Sponsors: Arab NGO Network for Development (ANND); Bretton Woods Project; Middle East Task Force of the New America Foundation

Panelists: Kinda Mohamadieh (Regional Advisor, Arab NGO Network for Development), Dr. Mohamad Saadi (Professor, Casablanca University), Harald Finger (Deputy Director of Middle East and Central Asia, IMF), CHAIR: Ziad Abdel Samad (Executive Director, Arab NGO Network for Development)

Presentations

Mohamed Saadi

• History of IMF in Arab region
  • 1980s saw the first deepening of IMF involvement in the region during the debt crises – focussed on macroeconomic indicators, with tight conditionality – but outcomes of programmes were not satisfactory, with impacts on growth/social outcomes
  • We ended up with unemployment, low growth, disparities, inequality; but this also instigated corrupt and crony practices in the economy – this might have been overlooked because of the geopolitical alliances of Arab regimes with Western powers
  • Recent years
    • Favourable global economic environment meant decent growth since 2000, but not trickle-down, and meaning gains were concentrated in the elite
    • IMF response to Arab Spring focussed again on harsh austerity, effecting fiscal policy, wages, subsidy, labour regulation sides
    • But we know these policies are going to create worse unemployment
    • Moroccan situation – $6.2 billion loan
      • Conditions: removal of food/energy subsidies; wage/employment freeze in public sector; labour market flexibility
      • Has the IMF changed policies given inequality paper? No – business as usual; Latest Moroccan programme note stressed continued fiscal consolidation, subsidy reform – including both fuel and food; plus business climate reforms
      • Impacts: Slashing expenditure to social services, price increases; leading to increase in socio-political risks from tensions (ie. Trade union protests) and crime
      • We need to ask what are the alternatives

Harald Finger

• It is clear now that we didn’t pay enough attention in 2000s to economic inequalities; we are paying more attention to social issues
• Subsidy reforms are important – we think it is not an end in and of itself, it is a question of fiscal deficit; there is a real underlying problem
  • We don’t recommend big fiscal adjustment in the near term, recent programmes had relatively gradual adjustment (more gradual than EU countries)
  • Subsidies are more than 6% of GDP, larger than spending on education; and this is inefficient because of mis-targetting; food subsidies are less mis-targeted, but it should be targeted eventually in conjunction with appropriate social protection measures
  • Need to free up fiscal resources, we should talk about revenue for example; we do not recommend cuts to investment spending; wage bills have grown a lot, so good idea to keep this steadier
  • In practice – hard to implement subsidy reform well, have to decide country-by-country
    • Need targeted mitigating measures, phasing and sequencing, rules-based pricing mechanism, energy sector reform and fix efficiency of SOEs, needs to be communicated well
    • Social safety nets: there is substantial poverty in the region, existing safety nets are small
      • Need to increase spending and targeting, simply the programmes, delivery infrastructure is important (smart cards, etc)
      • Prioritise things that focus on human capital; proxy means testing, communications

Kinda Mohamadieh, ANND

• New IMF paper yesterday on the situation in the Arab economies – this is a big improvement on the past document from 2011
  • 2011 paper focussed on same old recommendations, but in a better governance environment – it focussed on liberalisation in many sectors
  • New paper is more cautious, with focus on prioritisation and sequencing, building coalitions for reform; it has good aggregate aims, but the designs to get there are important
  • Trade-related points in the paper: focus on competitiveness, export-led growth
    • Liberalisation was not sequenced appropriately, so it harmed the  countries in the end
    • Shocks from shrinking EU demand is not in the paper; but we should also build domestic markets and consumption
    • Possible to focus on regional integration before moving to liberalisation for outside; particularly the financial sector; this sequencing is very important
    • Good point we need to discuss more – progressivity in tax areas for redestribution

Harald

• recognise need more on supply side reforms, need to deal with unemployment, esp youth unemployment; need more dynamism and better education
• trade is an area for catch up, non-tariff barriers in EU block MENA country access to markets; advanced countries have a role to open up for trade
• Useful to integrate into global value chains – they are not conditionalities, this is medium-term
• Need gradual liberalisation on trade side, regional integration would be good for FDI as well
• In ACT, only 7% of companies have access to credit – finance is very concentrated; so need to boost financial inclusion

Discussions

Q: economists agree on the role of the state in the economy, but here and in IMF paper it seems to be a taboo topic; what about sectoral approaches, you ignore agriculture which is where 50% of people are located in rural areas. What about the role of the system, like S Korea or Taiwan?

Q: safety nets are viewed as a tool to release fiscal space, but nets should be counter-cyclical mechanisms in the midst of a fair-growth paradigm; the real story is monopolies in the market; are safety nets the end story for building a fair growth model?

Q: in Jordan, taxation is a problem, with low income taxes but high fuel and VAT taxes; need to take into consideration the political context and the socio-economic impacts

Q: in Yemen – the conditionalities – subsidies removal, tax reform, price liberalisation – but from citizen perspective there is a lack of social protection in place to cover the impact on poor and low-income households; big implications on people involved in agriculture because of transport costs, so disproportionately impacting on the poor; social safety nets for cash transfers of $15/month are inadequate; plus the corruption prevents effective implementation

Mohamad Saadi – in Morocco we have had 30% increase in energy prices since 2012, is this considered gradual? This will have impact on food security. Public sector wage bill freeze will lead to real wage declines, and lower willingness to do work; social services will essentially be withdrawn. There are numerous contradictions in the measures, and safety nets are too small.

Harald

• Hard to take a firm view on industrial policies, we at IMF look at enabling conditions to get private sector to create growth, next step depends on the circumstances. In ACT private investment is holding back because of the political transitions, we need to see some public sector action to get investment moving and to get demand going
• Hard to make concrete recommendations, because activist industrial policies have failed miserably elsewhere
• Sectorally, agricultural sector can be a good investment because of rural incomes and freeing up labour – but generally this is beyond the IMF’s role
• Safety nets are not intended to be pro-cyclical, they should be targeted and not taken by the rich, they need have automatic stabilisers
• We are focussing more on fairness of taxation now, but implementation ease is also a concern; we need something more progressive, and something that can be worked on
• Yes removing subsidies will be painful for the poor, we need to make sure adequate transfer systems in place – it is a big fiscal issue – there will be consequences, and we need to address them with safety nets; corruption is an issue – this is why modern delivery mechanisms are better, and cash can be a better way to avoid corruption than food subsidies

Kinda: trade policy is not in the mandate of IMF either, yet is promotes FTAs, so you could have a view on industrial policy too. The trade policies means you are already in the discussion on industrial policy, because the trade policies will impact on future industrialisation of our economies. Private sector has to work in the context of an environment that the public sector creates.

Ziad – to continue this discussion in the future, we must have more transparency of your negotiations with governments.