Arab World Economies — Weathering the Storm
The global recession set off by the financial crisis in late 2008 has strained Arab World economies, but early signs suggest that the downturn in the region will not be as severe as it has in other emerging markets or the developed countries. Arab economies are, on the whole, weathering the crisis better than others in the short term. In the long term, however, a prolonged recession is likely to create the potential for social and political instability.
Oil economies have managed to maintain high levels of capital spending despite the decrease in oil revenues. Non oil producing countries, on the other hand, might show delayed effects as capital inflows from remittances, foreign investment, and tourism revenue fall and affect the rest of their economies. Countries less integrated into the global economy are not likely to see severe losses.
Gross domestic product (GDP) growth for the Arab World in 2008 was 6 percent, but is projected to fall to 3.1 percent in 2009. This is a radical departure from the IMF earlier forecast of 5.9 percent growth for 2009, but still compares favorably to other emerging economies, such as Latin America’s, where GDP growth fell from 4.2 percent in 2008 to –2.2 percent in 2009. Some Gulf countries such as Qatar, Oman and Abu Dhabi are expected to meet the target anticipated of GDP growth of over 5% in the midst of the crisis.
The Arab world economy can be divided roughly into two regions namely the resource rich, mostly hydrocarbons and the labor abundance. For the resource rich economies of the Arab world, lower oil prices and declining government revenues economies have created significant deficits in fiscal balances, which affected investors’ confidence and contributed to a drop in equity prices. Oil-exporting countries experienced a sharp decline in oil revenues at the onset of the economic crisis. Although forecasts show relative increases in oil prices, it is unlikely that revenues will soon return to the all-time highs they reached prior to the crisis.
The real estate market, a major investment market in the Gulf, reflected similar investor fears and a credit crunch. Despite the fall in oil and gas revenue, the decline of the stock markets, and the problems of the real estate sector, the region’s oil exporters (including GCC countries, as well as Algeria and Libya) have proven resilient, due to sustained high oil prices in the pre crisis boom and government responses that helped mitigate the effects of the downturn. Between 2005 and 2008, high oil prices facilitated robust economic growth, including various diversification efforts throughout oil economies, leading to increased non-oil growth between 2005 and 2008. This helped oil-exporting countries build up foreign assets and lower government debt, cushioning their financial systems, although they did suffer losses from investing in foreign assets.
According to IMF reports, aggressive government responses to the downturn included fiscal stimulus and rescue packages and sustained high government spending. Saudi Arabia increased government spending for 2009 by 15.8 percent, with a $124.7 billion stimulus package. After a long period of political deadlock, Kuwait passed a stimulus package of $5.2 billion in April 2009 to help speed up economic recovery. The United Arab Emirates provided some $32.7 billion in subsidies and assistance to its financial and investment institutions.
GCC sovereign wealth funds, though they lost significant percentages of their values, also played a role in mitigating the effects of the crisis by providing liquidity and increasing financial stability. The funds’ increased involvement in financial transactions has brought them under greater scrutiny by regulators throughout the world.
Although GCC countries face significant reductions in economic growth over the next two years, their overall performance will largely be determined by the duration of the global recession and the fluctuation of oil prices. As these economies try to ride out the crisis, economists stress the importance of coordinated policy responses, tighter control of financial structures, and greater measures to improve investor confidence.
In April 2009, oil prices stabilized at about $50 per barrel, despite falling demand and much pessimism about the short-term prospects for the international economy. The main reason for this was that oil had become a store of value for those who lost confidence in the dollar and other currencies. There remains, however, extreme uncertainty about the state of the international economy and the short term as well as longer-term prospects for oil prices.
The oil-rich states have predictably, since August 2008, experienced a sharp decline in revenues. According to the U.S. government’s Energy Information Agency, oil income for Arab members of OPEC will continue to fall from $678 billion in 2008 to $268 billion in 2009. Saudi Arabia’s export revenues are forecast to decline from $285 billion to $111 billion and Iraq’s from $59 billion to $23 billion. While forecasts must be treated with caution, these estimates seem reasonable.
This will have a direct impact on the economies of the larger oil producers. For example, the Saudi budget is expected to go into deficit possibly as high as 11–12 percent of GDP for the first time since 2002. Economic growth has decelerated from about 4 percent in 2008 to almost zero in 2009. In the UAE, the large budget surplus recorded in 2008 will give way to a deficit in 2009. Economic growth has fallen sharply from nearly 8 percent in 2008 to under one percent.
