May 09 - 15, 2005

After some 30 years at the IMF concentrating on economic research including as Director of the IMP Institute and Deputy Director of the Research Department Mohsin S. Khan, a Pakistani national, took over as Director of the Middle East and Central Asia Department in early 2004. The region, which continues to struggle with military conflicts, slow growth, high unemployment, and rapid population growth, has in many ways been sidelined from globalization and the benefits of closer economic links with the rest of the world.



Khan recently spoke with IMF survey about some promising developments and what the region must do to bolster its economic prospects. IMF Survey: Rapidly growing, youthful populations hold great potential but also risks for the Middle East, which in recent decades has experienced sluggish growth and job creation. Is it approaching a tipping point where something must be done to meet rising expectations or risk a social crisis?

KHAN: The idea that the region is reaching a tipping point is probably the right way to put it. It's not at a crisis point yet, because the states are still by and large able to support the present population with subsidies and jobs, and in many of these countries, public sectors can still grow even more. That's not a good idea. It's not good economics or good policy. But if they have the resources, they can do it. Right now, the region's biggest challenge is unemployment, and the answer to unemployment is faster economic growth plus lower population growth, which then gets into cultural and social patterns. But I don't think that anyone really has an answer to why the region has been growing more slowly on average on a per capita basis than most other developing country regions, especially given its relatively abundant natural resources.

Q: In North Africa, growth is relatively strong but still insufficient to bring down high unemployment rates. What should the top priorities be for the Maghreb? How important is greater regional integration?

KHAN: The main challenge for the Maghreb countries, also, is unemployment, and there's a consensus between the IMF and Algeria, Morocco, and Tunisia that the priorities must be maintaining macroeconomic stability, developing financial sectors, and increasing integration into the world economy with a focus on stepping up regional integration. Very little trade takes place between these nations, although they're trading much more with the European Union through association agreements. The argument for greater regional integration is that it could significantly boost growth rates (which now hover at 3-5 percent a year) and lower unemployment rates. The creation of a market of 75 million people would open up more opportunities for foreign direct investment. Investors could think: "If I set up in Algiers, I could easily sell in Rabat and Tunis." There's still a political problem between Morocco and Algeria on the Western Sahara, which I hope will be settled soon. The IMF plans to hold a seminar on regional trade facilitation in the fall for the Maghreb countries, and they've all agreed to attend.



Q: Iran, potentially a big player in the region, is reporting a growth rate that is higher than the Middle East average. How do you reconcile this with the country's persistently high unemployment rate?

KHAN: Iran has been growing well largely thanks to oil price increases and economic reforms undertaken since 2002 but unemployment is still in double digits. The big question is: Could unemployment have declined by more, given the 7 percent rate that annual growth has averaged over the past few years? And what kind of growth rate is needed to make a significant dent in unemployment? This brings us back to the point that I was making earlier about unemployment and growth. If Iran's labor force is growing at an annual rate of 31/2 percent, it has to create 500,000 to 750,000 jobs a year just to absorb the new workers something that is very tough to do. One answer would be to limit the growth of the population and labor force, but that would entail cultural and traditional issues centering on the desired family size. The alternative would be to grow even faster say at 8, 9, or 10 percent a year. But for that to happen, even more reforms would be needed to stimulate the private sector so that it could create the extra jobs.

Q: The IMF Managing Director and yourself recently attended the London meeting in support of the Palestinian National Authority (PNA). Foreign ministers agreed on a series of steps to help the PNA strengthen its governing institutions, combat corruption, and unify security forces, and $1.2 billion was pledged toward the reform efforts. What are the economic prospects for the West Bank and Gaza? What is the IMF's role in assisting the PNA? And how are we contributing to the peace efforts?



KHAN: The economic situation is grim. Real income per capita is 35 percent lower now than it was in 1999 before the intifada, half of the population is living in poverty; and unemployment averages about 27 percent in the West Bank and 35 percent in Gaza. Economic prospects are highly dependent on political and security developments. The good news is that there's an opportunity now for the Palestinian economy to strengthen and regain lost ground. At the London conference there was a clear sense of optimism.

How does the IMF fit in? We're playing our part in the peace process by contributing to economic development, which also feeds back and helps political and security developments. At this stage, we're focusing on technical assistance. We're supporting the PNA in building sound economic and financial institutions. We're also assisting with donor coordination by ensuring that everyone is aware of the overall macroeconomic objectives and financing needs.

(Courtesy: Tehran Times)