Economic Development in the Middle East and North Africa

Despite the global liberalization of trade, financial and technological flows, there still are tremendous disparities in terms of income per capita and growth rates across countries (Hall and Jones, 1999). Among the plethora of explanations proposed in the economic literature on this phenomenon, institutions have become a common factor for long-term economic performance (Acemoglu et al., 2001) as well as international activities such as trade (Dollar and Kraay, 2003) and foreign direct investments (Ali et al., 2010) and the legitimacy or failure of states (Subramanian et al., 2004). Given these pivotal implications of institutions for the social and economic welfare of countries, this chapter proposes to review the current institutional background of countries in the Middle East and North Africa (MENA) region and provide some insights into the historical and more recent evolution of formal institutions in this part of the world.

Economic growth is an increase in the productive capacity of an economy. The productive capacity can be increased by an increase in factors of production, such as capital, labor, or the level of technology. Economic growth can also be defined briefly as an increase in the level of output that an economy can produce. From a supply-side view, the main sources of economic growth are expected to be from capital (both physical and human), accumulation and technological progress. The literature on economic growth examines whether the sources of economic growth stem mostly from technological progress, physical capital accumulation, or human capital accumulation. Besides, it is a fundamental debate about a simple question: Why does rapid growth occur in some countries when some others cannot achieve such a performance? Important literature analyzing the high and sustained economic growth of countries already exists. The main concern is to disentangle the contributions of capital accumulation and technological progress from this growth process. In light of this main concern, sources of growth should also be investigated for the countries in the Middle East and North Africa (MENA). Our study explores the sources of economic growth for the MENA countries and contributes to the debate over whether they stem from technological progress, physical capital accumulation, or human capital accumulation, and deliberates on the identifying assumption used in growth accounting theories.

The relationship between natural resource wealth and economic growth has been extensively studied. As opposed to basic intuition, the results of several empirical studies suggest that vast natural capital endowments don’t necessarily generate prosperity, giving rise to the idea that natural resource wealth represents a curse rather than a blessing for economic development.

In the past decades, international remittance inflows have significantly increased in developing nations. Their importance is being acknowledged due to their scale and growth, which makes them stand out on an aggregate and per capita basis; Adams (2011) reports that remittances make up 30 percent to 40 percent of household income in developing countries. Numerous developing countries receive international remittances (sent by family members that have emigrated) in volumes that exceed the volume of public aid, private capital flows, or foreign direct investment. Certified international remittances come after foreign direct investments as a major source of external finance, as they have grown from USD 3.3 billion to a staggering USD 289.4 billion between 1975 and 2007 (World Bank, 2009). This represents about twice the volume of official aid, in both absolute terms and as a share of GDP (Aggarwal et al., 2011), with the remittances ratio to GDP exceeding 1 percent in 60 nations (Bhaskara and Hassan, 2011). Some developing countries have had more international remittances than they do official development assistance (ODA) as well as foreign direct investments (FDI), and have, in 2010 alone, received over USD 325 billion in remittances (Ratha, 2003; Yang, 2011). These remittances are made up of transfers that involve migrants sending money back to their home nations.

Inflation and its dynamics have been always capturing the attention of economic scholars and policymakers worldwide. Numerous theories in economic literature tried to define the concept of inflation by suggesting different sides of the phenomenon—by evoking the cost-push inflation side, the demand-pull, or both sides. Potential determinants of inflation discussed in the literature are diverse (see, e.g., Ben Ali and Ben Mim, 2011). The general consensus is to define inflation by its symptoms, as a persistent rise in the general price level in a given economy.

Corruption is believed to be widespread and it adversely affects countries at different intervals, in different degrees. Corruption scandals show that bribes are commonplace and that even societies that are supposedly free of corruption are affected by it. However, as highlighted in several studies, corruption influences countries’ economic development in a manner in which the perception about rich countries is that they are less corrupt than poor nations. It is unclear, however, if increases in income reduce corruption across regions and income classification consistently. Researchers have often focused on the process of detection rather than exploring the degree to which the income level has an effect on corruption.

The financial sector’s role in economic growth is heavily contested by economists. Some argue that economic growth is not caused by finance, but that it responds to changing demands, while others argue the positive effect of finance on economic growth (Robinson, 1952; Miller, 1998). Many researchers have concluded that ignoring the notion of the finance-growth link only restricts understanding of economic growth (Bagehot, 1873; Schumpeter, 1912; McKinnon, 1973).

Examination of the growth phases in developed and in developing countries and their involvement in international trade shows the importance of trade policies in these countries. In recent decades, many developing countries have made great efforts to liberalize their trade. North Africa is a developing region whose foreign trade plays an important and growing role in the economy. Many countries have established growth promotion policies driven by exports, evidenced by the signing of several bilateral and multilateral agreements.

Foreign direct investment (FDI), which may be flow or stock, represents the investment of foreign assets into domestic structures, equipment, and organizations. The parent multinational corporations (MNCs) may use vertical, horizontal, or conglomerate integration in carrying out the requisite FDI. Such investments may take various typologies, including resource-seeking, market-seeking, efficiency-seeking, and/or strategic (created) asset-seeking FDI.