Transcript The Economics of The Arab Spring– the case of Egypt

The Economics of The Arab
Spring– the case of Egypt
The whole region now in turmoil – can
Tunisia and Egypt show the way?
Agenda
1. The present
2. The past
3. The revolutionary decision?
4. Transition
5. Economic reforms
6. Policy options
How can economists be useful?
• Economic gains in the past modest, future looks worrisome given
demographics and education
• Rising discontent related to perceptions of rising corruption, lack of
liberties, increased repression, unpopular external postures
• Economic gains not good enough to sustain an autocratic bargain
The revolts may be mainly driven by political factors, but old economic
ills remain and will continue to frustrate popular aspirations
There are risks of populism and bad closures if economics do not come
to the rescue
Can a more democratic order allow for more pro-active reforms and
more successful growth policies?
1. Understanding the present
• High unemployment, especially among the
youth (20 to 30%) – the youth bulge
• Rising inequality – the result of economic
liberalization
• Bad governance – low voice and
accountability
• High levels of corruption
A young population (Egypt)
.
Very high unemployment (Egypt)
Asaad 2007
Especially for women
Asaad 2007
The unemployed tend to have higher
education
• .
Deteriorated governance
• .
Corruption and democracy
Large increase in Inequality
Egypt 1998-2006
Nadia Belhaj, 2011
Inequality of opportunity
Source: Nadia Belhaj 2011
2. Understanding the past
• SLI of the 60-70 – Arab nationalists
revolutions led by armies and
appealing to MC -- Oil and rentier
states – the autocratic bargain
• By mid-1980s, decline of oil prices
and Forced economic liberalization
and reforms start, but unlike LAC
after debt crisis, political
liberalization is aborted
• 1980-2000, performance declined
but on average economic growth
not inferior to other regions
except for East Asia
Modest economic performance
Not the worst, but modest over the LT, worsened in 1980s (esp
for oil based), but improved in some cases in the 2000s
Rate of Growth of GDP per Capita in Constant Prices, 1960-2000
percent
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Middle East
OECD
East Asia
Latin
America
Source: World Development Indicators, 2003; Taiwan Statistical Databook, 2004
South Asia
Sub-Saharan
Africa
Oil explains a lot of the variability
..
Rising incomes translate into improved life chances…
Infant mortality rate, 1960-2002
Life expectancy, 1960-2002
90
Algeria
Bahrain
80
Djibouti
70
Egypt
Iraq
60
Jordan
50
Kuwait
40
Lebanon
30
Libya
Morocco
20
Oman
10
Qatar
Saudi Arabia
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
0
Note: Life expectancy at birth.
Source: World Development Indicators, 2004
Syria
Tunisia
200
180
160
140
120
100
80
60
40
20
0
Algeria
Egypt
Jordan
Kuwait
Morocco
Saudi
Arabia
Syria
Tunisia
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
years
UAE
Yemen
Note: Deaths per 1,000 live births.
Source: World Development Indicators, 2004.
.
Increased educational attainment…
Human capital accumulation, 1960-2000, resource
endowed economies
Human capital accumulation, 1960-2000, typicallyendowed economies
12
10
8
6
Egypt
7
Morocco
6
Tunisia
5
Algeria
Bangladesh
4
Iraq
Brazil
China
2
India
0
Pakistan
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
4
Note: Mean years of total education of the population age 15
and over.
Source: Bosworth and Collins (2003)
Years of education
Jordan
South Korea
Taiwan
Turkey
3
Indonesia
2
Nigeria
1
Venezuela
0
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Years of education
Note: Mean years of total education of the population age 15 and over.
Source: Iraq, Nigeria, and Venezuela: Nehru and Dhareshwar (1993); others:
Bosworth and Collins (2003)
But low quality: average math scores
of eighth grade students 2003
Singapore
605
Korea, Republic
589
of
2,3
Hong Kong SAR
586
Chinese Taipei 585
Japan
570
Belgium-Flemish
537
2
Netherlands
536
Estonia
531
Hungary
529
Malaysia
508
Latvia
508
Russian Federation
508
Slovak Republic
508
Australia
505
(United States)
504
4
Lithuania
502
Sweden
499
2
Scotland
498
(Israel)
496
New Zealand
494
Slovenia
493
Italy
484
Armenia
478
4
Serbia
477
Bulgaria
476
Romania
475
Norway
461
Moldova, Republic
460 of
Cyprus
459
(Macedonia, Republic
435
of)
Lebanon
433
Jordan
424
Iran, Islamic Republic
411
of
4
Indonesia
411
Tunisia
410
Egypt
406
Bahrain
401
Palestinian National
390
Author
Chile
387
(Morocco)
387
Philippines
378
Botswana
366
Saudi Arabia
332
Ghana
276
South Africa
264
8th Grade Science and Mathematics Scores
Deviation from Mean - 2003
150
100
50
Scienc
Mathem
0
-50
-100
Percentage of University Age Students Studying
Engineering and Science in Universities
0.25
0.20
0.15
0.10
0.05
0.00
Algeria
Egypt
Kuwait
Morocco
Saudi
Arabia
Syria
Tunisia
South
Korea
malaysia
thailand
Graduate Students Enrolled in American Universities, 2000
25000
20000
15000
10000
5000
0
Manufactured Exports
•
MENA nations as a group have
disappointing growth despite
proximity to EU – especially
surprising given that major low
resource/labor nations are on the
Mediterranean and have low
transportation costs
•
Competition by Eastern Europe
after 1990
•
Increasingly stringent global
conditions - rise of China and
India imply increased competitive
pressures
Why job growth slow after reforms?
