Brookings: Experts - Hafez Ghanem

Can Egypt’s Transition and Economy Be Saved?

Hafez Ghanem — Wed, 01 May 2013 12:19:00 -0400

The Egyptian economy is unlikely to collapse suddenly. However, in the absence of a serious macroeconomic stabilization program it will continue to deteriorate gradually, with low growth and increasing unemployment and inflation. Even corruption appears to be on the rise. The Egyptian people are also feeling the pinch in terms of higher prices and shortages of some imported necessities. If this continues, the transition to democracy could be jeopardized. On the other hand, politics in Egypt is so polarized that it is difficult to see how serious economic reforms could be implemented without first reaching compromises on some thorny political issues. Perhaps the recent agreement on a coalition government in Italy could serve as a model for Egyptian politicians.

There are signs that the democratic transition is in danger. Loud grumblings can be heard all over Egypt. There is even nostalgia for autocratic rule and some are calling for a return of the military. According to the Pew Center’s “Global Attitudes Project” more than 70 percent of Egyptians are unhappy with the way the economy is moving, 33 percent feel that a strong leader is needed to solve the country’s problems, and 49 percent believe that a strong economy is more important than a good democracy. The number of people disillusioned with the revolution is likely to increase as the economy weakens further.

In addition to freedom and dignity, the young people who started the Egyptian revolution on January 25, 2011 were demanding better living conditions and greater social justice. Their demands are far from being met as economic growth has declined and unemployment has risen (figure 1). Industrial growth which was at a healthy 5-7 percent a year before the revolution has fallen to about 1 percent, and the official unemployment rate rose from 9 to 12.5 percent. About 95 percent of the unemployed are youth with at least a secondary education. Nearly three-quarters of those who are lucky enough to find jobs end up working in the informal sector where wages range between $2.60-3.70 per day.

The Egyptian government’s fiscal policy has not been conducive to growth and employment generation. Figure 1 shows that the government deficit rose from about 8 percent of GDP in 2010 to nearly 11 percent in 2011. It could exceed 12 percent of GDP in 2013. The increasing deficits have been financed almost entirely domestically, and the public domestic debt rose from some 60 percent of GDP in 2010 to 70 percent in 2012. At some point in 2012, the Egyptian government was paying 16 percent interest on its short-term domestic debt. That is, the government has been sucking liquidity from the domestic financial system and crowding out the private sector; discouraging investment, growth and employment creation.

Surprisingly, corruption seems to have increased after the revolution. Ending corruption has been a key demand of the revolutionaries, and the country witnessed more than 6,000 corruption investigations and several high profile incriminations since February 2011. Investigations and police action send a political signal, but they do not constitute an effective anti-corruption program. In 2010, Egypt was ranked 98th on Transparency International’s Corruption Perception Index. Its ranking deteriorated to 112th in 2011 and 118th in 2012. Data for 2011 from the Worldwide Governance Indicators (WGI) also shows deterioration in corruption control. The WGI 2012 data is not yet available.

Falling tourism and foreign direct investment, together with increasing capital flight, led to a decline in foreign reserves from more than $35 billion in 2010 (covering 7 months of imports) to less than $15 billion in 2012, which covers less than three months of imports (figure 2). As a result foreign exchange has become scarce and the Egyptian pound started depreciating rapidly. It has depreciated against the US dollar by about 15 percent in the past three months. Moreover, a black market in foreign exchange has emerged. In addition, Egypt’s credit rating suffered a setback as Moody’s downgraded Egypt’s debt to “caa”, which means it is of poor standing and entails very high risk.

Imports are becoming more expensive and increasingly difficult to procure. Egypt is highly dependent on the imports of many necessities, including food and fuel. The Egyptian pound’s depreciation means that domestic prices for imports are rising; which affects millions of poor and middle class families. Scarcities of some imported goods (e.g. diesel fuel) are appearing as foreign exchange is increasingly difficult to obtain, and foreign banks are wary of providing credit to Egyptian importers. Some businessmen complain that it now takes more than six weeks to open a letter of credit, while it only took three days before the revolution.

It’s clear that Egypt is facing an economic crisis, and needs to implement credible reforms to stabilize the economy, control corruption, and lay the foundations for inclusive growth. Such reforms would normally include a reduction in the fiscal deficit to bring the domestic debt under control and a further depreciation of the Egyptian pound to encourage exports and tourism. The Egyptian government is negotiating with the IMF to obtain support for such a stabilization program. IMF support is desirable because it would open the doors for increased assistance from other bilateral and multilateral donors, and thus help ease the pain of stabilization.

But macroeconomic stabilization requires implementing unpopular measures such as reducing subsidies and raising taxes. The government, which is already facing stiff opposition and unrest, is, understandably, reluctant to adopt such measures. It has so far been able to postpone difficult decisions by getting exceptional financial support from regional allies. However, this has not been enough to turn the economy around.

The Egyptian government appears to be in a no-win situation. Implementing reforms could lead to greater unrest and political instability and jeopardize the democratization process. On the other hand, doing nothing will imply a deepening economic crisis and more hardship. This will also lead to unrest and instability, and ultimately jeopardize the transition process.

How then can Egypt’s transition be saved? A national consensus needs to be reached and the reforms have to be broadly owned and accepted. The opposition (which itself is divided between liberals, Nasserists and Salafists) will have to buy into the economic reform program. This is unlikely to occur unless a consensus is also reached on outstanding political issues (e.g. election law, revision of the constitution, reform of the judiciary, etc.). Both government and opposition will have to make compromises. But do they have the required level of political maturity to do that?

