Introduction to Middle East Economics Summary | WiSe 12/13
Lecture 1: Economics growth in the Middle East: Basic facts and evidences 1.1 Key Definitions
Gross Domestic Product (GDP):
● Output produced in an economy in a year
● What matters is where the output is produced.
Gross National Product (GNP):
● measures the total amount of output produced by an economy in a year.
● What matters is who owns the resources where the output is produced.
● GNP = GDP + Net factor income from abroad Real GDP:
● GDP adjusted for inflation
● Rate of change of real GDP = New value of GDPold value of − old value of GDP GDP
Purchasing Power Parity (PPP) Measure:
● Number of units of a country’s currency required to purchase the same basket of goods and services in the local market that 1 $USD would buy in the USA.
Unemployment rate:
● % of unemployed
● # Unemployed
# Unemployed + # Employed
Labor force participation rate (LFPR):
● % of the population ages 16 and over that is in the labor force
● LF P R = Labor Force Population (16 and over)
Consumer Price Index (CPI):
● measures changes in the price level of consumer goods and services purchased by households.
Output = F(K,L, NR, Knowledge)
1.2 Paper: Determinants of Growth in the MENA Countries (Makdisi, Fattah, Limam 2007) Findings
● Capital is less efficient
● Trade openness does not contribute to economic growth in MENA (Iran)
○ Illegal trade. Quality of institutions is an important factor for positive growth effects of trade openness.
● External shocks affects economy more than other regions in the world Major Points
● lower Total Factor Productivity Growth (TFPG) due to:
○ Weak quality of Institutions
○ Low stock of human capital
○ low link between education system and manufacturing/ industry
● Nonoil economies of MENA perform better in economic growth and TFPG Background for Study
● Labor force growth > economic growth → High unemployment
● Disappointing growth pattern due to:
○ High oil dependency
○ Weak economy base
○ High population growth (Bad when Resourcedependent)
○ Low ROI in physical and human capital
○ Low integration in world economy
○ Market friendly institutions
○ Significant presence of state in the economy
● MENA economies greatly influenced by oil shocks
● Per capita investment in NonOilMena = 20% of OilMena (per capita investment) Growth record
● High volatility in growth due to:
○ Low diversification (Natural resources too important)
○ Political instability and regional conflicts
● Volatile terms of trade
○ Dependency on Oil
○ Indirectly affects terms of trade of nonoilmena
■ They are dependent on flows of workers remittances, investment and financial assistance flow from oilmena
MENA economic growth in global context: Crosscountry regression:
Righthand side variables (RHS):
● Initial Conditions
○ Poor country would tend to grow faster because of higher marginal productivity of capital
● Human Capital
○ Affects because it is a Factor of Production
○ Proxy: Level of primary school enrollment
● Investment rate (robust variable)
● External Schocks
● Macroeconomic performance
○ Inflation rate
● Trade Openness
○ Magnifies benefits of int. Knowledge Spillover and technological diffusion. Cost discipline through import competition
○ Proxy: Share of total trade (Imports + Exports / GDP)
● Natural Resource Abundance:
○ Countries with high initial ratio of Natural Resource Exports tend to grow slowly in subsequent periods.
■ Dutch disease
■ Rent seeking
■ Impending reforms
■ Volatile prices
○ Can be positive for growth
■ Financing investment in infrastructure and human capital and improvement of welfare
● Output volatility
■ Uncertainty delays investment decisions
Why low efficiency of capital?: inadequate business environment/ institutional support
Lecture 2: Economic growth in the Middle East: What is the role of financial development?
Financial Development: Improvement in quantity, quality and efficiency of financial intermediary services
● Producing information (Possible investments and allocating capital)
○ High information costs may prevent capital to flow to its highest value use
○ Financial intermediaries undertake this cost
■ Info Cost↓ → Resource allocation ↑ → Growth ↑
○ Stock market stimulate production of information about firms
■ larger markets increase incentive to research firms
■ Stock Market Liquidity↑→ Information acquisition↑→ LR economic growth↑
● Monitoring firms & Corporate governance
○ Size of Stock Market↑→ People as shareholders ↑→ Higher monitoring of firms managers and performance↑
● Trading, diversification and management of risk
○ Capital Markets reduce risk of investment (Risk diversification)
○ Risk diversification → savings rate → ressource allok. → econ. growth
● Mobilizations and pooling of savings
○ Pooling of savings help matching supply and demand for credit
Measuring financial development
Forms of Money: M1 (cash, travelers check), M2 (M1+money little time), M3 (M1+Big deposits), Banking depth: Comparing M1 or M2 or M3 to GDP
● Size of banking sector
○ BUT: Only degree of monetization!
