2
                                (Lebanon: -2)
                                       0                      -1              +1
Trade Policies                                         (Algeria: +1)
                                       0                      -1              +2
Regulatory Environment           (Jordan: +1,
                                  Egypt: -2)
Financial Sector                       +1                     -2              +2
                                ( Lebanon: +2)
Weight of public sector                0                      -2              -2
Quality of public                      +1                     -2              +1
administration                     (Egypt: -1)
                               CREMed. Inaugural Lecture.
                                European Institute of the
                            Mediterranean, November 7, 2008
What are the possible explanations
for this lack of progress and weak
response?

   Incomplete reform agenda; need
    just to do more? Need to overcome
    resistance of special interests?
   Long lags in response; just wait?
   More fundamental institutional
    problems? As suggested by some
    pieces of evidence to follow.


              CREMed. Inaugural Lecture.
               European Institute of the
           Mediterranean, November 7, 2008
As evidenced by the lack of trust
between public and private sectors
…
        Governments and a private sector that do not trust
                          each other.


             How would you rate the respective roles of the government and the
                     private sector in your country's development?
    5
                                                                4.2
    4                             3.7

                                             Average score
    3
                                             government
                                             respondants
    2
                     1.3                                                     1.2
                                             Average score
    1                                        private sector
                                             respondants
    0
            On the role of the private sector.           On the role of the government.


    Source: survey of 103 government officials and 114 private
    sector representatives at various conferences (2006/2007).
                    CREMed. Inaugural Lecture.
                     European Institute of the
                 Mediterranean, November 7, 2008
    …the concerns of the private sector
    about policy uncertainty ….
Policy uncertainty and the unequal implementation of rules are leading constraints to
businesses
                                                          Leading constraints to MENA firms.
                          (simple average of country's share of firms ranking a constraint as "Major or severe ")
  60%
        49.8%
  50%                   46.2%               43.7%         42.5%
                                                                                 37.2%
  40%                                                                                                35.9%                 35.9%        33.6%
                                                                                                                                                           30.7%                 30.1%
  30%

  20%

  10%

  0%
                        Access or cost of




                                             Corruption




                                                                                                                                         Access to land
                                                                                                                            Tax rates
        Macroeconomic




                                                           Anti-competitive or




                                                                                 Regulatory policy




                                                                                                      Tax administration




                                                                                                                                                                                education of
                                                                                                                                                          licensing/operating
                                                           informal practices




                                                                                                                                                                                 Skills and
         uncertainty




                                                                                                                                                                                  workers
                                                                                   uncertainty
                           financing




                                                                                                                                                                Business

                                                                                                                                                                 permits
                                                CREMed. Inaugural Lecture.
                                                 European Institute of the
                                             Mediterranean, November 7, 2008
…and the negative perceptions about
the consistency and predictability in the
application of rules and regulations.
 Perceptions about the consistency and predictability of rules and regulations as
they are applied in MENA countries
                 Interpretations of regulations are consistent and predictable.
                                (% of respondents disagreeing)
  80
                                                                        66.2       66.6
                                              57.7          60
  60

                    41.2           42.3
  40

         21.5
  20



   0
        Saudi      Ye me n        Jordan     Alge ria    Morocco     We st Bank   Le banon
        Arabia                                                       and Gaz a


                                CREMed. Inaugural Lecture.
                                 European Institute of the
                             Mediterranean, November 7, 2008
Reforms and progress of private
sector hinge on major institutional
changes

   Rules based and less discretion in
    the business environment
   Less room for rent-seeking and
    more for innovation and entre
   Greater credibility of commitment to
    respect of property rights and
    respect of rules and regulations


              CREMed. Inaugural Lecture.
               European Institute of the
           Mediterranean, November 7, 2008
IV. Education
   Another major challenge linked to the
    demographics and employment
    challenge
   Received high priority by governments
    and major progress in terms of access
   But problems with quality and weak
    results in terms of efficiency
   Reforms hinge on progress in
    accountabilities
               CREMed. Inaugural Lecture.
                European Institute of the
            Mediterranean, November 7, 2008
              Major gains in access to education

           Gross Enrollment Rates in MENA (1970-                         Average Years of Schooling in MENA of the
                           2003)                                               Population Aged 15 and Above
(%)
  100                                                              8
  90
                                               Primary
                                                                   7
  80
                                                                   6      Latin
  70
  60
                                                                   5     America
                                                Seco nd ary
  50                                                               4
                                                                                 East Asia
  40                                                               3                                   MENA
  30
                                                                   2
  20
                                                                   1
      10                                            T ert iary
      0
                                                                   0
              Source: Statistical Appendix                       Source: Barro and Lee (2000)
               1970     1980       1990      2000         2003              1960                1980          2000
                                                 CREMed. Inaugural Lecture.
                                                  European Institute of the
                                              Mediterranean, November 7, 2008
     Good achievements in terms of the
       quality of human capital

