Demographic patterns and structural change in North Africa and the Middle East

The political turmoil in Tunisia and Egypt that precipitated the abrupt end of decades of political dictatorships that governed the vast majority of countires in the MENA (Middle East and North Africa) region. The political revolution, influenced by democratic upheaval in Tunisia and Egypt, facilitated the attempts to overhaul the autocratic regimes in Bahrain, Syria, Yemen and Libya.

One of the most interesting and highlighting puzzles to resolves is which features contributed to the rise of democratic revolutions sweeping across the entire region. In fact, MENA region is world’s largest exporter of oil, enjoying the largest oil reserves in the world. Saudi Arabia, Qatar, Algeria, Libya and Kuwait constitute more than 42 percent of world oil reserves. In recent decades, MENA region experienced a growing degree of macroeconomic stability with low and stable inflation rate and steady economic growth. Large oil inflows, driven by the growing oil consumption in emerging markets such as China and India, boosted local currency appreciation and current account surpluses. The rates of growth in recent decade were remarkable, reflecting the growth of domestic demand as well as robust investment as the engine of growth. Countries in the MENA region also enjoyed favorable demographic conditions with low old-age dependency ratio and high share of working-age population, resulting in a demographic dividend which brought robust economic growth.

The indices of political change in the MENA countries prior to the outburst of the political protests in Tunisia and Egypt were nearly impossible to predict since a variety of macroeconomic, demographic and structural indicators facilitate the course of political change in developing countries, shifting from authoritarian political leadership towards a democratic political institutions with free press, free election and a vibrant civil society. Prior to the onset of the protests against authoratic governments in the MENA countries, the latter experienced benign levels of economic freedom. In the MENA region, the majority of countries experienced rampant corruption, heavily regulated labor markets, financial underdevelopment and inefficient legal systems. Bahrain, Qatar and Saudi Arabia enjoyed the highest degree of economic freedom in the region while Yemen, Syria and Algeria were already suffering from institutional paralysis and bad governance which brought these countries on the brink of failed states. If political change could be predicted on the basis of the level of overall economic freedom, Yemen, Syria, Algeria and Libya would experience the highest likelihood of political protests that would eventually lead to the political change.

Prior to the independence from France, MENA countries have been plagued by authoritarian governments given the extensive reserves of oil and natural gas. The absence of market institutions based on the rule of law under good governance and independent judicial systems eventually intensifed the rise of hybrid political regimes prone to corruption and poor governance. Even though corrupt military rule and political dicatorship precipitated the rise of the protests against authoratic rule, the pattern of structural change could be easily seen from the changing demographic landscape across the MENA region.

For most of the 20th century, countries in the MENA regions experienced rising income per capita levels. In fact, the growth of per capita incomes in North Africa surpassed the regional average given the fact that North African countries enjoyed high relative levels of income per capita at the beginning of the 20th century compared to Sub-Saharan Africa. For instance, in 1913, Tunisia enjoyed higher per capita income than Mauritius. The change in the demographic structure of the population began after 1950s. In all countries of the MENA region, the fertility rate decreased substantially. In Syria, the fertility rate almost halved between 1950-1955 and 2005-2010, from 7.30 to 3.29. The same trend in the fertility rate swept across the entire region. In Libya, the fertility rate between 2005 and 2010 fell below 3 children per women while Tunisia’s fertility rate dropped below 2 children per women in the same period. The astounding drop in fertility rates strongly reflected the growth in per capita incomes which boosted domestic consumption of durable and non-durable goods. In addition, oil-exporting countries such as Libya and Bahrain have experienced a substantial increase in export earnings. Large inflow of oil earnings, in fact, unleashed the income effect, brining higher spending on education and infrastructure. The distribution of literacy rates across countries (link) shows that literacy rates in MENA regions are remarkably high. In fact, Bahrain and Turkey boast of 88 percent literacy rate. Libya remained the North African leader in literacy rate (86.8 percent), ahead of Tunisia, Egypt and Algeria which, given the fragmentation and dichotomy of the population, enjoy literacy rates below 80 percent of the total population.

