d e z ri o h ut A e r u s o cl s Di c bli u P d e z ri o h ut A e r u s o cl s Di c DIRECTIONS IN DEVELOPMENT bli u Trade P d e z ri Natural Resource Abundance, o h ut A e Growth, and Diversification in the r u s o cl Middle East and North Africa s Di c bli The Effects of Natural Resources and u P the Role of Policies d Ndiamé Diop, Daniela Marotta, and e z ri Jaime de Melo, Editors o h ut A e r u s o cl s Di c bli u P Natural Resource Abundance, Growth, and Diversification in the Middle East and North Africa Natural Resource Abundance, Growth, and Diversification in the Middle East and North Africa The Effects of Natural Resources and the Role of Policies Ndiamé Diop, Daniela Marotta, and Jaime de Melo, Editors © 2012 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org Some rights reserved 1 2 3 4 15 14 13 12 This work is a product of the staff of The World Bank with external contributions. 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Contents Acknowledgments xi Contributors xiii Chapter Abstracts xvii Abbreviations xxi Chapter 1 An Overview of Diversification in MENA: Rationale, Stylized Facts, and Policy Issues 1 Ndiamé Diop and Daniela Marotta The Facts: MENA Economies’ Low Level of Diversification 3 Limited Diversification, Natural Resource Rents, and Growth Volatility 9 Why Is Greater Diversification Desirable in MENA? 11 The Role of Rents and Real Exchange Rates 13 The Role of Weak Links in Output Concentration 16 Fiscal Policy and Output Concentration 18 Natural Resources and Incentives for Regional Trade Reforms 20 v vi Contents Notes 22 References 23 Chapter 2 Resource Abundance and Growth: Benchmarking MENA with the Rest of the World 27 Jaime de Melo and Cristian Ugarte Benchmarking MENA’s Long-Term Growth and Volatility 29 Correlates of MENA’s Growth Performance 36 Conclusion 60 Annex 2A Trade, Structural Change, and Natural Resources 61 Annex 2B Ten Observations on Successful Growth 71 Annex 2C Applied Tariff Protection Is Still Relatively High 72 Annex 2D Ad-Valorem Equivalents Estimations 74 Notes 78 References 82 Chapter 3 Rents, Regulatory Restrictions, and Diversification toward Services in Resource-Rich MENA 87 Ndiamé Diop and Jaime de Melo Services in MENA: Stylized Facts 89 Relative Roles of Engel’s Effects in Consumption and Rents 94 The Role of Microeconomic Regulations 102 Export Diversification Opportunities for Resource-Poor MENA 105 Concluding Remarks 108 Notes 110 References 110 Chapter 4 Patterns of Diversification in MENA: Explaining MENA’s Specificity 113 Marcelo Olarreaga and Cristian Ugarte Empirical Methodology 115 Measuring Weak Links and Dutch Disease Effects 116 Contents vii Data Description 118 Empirical Results 118 Concluding Remarks 130 Notes 138 References 140 Chapter 5 Fiscal Policy and Diversification in MENA 143 Ali Zafar Role of Fiscal Policy in the Aftermath of the Arab Spring 144 Fiscal Policy in MENA: Stylized Facts 148 Fiscal Policy and Diversification 156 The Behavior of Fiscal Policy in MENA: Econometric Evidence 168 Concluding Remarks 169 Notes 170 References 172 Chapter 6 Natural Resource Heterogeneity and the Incentives for and Impact of Regional Integration 175 Celine Carrère, Julien Gourdon, and Marcelo Olarreaga Trade Agreements in MENA: An Analytical Setup 177 Empirical Results 182 Concluding Remarks 190 Notes 195 References 196 Appendix A Country Grouping Classifications 199 Notes 201 References 201 Boxes 1.1 How Is MENA Performance Captured and Benchmarked in This Volume? 5 2.1 MENA in the Natural Resource Curse Literature 40 viii Contents 3.1 Regulatory Restrictions in MENA: Findings from Other Case Studies 104 3.2 Dubai’s Successful Approach to Diversification 106 Figures 1.1 Changes in the Composition of GDP, 1980–83 to 2007–10 3 1.2 Services Share in GDP by Level of Income 4 1.3 Share of Services in Nonmining GDP 7 1.4 Drivers of Export Growth (Excluding Oil Products), 1998–2008 8 1.5 Natural Resource Rents in 2010, by Region 10 1.6 Growth Volatility, by Region 11 2.1 MENA Long-Run Growth Performance 30 2.2 Estimated Equilibrium Real Exchange Rates 39 2.3 Frequency Ratios, Core NTMs, 2001–10 44 2.4 Average Distance of Trade and Trade Costs 50 2.5 Average Trade Distance of MENA Countries with Traditional and New Trade Partners 52 2.6 Export Diversification and per Capita Income 56 2.7 Kaplan-Meier Survival Rates 58 2A.1 Predicted Trade Shares in GDP 64 2A.2 Actual versus Predicted Shares of Manufactures and Manufacture Exports: MENA 69 2C.1 Predicted Applied MFN Protection 73 2D.1 Ad-Valorem Equivalent of NTMs and per Capita Income 77 3.1 Services Value-Added Growth and GDP Growth in MENA 89 3.2 Composition of Exports in MENA and South Asia, 2008 90 3.3 Changes in the Composition of GDP: 1980–83 to 2007–10 91 3.4 Services Share in GDP by Level of Income 92 3.5 Services Share in GDP, MENA versus Rest of the World 93 3.6 Share of Services in Nonmining GDP 95 3.7 Share of Consumption of Services in GDP 97 3.8 Share of Imported Services in GDP 98 3.9 Restrictiveness of Services Trade Policies and Share of Services in GDP, MENA-GCC, GCC, and Other Regions 103 4.1 Diversification of Output (Gini ) on GDP per Capita 124 out 4.2 Diversification of Output (Gini ) on GDP per Capita 124 empl