Currently, high government expenditures are filling the void left by the retrenchment of private sector activity in oil-producing states. This is the case, for example, in Kuwait, Libya, Oman and Saudi Arabia. While the other part of the Arab world economy namely the net oil importers including Morocco, Tunisia, Egypt, Jordan, Syria, and Lebanon are likely to see a delayed impact of the downturn. It anticipated that pressure will intensify throughout 2009, as major 5 industries in these countries suffer the effects of decreased remittances, which are a significant source of national income. These countries will also suffer an overall decline in foreign direct investment, and lower tourism revenues-notably Jordan and Morocco, where international tourism made up 10 and 9 percent of GDP respectively in 2008.
Remittances totaled $33.7 billion across the Middle East’s oil-importing economies in 2008, constituting 8 percent of GDP in Morocco, 14 percent in Jordan, and a remarkable 20 percent in Lebanon. Remittances across the region are expected to fall from a total of $33.7 billion in 2008 to $29 billion in 2009. Though the drop in remittances seems marginal, coupled with an anticipated $11 billion decline in foreign direct investment across these economies from 2008 to 2009, the effects are likely to be painful for individual households. In addition to a decrease in annual exports and imports, capital flows are also expected to fall. The effects of the tightening financial conditions in the GCC countries are already discernable in the form of decreased FDI flows to non-oil countries, which traditionally targeted the industrial sector, infrastructure, and real estate markets.
As Middle Eastern economies are not deeply integrated into the global economy and have fewer links to global financial institutions, they have not been as hard hit by the crisis. But they are likely to suffer secondary effects resulting from decreased capital flows, slumping further into poverty and higher unemployment. Unemployment rates are 6 expected to jump from 9.5 percent in 2008 to 10.3 percent in Morocco in 2009, for example, and from 8.4 percent in 2008 to 13.9 percent in 2009 in Egypt. Inflation has also increased following a spike in commodity prices in early summer 2008, causing social unrest in Tunisia, Lebanon, Morocco, Egypt, and Mauritania.
Economists expect the impact of the crisis to intensify as Middle Eastern countries’ trading partners and leading investors focus on their own recoveries, and as the global economy experiences slower, if not altogether stymie, growth. As long as the major industrialized countries continue to experience uncertainty about their own growth prospects, the future of direct investment in Middle Eastern economies will also face uncertainty.
Most oil importers have responded to the crisis by adopting fiscal and monetary policies to ease the pressure and reducing fiscal deficits. Tunisia, Jordan, and Morocco have taken measures to ease monetary pressures by lowering interest rates, but until now, policy measures have been largely inadequate due to limited resources. International Monetary Fund economists stress the need for these countries to pursue better coordinated measures including structured fiscal reforms, improved financial supervision, and long-term planning.
The International Monetary Fund (IMF) warns that a protracted period of global economic turmoil could prompt oil exporters to reassess their long-term oil price expectations and thus curtail infrastructure spending plans and investment in oil production, which are already low. This would have negative effects on the economy of the entire region because the demand for Arab workers in the oil-rich states would fall with consequent effect on their remittances. Inter-Arab tourism revenues would decline, resulting in less investment by the richer Arab states in the poorer ones. This, in turn, could lead to lower asset prices, which would feed through to corporate and, eventually, bank balance sheets, placing even greater stress on financial institutions in the region.
Governments in the non-oil producing states or those with small production were not well placed to help. What assistance they could extend resulted in larger budget deficits. In Syria, for example, the budget deficit officially planned for 2009 is now $5.3 billion, equal to about 9.25 percent of forecast GDP.
In the second half of 2008, Egypt suffered a 35 percent fall in Suez Canal revenues as a result of the slowdown in international trade. Tourism revenues have also fallen; this will reduce GDP growth by several percent. As a result of the crisis, Egypt has delayed increasing energy prices, designed to cut the subsidy bill that reached $15 billion in June 2008. The government is wary of anything that raises prices after the 18 percent increase in 2008. As of early 2009, inflation is forecast at about 8 percent. Economic growth has decelerated and is expected to be about 4 percent compared with 7 percent in 2008.
However, the most important challenge facing these Arab countries is reducing unemployment. The slowdown in 8 economic growth that is now being experienced is expected, according to most forecasts, to last at least a year, and will reduce the level of employment. Greater socio-economic and even political pressures in the region can therefore be expected. This is a factor that may contribute to continued instability in many Arab states.