Authors

Hafez Ghanem

Image Source: © Asmaa Waguih / Reuters

Arab Spring Countries: Beyond Political Upheaval and toward Inclusive Growth

Thu, 31 Jan 2013 14:00:00 -0500

Event Information

January 31, 2013
2:00 PM - 3:30 PM EST

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue, N.W.
Washington, DC 20036

Two years after the revolutions that changed the political landscape of the Arab world, countries in the region are still struggling to address the core political and socioeconomic issues behind the protests. Political unrest and an unfavorable international environment have led to economic stagnation and heightened short-term macro-economic risks. Little progress has been made toward achieving the revolutions’ objectives of better lives and social justice. In a series of papers, scholars from Brookings and the Japan International Cooperation Agency (JICA) address how these countries can move beyond the political upheaval and support economic and social development.

On January 31, Global Economy and Development at Brookings hosted a discussion on how post-Arab Spring countries can move toward more inclusive growth. Brookings Senior Fellow Hafez Ghanem presented the overall recommendations from the papers and a group of experts discussed their thoughts on the papers and the broader issues. Panelists included: Inger Andersen, vice president of the Middle East and North Africa region at the World Bank; Andrew Baukol, deputy assistant secretary for Middle East and Africa at the U.S. Treasury; Heidi Crebo-Rediker, chief economist at the U.S. State Department; and Akihiko Koenuma, director-general of the Middle East and Europe Department at JICA. Vice President Kemal Derviş, director of Global Economy and Development, moderated the discussion.

After the Spring: Inclusive Growth in the Arab World

Hafez Ghanem — Wed, 30 Jan 2013 15:47:00 -0500

The revolutions that swept through the Arab world two years ago have socio-economic as well as political roots. The end of decades-long autocratic rule in Egypt and Tunisia represented the population’s ardent wish for political, social and economic change, and many were hopeful it meant progress was imminent. However, almost two years later, we continue to see Egypt plagued by violent protests, with critics arguing President Morsi is a new form of authoritarianism that disregards the judiciary and continues Mubarak’s reign of social injustice. In Tunisia, unemployment has risen from 14 to 19 percent and few real advances in economic and social development have been seen in other Middle East and North African countries racked by unrest. The populations that fed the Arab Spring movement feel betrayed and argue the purpose behind their protests have yet to be realized. As a consequence Arab governments and their development partners need to adjust their economic policies and assistance programs to respond to the demands for inclusive growth and social justice. Failure to do so could jeopardize the transition to democracy and lead to continued unrest and instability.

This is the overarching message of five papers on the Arab economies that have been recently published as part of a collaboration between Brookings and the Japan International Cooperation Agency (JICA). After making the case for a change toward more inclusive growth patterns, these country-focused papers cover three important dimensions of inclusive development in Egypt, Tunisia, Yemen and Iraq: (1) economic opportunities for youth, (2) education, and (3) voice and good governance.

Later this week, we will be discussing the themes and policy recommendations of these papers as well as ongoing issues in Egypt and other Arab Spring countries at an upcoming public event at Brookings. Below is a summary of the major themes of the papers.

Economic Opportunities for Youth

Young men and women led the revolutions of the Arab Spring. Nearly 55 percent of the Arab population is under the age of 25 and two-thirds are under the age of 30. Hence, creating opportunities for the millions of young people who are entering the job market every year is a major economic challenge for post-revolution governments. Youth unemployment in the Arab world is among the highest in the world, and joblessness is a particularly serious problem for educated youth and for young women (female labor force participation rates are only around 25 percent). In Egypt youth with secondary education and above represent about 95 percent of the unemployed, and in Tunisia the unemployment rate for university graduates is nearly 30 percent.

The small enterprise sector is a major employer in most Arab countries. It is growing at about 5 percent a year in Tunisia and thus providing the majority of new jobs. In Egypt about 72 percent of new entrants to the labor market end up working in small and micro enterprises. Therefore, it seems that encouraging youth entrepreneurship and the development of small businesses, so that they can create better paying jobs, have to be key objectives of any inclusive growth strategy in the Arab world. It is the subject of two papers that use Egypt and Tunisia as case studies.

The Egypt case study uses enterprise surveys from 2003, 2008, 2010 and 2011 to describe the Egyptian micro and small enterprise (MSE) sector and identify key obstacles to its development. It argues that the objective of government policy and donor interventions should not be simply to support the growth of the existing small enterprise sector that is characterized by low productivity (average wage for males is $3.70 a day and for females $2.60 a day) and low market access (99 percent of MSEs service local markets with no access to national or international markets). The aim should be to raise the sector’s productivity and its linkages to domestic and international markets, and to support its modernization so that it can become more dynamic, providing better living standards for young entrepreneurs and decent jobs for new entrants to the labor market. Programs to support MSEs have focused on providing financing. However, the key constraints facing the sector are probably access to technology and markets. The paper concludes by proposing a two-pronged strategy for the expansion and modernization of the MSE sector: a macroeconomic and regulatory environment that is conducive to the development of MSEs, and specific interventions to support the sector and encourage youth entrepreneurship.

The Tunisia case study analyses trends in youth employment and unemployment in private sector development, with special attention to education and female employment. It uses data from a 2007 enterprise survey to study the evolution of the MSE sector and argues that Tunisian MSEs are suffering from similar problems faced by the private sector generally. The business environment has been plagued with corruption and many other imperfections and uncertainties, and was not conducive for substantial investment and enterprise creation. Small entrepreneurs, who are not well-connected to the old political elite, have been particularly hurt by the lack of clear rules and by rampant corruption. The paper argues for reforms of labor laws and of the financial sector in order to encourage MSEs to become formal and gain better access to credit. It also points out huge inequalities between different regions in Tunisia (the poverty rate in the center west region is three times that in Tunis) and to a strong gender bias in the labor market (female labor market participation rate is 27 percent compared to 70 percent for males), and argues for special policies and programs to deal with them.