● Indicators of Shadow Economy
Banking Credit depth:
● Domestic credit (by banking institutions and monetary authorities) provided by banking sector (% of GDP)
○ Indicator for general access to financial sources in an economy
○ Credit funds new investments and allow people to buy goods
■ Excessive lending → financial crisis
● Domestic Credit to private sector (%GDP) (NOT GOVERNMENT!)
○ If banking credit to private sector >70% of GDP → relatively well developed financial system
Capital Market Development
● Stock Market capitalization
○ Value of listed firms in the stock market to the GDP
○ > 50% Stock Market of GDP is a well developed stock market
■ Not necessarily active!
● Total Value Trade
○ Value of traded stocks as % GDP
● Turnover Ratio:
○ Value of traded stocks as a share of total value of listed firms Problems of capital markets in developing countries
● Financial repression
○ f.e ceiling on interest rates
○ Inflation real rates of interest are often negative
○ Very high reserve requirements
○ Regulation
○ Compulsion of banks to buy govt. bonds
○ Govt encourages investment by banks in certain priority sectors Introduction to Global Findex (Global Financial Inclusion Index)
● MENA lowest penetration in the world
Ersel, Kandil (relation between fin dev and econ growth)
● Increasing the resource mobilization and resource allocation capacities of the financial systems and enhancing operational efficiency of financial system positively affects growth performance of developing countries.
(RM, RA, OE are 3 dimensions of financial systems)
○ No difference in relation between financial development and economic growth in
MENA and other developing countries.
Lecture 3: The corruption: Lessons for the MENA
Common definition: “The misuse of public power for private benefit.”
Corruption can be understood through PrincipalAgent problem
Bribery: Obtaining of money or favors by public decision makers in return for preferential treatment or government favors
Embezzlement: Theft of resources (No client involved) Other types
● Clientelist: briber obtains higher benefit
● Patrimonial: bribee obtains the bigger share
● Petty corruption: involves frequent, small payments to lowhierarchy
● Grand corruption: large, oneshot payments to higher ranks
● Political (to politicians) vs administrative (bureaucrats) Gray Areas
● Lobbying
● Gift giving Measurement
● Transparency International Corruption Perceptions Index (CPI)
○ Perception of corruption
● International Country Risk Guide (ICRG) Corruption Index
○ World Bank Control of Corruption Index
○ Perception of public power exercised for private gain.
Consequences of corruption
● Corruption and human development
○ Degrees can be for sale (Ex. Russia)
● Corruption and Foreign direct investment (FDI)
○ When outcomes of corruption less predictable → less investment.
○ Positive relationship between Corruption and FDI (Corruption is stimulus for FDI)
● Government budget
○ Corruption ↑→ Education budget ↓
○ Corruption ↑→ Military spending ↑
● More protestantism, less corruption? (Weber, 1904)
● Distorts economic and financial environment
● Reduces efficiency (Power gained through cronyism instead of ability)
● Inherent instability
Lecture 4: Shadow Economy
Unregistered economic activities that are not accounted for in estimates of GDP / National Income Accounts.
Why study Shadow economy?
○ Governments with large informal economies raise taxes (To make up for revenues) whit Assessment of corruption within the political system
→ this encourage enlargement shadow economy even further
● S.E is a source of unfair competition to formal firms
● S.E makes official statistics unreliable and incomplete
Reasons to go into the Shadow Economy
● Taxes
● Bureaucracy, corruption, weaker legal environments
● Social security
● Transfer Payments
● Regulations
○ Reduced freedom of choice
○ Increased labor costs (incentive to work on S.E)
● Unemployment (ambiguous)
○ Incentive working in S.E
○ High unemployment correlated with lower demand for labor Measurement:
● Currency demand approach
● Electricity demand approach
○ Electricity = proxy for economic activity
○ Difference between growth of elec. demand and GDP growth
● Labor force approach (weak)
○ Decline in participation in formal economy = increase in informal econ.
○ but: Other causes possible, Double work
● Multiple Indicator Multiple Causes Model (MIMIC Model)
Size of Shadow Economy in MENA
● > ⅔ may not have access to health insurance, nor contribute to pension system
● ⅓ of Economic Output is undeclared ( → not taxed)
● Not much information available due to data confidentiality
● Rodman (2007): S.E rised because of decline in public sector employment
○ Formal business face barriers
■ Complex bureaucratic procedures
■ Access to poor infrastructure
■ Credit technologies
■ High labor taxes
● Differences between GCC (Gulf Corporation Council) and NonGCC
○ Informal workers in GCC have high levels of productivity
■ Go to informal sectors because of higher profit (tax evasion)
○ NONGCC low productivity of informal workers
■ Informal employment is 67.2% of labor force, but produces only 35% GDP
■ Go to informal sector because of constrained access to credit, services and technology
● High share of agricultural employment → more informality
● Larger public sectors and more urbanization → less informality
● Returns to education are very low in the informal sector
○ → Loss of human capital: It is not worthwhile to pursue higher education
Shadow Economy and Economic Development
● Shadow economy causes more pollution
○ Environmental regulations can be avoided
○ Shadow economy and pollution are dependent on levels of corruption
● Shadow economy and Education
○ Higher levels of participation in education reduce S.E activities only if there are high quality political institutions
● Smuggling
○ Penalty rate for smuggling and quality of institutions (pol & econ) reduce smuggling while tariffs and black market premia increase incentives for illegal trade
● More trade openness is associated with greater illegal trade in the case of Iran.