Countries from the MENA region differ substantially in the demographic projections of old-age dependency ratio. The estimates by the UN suggest that by 2030, the dependency ratio in North Africa and the Middle East is expected to experience a persistent rise. In fact, under constant fertility rates, the share of the population 65+ is expected to increase by 25 percentage points in Bahrain, 24 percentage points in Libya, 23 percentage points in Tunisia, 20 percentage points in Algeria, 15 percentage points in Syria and Saudi Arabia and 14 percentage points in Egypt. In Turkey, favorable fertility assumptions predict 7 percentage point increase in old-age dependency ratio until 2030. The empirics behind the clear explanation of fertility dyanmics across the MENA region reveals a persistent shift towards rapidly aging population across the entire region. The expedience of high fertility rates boosts the demographic dividend alongside the growth in income per capita until the break-even point when the pressure of aging population raises public pension expenditure and the introduction of social security schemes. These schemes, in fact, do not pose a systemic threat to the long-term solvency of public pension system as long as high fertility rates boost stationary population growth. The remarkable decrease in the fertility rates in the MENA is partly beared by the increasing amount spent on education. For instance, Tunisia’s education spending amounted to 7.2 percent of the GDP. The ratio is higher than in many advanced countries in the world. In 2007, Italy spent 4.3 percent of GDP on education, the same ratio as Algeria in the year later. The increasing amount of education expenditure, in both absolute and relative sense, reflects robust literacy rates for middle-income countries of the MENA region. In fact, the increasing amount of education expenditures per inhabitant boosted the information awareness by driving up reading, mathematical and computer literacy. Higher literacy rates, compounded by free access to various Internet applications, could substantiate hypothetically greater awareness of the public demanding political liberties, freedom of assembly and free press.

The demographic transition in the Middle East and North Africa is remarkably uneven, reflecting the variation in income per capita across the region. One of the key drivers of the demographic adjustment is the changing immigration landscape. Traditionally, North African countries have boosted one of the highest outward migration rates, particularly into Italy and France where Muslims account for about 9 percent of the population, the highest share in Western Europe. In addition, with 2.01 children per women, France enjoys one of the highest fertility rates in Europe. A brief overview of the ethnic fertility rates in France shows that French women of the Muslim origin boost significantly higher fertility rates compared to immigrants from Western countries. For instance, the fertility rates for women of Algerian and Moroccan descent exceed the fertility rates of Spanish and Italian immigrants by almost three times. In the next decade, income per capita across the Arab world is expected to increase robustly. Higher incomes would mean a shift towards the increasing amount of expenditures on durable goods. The change in the consumption pattern would be accompanied by a robust decline in the relative amount of income spent on food and other non-durables. Hence, the assumed fertility rates would converge to the Despite the prolonged decline in fertility rates across the Arab world, the demographic transition could precipitate the subsequent decline in robust economic growth rates which exacerbate the rapid rise in per capita incomes in the MENA region.

The peculiar feature of the majority of countries within the MENA region with the exception of Turkey is the presence of natural resource barriers. The abundance of natural resources, such as oil, phosphate and natural gas, is a major constraint on the quality of public sector governance replaced by the seizure of the state by powerful political elites such as the military regime during the Mubarak rule in Egypt prior to the 2011 revolution. Unless accompanied by democratic institutions and systemic constraints on the executive power, the political revolution can eventually result in the organic evolution of the failed state with a strong persistence of the old elites pushing for the status quo to protect the privileges preserved under the old system. The Arab awakening signaled the beginning of the demographic transition with decreasing fertility rates and slowly growing old-age dependency ratios. Hence, diminishing returns to demographic dividend and the gradual relative decline of the share of the working-age population both indicate a tendency towards greater democratic governance.

Looking around the corner for inflation

As of February 2011, the Consumer Price Index has gone up 2.1 percent in the preceding 12 months. Core inflation (All items excluding Food and Energy) went up just 1.1%. Inflation is certainly not beating at the door. On the other hand, global food commodity prices have been rising suddenly as have oil prices. In class we talk about how the All Items CPI is important, but that the Core CPI is a better measure of broad-based changes in prices.

The modest inflation measures will change in the future. We almost certainly should expect prices to rise more rapidly. We just don’t know when, or for how long.

Aggregate Demand and Aggregate SupplyAggregate Demand and Aggregate Supply

This blog post by economist Tim Duy has a very thorough and clear explanation of some of the forces gathering on the inflationary front. He presents this as a way to help understand the decisions and debate within the Federal Open Market Committee (FOMC) in the months to come. Though clear, his explanation requires an understanding of aggregate demand and aggregate supply curves. So, for my students, mark this post and come back to it once we’ve covered those subjects.

