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ARAB COUNTRIES IN TRANSITION IN
THE AFTERMATH OF THE GREAT
RECESSION: THE POLICY OPTIONS
Yiannis Kitromilides
SOME DEFINITIONS
A. ARAB COUNTRIES IN TRANSITION (ACT)
Egypt, Jordan, Libya, Morocco, Tunisia
and Yemen
B. TRANSITION ECONOMICS
Eastern Europe: Transition from a Centrally
Planned Economy to
a Market Economy.
Arab transition: from Dictatorship to ‘Democracy’.
C. POST-2008
The Great Recession exacerbated but was not the pivotal cause of
Arab Spring popular uprisings in 2011.
Both events were
unexpected: Hindsight-foresight.
My main concern is not so much with the impact of the Great
Recession on the ACT economies but on the policy narrative.
Has the policy ‘narrative’ changed?
A. ACT
• Part of larger group-MENA group of Arab
countries.
• Tunisia, Egypt, Libya and Yemen- ‘Arab Spring’
counties. Regime change, overthrown long
standing dictators (Ben Ali, Mubarak, Qaddafi,
Saleh)
• Jordan, Morocco are monarchies which weathered
the storm but recognised the need for change.
• There is international support for the 6 transition
countries by institutions like the IMF and G8
countries through the ‘Deauville Partnership’.
B. TRANSITION
• Political Transition
• Professor Robert Owen of Harvard describes a Revolutionary
Calendar:
• New Constitution- Constituent Assembly- Elections- Draft
Constitution- Religious Parties win the elections.
• Economic Transition
International institutions offer support to fill financing gaps/ job
creation.
Economic transformation requires policy initiatives but help comes
with strings attached:
The only game in town in terms of policy is neoliberal orthodoxy.
Political and Economic TRANSITION – problematic.
C. Post 2008-POLICY OPTIONS
• The recent global economic crisis has re-ignited the old
debate, which had remained dormant for a number of years,
regarding the workings of capitalism.
• In the aftermath of the global economic crisis of 2007 and
the Great Recession of 2008 although the dissenting voices
in economics have become more vocal and their criticisms
of mainstream economic theory and policy more pertinent
and credible, they do not appear to have had a significant
impact on either the academic or the policymaking
orthodoxy.
• The commitment to the basic axioms of neoliberal
economics by academics and policymakers remains largely
unshaken.
The Established Narrative.
• There are, in the IMF/World Bank language,
significant ‘challenges’ facing Arab Countries
in Transition. Some of these ‘challenges’ are
long standing while others are newly created.
• Three challenges:
• UNEMPLOYMENT,
• INDEBTEDNESS,
• STRUCTURAL REFORMS
The Challenges
• Most of these problems can be mutually reinforcing.
Therefore they need to be addressed simultaneously.
• Unsatisfactory growth performance lies at the heart of
most of these problems and therefore failure to tackle
them simultaneously can lead to a vicious circle of
economic stagnation.
• For example high public indebtedness may affect
growth which may impact negatively on unemployment
which may create more indebtedness, lower growth,
higher unemployment and so on. Breaking this vicious
circle is not always an easy undertaking.
UNEMPLOYMENT
• Prior to 2011 unemployment in the ACTs was high,
running at more than double the average rate of
EMDCs.
• Youth unemployment was among the highest in the
world.
• Demographics and projections for growth since 2011
present a bleak prospect. According to the IMF:
• “Demographic pressures suggest that, under current
baseline projections for GDP growth through 2018 of
around4¼ percent in the oil-importing ACTs,
unemployment is expected to continue rising.”
INDEBTEDNESS
• The debt problem in ACT has two components:
an internal deficit in the government’s fiscal
balance and high total indebtedness and an
external deficit in the country’s current account.
• Many ACT countries carried substantial public
debt and some were running high fiscal deficits
prior to 2011 partly the impact of the Great
Recession
• Post 2011- rising popular expectations combined
with a downturn exacerbated the indebtedness
challenge.
STRUCTURAL REFORMS
• ‘Structural reform’ is a generic term referring to the
need for change in long standing activities, behaviour,
practices and institutional arrangements that the
IMF/World Bank do not like because it is considered
that they are inimical to growth and development.
• Of all the ‘challenges’ this appears to be the one least
amenable to short-term solutions.
• Yet some of these reforms, if quickly implemented,
could produce the economic transformation that can
make the task of managing the other ‘challenges’ of job
creation and reduction in indebtedness considerably
easier.