Lecture 5 & 6: Resource curse
“All in all, I wish we had discovered water.”
Analyzed Resources: Oil, natural gas, coal, minerals, and forest resources Point resources:
● Extracted from a narrow geographic area that can be controlled at relatively low costs, such as oil or minerals
Diffuse resources:
● Produced in wider geographic area and can be less controlled by the government (f.e Forest and agricultural products)
Rents:
● Difference between market value of extracted natural resources and its discovery extraction and production costs.
● Rents ≠ profits (Profits imply effort) Resource Dependency Indicators:
● Share of natural resource rents in GDP (relative importance of Res.Sector rent)
● Share of natural resource exports in total exports (Export dependency)
● Share of natural resource export revenues in total govt. revenues (govt. dependency) Resource Abundance Indicators:
● Resource production per capita
● Resource reserves per capita
Problems with Dependency and Abundance Indicators:
● OPEC membership (Proxy for rentierism) (Fish 2002, 2005)
○ more nonOPEC major exporters
○ OPEC members = nonOPEP members
● dependence on oil exports for more than half of total exports (Gandhi et Przeworski 2006, 2007)
○ Are <49.9% oil revenues politically irrelevant?
● Oil exports
○ How exportdepending is the country?
● Oil revenues as a share of GDP
○ Population size makes rent capacities for patronage or coercion different! (Kuwait and Iran)
Volatility
● Oil market is very volatile
● Higher dependence on oil and gas means lower dependence on Tax revenues
○ Governments don’t have incentive to stimulate private sector growth as it has no significant impact on their budgets.
○ No incentive to open trade and reduce tariffs Resource curse:
● Resource rich countries are on average and in the longrun poorer
● Oil per se may not be a problem!
● Factor X (X interacts with oil and becomes problematic) ist guilty!
○ Deterioration of Institutions
○ Dutch disease
○ Neglect of Human capital
○ Reduction in Saving and Investment
○ Rent Seeking
○ Civil conflict
○ Political Factionalism
Oil and democracy: Negative correlation between oil and democracy. REASONS:
● A rentier government collects fewer taxes from the population → less accountability in return.
● How the government spends the revenues
○ Oil countries overspend on public services in form of subsidies and transfers to weaken pressure for political reform
○ Easy money → no need for painful economic reforms
● Rents enable govts to alleviate any social grouping that may demand for political rights
Regressions:
Regressions in which TAXES is significant, has a positive coefficient and OILRENTS is insignificant (and has negative coefficient):
● Political stability
● Law
● Freedom of corruption
● Government effectiveness
Regressions in which TAXES is significant, positive coefficient and OILRENTS is significant and has a negative coefficient:
● Regulatory Quality
● Democracy Oil and Conflict:
Higher resource rents increase political instability and conflicts by:
● Funding Rebel Groups
● Weakening State Institutions
● Making Separatism Financially Attractive Other Findings: Oil may buy stability
● Reduced conflict in Sub Saharan Africa
● More ability to calm masses (redistribution of rents)
● Government can redistribute economic rents in exchange for loyalty Regression
Y = POLSTAB
X1: OILRENT, significant, negative coefficient
X2: VOICE (democracy), significant, positive coefficient X3: VOICE * OILRENT, significant (90%), negative coefficient Countries with oilrents have less political stability
Democratic countries have more political stability
Democratic countries with oilrents have less political stability Oil and Corruption
Rents lead to an increase in corruption IF and only IF the quality of democratic institutions is relatively poor.