Education

Youth unemployment and lack of entrepreneurship can be partly explained by weak education systems. Arab countries’ public spending on education is relatively high (measured as a percentage of GDP), but the results are unsatisfactory. Arab education systems perform poorly on three important dimensions: equity, relevance and quality of learning. In some countries, such as Yemen and Morocco, equity of access remains a particular issue for girls. In all countries there is a mismatch between what is taught in schools and universities, and the demands of the labor market. Moreover, these inadequate curricula are not effectively transmitted to students. The quality of education is poor. All of the 13 Arab countries that participated in the Trends in International Mathematics and Science Studies (TIMSS) scored below the scale average of 500 in 2007.

One of the research papers looks at the issue of the quality of education, using Yemen as an example. It uses micro-data from TIMSS and from surveys conducted in underserved rural areas, as well as macro-level policy information from the “System Assessment for Better Education Results” (SABER) database. The analysis indicates that the availability of teachers and resources at schools, the monitoring and supervision of schools, and parental involvement in schooling are important factors for better learning outcomes and avoiding trade-offs between expansion of enrollment and quality of learning. The paper suggests three types of reforms that can be carried out in the short run. First, it is necessary to systematically monitor teachers’ actual deployment and attendance in order to link the information with salary management and incentives. Second, there is a need to refine and scale up the existing implementation and monitoring mechanism for school grants to reward schools and communities that improve access for disadvantaged students and girls, and enhance the quality of learning. Third, there is a need to enhance transparency and accountability of school resources and results by disseminating a simple database that would include trends of basic indicators to monitor and compare progress at the school, district and governorate level.

Voice, Participation and Good Governance

Implementing inclusive growth policies requires changes in the way governments operate. Arab countries lag behind the rest of the world on nearly all governance indicators, particularly those related to voice and participation. Together with a lack of transparency and low accountability, this has led to greater corruption and the emergence of the soft state. A sense of alienation and exclusion, especially among youth, contributed to popular dissatisfaction that remains unsolved after the revolution. That is why one of the research papers focuses on ways to improve participation in policymaking and economic planning, and to provide a guiding vision to recover from the crisis after the revolution, using Egypt as an example. The paper reviews the experiences of Japan, Malaysia and Indonesia, which indicate the importance of achieving a national consensus on an economic vision for the future, and the policies and programs needed to achieve it. Successful East Asian countries have put in place consultative processes (including different government departments, the private sector and civil society) to agree on national development plans and monitor their execution. The situation has been very different in Egypt where an institutional coordination mechanism among the various stakeholders to build a national vision was missing. The research paper adapts the experiences of East Asia to Egypt’s situation, and presents a proposal for introducing the concept of “inclusive planning” in economic planning and policymaking.

The last research paper addresses the question of how donors can remain engaged and support governments implementing democratic reforms. Countries in transition often go through periods of serious unrest, upheaval and weak governance. Yemen and Iraq are examples. Usually donor agencies hesitate to increase their support as they face two key problems in post-conflict or post-revolution situations: (1) high security risk for transparent implementation; and (2) poor government effectiveness, marred by corruption, ethnic tensions and economic malaise. But this is precisely the time when donor engagement is needed most. By using the experience of JICA projects in Iraq, the paper argues that donors should not withdraw their support in difficult post-conflict situations. It proposes three mechanisms – information; social recognition; and mediation – to solve such difficulties in a post-conflict society. The empirical analysis shows that more intensive feedback especially leads to a positive impact even in war-torn Iraq.

Authors

Hafez Ghanem

Image Source: © Amr Dalsh / Reuters

The Role of Micro and Small Enterprises in Egypt's Economic Transition

Hafez Ghanem — Tue, 29 Jan 2013 14:36:00 -0500

The success of Egypt’s transition to democracy will depend crucially on the ability of the democratically elected leadership to develop and implement a new economic vision that responds to the aspirations of the millions of youth who have so far been marginalized. Future growth needs to be much more inclusive than in the past. Therefore, encouraging youth entrepreneurship and the development of small businesses have to be central to any new growth strategy.

This paper focuses on the economic aspects of Egypt’s transition. It argues that while past economic policies (especially starting in 2004) achieved high growth and poverty reduction, they failed to be inclusive as they left millions of Egyptians trapped in lower middle-class status living on $2 to $4 a day and provided few opportunities for youth who felt economically and socially excluded. There was an increasing sense that the system was "unfair," which explains the strong demands for social justice. Inclusive growth could be achieved by shifting away from a system of crony capitalism that favored large and established enterprises to one that focuses on developing small businesses and on creating more opportunities for young men and women. The paper uses enterprise surveys from 2003, 2008, 2010 and 2011 to describe the Egyptian micro and small enterprise (MSE) sector and identify key obstacles to its development. It concludes by proposing a two-pronged strategy for the expansion and modernization of the MSE sector: a macroeconomic and regulatory environment that is conducive to the development of MSEs, and specific interventions to support the sector and encourage young entrepreneurs.

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Authors

Hafez Ghanem

Image Source: © Amr Dalsh / Reuters

Two Years After the Egyptian Revolution: A Vision for Inclusive Growth Is Needed

Hafez Ghanem — Fri, 25 Jan 2013 11:41:00 -0500

Two years after the revolution that swept away a 60-year-old autocratic system, Egypt needs a new economic vision based on more inclusive growth and greater social justice. Economic policies before the revolution achieved high growth, but they failed to be inclusive as they left about 45 million Egyptians trapped in lower middle class status living on $2-$4 a day and provided few opportunities for youth who felt economically and socially excluded. Inclusiveness would require a more participatory decision-making process, as well as a shift away from a system of crony capitalism to one that focuses on developing small businesses and on creating more opportunities for young men and women. The government is currently under pressure to adopt measures to stabilize the economy. Articulating a vision for future growth with social justice, and taking steps to implement it, could make such measures more acceptable to the majority of Egyptians.

