1 Summary of the Seminar

Saíd El-Naggar
Published Date:
September 1987
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El-Naggar Said

Statement of the Problem

Recent changes in the world economy have had a profound impact on the Arab countries. The nature and extent of the impact varied greatly from one country to another. In the context of adjustment and development it is possible to identify three groups of countries. There is first the group of oil exporting countries such as Kuwait, the Libyan Arab Jamahiriya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. With respect to this group, the single most important factor has been the rise and fall in the price of oil which constitutes, on average, more than 90 percent of its exports. During the better part of the 1970s and the early 1980s, these countries were in the fortunate position of adjusting to the dramatic increase in their wealth following soaring oil prices. More recently they have been confronted with the consequences of an equally dramatic decline in their oil revenues. For this group adjustment is required in mainly two directions:

  • Preserving the diversification drive that was initiated during the 1970s so as to reduce heavy dependence on oil.

  • Managing the transition from a situation where their oil revenues amounted to nearly $200 billion, to a situation where they plummeted to barely $60 billion.

The challenge facing countries in this group is far from easy. Diversification of their economies is still at an early stage. It has been nurtured under an umbrella of extensive subsidies both direct and indirect. In the less affluent conditions of the mid-1980s adjustment means a gradual reduction of subsidies coupled with a gradual improvement in efficiency. This is a difficult task in all circumstances. It is doubly difficult in countries which have traditionally been dedicated to the principle of a free and open trading system. Equally challenging is the task of adjustment to greatly reduced oil revenues. Over a relatively short period of time, they are required to effect considerable cuts in public expenditure. But there are many constraints on the rapid implementation of measures in that direction. As a consequence, most countries in this group are running sizable budget deficits. At the same time they have to contend with parallel deficits on current account. While these deficits last, the oil exporting countries have no alternative but to run down their foreign exchange reserves or resort to foreign borrowing. Evidently, this is not an equilibrium position. There is need for adjustment so as to reduce the two types of deficits to sustainable levels.

The second group of countries comprises the middle-income Arab countries such as Algeria, Egypt, Jordan, Lebanon, Morocco, the Syrian Arab Republic, and Tunisia. This is not exactly a homogeneous group. They might or might not have oil and natural gas resources. In cases where oil exists, it does not play as important a role as in the first group of countries. There are wide variations between them both with respect to the size of population and the level of per capita income. Population ranges from less than 4 million to more than 45 million, while per capita income varies from less than $800 in current prices to more than $1,500. However, they have certain features in common which justify treating them as one group. In particular, they possess a relatively diversified production base which includes an important manufacturing sector. Moreover, they have fairly developed economic and financial institutions and infrastructure.

Most countries of the group are in a particularly difficult situation. In the first place, they have been adversely affected by recent developments in the oil market. This is obvious in the case of countries such as Algeria and Egypt where oil (or natural gas) represents a major source of foreign exchange earnings. In the case of net oil importers such as Jordan and Morocco, the decline in the price of oil has, of course, been beneficial. On balance, however, they were net losers. Recession in the major oil exporting countries has meant a significant loss of foreign exchange income which far outweighs the benefit they derive from cheaper oil imports. The loss is particularly felt in some countries as regards workers’ remittances, financial assistance, and foreign exchange receipts from exports to the oil exporting countries. No less important is the loss of employment opportunities for their surplus labor and the return home of large numbers of craftsmen and unskilled workers who swell the ranks of the unemployed.

Aside from developments in the oil market, these countries, like other developing countries, have to grapple with a highly unfavorable global environment. This is reflected in depressed commodity markets, deteriorating terms of trade, proliferation of trade barriers facing their exports, and stagnating financial flows.

The net result of these developments has been large and mounting external deficits. The problem was compounded by the failure of most countries to carry out necessary policy reform. Some countries were able to postpone adjustment by borrowing abroad on a significant scale. Eventually, this led to the accumulation of large external debts and a debt-service burden which, in some cases, accounts for more than one third of total foreign exchange receipts. In most countries external deficits are matched by budget deficits which are largely financed by borrowing from the banking system. As a consequence, the situation in most countries is characterized by relatively high rates of inflation and overvaluation of exchange rates. At the same time, there are structural imbalances which are reflected in widespread price distortions, low capital and labor productivity, and a large inefficient public sector.