• Structural factors
– LF rising fast – at over 3.5% even before accounting for any
increase in female LF participation
– Gains in education faster than gains in new skilled jobs
– MIC glass ceiling
• Political factors
– Economic reforms have not gone far enough – or were not
politically feasible as the old order favored the status quo
– Given perceived political risk and corruption, supply
response was weak
– Unequal model of growth: Poor left behind, lagging
regions (SidiBouzid, upper Egypt)
Political economy linkages
• Need to control street (esp after 911) led to
police state: liberties curtailed, institutions
corrupted (justice, market regulation, finance)
• Economic w/o political liberalization:
– Exclusion processes at center: initially, to prevent
constitution of autonomous power centers. Over
time, led to corruption among insiders, under
guise of liberal policies (privatization, preferential
access to capital, tax exemptions, state contracts,
monopoly rights)
– Inability to regulate grew over time – logical
destiny, hubris, moral decay? Regional contagion
at work?
Evolution of political systems
1960s – 70s
State led
industrialization
fails
1980s – 90s
Infitah – young
leaders
Towards political
and economic
liberalisation
2000s – 2011
* failed peace process
* Iranian revolution
* Iran-Iraq war
* Gulf war
* Islamic movement
*
9/11
Repressive
autocracies
with corrupt
liberalism
revolution
Issues
- evolution of the “political settlement”
- consequences of economic without political liberalization
- corruption in repressive autocracies
A low equilibrium
“Old” political settlement a low equilibrium : elite gets a large share of a small pie -- keeps the street
angry but under control, and scares external actors and middle class to support regime.
A weak state
• Slow growth, consumption expenditures (salaries for diploma holders, subsidies to middle class) led
to inability to pay decent wages and to spread of petty corruption in bureaucracy.
• Predatory and inefficient bureaucracy delivering poor quality social services
• Muselled civil society reducing the potential for activism and social accountability at all levels
A weak economy
• Restricted state budgets led to less investment in infrastructure, especially away from the centers of
power -> lagging regions
• Private activity repressed: large transaction costs push SMEs into informality; private sector starved
for finance
• Artificially created political/security instability leading to low and foot-lose investments and loss of
savings (capital flight:$5b in Egypt, $1b in Tunisia/yr over past decade).
• Misallocation of effort into rent seeking rather than productive activities
A vicious cycle of state decay and low growth …
Capital flight
timid
Capital
•Low econ.
Transformation
•Low investment
•Corrupt privatization
•monopolies
Corruption
Repressive
Autocracies
weak
State
rents
•Low growth
• Rising
middle class
•Unemployment
•
Demographics
•Youth
frustration
•Education
•Inequality
Poor quality
services
Subsidies
Migration
3. Looking more carefully at Egypt
Low investment
Means low growth
Source: World Bank 2009
Shrinking credit to the private sector
One of many constraints
Most loans go to large firms
• .
But they did not deliver the jobs!
Source: Asaad 2007
SMEs predominate
.
And mostly go to the rich
Egypt: subsidies+military= 2.5 times
health plus education
4. Rebelling
Questions:
• Unlike Latin America (1980s), Eastern Europe and
Africa (1990s), Asia, South Europe, direct causes not
clear
• Economic reforms? Why did the revolutions start at the
end of 2010 rather than in 1990s?
• Recent literature – 1980s-90s: the autocratic bargain;
oil rents; 2000s: how autocrats adapt, coopt middle
class; repress PI; external alliances
• Why experts did not see the revolution coming? Why
did it start in Tunisia and Egypt? Why is it spreading to
whole region?
Interpretation
• Predications of classical autocratic bargain (Ghandi and Prezeworski
2006; Desai,Olofsgard, and Yousef 2009) do not apply
• Political bargain since 1990s based on protecting liberals and West
from Political Islam -- it sustained autocracies until now
– Political Islam: radicalization, but also rapprochement with middle
class
– By 2000s, most Arab regimes openly repressive and increasingly
corrupt
• Revolution when MC equation tipped from support for autocrats
against PI insurgency, to new democratic settlement wt PI
• Mechanisms:
– economic liberalization under repression led to increased corruption
– over-repression in order to radicalize PI and scare liberals
– nature of support from donors biased policies (social, external
relations)
Implications of tipping point
perspective
• Concessions by the autocrats under pressure to
keep Liberals in coalition
– Includes: more space for media, “Islamization” of
social policies, rise of subsidies
• Tipping point: when changes take place on both
sides of the equation
– how attractive is it to remain in autocratic coalition
– how attractive it is to enter into political settlement
wt PI
• Imperfect information
• Regional contagion effect
regional variations..
