THE BLOG

The Key to Countering Extremism and the Arab Firestorm

The time has come to set up an Arab Bank for Reconstruction and Development (ABRD) to address the multiple challenges faced by countries in transition in a region where the 'Arab spring' has turned into a firestorm.

The new bank would be a vehicle for transformation and collective action. It would be a vehicle for jettisoning outdated development models based on large public sectors that have failed to generate sustained growth, productivity gains, inclusiveness or poverty alleviation. Instead, the region would be propelled decisively in the direction of supporting job-creating private business and boosting infrastructure. Investments in both spheres are crucial for accelerating growth and for reducing inequality and poverty.

The Arab countries across the Middle East and North Africa (MENA) represent the only region of the world without a dedicated development bank. Regional institutions are better placed to satisfy regional needs. If there is one important lesson of the upheavals following the overthrow of repressive governments three years ago, it is that the region needs to own its transformation. Countries must develop their own roadmaps rather than reply on others' efforts. But they need help from outside. As in Europe after the fall of the Berlin Wall, which led to formation of the European Bank for Reconstruction and Development (EBRD), countries in transition need not only a vision to formulate their goals but also assistance in achieving them.

The Arab spring is sadly no longer the correct characteristic for a region in turmoil, heading towards an uncertain destination. Firestorm is a better word. Once ignited, it spreads everywhere, burning all in its path and leaving behind devastation.

Establishing the ABRD would recognize that the countries hit by this firestorm are being affected as much by economic as by political influences. So far, much of the focus in the Arab world has been on political change and transition. But economic reform and transformation are fundamental for any successful political change. The ABRD can help nurture the spirit of entrepreneurialism and self-help that has been absent during the years of dictatorial regimes and is still painfully lacking during the fragile times these countries now face.

The Arab upheavals are as much about economic rights, lack of participation, and absence of 'trickle down' or 'pull-up' in the running of countries' economies as they are about political rights, human dignity, corruption, bribery and parasitic institutions. Recent estimates by HSBC suggest that the GDP of the seven worst hit Arab countries -- Egypt, Tunisia, Libya, Syria, Jordan, Lebanon and Bahrain -- would be around 35 percent lower in 2014 than if the turmoil had not happened, representing about $800 billion in lost output. The ABRD that I am recommending would be a multilateral institution owned by the Arab countries and capitalized at $100 billion. This would be largely subscribed by the Gulf Cooperation Council -- Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Bahrain and Oman, running a joint current account surplus of around $300 billion -- and their aid agencies, along with the G20 countries.

The ABRD could reflect the structure of other regional development banks around the world, but would be different in terms of participation from both the public and private sector entities, including regional sovereign wealth funds. The European Investment Bank (EIB), the EBRD, the Islamic Development Bank and other international financial institutions would participate in the bank's capital and provide management expertise to initiate its development.

The case for ABRD is strong. Demand and supply would come into better balance through a mechanism that would be more effective in providing regional public goods, especially those requiring large initial investments and regional coordination mechanisms.

The ABRD would deal with multiple tasks. It would handle reconstruction and infrastructure finance, including regional and cross-border projects and investments that promote regional economic and integration. It would generate and promote private participation in infrastructure. It would drive the development of financial markets in the region. And it would finance private sector activity, with a focus on small- and medium-sized enterprises.

There would be substantial benefits outside the immediately affected region. With the global economy languishing, the GCC and G20 countries would directly benefit from massive infrastructure spending across MENA. The Arab firestorm is a defining moment for the GCC countries that should take the leadership in setting up the ABRD and provide a new vision of hope. They have a direct geo-strategic interest in the economic development, social and political stability of the Arab countries, engineering a smooth transition away from the current cycle of violence into an era of hope and renewal.

There is a great deal at stake. Given the risk-averse nature of MENA's banks, it is urgent to mobilize funds and channel resources to meet the region's growing capital needs. Private participation in infrastructure can help countries undertaking reconstruction by extending access to basic necessities for economic growth and improving the quality and reliability of services. Based on data from the World Bank, the MENA region ranked among the lowest region in public-private partnerships in infrastructure projects both in terms of number of projects and total investment.

Reconstruction and infrastructure investment require a multi-year sustained effort built around regional cooperation and institution-building. The demand for longterm funding will continue to grow as a result of ambitious investment plans for development projects driven by demographic factors, increased urbanisation, growing social aspirations and the need to create jobs for a rapidly growing labour force. However, shallow financial markets, the economies' narrow product range, limitations on longer-term finance and limited banking capacity are important constraints.

While the international financial institutions recognize the need to step up financing for the region, they continued to underinvest: less than 8 percent of their portfolios are in this region. Similarly, the MENA Transition Fund set up under the Deauville Partnership to support economic and political transition in the firestorm countries has delivered meetings but little funding. About $100m has been approved to date, nearly half of which goes to Morocco and Jordan.

The MENA region is a land of contrasts and contradictions. The region is among the richest in terms of energy and natural resources, resulting in high per capita incomes in the GCC countries while other countries are mired in poverty and underdevelopment. Per capita annual income in 2012 varied from a miserly $984 in South Sudan to a modest $3,112 in Egypt, while Qatar towered at $104,756.

Growth in MENA has underperformed other emerging economies, with increases in output mostly accounted for by natural resource production, with little productivity growth or innovation. The oil -- and government -- based development model has failed. Youth unemployment rates are the highest in the world.

Growth has been volatile, punctuated by wars, violence and destruction, notably in Palestine, Iraq, Sudan, Syria, Libya, Lebanon and Yemen, depleting human capital and infrastructure. The costs of reconstruction are staggering and exceed $1.1 trillion: $700 billion for Iraq, at least $250 billion for Syria, and $150 billion for the other countries.

In addition to reconstruction investment and finance to remedy the ravages of war and violence, rapid population growth, the Arab 'youth bulge' and urbanization require massive infrastructure investment. Instead there has been severe underinvestment in the region's infrastructure despite the high economic and social returns. The World Bank estimates MENA's infrastructure investment and maintenance needs through 2020 at $106 billion per year or 7 percent of annual regional GDP. But there is a $60 billion financing gap.

These figures are likely to be a severe underestimate of the actual gap, as they exclude not only regional development projects but also reconstruction of the region's war torn countries. Infrastructure investment is job-creating as well as growth-lifting. Each $10 billion invested can lead to 1m new jobs. Badly needed infrastructure spending can underpin social solidarity and peace, countering the propensity towards conflict seen in many societies. The ABRD by itself cannot be a panacea, but it would be an important step towards safeguarding a region that risks being thrown back into its turbulent past. The avoid this happening, governments within and outside the region need to consider this plan now -- before it's too late.