The third group comprises the low-income countries such as Mauritania, Somalia, Sudan, the Yemen Arab Republic, and the People’s Democratic Republic of Yemen. They are mostly least developed countries as defined by the United Nations. The problem of adjustment in this group is far more intractable than in the second group. These countries are heavily dependent on one or a narrow range of primary commodities. For this reason they are highly vulnerable to external shocks. They are almost completely dependent on official financing as they have practically no access to private capital markets. Some of them have recently been victims of natural disasters, such as drought, or man-made disasters, such as wars and civil strife, which have devastated their economies. In some cases, the burden of external debt is excessive with a debt-service ratio which is seriously out of line with their payment capacity. Both external and domestic imbalances are high in relation to gross domestic product. In practically all cases rates of inflation are well above the average in the middle-income Arab countries. Infrastructure is still at a rudimentary stage and so are the economic and financial institutions. The problem of adjustment is further complicated by the fact that a large and growing proportion of economic activities is being carried out in the informal sector and thus falls beyond the reach of government policy. In most countries per capita income has been on the decline for more than a decade.

Adjustment and Growth

This brief survey of the economic situation in the Arab countries underscores the need for adjustment. In practically all of them, particularly the non-oil countries, the balance of payments position is not viable. With dwindling reserves and declining financial inflows adjustment is inescapable. The real issue is not whether to adjust, but the specific means and content of adjustment. For adjustment would happen anyway, but in a disorderly manner entailing high social cost and jeopardizing growth and development prospects. Such is the case if external balance is obtained through severe restriction of imports and/or excessive deflationary policy. Orderly adjustment on the other hand has two essential features. It aims at a reduction of external deficit to sustainable levels, that is, levels that can be financed by voluntary financial inflows. Moreover, external balance should be consistent with the maintenance of reasonable rates of growth and price stability.

Growth-oriented adjustment was one of the major topics in the seminar. It is possible to recognize two strains of thinking. The first can be described as a market-oriented, outward-looking approach to adjustment. The second is more inclined toward an interventionist, inward-looking approach.

The elements of the first approach were set out in A.S. Shaalan’s paper, “Adjustment Challenges and Strategies Facing Arab Countries in Light of Recent Experience and New Initiatives” and in Parvez Hasan’s paper, “Structural Adjustment in Selected Arab Countries: Need, Challenge, and Approaches.” Both papers advance the thesis that growth-oriented adjustment calls for policy action aiming at the elimination of macroeconomic and structural imbalances. Economic distortions are so deep-rooted and widespread in many of the non-oil Arab countries, whether middle- or low-income, that policy reform has to address both types of imbalances simultaneously.

At the macroeconomic level, there is need to correct distortions in exchange rates and interest rates, and to reduce budget deficits. In most countries exchange rates are significantly overvalued and are not allowed to change in line with changing economic reality. Overvaluation is largely responsible for the loss of competitiveness in international markets. At the same time, it discourages exports and encourages imports. Interest rates are kept at levels justified neither by the scarcity of capital nor by rates of inflation. As a consequence, they conceal negative real interest rates which lead to excessive investment in capital-intensive projects and militate against the mobilization of domestic savings. The combination of overvalued currency and negative real interest rates is a prescription for capital flight which exacerbates external imbalance and deprives the country of badly needed resources. Fiscal imbalances, it is argued, are largely responsible for excess demand and chronic inflationary pressures which distort price signals, erode competitiveness, and impose an intolerable burden on low-income groups.

At the structural level, most countries maintain a rigid system of administered prices which fail to reflect the opportunity cost of goods and services. Relative prices show a high degree of distortion. In many cases there is a wide gap between domestic and international prices. Energy prices provide a case in point. Until 1985, the price of energy in Egypt was only 20 percent of international prices. After the recent decline in oil prices, it is still well below international prices. The same is true of prices for principal crops such as wheat, rice, cotton, and sugarcane where prices are kept at a low level compared with international prices. The result has been a significant shift from the production of food grains and cotton to fruits, vegetables, and livestock where profitability is high, owing to absence of price controls. This is reflected in a large and growing agricultural trade deficit which has increased from $600 million in the early 1970s to about $3 billion in 1985/86. There are other types of relative price distortions. In many cases relative prices are completely divorced from relative costs. In other cases, the same commodity commands a multiplicity of prices according to different categories of consumers. The waste involved in these distortions is considerable. A more or less similar situation can be seen in the Syrian Arab Republic, Morocco, and Tunisia.

In view of the large size of the public sector in most Arab countries, reform in this area acquires special importance. In many countries, losses of public enterprises account for a major portion of fiscal imbalances. There is need to improve the performance of public enterprises, to scrutinize government expenditure programs, and to reconsider investment priorities. There is also need to improve the climate for domestic private investment as well as for direct foreign investment.

The foreign trade regime in many non-oil Arab countries is highly restrictive. Imports are subject to a wide range of tariff and nontariff barriers. Quantitative restrictions and exchange controls are resorted to widely as a means of regulating the flow of trade, while tariffs are frequently high and in some cases virtually prohibitive. Liberalization of the foreign trade regime could improve competitiveness, promote economic activities in which there is comparative advantage, and eliminate substantial waste arising from the misallocation of resources.