Oil and Education
Expenditure on education, expected years of schooling for girls and secondary school enrollment are inversely related to the share of natural capital
→ Natural capital crowds out human capital → slowing down economic development
Lessons:
● Diversify economy
● DeLink flow of oil Money to the local economy
Lecture 9 (Lecture 7: Reading Week, Lecture 8: Probeklausur) Military Spending
MENA: Highest military burden
● How many resources (Economic & Human) are allocated to the military industry Military sector is important employer in MENA
Opportunity cost of spending on military is high (less for education, health and social cat) Measurement
● Share of military expenditures as a share of GDP
● Share of military expenditure in total government expenditures
● Per capita military expenditures
Determinants of Military Spending (Theory)
Arms Race Model
● Military spending depends on the spending of potential enemies/allies
● Models based on bilateral relations do not successfully explain
● Threats to security are the most influential explanatory variable (Rosh)
● Change from outside to inside threats (Civil wars) have changed determinants of military spending
Economic, Political and strategic factors
● Socioeconomic
○ Population has negative effect on military spending
■ Large population = security
■ Civil Consumption > Security threats
○ GNP has negative effect (In some studies insignificant)
○ GDP/cap has positive effect
○ Military spending is component of government expenditure, and government expenditure is increasing
○ Aid has positive effect
■ 11.4% of development aid leaks into defense budgets
● Strategic
○ External wars increase military spending
○ External threats increase military spending
○ Internal threats increase military spending
● Political
○ Democracy has a negative effect
○ Democracy with low Income increases violence
■ Lootseeking at low levels of income and not accountability is the source of rebellion. Enhanced accountability due to democracy has little effect
■ As income increases preferences change
Impacts of military spending on growth No clear consensus!
Could decrease economic growth:
● High opportunity growth (Tradeoff with f.e health, education)
→ Crowding out!
Could increase economic growth:
● Keynesian multiplier (G↑ → Y↑), reduce unemployment
● Technological spillover
● Positive Externalities (Infrastructure/Human capital)
● Positive and significant in Iran! (Farzanegan)
Lecture 10: Demographic Transition Definition:
Increase in Labor Force caused by transition from high fertilitymortality to low fertilitymortality (Baby Boom!)
Measurement:
● Population ages 1564 compared to total population
● Age dependency ratio (<15 and >64 compared to total working age)
○ <15 youth dependency ratio
○ >64 elderly dependency ratio
● The lower the dependency ratio the less the burden to an economy!
Growth effects of demographic transition (Theory)
● Demographic Window: End of Baby Boom
○ Fertility falls in sequence of mortality decline
○ Lower dependency ratio (lower youth dependency)
○ More working age population compared to total population
■ Bigger Labour Supply, more savings (More Investments
● Changes during demographic window may boost economic growth (If appropriate economic and social policy)
○ “Demographic dividend to economic growth”
● Reasons
○ Increase in Labour supply (If market can absorb it)
○ More free time for women → more participation in the labor market
○ Longer life span increases willingness to invest in human capital and savings
● Potential Window of Opportunity (WOP):
○ Period in which these positive effects are expected to occur Policies Matter: Case of Iran
● Active policy can cause decline of fertility
MENA’s problems in benefiting from Demographic Transition Most dramatic demographic transition in the world
Window of opportunity is less open for resource rich economies
● Oil dependency leads to rent seeking, corruption, deindustrialization
● Working age people unable to find jobs will
○ Participate in shadow economy
○ Engage in political protest ( → instability)
● Resource rents reduce the capacity of the economy to productively absorb increases in the labor force (addition to dutch disease!)
Lecture 11: Institutions and Governance Scope of Governance:
● State’s institutional arrangements
● Processes for formulating policy, decision making and implementation
● Information flows within government
● Relationship between citizens and governments
Governance consists of the traditions and institutions by which authority is exercised.
Includes: (Kaufman)
● Process of selection, monitoring and replacement
● Capacity to formulate and implement sound policies
● Respect for institutions
“Governance is the exercise of political, economic and administrative authority necessary to manage a nation’s affairs” (OECD definition)
Good governance:
Characteristics (8)
● Participation
○ Participation of both men and women (informed and good organized)
● Transparency
○ Decisions and enforcement follow rules and regulation
○ Information is freely available, accessible and understandable
● Effectiveness and Efficiency
○ Process and institutions meet society’s needs with best use of resources
○ Also sustainability and environmental protection
● Responsiveness
○ All stakeholders have to be served
● Accountability (Key requirement)
○ Cannot be enforced without transparency and rule of law
● Consensus oriented
○ What is the best interest of the whole community
● Equity and inclusiveness
○ Members have to have stake in it, and not feel excluded
● Rule of Law
○ Fair legal framework, full protection of human rights (minorities!), independent and impartial judiciary and incorruptible police
The Worldwide Governance Indicators (WGI) Measurement (Subjective Perception):
● Voice and Accountability
○ Participation of citizens, freedom of expression, freedom of association and free media
● Political Stability and Absence of Violence
○ Likelihood of government being overthrown or destabilized
● Government Effectiveness
○ quality public/ civil services, stability, predictability and efficiency of government
● Regulatory Quality/regulatory burden
○ Sound policies and regulation that promote development of private sector
● Rule of Law
○ Respect for law and order, predictability and effectiveness of judiciary system, enforceability of contracts
● Control of corruption
○ Petty and Grand corruption
○ Capture of the state by private interests Subjective assessment (Polls of experts, surveys..)
