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For debate in the Standing Committee see Rule 47
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Doc. 8069
7 April 1998
Economic development in the Middle East and North Africa
Report
Committee on Economic Affairs and Development
Rapporteur: Mr Jan Dirk Blaauw, Netherlands, Liberal, Democratic and Reformers' Group
Summary
The countries in the Middle East and North Africa are facing formidable economic challenges under the pressure of rapid global change. Some have made remarkable progress. For others the choice is between, on the one hand, the pursuit of economic, institutional and political reform by which they can develop more rapidly; and, on the other, delaying such reform, thereby risking economic decline and reduced social and political stability, not least in the face of rapid population growth. The key is to take advantage of the economic opportunities brought by the globalisation process and to make productive use of the region’s considerable human, financial and physical resources. This holds very much also for the contribution of women.
The report examines the major characteristics of the economies in the Middle East and North Africa. It expresses the hope that the current stalemate in the Middle East peace process can be overcome, especially to permit budding regional economic co-operation to take off in earnest and thereby in turn fortify peace. The report goes on to suggest a comprehensive macroeconomic strategy for the region, adapted to the particular situation of each country. It would include such areas as privatisation of state-owned enterprises, trade liberalisation among neighbouring countries, joint exploitation and preservation of natural resources, targeted programmes to protect the environment and the establishment of a well-functioning institutional and regulatory framework. Such a set of policies would favour a more complete integration of the region into the world economic framework.
I. Draft resolution
1. The Assembly sees many of the countries of the Middle East and North Africa as facing an urgent choice: either they pursue and intensify economic and political reform in the direction of greater freedom and openness; or they risk falling irremediably behind more successful neighbours and many other parts of the world, with a resulting loss in prosperity for their peoples. Globalisation in itself will not solve problems as regards income distribution, social protection, education, public health and the preservation of the environment; yet it constitutes a powerful engine for economic growth, essential for balanced and sustainable economic and social development, although population growth may have a detrimental effect.
2. The Assembly, recalling its past recommendations and resolutions on this subject and in particular Resolution 1103 (1996) on the situation in the Middle East, commends several of the countries in the region on remarkable economic achievements in terms of high growth, reduced debt and low inflation. It recognises that while successful economic and social reform must be adapted to the unique situation of each country, with its own cultural and historical background, its fruits in the form of increased wealth must be equitably shared among the people. The region also faces the challenge of creating new employment due to growing population.
3. The Assembly notes in this context, however, that the recent setbacks to the Middle East peace process, as well as the rise of forms of religious extremism, may hurt positive, region-wide economic developments planned or in progress.
4. The Assembly is convinced that continued privatisation of state-owned enterprises, increased co-operation among neighbouring countries and further liberalisation of protective trade regimes should be stepped up, in order to reduce the economic role of governments and to increase the international competitiveness of the countries concerned, favouring the realisation of their economic potential as well as their integration into the global economy.
5. The Assembly recognises the important role played by international economic institutions such as the World Bank, the International Monetary Fund, the World Trade Organisation as well as the European Union and others in providing the technical and material support needed to deepen social and economic reform. It encourages them to continue these efforts in a region crucial to world peace.
6. The Assembly considers it vital for the region as a whole to enhance co-operation in projects directly affecting its limited natural resources, in particular water, and the environment. It calls for greater joint efforts to protect the environment, not least through targeted programmes and the use of "clean" technologies preventing additional environmental damage.
7. The Assembly is of the opinion that continued social and economic reform should include:
i. enhanced efficiency and accountability on the part of public administrations, appropriate to the needs of an emerging market economy;
ii. adequate protection for vulnerable groups, such as the old, the unemployed, the handicapped and disadvantaged families;
iii. promotion of the education, vocational training and retraining of the workforce, male and female, in order to benefit the region’s vast human resources;
iv. a particular effort in favour of the education of women and girls, an aspect too often neglected;
v. a comprehensive regional strategy aimed at avoiding wastage, excessive use and pollution of scarce water reserves;
vi. a positive policy to limit the growth in population
8. The Assembly encourages the governments of all Council of Europe member states to enhance access to their markets for the region’s exports, including agricultural commodities, and to resist any protectionist measures that could jeopardise economic growth in the area.
9. Finally, the Assembly calls on the countries of the Middle East and North Africa to muster, in a spirit of mutual concession, the will and the determination necessary to overcome the last obstacles to a successful regional economic co-operation, capable of strengthening overall peace and a stronger and more balanced economic and social development of the region.
II. Explanatory memorandum by Mr Blaauw
Contents
A. Introduction
B. Economic developments in the Middle East and North Africa region
C. International development co-operation policies for the Middle East and North Africa region
D. Water Management: A harbinger for closer overall co-operation in the region?
E. Israel: an economic profile
I. Jordan: an economic profile
G. Palestinian Territories of the West Bank and the Gaza Strip: an economic profile
H. Morocco: an economic profile
I. Tunisia: an economic profile
J. Egypt: a brief economic profile
K. Lebanon: the economic outlook
L. Libya: a brief economic outlook
M. Syria: a brief economic outlook
N. Algeria: a brief economic outlook
O. Concluding remarks
A. Introduction
1. Over the past decade the Parliamentary Assembly of the Council of Europe has been monitoring with great interest the economic development of the Middle East and North Africa as well as the peace process, in particular in consideration of the direct relationship between economic development and peace in the region. Numerous visits have been paid and many important activities and initiatives undertaken to help foster regional co-operation and understanding and to support the peace process.
2. In September 1993 the Parliamentary Assembly of the Council of Europe adopted Resolution 1013 and Recommendation 1221 on the peace process in the Middle East. Recommendation 1221 fully supported the peace process "as a means of resolving the Arab-Israeli conflict, on the basis of United Nations Security Council Resolutions 242 (1967) and 338 (1973)".
3. It also referred to the need to ensure "durable agreements" and recommended that the Committee of Ministers "urge the governments of member states and the Commission of the European Communities to support economic development programmes in the Middle East". Other texts were adopted subsequently, such as Recommendation 1249 (7 October 1994) on co-operation in the Mediterranean basin and Resolution 1088 (26 April 1996) on the threat to the peace process in the Middle East.
4. The Political Affairs Committee, meeting in Rhodes in July 1995, decided, through its Sub-Committee on the Situation in the Middle East, to “set up five task forces with a limited number of members and specific themes to deal with". One of these task forces, focussing on economic development and reconstruction, was organised by the Committee on Economic Affairs and Development.
5. The task force meeting, held by the ad hoc Sub-Committee on Economic Development and Reconstruction in the Middle East, took place in Brussels in November 1995. It was attended by members of the Parliamentary Assembly's Committee on Economic Affairs and Development, representatives of the Palestinian Authority, Israel, Norway, the European Union, international organisations such as the World Bank, the Council of Europe's North-South Centre, research institutes as well as non-governmental organisations. The discussions were highly instrumental in furthering the understanding on the part of the various parties of one another’s concerns and priorities.
6. One of the main conclusions was that the Council of Europe could serve as a catalyst for establishing contacts among the parties concerned, and act as an intermediary with various financial institutions with which the Committee on Economic Affairs and Development enjoys privileged links..
7. In November 1996 the Assembly’s Political Affairs Committee adopted Resolution 1103 on the situation in the Middle East, in which it re-affirmed its support for peace in the region. It recalled, inter alia, that the human, cultural, and economic potential of the Middle East had for too long been hindered by conflicts, with consequences also for stability and security in Europe.
8. On the basis of the work of the task force, a contribution (Doc. 7641) was presented by the Committee on Economic Affairs and Development to the Assembly’s debate on the situation on the Middle East concerning economic reconstruction and development, with particular reference to the Palestinian Territories of the West Bank and Gaza. In this report the wish was expressed for the Committee to be able to prepare a further report on the economic development in the Middle East and North Africa.
9. A fact-finding mission to the region was carried out in July 1997. One main conclusion from this mission is that regional economic development, to be achieved primarily through increased trade and investment in a context of progressive liberalisation and structural adjustment, is a prerequisite for the resumption and sustainability of the peace process. Before addressing the subject as such, the Rapporteur wishes to thank all his colleagues on the Committee on Economic Affairs and Development for the keen interest they have shown in the report at its various stages of preparation, and for their many extremely useful comments.
B. Economic Development in the Middle East and North Africa Region
10. It is important to clarify what we mean by the terms ‘Middle East’ and ‘North Africa’. The World Bank and the IMF use the acronym MENA to signify a much larger number of countries than those in the proximity to Europe1 or those most directly affected by the Middle East peace process.
11. The withdrawal of Israeli troops from the West Bank town of Hebron in mid-January 1997 spurred new hopes for a continuation of the peace process. However, an Israeli decision in March 1997 to build homes for 30,000 Jews in East Jerusalem - the Har Homa settlement on the hills known to Arabs as Jabal Abu Ghneim – complicated matters considerably.
12. The Israeli decision was followed in March 1997 by the 22-nation Arab League recommendation to freeze normalisation with Israel. Thereafter, peace was weakened further by terrorist attacks in Jerusalem in July and September, in which about twenty people were killed and hundreds injured.
13. For the purposes of this report, the Middle East and North Africa region is considered to include the majority of the twelve non-European countries, which adopted the Barcelona Declaration establishing the so-called Euro-Mediterranean Partnership2 (and Libya). Our definition is therefore slightly different from that used by the World Bank and the IMF.
14. Two significant MENA economic summits and one MENA conference have been held. On these occasions economic development in the region was analysed from a broader perspective than that utilised in this report. This notwithstanding, their results will be taken into full account in this report.
15. The Rapporteur strongly believes that in spite of the current deadlock in the peace process, the economic fundamentals of most countries in the region are such that they have an objective interest in peace rather than conflict, and in co-operation and trade rather than mutual isolation.
16. The choice of the Rapporteur to limit his visit to Jordan, Israel, and the Palestinian Territories of the West Bank and Gaza, is mainly due to a lack of time. In order to permit a comprehensive approach, the report gives not only profiles of the countries and territories already mentioned but also the economic outlook for countries like Algeria, Egypt, Lebanon, Libya and Syria.
17. The Rapporteur is convinced that only an agreement covering the whole region, i.e. also including Syria and the Lebanon can produce an economic environment conducive to long-term sustainable development. By the same token, lasting overall peace will be probably achieved only when the prospects for the region’s economic development have become more fully realised. Hence, more attention needs to be paid to all the economies in the Middle East/North Africa region.
18. In the years following the 1991 Madrid Conference the Parliamentary Assembly paid particular attention to Jordan, Israel and the Palestinian Territories of the West Bank and Gaza, especially since it was clear that no regional economic development would be possible without the full contribution. This is so not only because of their direct involvement in any peace settlement, but also because regional trade and economic co-operation in the Mashreq will depend to a critical degree on the effectiveness of the implementation of the economic agreements and protocols already signed by the three parties.
19. Additional factors are the signing of bilateral free-trade agreements with the European Union, the economic interdependence between the Palestinians and the Israelis, the size and strength of the Israeli economy, and the performance of Jordan in terms of trade liberalisation and structural adjustment - the best in the Mashreq. In other words, this particular area has a great potential to become - especially by taking advantage of the relative economic strength of Israel - the engine for economic growth in the entire region.
20. Morocco and Tunisia are the two countries in the Maghreb which have the most developed economies and which have come furthest along the road of structural adjustment. They have also signed bilateral free-trade agreements with the European Union, a fact that is likely to favour trade and investment in the Maghreb in the years to come.
21. The two countries and territories visited by the Rapporteur are key players in the economic development of the Middle East and North Africa region, but others included in the Euro-Mediterranean Partnership will no doubt also be crucial partners in a collective effort which, if supported by Europe, could assist regional peace and development.
C. Current international economic development co-operation policies for the Middle East and North Africa region
22. The Middle East and North Africa region has a great potential to achieve major economic and social improvements by the year 2010, and thereby become a full-fledged actor in the global economy. It can do so by increasing its overall competitiveness if it pursues co-operation within the region as well as with Europe.
23. An attractive investment environment - a major pre-requisite for growth anywhere in the world - can be established only if a number of necessary conditions are met: peace, macroeconomic adjustment, and prospects for increased trade and co-operation.
24. Although the region is vast and rather heterogeneous, a number of common characteristics can be identified among many countries, such as a relatively pronounced state intervention in economic life, regulated trade, and dependence on the extraction of natural resources such as oil.
