Economic Reform and Growth in Middle East: Obama on the EBRD and Other Smart Proposals

This is a joint post with Lawrence MacDonald.Even an avid consumer of the news and commentary on Obama’s speech on the Middle East yesterday could easily miss his proposals for supporting job-creating economic growth and development in the region. But long after we have forgotten the media bluster over a possible shift (or not!) in U.S. policy towards Israel and Palestine, the president’s seemingly modest suggestions on development just might be making a difference.The one that intrigues me most involves putting the European Bank for Reconstruction and Development to work in the Middle East and North Africa. Set up after the fall of the Berlin Wall, the EBRD is the only one of the multilateral development banks that includes support for democratization in its mandate, and the only one that specializes in promoting the growth of the private sector (see Figure 6 on p. 9 here. It has done so with a good record in the former Soviet Union and Eastern Europe. It is well placed to do so in the state-dominated economies where insider privileges have reigned – starting with Egypt and Tunisia. Less surprisingly, the president said he would propose at next week’s G-8 Summit in France that the World Bank and the IMF put forward a plan to “stabilize and modernize” the economies of Egypt and Tunisia. Stabilization in Egypt is particularly urgent; it is hemorrhaging fiscal funds with investment and tourism at a standstill.More broadly, the president invoked as a model the success of the post-Cold War transformation of Central and Eastern Europe:

The United States will launch a comprehensive Trade and Investment Partnership Initiative in the Middle East and North Africa.  If you take out oil exports, this entire region of over 400 million people exports roughly the same amount as Switzerland.  So we will work with the EU to facilitate more trade within the region, build on existing agreements to promote integration with U.S. and European markets, and open the door for those countries who adopt high standards of reform and trade liberalization to construct a regional trade arrangement.  And just as EU membership served as an incentive for reform in Europe, so should the vision of a modern and prosperous economy create a powerful force for reform in the Middle East and North Africa.

It’s a useful analogy and I can only hope that it will work. But there is an obvious difference: the carrot of accession to the EU provided a crucial incentive for the former Warsaw bloc countries to reform and open up their economies. Whether the prospect of a “regional trade arrangement” and “the vision of a modern and prosperous economy” can do the same seems somewhat unlikely—indeed, if that were enough it might have happened already.There was a specific ask for the U.S. Congress: to create Enterprise Funds to invest in Tunisia and Egypt modeled on funds that supported the transitions after the fall of the Berlin Wall.  And there was the promise of a new $2 billion facility from the U.S. Overseas Private Investment Corp. (OPIC) to support private investment across the region.  OPIC is remarkably effective and actually earns money for the U.S. government, so this seems eminently sensible. A proposal to relieve Egypt of up to $1 billion of its debt, with the money to be invested instead in entrepreneurship, and to extend $1 billion in fresh lending guarantees may seem small bore relative to the challenges Egypt now faces.  But it is perhaps the most that can be expected given the anti-debt hysteria in the U.S. and fiscal woes in Europe. And anyway, infusions of cash will be much less important than trade and investment policies in helping Egypt, Tunisia and other new Middle Eastern democracies that may follow in their footsteps.There were important promises to help in the fight against corruption, including the repatriation of stolen funds, and there was an applause-winning reference to supporting the education and rights of women, work that USAID and other US agencies have long been quietly pursuing in the region.The main challenge for the administration, and for the U.S. Congress where legislation is needed, will be in making much better use of the non-aid development tools, especially trade and investment policies. Fortunately, we have pretty good measures of these, so it won’t be hard to check back in a couple of years to see if the United States has made progress. As my colleague David Roodman noted yesterday drawing on our Commitment to Development Index, on the part of the United States there is considerable room for improvement. Meanwhile it's time for this kind of approach – harnessing investment and trade tools and leveraging the financial and technical heft of the multilateral institutions – to be applied by the United States in another weak democracy where private sector growth is urgent: Pakistan.