● Governance can be measured
● Developed countries can have bad governance (Greece)
● Developing Countries can have good governance (Chile, Costa Rica)
● Governance can improve in short time
Strong correlation of Accountability and Freedom of corruption Exceptions: Singapore vs Bangladesh and Indonesia
Institutions:
“Humanly devised constraints that shape human interaction” North, 1990
● Formal
○ Property Rights, legal system, Rule of Law, Constitution
● Informal
○ Not enforced by law (behaviour, norms, conventions)
● Economic institutions
○ individual Property Rights, patents, contract law
● Political institutions
○ democracy, electoral rules, check and balances
Good economic institutions and bad political ones are possible! (Singapore, Qatar, UAE) Correlation does not imply causation!
Correlation: 2 things happen in related way, together or at same time
(countries higher income per capita → democratic institutions (pos corre) Causation: if A happens, then B will occur
Correlation between Institutions and income Acemoglu, Johnson, Robinson:
History affects quality of institutions!
Governance and Business Environment
● Poor governance affects negatively business environment
○ Firms have to hire people to deal with bureaucracy
● Increasing cost and risk to business
○ Lowers quantity and quality of investment
○ Reduce growth
● Improved Inclusiveness and accountability of GOVERNANCE will help:
○ Reduce scope of arbitrarily and distorted policies
○ Improves bureaucratic performance (reducing uncertainty and costs of doing business)
○ Improves the delivery of public services (Allow businesses to be more productive)
● Better governance makes it easier for entrepreneurship
● Accountable and capable bureaucracies lower transaction costs
● Transparency and Inclusiveness reduce information asymmetries between Business and Governments
○ Reduce uncertainty and unpredictability Governance and Shocks
● Better Governance increases flexibility of countries to respond to shocks Governance and Public Goods and Services
Governance and Growth
● Good governance reduces uncertainty and promote efficiency ( → more growth!)
● Without strong PR market transactions are limited
● Inadequate regulatory regimes undermine investment prospects
● Corruption undermines legitimacy of public institutions that support markets
● No restraints hampers ability to provide growthpromoting institutions
1) Good governance matters for growth
2) Higher incomes do not necessarily lead to better governance
3) Good governance is not a luxury good that countries receive when they become richer
Lecture 12: Environmental quality, economic growth and the MENA region Mena and Climate Change:
● Less than 5 percent contribution, but rapidly increasing
● 4/10 top emitters are in MENA (bsp. Qatar)
● Fresh water will be very scarce
● Tehran is very polluted
Environmental quality (Key indicators, definitions and measurements) Indicators
● CO
○ Global Air Pollution indicator
● SO2 (Sulfur dioxide)
○ Local Air Pollution Indicator
○ Controllability by local governments
○ Source: Electric generation (IC) / Burning of diesel fuels (DC)
● BOD (Biochemical oxygen demand)
○ Measure of organic water pollutants
○ Amount of oxygen required to decompose a given amount of pollutants
○ High BOD = High water pollution
○ Standard and common method of measurement Environmental Performance Indicators:
● Environmental Performance Index (EPI)
○ 0 to 100 (The higher the better)
○ Impossible to compare over time (due to measurement changes)
● Environmental Sustainability Index (ESI)
○ Earlier version of EPI Das and DiRienzo (2010)
● Ethnically fractionalized countries perform worse in environmental quality Park et al. (2007)
● Multidimensional relationship among cultural and environmental sustainability measures Bueh and Farzanegan Air Quality Index: Advantages
● Can be compared over time (from 1985 to 2005)
● Weighs relative importance of determinants (not equal weights)
● Allows us to empirically test the importance and statistical significance of determinants Environmental Quality in MENA
Common environmental problems:
● Scarcity of fresh water
● Deforestation
● Desertification
● Difficulties in preserving and protecting coastal area
● Relative scarcity of arable land
● Air pollution Population growth
● Population growth = higher consumption of energy → intensive extraction of resources Energy use:
● Gulf countries have highest per capita energy use in the world!
● High electricity consumption
● Reason (one of): SUBSIDIES!
Farzanegan & Markwardt (2012)
● Effects of economic growth on the quality of environment (MENA)
○ Role of political institutions
● Rich oil reserves
● Subsidies distort the price mechanism → Inefficient allocation Pollution, Economic Development and Democracy
● Political and democratic institutions are less developed in MENA
○ Some have improved in the last 2 decades
● With higher Percapita Income (after a turning point) there is less environmental deterioration Environmental Kuznets Curve (EKC)
○ Higher quality of institutions may help countries reach the turning point faster
○ Better governance (Secure PR, Rule of Law, enforcement of contracts,
environmental regulation, transparency, better financial sector and higher literacy) can significantly affect environmental quality
● Hypothesis
○ GDP has an increasing effect on emission. After a turning point, higher GDP lowers emission.