25. Understandably, there are also many differences. The Palestinian development model is very much marked by the peace process and the international assistance that accompanies it, and the country is also highly dependent economically on its trade and workforce links with Israel. Israel has a much more developed economy than most other countries in the area, with a per capita GDP ten times higher than the average of the region.
26. Lebanon’s economy has traditionally been relatively open and private sector-oriented. Some Arab states have carried out highly successful macroeconomic stabilisation policies under the guidance of the IMF and the World Bank - in primis Morocco, Tunisia and Jordan, but also Egypt - while others have not done so to the same extent, among them Libya and Syria. Structural reforms of the regulatory framework have been more successful in some countries than in others, for example in Israel, Lebanon, Jordan, Morocco and Tunisia. Libya is still isolated internationally and Algeria is ravaged by terrorism..
27. During the period 1960-1985 the region outperformed other parts of the developing world in income growth and distribution, according to World Bank data. This helped reduce poverty3 in the larger MENA region. Thus, by 1990 only 5.6% of the population lived under the poverty benchmark (compared with 14.7% in East Asia and 28.8% in Latin America; more specifically, less than 4% of the population in Algeria, Morocco and Tunisia, less than 6% in Egypt, but above 12% in Jordan). This growth in the region was facilitated by high oil prices, the positive business cycle in the world economy, and relatively low competition from abroad, partly due to the "easy" stages of industrialisation that the countries went through.
28. The situation has changed considerably over the last ten years as a consequence of falling oil prices, slackening productivity and domestic unrest in many of the countries. A further destabilising element is Islamic fundamentalism, which has discouraged much foreign direct investment. All these factors have had a negative impact on growth and capital investment. (Even growth in non-oil exporters such as Jordan, Morocco and Tunisia has suffered - although to a lesser extent - because of the labour and capital market effects of declining regional oil revenue).
29. Poor competitiveness was partly the result of misplaced development strategies as regards human resources, and often less well-reflected investments in the public sector. Moreover, government postponed trade and privatisation reforms, which could have favoured private sector initiatives. These policies were implemented since governments could rely not only on internal tax revenue but also on revenues from oil sales (known as exogenous revenues) as well as foreign aid. It is thus no accident that countries like Israel, Jordan, Morocco and Tunisia, which have had relatively low exogenous revenues rates (especially because of their lack of dependence on oil receipts), are the countries in the region which are the most integrated in the world economy.
30. Today's global competitive pressure, along with increased domestic demand for employment, is forcing the countries in question to accelerate the pace of reform. Such measures should promote macroeconomic stability, help implement credible and consistent trade liberalisation and privatisation policies, tailor educational policies to the real needs of the economy, and eventually help alleviate poverty through sustained growth.
31. There is of course a trade-off between fast economic reforms and the social costs that often accompany them. According to a recent study by the World Bank, "these costs translate into higher unemployment and lower consumption (to allow for greater investment) during the transition, conservatively estimated to be about five years". However, the costs of the reforms can be shared - with the private sector and with donors – since there is no shortage of financing. (The approximately $350 billion in assets held abroad is just one source of potential financing.)
32. Aside from foreign direct investment, a source of support for economic reforms financing can - and should - be donor funding, especially since donors may be willing to finance the costs of reform to help reform-minded governments overcome short-term difficulties. The effect of donor funding is more important than it may appear. Its effects go beyond mere financial assistance, in that it may enhance the credibility of recipient countries as regards continued pursuit of structural reform. Recent studies indicate that FDI (foreign direct investment) in the Middle East has shifted from oil-producing countries towards those countries that have implemented significant structural reforms, in particular in the manufacturing and services sectors.
33. The two most important initiatives aimed at supporting economic development in the Middle East and North Africa region after the 1991 Madrid Conference are the Euro-Mediterranean Partnership and the MENA economic summits (and conferences). It is also worth noting that, as part of the peace process, a Regional Economic Development Working Group was established under the guidance of the EU. The REDWG has set up a Monitoring Committee (with a Secretariat in Amman funded by the EU) and four Committees covering Finance, Infrastructures, Tourism and Trade.
34. The Euro-Mediterranean Partnership may become a major factor in promoting sustainable economic development in the region. This agreement, adopted in Barcelona in November 1995, spells out the new EU Mediterranean strategy, which is not a break with the past but more of a deepening of past efforts. The budget for EU assistance to the Mediterranean region amounts to about ECU 9.4 billion4 for 1995-1999, divided evenly between funds of the EU and loans from the European Investment Bank. The aspects of the partnership are three: 1) strengthened political dialogue on a regular basis: 2) development of economic and financial co-operation: 3) greater emphasis on the social, cultural and human dimension.
35. As regards the second aspect of the partnership, the participants set themselves the long-term objectives of accelerating socio-economic development, improving the living conditions and employment levels, reducing the ‘development gap’ among countries in the Euro-Mediterranean region, and encouraging regional co-operation and integration.
36. Furthermore, the agreement calls for the progressive establishment of a free-trade area by the year 20105. It is to be established through the new Euro-Mediterranean Agreements and free-trade agreements, and will cover most trade, with due observance of WTO obligations. Its realisation will depend on agreement on such things as rules of origin, certification, protection of intellectual and industrial property rights and competition.
37. Hence, even though the free-trade area is to be set up through bilateral agreements among any two countries, the Euro-Mediterranean Partnership clearly creates a multilateral framework for the region. Furthermore, EU financial assistance to the countries of the southern basin of the Mediterranean area will be allocated on a conditional basis linked to reforms undertaken by each country. Thus, aid goes beyond mere project financing since it encompasses support for broader macroeconomic and structural reform.
38. A second initiative is the MENA economic summits and conferences. The first MENA summit - strongly supported by the United States - was held in Casablanca, Morocco, in 1994 in order to translate political progress into economic dividends that would, in turn, foster peace. Thus, the Casablanca summit was the first step in a process designed to build cross-border links between regional governments and the private sector6.
39. One of the main objectives of this process is to bring about economic co-operation at the company level. Strategic alliances among Middle Eastern business executives can greatly favour economic development, by opening up new markets, providing outsourcing opportunities, lowering production costs, improving know-how and transferring technology. Following the summit a secretariat was established in Rabat to oversee the process and build public-private partnerships.
40. Casablanca was followed by a second summit held in Amman, Jordan, in October 1995. At the time of the summit the peace process was showing considerable progress, improving the prospects for economic co-operation. Therefore, discussions focused on the need for many countries in the region to achieve macroeconomic stability, create the right environment for investment and savings, and liberalise international trade and capital markets.
41. It was noted that the emphasis should be on a private sector-led, outward-oriented economic strategy, supplemented by multilateral and bilateral financial and technical assistance. An important decision was that of creating new regional institutions designed to promote regional development and regional economic co-operation: in particular, the Middle East Bank for Reconstruction and Development and regional councils for business and tourism.
42. The third stage of the "Casablanca process", co-sponsored by the United States and Russia and with the support of Canada, the EU and Japan, was held in Cairo, Egypt, in November 1996. The by this time emerging deadlock in the peace process caused the Cairo event to be downgraded from a summit to a "conference" which nevertheless stressed the importance of regional economic reform and global integration.
43. The Rapporteur at this point wishes to emphasise the close relationship between the peace process and regional economic development. As far as the MENA initiative is concerned, a tangible negative consequence of the halting of the "Casablanca process" is the fact that the regional development bank that was decided has not yet seen the light of day.
D. Water Management: A starting point for a closer co-operation
in the region?
44. Water is one of the most pressing problems facing the region as a whole. The majority of the countries suffer from a serious shortage of water, stemming from a rising demand due to agriculture, population growth, increased urbanisation and rising tourism. Furthermore, wasteful usage and pollution of some water resources worsen an already alarming situation. While in Israel around 12% of water is lost owing to leaking pipes, in Jordan and in the Palestinian Authority waste of this kind reach over 40% of the total volume. Unfortunately, the solution to this seemingly straightforward problem is not so easy. Water pipes rehabilitation programmes require considerable funds and time since it is very hard to identify broken or leaking pipes.
45. A successful water strategy has to be comprehensive and based on a concerted and agreed-upon policy aiming to preserve water reservoirs from overexploitation and pollution, as well as to enhance the efficiency of utilisation and develop new water resources. A correct water pricing (the cost of water should reflect the cost of its replacement) should also be included in future policies to discourage excessive water usage.
46. The Rapporteur is convinced that the long-term solution to the problem of water lies in a two-pronged strategy: desalination of seawater and brackish water for domestic purposes, and wastewater treatment for irrigation. To be effective and fruitful, such a strategy has to be carried out by all countries concerned. As the Jordanian Minister of Water and Irrigation, Dr. Munther Haddadin, so rightly put it in a conversation with the Rapporteur, regional co-operation is the only answer to the problem of water.
47. Nonetheless, there still are numerous issues to be solved. They include uneven distribution of water resources within countries, slow acceptance of new technologies in the agricultural sector and the location of important water resources of a country beyond its borders. Moreover, some countries have decided to implement development programmes that could adversely affect the water resources of neighbouring countries.
48. For instance, the Palestinian Authority has a desalination plant located along the border with Israel. Such plant, however, cannot be used efficiently. On the one hand, Israel stops the construction of a pipe taking the salty water back to the Mediterranean Sea on the grounds that it is beyond the Palestinian Authority's border. On the other hand, the Palestinians refuse to build another pipe within their territories - which would be longer than the one passing through Israel - arguing that it would be too expensive. Such a stalemate not only produces waste of energy and water but also reflects poorly on the "spirit of co-operation" that is supposed to prevail in Israel- Palestinian Authority relations.
49. In Israel, according to its Ministry of Agriculture, yearly water consumption, around 2 billion cubic meters, has been basically steady since 1960. Fresh water is used for domestic purposes (600 mln) as well as for irrigation (900 mln) and industrial production (100 mln), whereas treated water is mainly employed for a limited number of crops. This situation is bound to change in the near future, in particular owing to immigration from central and Eastern Europe, which has drastically increased the demand for fresh water. It is in this context to be regretted that Israel is still growing cotton to such an extent. It is a very water-intensive commodity and one usually not suited for a climate such as that of Israel.
50. Among the several options considered by the Ministry, desalination seems to be preferred, for at least two reasons. First, provided that a good degree of purification can be reached, treated water can be extended to all agricultural commodities, thereby leaving more fresh water for domestic consumption. Second, maintenance costs for desalination plants are not exorbitant. The first pilot plant is located in Ashdod and is so far showing good results.
51. However, according to the Director of the Integrated Regional and Environmental Planning, Mr Aharon Zohar, it will take about seven years to reach the necessary capacity in order to meet the rising needs of the country. He calculates the cost of treating one cubic meter of salty water at around 60 cents, to which should be added the cost of transportation, roughly amounting to 40 cents. The total cost of desalinating one cubic meter is therefore US1, too high to supply those living in Gaza and the West Bank. Hence, desalinating water may be a solution to Israel’s water problems but not, a priori, for the region as a whole.
52. In the Palestinian Authority territories, the situation is outright alarming. People have already experienced serious shortages of drinking water. The northern and western aquifers are insufficient to meet the needs of a rising population, while that situated in the eastern side is not yet fully exploited. The water quality in some water resources has deteriorated sharply, mainly due to pollution. One explanation is that in the Palestinian Authority territories there is neither waste treatment nor a proper sewerage system. Hence, contamination of water reservoirs is almost inevitable.
53. Furthermore, the three desalination plants located in the West Bank are in poor condition. The biological processes governing the functioning of these plants recently collapsed. Some sources argued that municipalities do not provide proper maintenance. Whatever the cause, the impact on public health can be serious. The Rapporteur believes that a rapid privatisation of water utilities, in which international tenders would be invited, could improve the situation.
54. In Gaza, agriculture is among the few resources available. It employs around 4 percent of the active labour force and provides a sufficient amount of vegetables and dairy products for domestic consumption. The West Bank is less dependent on agriculture, given its emerging industrial tissue. In the West Bank, Palestinians have intensified efforts to bring back many water streams to life. However, problems remain, such as a lack of waste treatment that can reduce the risk of infiltration of pollutants into the water system, and transportation costs which render outside supplies largely unaffordable to Palestinians. Therefore, the situation in the Palestinian Authority territories, and in particular in Gaza, is becoming increasingly explosive.