Taking difficult stabilization measures is necessary because Egypt is facing a macroeconomic crisis. The fiscal deficit is about 12 percent of GDP, the public debt has ballooned to 80 percent of GDP, international reserves barely cover three months of imports and the Egyptian pound is under increasing pressure. As a result investment and growth are down, unemployment is up, prices of basic necessities are rising, and fuel shortages and electricity blackouts are common occurrences. Egyptians are worse off than they were two years ago. They have been patient, and have accepted temporary economic hardship as the price of freedom and democracy. But how long will this patience last?

Dealing with the current crisis will most likely require additional sacrifices. Government will probably have to reduce subsidies and the Egyptian pound may continue to depreciate. Prices of many necessities would rise further, hurting the poor and the middle class. In order to stabilize the economy, and reach an agreement with the International Monetary Fund, the government announced in December 2012 a series of measures to reduce subsidies and increase taxes, but it rescinded them the very next day out of fear of popular unrest at a time of heightened tensions surrounding the adoption of a new constitution. However, difficult macroeconomic decisions cannot be postponed indefinitely, and the government has launched a “societal dialogue” to explain the proposed measures and gain support for them.

Launching a broad dialogue on economic issues is a positive development, but this dialogue needs to be well-organized and institutionalized. Before the revolution Egypt lagged behind the rest of the world on nearly all governance indicators, particularly those related to voice and participation. Therefore, there is a need to develop new mechanisms to broaden participation in economic decision-making. Experiences of Japan, Malaysia and Indonesia indicate the importance of achieving a national consensus on an economic vision for the future, and the policies and programs needed to achieve it. Successful East Asian countries have put in place consultative processes (including different government departments, the private sector and civil society) to agree on national development plans and monitor their execution. A recent Brookings research paper by Kei Sakamoto adapts the experiences of East Asia to Egypt’s situation, and presents a proposal for introducing the concept of “inclusive planning” in Egypt.

A dialogue that focuses exclusively on macro-stabilization may not attract the kind of support that the government needs. Stabilization should be viewed as a step towards the resumption of growth. Better living standards, human dignity and social justice were key demands of the revolution. Government needs to launch a discussion of how those demands would be met, and why stabilization is necessary to meeting them. A strategy to achieve inclusive growth and social justice could be one of the outcomes of such a dialogue.

Programs to encourage youth entrepreneurship and develop small businesses should be part of such an inclusive growth strategy. It has become increasingly hard for educated young people to find jobs, and youth with secondary education or above represent about 95 percent of the unemployed in Egypt. The problem is particularly acute for young women who are 3.8 times more likely to be unemployed than young men. Of the young men and women who do find jobs, only 28 percent find formal sector jobs—18 percent in the public sector and 10 percent in the formal private sector. The vast majority, 72 percent, end up working in the informal micro and small enterprise sector, often as unpaid family workers. For those who are paid, many have no labor contract, no job security or social benefits. Therefore, it seems quite clear that policies and programs that aim at expanding and modernizing small business, and encouraging educated youth to start their own enterprises would have a significant impact on employment, and would contribute to growth and social justice. In a recent Brookings research paper I present some proposals on how to develop small businesses and youth entrepreneurship in Egypt.

For two years now economic issues have been put on the back burner as Egyptians focused on politics and questions of religion and national identity. As a result, the economic situation has seriously deteriorated and aspirations for better living standards and greater equity are far from being met. This could ultimately jeopardize the democratic transition. Government’s decision to launch a broad economic dialogue is positive. This dialogue needs to be institutionalized and extended beyond stabilization to include strategies to achieve inclusive growth.

Authors

Hafez Ghanem

Image Source: © Mohamed Abd El Ghany / Reuters

Unrest in Egypt: Political Challenges to Economic Stabilization

Hafez Ghanem — Mon, 26 Nov 2012 14:58:00 -0500

On November 20, the International Monetary Fund announced that its mission to Egypt has reached a staff level agreement with the Egyptian government on a macro-stabilization program. That was important news for President Morsi’s administration. Approval of this agreement by the IMF’s board would give Egypt access to about $14.5 billion of much needed foreign financing, including $4.8 billion from the IMF. However, the current political turmoil—following the November 22nd constitutional decree that gave the president powers over the judiciary—will probably make implementation of the agreed program more challenging.

Restoring economic stability is an urgent priority. The Egyptian economy has been in the doldrums since the revolution of January 25, 2011. Ad hoc financial support from Saudi Arabia, Qatar, Turkey, and other regional partners and financial institutions has so far helped avert a serious financial crisis. That is why a strong macro-stabilization program, with the IMF’s stamp of approval to enhance credibility, is needed as an important first step toward restoring confidence in the Egyptian economy and putting in place policies to restore growth and improve social equity.

According to a press statement by the IMF’s mission chief to Egypt, fiscal reforms (that include reforming fuel subsidies) are a key pillar under the program agreed with the Egyptian government. The objective is to reduce the government deficit from about 11 to 8.5 percent of GDP. He also stressed the importance of monetary and exchange rate policies to enhance competitiveness, to stimulate trade and to attract capital inflows. This means that the Egyptian authorities are expected to take politically difficult decisions on fuel subsidies, and probably on the exchange rate as well.

The Egyptian government spends about 6-7 percent of GDP on fuel subsidies. Therefore, any deficit reduction program will have to include actions to cut and eventually eliminate them. Further arguments for cutting fuel subsidies include the fact that a large portion of those subsidies go to the better off (according to the World Bank, 57 percent of the subsidy goes to the two top percentiles of the income distribution), as well as the fact that they encourage over-consumption of energy (it is estimated that the energy intensity of the Egyptian economy is 2.5-3.0 times higher than that of OECD countries).

On the other hand, Egypt’s poor and middle class also benefit from fuel subsidies, and cutting them will have social and political repercussions. For example, Jordan has recently tried reducing subsidies and the result has been widespread unrest. When President Sadat tried reducing subsidies in Egypt in 1977 mass protests forced him to reverse the decision.