○ This effect also depends on institutions (!) Lecture 13: Globalization and the MENA Region Definition & Measurement:
● Economic integration, through increased flow of goods, services, investment and labor, information and ideas.
○ Broader definition adds cultural, political and military integration
● KOF Index of Globalization
○ Economic
■ Actual Flows (Trade, FDI)
■ Restrictions (Barriers, Tariffs, Taxes)
○ Social
■ Data on personal contact(Telephone, Foreign population, Toursim)
■ Data on Information Flows (Internet, TV)
■ Data on cultural proximity (McDonald’s, IKEA)
○ Political (Embassies, memberships, treaties)
○ 19702009
● Trade Openness: Imports + Exports in GDP
○ But: Tricky! Size of the economy changes relative values and oil exports distort it
● Cost of exports
○ When trying to globalize, costs of business will be sunk
○ Fees for completing procedures to export/import
■ Documents, administrative fees...
■ No tariff or trade taxes included
● Foreign Direct Investment (FDI)
○ Net inflows of investment to acquire a lasting management interest (10% or more of voting stock)
○ ∑ Equity capital, reinvestment of earning, long and short term capital MENA problems in Globalization
● Lack of competitiveness → no full benefits of globalization for MENA
○ Poor performance
○ low export market shares
● MENA has failed to increase its global market share in part because exports flow mainly to Europe and are concentrated in traditional products.
○ 60% of total exports
○ No benefit from growth of LATAM, Asia
○ Traditional products haven’t have had so impressive growth
● Poor education outcomes, unfavorable business environments and overbearing governments are key reasons for MENA’s lack of competitiveness
○ Workers don’t have necessary skills
■ Mismatch between supply and demand for skills
■ Government has been employer of first choice
● Not the skills looked for in the private sector
○ Low quality of education
○ Business environment doesn’t promote entrepreneurship
○ Bad regulatory & legal environment, basic infrastructure Success Stories in the Region
● Tunisia (Outsourcing Hub for Car assembly, textile, food processing and IT)
○ Simplified regulation, modern infrastructure, government incentives
○ commitment of knowledgebased economy → welltrained & low cost workers
○ Tunisia scores better on competitiveness indicators
● Egypt → IT investment
○ “Smart village”
○ Structural reforms Globalization & Inequality
● Kuznets curve
● Economic globalization increases income inequality
● Political and social globalization have a negative effect on inequality
Possible Questions
1. Difference between GDP and GNP. Does it make sense to use GNP for MENA?
GDP measures the output produced in an economy in a year (Y = C + I + G), whereas GNP measures the output produced by an economy in a year (Who?). GNP = GDP + net factor Income from abroad.
GNP can be useful to understand MENA economies, specially nonOilMENA countries, as a important fraction of the labor force works in the Oilproducing countries and send remittances back home. These would not be taken into account in the GDP.
2. Provide some characteristics of MENA countries (Makdisi, Fattah, Limam)
Capital is less efficient (In part because of weak institutions, low stock of human capital, and a low link between education system and manufacturing/ industrial sector). Economies are very oildependant (Even nonoil producing countries), and as oil is very volatile and MENA economies are not that diversified, it makes them especially sensitive to external shocks. They also have a large shadow economy, high levels of corruption and low financial penetration, among others.
3. What are Righthand side (RHS) Variables ? Which are some of them when studying economic development?
Right Hand side variables are all variables on the right side of a regression equation. Y = ß 0+
∑ß*x + u
They are the independent variables used to explain the dependent variable. Usually there are variables in which we are not primarily interested but are used to avoid the Omitted Variable Bias.
In the case of economic development, some of the variables that should be taken into account is the quality of institutions, geographic location, resource abundance, external shocks, human capital, trade openness, among others
4. What are rents (oilwise) and what is the difference between rents and profits? How do we measure oil dependency?
Rents are the difference between market value of extracted natural resources and its discovery, extraction and production costs.
Rents are different than profits, because profits imply human effort, whereas the resources which produce rents are exogenously given by nature.
We can measure Oil dependency different ways:
1) Share of oil revenues in total GDP (relative importance)
2) Share of oil export revenues in total exports (Export dependency)
3) Share of oil export revenues in total government revenues (Government dependency on oil).
5. What is the difference between oil abundance and oil dependency? Provide examples.
Oil abundance refers to the reserves (how much oil is left underground). Oil dependence is to which extent does an economy (and/or government) depend exclusively on oil. Norway is oil abundant, which means that even if they have oil, they have a more diversified economy than oilproducing MENA countries, which are oil abundant, but also oil dependent (Which has a series of often negative consequences).
