Speech

Opening Remarks by Takatoshi Kato, Deputy Managing Director, International Monetary Fund, At the High-Level Seminar on: Institutions and Economic Growth in the Arab Countries

December 19, 2006

As Prepared for Delivery

1. It is a great pleasure for the IMF to be co-hosting this seminar with the Arab Monetary Fund (AMF). The seminar brings together policy makers and private sector representatives from the region, scholars from around the globe, as well as officials from regional and international financial institutions, including the AMF, the IMF, and the World Bank. The purpose of the seminar is to facilitate a frank and meaningful discussion of the constraints in the region that limit growth and greater global economic integration, and to explore possible solutions.

2. While globalization has brought immense benefits, it has also created new challenges for all countries. Key among these challenges is to build the institutional capacity needed to facilitate beneficial economic integration with global markets. For the MENA region, a clear understanding of the institutional imperatives and appropriate policy responses should promote greater integration into the global economy, with positive effects on economic performance.

3. As an institution, the IMF recognizes the need to intensify its efforts to help member countries meet these challenges. The IMF Medium-Term Strategy that was endorsed at our Spring Meetings in Washington is a step in this direction. While the strategy is a multi-faceted attempt to assist IMF members in taking full advantage of globalization and face the challenges it presents, I would like to talk briefly about the topic of this seminar, building institutional capacity.

4. This is a critical theme that was stressed by many participants during the seminar for economic journalists from the Middle East held by the IMF yesterday in Dubai. An important part of the Medium-Term Strategy is to increase the IMF's contribution to capacity building in member countries through training that enhances the ability of member country officials to analyze economic developments, and formulate and implement effective economic policies. Increasingly, IMF training also focuses on the importance of strong institutions to complement effective macroeconomic management—both are necessary conditions for strong and sustained growth.

5. The joint IMF/AMF Regional Training Program (RTP) is an important part of this effort. It was established in May 1999 to expand training for Arab government officials in the areas of macroeconomics and finance. Since the start of the program we have offered a total of 71 courses and seminars, providing training for 2,300 Arab officials. The curriculum is updated annually to take into account changing training needs of countries in the region. We are proud of the results of this cooperative effort between the IMF and AMF. In recognition of this important contribution, in 2005 both institutions agreed to renew the training program for another four years.

6. But besides the training offered by the RTP, we have also sought to bring together high-level government officials to discuss the most consequential economic issues facing the region. This is the fifth of such kind. The subject of this year's seminar "Institutions and Economic Growth in the Arab Countries," was chosen jointly with our colleagues at the AMF.

7. The most pressing development challenge facing the MENA region today is employment creation. The labor force in the region is growing rapidly and is projected to reach 185 million in 2020, almost 80 percent higher than in 2000. This means, according to a recent World Bank report, that about 80 million new jobs are needed over the first two decades of the 21^st century just to keep pace with new labor force entrants.

8. As Tarik Yousef has emphasized in a recent paper, unemployment rates in the region are already among the highest in the world, second only to those in sub-Saharan Africa. If allowed to grow, unemployment could pose a threat for social and political stability. To absorb the currently unemployed in addition to new entrants to the labor force, job creation must be even higher: close to 100 million new jobs by 2020. Again, Tarik Yousef noted that this is equivalent to creating as many jobs in the next 15 years or so as has been done over the past 5 decades. In a 2005 report on economic developments and prospects for the MENA region, the World Bank pointed out that job creation on this scale probably requires real GDP growth of 6 to 7 percent annually for a sustained period of time, double the average rate of about 3 percent per year achieved over the late 1990s.

9. It is hard to imagine the region meeting this growth and employment challenge without greater penetration of global markets. Expansion of exports in labor-intensive activities could accommodate many new labor market entrants in the region; import liberalization would allow for cheaper access to capital goods needed for growth; and FDI could potentially be a vehicle for technology transfer, as suggested in the forthcoming book by Pack and Noland.

10. There is enormous scope for increasing the integration of the region into global markets. According to a 2005 World Bank report, Finland, with a population of about 5 million, has more non-oil exports than the entire MENA region, with a population of more than 300 million people. In a recent paper, Iqbal and Nabli point out that the same is true of Hungary and the Czech Republic.

11. While the region has recently experienced an increase in FDI inflows, they still account for less than 2% of global inflows. A number of the papers prepared for this seminar make the point that enhancing the region's competitiveness and meeting MENA's growth and employment challenges requires a vibrant private sector, free from red tape and excessive regulation. Yet, they also argue that the region is characterized by serious institutional weaknesses, cumbersome and costly business procedures, and regulations that hinder private sector development and firm creation. For example, the minimum capital requirement for starting a business in the region is higher than in any other region in the world and about five times the world average. Similarly, enforcing a contract is very costly, requiring about forty procedures. Contract enforcement also requires on average 426 days, about 50 percent higher than that in East Asia and 60 percent higher than in the OECD countries.

12. In sum, there is an enormous potential in the region for improving the business environment. Clearly, an environment conducive to encouraging entrepreneurship would elicit higher rates of investment—both from domestic and foreign sources. It would also have a large beneficial effect on productivity and employment growth. The development of export-oriented industrial sectors would enhance the integration of the region into the world economy.

13. Finally, of course, strong institutions and a facilitating environment will enable the region to achieve sustained growth at a pace sufficient to absorb the rapidly rising labor force.

14. The issue this high level seminar will address is indeed important. I am looking forward to the presentations and discussions as you all are, and I am confident that the exchange of ideas and experiences will be highly enriching and useful for all of us.

15. Thank you.