55. For example, the cost of water supplied to Gaza by Israel is only covers provision expenses, affording no profit to be made. However, even that cost is too high for those living in Gaza. Hence, Israeli water bills remain unpaid, while Palestinians continue to insist on having more water for domestic purposes and irrigation.
56. The Rapporteur feels that the international community should be more involved in finding a permanent and valuable solution to the pressing issue of water. Several members of the Committee also share this concern. According to internationally agreed norms, a person is entitled to 100 cubic meters per year. On average and excluding agriculture, Palestinians consume some 40 cubic meters per person, and Israelis around 80 cubic meters. Thus, agriculture and a growing population largely account for the current water crisis.
57. ‘Water relations’ between Israel and the Palestinian Authority are guided by Article 40 of the Memorandum of understanding signed in September 1995. Among the various provisions, there is one calling for the setting up of a Joint Water Committee. However, that body has ceased to function a long time ago.
58. The Joint Water Committee was supposed to co-ordinate water resources management, protect water reservoirs, and establish the water supply from one side to the other, as well as exchange information on water legislation and regulations. The Rapporteur believes that it is in the interest of both sides that the JWC be able to resume its activities as soon as possible, in order to help reduce a water problem that is becoming more serious by the day.
59. Jordan enjoys stable water resources. At issue are their distribution and use. In Amman alone, almost 50% of the pipe network is leaking, due to rising population pressure and insufficient maintenance. The cost of restoring and restructuring the pipe system is well beyond the financial capacities of Jordan. Hence, the necessary capital investment in this sector, as in others, depends on the generosity of donors.
60. At present, the international community has committed some US150 mln for the rehabilitation programme and almost the same amount for the restructuring of the water network, by which the number of distribution zones would increase from 5 to 43. The government would not be able to recuperate the enormous cost of these projects by increases in the price of water. The population simply could not afford it.
61. Another problem is the geographical separation between where the majority of the people live relative to the location of water reservoirs. The population is concentrated on the high plains, or plateaux, which are far from the aquifers. This entails huge government expenditure on energy and transportation, since water has to be pumped up, (sometimes by 1000 meters). The introduction of advanced technologies may, however, reduce costs in the future.
62. With regard to water utilisation, several experts consulted claim that Jordan is using up excessive amounts of water in agriculture, partly due to outmoded technology. Capital investment will be required to increase productivity, bring in new technology and provide targeted training to farmers. Treated water should gradually replace fresh water for irrigation and industrial purposes.
63. Water relations with Israel are based on Article 6 of the peace accord signed by the two countries in September 1994. Numerous joint programmes are under consideration. For example, the Jordan River Valley (JVR) project may form a solid basis for the advancement of co-operation between Israel and Jordan. The valley itself is relatively inhospitable to human settlement, but the Jordanian government has plans to use advanced techniques to obtain higher agricultural yields.
64. Another joint project is for the Aqaba canal, by which water could flow from the Gulf of Aqaba, in particular for agricultural and industrial purposes. The cost is high, around US5 bln. However, it would have positive effects on, for example, employment, fisheries and tourism. The objective would be to supplement the ground water coming through the north-east aquifer, which is currently overpumped.
65. A further undertaking is the Red Sea - Dead Sea canal. Israel maintains that this project is extremely expensive, given the infrastructure and energy costs involved (water must be pumped up 1,300 meters). Mrs Valerie Brachya, Head of Planning Department in the Israeli Ministry of Environment, told the Rapporteur that bringing water to the surface would consume over 20% of Jordanian overall energy resources. Moreover, the completion of the canal will take around 10 years. The Jordanian government for its part believes that using new Japanese technology using static pressure could reduce energy costs, with water being carried through a network of pressure channels.
66. Despite the impasse into which it has recently passed, the Middle East peace process has the potential of fostering co-operation and co-ordinated activities, providing an impetus to environmental initiatives that could benefit the entire region. Previous bilateral and multilateral peace talks have helped forge new paths towards co-operation and collaboration on numerous important issues, such as water management.
67. Political leaders have to realise that peace presents a unique opportunity for the region to mobilise and pool efforts to deal with common environmental problems. The countries in the region face the same environmental challenges, as they share water, land, air, coastlines and natural and other resources.
68. It is likely against this background that the countries in question will have an interest in searching for similar solutions, toward which each nation can make its own unique contribution. The problems are far from insurmountable. The signing of the peace treaty between Israel and Jordan and the agreements between Israel and the Palestinians as well as the openings of relations with other Arab countries give hope that genuine political and economic co-operation may become a reality.
E. Israel: An Economic Profile
69. Israel's current financial status and economic situation are relatively strong, and the continuation of the peace process would only enhance the country’s economic development. The success of the Camp David Accords between Egypt and Israel, negotiations with the PLO, and the increasingly optimistic prospect of economic co-operation with Jordan and other Arab countries, ushered in a new era in Middle East politics and business. The possibilities for regional co-operation that opened up immediately after the signing of peace treaties with the Palestinians in 1993 and Jordan in 1994 served as an additional impetus to the economic dynamism that the country has experienced over the last twenty years.
70. Following the Oslo Agreement, signed between Israel and the PLO in September 1993, Standard and Poor's improved Israel's credit risk rating, a trusted indicator of the political and economic stability of a country. The recent halting of the peace process, mainly due to friction with the Palestinian Authority as well as to a stalemate on the Syrian front, has led to renewed pessimism. Most of the Rapporteur’s Israeli interlocutors were very frank in expressing such pessimism.. It is therefore clear that representatives of economic life also very much hope that the peace process can resume.
71. Israel is a highly developed economy with a per capita GDP of about US$ 17,000, reaching the level of industrialised countries such as, for instance, Spain. This figure (as well as other indicators such as single-digit inflation in 1995, GDP composition, technological know-how, trade volume) might lead one to conclude that Israel has already achieved an economic structure typical of western economies. However, both its recent economic history and macroeconomic fundamentals would argue in favour of still placing Israel in the category of emerging markets.
72. For example, Israel experienced a hyperinflation in the early 1980s, and its economy was regulated in a way that allowed for a high degree of protectionism in capital markets and in trade. Thus, notwithstanding the, undeniably, great economic achievements of recent years, Israel’s economic outlook is not altogether rosy.
73. In 1985, under the pressure of difficulties caused by economic fundamentals, the government decided to change the course of its economic policy and adopt a long-term programme of adjustment. The stabilisation programme initially tackled those macroeconomic problems, which were affecting the Israeli economy the most: inflation, public and external debt, and a balance-of-payments crisis. The success7 of the measures undertaken from 1985 to 1990 encouraged the government to carry out a second phase of the stabilisation programme, this time focussing on domestic reforms seeking to improve overall efficiency and competitiveness. This new plan targeted trade, capital markets, privatisation and exchange rate policies.
74. Israel’s exchange rate is determined by a basket of five foreign currencies (the US dollar, German mark, French franc, British pound and Japanese yen; the current exchange rate is about NIS3.55 to $1). The Bank of Israel's policy has aimed at only minor adjustments in the exchange rate and at avoiding depreciation because of its inflationary effect. The Bank of Israel accepted a small, gradual depreciation of the shekel in 1995 in order to reduce a trade deficit deemed unacceptable. There have been calls for further depreciation by the Manufacturers Association, but so far the Bank of Israel has stood firm.
75. Israel's economy is at present on a clear path toward long-term growth and stability. The country's GDP, the indicator of overall economic activity, has risen on average about 5% annually over the past five years, and GDP growth forecast for 1997 is 3.9% to 4.4%. Even faster growth is taking place in the business sector, and the trend is bound to continue. Sustained growth has been made possible by domestic reforms, but it was of course also helped by external factors as well, such as the peace process and the opening of Asian markets.
76. Although the peace process has led to the abandonment of various Arab boycott campaigns and the establishment of ties with a number of Arab countries, the direct effects of such contacts on the Israeli economy have so far been limited, with the potential virtually untapped. Nevertheless, the perception of a stable political and economic regional environment resulted in a huge increase in foreign investment (FDI) into Israel, both direct and via the stock market.
77. A large immigration - more than 600,000 people - from the countries of the former Soviet Union and from Eastern Europe, took place in the early 1990s. This had a major impact on the economy, in particular in the housing sector. The influx of immigrants is expected to continue, and with a stimulating effect on growth. They represent a wealth of intellectual capital, and their technical innovations are attracting international attention. Their sheer numbers have created new consumption and investment, which further power the economy, on both the demand and the supply side.
78. Israel now has among the most highly educated work forces in the world, with more than twice as many scientists and engineers per capita engaged in research8 and development than any other country. The percentage of the work force in technical and professional occupations, at 25%, exceeds nations such as the US, Japan, Germany or Korea. This labour market provides a great attraction for foreign investors, especially since the salaries of such professionals are often 20%-30% lower than in other parts of the western world.
79. Israel, with a total GDP of over US$ 90 billion and a population of 5.6 million people, now has a per capita income of US$ 17,000, more than ten times the average of the MENA countries. Agriculture accounts for 4.4%, construction for 12.1%, transportation & communication for 15.4%, others for 29.3% (trade & services, water & electricity), and industry for 38.3%.
80. The country has become an economically stable and commercially competitive emerging market. The GDP composition approximates those more typical of western economies, with a highly developed services sector and a solid industrial base. As Professor Kanovsky of Bar-Ilan University pointed out to the Rapporteur, agriculture is expected to see its share in the economy reduced.
81. Israel had a negative trade balance of $10.5 billion in 1995, and it has remained negative ever since. Foreign reserves stood at $9.0 billion at the end of 1997, up by $1.4 billion from 1994. Israel’s rapid growth in exports – so far insufficient to close the trading gap - has been due to increased product competitiveness, in particular in the area of technology. (If the balance-of-payments has been sustainable for so long this is largely due to substantial financial transfers from abroad.)
82. A government commitment to privatisation - a cornerstone of economic policy after 1985 - and pro-market reforms should contribute to further private sector competitiveness. The current government has pledged to carry out an aggressive programme of privatisation in an effort to achieve higher efficiency and profitability.
83. In the light of such developments many multinational corporations have initiated operations in Israel, and many more are expected to follow suit. With Israel's strategic location at the crossroads of Europe, the Middle East and North Africa, the future of this economic powerhouse seems bright. Israel’s economy could well be seen as an engine for increased regional growth and trade.
84. The last aspect of the Israeli economy is the importance of its capital market, which has been largely reformed following the stabilisation programme of 1985. Although the reform process is still expected to continue, particularly in easing foreign currency restrictions, a number of important financial regulation measures have been implemented.
85. The Tel Aviv Stock Exchange (TASE) has been one of the world's fastest growing stock markets, reflecting strong confidence in Israeli entrepreneurship, the country’s pro-business agenda, and liberalisation efforts. Market capitalisation rose from $8 billion in 1991 to nearly $51 billion in 1993 while the number of listed companies rose from about 300 to nearly 600. Share prices increased more than 750% from 1988-1993.
86. This was a result of a number of factors, including Israel's strong economic performance, the absence of capital gains taxes and restrictions on foreign investors, and the positive prospects for peace in the region. The TASE continued to rise until 1994 when, as a result of inflated values, it was forced to adjust downward. The TASE now more accurately reflects the actual value of listed companies. Also significant is the fact that Japan’s Finance and Foreign Affairs Ministries have designated the Tel Aviv Stock Exchange as an approved stock exchange, a fact which is likely to encourage Japanese investment in Israel.
87. The last five years have ushered in an era of sustained growth and development for Israel. Among the forces driving the favourable forecasts for Israel’s economy are healthy export growth, increases in manufacturing, and investment in infrastructure. Israel, a leader in technological innovation with many well-developed export-oriented enterprises, is increasingly free-trade minded. It benefits from trade agreements with the United States, the European Union, Canada, the Czech Republic, Slovakia, Turkey and the EFTA countries, as well as double taxation treaties with 18 countries, including the US, UK and Canada.
88. Unfortunately, Israel still has a structural trade deficit, a large part of which is with the countries of the European Union, Israel’s main trading partners. Export growth has not increased at the same rate as imports, resulting in a growing trade gap of US$ 5,6 billion in 1993, US$ 7,4 billion in 1994, and almost US$ 8.5 billion in 1995. For example, imports from the EU are now almost 14 times bigger than Israeli exports to the EU.
89. In 1995 Israel concluded an Association Agreement with the EU. The agreement, which differs from those with Morocco and Tunisia because of Israel’s more advanced economy, is part of a larger co-operation programme.
