Arab World Grapples With Reform

In Lebanon, a busy government dreams of regaining the country’s prewar status as commercial hub of the eastern Mediterranean. But ordinary Lebanese can still wait years to get a telephone line.

Peace hopes in the Middle East have raised Jordan’s ambitions to become a regional crossroads. But while its ministries buzz with projects, Amman was able to invest an average of just $1.50 per capita in telecommunications last year.

Even in Morocco, stable and growing steadily at last, the kingdom produces just one-fifth of the electricity of similar developing countries worldwide.

“Throughout the region, governments have now decided to catch up,” said Kemal Dervis, the World Bank’s vice president for the Middle East and North Africa. “But [economic] growth rates must double. If they continue with business as usual, in 15 years’ time everybody will be in the same place they are today.”

Dervis delivered his warning this week in a speech to an Istanbul conference on how to finance the region’s infrastructure.

To judge by the response, Arab states are beginning to realize the scale of the economic reforms they must implement, but they are still battling to digest the loss of political power that liberalization entails.

At least the World Bank has now proved that, for the last decade, the poorer countries of the Middle East and North Africa have lost the race to create an infrastructure in which their people can make themselves healthy and wealthy.

National income in eight developing Arab states helped by the World Bank actually dropped from $1,320 per person in 1980 to $1,200 per person in 1995, a level about one-twentieth that in the United States.

The image of the rich Arab sheik is also out of date as the wealthier states of the region have found low oil prices and wasteful use of utilities burning bigger and bigger holes in their budgets.

Both the rich and poor of the Arab world’s 280 million people are suffering from two legacies: that of the 1960s, in which Arab nations celebrated full independence by nationalizing everything in sight according to the central planning beliefs of the time; and that of the 1970s, when the quadrupling of oil prices meant they could afford it.

In the cold light of the 1990s, bad habits formed in the heyday of easy money have turned into a developmental curse. They have spawned armed conflicts, over-centralized governments, inefficient state-run industries, dependent-minded populations and jealous, corrupt bureaucracies.

“Social organizations, like man, must evolve or perish,” Abdelatif Hamad, chairman of the Arab Fund for Economic and Social Development, warned regional planners and financiers at the conference. “I wonder, in the presence of government representatives here, whether they have the capacity to evolve as birds or perish as dinosaurs.”

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Arab ministers who spoke after the tough-talking Kuwaiti banker seemed to have taken the reform message to heart. The only way out of their development bottleneck, they agreed, is to embrace market forces and clear the way for private investment in basic infrastructure such as power, telecommunications, transportation, water and sanitation.

“There is a change of awareness. The private sector is now already the majority in production and investment,” said Nawal Tatawi, Egypt’s economy minister. “In fact, if you look at Egyptian history, nationalization is only a very brief phenomenon.”

This new spirit has raised some hopes at the World Bank about the fate of the seven poorer Middle East and North African countries it deals with directly--Algeria, Egypt, Jordan, Lebanon, Morocco, Tunisia and Yemen--as well as the West Bank and Gaza Strip.

“In some places, 1996 has been a year of substantial growth. It may be a turning point,” Dervis said.

The turnaround may be as slow as a supertanker changing course. Arab governments have long used threats such as political instability, Islamic radicalism and the Arab-Israeli conflict as excuses for authoritarian control.

To help shake the poorer states awake, the World Bank has made some disturbing calculations.

The fact that Arab populations are still growing at a rate of 2.5% means that, after 15 more years of their current 3% economic growth, they will still be stuck in 2010 with an income virtually unchanged at $1,300 per head.

The warnings are there for all to see. Conference delegates said the bloody civil war in Algeria was perhaps less a product of Islamic ideology than of a regime that failed to deal with growing poverty, ballooning population growth, a state-controlled economy and a corrupt elite that refused to share the benefits of the country’s considerable petrochemical wealth.

Fears of instability, immigrants and refugees have also prompted action from the European Union, which sponsored most of the Istanbul conference.

The rich EU member nations have already pumped the equivalent of $1.1 billion into plans and projects to develop run-down or nonexistent infrastructure in its southern neighbors. Many consider infrastructure investment to be the wheels, if not the engine, for spurring economic growth. The region can no longer stumble along with half its roads in poor condition and telephone systems that, in the worst case, put through only one call in three.

Nobody wants to see the Algerian example repeated, conference-goers agreed. But where will the money for new infrastructure come from? Only one of the poorer countries, Tunisia, can issue investment-grade government bonds. Even the rich of the region invest their money elsewhere.

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The poorer states that qualify for World Bank lending can supply less than half the annual $10 billion needed for new infrastructure investment.

The World Bank calculates that it can supply only one-sixth more. That leaves a financing gap of more than $4 billion a year, and the only possible source is the private sector.

But the poorer Arab countries have created such unfriendly investment climates that they are now attracting just 1% of the estimated $60 billion of private money being invested each year in infrastructure projects worldwide.

To get around the problem, the World Bank is offering to try to bridge the credibility gap. It has long performed this role in the bond markets, borrowing on the strength of its premium rating and lending the money to the developing world at a marginal markup.

Arab governments, however, must be ready to meet the bank halfway in developing better legal frameworks and foreign exchange management, according to Nemat Shafik, one of the bank’s regional managers. Only then will the World Bank insure private investors against any risks beyond the normal commercial ones.

It’s an idealistic vision that has so far had only a dozen takers around the world.

“I don’t think there are any individuals in America ready to invest in the Middle East . . . except if there are special reasons, like they come from the region,” said Gregory Fishbein, a conference participant from Mercer Management in Boston. “It’s too big, long-term and complicated.”

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Playing Catch-Up

The World Bank says the average 3% annual economic growth rate in Arab nations must double to avoid stagnation and to make a discernible difference in living standards for a population growing by 2.5% each year.

Arab nations’ per capita income

1995: $1,200

2010: $1,300 (with 3% growth)

2010: $2,100 (with 6% growth)

Per capita investment in telecommunications

Tunisia: $14.0

Morocco: 9.6

Lebanon: 8.0

Yemen: 5.0

Algeria: 4.3

Egypt: 2.5

Jordan: 1.5

1995 figures

In the United States, there is one phone for every person, whereas in the Arab world, there is one phone for every 50 people. The average wait to get a telephone in Arab nations varies from one year in Morocco to 10 years in Lebanon.

Source: World Bank