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(originally published by Booz & Company)


Staying on the Road to Growth

Even amid ongoing tensions, Middle East leaders must maintain their commitment to economic reform.

The Middle East and North Africa (MENA) region is experiencing its greatest level of change in 50 years. Middle East governments are being challenged by their populations, often in unprecedented ways that have highlighted the tensions in some countries. Young people, many of whom face debilitating unemployment, are demanding that their voices be heard. Observers point to these and other factors as signs of even greater imminent change.

But this focus on immediate issues, however compelling, should not draw attention away from long-term trends and economic growth. Many Middle East countries have engaged in decades of economic reform. The perception that these systemic adjustments have not gone far enough in some cases, or not proceeded fast enough, is itself a cause of tension. Yet economic growth in the MENA region is genuine, is substantive, and has already had lasting effects. It would be unfortunate if Middle East government leaders, while pursuing appeasement measures and other short-term policies, regressed or relented on the systemic economic reforms that are needed for future growth and success.

The understandable inclination to focus exclusively on immediate issues could dissipate some of the positive economic momentum that many leaders of the Middle East have worked hard to sustain. For example, the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) have deliberately set out to use their resource wealth to build modern, knowledge-based economies and move away from dependence on hydrocarbon revenues. Some of these GCC countries are increasingly active on the global stage. Their largest companies are becoming nimble, competitive multinational corporations, almost unrecognizable as the sluggish state-owned behemoths that they were a few years ago.

If the effect of the current regional upheaval is to slow the pace of economic growth and private-sector development, it could mean missing a chance for prosperity that may not come again. The costs would be paid later, and with interest. A slower pace of deregulation, which would prevent the setting up of new, efficient service providers, would lead to lower standards of living. Less effort invested in transforming government agencies and how they serve their communities, whether through healthcare or pensions, would lead to weaker social cohesion. Insufficient and inadequate investments in such vital social services as education and health will rob future generations of the ability to compete in the global economy.

A slowdown in systemic change could also prevent the region from exploiting its potential in global trade and investment. There is a shift toward increased Middle East trade with, and investment in, less-developed frontier economies across the developing world — so-called south–south flows. (See “The New Web of World Trade,” by Joe Saddi, Karim Sabbagh, and Richard Shediac, s+b, Autumn 2011.) Throughout the region, cross-border business is expected to experience massive growth. HSBC’s February 2012 “Global Connections Trade Forecast” projected that regional trade could increase by 131 percent between 2012 and 2026, compared with an 86 percent global forecast. But much of that trade could be lost if governments retrench.

Moreover, without deep economic change, the MENA region will be unable to realize the benefits that come from having a young, energetic, and aspiring population. The current demographic bulge (in which more than half of the population is younger than 25) means that the Middle East needs to create millions of jobs just to stand still. Youthful populations can fuel prosperity, as China, India, and Brazil have all recently discovered. However, this prosperity depends on having a reinforcing virtuous circle in which economic growth, robust and relevant education, and creative opportunities come together. MENA governments have invested in education, but the results have been slow to appear. People in the region are more educated than ever before, but many are struggling to find suitable jobs, and that has been an ongoing source of unrest.

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