The World Bank: MENA can be an engine for change, partner for sustainable future

Region must tackle important structural reform agenda to ensure peace and stability
The World Bank: MENA can be an engine for change, partner for sustainable future
Roberta Gatti is the chief economist of the Middle East and North Africa, The World Bank

With the world facing an economic slowdown, there’s much to consider — and it goes beyond just tackling how to navigate challenges and uncover hidden opportunities. In this comprehensive interview with Economy Middle East, the Chief Economist of the Middle East and North Africa (MENA) region of the World Bank, Roberta Gatti reveals how the region can potentially shape the global economic future. She also delves into the importance of sustainable development, female labor participation and the role of financial solutions in fostering inclusion.

From your perspective as chief economist, where do you see the global economy heading in the next few years? What are the most significant hurdles?

The world is in its third consecutive year of decelerating growth, which reflects the repercussions of tight monetary policy and weaker global trade and investment. If trends continue unchanged, world growth is likely to be below potential for the rest of the decade. Downside risks abound, stemming from geopolitics, climate change and further trade fragmentation. Moreover, many emerging economies — including oil-importing countries in the MENA region —  are now grappling with high debt, which is increasingly costly to service in the new high-interest rate environment.

If prospects seem grim, there are a few things to keep in mind: forecasts are, by nature, changeable and when uncertainty is high — as it is now — forecasting into the future is a complicated endeavor. Importantly, good policies can help put economies on better footing.

How important are Middle Eastern countries in shaping the world’s economic future? What challenges do you think the region should prioritize addressing?

The MENA region can be an important engine of change for a better economic and sustainable future, with its young population and natural resource wealth — and here, I’m not thinking about oil and gas, but of wind, sun and natural beauty.

Yet, the region also grapples with many overlapping challenges: first and foremost, the current conflict in the Middle East, with consequences going far beyond what can be captured in numbers alone. Our research shows catastrophic impacts on the people of Gaza, as well as on the Palestinian economy, which has experienced one of the largest shocks recorded in recent times. The conflict comes atop ongoing regional vulnerabilities such as increased fragility, a history of chronic low growth, persisting macroeconomic imbalances, especially in oil-importing countries and the lowest female labor force participation in the world.

Peace and stability are the essential foundations of development. However, the region must also tackle an important structural reform agenda.

For example, the debt-to-GDP ratio is worrisomely high in oil-importing countries. In addition to re-establishing macroeconomic stability, for some countries, it will be essential to level the playing field between public and private firms and reduce the state’s footprint in the economy so that the private sector can grow and create jobs. In parallel, investing in human capital — improving learning and making quality health care accessible and affordable — will set the stage for more productivity tomorrow. These reforms are sorely needed, but many haven’t happened yet for reasons rooted in both privilege for the governing elites and public distrust of government.

Of course, there is no one-size-fits-all recipe that will magically work in every country. Each society must find its own path to corral support for change. But, as I’ve written elsewhere, there is one set of no-regret reforms: opting for transparent governance with a view to building a relationship between governments and citizens that relies on full information and data openness.

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Given the headwinds we’re facing, how can nations collectively enhance their sustainability efforts without compromising economic growth and stability?

The dichotomy between sustainability and growth is a misleading one. What countries need is a plan for sustainable development.

Many emerging economies are still expanding their energy use and now have an opportunity to steer their development toward renewables with policies such as carbon pricing and market-based energy sector reforms. Think about carbon taxes: They are simple to administer, they can reach the informal economy and they provide a source of revenue for governments, which is key at a time of limited fiscal space. Importantly, the social and health co-benefits of growing green are significant. For example, the benefits of reducing air pollution in terms of life expectancy far outweigh the costs of reducing carbon emissions.