Experience from other developing countries that have succeeded in lowering fuel subsidies (e.g. Ghana and Indonesia) indicate that there are two keys components to success: compensatory policies to help the vulnerable and public information campaigns to try and build consensus on the reforms. The recent bout of political unrest complicates Egyptian government efforts to launch an effective national dialogue on fuel subsidies.

The IMF’s 2010 Article IV consultation report with Egypt states that the local currency “appears somewhat overvalued.” Since then the nominal exchange rate has depreciated by about 7 percent, which is not enough to cover the inflation differential between Egypt and its trading partners. That is, the real exchange rate has continued to appreciate. If the real exchange rate was “somewhat overvalued” in 2010 when the economy was growing fast and had large external reserves, it is probably significantly overvalued in 2012 when growth has stalled and foreign reserves have dwindled to cover less than three months of imports.

A depreciation of the Egyptian pound may very well be required to enhance competitiveness, attract foreign investment, and reduce the current account deficit. But such depreciation would also increase the domestic prices of imports and reduce the purchasing power of the poor and the middle class. This is particularly true because Egyptians are highly dependent on imported food. Hence, implementing exchange rate realignment in the current political climate may be quite challenging.

In his press statement on November 20, the IMF mission chief stated that “broad based domestic and international support will be crucial for the successful implementation of the planned policies.” The international community has repeatedly expressed its desire to support Egypt’s economic program, and the IMF has acted quickly to mobilize this support. Therefore, it seems that the real challenge today is to build broad-based domestic support and a national consensus on the necessary economic reforms, a task made more difficult by the recent unrest.

Authors

Hafez Ghanem

Image Source: © Mohamed Abd El Ghany / Reuters

After the Spring: Achieving Inclusive Growth in the Arab World

Mon, 15 Oct 2012 12:30:00 -0400

Event Information

October 15, 2012
12:30 PM - 4:30 PM EDT

Tower Hall
Roppongi Hills Mori Tower 49F
Tokyo

What is the state of the Arab world nearly two years after the start of the revolutions? What role can donors play to support a successful transition to democracy? These were two of the questions debated at an October 15 workshop organized jointly by the Agence Francaise de Développement (AFD), the Japan International Development Agency (JICA) and the Brookings Institution. The workshop took place in Tokyo after the Annual Meetings of the International Monetary Fund and the World Bank, and was attended by a large number of senior representatives from Arab countries and the international community.

Mr. Ashraf El-Araby, the Egyptian minister of planning and international cooperation, summarized many of the many conclusions of the seminar in his remarks. He stated that improving the Arab world’s social situation is a major concern and that more projects that create jobs, particularly for young people, were needed. He noted that donors can also help in setting up social safety nets and social insurance schemes and stressed the importance of small and medium enterprises for employment and shared growth. Also, he explained how his government is working to improve the overall business environment of Egypt, paying particular attention to regulations affecting small businesses while also acknowledging that the Arab Spring countries are facing huge challenges on many fronts and need to work with development partners to enhance their institutional capacities.

Event Materials

1115 joint research interim outputs

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Panelists

Tunisia After the Spring: University of Tunis El-Manar-Brookings Joint Workshop

Thu, 20 Sep 2012 08:30:00 -0400

Event Information

September 20, 2012
8:30 AM - 6:30 PM EDT

Tunis, Tunisia

Tunisians are concerned about political and economic management during the post-revolution transition. They agree that the transition process is going to be long and filled with uncertainty and that even regression is a possibility. In addition, the economic situation has deteriorated since January 2011 and may deteriorate even further. Despite these challenges, they remain optimistic that over time they will build a well-functioning and prosperous democracy. These are the main messages that came out of a one-day workshop organized jointly by the University of Tunis El-Manar and the Brookings Institution on September 20 in Tunis, which brought together a large number of academics, students, civil society activists and donor organization representatives. Civil unrest and attacks on the United States embassy and the American School in Tunis in response to an anti-Islam movie, which occurred less than a week before the workshop, underlined some of the risks facing the transition in Tunisia and heightened the sense of uncertainty. Arguments about the government’s handling of the situation demonstrated the deep cleavage between secularists and Islamists in Tunisia.

The year 2011 was difficult for the Tunisian economy. Uncertainty associated with the revolution as well as the recession in Europe, Tunisia’s main trading and investment partner, led to a sharp drop in economic activity. Real GDP, which was growing at a healthy 5 percent before 2010, fell by nearly 2 percent in 2011, while unemployment jumped from 13 to 19 percent with unemployment rates for educated youth higher than 30 percent. Exports, tourism revenues and foreign direct investment fell sharply, leading to a widening of the current account deficit from 1 to 3.5 percent of GDP (the deficit is estimated at 7 percent of GDP in 2012). Thus, foreign reserves fell from the equivalent of six to nearly three months of imports. Widening fiscal and external deficits are coupled with a weak banking sector portfolio, which may justify some concerns about Tunisia’s macroeconomic stability.

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Event Materials

Campaign 2012: War on Terrorism

Mon, 10 Sep 2012 15:30:00 -0400

Event Information

September 10, 2012
3:30 PM - 5:00 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue, N.W.
Washington, DC 20036

This event was broadcast live on C-SPAN3 and online at C-SPAN.org.

With both presidential campaigns focused almost exclusively on the economy and in the absence of a major attack on the U.S. homeland in recent years, national security has taken a back seat in this year’s presidential campaign. However, the administration and Congress remain sharply at odds over controversial national security policies such as the closure of the Guantanamo Bay detention facility. What kinds of counterterrorism policies will effectively secure the safety of the United States and the world?

On September 10th, the Campaign 2012 project at Brookings held a discussion on terrorism, the ninth in a series of forums that identify and address the 12 most critical issues facing the next president. White House Reporter Josh Gerstein of POLITICO moderated a panel discussion with Brookings experts Benjamin Wittes, Stephen Grand and Hafez Ghanem, who presented recommendations to the next president.