Cont.
• The list of structural reforms deemed
necessary differs from country to country but
they typically fall into three categories:
• Reforms in the public sector, reforms in the
private sector and reforms in social security
and welfare systems.
• The government is directly or indirectly
involved in all three categories of the agenda
for ‘structural reforms’.
Public Sector
• Reforms in the public sector usually involve demands
for a reduction in its scope and size.
• These demands typically require a reduction in the
number of public employees, changes in the
composition of public expenditure away from
generalized subsidies, modernization of the banking
and financial system and privatization of public
enterprises which may include public banks.
• There is also a general expectation that the government
will promote a business friendly environment by
cutting down on excessive regulations and bureaucratic
red-tape in the public sector.
Private Sector
• The reforms in the private sector are mainly
concentrated in efforts to reform the labour
market.
• It involves the creation through legal and
institutional reforms of what has come to be
known as a ‘flexible labour market’. The familiar
slogan supporting these reforms is: ‘if it is easy to
fire workers it is easy to hire’.
• This means that under these reforms what workers
regard as their hard earned rights come under
threat.
Welfare Reforms
• The final category of expected structural reforms is closely
connected with the implementation of reforms in the previous two
sectors.
• Vulnerable groups in society must be protected from the adverse
effects of structural reforms in the public sector and labour market.
• The gradual reduction of generalized subsidies or the introduction
of a more ‘flexible’ labour market will result in severe hardship for
‘vulnerable’ groups and therefore an alternative ‘targeted’ system of
support must be put in place. On the other hand the level of such
support must not be too high as to discourage ‘job search’ among
unemployed workers.
• In all three areas of required ‘structural reforms’ of paramount
importance is, of course, the implementation of measures to root
out ‘corrupt’ practices and ‘rent seeking’ behaviour in the
economy and politics.
THE POLICY OPTIONS
• These are the USUAL SUSPECTS of
‘challenges’.
• There is an equally familiar set of policy
prescriptions for tackling these challenges
according to the established narrative.
• The range of policy options is limited and ought
to be adopted voluntarily .
• The details are, of course, country specific but the
generalities are very familiar. A typical ‘menu’ of
policies usually includes the following
prescriptions/conditions.
Cont.
• An austerity program aimed at rapid budget deficit reduction should
be implemented immediately.
• Fiscal consolidation should preferably be achieved primarily
through public expenditure cuts than tax hikes.
• The revenue raising capacity of the government should be enhanced
through reforms to the tax collection systems.
• Loss making public enterprises should be privatized.
• Priority should be given to structural reforms in the labour market
and the civil service.
• The system of welfare support should be reformed and ‘targeted’
safety nets should be implemented replacing generalized subsidies.
• As far as possible a ‘business friendly’ environment should be
promoted and cumbersome and bureaucratic regulations
discouraging business and FDI should be removed.
Cont.
• Such a program is expected to produce short-run
macroeconomic stability which should, in turn, lay the
foundations for rapid economic growth.
• Although not a sufficient condition, acceleration of
economic growth is a necessary condition for job creation
and reduction in unemployment.
• The underlying fundamental assumption in this policy
agenda is that the primary engine that can bring about such
an acceleration of economic growth in both advanced and
emerging economies is the private sector of the economy
• It is the most efficient, dynamic, innovative and progressive
sector capable of creating the conditions for acceleration of
growth and lifting the country out of economic stagnation.
Cont.
• There is, it is claimed, a considerable body of theoretical
arguments and empirical evidence that support this vision:
that the best way forward is through the creation of the
appropriate environment for private sector-led growth.
• The political transition from dictatorship to democracy
offers Arab Spring countries a unique opportunity to set in
motion a process of not only political and social but also
economic transformation.
• What is meant by ‘economic transformation’ is perfectly
clear: the creation of the conditions for private-sector led
growth. The policy prescriptions outlined above follow
from this vision.
An evaluation of the narrative
• This strategy- and the assumptions on which the strategy is
based on- is considered to be appropriate not only for ACTs
but for virtually all emerging and developing economies.
• What are the theoretical underpinnings of the strategy and
is the claim of universal applicability justified?
• The dominant paradigm in the discipline of economics is
generally known as ‘neoclassical’ or ‘neoliberal’ economics.
• Its central message is that a free market economy is superior
to any other known economic system and the best route to
growth and prosperity for a country is the adoption of
economic policies that promote and support free markets.
Cont.
