Institutional Reform and Development in the MENA Region .


Title : Institutional Reform and Development in the MENA Region

ISSN : 6

Publisher : Arab Planning Institute - Kuwait

Author : Imed Limam(Editor)

Published Date : 1999

Contents :

Over the recent past, the area of institutional economics has increasingly gained momentum. Two of its main contributors, Douglass North and Ronald Coase recently won the Noble Prize in Economics. Many factors may be presented to explain the long eclipse of institutions from the field and the recent resurgence of interest in the subject.

Mainstream neoclassical economic theory has consistently discarded institutions and institutional change from the analysis and pushed them in the background by assuming that they are exogenous. Economic factors are the main fundamentals in explaining economic development. In this context, economic development is seen as a universal process whereby development stages are dependent on quantitative economic factors such as capital, labor, land, and more recently, human capital. This view has obviously misrepresented reality and failed to explain growth differentials among countries in time and space. The lack of empirical evidence with regard to the â??convergence hypothesisâ?‌ lends support to this claim. A country might accumulate a substantial amount of physical and human capital but be locked into a low level of development if its institutional set-up is not right.

With regards to the rationale explaining the renewed interest in institutional factors, the answer is multidimensional. The first explanation lies in the recent cognizance made by international financial institutions such as the World Bank, and by policy makers alike, or the fact that macroeconomic discipline and conventional economic reform packages are not enough to put developing countries on a sustainable development path. More fundamental changes are needed. The notion of governance which has appeared more frequently in recent literature illustrates the new perception of the type of the needed changes. Governance may be defined as â??the manner in which power is exercised in the management of a countryâ??s economic and social resources for developmentâ?‌ (Williams 1996: 157). Better governance requires reforming several aspects: notably improving the efficiency and operation of the government apparatus and increasing its accountability; enhancing the legal framework by improving the efficiency and credibility of the court system; clarifying property rights; clearing law texts from incoherence and inconsistency; and enforcing the rule of law; guaranteeing transparency and the easy dissemination of information; and harnessing participation of civil society.

Other important reasons for the revival of interest in institutions, are the success stories of some East Asian countries and the demise of communism in Eastern Europe. Present problems notwithstanding, the spectacular growth rates enjoyed by many East Asian over the last two decades or so, have been attributed to a great extent, to the presence of enabling institutions. Decentralized, politically pressure-proof, and high quality bureaucracy; commitment to shared growth; transparency; accountability and participatory polity, are among the factors presented in explaining the success of these countries. In the opposite camp, Eastern European countries are often portrayed as instances of institutional failure with respect to the latter factors.

The third explanation for the recently rekindled interest in institutions stems from the recent changes in the world economy brought about by globalization that has made very apparent the cost of non-reform. The pace of the changes entailed by globalization compels national governments to react by changing the rules of the game, i.e., reforming their institutions. The fight for survival and against the risk of marginalization in an increasingly competitive and integrated world, requires the creation of market-friendly institutions; a stable economic environment; a higher degree of preparedness to adjust to external shocks; proper regulations that influence market outcomes that are not socially optimal; the provision of public goods such as property rights and basic social services; and the protection of the vulnerable and the environment.

Institutions and institutional reforms are of paramount importance for the Middle East and North Africa (MENA) region on several grounds. The process of its integration in the world economy is slow in comparison with high performing developing countries (Nabli and De Kleine, 1998). Without appropriate institutional changes, notably the development of market institutions and the protection of property rights, the region will forego the windows of opportunities offered by globalization. Moreover, the past weak growth performance of many MENA countries is largely attributed to its low level of productivity, lack of international competitiveness and its reliance on traditional factor-based sources of competitive advantage (Bisat et al., 1997). The region is also characterized by a high level of social and political instability that can be detrimental to the functioning of market economies.

There has been an obvious effort made by developing countries toward undertaking substantial institutional reform notably through improving their governance structure. The record of the MENA countries on institutional quality as proxied by their scores on country risk indicators published by credit ranking institutions, have improved over the last decade or so (ERF, 1996). However, much remains to be done. Several institutional aspects are still lagging behind even by developing countriesâ?? standards. Individual studies show, for instance, that many countries in the region provide the weakest institutional support for investment and private sector development. This creates the need for analyzing the institutional setup and pinpointing the institutional impediments for the development of the MENA region from both the theoretical and practical perspectives.