90. In fact, the EU’s current economic relations with Israel have been strengthened by three additional agreements: one on scientific and technical co-operation, another on public procurement and a third on public procurement in the telecommunications sector.
91. The relatively high economic and scientific development of Israel has led the EU to pursue a different co-operation policy from those observed with many other partners in the Mediterranean basin. Various economic, commercial and technological accords have been concluded between the EU and Israel starting in 1964. The basis for the EU’s current relations with Israel is the Agreement of May 1975, which covered the fields of economic, technical and financial co-operation as well as trade and labour.
92. The Community’s recognition in 1992 of the need to improve the 1975 accord into a more comprehensive Association Agreement led to lengthy negotiations which ended with the signing of the agreement in November 1995, with the implication of substantially deepening EU-Israel relations. The new agreement has a rather global character, which not only reinforces free trade (the provisions for trade have been in force in the Interim Agreement since January 1996). It also implies enhanced political dialogue as well as co-operation in the social, research and development and other fields.
F. Jordan: Economic Profile
93. From a historical perspective the Jordanian economy - endowed with few natural resources other than phosphates - has been largely depended on external revenue, in the form of both foreign financial aid and remittances from Jordanian workers abroad (especially those in other Gulf countries). Jordan is thus a relatively poor, aid-dependent country, with a small domestic market, high unemployment, and a public sector which is too big.
94. Moreover, Jordan has a structural trade deficit (exacerbated by the closure of Jordan’s principal export market Iraq), as exports are mainly related to the mining and construction sectors, whilst the relatively low quality of manufacture has hindered the opening of new export markets for Jordanian products.
95. However, the country has shown credibility in implementing structural reform. The macroeconomic results already achieved, the country’s political stability, the persistent pursuit of liberalisation and Jordan’s geographic position, bolster the general view that Jordan can become one of the region’s main centres for services. As was also confirmed to the Rapporteur by the Jordanian Minister of Planning, Dr. Hunaidi, the Jordanian economic policy strategy is based on trade, especially through gradual price liberalisation and economic integration in the global economy, and regional economic co-operation, especially in the areas of water, agriculture, energy and trade.
96. Among the major privatisation projects in the pipeline, perhaps the most significant concerns the electricity supply. It will be divided up and privatised, following which the grids will be connected with Israel and Gaza. This is the first transfrontier project since it aims to render Jordan a net exporter of electricity in the region. Another project concerning solar energy will accompany this initiative. As these lines are written, the scheme has just received parliamentary approval.
97. The present halting of the peace process, however, poses serious problems for Jordan. Dr. Hunaidi pointed out that at present the Jordanian government cannot "show peace" to the man on the street. Thus, domestic minorities are starting to influence people's minds. Government has limited means to oppose this propaganda. The Minister for Foreign affairs, Dr. Tarawneh, also expressed this view, saying that the government is coming under pressure as peace with Israel is showing little economic benefit to the people. Nevertheless, Jordan remains eager to maintain the momentum of the peace process, for political as well as economic reasons.
98. Dr. Hunaidi went on to say: “The international community should grant market access to Jordanian agricultural products - although Spain is solidly against this - considering that trade furthers peace and that the Middle East, North Africa and Europe in particular are so closely linked from the point of view of security. Thus, the region's economic prosperity is in Europe's interest. Europe should help establish a free trade area with the region. Trade is the key to success. Europe and the US should work to create a successful regional framework. This will foster democracy, human rights and stability in the whole region.”
99. In the 1970s and early 1980s exogenous revenue enabled the country to achieve annual growth rates of around 10%, investment was up, and production expanded rapidly in most sectors. This rise in prosperity resulted largely from the oil boom period (demand for imports in many Arab states opened new markets to Jordanian goods) and two additional factors, namely the transfer of many financial and other services from Beirut to Amman, and Jordan’s role as a transit route following the Iran-Iraq war.
100. However, the country’s growth did not rest on solid foundations. In the mid-eighties Jordan suffered the consequences of the 1983 regional recession, which was accentuated by a decline in oil prices. A loss in revenue and reduced assistance from other Arab countries combined to strain the budget, and the country’s external debt rose.
101. Consequently, the authorities began implementing a new economic policy based on cuts in expenditure for capital investment and development projects. Despite the adoption of these measures, the authorities were forced to continue borrowing internationally to appease tensions caused by increasing unemployment.
102. In January 1989 Jordan was facing a deep economic crisis, with high unemployment (close to 18%) and the impossibility of continuing to service its external debt. The authorities were forced to request IMF intervention as well as a debt rescheduling with the Paris Club. The urgency of the structural adjustment programme agreed with the IMF (for the period 1992-19989) is illustrated by the fact that in 1991 the current account and budget deficits were still 24% and 17.8% of GDP, respectively.
103. In co-ordination with the structural adjustment programme agreed with the IMF for 1992 1998, the government approved a new blueprint for Jordan’s transition to a modern market economy: the Plan for Economic Development 1993-97. It was a structural adjustment programme aimed to implement economic policies promoting savings, investment and exports, as well as to adapt consumption to the new circumstances and to fight inflation.
104. The programme’s main objectives for 1998 are 1) to reduce the budget deficit to 2.5% (by reducing public spending to 35% of GDP and increasing revenues to 30% of GDP); 2) to improve the current account position and bring it to a deficit of just 2% of GDP; and 3) to stimulate real GDP growth of up to 6.5%.
105. The government’s plan is to foster FDI, trade liberalisation and industrial development, and to reduce significantly the role of the public sector in the economy. The plan identified the private sector as the main engine for growth and the achievement of its main targets (including a reduction in unemployment to 9.2% as well as a shrinking of the external debt from 141% of GDP in 1992 to 100%).
106. The structural adjustment programme has yielded overall excellent results. The budget deficit went down from 22% of GDP in 1989 to only 4.6% in 1995, with real GDP growth standing at 5.9% in 1993, 5.8% in 1994 and 6.4% in 1995. In these same years inflation was kept, respectively, at 3.3%, 3.7% and 3.6%. The regulatory framework has been modernised (there are, for example, a new investment law and a simplified tax system); foreign exchange controls have been relaxed, and trade has been liberalised (tariff reductions of up to 70 percent and the conclusion of an association agreement with the EU).
107. However, much remains to be done. The external debt is high (100% of GDP in 1995), as are the structural trade deficit (31.8% of GDP in 1994) and unemployment (currently estimated between 13 and 15 percent).
108. Jordan, with a total GDP of over JD10 4.6 billion in 1995 and a population of 4.1 million people, has a per capita income of almost US$ 1,600, about the average of MENA countries. The GDP composition in 1994 was: agriculture 8.0%, construction for 7.4%, industry 19.6% and services 65%.
109. The GDP composition indicates that the Jordanian economy is strongly geared toward services. These are mainly private sector services (especially in the financial, industrial, tourism, transports and communications sectors), but a share - viewed by most as excessive - of 19.2% is in public services. Especially in recent years, however, industry has become more significant, especially in the agri-food industry and pharmaceuticals. In 1996, 88.5% of all exports were industrial products, 24% of which were based on phosphate and potash.
110. Agriculture remains important for Jordan even if its share of GDP is minor. The industry provides the main income for about 20% of the population and is of strategic importance for a country highly dependent on food imports.
111. In conclusion, Jordan has shown considerable willingness to look ahead and try to integrate its economy further both in its own region and beyond. To Dr Tarawneh, Jordanian Minister for Foreign Affairs, the trend is clear: inflation stands at 5%, unemployment at around 13%, the balance of payments situation has improved and the external debt burden has been reduced.
112. Nevertheless, the government has had to face a severe cash flow crisis, mainly due to the economic reforms and in particular the trade liberalisation (which reduced revenue from import tariffs). Following reduced government expenditure on welfare and subsidies opposition to the government’s austerity policies is growing. Thus, the Minister said, Jordan would need a five-year financial package in order to restructure its economy and develop its export-oriented sector.
G. Palestinian Territories of the West Bank and Gaza Strip: An Economic Profile
113. Economic development in the West Bank and Gaza Strip (WBGS) cannot be understood if abstracted from the more general geo-political context. The situation of the Palestinian people is still one of a lack of sovereignty and one of unstable relations with its neighbour Israel, in spite of the different agreements concluded with it.
114. WBGS development is even more dependent on a successful peace process than are those of Jordan or of Israel. Indeed, given the WBGS’s economic reliance on Israel, the present slowdown in the negotiations process constitute a serious threat to the entity’s future. Moreover, the Palestinian Authority (PA) has not yet been able to deliver any real “peace dividend” to its people. As a consequence, popular support for macroeconomic reforms and peace is less strong than only a few years ago.
115. A major advantage is to be found in the area of human resources and the overall exceptionally high level of education of Palestinians.
116. Pessimism is spreading over the current slowdown of the peace process, and it came out in many of the Rapporteur’s talks. The Minister of Planning and International Co-operation, Dr Nabil Shaath, expressed his regret over the so far meagre economic benefits reaped by the Palestinian people, who also need peace to rebuild democracy and the economy.
117. The Minister of Economy and Trade, Mr Maher Masri, pointed out that since the Oslo accord the economic situation in the PA territories has deteriorated sharply. The Managing Director of the Palestinian Economic Council for Development and Reconstruction (PECDAR), Dr Mohammad Shtayyed, added that, in spite of the economic difficulties, there was still popular support for the peace process.
118. During his visit your Rapporteur noted that many data on the Palestinian economy were incomplete or outdated, while Palestinian officials sometimes gave conflicting figures. More reliable data will soon be available with the opening of a Palestinian Central Bureau of Statistics, operating with the technical support of the IMF.
119. Another point is worth mentioning. Dr Mohammad Shtayyed told the Rapporteur that about US$ 800 million, to be used for economic reconstruction, is deposited with Egyptian and Jordanian commercial banks located in the Palestinian territories. However, 20% of this money has been used, owing to the fact that Palestinian entrepreneurs cannot provide the collateral needed to obtain loans at favourable terms. Thus there is considerable irony in the fact that important financial resources exist but cannot come to use.
120. Major concerns, voiced by several Palestinian interlocutors, are the constraints on the free movement of goods and people. The repeated closure of borders imposed by Israel - in 1996 borders were closed in on-and-off fashion during 220 days - hampers PA economic development, even though Israeli security concerns following numerous deadly terrorist attacks are fully understandable. This has brought frustration among the people, and the WBGS economy has, in the eyes of the interlocutors, become a sort of “convoy economy” where the flow of goods and people is strictly regulated by Israel. One of the most alarming aspects is the current almost complete halt in infrastructure construction.
121. According to the current rules, only a limited number of trucks can enter the PA territories. This convoy system requires, for instance, a Palestinian entrepreneur to obtain an Israeli permit in order to be able to deliver goods outside the PA territories. He or she must communicate to the Israeli authority, with 12-hour notice, the type and quantity of goods as well as the name and driver’s licence number of the driver.
122. Several statements highlighted the problems associated with the uncertainty as regards the political status of the WBGS, also in the economic arena. Furthermore, the Palestinians are faced with fundamental long-term constraints to private-sector led economic growth, partly due to the previous military occupation, which has prevented them implementing a comprehensive strategy for a balanced socio-economic development.
123. Main obstacles to economic development are the heavy dependence on Israel for trade and employment, inadequate infrastructure (in particular in transport, telecommunications, water and electricity), a lack of monetary autonomy, the still rudimentary financial system and the absence of a clear regulatory framework. All these impediments have greatly distorted the natural development of the productive system, increased the cost of private sector activities, and left the WBGS with an underdeveloped industrial sector, even when compared with countries at a similar income level.
124. Thus, economic development in the WBGS has four characteristics: 1) massive investment in construction, to the detriment of investment in direct production; 2) low industrialisation; 3) undeveloped and insufficient public services; 4) a structural trade deficit. In spite of these shortcomings, relatively high economic growth prevailed in the areas that were eventually to become the WBGS from 1967 until the early 1980s. It came to a halt towards the end of 1981 and economic decline became even more pronounced with the start of the Intifadah in 1987.
125. The more recent economic history of the WBGS can be divided into four periods. From 1967 to 1981 growth was strong and accompanied by high employment and strong trade, raising incomes, generating demand-led growth. The high growth rates enhanced savings, which were channelled into construction.