The Arab states are not significant exporters of nonoil products, so they are less exposed to the contraction of world trade. In 2007, Arab states accounted for about 20 percent of world fuel and mining exports, but only about one percent of world exports of manufactured goods. This meant that, in sum, Arab states accounted for less than five percent of total world exports. Normally, this would be a depressing statistic; it is a silver lining during a worldwide recession.
It is also worth noting that central banks across the region have reacted appropriately, providing liquidity, cutting reserve requirements, and lowering interest rates. This is the case in Egypt, Jordan, Kuwait, Saudi Arabia, and the UAE. Countries with pegged exchange rates (such as Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Syria, and the UAE) have benefited from the continued monetary easing in the United States.
In countries that have been most affected by financial sector pressures, tighter liquidity, falling property values, and rocky stock markets, the policy responses have been relatively swift. Authorities have implemented myriad measures to shore up confidence and prevent a systemic banking crisis. 9 These have included introducing blanket deposit insurance (Kuwait and UAE), providing liquidity, and injecting capital into banks (Qatar, Saudi Arabia, and UAE).
The real hope for the Arab economies depends on the quality of economic policies and reforms that they will adopt. According to the World Bank Doing Business report, 13 Arab economies introduced an impressive 31 reforms 29 of which made it easier to do business while 2 made it harder. The most dramatic regulatory reforms in the Arab World make it easier to start a business by reducing the time, number of procedures and costs associated with startups. According to the report 10 of the 20 Arab economies examined simplified their start-up procedures and reduced costs. For example, Tunisia and Yemen eliminated the minimum capital requirement for starting a business, while Jordan reduced it by more than 96’10. The report finds: “Yemen’s move is one of the boldest reforms this year as its minimum capital requirement was among the highest in the world.”
Starting a business is the top area of reform in the Arab World for the 5 year period tracked, with reforms seen in Egypt, Jordan, Lebanon, Mauritania, Oman, Saudi Arabia, Syria, Tunisia, West Bank and Gaza and Yemen. The next most popular areas of reform during this period are in getting credit (information) and easing trade across borders.
Another silver lining is that many of the aforementioned oil producers have sought to invest wisely with the surplus cash they earned in recent years. This was particularly true 10 of Saudi Arabia and Oman. Budget surpluses enabled it in recent years to reduce internal debt. It also resulted in an accumulation of foreign assets. GCC oil producers have concentrated on infrastructure projects and helping the private sector take a larger role in developing the non-oil and gas sectors. Abu Dhabi, the richest oil-producing member of the UAE, had $875 billion in investment funds at the beginning of 2008; Kuwait’s Reserve Fund for Future Generations had $250 billion. Even Libya had accumulated $50 billion in its Oil Reserve Fund.
If the crisis encourages Arab governments to restructure their economies, they will be better placed when the international economy picks up. The Gulf States are taking these challenges much more seriously than in the past. They are investing large sums in upstream hydrocarbon projects to get more value from their oil, and are trying to diversify their economies away from petroleum products. They have also made investments in alternative energy to reduce domestic demand for oil and gas, thus freeing up more for export.
On the other hand, the fact that oil-producing states have not been affected as much as others may induce complacency. This could, in turn, lead to a failure to enact meaningful economic reforms at this critical juncture, and only ensure similar problems in the future global downturns that are sure to follow.
The recovery of Arab economies is likely to be slow, protracted, and inextricably bound to the global recovery. 11 In order to come out of the crisis stronger, governments in the region must think long term, establish strong economic institutions, and consider serious economic reforms. Within the Arab economies, there are no reforms related to enforcing contracts, employing workers or in getting credit (legal rights).
Increases in economic freedom are, in effect a return to the classical Arab model of free trade and open markets, would help meet the challenges discussed above and generate the economic dynamism needed to create the jobs and prosperity that the region requires for a successful future. The era of government-directed economies, import substitution, and other uses of government power (largely based on Western socialist models) to direct the economy did not produce the results needed for regional prosperity and advancement.
A large body of empirical research has found that economic freedom is key to increasing prosperity, particularly among the emerging nations. Fact-based studies in top academic journals have shown that economic freedom promotes growth, prosperity, and other positive outcomes. The relationship of economic freedom to prosperity is unsurprising. Individuals and families are best able to look after themselves when free to do so, without external constraints.
