2002 Reports

Economic growth and investment in the Arab world

Sala-i-Martin, Xavier; Artadi, Elsa V.

This paper analyses the economic growth performance in the Arab world over the last forty years. The Arab world has managed to reduce poverty performance despite its relatively disappointing growth performance. We relate this poor performance of both oil and non-oil producers to investment. Contrary to widespread belief, we do not find evidence that low quantity of investment is the main of low growth. The decline in the investment rate followed rather than preceded the reduction in the aggregate growth rate. We conclude that the low quality of investment projects is the key determinant of growth. The excessive reliance on public investment, the low quality of financial institutions, the bad business environment (due to political and social instability and to excessive public intervention and overregulation) and the low quality of human capital are important determinants of systematically unproductive investment decisions and, thus, low economic growth.