I don’t mean to say that there are no trade-offs along the path of green growth. In MENA, a clear priority is to phase out fossil fuel subsidies, which are widespread and distortive. They de facto provide an incentive to use more fossil fuels and, by doing so, they distort production choices toward capital, rather than labor-intensive production. However, phasing out fuel subsidies will hurt the poor since much of their consumption is just food and energy. So, expanding and properly targeting social safety nets becomes essential to protect vulnerable families.

If we look at MENA specifically, an important challenge for oil-exporting countries is diversifying. Since the early/mid-2010s, oil markets have changed. On the supply side, technological advances have expanded supply with new countries entering oil markets as exporters. On the demand side, the rising awareness of climate change has decreased the willingness to pay for oil and other fossil fuels. These changes will likely translate into lower oil prices in the medium to long run, adding an urgent economic challenge to the climate change imperative for oil exporters.

Some of them in MENA have already taken steps toward diversifying away from oil, and here I would like to highlight one: The Kingdom of Saudi Arabia has undertaken purposeful and important reforms to support female labor force participation, which has more than doubled in the past few years.

You are talking about accelerating female labor force participation in MENA. Can you run us through some of its economic benefits?

If you were to ask me, “Where are the sources of growth for MENA in the future?”, I would zero in on two aspects: creating an enabling business environment for the private sector to grow and increasing female labor force participation.

In MENA, only one in five women participate in the labor force. Only about one in five firms has a woman as an owner, and about one in twenty has a woman as a top manager. This is happening while girls do increasingly well in school. Indeed, in the region now, a higher fraction of women are enrolled in tertiary education compared to men (43 percent vs. 39 percent), amounting to much talent being underused. When these educated women do not participate, there is a loss in the potential for innovation and entrepreneurship and missed opportunities for growth in aggregate productivity, which can lift standards of living in the region.

A recent research paper finds that in a country like Egypt, equalizing employment rates between women and men would increase GDP per person by at least 50 percent, and these potential gains will only become increasingly larger as women continue to attend school. On top of these economic gains, research has also shown that reducing gender gaps improves women’s status, children’s well-being and women’s inclusion in decision-making at all levels.

A number of complementary policies are needed to unleash this growth potential: eliminating gender-specific restrictions to employment, making transportation and working environments safe for women and expanding the supply of childcare, just to name a few. For example, when childcare is implemented with quality, it amounts to a triple win: It allows women to join the labor market, it creates new jobs for teachers, and it also contributes to cognitive and socio-emotional development of young children at a time when their skills are the most malleable.

World Bank

How can financial solutions contribute to reducing poverty and inequality on a global scale?

The financial sector plays a crucial role in addressing poverty and inequality on a global scale. One of the pivotal ways through which financial solutions contribute to poverty reduction is by fostering economic inclusion.

Many individuals, particularly in developing countries, lack access to basic financial services due to factors such as geographic remoteness, lack of infrastructure or exclusion based on socioeconomic status. Through initiatives like microfinance and mobile banking, financial institutions can reach underserved populations, allowing them to save, borrow and invest in income-generating activities. This access to capital enables individuals to start or expand businesses, invest in education and healthcare and build assets, ultimately lifting themselves and their families out of poverty.

Financial solutions can help mitigate inequality by promoting financial literacy and education. By equipping individuals with the knowledge and skills to manage their finances effectively, they are better equipped to navigate financial markets, make informed decisions, and plan for the future. This can help break the cycle of poverty by empowering marginalized communities to build wealth and assets over time. Moreover, financial education can promote greater awareness of rights and opportunities, enabling individuals to advocate for fair treatment and access to resources.

Finally, innovative financial technologies, such as blockchain and digital currencies, have the potential to revolutionize financial inclusion and reduce inequality. If carefully regulated, these technologies can offer secure, transparent and efficient platforms for financial transactions, particularly in regions with limited banking infrastructure. By leveraging these digital solutions, individuals can access financial services remotely without the need for traditional brick-and-mortar institutions.

There are also important synergies with other sectors. For example, the payments infrastructure allows for efficient money transfers, including social payments.

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