Participants can follow the conversation on Twitter using hashtag #BITerrorism.

Download papers from the event:

Keeping on Offense: The Next President Should Keep After al Qaeda but Mend Relations with Congress on Terrorism, by Daniel L. Byman and Benjamin Wittes
An Opening for a New Narrative in U.S.-Muslim World Relations, by Stephen R. Grand
What Focusing on Drones and Detention Misses, by Kevin Watkins and Rebecca Winthrop

Campaign 2012: Twelve Independent Ideas for Improving American Public Policy is an indispensable guide to the key questions facing White House hopefuls in 2012.

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Campaign 2012: War on Terrorism

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Uncorrected Transcript (.pdf)

Event Materials

Egypt and the IMF: Turning a New Page?

Hafez Ghanem — Fri, 24 Aug 2012 16:00:00 -0400

On August 22, Christine Lagarde, the IMF’s managing director, was in Cairo where she met with President Mohamed Morsi and other Egyptian government officials. At the end of her meetings, she announced that the new government has officially requested an IMF program and that the Fund will respond as quickly as possible to this request. A Fund mission will visit Cairo in September to hold discussions, and the parties plan to reach agreement in November.

Ms. Lagarde’s visit and announcement has triggered a wide-ranging debate in the Egyptian media and especially the blogosphere. This debate in itself is a positive outcome of the trip. Since the January 25 revolution Egyptians have been focusing almost exclusively on political matters while their economy continued to rapidly deteriorate. Recent power and fuel shortages are just one symptom of this deterioration and impending macroeconomic crisis. It is high time for Egyptians to give the economy the attention it deserves, and agreeing on a program with the IMF to achieve macro-stability and set the foundations for renewed growth will be a step in the right direction. However, this new program should reflect the changes occurring in Egypt and herald the start of a new era of partnership with the IMF.

The IMF is seen by many Egyptians as a supporter of the Mubarak regime which was responsible for policies and programs that hurt the poor and increased social inequities. Even the military who ruled Egypt during the initial phase of the transition felt that borrowing from the IMF would be too risky and refused to sign off on an agreement reached by the Ministry of Finance in mid-2011. It is not surprising, then, that many Cairo commentators are arguing against a new Fund-supported program. While the reasons given for opposing a Fund program vary widely, ranging from loss of national sovereignty to Islam’s prohibition on interest-bearing debt, two arguments warrant particular attention. First, some observers believe that in the absence of a parliament (since it was dissolved by the Constitutional Court) no forum exists to discuss a new program and agree to it. An economic program designed behind closed doors by the government and the Fund will lack the legitimacy and popular support needed for its success. Second, it is argued that the program under discussion will be no different from previous ones, and that in any case it was prepared by the transitional team of former Prime Minister Genzouri. Thus, the economic changes promised by President Morsi, and particularly those relating to social justice, will be overlooked.

Those concerns should not be ignored in the rush to agree on a much needed stabilization program. It is important for the newly elected Egyptian government to demonstrate a clear break from past undemocratic practices in the management of the economy and for the IMF to show that it is a true partner supporting the transition to democracy in Egypt as it did in other countries.

Transparency and participation are key factors for ensuring broad popular support for the economic reforms. IMF missions regularly meet with representatives of civil society, including the political opposition. However, in Egypt’s circumstances that outreach may not be enough. In the absence of a parliament, the government (perhaps supported by the IMF) should consider putting in place a broad participatory process that includes civil society, political parties and other thought leaders. Officials could explain the country’s economic situation and the proposed reforms and seek citizens’ views and suggestions. Participatory processes are time consuming and can sometimes be messy. Moreover, transparency and participation are not part of Egypt’s civil service culture. Hence, designing and implementing such a process will require a great deal of effort and political will. However, the benefits in terms of getting people to own the reforms can be enormous.

In particular, an open participatory process would allow for a real national debate on the thorny issue of energy subsidies, and perhaps a consensus can be reached on how to deal with it. Energy subsidies in Egypt represent about 6 percent of GDP. They are higher than the health and education budgets combined and are clearly fiscally unsustainable. They are also economically damaging as they encourage energy overconsumption. The energy and carbon intensity of the Egyptian economy is estimated to be two and a half to three times higher than the OECD average. Moreover, energy subsidies are regressive: The two top quintiles of the population capture 57 percent of the subsidy. On the other hand, the fact that 43 percent of the subsidy goes to the lowest three quintiles implies that a large number of poor people also benefit from it. Even when we talk about the top two quintiles of the income distribution in Egypt, we must realize that about one-fourth of the people in this income group live on less than $4 a day, and three-fourths live on less than $6 a day. Moreover, a sudden and sharp increase in energy prices, resulting from the removal of subsidies, could have broader effects on economic activity and employment. This possibility may explain why previous governments avoided dealing with the problem. However, given its popular mandate and electoral legitimacy, Mr. Morsi’s government is probably in a better position to deal with an issue that is of vital importance for Egypt’s short term macro-economic stability and long-run sustainable growth and equity. Other countries in a similar situation have been able to eliminate or drastically reduce energy subsidies. The case of Indonesia, which put in place a temporary cash transfer for 64 million people considered poor, could be a useful example for Egyptian authorities to study.

Fighting corruption is a key popular demand and could be a central part of a new economic program that would clearly demark it from past programs. Egypt scores poorly on all corruption indicators (it scores in the bottom half of the worldwide governance indicators on corruption control). A program to fight corruption would normally include measures to enhance government’s transparency, to empower civil society to monitor government and hold it accountable, to reform and professionalize the civil service, and to improve public financial management as well as public procurement procedures. Experience from other countries show that there is always a risk that fighting corruption can be used as a weapon against political opponents and business leaders who are not close to the government in power. This is a risk that needs to be avoided.

