Director General gives speech in Cambridge University

Address by Mr. Abdlatif Al-Hamad

Director General / Chairman of the Board of Directors

Arab Fund for Economic and Social Development 

Symposium on

“Science and Research in the Arab World: Obstacles, Challenges and Future Perspectives”

Cambridge University Arab Society (CUAS)

March 14th, 2009

Keynote Address

"Economic and Social Challenges Facing the Arab World Today"

Ladies and Gentlemen:

Good Morning,

I am delighted to take part in this symposium, and would like to thank the organizers for the invitation to participate in this important event.  

We now live in the midst of a deep economic crisis that is reordering the landscape of the world economy. No country, whether developed or developing, has been spared. The world earlier witnessed a severe global food shortage that threatened to send millions of people back to poverty.  Uncertainty caused by transformations in the global economy and the cascade of systemic crises, is on the rise affecting the day-to-day lives of people in every corner of the globe. The Arab countries as in many developing countries have been profoundly affected by these transformations increasing the size, nature and the intensity of the challenges they face.

Let me say at the outset that it is difficult to classify all Arab countries in one category. They have diverse characteristics in terms of size, economic and social structure, natural and human resources, geography and culture.    

However, in spite of their diversity, Arab countries share a number of similar development challenges. In this presentation, I will focus on some of the major common challenges and underline the main issues in which the whole Arab region is falling short.  

 The Growth and Employment Challenge

The first valid generalization that may be made about Arab countries is that their recent and past performance does not meet the challenges that need to be confronted. Reliance on a single-resource like oil or on an insufficiently diversified economy should not be expected to make growth sustainable. It takes stronger and broad-based growth to generate enough resources to meet the most urgent challenges especially the creation of enough jobs for the rapidly growing labor force.

It is a well known fact that the region has one of the highest unemployment rates in the world, estimated at about 14 percent. The concentration of unemployment among educated youth and first-time job seekers with high expectations represents a serious threat to the social and political stability in the region.  Ten years from now, around 100 million additional jobs need to be created in the region. This would imply almost a doubling of the current level of employment. Even the moderate target proposed by Arab leaders during the Arab Economic Summit held in January this year, of halving actual unemployment rates by the year 2020, would imply growth performance much beyond what has been achieved in the region during the last four decades.

To meet the combined challenges of growth and employment, the region needs to rid itself from the long-standing State-led and inward-looking development model that has run its course. This model is in many countries precluding economic diversification, proliferating uncompetitive attitudes, and stifling private sector initiative.  The Arab countries need to revamp their economies and rely on more sustainable sources for growth.

A few countries in the Arab world were able to make headway in transforming their economies such as UAE, Qatar and Saudi Arabia, Morocco and Tunisia.  The many attempts for economic reforms carried out by the others, have yet to show progress towards higher growth path and make their economies more competitive. They should enact policies that ensure greater diversification of their economies and adopt spending habits that enhance growth with special emphasis on education, research and development (R&D) in addition to vital infrastructure both physical and legislative. All this is needed notwithstanding the fact that Arab countries have so far invested heavily in their infrastructure, but much more remains to be done. Upgrading the basic infrastructure, notably in the areas of energy, transport and telecommunications, is crucial for future growth and for job creation.  

Large investments in the oil sector, upstream and downstream, are still needed to expand supply and overcome potential shortfalls due to the tight spare capacity within the region. Other productive investments should be encouraged to accelerate non-oil growth and generate adequate employment opportunities outside the public sector, which is the traditional engine of job creation.  The private sector should be a major player in this respect. However, it cannot be expected to contribute to the effort of diversifying economies and meeting the employment challenge in an inadequate business environment. The private sector in the region is often crippled by the heavy hands of bureaucracy, with high start-up costs, complex business regulation, and weak infrastructure.

Reducing the cost of doing business and improving the investment climate should provide incentives for innovation, cost effectiveness and higher productivity, elements that are necessary to compete more effectively in international markets in order to meet the employment challenges.

Better Integration in the World Economy

A number of benefits will accrue from better integration in the world economy. The Arab region as a whole is still the least integrated region in terms of trade and Foreign Direct Investment (FDI).

In spite of the recent efforts at reducing tariffs and dismantling non-tariff barriers, the region is opening up very slowly. The international globalization of production and trade in services has simply bypassed the region, and only a few countries are engaged in the production of dynamic and high value-added products. On the other hand, our share of FDI is low by comparison to countries in Asia and Latin America. FDI in the Arab region as a whole represents only one third of the FDI that flow to other countries of comparable size and income. Some Arab countries have even lost ground in the fierce competition for FDI hosting, due to inadequate regulatory framework and the lack of needed managerial and technical skills.

Of course I make no claim here that more integration and openness does not have potential costs. In fact, the benefits are neither systematic nor universal, and the costs are more immediate and eminent. Arab countries should, however, develop the capacity to manage and regulate integration in the world economy with the least possible costs while taking full advantage of its benefits.