Moreover, economic freedom has intrinsic value and is inextricably linked to all other freedoms. Individuals and families should have the inherent right to make their own economic decisions. When they do, that economic freedom liberates them from government dependence and opens the door to other freedoms.
Economic freedom creates positive social and economic dynamics. In economically free nations, people succeed by creating goods or services that others want to buy. In other words, people get ahead by creating benefits for other people. Where economic freedom does not exist, economies grow slowly, if at all, and people gain by rent-seeking and limiting the possibilities of others.
In the case of economic freedom, the biggest gains are achieved by people who increase the size of the pie for everyone; without economic freedom, the biggest gains are by those who cut a bigger slice of the pie for themselves to the disadvantage of others. This is a key reason that economic freedom has been shown to promote democracy and other freedoms (Griswold, 2004). A society where individuals gain by promoting the well-being of other individuals (by efficiently creating goods and services people want) differs dramatically from one where, in the absence of economic freedom, rent seeking—cutting a bigger slice of the pie for oneself—and power hoarding to the disadvantage of others is the path to increased wealth and power. In the first, positive social and economic dynamics lead to a stable, peaceful, civil society marked by freedom; in the second, negative dynamics create incentives to reduce freedoms.
Since the publication of the first edition of the Economic Freedom of the World in 1996 and, more recently, national 13 and regional indexes like this one, there have been about 350 scholarly and policy articles that have used the economic freedom indexes to explore the relationship between economic freedom and other socioeconomic outcomes. Here, we will focus briefly on the relationship of economic freedom to economic growth and prosperity. Intuitively, one would expect that economic freedom would have a positive impact on economic growth because economic freedom creates a climate that allows individuals and business to allocate their resources to the highest end use. However, the question is ultimately an empirical one. One of the first studies, Easton and Walker (1997) found that changes in economic freedom have a significant impact on the steady-state level of income even after the level of technology, the level of education of the work-force, and the level of investment are taken into account. De Haan and Sturm (2000) show empirically that positive (negative) changes in economic freedom lead to positive (negative) changes in economic growth rates. Using the economic freedom index published in Gwartney, Lawson, and Block (1996) and per-capita GDP data for 80 countries, their results indicate that, after educational level, investment, and population growth have been taken into account, changes in economic freedom have a significant impact on economic growth.
Gwartney and Lawson (2004) examined the impact of economic freedom on economic growth but with a specific focus on investment and productivity. They found that economic freedom strongly promotes investment. Nations 14 with an economic freedom score below 5 (on a scale from zero to 10 where higher value indicates higher level of economic freedom) attracted US$845 in investment per worker over the period from 1980 to 2000 and only US$68 per worker in foreign direct investment. Nations with an economic freedom score above 7 attracted US$10,871 in investment per worker, including US$3,117 of foreign direct investment. Moreover, investment is more productive in economically free nations. Holding constant factors thought to affect growth and productivity, such as initial per-capita GDP, tropical location, coastal location, change in human investment, and public investment, Gwartney and Lawson found that an increase of one percentage point in the ratio of private investment to GDP leads to increases in the growth rate of per-capita GDP by 0.33 percentage point in an economically free country. The same increase in private investment in a less economically free country increases the growth rate of per-capita GDP by 0.19 percentage point. In other words, investment in economically free nations with a score above 7) had a positive impact on growth that was 70% greater than investment in nations with poor levels of economic freedom (score below 5). Using the same regression model, Gwartney and Lawson also calculated the impact of economic freedom on overall growth through both direct and indirect effects. They found that, if a nation increased its economic freedom by one unit (on a scale from zero to 10) in the 1980s, it would have seen increased growth of 1.9 percentage points a year over the period from 1980 to Because of the high rates of growth associated with economic freedom, they also found that over the long term economic freedom explains over two thirds of the cross country variation in GDP.
Increases in economic freedom also reduce poverty (Norton and Gwartney, 2008). Specifically the weighted $1-per-day poverty rate was 29.7% in 2004 for countries with EFW ratings of less than 5 but only 7.7% for countries with EFW ratings between 6 and 7; the $2-per-day poverty rate declines from 51.5% to 46.2% to 38.9% as one moves from the least-free to the most-free economies.
