Conflict has engulfed the MENAAP region, exacting a serious human and economic toll and heightening geopolitical uncertainty. The closure of the Strait of Hormuz and damage to energy infrastructure have pushed up oil prices, increased financial volatility, and weakened the 2026 growth outlook. A prolonged conflict would intensify displacement, fiscal pressures, and losses in trade, tourism, and remittances, hitting a region already burdened by sluggish productivity, weak labor markets, and limited private sector dynamism. These shocks expose deeper structural weaknesses: limited diversification, weak productivity, and fragile labor markets. Against this backdrop, the report turns to industrial policy as a tool for long-term growth. Widely used across the region, often through sovereign wealth funds and state-owned enterprises, industrial policies can address market failures and foster growth—but only when aligned with country capabilities, implemented with accountability, and backed by capable institutions.