     Adult Illite racy Rate s, 1980 and 2003                                    TIMSS score (math and science)
                                                                                          1998 and 2003
60
                                                                   Top country
50                                                                   Int'n'l avg.
                                                                       Lebanon
40
                                                                        Jordan

                                    2                                       Iran
30
                                                                        Tunisia
20                                                                        Egypt
                                                                        Bahrain
10
                                                                           WBG
                                                                      Morocco
 0
            MENA                 Ea st Asia         La t in Ame ric aSaudi Arabia

                               1980     2000                                        0    100    200   300   400    500   600
                                                                       Math
                                               CREMed. Inaugural Lecture. (1998)
                                                                     Science
                                                                                                  Science   Math
                                                  European Institute of the
                                              Mediterranean, November 7, 2008
Source: UNESCO Statistical Yearbook 1998 and UIS                Source: TIMSS 2003 Highlights
database.
But very low economic returns

         Pri vate Rate s of Re tu rn , 1970-1998
     (vari ou s ye ars s u bje ct to data avai l abi l i ty)


25

20

15

10

 5

 0
                                     Source: Source: Allen, 2001; CRESUR, 2004.
         P rimary             Secondary                       T ert iary
                   CREMed. Inaugural Lecture.
                    European Institute of the
                Mediterranean, November 7, 2008 in
              MENA        East Asia           Lat         America
        Despite very heavy investments by
         governments (and private sector).
          Public Expenditure as a % of GDP                     Public Spending as a % of Government Budget,
                                                                     most recent year during 2000-2004

6
                                                        35
5          MENA                                         30
                                                        25
4                          Latin
                                                        20
                          America
                                                        15
3
                                         East Asia      10
2                                                        5
                                                         0
1
                                                             Algeria
                                                             Saudi
                                                             Bahrain
                                                             West
                                                             Djibouti
                                                             Egypt
                                                             UAE
                                                             Iran
                                                             Jordan
                                                             Kuwait
                                                             Lebanon
                                                             Libya
                                                             Morocco
                                                             Oman
                                                             Qatar
                                                             Syria
                                                             Tunisia
                                                             Yemen
                                                             MENA
Source: World Development Indicators                      Source: World Development Indicators, UNESCO Institute for Statistics,
                                                          UNICEF, National Sources and Author’s Calculations,
0
                                           CREMed. Inaugural Lecture.
       1965        1975-84       1985-94 1995-2002 Institute of the
                                            European
                                        Mediterranean, November 7, 2008
..and a host of other problems going
forward

   MENA countries need to deal with a
    youth bulge not seen elsewhere
   The challenge of globalization and the
    knowledge economy
   The challenge of financing education




               CREMed. Inaugural Lecture.
                European Institute of the
            Mediterranean, November 7, 2008
     Reforming Incentives and Institutions
     of Accountability is key
Based on experience in the region and elsewhere three
  key factors:

   Successful reformers have better engineering and
    more aligned incentives.
   The better performers engage the private sector in
    providing education to a larger extent, especially at
    higher levels of instruction
   Countries with higher public accountability
    produced better education outcomes


                     CREMed. Inaugural Lecture.
                      European Institute of the
                  Mediterranean, November 7, 2008
     Countries need to consider the
        following several critical reform
        perspectives
   From Engineering Inputs to Engineering for Results
   Promoting More and “Smarter” Non public Provision of
    Education
   From Hierarchical Control to Incentive-Compatible
    Contracts for the Teachers
   Greater Accountability to the State versus Accountability
    to the Public
   Greater School Autonomy and Accountability
   Effective Information Dissemination Systems to Promote
    Accountability
   Quality Assurance Mechanisms
   Promoting Reforms in Migration and Labor Polices to
    Maximize Returns on Education
                    CREMed. Inaugural Lecture.
                     European Institute of the
                 Mediterranean, November 7, 2008
V. Water

   One of the most critical challenges
    in the region
   Becoming even more critical with
    impact of climate change
   Meeting the challenges illustrates
    the role of institutions and
    institutional change


              CREMed. Inaugural Lecture.
               European Institute of the
           Mediterranean, November 7, 2008
         Situation is already critical: lowest
         water availability in the world
                    Annual renewable water resources per capita
              Australia & New Zealand
            Latin America & Caribbean
                       North America
                Europe & Central Asia
                   Sub-Saharan Africa
East Asia & Pacific (incl. Japan&Koreas)
                      Western Europe
                          South Asia
            Middle East & North Africa

