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The Economics of The Arab Spring– the case of Egypt
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The whole region now in turmoil – can Tunisia and Egypt show the way?
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Agenda1. The present2. The past3. The revolutionary decision?4. Transition5. Economic reforms6. Policy options
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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?
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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
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A young population (Egypt)
.
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Very high unemployment (Egypt)
Asaad 2007
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Especially for women
Asaad 2007
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The unemployed tend to have higher education
• .
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Deteriorated governance
• .
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Corruption and democracy
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Large increase in Inequality Egypt 1998-2006
Nadia Belhaj, 2011
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Inequality of opportunity
Source: Nadia Belhaj 2011
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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
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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
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Middle East OECD East Asia LatinAmerica
South Asia Sub-SaharanAfrica
Source: World Development Indicators, 2003; Taiwan Statistical Databook, 2004
percent
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Oil explains a lot of the variability
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..
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Rising incomes translate into improved life chances…
Infant mortality rate, 1960-2002
0
20
40
60
80
100
120
140
160
180
200
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
Algeria
Egypt
Jordan
Kuwait
Morocco
SaudiArabiaSyria
Tunisia
Note: Deaths per 1,000 live births. Source: World Development Indicators, 2004.
Life expectancy, 1960-2002
0
10
20
30
40
50
60
70
80
90
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
Algeria
Bahrain
Djibouti
Egypt
Iraq
Jordan
Kuwait
Lebanon
Libya
Morocco
Oman
Qatar
Saudi Arabia
Syria
Tunisia
UAE
YemenNote: Life expectancy at birth. Source: World Development Indicators, 2004
years
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.
Increased educational attainment…
Human capital accumulation, 1960-2000, typically-endowed economies
0
2
4
6
8
10
12
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Years of educationEgypt
Jordan
Morocco
Tunisia
Bangladesh
Brazil
China
India
Pakistan
South Korea
Taiwan
TurkeyNote: Mean years of total education of the population age 15 and over.Source: Bosworth and Collins (2003)
Human capital accumulation, 1960-2000, resourceendowed economies
0
1
2
3
4
5
6
7
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Years of education
Algeria
Iraq
Indonesia
Nigeria
Venezuela
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)
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But low quality: average math scores of eighth grade students 2003
Singapore 605 Italy 484Korea, Republic of589 Armenia 478Hong Kong SAR2,3586 Serbia4 477Chinese Taipei 585 Bulgaria 476Japan 570 Romania 475Belgium-Flemish537 Norway 461Netherlands2 536 Moldova, Republic of460Estonia 531 Cyprus 459Hungary 529 (Macedonia, Republic of)435Malaysia 508 Lebanon 433Latvia 508 Jordan 424Russian Federation508 Iran, Islamic Republic of411Slovak Republic508 Indonesia4 411Australia 505 Tunisia 410(United States)504 Egypt 406Lithuania4 502 Bahrain 401Sweden 499 Palestinian National Authority390Scotland2 498 Chile 387(Israel) 496 (Morocco) 387New Zealand 494 Philippines 378Slovenia 493 Botswana 366
Saudi Arabia 332Ghana 276South Africa 264
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-100
-50
0
50
100
150
8th Grade Science and Mathematics Scores Deviation from Mean - 2003
Science
Mathematics
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Percentage of University Age Students Studying Engineering and Science in Universities
0.00
0.05
0.10
0.15
0.20
0.25
Algeria Egypt Kuwait Morocco SaudiArabia
Syria Tunisia SouthKorea
malaysia thailand
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0
5000
10000
15000
20000
25000
Graduate Students Enrolled in American Universities, 2000
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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
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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)
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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?
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1960s – 70s 1980s – 90s 2000s – 2011
* failed peace process * Iranian revolution * Iran-Iraq war * Gulf war * Islamic movement * 9/11
Issues - evolution of the “political settlement” - consequences of economic without political liberalization - corruption in repressive autocracies
State led industrialization
fails
State led industrialization
fails
Infitah – young leaders
Towards political and economic liberalisation
Infitah – young leaders
Towards political and economic liberalisation
Repressive autocracies with corrupt
liberalism
Repressive autocracies with corrupt
liberalism
revolution
Evolution of political systems
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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
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RepressiveAutocracies
timid Capitaltimid
Capital
weak State
Capital flightCapital flight
rentsrents
•Low econ. Transformation•Low investment
•Corrupt privatization•monopolies
CorruptionCorruption
Poor quality services
Subsidies
•Low growth
• Rising middle class
• Demographics
•Education
•Unemploy-ment
•Youth frustration
•Inequality
MigrationMigration
A vicious cycle of state decay and low growth …
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3. Looking more carefully at Egypt
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Low investment
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Means low growth
Source: World Bank 2009
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Shrinking credit to the private sector
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One of many constraints
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Most loans go to large firms
• .
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But they did not deliver the jobs!
Source: Asaad 2007
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SMEs predominate
.
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And mostly go to the rich
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Egypt: subsidies+military= 2.5 times health plus education
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4. RebellingQuestions:• 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?
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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)
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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
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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
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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
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Average growth performance during typical transition (percent)
Freund and Mottaghi (2011) based on 32 transitions
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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?
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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
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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
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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
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No social accountability
Research:how to improve state services and root out state corruption? the role of higher wages vs social accountabilityThe political role of state subsidiesThe influence of rents, foreign aid
Active social accountability
issues:how to improve state services and root out state corruption? the role of higher wages vs social accountabilityThe political role of state subsidiesThe influence of rents, foreign aid
Rents: Oil, SuezTourism
Foreign policy/AidMigration/remittances
Rents: Oil, SuezTourism
Foreign policy/AidMigration/remittances
StateState
Low wages Corruption
Poor servicesSubsidiesBad economy
RepressionRepression
State failures and rescueState failures and rescue
Good economy
X
Good wages -> Higher
performance
Effective social services and
social protection
Effective social services and
social protection
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Towards new national pactsProspects 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.
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PE s More
productivePE s
* low supply response, informalization
Challenges: - 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 deficits
RentsRents
CapitalLarge firms politically connected
Army controlled sectors
SME, Informal sectorSME, Informal sector
•Tourism• labor intensive
Industry• Construction
•Tourism• labor intensive
Industry• Construction
Capital flight
Capital flight
Capital: failure and rescue
X
XLarge firms invest in jobs &
productivity
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State shrinks – informality rises
Source: Asaad, 2007
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Not much fiscal space to respond to popular demands
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Wage bill and public investment low
From ECES December 2010
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Are public sector wages too low, or too high?
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Must not compare apples and oranges..
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Subsidies super large