Why are financial intermediary services important? (Tasks)
Financial intermediaries are important because they can help match the supply and demand for credit. They can pool savings and then give credit to people who wish to undertake enterprising activities. This could prove to be very difficult (if not impossible ) without intermediaries. They have a very important role in providing information for potential savers and investors. As there are high information costs, the undertaking of them by financial intermediaries can be helpful to create a healthy investment environment. A developed stock market can help produce
information about different companies and discipline the management of the different companies. Developed financial systems also help to diversify investments and thus risks.
Indicators of financial development? How is the status of MENA financial development?
What are the problems of capital markets in MENA (and other developing countries)?
Banking depth, credit depth, size and turnover rate of stock market.
MENA’s financial sector is underdeveloped, being the region with the lowest credit penetration.
MENA (and other developing nations) have some barriers that prevent them from improving their financial health situation. The government intervenes to a large extent in the financial sector which distorts the price mechanism, and misguides investments. For example, sometimes a special interest rate is arbitrarily decided by governments for ‘preferred’ sectors of the economy, or coerce banks into buying government bonds. The financial sector can also be highly regulated and banks require to have very large reserve rates. Failed monetary policies may also lead to high inflation which makes real rates for investments low or even negative (savings being thus discouraged).
Why is resource mobilization important?
Resource mobilization helps allocate capital where it is most valued. It has been show that regardless of geographic location higher resource mobilization positively affects economic growth (Erstil, Kandil)
What are the consequences of a large shadow economy? How do we measure the shadow economy?
A large shadow economy leads to unreliable statistics. It also reduces government revenues as people operating in the informal economy do not pay taxes. This sometimes lead governments to raise taxes, thus increasing the incentives for people to move to the shadow economy. It can also lead to unfair competition and environmental pollution. Participants of the shadow economy do not participate in programs such as retirement funds or social security (unless they also have a job in the formal economy). As formal education has very low returns in the shadow economy, it also imposes a loss on human capital for countries with large shadow economies.
It is very hard to measure the shadow economy. We use proxies like the level of monetization of an economy (M1, M2), or the level of electricity consumption growth compared to GDP (total level of electricity consumptions proxies for economic activity while GDP tells us the level of official economic ability), or the level of labor force participations. None of these methods,
however is perfect, and each has its drawbacks.
Why does a large shadow economy have a negative impact on the environment?
Production in shadow economy is concealed from public authorities inter alia to avoid environmental regulation and policies. A large informal sectors may be accompanied by higher pollution levels.
The Shadow economy includes many pollution intensive activities, such as resource extraction, metal working, transportation with old and inefficient vehicles etc. In general the firms in shadow economy do not follow environmental standards.
What are the reasons for people to work in the shadow economy? What is the relationship between government and the shadow economy? (Vicious circle)
The reasons for people to work in the shadow economy is to avoid payment of income taxes, social security contributions or other taxes, to avoid bureaucracy, transfer payments, various regulations (labor market regulations, trade licenses and barriers etc), low disposable income, unemployment (ambiguous). The income people get in the shadow economy rises automatically because they don't have to count only with the aftertax earnings from work.
Vicious Cycle: government with large informal or underground economies may raise tax rates to make up revenues, encouraging further enlargement of the underground economy.
How is the shadow economy in the MENA?
● In MENA countries only 85,2 % of firms are formally registered when they started operations in the country.
● And 42,7 % of firms are identifying practices of competitors in the informal sector as a major constraint.
● One third of economic output in MENA is undeclared (not taxed)
● >2/3 don't have access to health insurance, nor contribute to pension system
What does it mean that “Institutions matter” ? How does this relate to MENA countries?
It means that the Framework within which agents of an economy interact is important. Some factors (such as resource abundance) may not be a problem per se but may lead to negative consequences if the institutions are weak and do not encourage economic growth.
What is the ‘Oil curse’ ? What are the consequences of oil dependency?
Countries rich on natural resources, on average and in long run, have slower economic growth than the resource poor countries. (can be compared with the per capita growth in resource importers and exporters).
But oil per se may not be a problem. There are other factors, which together with oil factor have a negative influence on the economic growth of the country. These factors are: dutch disease,
neglect of human capital, rentseeking, civil conflict, deterioration of institutions.
What are the common problems with natural resources dependency abundance measurements?
There can be some problems with a number of dummy variables used as proxies for rentierism:
OPEC membership and dependence on oil exports for more than a half of total exports.
1) OPEC = nonOPEC
2) OPEC countries are not inherently different than their more numerous exporting counterparts.
3) Does it mean, that oil revenues are politically irrelevant, if the oil exports are 49,9% of the total exports & relevant if they are 50,1% ?