• A kingdom factor? Jordan, Morocco, SA, Gulf
• Ethnicity: Lebanon, Syria, Iraq, Maghreb
• External relations + the Israel factor –
especially active in Mashrek
• The role of armies + security forces
• Level of oil and other rents/ migration
remittances
5. Transition issues
• Constitutional choices will determine shape of future
majorities
– Quick vs slow change to give time for parties to come to
life?
– alternatives voting systems (district based, proportional,
to bring in lots of new parties; which parties to legalize
• Economics
– Revolutions represent a macro shock – capital flight
accelerated, lower FDI, tourism, larger deficits – lead to ST
losses
– Economic choices: how much to expand, borrow, vs leaving
more choices for the future
Average growth performance during
typical transition (percent)
Freund and Mottaghi (2011) based on 32 transitions
6. The future: can political change lead
to better outcomes?
Q: can new settlement preserve some of the
achievements of the past (eg macro stability) and
provides for improvements?
• Security and stability based on legitimacy of ballot, much
better than repression from an economic perspective too
• Transparency, checks and balances, and social
accountability can create extra accountability mechanisms
• Is it possible to include the youth more centrally in the
economy as a source of entrepreneurship and skilled jobs?
Democracy not automatically better
for growth
Source: Besley, Timothy J. and Kudamatsu, Masayuki, Making Autocracy Work (June 2007). , Vol. , pp. -, 2007. Available at SSRN:
http://ssrn.com/abstract=1136696
Creating more jobs
• How to increase investment and jobs?
– Reduced corruption , capital flight, leading to higher investment,
better allocation
– Labor intensive jobs – how to rehabilitate large private concerns?
– Big push on supporting young entrepreneurs?
– SME development: can Islamic finance help?
• Supporting policies: competition, SMEs support, democratization
of finance, pro-active labor policies
• Political challenges:
– Big capital accept new rules -- more investment , less capital flight,
more competition
– middle class embraces entrepreneurship – better regulation and
access to capital, not public sector jobs;
– poor accepts unskilled jobs wt inter-generational deal on education
– State reduce intake of national savings
Fixing the state
• Better services require more financing esp. higher
public sector wages
• Can this be financed by reducing subsidies?
• Opening up to social activism and social
accountability mechanisms
• Ambitious bet, requires a new social contract:
– middle class accepts lower subsidies before
improvement of services
– Civil servants work harder (for higher wages) and give
up corruption rents
State failures and rescue
No social
Active
social
accountability
accountability
Low wages
Good
wages
Corruption
-> Higher
Poor
services
performance
Good
Bad economy
economy
X
State
Repression
Rents: Oil, Suez
Tourism
Foreign policy/Aid
Migration/remittances
issues:
Research:
how to improve state services and root out state corruption?
the role of higher wages vs social accountability
The political role of state subsidies
The influence of rents, foreign aid
Effective social
services and
Subsidies
social
protection
Towards new national pacts
Prospects and constraints
• Coalition building difficult: tight fiscal constraints, diverse ideologies, scope of
economic challenges.
• Hard-won change brings momentum for institution of new National Pact around
widely shared aspirations – democratic politics can break the status quo
Democracies make coalitions possible. Which coalition needed for complex reforms?
• w/o capitalists: a jobs gap (left?)
• w/o youth/middle class : a democratic gap (populism?)
• w/o workers: a security gap (right?)
Risks :
• Democracies initially likely to be messy (and clientelistic), but risk of populism
worse as it will not solve old problems
• radicalization: failure leading to chaos, a return of the old order, perhaps in
alliance wt the army (a Pakistan scenario); or chaos leading to fragmentation.
• New aspirations likely to include regional postures that may not be of the liking of
the West, but external support for unpopular causes will strengthen radical causes.
Capital: failure and rescue
More
productive
PE s
PE s
X
Army
State
deficits
Capital
X
Rents
Challenges:
Capital
flight
Large firms
Large firms
invest in
politically
jobs &
connected
productivity
controlled
sectors
•Tourism
• labor intensive
Industry
• Construction
SME, Informal sector
* low supply response, informalization
- democratizing the financial sector
- regulating capitalism: Capital flight, corruption, “supply response”
- fixing the public enterprises
- the youth and entrepreneurship
- how promising are the emerging labor intensive industries?
- Improving SMEs’ efficiency and linkages
State shrinks – informality rises
Source: Asaad, 2007
Not much fiscal space to respond to
popular demands
Wage bill and public investment low
From ECES December 2010
Are public sector wages too low, or too
high?
Must not compare apples and
oranges..
Subsidies super large