Moreover, a one-unit increase in the EFW rating between 1980 and 1995 was associated with a 5.21 percentagepoint reduction in the $1-per-day poverty rate and a 5.22 percentage-point reduction in the $2-per-day poverty rate. Norton and Gwartney also examined the relationship between economic freedom and other measures of well-being. In the most unfree economies, 72.6% of the population has access to safe water compared to nearly 100% in the most free economies. Life expectancy of people in the mostly free group is over 20-years greater than for those in mostly unfree economies Mostly free economies have more than twice as many physicians per 1,000 population than mostly unfree economies.
For every 1,000 births, 64 more babies survive in mostly free economies per year than in the mostly unfree countries. For every thousand children under age of five, 109 more children survive in mostly free countries each year than in those countries that are mostly unfree. For a sample of literature on economic freedom, see the web site, http:// www. freetheworld.com. For a summary of literature on economic freedom and economic prosperity, see Berggren, 2003 and Doucouliagos and Ulubasoglu, 2006.
The Index of Economic Freedom in the Arab World
The structure of the index
The index published in Economic Freedom of the World uses 42 components in five areas. Because underlying data for some of the components used in the world index were not broadly available for the Arab world, they were replaced by similar components with broader coverage of the Arab world. The index published in Economic Freedom of the Arab World includes the same five areas as Economic freedom of the World but has 39 components. The score for each of the five areas is derived by averaging the components within that area. The most recent data available for this report are from 2007. The five areas, described in more detail below, are
Area 1: Size of Government: Expenditures, Taxes and Enterprises;
Area 2: Commercial and Economic Law and Security ofProperty Rights;
Area 3: Access to Sound Money;
Area 4: Freedom to Trade Internationally;
Area 5: Regulation of Credit, Labor, and Business.
The overall rating was computed by averaging the scores of the five areas. Each component was normalized on a scale of zero to 10.
For consistency, the minimums and maximums used in last year’s report are also used in this year’s report. Global rather than regional minimums and maximums were used because of the small variability in some of the components among Arab countries and in order to place the Arab nations in a broader context.
Thus, a high score indicates that a nation is doing well, not only in comparison with its immediate regional neighbors but also in comparison with nations around the world whose economic practices encourage economic freedom. The index published in Economic Freedom of the Arab World includes data for the 22 nations of the League of Arab States. Eleven of these nations also appear in Economic Freedom of the World and the relative rankings of these nations in both indexes are very similar, despite the slightly different menu of components used in the index published in Economic Freedom of the Arab World. An overall score was computed for 15 of the nations included in Economic Freedom of the Arab World; an overall score could not be computed for the remaining nine because of a lack of data. This is an advance from last year’s report when scores for only 18
13 nations could be calculated; additional data allowed us to calculate a score for Qatar and Bahrain this year. New data for the latter, including data for previous years, is particularly significant since Bahrain ranks number one in the index for economic freedom in the Arab world.
A review of the results
As noted above, to increase coverage of the Arab world Economic Freedom of the Arab World uses a menu of variables somewhat different from that used in Economic Freedom of the World. The indexes are highly consistent with one another. Of course, even hard economic data, such as the data on government expenditure used in the index, are constantly revised, while other data streams are based on surveys. The scores in this index should be treated as highly precise, though not exact, estimates. Thus, there are very small differences between the two indexes.
Changes in economic freedom come slowly as policies and attitudes change and develop. Nonetheless, it is encouraging that levels of economic freedom have remained constant over a difficult period. The years from 2002 to 2007 reflected by survey data have seen great political stress in the region such as the continuing fallout of the Iraq war, instability in Palestine, troubles in Lebanon, and other factors. Yet, economic freedom in the region has remained relatively constant.
As Economic Freedom of the Arab World evolves, it will offer a key insight on where progress is being made 19
and, because of the extensive descriptive capacity of its 39 components; will provide a detailed prescription indicating where policy improvements are required.
The rankings
Bahrain holds the top spot this year with a score of 7.9, Kuwait and Lebanon are tied for second with a score of 7.8, Oman is fourth with a score of 7.7 The closeness of the scores suggests a near tie for top spot, since the top four are within Jurisdictions involved in on-going, high-level internal conflicts (in this case, the West Bank and Gaza, and Iraq), have not been ranked. Economic freedom is clearly eroded by lack of personal security and the data that are available would fail to reflect this. 0.2 points of each other. The top four are followed by another two nations tied at fifth, Qatar and Jordan, which are only 0.3 points behind Bahrain.
