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"The Economic Consequences of Recent Political Developments in the Mediterranean Region"
Events in the Southern Mediterranean and the Middle East have taken most outside observers by surprise: no one was expecting the decades-old regimes of the region to collapse, in the same way that those in Eastern Europe did after the fall of the Berlin Wall. In the Middle East, the street protests and revolutions were not only the expression of a suppressed voice, but also the result of economic inequality that had been fomenting for many years.
In the case of Egypt, low average wages, which had not kept pace with GDP growth in the past decade, and shortages of basic commodities, such as food and energy were key factors in the eruption of violence in 2008. And yet, as recently as last year, the IMF, in concluding its Article IV Consultations with Egypt, wrote that the economy had weathered the financial crisis comparatively well and that, with further reform, the government would be able to navigate the country through the recovery period. From the policy perspective of maintaining macroeconomic stability, the horizon seemed unproblematic and a return to business as usual (a focus on price stability, liberalised capital accounts, open trade regimes, and so on) would ensure social justice and prosperity for all.
Now, and especially after the recent events in Egypt and other countries in the region, we know better. UNCTAD recently produced a Policy Brief that summarized our analysis of the underlying economic causes of political change in the Arab region and the future orientation of economic policy which will be required for successful development, social justice and civil and political stability. You have the Policy Brief in the room today, and it is available on our website. In a nutshell, we argue that the underlying model of development in the region produced jobless growth that was less than equitable, and therefore unsustainable. UNCTAD´s message to the region, and to other developing countries, is that government policy must now put growth and distribution at the heart of economic policy. It must pay special attention to how growth will benefit the population; how many jobs could be created, what kind of jobs, and how it will impact on social goals and policy. In short, it is imperative that the Region moves to a more sustainable and inclusive model of economic development.
It is still too early to tell how the situation in Libya will end, or how the contagion effect of the revolutions in Tunisia and Egypt will impact other countries in the region. However, one thing is clear: the underlying economic argument remains the same for all countries, and reform must focus on inclusion, which will lead to sustainability. I will elaborate on these concepts in my remarks today.
My presentation is structured in 3 parts. Firstly I will briefly discuss the economic causes of the political changes in the region, illustrating the characteristics of the previous economic model; secondly I will outline the current economic consequences of political change, that is, the challenges and opportunities arising from the various revolutions and reforms; and thirdly, I will conclude with some long term considerations for economic development and the role of organizations like the UN and EU, and how, even, we can learn from the experience of Eastern Europe 20 years ago.
Causes of political change in the Arab Region
UNCTAD´s analysis of the recent political changes in the Arab region concludes that economic factors played a critical role in the demise of former regimes. Despite the region having enjoyed significant GDP growth in the past decade the benefits of this growth were not shared equitably among the population. During the last 10 years, GDP in Egypt, for example, grew by 120% but average per capita income increased at a slower rate of 75%.
The available data on the evolution of the share of wages in national income suggests that it has been, with some exceptions, on a declining trend over the past three decades in both developed and developing countries. For the group of three North African non-oil producing countries for which data is available (Egypt, Tunisia and Morocco), despite sustained GDP growth and labour productivity gains, the wage share has not kept up. Rather, the share of wages for this group of countries hovered around 33 per cent of national income since the mid-1990s, with some short-lived improvement until 2005, after which it has declined. In Egypt, the wage share has fallen recently below a quarter of national income.
What has taken place recently in Tunisia, Egypt and other countries in the region is thus partly symptomatic of a wider malaise in economic policy that has inspired a rapidly evolving social and political transformation agenda. Even though the acceleration of GDP growth in the 2000s has been accompanied by higher labour productivity and a declining incidence of vulnerable employment and of the working poor, labour market characteristics in North Africa have remained largely unchanged since the 1990s. Participation rates increased marginally, and in the late 2000s were at about 44 per cent of the labour force. Registered unemployment has shrunken from around 15 per cent in the late 1990s, although at between 10-13 per cent in North African countries during the past decade, it remains high relative to other developing regions.
In Egypt, almost half the population, 40 million people, are under the age of 30, a good number of whom are educated but without work. The gap between expectations and opportunities, and between the perceived corruption of the leadership and the poverty of a large part of the general population, created a highly combustible situation in many countries in the region.
The economic model that had been pursued by most North African countries in the past 20-30 years introduced wide-ranging reforms with the intention of empowering the private sector. However, little attention was given to the role of the State in structural transformation and investment, nor indeed its role in providing social safety nets, and legal and regulatory frameworks. As a result the government´s role has been marginalized, and its attempts to address adequate employment creation and poverty reduction has failed. The interaction of these factors created jobless growth and an extreme form of misallocation of resources in the form of rampant corruption (as can bee seen from the media reports coming from Tunisia and Egypt).
