After spring comes? Recent development investments into the MENA region

The democratic awakening in the Middle East and North Africa (MENA) region seems to have stalled. Prospects for future development in economic and security terms are dire. Projections suggest that risks of instability remain high across the MENA region well into the 2020s. This is due to economic indicators such as high youth unemployment and other structural factors such as regional and social inequalities and low-value exports. It is also a result of regional vulnerability to global economic forces, dependence on European markets, and a lack of intra-regional integration.

At the same time, MENA is one of the most important regions strategically for Europe in political and economic terms. This is why, in the wake of the Arab Spring, G8 countries and other nations as well as multinational and bilateral development banks and other international financial institutions have pledged major sums to stabilize the region. These financial and economic support packages have the potential to become stability and resilience investments, especially when spent on infrastructure projects.

Yet they could also fail to stabilize the region. Energy infrastructure projects, for instance, create lock-in effects because they determine a country’s energy system for decades. Infrastructure that entrenches the dependence on fossil fuels in MENA countries for their energy supplies increases their vulnerability to external risks and shocks. For instance, the increase in and volatility of energy prices could be a major obstacle to future growth – especially since energy is heavily subsidized in most MENA countries. In Egypt in 2010, energy subsidies amounted to 11.9 percent of total GDP; in Tunisia in 2009, food and fuel subsidies taken together were 11.6 percent of GDP.

Investing in the development of Arab Spring countries – helpful or harmful?

Moreover, countries in the region are already facing major constraints on growth due to energy and water pressures, vulnerability to volatile international food prices, and climate impacts on tourism and agriculture. Thus, climate and resource pressures will impact stability through two key routes:

• Increasing exposure to shocks to living standards through volatile and rising global food and energy prices.
• Depressing output in critical areas of the economy such as tourism, agriculture, and energy.

Maladaptation may also lead directly to social tensions, for example in rural Egypt, where the vast majority of the population depends on agricultural production for their livelihoods.

Investments addressing these constraints arising out of the climate–energy–resource nexus could help MENA countries build resilience against future shocks. For example, climate-resilient investments that address vulnerability to drought and rising sea levels can mitigate the economic, social, and security impacts of climate change. Energy and water are key components of economic development and growth. They are also decisive for agricultural production, and hence food security. Investments in the areas of renewable energy systems, energy efficiency, water infrastructure, desalination and irrigation systems, etc., therefore address some of the most pressing issues in the region, such as energy poverty, economic development, and public health.

Existing investment packages do not address the issue of resilience. This suggests that the international public investment community is not yet joining the dots by asking how long-term, sustainable impacts can be achieved, for instance by systematically including energy, climate, and resource factors. At the same time, the window of opportunity to implement resilience investments is narrow. A growing number of investors – with Saudi Arabia in the lead – are lined up to secure their share of profits from the vast amount of infrastructure projects in the region. Whether or not this will create low-carbon development paths is uncertain. 

A recent project by E3G – Third Generation Environmentalism is developing practical recommendations on how international financial and economic support packages could put the region on a sustainable low-carbon growth path. The main argument is: Successfully managing the wide range of risks involved in the MENA region requires addressing vulnerabilities directly in order to turn what will be a low-carbon and resource-constrained future from a risk into an opportunity. 

Four strategic priorities emerge from our analysis for investing in stability:

1. Improve resilience to shocks. Investments need to be refocused to address immediate resilience challenges over food, water, and energy. This includes support to countries when tackling energy price vulnerability and energy subsidy reform; the reassessment of export-oriented agriculture vs. agricultural policies, ensuring national food security; and holistic packages of water management reforms based on efficiency, community management, and targeted investment in areas of high potential water and social stress.
2. Support economic diversification into resource-efficient industries. Investments should support new industries that are sustainable, even if resource stresses increase. Also, the potential of low-carbon zones[1] and clean energy exports should be explored with more rigor.
3. Build resilient infrastructure. External public investors should be required to assess the resilience of their investments under different scenarios. Investments in “soft infrastructure,” that is, community control, protective natural (rather than artificial) barriers, etc., should be explored, as they could provide alternative, more resilient investment options.
4. Rationalize external support on resource pressures. Current external support packages need to be better joined up to achieve synergies. One example concerns the objectives and potential impacts of renewable-energy electricity networks such as Medgrid,[2] DESERTEC,[3] and similar projects. The EU in particular needs to reassess where it can add the most value and achieve a few high-impact stability and development objectives.

Focusing on these priorities could dissolve the current disconnect between the high-level political processes aiming to support stability and democratization in the MENA region and the allocation priorities of practical investment processes. There is a major opportunity now to avoid negative path dependencies and put the region on the road of resilience and low-carbon development.

Dr. Sabrina Schulz is Head of Office in Berlin of E3G – Third Generation Environmentalism.