The Egyptian government’s decision to officially request an IMF loan is a positive sign that it intends to start dealing with the country’s serious economic problems. Opponents of an IMF program raise many concerns, some of which are legitimate and need to be addressed. In particular, it is important that the design of the program be done in a transparent and participatory manner and that it starts tackling the long-neglected problems of energy subsidies and corruption control.

Authors

Hafez Ghanem

Two Economic Priorities for Post-Election Egypt: Macro-stabilization and Corruption Control

Hafez Ghanem — Mon, 25 Jun 2012 11:13:00 -0400

Mohamed Morsi of the Muslim Brotherhood (MB) has been elected president of Egypt after a long period of uncertainty as the announcement of official results kept being postponed. The chaotic post-election scene was a reflection of the absence of credible democratic institutions as well as the absence of a culture of democracy in a country that has been for all practical purposes under military rule for 60 years. Mr. Morsi’s election is just the beginning of what appears to be shaping up as a long and difficult transition that may be occasionally marred by political instability. Egypt is sharply divided between Islamists and secularists, it has no constitution, and no one knows exactly what Mr. Morsi’s prerogatives will be. The country has a very strong military establishment that wields enormous powers and its first ever freely elected parliament was recently disbanded by the constitutional court. Under such circumstances, democracy and stability can only be achieved gradually as the institutions that are crucial for democracy (the constitution, the judiciary, free press, civil society, political parties, etc.) are strengthened and in some cases built from scratch.

In the meantime, it is dangerous to continue neglecting the economy. Over the last year and a half, economic growth has virtually come to a halt (real GDP growth this year is projected at 1.5 percent). Official unemployment has increased to 12.4 percent from 9 percent before the revolution. The problem is especially acute for young people whose unemployment rate is estimated at more than 25 percent. About 20 percent of Egyptians live below the poverty line. The country’s budget deficit is now about 10 percent of GDP with the public debt rising to nearly 80 percent of GDP. As a result, the interest rate on government Treasury bills has increased to 16 percent and the rating agencies have downgraded Egypt’s debt. On the external side, capital flight and a sharp decline in tourism revenue have led to a fall in the country’s foreign reserves from about $43 billion (8 months of imports) before the revolution to some $15 billion (3 months of imports) today.

In the short run, Egypt needs to develop and implement a credible program to stabilize the economy while taking serious steps to improve economic governance and control corruption. Such a stabilization program will certainly require making some hard choices that would affect public spending, subsidies, taxes and the exchange rate. However, it is necessary to avoid a meltdown (as public debt and foreign reserves have reached worrisome levels) and to set the stage for a resumption of growth. At the same time action can be taken to control corruption. Controlling corruption is necessary to achieve shared growth and social justice. It can be done at a very low financial cost, and it will bring huge political benefits.

Three successive post-revolution finance ministers felt the need to reach an agreement with the International Monetary Fund on a macro-stabilization program, but their efforts were thwarted by politics. During the spring of 2011, the finance minister at the time negotiated and agreed on a program with the IMF but was stopped from signing it by the political leadership and a few weeks later left the cabinet. Opponents of the program argued that they did not want to increase Egypt's foreign debt especially since an IMF loan does not finance productive projects. The cost of this decision was that other donors stayed away, capital flight continued, the government increased its domestic borrowing – which resulted in raising interest rates and crowding out private actors –, and the country's foreign reserves dwindled. The next finance minister also realized the importance of an IMF-sanctioned stabilization program and worked on convincing other political leaders of the need for it. However, by that time Egypt’s economic situation had greatly deteriorated and reaching agreement had become more difficult. The current finance minister built on his predecessors’ work and obtained leadership support for an IMF program, but it was too late. The IMF, predictably, preferred to wait until after the presidential elections.

Controlling corruption is a key demand of the Egyptian revolution. According to the Worldwide Governance Indicators (WGI), in 2009 Egypt was in the bottom half of all countries surveyed in terms of corruption control. It ranked at the 41st percentile, doing worse than South Africa which ranks at the 60th percentile, Brazil at the 56th percentile or India at the 47th percentile. After the revolution, several political and business leaders from the Mubarak regime were jailed on corruption charges, but this does not constitute a comprehensive anti-corruption program. Of course wrongdoers should be punished and no one should be above the law. However, this is only part of the solution. A comprehensive program would include measures to enhance the transparency of government decision-making, as well as measures to empower citizens and to give them more voice to hold the government accountable for its actions. Initiatives to enhance transparency could include freedom of information laws, public disclosure and public debate requirements for all laws before their passage, as well as improved financial management and procurement practices. Reforming and professionalizing the civil service would also be an important step toward controlling corruption.

Under the Mubarak regime Egypt rated particularly poorly in the area of voice and accountability, which is necessary for controlling corruption. According to WGI, in 2009, Egypt ranked at the 15th percentile, doing much worse than South Africa at the 66th percentile, Brazil at the 62nd percentile or India at the 60th percentile. This rating will probably improve now as a result of the revolution and the ensuing political opening. Nevertheless, it is starting from a very low base and Egypt can draw some lessons from other countries’ experience in this area. The Indonesian experience is particularly pertinent. After the fall of President Suharto, the new Indonesian rulers introduced changes to make government more accountable and to involve citizens in economic policymaking and fighting corruption. Key reforms included: (1) creating the Partnership for Governance Reform between civil society and government to lead the fight against corruption; (2) passing new laws allowing the police to investigate corruption and the establishment of a Corruption Eradication Commission; (3) passing a decentralization law to bring public services closer to citizens; (4) supporting the growth of civil society organizations and a vibrant press that provide a voice for citizens and hold rulers accountable; and (5) creating an independent Socioeconomic Monitoring and Research Unit to provide objective analysis of social and economic conditions in the country. In addition to beginning a process of corruption control, these reforms proved to be highly popular and appreciated by Indonesian citizens.

