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What ails Arab economies is older than Covid-19

Dependence on oil and natural-gas exports and an over-reliance on Europe and US as trade partners have made it difficult for the region's integration into the world economy.

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The International Monetary is predicting the economies in the Arab nations of the Middle East and North Africa will contract by 5.4% in 2020-21 due to the covid-19 pandemic and the collapse in international oil prices. (I’ve left out Lebanon and Libya, because they face exceptional circumstances.) This means the Arab MENA region, despite being among the least affected by the pandemic in terms of confirmed cases and deaths, will suffer disproportionate economic pain.

The IMF’s economic outlook for the world shows that economic contraction has been proportionate to the public-health crisis caused by the pandemic in most regions — North America, Europe, Latin America and the Caribbean, South Asia. The U.S. economy is to contract by 4.3%, the Euro zone, Latin America and India by 8.3%, 8.1% and 10.3%, respectively. Conversely, China is expected to grow by 1.9%, which reflects Beijing’s effective containment of early outbreaks.

Now look at Arab MENA region, excluding Israel and Iran. On the public-health front, the Arab nations have done relatively well when compared to many other parts of the world. This is borne out by the data for Covid-19 deaths per million people in the period between December 2019 and October 2020. The ratios for the U.S., European Union and South American were 673.80, 360.45 and 661.29, respectively. The average for the Arab world was 79.46 per million. For the most populated Arab nations — Egypt, Algeria, Sudan, Saudi Arabia, Morocco and Tunisia — the average was even lower, at 62.21 per million.

Even if there is some underreporting in the figures for these countries, they should be comparable to the other parts of the world with similar income levels and relatively limited state capacities to collect, process and report data.

Nobody knows for sure why some world regions are worse-hit than others. However, the situation in the Arab MENA becomes more inexplicable still when you consider that some of its most populated countries — like Egypt — never had full lockdowns for extended periods. This should have mitigated the economic impact of the pandemic, but did not. How can this be explained?

Also read: Kuwait, one of the world’s richest petrodollar countries, is running out of cash

The global pandemic has exacerbated the region’s already troubled mode of insertion into the world economy. Three factors come to the fore: the heavy and persistent dependence on oil and natural-gas exports as the most defining feature of the Arab nations’ place in the global division of labor; the over-reliance on Europe and the U.S. as the main trade and investment partners; and the low levels of trade integration within the region itself. These longstanding structural weaknesses have magnified the economic impact of the covid-19 crisis.

It is hard to say that this is exceptional to the Arab world, as the same pattern seems to apply to sub-Saharan Africa, albeit to a lesser extent. Both regions are major raw material exporters to more developed parts of the global economy in North America, Europe and Asia.

The Arab MENA has the highest ratio of merchandize trade to GDP in the global south, but the trade is dominated by oil and gas as exports and heavy imports of basically everything else. In 2019, the MENA ratio was 63.7%, compared to 41.3%, 40.6% and 28.9% for Latin America, sub-Saharan Africa and South Asia, respectively. Even if the high-income MENA countries, that are all oil-exporting small nations, are excluded, the ratio of merchandize trade to GDP would still be around 57%.

In 2013, before the collapse of the international oil prices, fuel exports constituted 71% of total merchandize exports for the Arab MENA region. Even when excluding the high-income oil exporting small nations, the share of fuel exports was 67%. The decline in the share of fuel imports after 2014 did not indicate better diversification: In fact, total merchandize exports shrank dramatically.

In addition, the fact that the EU and the U.S are the main trade and investment partners of the Arab world has amplified the impact of the health crisis in those areas on the economic performance of the MENA region. The region has by far the lowest percentage of merchandize exports to low- and middle-income countries, compared with any other region in the global south.

The low level of intra-regional integration in trade has denied the MENA countries the chance to make use of the relatively better public-health situation in the neighborhood by exploiting a potentially huge market in terms of population and purchasing power.

For the Arab MENA region, then, the story of 202 has been as much about old economic ailments as new physical ones.- Bloomberg

Also read: Why Arab states should avoid an arms race with Iran


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