• Several tenets of neoliberalism have attained the
status of ‘axioms’ or self-evident truths. To be
fair, orthodox economists never described these
tenets as ‘axioms’.
• Many so called ‘heterodox’ economists who had
consistently questioned these basic tenets have
been brushed aside and totally ignored by both the
academic and the policymaking establishments.
These tenets therefore appear to be self-evident
truths whose validity nobody questions.
Neoliberal axioms
The commitment to the basic axioms of neoliberal economics by academics
and policymakers remains largely unshaken. The following are some of
the major ‘axioms’ of neoliberal economic theory:
• The public sector of an economy is inherently inefficient and the private
sector inherently more efficient. This leads to the policy prescription of
public sector cuts and privatisation of public enterprises. Nationalisation
of any part of the economy is off the policy agenda.
• Markets, including financial markets, are efficient and can be relied upon
to produce an optimal allocation of resources. This leads to the policy
demand for ‘de-regulation’.
• High rates of income taxation and welfare payments create disincentive
effects to work effort. Therefore both should be reduced. Alternatively
demands for higher taxes for the rich should be rejected.
• Rising inequalities in income and wealth do not matter.
There is a ‘trickle-down’ effect whereby although the rich
are getting richer the poor are better off in absolute terms.
• By the same token reducing the power of trade unions by
creating ‘flexible’ labour markets is also in the long term
interest of the workers.
• At the macroeconomic level deficit spending by
governments will ‘crowd-out’ private investment spending.
Fiscal policy, therefore, advocated by Keynesians to deal
with recessions is ineffective.
• By the same token policies of fiscal austerity to deal with
public indebtedness can be expansionary.
• The recent global economic crisis has
rekindled the debate on the shortcomings of
orthodox economics.
• The criticism and the questioning of the basic
tenets of orthodox economic theory and the
policy prescriptions that follow from these
theories re-emerged and it has taken a variety
of forms. Many critics argue that:
• The superior efficiency of the private sector
can no longer be taken for granted after the
sub-prime fiasco in the USA.
• The massive mismanagement of risk by the
financial sector clearly demonstrates the folly
of the strategy of de-regulation of the financial
services sector and that ‘light-touch’ regulation
can no longer be regarded as a credible and
reliable policy tool.
• This on-going debate is significant, not because it
will soon produce a definite resolution of all the
theoretical and empirical disagreements in
economics but because it raises doubts and
uncertainties about the ‘status’ of these basic
tenets of neoliberal economics. Axioms that are
questionable cannot remain axioms or selfevident truths forever.
• The IMF/World Bank policy narrative can be seen
in this light. It is a narrative which is based on
some questionable axioms
Is there an alternative?
• Although fundamentally the IMF/World Bank policy
narrative remains firmly based on the neoliberal paradigm
there have recently been some shifts and changes in
emphasis in certain aspects of the IMF position which are
very significant and noteworthy.
• Mr. Masood Ahmet, Director of the Middle East and Central
Asia Department of the IMF has recently declared that
• “with the benefit of hindsight, it has become clear that in
past years we paid insufficient attention to growing
socioeconomic imbalances and unequal access to economic
opportunity…The Arab transitions have thus prompted us to
step back and rethink our approach to economic policy
recommendations for the countries undergoing transition”
• This rethinking is taking place also in the IMF’s economic research
department.
• First, Olivier Blanchard, the IMF’s chief economist, has recently
acknowledged that mistakes were made in the design of the
Greek austerity program: the fiscal multipliers were much more
powerful than expected.
• Second, a succession of very important IMF staff papers deal with
issue of inequality in a novel way claiming that the effects of
redistribution policies are on the whole pro-growth. Moreover in
embracing the concept of ‘inclusive growth’ policymakers ought to
utilize the work done on developing the so called quality of growth
index: good quality growth is seen as growth that is “strong, stable,
sustainable, increases productivity and leads to socially desirable
outcomes, like improved standards of living, especially in the
reduction of poverty”.
• Third the IMF has now recognized that program
implementation in the ACTs is not a purely technocratic
exercise. More focus is necessary on the political economy
of reform. Political transition and economic transformation
need to reinforce one another.
• Finally an interesting development is the emergence of
massive Chinese lending to developing economies. Denied
enhanced role in the IMF China is proposing the creation of
the Asian Infrastructure Investment Bank. Could there be a
rival to the ‘Washington Consensus’- a ‘Beijing Consensus’,
whatever that might turn out to be?
• The neoliberal policy narrative might not be the only game
in town.