                                       0      10         20              30   40
                               CREMed. Inaugural Lecture. m^3
                                                      1000      / year
                                European Institute of the
                            Mediterranean, November 7, 2008
             The region has already stored
             almost all of the water it can store
     Proportion of regional surface freshwater resources stored in reservoirs
             100%
                90%
                80%
                70%
                60%
                50%
                40%
                30%
                20%
                10%
                 0%




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       m




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                                         European Institute of the
 tin




                                                               id
                                                                 M
La




                                     Mediterranean, November 7, 2008
                Deterioration of water quality is
                already costly

                       Cost of Environmental Degradation of Water

                3
               2.5
Share of GDP




                2
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                1
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                0




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                                     CREMed. Inaugural Lecture.
                                      European Institute of the
                                  Mediterranean, November 7, 2008
Growing population will recue per capita water
availability by half by 2050 and climate change
likely to reduce rainfall by at least 20%




                 CREMed. Inaugural Lecture.
                  European Institute of the
              Mediterranean, November 7, 2008
           MENA countries are spending
           heavily on water

           Public spending on water as share of
                   GDP (various years)

            4
          3.5
            3
percent




          2.5
            2
          1.5
            1
          0.5
            0


                                                          en
                                                  n




                                                                      a
                 pt




                                                                              ria
                           o


                                      ia


                                               Ira




                                                                    si
                          c
                gy




                                     b




                                                        em
                       oc




                                                                             e
                                                                  ni
                                  ra




                                                                          lg
            E




                                                                 Tu
                      or


                                 A




                                                       Y




                                                                          A
                     M


                             di
                           au




                                  CREMed. Inaugural Lecture.
                           S




                                   European Institute of the
                               Mediterranean, November 7, 2008
                  Not getting full benefits from public
                  investment

                Algeria : Underexploitation of water stored in dams

          600
          500
          400
'000 ha




          300
          200
          100
           0
                  Area that could be irrigated with        Area equipped for irrigation
                           stored water
                                           source: Min Agriculture
                                      CREMed. Inaugural Lecture.
                                       European Institute of the
                                   Mediterranean, November 7, 2008
Need to Reduce consumption to
sustainable levels and achieve sustainable
water management at minimal social cost
 From….                To….



                                                                Additional resources:
                                                                • Conventional
                                                                • Non-conventional
                                                                • Reduce losses




Consomm       Ress                     Consomm         Ress
 actuelle    renouv                      future       renouv
            actuelles                                 futures
                           CREMed. Inaugural Lecture.
                            European Institute of the
                        Mediterranean, November 7, 2008
1) Through better water policies

    Policies to limit consumption, especially in
     agriculture
        Investments to reduce losses
        Limit consumption
        Strong enforcement of limits
    Compensate farmers for reduced
     consumption with help to improve water
     productivity
    Mobilize additional water sources
    Better tariff policy



                      CREMed. Inaugural Lecture.
                       European Institute of the
                   Mediterranean, November 7, 2008
  2) Through other interventions in “non-
  water” sectors

Energy prices                               Employment
                                            opportunities




Public finance                                     Trade policies
                    CREMed. Inaugural Lecture.
                     European Institute of the
                 Mediterranean, November 7, 2008
                              3) Through improved public accountability

                              1.0


                              0.9


                              0.8
Index of quality of service




                              0.7                                                           Countries with
                              0.6                                                           accountability below
                              0.5
                                                                                            MENA avg
                              0.4
                                                                                            Countries with
                                                                                            accountability above
                              0.3
                                                                                            MENA avg
                              0.2


                              0.1


                              0.0


                                    Access    Urban utility     1-Urban      Water use in
                                             cost recovery    water losses      agric
                                                            CREMed. Inaugural Lecture.
                                                             European Institute of the
                                                         Mediterranean, November 7, 2008
Greater accountability helps all
aspects of water management


   Improves water supply services
   Provides information necessary for making
    and enforcing decisions that reflect
    everyone’s needs
   Ensures that governments and service
    providers see consequences of actions
   Helps improve how well public money is spent

                 CREMed. Inaugural Lecture.
                  European Institute of the
              Mediterranean, November 7, 2008
    The region has history of adapting
    to water scarcity but needs major
    adaptation now
   Societies developed over millennia
    institutions to deal with scarcity

   More recently public institutions led
    investments in large infrastructure systems

   Institutions need to adapt now to new
    realities



                  CREMed. Inaugural Lecture.
                   European Institute of the
               Mediterranean, November 7, 2008
VI. The Political Economy of Reform
A theory of political economy has to explain why
    this slow and hesitant pace of reforms and
    inability to achieve major required institutional
    changes:
1.  Reforms have failed to tackle the central
    challenges
2.  Reforms have mostly relied on top down
    decree-type measures, and do not threaten
    the political equilibrium
3.  Reforms which require institutional changes in
    public accountability mechanisms slow and
    hesitant
                CREMed. Inaugural Lecture.
                 European Institute of the
             Mediterranean, November 7, 2008
The political economy of reform in
MENA countries shaped by 3 major
factors:
    Large oil revenues and rents