It is understandable that Egypt’s new leaders will continue placing a high priority on the task of institution building. However, experience from other developing countries like Brazil and Indonesia indicate that building institutions is a long-term endeavor and that transitions to democracy take many years to succeed. It is important that economic issues are not neglected during this transition. Over the next few months, Egypt’s new leadership will need to tackle macro-stabilization and fighting corruption in order to avoid an economic crisis and lay the ground for a resumption of growth that will be more equitable than in the past.

Authors

Hafez Ghanem

Image Source: Suhaib Salem / Reuters

Finding a Path to Inclusive Growth in Arab Economies

Kemal Derviş, Hafez Ghanem, Daniel Kaufmann and Homi Kharas — Thu, 22 Mar 2012 12:21:00 -0400

“Bread, liberty, social justice” was the rallying cry of revolutionaries in Tahrir Square and elsewhere in the Arab world last year. Democracy and freedom were certainly key demands for young Arabs protesting in the streets, but they were not the only demands. They also cried for “bread” and “social justice”.

There are high expectations for the new governments of the Arab Spring countries to improve the quality of life for their citizens. Yet, debates in the newly-elected parliaments and legislatures barely touch on economic issues. Instead, these bodies are consumed with the new politics.

In Tunisia, the transition government has taken some steps to stabilize the economy and reached agreements with the International Monetary Fund and the World Bank to fund part of the transition costs. However, longer-term institutional and structural reforms are yet to be addressed. Egypt’s successive transition governments have so far not taken the necessary decisions to stop the hemorrhaging of international reserves or to restore economic growth. Egypt has lost two-thirds of its foreign reserves since January 2011, its budget deficit is at 10 percent of GDP, and the government is borrowing heavily from domestic banks, crowding out private businesses.

New governments in Arab Spring economies, starting with the government that will take power after the upcoming presidential elections in Egypt, may end up having electoral legitimacy yet they will inherit huge economic and social challenges, including high unemployment, poor and deteriorating public services, unsustainable budget deficits, low reserves and negative or low growth. These governments will have very little room for maneuver.

Unless the political transitions quickly create economic change, based on a national dialogue that generates a sustainable path to inclusive growth, these new governments will be caught up in a cycle of short-term economic crisis management that will satisfy no one. That would not be unusual. In our new book, After the Spring: Economic Transitions in the Arab World, we found that almost half of the 103 countries that experienced rapid democratization since 1960 had a worse economic situation five years after the beginning of their transition.

The Economic Research Forum, the largest network of economists working on the Middle East, is organizing its annual conference in Cairo next week. This is an excellent opportunity for continuing the conversation in the region about how to achieve a transition to economic prosperity and social justice, and to debate whether some of the successful experiences in other countries transitioning to democracy can be adapted to the Arab context.

Although Arab economies are quite different from each other, the type of transition they are facing has similarities. We suggest that a program for inclusive growth in the post-revolution Arab countries needs to focus on opportunities for young people, reforming public institutions, promoting a competitive private sector, and integrating with the rest of the world.

Nearly two-thirds of the Arab population is less than 30 years old and youth unemployment is 22 percent. The situation is even worse for young women whose unemployment rate is 28 percent. In the short term, governments can best hope to promote jobs by encouraging small businesses, by providing large-scale semi-skilled training like the successful Chile Joven program, and by job training and matching programs like the voucher program of the National Organization of Women in Jordan that has helped young women get jobs. In the medium term, education systems need reform to provide young men and women with the skills needed to compete in a globalized economy rather than the credentials needed to get a public sector job in an economy of privilege.

Arab public sectors also require a modernization of state institutions to deliver better services without unsustainable deficits and untargeted subsidies, cronyism and many public employment sinecures. Arab states have been captured by elites and have mainly benefitted a few well-connected private citizens. This must change and be replaced by a new culture of responsiveness to all citizens, freedom of information, audits to combat corruption, and reforms focusing on service delivery.

Despite notable exceptions, much of the private sector in many Arab economies is inefficient, operating in the shadow of a large public enterprise sector and over-regulated as well as rent seeking. The private sector is also synonymous with corruption in the minds of many citizens in the Arab world. An undeveloped financial sector that funnels savings to the government and large firms does not help. The result is that most Arab economies have failed to industrialize. Arab economies need a dynamic private sector where small enterprises can compete on an equal footing and where young men and women can find opportunities as entrepreneurs as well as employees. Hence, reforms need to include support to small and medium enterprises; credit for small businesses (and especially women); upholding property rights and the rule of law; developing infrastructure; simplifying regulatory frameworks; and reforming tax systems to encourage investment and job creation.

Arab economies also will need new regional and global strategies that can help integrate their economies with the rest of the world so that they can join the ranks of fast-growing emerging economies like Brazil, China, India and Turkey. There is clearly a need to promote non-oil exports and to make better use of the instruments offered by international and regional financial institutions to smooth the costs of transition over time. But there are limits to what external donors can do. Most can only provide loans, not grants, and these are of limited use to countries that are already highly indebted. Market access to the West exists, but firms cannot take advantage of it because of the lack of infrastructure, limited regional connectivity and border barriers. Before they can help, Western donors must see their trust re-established in the region. After all, they were large supporters of the previous regimes. So they would be well-advised to be selective and humble, and provide advice when it is asked for but leave space for an Arab dialogue that should determine each country’s future path.

The young men and women who led the Arab Spring have shown tremendous energy, resourcefulness and organizational abilities. They must now find common ground on an economic platform that is financially realistic and sustainable but delivers results in terms of bread, liberty and social justice. The dialogue among Arab economists next week is precisely what is needed to ensure that these countries join the scores of other countries that have prospered economically after the democratic revolutions of the last 50 years.