Surviving Quicksand

The Middle East and North Africa (MENA) region currently hinges on a growth model that is losing traction. This model is characterized by a deep-rooted reliance on oil exports and an inclination for grand, yet often misjudged, mega public projects that lack regional coordination and sufficient diversification efforts. The volatile nature of oil prices and persistent economic problems, coupled with the looming energy transition, prove the unsustainability of this model and necessitate a comprehensive reevaluation of the prevailing growth model in both oil exporting and oil importing countries alike. Considering this, a new growth model that emphasizes regional integration, human capital investment, private sector involvement, and economic diversification is the way forward.

For decades, the MENA region's overreliance on oil and limited success in diversification have failed to deliver sustainable economic growth, leaving it vulnerable to the cyclical fluctuations of global oil prices. Over the last two decades, for example, commodity revenue from oil and gas has made up, on average, over 60 percent of government revenue — equivalent to nearly 30 percent of GDP. This dependence extends even to non-oil exporting countries, their fortunes linked to oil petrodollars through substantial remittances, grants, and investments primarily from oil-rich Gulf countries. In 2021, Egypt received over $31 billion in remittances, equivalent to about 8 percent of its GDP and surpassing foreign portfolio investment, FDI, and the Suez Canal revenues, with the majority originating from the Gulf.

However, this oil-dependency in the MENA region brings its own perils. Compared to other emerging markets and developing economies (EMDEs), MENA nations have experienced growth volatility exceeding 2 percentage points, largely due to higher exposure to the unpredictable global commodity markets. Furthermore, many MENA countries continue to grapple with persistent issues like regional conflict and high unemployment, especially among the youth (with the world's highest average of about 25 percent). These challenges are largely attributed to insufficient economic diversification and an over-reliance on oil, indicating the problems with the current growth model and underscoring the urgency for economic diversification.

The call for economic diversification in the MENA region is not new, and numerous attempts have been made to broaden income sources in these countries. This is evident by the regular emergence of economic reform and transformation plans, including the latest wave, best known as 2030 visions, announced in Bahrain, Egypt, Saudi Arabia, Qatar, and United Arab Emirates, among others. The main objective of these plans, like those of the 1990s, is to stimulate growth and alleviate oil dependence. A common theme in past and current diversification efforts involves substantial investments, primarily in construction-heavy mega public projects. However, many of these projects have faced challenges such as slow progress, operational inefficiencies, lack of regional coordination and, in some cases, insufficient funding. As a result, many critics have labeled these projects as "white elephants," indicating their perceived lack of practicality and casting doubts about their success in diversifying these economies. Previous notable examples include the Toshka project in Egypt, which was launched in the 1990s, and has yet to deliver its transformative impact on Egypt's agricultural sector.

In addition, these ambitious megaprojects, which involve substantial spending and heavily rely on imported components, often have unintended consequences such as crowding out private sector investments and exerting immense pressure on foreign reserves, particularly in non-oil exporting countries. Egypt serves as a striking example. Its ambitious infrastructure projects such as the new administrative capital, while impressive on the surface, have contributed, at least in part, to a concerning depletion of foreign reserves, placing significant strain on the Egyptian pound. Not to mention the formidable challenges confronted by the private sector. In fact, the January 2023 staff report from the International Monetary Fund (IMF) highlighted these issues in Egypt. The report emphasized the importance of managing national investment projects in a manner consistent with external sustainability and economic stability. It further called for comprehensive structural reforms to reduce the state footprint, create a level playing field for all economic actors, promote private sector-led growth, and enhance governance and transparency in the public sector.

The danger does not solely stem from ambitious megaprojects. The issue arises when white elephants, often viewed as a miraculous solution to economic woes, are accompanied by overblown political campaigns and rhetoric, overshadowing the crucial need for genuine structural reforms. Furthermore, unforeseen temporary surges in oil prices can create a false perception of economic stability in oil-dependent economies, spurring reckless spending and further delaying necessary reforms.

This is not to be misconstrued as an argument against all megaprojects, but rather a plea for more thoughtful and integrated planning. For instance, investments in transport and communication infrastructure are essential catalysts for growth. However, they should be approached as elements within a wider, judiciously crafted regional integration scheme. It is crucial for the MENA region to avoid repeating past mistakes, where many previous initiatives resulted in unfinished or underutilized infrastructures, such as industrial and educational cities. Additionally, regional integration, supported by harmonized economic policies, cross-border infrastructure projects, and facilitated intra-regional trade, can stimulate growth and enhance the region's resilience to external shocks.

In summary, the MENA region is at a critical economic crossroads. The path to prosperity and sustainable growth lies not in impulsive measures but in a steadfast commitment to gradual and methodical economic reforms. Some strategies adopted in the region serve as a cautionary tale of surviving quicksand: hasty white elephants can worsen economic challenges, while slow and deliberate moves offer hope for survival. The key is to stay focused, resist distractions, and pursue well-planned, step-by-step economic reforms that empower the private sector, prioritize human capital investment, and improve the business environment. As the world moves towards a greener energy future, the MENA region must acknowledge its economic plight and strategically chart a course towards sustainability. Shifting away from an oil-centric, megaproject-driven model and embracing regional integration, human capital development, and private sector participation can pave the way for sustainable growth and stability. The urgency for change has never been more pressing.