126. During the second period (1981-1987), economic stagnation set in, mainly owing to declining remittances from Palestinians working abroad. In the following years, from 1988 to 1992, GDP contraction (- 8.5% in 1991) was also caused by the Gulf war and other factors more directly related to the Palestinian unrest and Israeli counter-measures, including border closures. According to one UN agency, the losses in income-generating opportunities provoked by border closures amounted to US$6.450 million for the 1993-1996 period, or US$4.4 million per day.
127. The fourth period, which began in 1993, must be distinguished from the first three, since it saw the transition from institutionalised economic policy dependence on Israel to Palestinian self-government. The current economic setting includes a custom union with Israel and policies in the fields of labour, taxes and monetary affairs.
128. The business cycle after 1992 has varied considerably in reaction to both internal events (such as variations in agricultural output, for instance in olives) and external changes (such as effects of borders closures), while the structural trade deficit, high unemployment and decreasing remittances have become more permanent features. Dr. Shaath mentioned that imports are about 8 times higher than exports (US$2.4 billion vs. US$300 million), partly due to the insufficiently high quality of Palestinian production.
129. Although GDP has grown (especially in the Gaza Strip) because of construction as well as public works started through international aid, it is estimated that the real GNP has declined by 18.4% between end-1992 and end-1996 (or, in constant 1995 US$, from about US$ 5,000 to about US$ 4,100 million). Real per capita GNP is reported to have declined by around 35% in this period.
130. This decline, partly caused by the negative effects of Israeli closures on employment and trade, has accentuated the difficulties of the PA leadership to “sell” the economic fruits of peace to the Palestinians, simply because there has not been all that much to “sell”. According to the IMF, the unemployment rate reached 34% in 1996 and overall investment declined to about 18% of GDP, down from 28% in 1992 (with private investment falling to 10% of GDP, from 25% in 1992). The daily average number of Palestinians workers in Israel fell from almost 120,000 in 1992 to only 25,100 in 1996.
131. Thus, the WBGS, with a real GNP of about US$ 4.1 billion in 1996 and a population of almost 2.4 million, feature a per capita income of US$ 1,700, very close to the average of the MENA countries. GDP distribution in 1995 was: agriculture 28%; construction 15%; industry 8%; and services 9%.
132. The GDP composition shows the peculiarity of the WBGS economy in comparison with those of other Arab countries at a similar income level: a lower level of industrialisation and a bigger role for construction and agriculture. The differences are particularly striking in the case of Jordan, perhaps the most similar country culturally and geographically.
133. Although Jordan’s share of industry in the GDP composition is more than twice that of the WBGS, the Palestinian economy is much more private sector-oriented, with private activities estimated to account for 85% of GDP. Thus, promoting the private sector would mean enhancing the effectiveness of the regulatory framework for business and focusing more on infrastructure. Other investment projects (with the participation of private entrepreneurs) should improve the PA fiscal position and thereby free resources for increased public investments. Capacity to “bypass” the current political risk constraints is a prerequisite.
134. Trade is another prerequisite for enhanced long-term competitiveness. Although trade is at present hampered by the problems mentioned, a significant step was the Interim Association Agreement with the EU, initialled in December 1996, by which the PA became a full partner in the Euro-Mediterranean Partnership. While this agreement does not in essence differ from those signed with other Mediterranean countries, it takes into account the special situation of the PA.
135. A final point to be considered is the need to protect the environment in the West Bank and Gaza. The Rapporteur is sorry to have to report a dramatic deterioration in this regard over the last few years. Garbage bins are rarely used as people tend to dump solid wastes everywhere. There is a little respect for the environment as such. For this reason, the Rapporteur believes that it essential for the Palestinian Authority to undertake a “greening project” in its territories. This programme, among other elements, should include incentives to induce people to change their habits.
H. Morocco: Economic Profile
136. The Moroccan economy is characterised by rich natural resources, notably phosphates (of which the country is the world’s largest exporter), vast areas of arable land and a long coast lending itself to tourism and fishing. Agriculture remains one of the weakest sectors of the economy in spite of massive investment in irrigation, and there are marked differences in socio-economic conditions between urban and rural areas. Following the results of a vast structural adjustment programme launched in 1983 under the guidance of the IMF and the World Bank, Morocco today has one of the most open economies in the Middle East and North Africa.
137. Morocco enjoyed per capita growth rates of less than 2% in the 1960-85 period, but its development strategy in the late 1960s and early 1970s was rather inward looking. Successive development plans centred on strong state intervention. Morocco initially tried to establish an industrial basis that was protected by currency and trade regulations, and which favoured import substitution.
138. Another five-year plan in the mid-1970s directed public investment towards heavy industry using local raw materials. This type of growth model would, however, have made sense only if it had been accompanied by commensurate investments to improve technological know-how and human resources.
139. To augment revenues the government in 1975 tried to use its quasi-monopoly over the world phosphate supply buy quadrupling prices. The attempt failed as American producers increased output dramatically in response, forcing prices down. Faced with a threat of collapse in revenue the government decided not to scale down its phosphate development plans but instead borrowed the required funds internationally, hoping to raise additional revenue through greater output.
140. The option proved to be the wrong one. By the end of the 1970s the country was seriously in debt and had a current account deficit close to 17% of GDP. The government then changed course and adopted a three-year stabilisation programme (1978-80), which, however, was not fully successful either.
141. The plan failed, essentially due to external factors, such as the 1979-80 increase in oil prices, declining remittances and phosphate exports revenue, the cost of its war in Western Sahara, and the need to go on subsidising basic consumer goods. By 1983 it was clear that the growth strategy had failed, especially as Morocco was forced to reschedule its US$ 13.8 billion foreign debt. In September that year the IMF approved a new stabilisation programme in exchange for fresh funds.
142. This period witnessed the beginning of Morocco’s liberalisation of its economy. The reforms started in1983 and have been gradual. Morocco has been consistent in the direction undertaken and has built credibility over time. The strategy, based on macroeconomic rigour, was initially aimed at making the economy more flexible. This was achieved through measures such as the removal of consumer price subsidies, export-oriented growth, trade liberalisation, and the reduction of public sector expenditures (also helped by revenue from privatisation). Despite these policies, the trade balance continued to deteriorate, and by 1986 the World Bank and the IMF expressed their concern over the structural weakness of the economy and the government’s performance in the fiscal and other fields.
143. Since strong measures were needed (including further reductions in public expenditures), a new five-year development plan (1988-92) was prepared. It envisaged a radical reform of the economy, with a new emphasis on trade liberalisation (and increased production for exports), attraction of FDI, development of tourism, and further privatisation.
144. Macroeconomic management this time around was more successful. According to the World Bank, the budget and current account deficits were reduced from an average of 10.4% and 7% of GDP in 1984-85 to 2.1% and 1.6% of GDP by 1992, while the inflation rate remained subdued throughout the period. The macroeconomic performance after 1992 has been affected by unfavourable outside factors, such as the severe drought of 1995. Despite these difficult circumstances, the Moroccan authorities have maintained stability and further accelerated reforms in important areas of the economy.
145. Morocco, with total GNP close to US$ 30.5 billion and a population of 27 million, has a per capita income of US$ 1,162, lower than the average of the MENA countries (US$ 1,780 in 1995). The composition of GDP is subject to year-to year variations due to the shifting output of agriculture, forestry and fishing, sectors which employ more than a third of the working population.
146. In 1994 agriculture, forestry & fishing accounting for 19.7% of GDP, energy and water for 3.6%, banking services and trade for 30.8%, transport & communications 5.9%, mining for 2.8%, manufacturing for 16.9%, building & public works for 3.8% and public administration for 16.4%.
147. It is true that, after more than a decade of economic reform, Morocco has achieved a remarkable macroeconomic performance and a relatively open economy. However, several challenges lie ahead. First, growth rates will have to be greatly increased to reduce rising unemployment (16% in urban areas in 1995) and alleviate poverty, which remains a major problem especially in rural areas. Second, as the economic structure is still vulnerable to external shocks and agricultural production changes, it will be vital to accelerate private sector development by removing market constraints, reforming the legal and regulatory framework and significantly reducing the share of public sector intervention in the economy.
148. The relative openness of Morocco’s economy has two sides: the degree of liberalisation of the economy and the trade structure. As far as the former is concerned, Morocco still has some challenges ahead before it can be considered a fully open economy. This notwithstanding, Morocco is probably the most open economy in the region. Significant progress has been made recently in the financial and monetary sectors, in relaxing price controls and in adopting a unified investment code.
149. Many measures have been passed in the 1990s to promote the development of a capital market, including current account convertibility (1993), a banking law, the creation of a commission to oversee capital market developments, etc. Morocco’s stock exchange has been included (January 1997) in the International Finance Corporation global composite index for emerging markets.
150. Privatisation of public enterprises has been advancing more rapidly than in other Arab countries. The sale of public enterprises took off in 1993. By the end of 1995, 35 companies (out of an official list of 112) had been sold, with total revenue amounting to US$ 850 million (35% coming from foreign investors). The Minister for Privatisation announced an extension of the programme in March 1995 to include public enterprises, which had previously been considered of strategic importance. At the end of 1996, total revenues amounted to dihram 8.9 billion or over US$ 1 billion (exchange rate average for 1995: US$ 1= Dh 8.54).
151. With regard to the second component – trade - the ratio of total trade to GDP (less than 40% in 1995 according to a recent IMF paper) would indicate that Morocco has not achieved the degree of openness of countries such as Tunisia and Jordan. Moreover, Morocco still has high tariffs (an average of 40%) which, however, will be adjusted in line with the free-trade agreement that Morocco signed in 1995 with the European Union. As Morocco also has a system of reference prices on imports of many domestically produced goods as well as quantitative restrictions on some agricultural products, it can safely be said that the country maintains a high level of trade protection.
152. One cannot analyse comprehensively the issue of trade liberalisation in Morocco without considering the Association Agreement signed with the EU in 1995. It sets the stage for Morocco’s future trade and development agenda. In a nutshell, the agreement aims gradually to remove trade barriers between Morocco and the EU. In addition to the 12-year phased removal of tariff and non-tariff barriers, the agreement foresees free access to the EU for most of Morocco’s manufactured goods. It also takes up trade rules, harmonisation of standards, reciprocal right of establishment, adaptation of the regulatory framework to approximate that in the EU, and financial and technical assistance to upgrade Moroccan industry and services.
153. However – and this is in the Rapporteur’s view as important as it is alarming - there still is a copious flow of drugs from Morocco into Europe. The contraband includes not only hashish grown on around 70,000 acres in Morocco’s Rif Mountains but also an increasing flow of Colombian cocaine. Despite several formal commitments, the Moroccan authorities have not yet replaced cannabis cultivation with fruit and other crops to improve the country’s image abroad and attract foreign investment. One explanation lies in the fact that the livelihood of over 3 million people is involved.
154. Numerous studies have demonstrated significant long-term welfare benefits from gains in competitiveness arising from the streamlining of rules and a reduction in trading costs. Thus, if Morocco achieved full trade liberalisation, the welfare gains would increase to 2.5% of GDP in the long run, with per capita income rising to almost US$ 1,800 by 2004. Transitional costs will probably have to be paid, both because protected industries must adjust to increased external competition (and thus produce temporary unemployment), and because of a likely worsening of the current account position resulting from raised overall consumption levels.
I. Tunisia: Economic Profile
155. After its independence in 1956, Tunisia emphasised state planning and a large public enterprise sector, especially in agriculture. Until 1962 the economy was inextricably linked to France, Tunisia's major trading partner, and real per capita GDP growth was stagnant. From 1962 to 1971 the government's ‘dirigiste’ policies were oriented toward the creation and development of agricultural co-operatives. Results were meagre, however, as agricultural production did not even suffice to meet domestic consumption needs.
156. Tunisia's development record changed considerably in the 1970s, thanks to rising oil prices in the early years of the decade. GDP in current prices increased from US$ 4,339 million (US$ 773 per head) in 1975 to US$ 8,667 million (US$ 1,356 per head) in 1980. This impressive growth was principally based on oil revenue, tourism receipts as well as remittances from abroad.
157. The improved economic situation enabled the government to increase investment and to increase wages and social expenditure. This new development strategy (supported by enhanced investments, from 20% of GDP in 1970 to 29% in 1979) focused on increasing the size of the public enterprises sector (especially in the production of import-substituting goods), and on protecting strategic sectors through subsidies and high tariffs.
158. In the early 1980s, however, increasing oil prices, severe droughts and declining remittances produced dangerous consequences for the country's balance of payment position, and the economy entered in a period of turbulence, which underlined the low level of competitiveness of Tunisia’s productive sectors.