The Gulf States have achieved the highest level of economic freedom in the Arab world on average. Contrary to what one might think, this is not made easier by wealth from oil production and export, which presents a great temptation for governments to overspend and crowd out private-sector economic activity and weaken free markets so that economic power remains concentrated in the hands of those who control the oil revenues. Because of the oil wealth, governments have the means to protect their positions, even if economic activity outside the oil sector is weak. Despite this, the Gulf States, have worked to open their economies internally and externally to world trade and this is a credit to governance in the region. Algeria, Syria, Mauritania, and Tunisia have the weakest levels of economic freedom. And, while the top scorers all rank very close to each other, there are significant gaps among the bottom four with Algeria at 5.7 and Syria at 5.8, while Tunisia and Mauritania are tied at 6.4.
Individual areas
Following is a description of the variables used to measure economic freedom, explanations of why they are relevant, and the scores for each of the Arab nations where data are available.
Area 1 Size of Government: Expenditures, Taxes and Enterprises
The four components of Area 1 indicate the extent to which countries rely on individual choice and markets rather than the political process to allocate resources and goods and services. When government spending increases relative to spending by individuals, households, and businesses, government decision-making is substituted for personal choice and thus economic freedom is reduced. The first two components address this issue: Government consumption as a share of total consumption (1A) and Transfers and subsidies as a share of GDP (1B). Government consumption 21
(1A) refers to the extent to which the government itself provides goods and services. If government employees build a road, it is included as government consumption; if the construction is contracted to a private company, it is no longer included in government consumption though it is categorized as government spending. Competitive contracting builds efficiency and lessens the politicization of the economy, if the contracting is done impartially. Transfers and subsidies (1B) weaken markets by rewarding political power and position rather than the ability to produce goods and services the world wants and will pay for.
The third component (1C) measures the extent to which countries use private enterprise and free markets rather than government enterprises to produce goods and services. The fourth component (1D) is based on the top marginal income-tax rate and the income threshold at which it applies. High marginal. This description closely follows Gwartney and Lawson, 2006: 10–12. tax rates that apply at relatively low income levels increasingly deny individuals the fruits of their labor.
Table 2 shows the results for Area 1: Size of Government. Lebanon is by far the best performer, followed by Egypt and, tied for third, Bahrain, Jordan, and Morocco. Unfortunately, several states, particularly Algeria and Saudi Arabia, have overly large government sectors, which will stifle entrepreneurial activity by state interference in the economy either through high taxation or high spending or both.
Area 2 Commercial and Economic Law and Security of Property Rights
Security of persons, contracts, and rightfully acquired property are central elements of both economic freedom and a civil society. Indeed, the legal system is the most important internal function of government. Security of property rights, protected by the rule of law, is essential to economic freedom. Freedom to exchange, for example, is meaningless if individuals do not have secure rights to property, including the fruits of their labor. Failure of a country’s legal system to provide for the security of property rights, enforcement of contracts, and the mutually agreeable settlement of disputes will undermine the operation of a market-exchange system.
As is appropriate for an assessment of economic freedom, the index focuses on economic and commercial law. However, the first two components in this area 2A, Military interference in the rule of law and the political process and 2B, Integrity of the legal system are measures of whether or not the rule of law is applied impartially and consistently, which is also essential for effective economic and commercial law. Component 2C, Regulatory restrictions on the sale of real property, provides information on how easy it is to establish property rights and 2D, Legal enforcement of contracts, indicates whether agreements freely entered into are effectively protected by the rule of law. Both 2C and 2D are composites of other sub-components that measure the number of procedures, delays in judgments, and costs. Procedures that are too numerous, time-consuming, or costly lead to deterioration of the legal system’s ability to protect freely made agreements.
Table 3 shows the results for this area. The Gulf States on average lead here, though Tunisia and Mauritania also have relatively strong scores. The top three jurisdictions are Saudi Arabia, Oman, and Kuwait. The weakest performers are Somalia, Sudan, Syria, Algeria, and Libya.
Area 3 Access to Sound Money
Money is essential to exchange. An absence of sound money undermines gains from trade and erodes the value of property held in monetary instruments.
Sound money is essential to protect property rights and, thus, economic freedom. When governments print money to finance their expenditures, they are in effect expropriating the property and violating the economic freedom of their citizens. This (measured in component 3A) leads to inflation. High and volatile rates of inflation (components 3B and 3C) distort relative prices, alter the fundamental terms of long-term contracts, and make it virtually impossible for individuals and businesses to plan sensibly for the future. Component 3D is designed to measure the ease with which other currencies can be used via domestic and foreign bank accounts: that is, can one freely exchange and obtain differing currencies.