For any reader, here are the summary conclusions that Duy reaches:

We can track the path of the prices and output and explore the positions of Fed officials within a fairly simple framework.  That framework suggests that the economy will experience a temporary period of accelerating inflation as it returns to potential (we should be so lucky, quite frankly).  There doesn’t seem to be much debate at what speed this will occur; Fed officials appear comfortable with growth expectations around 3.7% this year.  What does seem to be an issue of debate is the size of the unemployment gap.  If we are close to the natural rate of output, excess monetary stimulus is close to triggering the fabled wage-price spiral.  If far away, there is plenty of excess capacity and thus no need to tighten quickly.  Indeed, tightening policy too soon would only entrench disinflationary expectations.  Fed officials appear to be splitting along these two basic views of the world, with one side seeing recent price increases as consistent with their inflationary nightmares.  I tend toward the other, which I also think will be the dominate view at the FOMC.

And here is my translation:

  • The Fed expects economic growth to continue, and even at a somewhat faster pace.
  • Our regular models suggest that this continued growth will put upward pressure on prices.
  • One big unknown is whether there is a lot of unused capacity in our economy – particularly among workers.
  • If there are a lot of workers who can be put back into production, without much training, we have plenty of unused capacity which will soften inflation.
  • If those workers who are still unemployed have the wrong skills or geographic location, our unused capacity is smaller.
  • As we use up our capacity and get closer to full economic production, we get closer to the danger of a wage-price spiral that would cause inflation to increase significantly.
  • Some members of the FOMC fear we are close to capacity and that any more moves to stimulate the economy will trigger that wage-price spiral.
  • Other members of the FOMC are less worried about inflation and instead fear that a cutback in stimulus efforts will stall the recover.
  • Duy predicts that the inflation hawks (the first group) will be outvoted by those worried about recovery.

For my students – this is a bit more complicated than we handle in a Principles class, but a good way to test your understanding of aggregate demand and aggregate supply.

Macroeconomics Reading Club

For those of you who study macroeconomics and finance, here are some interesting articles on macroeconomic issues:

Menzie Chinn, The Employment Situation in the Graphs, Econobrowser, December 4, 2009 (link)

Menzie Chinn, Debt and Interest Rates; Some Empirical Evidence, November 23, 2009 (link)

Olivier Blanchard, Marianna Riggi, The Price of Oil and the Macroeconomy, Vox, December 7, 2009 (link)

Roel Beetsma, Massimo Guliodori, The Macroeconomic Costs and Benefits of the Economic and Monetary Union, Vox, November 27, 2009 (link)

Hey, Does Anyone Have a Better Idea?

1993 Ford Escort WagonSales of Ford Motor Company’s trademark pick-up trucks and SUVs were down 28% for the month of June, sending the DOW plunging into bear territory again, along with news of the worst inflation yet this year and oil prices today nipping at $143 per barrel. It’s sad really, but also more than a bit maddening.

I’m old enough to remember Ford’s slogan from bygone (and definitely better) days:

Ford Has a Better Idea!

Here and now I want to say to Ford, cool, let’s have it! Time for that better idea guys, and let’s make it snappy, shall we? Because so far, all I’m seeing is lots of panic and punditry, lots of CEO dithering and blathering, but a noticeable dearth of those famed better ideas. It’s as though the whole country has become mesmerized with helplessly watching the steady upward movement of oil prices, kind of like in those old black and white cartoons where some cute loopy farm animals lay around and wipe their brows as the temperature climbs higher and higher and the mercury finally busts out the top of the thermometer with funny sound effects.

I got an email from Common Cause today, which informed me that the 1927 Ford Model-T got 20 miles to the gallon, and the 2007 Ford Taurus gets 28 miles to the gallon.

That’s an improvement of 8 miles to the gallon in 80 years.

Now I know that designing automobiles is hard and complicated stuff and girls just can’t possibly understand it, (especially girls like me who work in call center bank jobs), and that we should really leave these issues to guys with engineering degrees and pocket protectors and CEOs in expensive suits, and not try to butt in where we don’t belong. Still, I’m thinking 80 years is enough time. They’ve had their chance and then some. I’m thinking that at this point, even a bunch of girls could definitely can do better than an 8 mpg improvement. It wouldn’t even have to be a bunch of particularly brilliant girls.