159. Initially the government tackled the crisis by adopting an expansionary fiscal and monetary policy. The result was a doubling of the budget deficit (to an average 6.4% during the 1980-84 period) and a peak in Tunisia’s external imbalances - with a current account deficit of 10.9% in 1984. Consequently, the country began facing a worrying increase in external debt (totalling US$ 4,880 million at the end of 1985).
160. Despite cuts in public expenditure and new foreign exchange and trade controls these problems culminated in 1986, causing the government to adopt a structural adjustment strategy to, as the official declaration stated, “improve overall economic efficiency by moving from pervasive economic controls to a more market-oriented approach”.
161. What followed can be defined as the time of Tunisia’s liberalisation of its economy. The new development model - to be achieved initially through a radical economic reform programme for 1987-91 with the assistance of the IMF - was all the more necessary as Tunisia was expected soon to become a net importer of oil.
162. The strategy, based on macroeconomic rigour and improved resource allocation, strove to liberalise trade and augment private sector participation in economic activities. Since the strategy hinged on an increase in exports, the Tunisian dinar was devalued to retain competitiveness and facilitate agricultural and manufactured goods exports. At the centre of the programme was also the objective of reduced price and investment controls, a prerequisite for the acceleration of the opening of the economy. Government policies were also directed at introducing tax reform, restructuring state enterprises as well as strengthening the financial sector.
163. By 1994, substantial progress had been made. According to the World Bank, the GDP per capita growth rate was 2.4% (up from 1.2% in the 1981-86 period), inflation was under control (4.7%), the budget deficit was down to 2.7%, and the growth of manufactured exports was healthy. This performance made it possible to achieve important goals as regards health, education and poverty reduction.
164. Tunisia, with a GNP of US$ 16.6 billion in 1995 (World Bank figure) and a population of 8.8 million people, now has a per capita income of US$ 1,93011, slightly higher than the MENA average. The structure of the economy is as follows: agriculture and fisheries 15% of GDP; services 52% (tourism 7%, transport and communications 9%, other 36%); and industry 33% (of which manufacturing 21%).
165. Thus, after a decade of profound economic reform – including structural adjustment, macroeconomic stabilisation and gradual liberalisation - Tunisia has achieved remarkable results, among the best in the Middle East and North Africa region.
166. The macroeconomic stability and openness of Tunisia can be assessed by looking at various basic indicators: inflation, the exchange rate, the budgetary position, the current account deficit, the degree of liberalisation of the regulatory framework, tariffs and the ratio of total trade to GDP. The economy in 1996 showed growth of 6.9% and one of the lowest inflation rates in the region, 3.8%, with little exchange rate volatility. It is worth noting that, in agreement with the IMF, the Tunisian dinar will become convertible in the near future.
167. However, Tunisia will have to keep pursuing tight fiscal policies as the government anticipated a budget deficit of 3.8% for 1996 (as against 4.2% in 1995). The current account deficit has been contained at 3.6% of GDP.
168. Again, in order to evaluate the level of openness of the economy, two things need to be considered: the degree of liberalisation of the economy and the trade structure. As far as the former is concerned, Tunisia still has some way to go before it can be considered an open economy. On the one hand, significant progress has been made recently in lessening price controls, as well as in adopting a unified investment code. On the other hand, considerable labour market rigidities remain and the privatisation of public enterprises is not advancing very rapidly. Tunisia’s Code du travail, drafted in the 1960s, is widely regarded - both by private sector operators and government officials - as incompatible with the market economy that Tunisia has been trying to create since 1986. The second part of the revised code was presented for debate in the Chamber of Deputies in 1996.
169. With reference to the second component – trade - the ratio of total trade to GDP (93% in 1995 according to official sources) suggests that Tunisia is among the most open countries in the Mediterranean basin. However, the country still has high tariffs, which will be adjusted as the free-trade agreement that Tunisia signed in 1995 with the European Union will be implemented.
170. Although Tunisia has implemented reforms gradually, the consistency with which it has done so has given it credibility. The payoffs are to be found in solid growth rates as regards incomes, exports, employment and foreign investment.
171. The above analysis describes the economic progress of Tunisia and suggests that prospects for further growth and a higher standard of living for its citizens are realistic. Nevertheless, many things remain to be done if the country is to attain lasting competitiveness and, hence, sustainable growth and the ability ensure a degree of social protection to its citizens.
172. Privatisation and trade liberalisation remain as priorities. If they are successfully tackled economic efficiency would stand to gain and a rapid expansion of FDI flows to Tunisia could be expected.
173. The Tunisian government started the privatisation process in 1989 with the objective of transforming a public-sector-driven production system into one based on market competitiveness. The dominance of the public sector in the economy - which dates back to independence and the 1960s when the government nationalised many enterprises – can be felt to this day. (According to the definition of the 1985 public enterprise law, there are still roughly 300 so-called public enterprises, or PEs, in Tunisia).
174. Divestiture of public enterprises active in competitive sectors has been an integral part of the country’s new economic course. The ultimate objective of this choice was to privatise loss-making companies to ease the government budget. However, as the programme took off it become clear that most operations were rather directed at merely restructuring companies, giving PEs more autonomy and limiting the expansion of the public sector. In the 1988-92 period Tunisia’s privatisation programme was in fact modest.
175. After this slow start the number of privatisations rose in 1994, raising proceeds from sales to US$ 180 million (mostly in tourism with nearly 50%, followed by the mechanical and chemical sectors with 21%, and agro-industries 10%). During 1995-96 operations have slightly increased, but the pace remains much lower than expected, with the consequence that foreign and local investors are being discouraged. It is believed that today the private sector controls only 55% of industry and 60% of services (in tourism the figure is 92%). It is therefore clear that only a quick acceleration of PE privatisation can produce an increase in the overall efficiency of the economy and yield the resources and political encouragement needed to liberalise the whole economy.
176. Understandably, full trade liberalisation is another priority, not only for its own sake (as Tunisia is a rather small market) but also for the competitiveness that liberalisation promotes. Trade liberalisation was launched in 1987 alongside the adjustment programme, with the dual objective of removing quantitative restrictions and attaining a lower rate of protection by the end of 1991. While progress has been made, quantitative import restrictions protect an estimated 25% of domestic production, especially in agriculture, processed foods and textiles. A 1994 GATT review of Tunisia’s trade policies showed high rates of protection based on tariffs.
177. Nevertheless, during the last ten years trade has been opening up to some extent, as Tunisia has shifted its exports from primary commodities to manufactured goods, currently accounting for almost 50% of the total. Despite a relative high export growth12, little progress has been achieved in opening new markets (with the EU accounting for 75% of Tunisia’s total imports and exports) or in diversifying exports further. In fact, textiles and clothing still account for more than half of the export value of manufactured goods (most of it coming from offshore companies that are exempt from custom duties and taxes).
178. As with Morocco, the Association Agreement concluded with the EU in 1995 merits our attention. In many respects it resembles the Moroccan accord. Thus, it aims to gradually remove trade barriers between Tunisia and the EU. In addition to the 12-year phased removal of tariff and non-tariff barriers, the agreement covers free access to the EU for most of Tunisia’s manufactured goods. Also included are trade rules, harmonisation of standards, reciprocal right of establishment, and modification of the regulatory framework to render Tunisian industry and services more competitive.
179. Studies on the impact of the agreement in Tunisia promise significant long-term benefits, for instance an estimated GDP growth at 4.5%-4.7% a year, stemming principally from gains in competitiveness. Transitional costs will have to be borne, both because protected industries must adjust to increased external competition and thereby shed employees, and because of a likely worsening of the current account position resulting from raised overall consumption levels. Interestingly, if Tunisia were to undertake full trade liberalisation with the rest of the world, growth could increase to 5.3% over time.
J. Egypt: Brief Economic Profile
180. The 1960s, under President Nasser, began with broad nationalisation policies, which brought all the main sectors of the Egyptian economy under state control. To the failure of this experiment, already evident after few years, came Egypt’s defeat against Israel in the 1967 war. Under Nasser’s successor Sadat, domestic calls for greater freedom in economic life stood a better chance of being heeded.
181. Following a restoration of confidence spurred by Egypt’s relative in success in the 1973 war against its eastern neighbour, Sadat pursued a policy of political and economic renewal, as witnessed by the signature of the Camp David Accords as well as the proclamation of a new “economic opening”. These choices were also meant to attract much needed foreign investment.
182. Although the adoption of “open door policies” led to unprecedented GDP growth during the 1975-85 period (which saw President Mubarak take office in 1981 following President Sadat’s assassination), results were more limited than might have been the case. In fact, the benefits of an expanding economy, mainly favoured by remittances, foreign aid and increased FDI, accrued mostly to a narrow segment of Egyptian society (which took advantage of personal connections and of new opportunities offered by private sector activities).
183. The economy, however, largely remained in state hands: the vast majority of services, as well as the main industries (hydrocarbons, textiles, iron, steel and consumer durable goods). The development model chosen - characterised by a large and inefficient public sector, subsidies, price controls, foreign exchange regulations and other distortions - created a worrying discrepancy in incomes and spreading poverty.
184. In the mid-1980s, the limitations of Egypt's rather inward-looking development strategy combined with falling oil prices to exacerbate the problems felt by a population with low income.
185. The political "necessity" of continuing to subsidise the state-owned part of the economy - both in financing loss-making state-owned enterprises (SOEs) and in guaranteeing jobs in the civil service (or in SOEs) for new graduates - had become a serious drain on the country's limited resources. Moreover, it was an obstacle to the development of a competitive manufacturing sector.
186. In 1986 real economic growth contracted and serious macroeconomic difficulties emerged. Despite massive financial aid the performance of the economy remained poor until 1993, when Egypt began to reap the benefits of macroeconomic stabilisation measures carried out under the guidance of the IMF and the World Bank since 1991. Egypt in this period implemented wide-ranging reforms in the macroeconomic field. It significantly changes its monetary and fiscal positions, for instance by eliminating multiple exchange rates.
187. Following these reforms, Egypt's achievements on the macroeconomic front have been impressive. After a period of stagnation in 1991-92, growth resumed strongly and double-digit inflation rates were quickly defeated13. In 1996 a constantly improving fiscal balance arrived at a deficit of only 1.1% (from -5% in 1991-92) and the ratio of external debt to GDP fell to 47% of GDP (or US$ 31 billion) from about 75% in 1991-92.
188. Furthermore, a surplus in the balance of payments led to a considerable accumulation of foreign currency reserves (close to US$ 19 billion in the first quarter of 1997). This has, in turn, allowed the government to maintain exchange rate stability and international confidence in the Egyptian pound.
189. Egypt, with an estimated GDP of US$ 65.48 billion in 1996-97 and a population of 60.2 million people, has a GDP per head of only US$ 1,121, or considerably lower than the MENA average. The structure of the economy is as follows: agriculture 19.8% of GDP; services 59.1%; and industry 21.1% (14.7% of which in manufacturing).
190. Notwithstanding these successes, Egypt still faces daunting tasks before it can be considered an open economy. Two structural problems must eventually be solved. Firstly, the current balance of payments surplus is made possible thanks to the reliance on exogenous resources such as oil exports; worth more than US$ 1.6 billion in fiscal 1995-96; remittances (close to US$ 3 billion); Suez Canal income; and foreign aid. This is worrying in the sense that it shows Egypt’s high degree of vulnerability to external shocks. The second, associated with the first, is the low level of domestic savings and investment.
191. Among the priorities for the Egyptian economy - already burdened by double-digit unemployment – must surely be structural reforms to create new jobs. The labour force expands rapidly, at a rate of some 560,00014 new entrants each year.
192. A recent World Bank report estimates that unemployment can be reduced both in the short and long run only at GDP growth rates of 6%15. Rapid and sustainable growth of this order can be achieved only through further structural reform (in addition to continued sound macroeconomic management) so that the economy can be opened further. These measures should include raising the level of public savings; a greater role for the private sector in the nation’s economic life; and continued trade liberalisation.
193. The still limited openness of the Egyptian economy can be gauged from the structure of its trade and the degree of liberalisation of the country’s regulatory framework. As regards trade, Egypt would be well advised to lower still high non-tariff and tariff barriers. Indeed, external trade in 1995 accounted for less than 40% of GDP. It is hoped that the finalisation of the association agreement with the EU will provide an impetus in this regard.
