G8 can help transform Middle East economies

May 25, 2011

By Una Galani
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

DUBAI — The G8 could help transform the Middle East economies. The World Bank has pledged $6 billion of aid to Egypt and Tunisia, but the summit of industrialised nations’ leaders this week could go further and come up with a model to prevent the Arab spring turning into an Arab winter. A significant package backed by multi-lateral institutions would be crucial to win back investor confidence.

Financial efforts to support the region so far have been piecemeal. On top of the substantial commitment from the World Bank, there’s $2 billion-plus from America, another $4 billion pledge by Saudi to Egypt, and some small enterprise funds here and there. That’s a mix of lending to both governments and the private sector over different periods of time. There are also ongoing talks with the International Monetary Fund.

It’s tough to assess the total needs of an entire region while it is still in motion. But a big headline figure in excess of at least, say, $15 billion to Egypt and Tunisia would help bring back foreign direct investment, even if it is just an addition of various commitments. Egypt alone says it faces a $12 billion funding gap until mid-2012. Tunisia is in slightly better fiscal shape with a fiscal deficit forecast to reach 4.3 percent in 2011.

The World Bank has set the right tone by linking its support to the pace of political reform, and focusing on reviving the private sector. But elsewhere measures are less impressive. Debt relief, as offered by America, isn’t a big shot in the arm to a government like Egypt’s which has low external debt and needs to diversify its creditor base, reducing its current reliance on local banks. Another challenge will be to ensure that democratic fervor doesn’t end up reversing the economic reforms achieved under autocratic regimes.

Crucially, the cornerstone of any support package needs to focus on financing labour-intensive infrastructure projects that would help lower unemployment. The region needs to create 70 million jobs over the next decade. If implemented properly, publicly-financed works would have a positive multiplier effect and could quickly attract private investment. By taking up a lead role in the effort, the G8 would show its decisions can have an impact, partly addressing rising questions about its own relevance.

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