Seriously, we could set it up like on of those dippy reality show competitions that are all over cable TV right now, (there are, for example, dog groomer reality show competitions, interior designer reality show competitions, cooking host competitions…you name it, it’s on cable as a reality show competition). So why not a “design a better Ford” reality show competition, girls only! What do we possibly have to lose?

Say you put Kathy Griffith, Paris Hilton, Cindy McCain, Oprah, and Katie Couric in a little room and said, ” OK girls, here’s the deal: You have eighty years to design a cute inexpensive little car that gets at least 50 miles to the gallon. The first one to come up with a viable design gets out of this little room and wins a Tesla, a gift certificate at Tiffany’s, and a whole new wardrobe from Saks (with Stacy and Clinton from What Not to Wear not even in the same universe, let alone the same store.)” Here’s a Blackberry, $5000, and some paper for each of you. Have at it and may the best woman win.

I’m telling you, that show would be over in about three episodes, if not sooner. Ford would have its better idea, some lucky girl would have a Tesla, some diamonds, and a new wardrobe, and the day would be saved.

You’re welcome.

Not that I expect anyone from Ford to pay any attention to me mind you. That ‘you’re welcome’ was sarcasm in case you didn’t pick up on that. You see, I’ve had to interact with Ford Motor Company before, so I know exactly what we’re dealing with here, and trust me, it ain’t pretty.

Let me tell you a story by way of illustration.

1993 Geo PrizmIn 1991 my mother died and left me a small amount of money. I bought a house and an IMac, and I had just enough left to buy a small car. Now at that time, GM was building a horrible little car called a GEO Prism that got great gas mileage; well over 50 miles to the gallon. It was all over TV, but could I find a single GEO Prism on a single Chevy lot? I could not. I was shown a Cavalier. No, I said, I don’t want a Cavalier, I want a GEO. I went to another dealer who said, “We don’t have any GEOs right now, but if you give me your address and phone number, when we get one in, I’ll personally drive it over to your apartment and let you test drive it before any one else even sees it.”

That was just creepy.

At my third GM dealer, no one would even talk to me. Lots of guys in bad polyester doing not much of anything seemed to be roaming about everywhere, but the very whisper of the word GEO sent them scrambling into their little locked offices.

Fine, I thought, I’ll call Ford. So I did. I called the Ford dealer closest to me and asked for a salesman. I got one. Once the salesman was on the phone I said, “You have a small car called an Escort. Do you have any Escorts on your sales lot right now?” Yes, he said they had a gazillion Escorts. “If I come there right now, with cash, will you sell me one of your gazillion Escorts? And I warn you, don’t toy with me, you are my fourth dealer today, and I’m in no mood for BS.” He assured me he would be beside himself with delight to have the pleasure of selling me a Ford Escort in exchange for my cash money.

Half an hour later, I was driving around in a blue Ford Escort with a balding man in a red polyester leisure suit, who was busy regaling me with tales about what was wrong with each of his former three wives. Finally I stopped the car, looked him straight in the eye and said, “Stop it. I don’t care about your personal life or anything else about you. You are being very inappropriate. Please be quiet and only answer questions I ask you so that I can make this decision.”

We got back to his office. I decided to buy the blue Escort for $12,730. When we sat down to sign the papers, he said that he would have to go talk to his manager about the price. I said, “I’m offering you the sticker price. Don’t tell me that nonsense about your manager. Everyone knows you don’t really talk to your manager, just sell me the car for God’s sake.”

He went to talk to his manager anyway, grinning all the way. Then I saw them both grinning and looking at me. Ha, ha. They knocked $500 off the sticker price (unasked) and threw in an FM radio and cassette player. I said thanks, gimme the car.

About a month later, Ford Motor Company sent me a lovely brochure along with a questionnaire asking me how my recent buying experience went, and how could it be improved? So I told them. In detail. Why on earth, I wrote, do all car dealerships hire these creepy losers to stalk the lots when over 50% of the people buying cars are women? Are you trying to make us hate you? Because if so, it’s working.

I only recount this story to show that 1) Ford doesn’t want to have a better idea, it wants to sell trucks to guys, 2) an affordable car that got over 50 mpg was available over 15 tears ago, so what is the big issue with building one now? and 3) the women of America should forcibly take over Ford Motor Company right now and start running it intelligently while there is still time.

