More Signs of Trouble Ahead- this time North Africa

I wish I had some good news to blog about, especially so close to the holidays, but the more I read these days the harder it is to find any ray of sunshine, at least over the next year or so.  Two reports struck me today as being particularly ominous, even though both only tangentially deal with the Middle East.  The World Bank this month released its 2009 update of Global Economic Prospects, this one subtitled, "Commodities at a Crossroad."  Although the report is not entirely pessimistic about the outlook for established commodity producers in the short and medium term, largely because of the large surpluses they were able to build up during the past five years, the Bank notes that one of the most significant effects of the current downturn will be a decline in investment in emerging markets which is forecast to fall by almost 10 percent from 2007 to 2009.  The Bank attributes this steep drop to tighter credit conditions and a shrunken appetite for risk.  The second report was a front page article in the Washington Post which reported that many countries have already begun to enact protectionist measures despite pledging an ongoing commitment to free trade at the G-20 Summit in Washington in November.  (The article also contains an excellent map detailing measures being taken globally.) 

These two reports taken together should sound a note of extreme alarm for North Africa watchers.  Morocco, Tunisia, and Egypt all have been enjoying economic growth largely through their trade links to Europe and, more recently, through a boom in investment from the Persian Gulf.  (Europeans have been important investors in each of these countries as well although in the past two years, Gulf investment flows have surpassed those from the EU, and in the case of Egypt, from the US.)  In fact, these countries have tied their economic liberalization and future development strategies to the joint pillars of exports and investment.  North African policymakers have few tools to counter this twin blow since domestic consumption in each of these countries is minimal, although before this year, consumption in Egypt was on the rise.  But in Morocco and Tunisia, domestic consumption remains stubbornly tied to the agrarian culture that formally marked the underpinnings of those economies.  In times of abundant harvests, consumers spend more, whether or not those consumers are inherently tied to the agriculture industry.  Likewise, in times of drought, consumption tends to retract.  It's been the recovery in Europe and petrodollar flows in the form of foreign direct investment and portfolio capital that have smoothed out some of the jarring movements in GDP that has been typical in North Africa.  

With so much being tied to new investment and further development in export-oriented industries, we should expect to see these economies enduring significant slowdowns in the short to medium term.  Of course with this comes rising unemployment, burgeoning current account deficits, and potential balance of payment troubles.  Although the economic downturn is being felt globally and should be worried about in many countries, North Africa holds a special place for me since it is really the birthplace of economic reform in the Middle East.  Tunisia, in particular, has been working for decades to break the resource curse and get itself on more stable footing.  I don't believe that the current slowdown will become a deal breaker for any of these countries in terms of their ultimate reform agenda, but it is a shame that after finally undertaking some serious changes (especially in the case of Egypt) this downturn will prevent these countries from reaping the fruits of their labors.