194. While the degree of liberalisation of the regulatory framework cannot be easily quantified, some criteria suggest that a further reform may be needed. Although progress has been made in easing price controls, considerable labour market rigidities remain, as does a cumbersome fiscal revenues system.
195. Privatisation, a key element for improving the overall competitiveness in the manufacturing sector16 and increased central government revenues, have not proceeded as fast as they should have. Privatisation is a touchy issue because “reformers” (lately supported by President Mubarak) are opposed by some factions in the government, as public sector employees and executives are scared of privatisations that could involve massive layoffs..
196. Nevertheless, some successful operations were implemented in 1996, when the government sold off, through the Cairo Stock Exchange (CSE), around 40 out of 314 selected companies, yielding a revenue of around E£ 5 billion. The CSE has seen capitalisation double (E£ 48.1 billion) and turnover triple (E£ 10.8 billion) in the last 15 months, mainly as a result of the new government’s policy to offer shares in a public sector enterprise. (The 1996 exchange rate average was US$ 1 = E£ 3.4001.)
197. Water remains a crucial issue for Egypt. Over 90 percent of the country’s 60 million people live along the Nile and in its delta, a narrow strip of land stretching south from the Mediterranean to country’s southern border with Sudan. Most of Egypt’s food is grown in this strip. A major goal of the Egyptian Ministry of Agriculture is to increase arable land to allow more food to be grown within the country.
198. Aggravating the situation is the fact that local people occupying the new land in the 1980s and early 1990s - situated higher than the Nile - often have only limited experience in farming and hardly any knowledge of irrigation. Most received little technical and other help, which helps explain why agricultural productivity has remained low. Moreover, the land irrigated by the Nile is vulnerable to weather changes, in particular droughts in upstream countries.
199. There is also the problem of water sharing with upstream countries, which claim ever larger amounts of water to meet rising needs. The Blue Nile, which provides around 85 percent of the water flowing through Egypt, rises in the Ethiopian hills and runs through the Sudan. The Nile’s other main tributary, the White Nile, flows from the Lake Victoria through Uganda and the Sudan. Decisions by these countries to take substantially more water from the two rivers could adversely affect the flow through Egypt, and not only cause severe strains on Egypt’s agriculture but also create political tensions in the region.
K. Lebanon: Economic Outlook
200. Following fifteen years of war and civil strife, Lebanon started its reconstruction effort in December 1990 a cabinet uniting most political factions was formed. By the time Mr. Hariri was appointed Prime Minister in October 1992 Lebanon had restored - albeit under strong Syrian influence – a state of affairs approximating peace. The newly found stability allowed Lebanon to become a participant in the Middle East peace process, which began in October 1991 in Madrid.
201. On the economic front, Lebanon, a traditionally open economy led by the private sector (which has historically accounted for about 85% of production) was an investor-friendly economic environment characterised by a highly qualified, service-oriented human resource base. The labour force - endowed with entrepreneurial talent and strong private sector leadership - was among the most educated in the Middle East. Thus, openness and human resources skills had traditionally favoured Lebanon's remarkable growth, especially in services and banking.
202. By 1990 the country had suffered great damage in all sectors of its economy, including in its infrastructure, reflected in a per capita real income decline of about two-thirds as well as in a weakening of the Lebanese currency from 45 Lebanese pounds to the dollar in late 1985, to 650 in May 1990. Although GDP growth resumed soon after the start of political stabilisation, the economy initially remained weak, with the pound dropping to 2,100 to the dollar in May 1992.
203. The period which followed Mr. Hariri's taking-of-office was characterised by a strong recovery. The stability of the currency became the backbone of the new government's economic policy, as a stable pound was considered essential for fostering balanced economic growth and attracting private capital.
204. The 1993-1995 period witnessed the success of economic policy, with strong GDP growth, (averaging 7.2% per year), currency appreciation by around 3% per year, a reduction in inflation from about 100% in 1992 to single-digit levels in 1995 and 1996. Foreign exchange reserves also rose to over US$ 8 billion. On the other hand, the fiscal deficit reached 18.4% of GDP in 1995.
205. Lebanon, with a total GNP of US$ 10.7 billion and a per capita GNP of US$ 2,670 in 1995 (World Bank figures), is at present above the average of the MENA countries. The structure of the economy is as follows (1994 figures): agriculture 7.0% of GDP, services 69.1%, and industry 23.7% (of which manufacturing accounts for 16.6%). The economy is very open and there are no currency and capital payments restrictions.
206. Sustaining the confidence in the country is a major prerequisite for long-term growth. As investors' confidence is the outcome of a perception of internal and external stability, it will be vital to pursue both macroeconomic rigour and reconstruction of the physical infrastructure and the country’s institutions.
207. In this respect it is interesting to note that the government has successfully placed Eurobonds on international capital markets. The positive reception was a sign of the confidence of the outside world in Lebanon's development prospects.
208. Another factor of great importance for Lebanon's future as a hub for trade and investment - either in the real economy or in the financial system, be it banking or the newly operating Beirut stock market – is its role in the regional context. Banking is still a strong sector of the economy, with over 80 commercial banks and high liquidity.
209. During the last five years the overall balance of payments has been in surplus, notwithstanding a high trade deficit (close to 50% of GDP in 1995) due to rising imports - of which two-thirds from Europe - for reconstruction. According to the Banque Audi, gross capital inflows have more than offset the trade deficit during the period 1993-95. While the trade deficit during the years 1993-95 stood, respectively, at US$ 4,482 million, US$ 5,418 million and US$ 6,479, gross capital inflows reached, respectively, US$ 5,652 million, US$ 6,548 million and US$ 6,735. Therefore, the balance of payments although on a declining trend, has been in surplus of, respectively, US$ 1,170 million, US$ 1,130 million and US$ 256 million.
210. Understandably, this augurs well for Lebanon's recovery. The capital inflows are important for the Lebanese economy, not least because any unsustainable pressure on the balance of payments would almost inevitably upset the government's policy for a stable currency.
211. The government's US$ 60 billion, 13-year reconstruction programme – the Plan Horizon 2,000 – is at the centre of the country's reconstruction. The Plan, going up to 2007 and towards which the private sector is expected to contribute some 42 US$ billion (while public investment is planned to amount to US$ 17.7 billion), is principally aimed at rebuilding and expanding infrastructure.
L. Libya: Brief Economic Outlook
212. In 1988 Libya began to adopt more moderate domestic and international policies, even though, it must be said, by its own rather special standards. Domestically, the growth of a limited private sector was permitted in some sectors (especially in agriculture and small and medium-sized enterprise manufacturing) together with the abolition of barriers to travelling and private importing. Fundamentalism has been oppressed by the regime - or rather, the latter has preferred to embrace a sui generis version of it to strengthen its own power.
213. Internationally, Libya sought to improve relations with the US and Europe (notably Italy, France and Germany, which are some of its major commercial partners). This move was meant to demonstrate that the country could become a full member of the international community as a whole rather than limited to relations with a few states in the region.
214. However, internal policies are such as to make Libya far from a democratic and open country. Many are the abuses that still occur. For example, many shopkeepers have been arrested for no seeming reason, unless it was that they had refused, as was reported, to pay a cut to the regime. There is even a dual legal system, which has the effect of discriminating against foreigners residing in Libya.
215. Moreover, in 1992-93 a number of events, including Libya’s alleged complicity in the Lockerbie disaster, led to the imposition of sanctions by the international community. This action has had the unfortunate effect of hurting an already suffering ordinary population even more, in particular the poor. In a dictatorial regime, people – five million strong - cannot make their voices heard.
216. The oil-based economy is in a virtual standstill and far from meeting market requirements. There is a tangible presence of black-marketeers, prices are very high for ordinary people and the welfare system is in disarray (The health sector collapsed two years ago, and there is little in the way of education or training for an the abundant workforce.) Furthermore, the government budget is under constant strain as unemployment benefits are being doled out to most everybody.
217. The oil industry is central to the Libyan economy. Oil generates 99% of total export revenues, with current production at around one million barrels per day, and reserves expected to last sixty years. Interestingly enough, Libya has taken a rather pragmatic approach towards oil exploration and production by engaging in joint ventures with foreign companies. Libya’s former ambitions of relying solely on itself in oil extraction field seem to have been abandoned in favour of linking up with foreign investment and securing ‘downstream’ outlets, not least in Europe.
218. As regards water management, Libya has recently undertaken the construction of a pipeline linking an aquifer in the Sahara to the coast, where water needs are rising. Unfortunately, it is now found that the water source in question is non-renewable.
M. Syria: Brief Economic Outlook
219. Syria, with a GDP of 496,504 million Syrian pounds (1994) and a per capita GDP of US$ 1,170 in 1992, is one of the poorest MENA countries (with an average GNP per capita in that year of US$ 1,780). The structure of the economy is as follows: agriculture & fisheries 29.8% of GDP; public services 11.8%; industry 16.6% (of which the largest part comes from hydrocarbon production); commerce 23.7%; transports & communications 9.1%; construction 3.8%; and other activities 5.2% (including finance and insurance services).
220. As was pointed out at a meeting with Prof. Eliyahu Kanovsky of Bar-Ilan University, Syria can be defined as a country with a weak market economy and which depends very much on oil revenue, foreign aid, and remittances from abroad (especially from Lebanon). In 1963 the leftist Ba'ath Party began imposing a socialist economic model, with dramatic results.
221. In the 1970s President Assad's regime, while maintaining the same centralised economic structure with a dominant role for the state in strategic sectors, introduced mild changes to favour private enterprise in some parts of the economy. These changes were pursued in three five-year development plans (1976-80, 1981-85 and 1986-90). Syria, however, still shows only limited liberalisation, little in the way of privatisation and widespread poverty.
222. At the end of the 1980s Syria faced a profound economic crisis, with galloping inflation, persistent current account deficits and declining foreign reserves. The government's squeeze on imports began to affect the whole economy, as production experienced a sharp contraction. A severe social crisis hit the country and induced further corruption, poor public sector management, reduced public spending, and growth of the black market. This situation led to a contraction of output during 1986-1988, with zero or negative real GDP growth.
223. Increasing oil prices in 1989 and Western and Arab financing as a reward for Syria's role in the Gulf War changed the economic outlook of the country, which witnessed real GDP growth close to 5% in 1991 and a surplus in its current account position. Subsequently, the government started a slow – though more significant than in the past - programme of domestic economic modernisation and liberalisation, while at the same time tax and other incentives were established to attract domestic and foreign investors.
224. The gradual growth of the private sector is currently influencing the state's policies. The enhanced attention of the government to the needs of emerging private enterprise is reflected in the decision to negotiate a free-trade area with the EU (no Association Agreement has been yet signed).
225. The several structural problems of the Syrian economy (inefficient public administration, a weak infrastructure, a cumbersome legal and regulatory framework, limited banking and financial services) did not hinder the inflow of money at the beginning of the 1990s. It stimulated economic activities and resulted in real GDP growth of 10.5% in 1992 and 6.5% in 1993-94. At present, governmental priorities are the combat against high inflation and a reduction in the level of foreign debt (some US$ 3 billion vis-à-vis the Paris Club).
226. Syria is also experiencing serious water problems. Some were exacerbated by the construction of big Turkish dams close to the countries’ common border. Others were mainly due to the lack of cross-border co-operation in regard to water supply projects involving the Euphrates and Tigris. Even the idea, launched by an Arab Summit in Cairo in January 1994, concerning water plans for redirecting inflows from the River Jordan into Lebanon and Syria has not yet produced the desired results.
N. Algeria: Brief Economic Outlook
227. Algeria can be defined as a country in transition, both politically and economically. Politically, the last five years have seen the country approach the brink of civil war, with high internal tension and turmoil between the government and opposition forces. Tens of thousands of lives have been lost in political violence, and huge damages (estimated at about 2 US$ billion) have been caused to infrastructure.
228. This situation is in part the outcome of the economic difficulties experienced by the Algerian population since 1986. Although the November 1995 presidential elections were deemed free and fair and most opposition parties have confirmed their willingness to work with the government in restoring peace and implementing the economic recovery programme, violent terrorist activity is still continuing17. Nevertheless, a transition from a centralised system to a more democratic state is taking place.
229. Economically, Algeria is trying to move away from a state-directed, oil-dependent economy to a market economy with increased private sector participation. High hydrocarbon revenue during the early 1980s and various oil booms were enough to sustain the economy temporarily, aided by various subsidy schemes which, however, hindered economic competitiveness and discouraged private sector initiatives. Oil revenues were largely spent on health, education and infrastructure (with good housing projects), thus implementing satisfactory social programmes.