I’m thinking, if their stock falls much farther, taking them over shouldn’t even be all that expensive. It could easily be a bloodless coup, especially if we all wear heels when we show up.

Now, who wants to talk color palettes?

Are Synthetic Fuels Viable Alternatives to Ethanol?

The cost of oil has only recently dropped after more than a year of bank-breaking prices. While it has decreased from $140 to $65 per barrel, the future of oil prices remains obscured. To alleviate the pressure of finding solutions to our oil dependency without funding tyrants overseas or drilling holes in our eastern seaboard, Dr. Jay Keasling at the University of California, Berkeley, is pioneering a new way. Keasling, a synthetic biologist, and others at the Joint BioEnergy Institute (JBEI) are trying to artificially generate some of the compounds found in fuels such as gasoline.

Keasling has already accomplished this type of thing once with an antimalarial drug. Keasling was able to engineer bacteria and yeast to produce artemisinin. This is an expensive compound normally from plants. With Keasling’s system, however, plants are no longer needed to help manufacture artemisinin, but rather, huge batches can be generated with the bacteria and yeast. Artemisinin is essentially a hydrocarbon that the bacteria and yeast are genetically altered to make. In the October 24 issue of Science, Keasling says, “Artemisinin is a hydrocarbon…we’re just trying to engineer organisms to produce different hydrocarbons.” These other hydrocarbons are what he hopes can be used to artificially reproduce gasoline, jet fuel and plastics.

While Keasling believes this technology “is just…the beginning”, it is still too expensive to beat the price of conventional oil, even with prices as high as $140 per barrel. Even so, several companies both small and large are looking into the possibilities. In fact, some companies have decided to begin manufacturing fuel, regardless of its more expensive cost. The hope is that although the price is high now, advances in the technology will deflate the cost to be competitive with conventional products. Optimistically, it could also become possible for conventional oil to become an option, rather than an imperative.

Ethanol’s Shortcomings

One of the first goals Keasling hopes to accomplish is to shift the public’s desire for ethanol. The Renewable Fuels Association reported in 2007 that 50 billion liters of ethanol was produced. Unfortunately, debate surrounds ethanol since it is derived from corn in the U.S. Opponents of this method contend that using corn for fuel increases the cost of food. Furthermore, they believe the progress made by using the environmentally friendly fuel is absorbed by the conventional gas and oil needed to grow, harvest and convert the corn. Ethanol is also problematic since it cannot be distributed through the pipeline infrastructure already in place for oil. For all of these reasons, Keasling and others like him believe the true answer lies in artificially generated fuel.

While Keasling believes the technique of using bacteria and yeast to produce fuel is promising, it is still far from perfect or practical on a large scale. When his group was working to make artemisinin, it required 50 changes to the bacterial DNA. By adding certain genes, Keasling was able to turn the bacteria into millions of little manufacturing plants. Initially, however, the bacteria were only able to produce small amounts of the antimalarial compound. Through optimization of his method, Keasling was able to increase the yield of artemisinin by a million fold. While this brought the production price down to competitive levels with the conventionally produced compound, accomplishing the same task with fuel will prove more of a challenge. While they were able to reduce the cost of artemisinin to $1 per gram, this same price for artificially generated oil would equal $125 per liter. Keasling has already started to increase the bacteria-produced hydrocarbon yield. At a meeting in September, he reported a method that has amplified the yield 77-fold.

Other Efforts

Keasling isn’t the only one getting involved. In San Francisco, bacteria are being manipulated to produce renewable petroleum and biodiesel. Gregory Pal, the senior director for corporate development at LS9, stated in Science that they have already made several hydrocarbons that could be used for fuel and that they are currently scaling up production. Although a pilot fermentation experiment is currently being conducted, if all goes as planned, a small fuel production plant could be operational by 2010.

While these two groups and others are manipulating different metabolic pathways of the bacteria to produce the desired results, the consequences will be the same, and relatively soon. By using an organism as easy to grow as the bacterium they have chosen and manipulating it, it is possible these scientists have opened a new door for energy solutions. With continued advancements, families in the future may be saved from facing the personal economic stresses they have struggled with for more than a year in areas such as gas for the family vehicle, food and air travel.

Reference

Service, Robert. Science, 322 (5901): 522-523 (24 October 2008). Eyeing Oil, Synthetic Biologists Mine Microbes for Black Gold.