What is the ‘dutch disease’?
Dutch disease is a “total” concentration of all activities and resources on the extraction and production of oil. The consequence is: there is no more diversification in the economy and other economic sectors don´t have a chance to develop. (Don´t put all your money in one basket!!!) Difference between Corruption and Embezzlement
Corruption is a misuse of public power for private benefit as receiving money, valuable assets or increase in power status etc. You can describe corruption with bribery: it involves two individuals, a state agent and a civilian, where the state agent misuse his power for money of other favors.
(PrincipalAgent Problem)
Embezzlement is a different kind of corruption, because there is no client involved.
Embezzlement is stealing of resources by a disloyal employee from his employers.
Relationship between oil and corruption
Rents lead to an increase in corruption IF and only IF the quality of democratic institutions is relatively poor.
Consequences of corruption?
Corruption is found to reduce government spendings on education and to raise military spendings in a cross section of countries.
Corruption in doctoral education undermine the credibility of real, earned doctorates and reduce the average quality of all doctorates (dissertations for sale).
There is a positive relationship between corruption and foreign direct investment (C. is a stimulus for FDI)
Corruption distorts economic and financial environment, reduces efficiency (cronyism, nepotism etc), leads to inherent instability in the country.
Give examples of areas where oil has an impact and say how it impacts
● Education: Rentier governments tend to spend less money on education (Natural capital crowds out human capital)
● Democracy: Rentier governments tend to be less democratically. With weak institutions oil may lead to an increase in corruption
Are the share of taxes (in relation with government revenues) important? What's the relationship of taxes and oil rents? How does this relate to democracy?
If the share of taxes is relatively small in relation with government revenues, than oil together with this share if taxes may negatively affect the democracy. Governments that don’t depend on taxes to sustain themselves have less accountability towards their citizens. Resourcerich governments tend to use petrodollars to weaken pressure for political reforms
What is the relationship of oil and conflicts?
Higher resource rents increase political instability and conflicts by funding rebel groups, weakening state institutions and making separatism financially attractive in resource rich regions.
Why is the role of military spending in economic growth of the MENA region so important?
Military burden is the highest in MENA (16,9 $ armes per capita). But military sector is also an important employer in MENA (4% of total labor force)
What is the effect of more militarization (opportunity costs) and what are the determinants?
Effect: Less budget for education, health, culture and other social categories. (Iran: 50% of budget goes to military sector, 15% to education, 3% ro health, 7% to social affairs etc).
Determinants of militarization are: The Arms Race Model (Richardson 1960) and models that include economic, political and strategic factors.
● the Arms Race Model focuses primarily on the military spending of potential enemies or allies to explain defense spendings. Its based on bilateral relationships (unsuccessful in explaining the determinants of military expenditure). It would seem that security is a multilateral, not a bilateral concern, as Rosh (1988) explains in developing the concept of a security web
● A second wave of research has focused on three types of variable in order to explain military spending: Socioeconomic (population, national income measures and external
aid), Strategic (external wars, civil wars, security webs, external threats, internal threats potential enemies and regional dummies), Political Variables
Why level of income is important for the final stability effects of democracy?
1. A change in the structure of the economy as income rises is that the share of primary commodities declines (its important because primary commodities generate ‘lootseeking' opportunities which are one motivation for rebellion)
2. As income increases individual preferences change: Inglehart (1997) finds that the
‘instrumental' goal of material reward becomes less important relative to the more abstract goals of ideology and identity, accountability.
What is the impact of military spending on growth?
There is no clear consensus about the effect (empirical evidences for both positive and negative influence).
● Defense expenditures may reduce economic growth by crowding out investment, health and education spendings and infrastructural improvement.
● On the other hand, military expenditure may enhance economic growth through Keynesian type aggregate demand effects. There may be technological spinoffs, positive externalities from infrastructure, investment in human capital, stimulative effect on production and employment.
How globalization affects democratization .??...?
Do economic liberalization and globalization increase income inequality?
Globalisation leads to an increase in income. As a country develops, there is a natural cycle of economic inequality driven by market forces which at first increases inequality, and then decreases it after a certain average income is attained. (Kuznets Curve)
Why globalization in the MENA region has not lead to higher economic growth? (Inst) Because of the low quality of institutions and oil dependancy. Also there is a lack of competetivness which cannot lead to full benefits from globalization. MENA exports flow mainly to Europe and are concentrated in traditional products, thatswhy MENA fauled to increase its global market share.
Globalization and environmental quality: Role of institutions
GLobalization and its impact of life satisfation
Economic liberalization and illegal trade: institutions
NAtural resource wealth and willingness to join globalization Glbalization and women labor force participation
Can economic and political globalization increase the political stability