Table 4 shows the results for this area. The leaders in this area, Lebanon and, tied for second, Djibouti, Oman, and Saudi Arabia have among the best records in the world for Access to Sound Money. All have scores over 9. Average scores in this area are typically higher than in other areas, though Comoros, Libya, Sudan, and Algeria are at the bottom of the rankings and could improve their policy.
Area 4 Freedom to Trade Internationally
In a world of high technology and low costs for communication and transportation, freedom of exchange across national boundaries is a key ingredient of economic freedom. The components in this area are designed to measure a wide variety of restraints that affect international exchange: these include tariffs (4A and its sub-components), exchange rate distortions (4B), and exchange rate and capital controls (4C). Individuals in the Arab world should have the right to buy and sell from each other and from everyone in the world: Arab consumers should be able to buy the products they want regardless of origin and Arab producers should be able to sell freely to the world market.
The leaders are Yemen, in top spot, followed by Qatar, and Bahrain. The Gulf States along with Yemen have in general the strongest scores in this year (table 5). Tunisia, Syria, Morocco, and Algeria do quite poorly with scores below 6.0. The uneven performance of Arab states in this 25 area is one of the reasons that they have achieved only limited trade integration.
Area 5 Regulation of Credit, Labor, and Business
When regulations restrict entry into markets and interfere with the freedom to engage in voluntary exchange, they reduce economic freedom. Regulatory restraints that limit the freedom of exchange in credit, labor, and product markets are included in the index. Red tape can strangle business expansion, entrepreneurship, and job creation. The first component (5A) reflects conditions in the domestic credit market. Individuals should be able to make their own decisions in credit markets and deal with the institutions they would choose freely. The components are designed to measure whether government allows free markets to determine credit or whether this is politically determined and whether credit is available in a timely, cost-efficient manner to credit-worthy individuals and businesses that freely seek it. The top three in this category are Bahrain, followed by Lebanon, and Oman Many types of labor-market regulation (5B) infringe upon the economic freedom of employees and employers. Individuals should be able to work for whom they wish and employers should be able to hire whom they wish. Variables include difficulty in hiring, rigidity in hours, dismissal regulations and costs, and conscription. Oman is the leader in labor-market freedom followed by Saudi 26
Arabia and Jordan. Mauritania, Algeria, Sudan, and Egypt had the lowest scores.
Like the regulation of the credit markets and labor markets, the regulation of business activities (5C) inhibits economic freedom. Individuals should be able to open the business they wish when they wish and close it when they choose. The regulation-of-business sub-components are designed to identify the extent to which regulatory restraints and bureaucratic procedures limit establishing a business (5Ci) and closing it (5Cii). Tunisia comes in first followed by Sudan and Morocco. The worst performer is Mauritania but the United Arab Emirates, Syria, Yemen, Algeria, Djibouti, and West Bank and Gaza all have very poor scores.
In regulation overall, the Gulf States along with Lebanon on average have the best scores. The leaders are Bahrain in first, followed by Lebanon, Oman, and Saudi Arabia, tied for second. Unfortunately for the region, those with the lowest scores include the region’s largest economy, Egypt. Syria, Mauritania, and Egypt all score below 6.0 (table 6).
Conclusion
The Arab world has considerable diversity in economic freedom, with some nations having high levels of economic freedom by world standards and others relatively low levels. Unfortunately, those nations with low levels deprive their 27 citizens of the well-known benefits of economic freedom. Economic freedom in the region has remained stable over the period of the index. This is a considerable achievement given the challenges the region has faced in recent years. As discussed in the analysis of recent economic development, the impact of high oil prices may also present economic challenges to the oil states.
Data Tables
This section presents detailed economic freedom scores for all components used in constructing the index for the 22 countries of the League of Arab States. An overall score was computed for 13 of the nations included in Economic Freedom of the Arab World; an overall score could not be computed for the remaining nine because of a lack of data. This is an advance from last year’s report when scores for only 12 nations could be calculated. Due to additional data, this year we were able to calculate a score for Mauritania.
For all countries, we present area scores as well as scores for each component, where data were available. All the scores in the index are values out of 10. 10 is the highest possible score and zero (0) is the lowest. A higher score indicates a greater degree of economic freedom.