Among the factors facilitating the success of integration is the use of regional and international trade agreements to face the fierce competition in international markets, strengthen the economy and pass very important economic reforms.  For example some countries of the region have successfully used their free-trade agreements with the European Union to improve their competitiveness by upgrading their manufacturing industries and improving the quality of their products. Others have made a leap forward in regional economic integration by establishing the Greater Arab Free Trade Area (GAFTA) whereby goods of Arab origin have become exempted from customs tariffs. GAFTA has had a positive impact on inter-Arab trade and investment. During the transitional phase of establishing GAFTA, 1998-2007, the value of inter-Arab trade has increased from 13 to $65 billion, and that of intra-Arab private investment from 2 to $14 billion.

Nonetheless, these achievements are only small steps towards the establishment of a Customs Union and an Arab Common Market.

Developing a knowledge-based and innovation-driven economy

Knowledge and innovation have become the driving force for growth in this more integrated world. Countries that acquire the prerequisites of knowledge-based and innovation-driven economies early on are those who are forging ahead with the highest and most sustainable growth rates.

The deficient knowledge capabilities in the Arab countries represent formidable impediments toward becoming more productive and more competitive. For example, the average numbers of years of schooling in the Arab labor force is about 5 years, much below that of a country like Sri-Lanka. Businesses are in many Arab countries constrained by the lack of skills and the low quality of education due to the lack of serious assessment of educational standards throughout the region.

The negative impacts of the low quality of education and the mismatch between school leavers and the requirements of the job market are often compounded by cultural factors that do not value highly freedom of thought, creativity and innovation.

The poor state of R&D in all Arab countries is reflected in a share in GDP less than 0.3 percent, representing one tenth of what developed countries spend on R&D. In addition, available research activities in the region focus on traditional fields that have weak connection with the productive sector and with little competitive advantages in the international markets. 

Drastic and bold reforms of the quality of education, increasing investments in R&D that enhance innovation and strengthening the connection between knowledge and the productive sectors in the economy, should be among the priorities of the region.

Surmounting the Challenge of Water Scarcity

Water is the second important non-renewable natural resource, after oil, for the region. The future of the Arab region in this sector is bleak. Arab countries, mostly located in arid or semi-arid lands have disproportionally lower share of world water resources than their share in world population with 0.5 percent for the former compared to 5 percent for the latter resulting in the lowest per capita share of water in the world. The per capita share of freshwater availability in the Arab region is about the critical level of 1000 m³/year and is expected to decline to half that by 2030 due to demographic pressure, that will result in a severe water crisis in the Arab countries.

This shortage is exacerbated by two important factors. The first is that about half of the water originate from trans-boundary sources outside the Arab countries that are constantly subject to the vagaries of political relationships between neighbors, and the increased insecurity in the entire region.  

The second aspect of the potential crisis lies in the fact that agriculture uses 85 percent of water resources in the Arab world.  A sector that is notorious for its inefficiency in water management. Any water shortage in the future will have serious implications for food security and hence on poverty, as the agricultural sector still is the largest employer surpassed only by the public sector in most countries of the region.

There is a desperate need to provide greater resources for research in developing credible solutions to this problem.

Fighting Poverty and Social Exclusion

There are no better safeguards for preserving social cohesion and political stability than the reduction of income disparity among people. That can be achieved by reducing poverty, creating employment opportunities and alleviating social exclusion.  The Arab countries in this regard are seriously challenged. They have to take steps to improve the standards of living of their people, and improve access to essential services such as drinking water, medical and educational services, and enhance the quality of their education.

The record of the Arab region in poverty reduction, universal primary education, and access to basic services, has been uneven across the region and within countries. To some degree progress has been achieved in improving literacy rates, gender equality, and child mortality. However, poverty is still widespread especially so in rural areas. Millions in the Arab world still do not have adequate access to safe drinking water, shelter; they are extremely vulnerable to economic downturns, epidemics, conflicts and natural disasters.  Expanding basic services and developing accessible, reliable and affordable infrastructure for the poor must continue to top the development agenda in the region.

We must explore more seriously the role of (R&D) in improving our performance in these areas. So far Arab countries have not focused their research agenda on the latter areas. For instance, improving soil-conservation techniques, irrigation systems, and seed quality, are all well established domains where R&D have contributed a great deal in the past. Nowadays, and in the face of increasing needs, the fast degradation of natural resources and sudden shocks in international food supplies, R&D is called upon more than ever to bring about more tangible solutions to improve the livelihoods of the poor. 

Ladies and Gentlemen:

Meeting the challenges I have enumerated so far is a long haul. It is going to take a lot of effort and will. The region will continue to face many new challenges above and beyond those I raised in this presentation. I have focused only on what I viewed as the most eminent economic and social challenges.

Finally, there can be no real sustainable economic and social development without freedom and democracy. This is not the aspiration of the intellectual elite only, but that of all Arab citizens.  That can be achieved through participatory politics. Consensus building is important for the success of economic reform.

As the saying goes, democracy is not a cure for all the ailments. In the long run, however, without greater participation, transparency and accountability, it would be difficult for the region to achieve sustainable development. 

I thank you for your attention.