230. After the 1986 oil shock, however, Algeria’s centralised economic system was profoundly shaken and soon headed for collapse. The country’s terms of trade began to decline, with direct implications for growth and unemployment (estimated at 25% in 1994). Welfare outlays were dramatically reduced, setting the stage for social tensions. Furthermore, the government - which tried to finance the increased budget deficit by borrowing internationally - was coping with an unsustainable level of external debt (US$ 29 billion or 69% of GDP by 1994).
231. These facts brought to the surface the structural economic failures of the past and convinced the authorities that the only solution lay in a transition to a full-fledged market economy. Broad, structural economic reform was necessary, along with a strict programme of stabilisation and adjustment. During the transitional phase now in progress it will be crucial to implement programmes to mitigate the adverse effects of a possible social crisis. (A Social Safety Net Support Project was launched with the World Bank support with the objective of creating temporary work in poorly served areas with high unemployment).
232. Algeria, with a total GNP of US$ 44.2 billion and a per capita GNP of US$ 1,580 in 1995, has an economic structure comparable to the majority of the other MENA countries. The structure of the economy features agriculture at 11.3%, services at 38.0% and industry at 50.7% of GDP (of which the majority comes from hydrocarbon production, while manufacturing accounts only for 11.5% of GDP). Algeria is therefore still highly dependent on revenues from hydrocarbons and rather vulnerable to external shocks.
233. Manufacturing is predominantly characterised, on the one hand, by the presence of approximately 600 large public enterprises. Their performance, especially after increased competition from imports, has steadily deteriorated. Since there appears to be little demand for privatisation of these companies, the government is implementing a restructuring programme aiming at applying performance criteria, reducing budget subsidies and enhancing the companies’ autonomy under market constraints. On the other hand, there are some 1,000 SMEs whose privatisation is supported by the government, especially in the construction and services sector.
234. In early 1994 Algeria introduced a broad programme of stabilisation and adjustment supported by the IMF and the World Bank. On the macroeconomic side, the budget deficit was reduced from 8.7% of GDP in 1993 to 4.4% in 1994. The dinar was devalued by almost 100% and money supply was tightened in an effort to contain inflation. Nonetheless, the consumer price index rose by 29.8% in 1995. A small recovery amounting to 4% of GDP growth in 1995 signalled the first positive effects of the economic recovery programme.
235. Algeria is still far from the degree of liberalisation requested by the structural adjustment programme. However, the government began eliminating most non-tariff trade restrictions, liberalised prices, reduced subsidies and started to create a regulatory framework compatible with a market economy (including the enactment of an investment code, and the passing of a competition law and a privatisation law).
236. In July 1996 a rescheduling agreement was finalised with the Paris Club for approximately US$ 7 billion, and some US$ 3 billion with the steering committee of commercial banks.
O. Concluding Remarks
237. Is there a role for Europe as a whole to help foster the region’s economic development? The answer must be a resounding yes. First, European policies should endeavour to heal the deep fracture characterised by a breakdown of trust on both sides of the Middle East conflict. Indeed, no economic strategy can be successful without real political stability and a lasting, peaceful solution to the ongoing conflict. It is crucial, however, that negotiations be conducted on a bilateral basis among the region’s key actors, who have to realise the importance of peace, both in economic and political terms.
238. For this reason Europe cannot confine its action to the economic realm. Since it is geographically and historically close to the Middle East and North Africa, it should use its good understanding of the situation to support all political and economic initiatives that can serve to restore a level of confidence among the parties concerned.
239. Europe’s strategy must be based on the region’s political and economic priorities to make people understand that Europeans do care about them. The EU enlargement and the establishment of the single currency, which will reinforce Europe’s economic and financial role in the region, will be an important part of Europe’s leverage.
240. Furthermore, the Rapporteur believes that Europe should expand its strategy by focussing more on the economic side. Europe should establish an incentive structure through which all companies operating in the region would receive benefits from a peace accord. There are of course many vested interests that try to resist political and economic changes. After all, history has taught us how profitable a quasi-war situation can be for some. This change may receive some support from the business community, which has to become more responsible for the economic future of the region. Companies have to begin to recognise the value of nearby regional markets rather than be mesmerised by the lure of US and European markets.
241. Apart from enhancing trade co-operation among neighbouring countries, Europe should press for a rapid privatisation of state-owned enterprises, a more rational use of the region’s scarce natural resources and the establishment of an institutional framework capable of attracting foreign investors in long-term projects in the region. This could allow at least some workers who have been laid off in the public sector to be absorbed by an emerging and dynamic private sector. Moreover, these economic changes would bring in new technologies, essential for increasing the region’s overall productivity.
242. This suggested strategy would be even more effective if Israel were to accept, even more than at present, to become a catalyst for growth in the neighbouring countries – somewhat akin to Japan’s role in Asia. One concrete example is the embryonic economic co-operation between Israel and Jordan. Israel contributes expertise, access to regional and global markets as well as design capabilities, while the Jordanian side provides production management and manufacturing prowess.
243. Co-operation is a positive-sum game. Israel can significantly lower production costs, thereby helping certain ailing domestic businesses. Jordan can acquire know-how, access to international markets and, most important, enhance productivity.
244. As regards the countries of North Africa, in particular Morocco and Tunisia, the Rapporteur commends the remarkable economic achievements attained there over the last three years. Declining external debt, significantly reduced inflation rates and increased growth are the main factors behind, or signs of, their economic renaissance. In conformity with such efforts some governments have recently decided on forceful action to reduce their budget deficits and gradually open up their trade regimes in order to provide a more stable macroeconomic environment favouring economic growth, private sector initiative and the job creation.
245. Morocco and Tunisia, which began their adjustment programmes in the 1980s with macroeconomic stabilisation, trade liberalisation and reforms in pricing and regulation, today enjoy higher growth in incomes than other Arab countries and are exceptional performers on almost every indicator of human development, such as life expectancy and infant mortality.
246. The Committee on Economic Affairs and Development in its various discussions of this report, strongly supported the Rapporteur in his belief in the importance of economic co-operation for political stability in the region. This, if any, has been the leitmotif in the foregoing presentation. The Rapporteur is convinced that the Council of Europe is in a unique position to assist the countries in the region in their efforts to develop a common agenda for further economic co-operation. He hopes, with the Committee’s and the Assembly’s support, to give the Resolution to be adopted all the political follow-up that it deserves. Furthermore, it should be noted that the Committee at its adoption of the draft Resolution in February 1998 drew attention to the role of women in the future development of the region. It also usefully underlined the various consequences that the region's rapid population growth may have in various fields. For these and other most useful contributions to his work the Rapporteur thanks Committee colleagues most warmly.
247. To conclude, the Rapporteur believes that a strong foundation for regional co-operation and trade can be built in the Middle East and North Africa. It promises to result in real progress towards a more stable political and economic future for the region as a whole. At any rate, in the new globalised world now upon us competition is such that domestic economic - and with it political - reform is a must for any country that wants to survive and keep even with its neighbours. From that point of view, and it is a message of hope, time is on the side of those who want change toward more political and economic freedom, and it is against those who are trying to turn the clock back. For Europe to help in this effort corresponds to its truest mission.
Reporting committee: Committee on Economic Affairs and Development
Budgetary implications for the Assembly: none
Reference to committee: Doc. 7364 and Reference No. 2028 of 25 September 1995.
Draft resolution adopted by the committee on 23 February 1998.
Members of the committee: Mrs Degn (Chairperson), MM. Elo, Bloetzer, Valleix (Vice-Chairmen), Aliko, Andreoli, Barsony, Behrendt, Billing, Mrs Blattmann, MM. Bonet Casas, Brunhart, Mrs Calner, M. Cunliffe, MM. Cusimano (Alternate: Turini), Dumitrescu, Mrs Durrieu, MM. Eyskens, Figel, Frey, Mrs Freyberg, Mrs Frimannsdottir, Mr Galváo Lucas, Mrs Gatterer, MM. Gonzalez Laxe, Lord Grenfell, MM. Gusenbauer, Gylys, Kacin, Kiratlioglu, Kirilov, Kittis, Koucky, Kutznetsov (Alternate: Averchev), Lambergs, Leers, Liapis, Merkushov (Alternate: Gamanyuk), Mitterrand (Alternate: Le Grand), Muravschi, Nothomb, Obuljen, Pereira Coelho (Alternate: Pocas Santos), Poppe, Puche, Rigo, Rippinger (Alternate: Regenwetter), Rutskoy (Alternate: Oorzhak), Sceberras Trigona, Shokhin (Alternate: Shuba), Siebert, Mrs Squarcialupi, Mrs Stepova, Mrs Stoyanova, MM Sungur, Szalay, Telgmaa, Townend, Tripunovski, Upton (Alternate: Connor), Vasile, Verivakis (Alternate: Koulouris), Mrs Verspaget (Alternate: Blaauw), MM. Wielowieyski, Yavorivsky.
N.B. The names of those members present at the meeting are printed in italics.
Secretaries of the committee: MM Torbiörn, Bertozzi and Ms Ramanauskaite.
1 Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, Somalia, Sudan, Syria, Tunisia, United Arab Emirates, West Bank and Gaza, and Yemen.
Algeria, Cyprus, Egypt, Israel, Jordan, Lebanon, Malta, Morocco, Syria, Tunisia, Turkey, West Bank and Gaza.
3 A poor person being defined as average spending of less than $1 a day at 1985 purchasing power parity.
4 About half the funds are earmarked to prepare for free trade (private sector development, trading infrastructure) while the remainder will be allocated to environment protection, poverty alleviation and rural development.
5 The Declaration states that, with a view to developing gradual free trade in this area, tariff and non-tariff barriers to trade in manufactured products will be progressively eliminated in accordance with timetables to be negotiated between the partners. Moreover, as far as the various agricultural policies allow and with due respect to the results achieved within the WTO framework, trade in agricultural products will be progressively liberalised. Finally, trade in services, including right of establishment, will be progressively liberalised with due regard to the GATS (General Agreement for Trade in Services) agreement.
6 Increasing regional trade is of the utmost importance as only less than 8% of Middle East exports are destined for the region.
7 Foreign debt reached 77% of GNP in the mid 1980s during the period of hyper-inflation. By 1989 it had fell to 38%, while by the end of 1996 it was down to 25% of GDP. Rates of inflation were dramatically reduced and the danger of continued hyperinflation avoided. Then, from 1986 to 1990, the yearly average increase in the inflation rate was 18%. From 1991 to 1996 it dropped to 12%, with only 8% in 1995. The inflation forecast for 1997 is about 10%.
Israel has one of the world's highest levels of basic and applied research. Two recent banking studies have given Israel high ratings among competing emerging markets. A Bankers Trust study rated Israel third, after the Philippines and South Korea. The United Bank of Switzerland, in 1994, compared the prospects for future competitiveness of 38 developed and developing states based on product growth, productivity and resources devoted to education, research and development, and placed Israel third after South Korea and China.
This programme succeeded the one agreed on in 1989, which had to be abandoned due to the Gulf war.
The average exchange rate of the Jordanian dinar to the dollar in 1995 was: JD 1.0 = US$ 1.4
11 Figure relative to 1995. Source: Tunisian Ministry of International Co-operation and Foreign Investment
Exports in the period from the beginning of January to the end of May 1996 were valued at Tunisian dinars 2.14 billion (US$ 2.18 billion), 4.3% higher than in the same period in 1995.
According to the IMF, real GDP growth during 1995-96 was over 4%, and inflation was down to 7% from 21% from the year before. Estimates for 1997 indicate real growth of 4.5% and an inflation of 6.8%.
Assuming a population growth rate of 2.1%, labour force growth of 2.8% and a participation rate of 47.2%.
With such growth, unemployment in 1999 is estimated at 7.9% (vis-à-vis a figure of 12% at 4% GDP growth).
Non-oil industries, which employ over 4 million people, have been mostly unable to produce manufactures suitable for exports. Apart from persistent problems (including technical limits, marketing capacities, lack of immediate financing etc.), quality production is negatively affected, inter alia, by the forced utilisation of “unspecialised” workers who cannot be replaced. Therefore, enterprises are largely influenced by local employment concerns and domestic demand, rather than by the necessity to produce quality goods for export markets.
See Report published by Amnesty International on 18 November 1997.