Let me give you an example. In the 1990s, following the policy advice of the International Financial Institutions, that was taken up by many countries at this time, Egypt embarked on a rapid program of privatization of its State owned firms and industries. Unfortunately, many buyers turned out to be speculators, interested mainly in making a quick profit rather than in productive investment and the upgrading of privatized industries, which resulted in the de-industrialization of some sectors. A lack of sufficient regulatory, legal and institutional capacity prevented the privatization policy from achieving the expected development benefits. Another story can be told about the Cairo stock exchange which lacked a supporting legal framework, proper regulatory supervision and oversight. As a result, the function of the stock exchange as a channel for savings to productive investment has been overtaken by speculation for short term, quick profit.
These examples illustrate the absence of effective Government, in the broad sense of institutions, legal frameworks, judicial and legislative functions. As a whole, these institutions and laws can target social justice and poverty reduction, guide the private sector to achieve developmental objectives, and offer protection to both producers and consumers. Moreover, effective government intervention can actually ensure the efficient and fair operations of markets and reduce the impact of market failure, rather than the reverse as was feared.
Current economic consequences of political change
In the immediate aftermath of the recent political changes in the Mediterranean region, several economic indicators declined. Trade has obviously been affected by disruptions to production, but also, for example in the case of Libya, by damage to infrastructure. FDI to the region has slowed down, as investors become wary about political instability and the short-term economic prospects, preferring a game of wait-and-see. The Cairo stock exchange, for example, lost a third of its value in the first few days of the revolution, and the Egyptian Central Bank reserves have fallen by more than 12% in the past three months. GDP growth for Egypt for 2010-11 was projected at 5% and this has now been revised down to about 1.5%, which translates as a loss of about US$ 8 billion to the economy. However, Egypt may not fair as badly as other countries, due to its more diversified economy, which can potentially withstand this transitory disruption.
Although these stylized facts tell of a shock to the economies of the region, the losses may be recovered quickly if economic policy reform can be implemented strategically and without delay. The potential for investment in the region is very great, for example, and countries must ensure that the legal and policy framework can further improve business perceptions of the region and attract productive investment, both domestic and foreign. Equally, trade and macroeconomic policies can support the region´s export industries and reduce poverty. Finally, industrial policies - which I will say more about - can help countries to diversify into new sectors, and create jobs.
At this moment, the region is in a transition phase and it will take time to fully establish a successful post-revolution economy. The process of transition towards an elected parliament and president, and the subsequent drafting of constitutions in countries in the region could take more than a year, based on current election schedules. In the interim, caretaker governments have responsibility for the day-to-day management of economic affairs, and so countries will need the support of the international community, including international organizations like the UN. The pace and scope of reform, for sure, will accelerate as the dust settles. For this, the UN and other international and regional bodies, as well as bilateral partners should be ready to help. Here, lessons should be learnt from Eastern Europe where some countries suffered an irrevocable loss of output in the months and years after the initial change in government. The EU was able to support and eventually incorporate some countries, but no such similar framework exists for North Africa.
Long-term economic outlook, resulting from political change
In the long term, all indicators suggest that countries in the region can establish sustainable and inclusive growth and become further integrated into regional networks and markets to the North, the East and the South. But they will need support from organizations like UNCTAD to develop successful policies for investment, competition, trade, as well as, perhaps, assistance in their negotiations in the areas of trade, debt, finance and other macroeconomic policies.
As I mentioned earlier, careful thought about industrial policy will also be necessary. The previous economic policy advice asked governments to set monetary policy at the right temperature and the economy would cook nicely. But this is perhaps a triumph of hope over experience, and experience shows us that successful job creating economies that can sustain equitable growth require a more active State to help develop productive capacities, which includes such items as research and development, infrastructure, and the implementation of selective trade and macroeconomic policies.
Moreover, for a virtuous circle of investment, productivity growth, income growth and employment creation to occur, policies need to be oriented towards ensuring that the income gains from productivity growth are distributed appropriately between labour and capital. This means that over time there should not be a decline in the share of wages in national income; for developing countries, this includes incomes from self-employment in agriculture and non-agricultural informal activities. However, this is not enough: an improving share of wages in national income does not in itself imply improved income distribution. Such a goal, which is also aimed at social justice, calls for complementary policies to avoid declines in relative and absolute real incomes of the vast majority of the population, such as tax policies and institutional changes.
In terms of where investment could be targeted in the future, the Mediterranean region has a great potential in new sectors, such as renewable energy technologies. With further cooperation with its neighbours, such as Europe to the North, the Region could better coordinate and integrate energy policy and markets, for example. Again, organizations such as UNCTAD and other members of the UN CEB Cluster have to be ready to help countries in the region orient their reforms toward economically sustainable and socially inclusive outcomes, through policy support, and technical assistance and capacity building, among others.
Whatever the economic losses from the political crisis, the future gains will be greater as a result of a change in policy direction and the model of growth. As the global economic crisis in 2009 showed, the economic situation ex-ante was not sustainable, and policymakers around the globe have acknowledged that a rebalancing needs to take place between the market and the role of the State. Given the potential of the Region there is every reason to be hopeful.