    Pervasiveness and persistence of
     conflict and violence

    Authoritarian political systems


                CREMed. Inaugural Lecture.
                 European Institute of the
             Mediterranean, November 7, 2008
Large natural resource wealth and
revenues

   Reduces incentives of rulers to seek
    broad-based economic growth
   Creates soft budget constraints which
    allow continuation of unsustainable
    policies for a long while
   Creates a disconnect of accountability
    between rulers and the public


               CREMed. Inaugural Lecture.
                European Institute of the
            Mediterranean, November 7, 2008
Conflicts are pervasive

   Reinforce authoritarian regimes
   Lead to allocation of large resources to
    security
   Creates risk aversion to reforms




               CREMed. Inaugural Lecture.
                European Institute of the
            Mediterranean, November 7, 2008
             Authoritarian Regimes

                            Figure 5. Democracy Trends in MENA
                             (Average Index Polity IV 1960-2006)


10
 8
 6
 4
 2
 0
      1960   1966   1972        1978            1984               1990   1996   2002
 -2
 -4
 -6
 -8
-10                           CREMed. Inaugural Lecture.
                               European Institute of the
                           OECD       MENA        Other Developing
                           Mediterranean, November 7, 2008
        Governance gap: Indicators of
          governance are well below potential
          in MENA.

                                                          Governance and Per Capita Income in MENA
                              2
                                         MENA
                                         Rest of the world
Index of Governance Quality




                                         MENA trend
                              1
                                         Rest of the world trend



                              0




                              -1
                                                                                                     MENA gap in quality
                                                                                                     of governance


                              -2
                                   6                                          8                                10
                                                                         Log of Per Capita GDP
                        Source: Per capita GDP, WDI 2002; Governance quality, World Bank 2003a.


                                                                CREMed. Inaugural Lecture.
                                                                 European Institute of the
                                                             Mediterranean, November 7, 2008
Authoritarian Regime Dilemma

   Benefits from stronger private sector: more
    growth, greater wealth base to tax, ability to
    redistribute and satisfy supporters, minimize
    contestation
   Accrual of these benefits requires: inclusive
    broad-based private sector, limits on ruler
    discretion
   Risks to rulers: greater ability of private
    sector to organize and revolt against ruler if
    reneges on guarantees
                CREMed. Inaugural Lecture.
                 European Institute of the
             Mediterranean, November 7, 2008
Implications (1): Weak Demand for
Reforms

   Collective action more costly under non-
    democratic regimes
   Prevalence of influence of privileged
    insiders
   Weak processes of internal and external
    accountability: more risk aversion to
    reforms


               CREMed. Inaugural Lecture.
                European Institute of the
            Mediterranean, November 7, 2008
Implications (2) Reforms are supply
driven and lack credibility


   Reforms are shaped to maximize the
    benefits to the ruling groups, including
    staying in power
   Lack of credibility of commitments to
    reform and respect of promises



                CREMed. Inaugural Lecture.
                 European Institute of the
             Mediterranean, November 7, 2008
Political Economy Calculus of
Incumbent Rulers
                                        RPLA/        RRLA/       RRLI
                                       emerging     transition
  Initial conditions/resistance
  to reforms by existing                     -         --        ++
  interest groups
  Incentives for rulers (1):                0           -         -
  Availability of Large rents
  Incentive for rulers (2):
  higher growth and more                   ++           0         0
  “taxation”
  Incentives for rulers (3):
  higher growth and                        ++          ++         +
  employment
  Incentives for rulers (4):
  threat of contestation                    --         --         0
  Conflict                                  -          --         0
  Total (1) Expected progress               +          --        ++
  on reforms
  Total (2) Credibility of                   -         --         ++
                   CREMed. Inaugural    Lecture.
  reforms
                      European Institute of the
                  Mediterranean, November 7, 2008
Implication: improving governance will
be critical to move forward on more
difficult reforms.
    Region’s inability to tackle deeper and
     more complex reforms points to
     limitations of top-down approach of
     reform by decree
    Deeper economic reform cannot proceed
     without reform of incentive structures in
     which reforms are embedded
    Governance reforms cannot be viewed
     as a separate agenda, to be pursued at
     its own pace, but integral to all other
     reforms. CREMed. Inaugural Lecture.
                 European Institute of the
             Mediterranean, November 7, 2008
The most crucial and critical
institutions to focus on are

   institutions of public accountability
   institutions for the enhancement of
    credibility of commitments




               CREMed. Inaugural Lecture.
                European Institute of the
            Mediterranean, November 7, 2008

								
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