A Different Perspective

This view of growth-oriented adjustment, which reflects the approach of the International Monetary Fund and the World Bank, was challenged by a number of participants. According to them, the Fund-World Bank approach is open to question on several grounds. In the first place, it is based on a single model of development which fails to take into account the great variety of situations, structures, and policy orientations in developing countries. Underlying that model is a set of value judgments in favor of market-oriented development and against government intervention in the economy. Adherence to a single model of development explains why Fund-supported programs contain the same set of prescriptions for all countries. It also explains why programs have not succeeded in achieving the objective of adjustment with growth. In many cases, it is claimed, the implementation of Fund-supported programs has been associated with low or zero growth, and has aggravated, rather than alleviated, both domestic and external imbalances.

It was also argued that such adjustment programs are excessively preoccupied with considerations of efficiency without due regard to considerations of equity. In many cases, the low-income groups are made to carry the main burden of adjustment in terms of higher rates of unemployment and lower real wages. As a consequence, Fund-supported programs are often resisted by trade unions and low-income groups. When they are implemented, they give rise to social and political unrest.

Many speakers questioned devaluation as an instrument of policy in practically all Fund-supported programs. Empirical evidence, it was pointed out, shows that in conditions of underdevelopment, devaluation is both ineffective and costly. Recent experience of the Sudan was cited to support this contention. During the last seven years, the Sudanese pound lost a substantial portion of its value as a result of successive waves of devaluation. However, due to low supply and demand elasticities, devaluation failed to improve external balance. Moreover, devaluation has been an important source of inflation. It has resulted in a substantial increase in the prices of imported inputs. In cases where these inputs are used by the export industries, devaluation has defeated its own purpose of stimulating these industries. According to some participants, devaluation was responsible for credit expansion in view of the fact that it was followed by revaluation of foreign currency assets held by the banking system. Furthermore, it has added significantly to the burden of external debt by calling for larger budgetary appropriations in local currency.

Some participants were equally critical of the role assigned to interest rates in most adjustment programs. In their view, underdeveloped economies are hardly responsive to interest rate variations. Moreover, in most of the Arab countries the use of this instrument is constrained by cultural and religious considerations.

Proponents of the Fund-World Bank approach expressed certain reservations with respect to these criticisms. It was pointed out that devaluation is an important instrument for the attainment of external balance. It cannot be dismissed out of hand on grounds of presumed low elasticities. In fact, available evidence drawn from the experience of many developing countries would suggest that price elasticities are higher than supposed by the critics. The recent experience of Turkey is a case in point. During the last five years Turkey experienced a phenomenal expansion of exports in the wake of devaluation. Part of the expansion, it is true, is accounted for by a rapid growth of exports in the context of the Iraq-Iran war. A major portion, however, is due to the stimulating effect of devaluation. Moreover, the elasticity argument loses much of its force if reference is made to the impact of devaluation not only on the balance of trade but also on the balance on current account. This is particularly important in countries like Egypt where tourism and workers’ remittances are significant sources of foreign exchange. Supply and demand elasticities in such cases are usually quite high. The same can be said with respect to the impact of devaluation on capital flows. If the exchange rate is kept in line with economic reality, it is likely to encourage financial inflows and discourage capital flight, which is a serious problem in many countries. As to the experience of the Sudan, where several devaluations failed to produce tangible results, a distinction should be made between nominal and real effective exchange rates. Depreciation of the nominal exchange rate may conceal an appreciation of the real effective exchange rate. It is suspected that this is what happened in the Sudan in view of the relatively high rates of inflation during the period in which devaluation took place. The lesson of the Sudanese experience should not be the ineffectiveness of devaluation but rather that it should be accompanied by supporting measures aimed at reducing the rate of inflation.

As to interest rates, it is, of course, up to each country to decide to what extent adjustment policy is consistent with its own cultural and religious values. Suffice it to mention that negative real interest rates could be a major source of imbalance especially on capital account.

With respect to the social cost of adjustment, it is recognized that in certain well-publicized cases the implementation of Fund-supported programs was associated with social and political disturbances. However, in a far greater number of cases there were no such problems. According to A.S. Shaalan, the explanation lies in the timing of adjustment. As he put it:

The Fund’s experience shows that adjustment programs are much easier to implement and proceed far more smoothly when they are undertaken at an early stage of a country’s emerging difficulties. Indeed, there are many examples to demonstrate that programs are most successful when adjustment is brought about in an orderly way through the timely adoption of corrective measures. On the other hand, when a country postpones adjustment for too long and allows its external payments deficit to become excessive, foreign financing becomes difficult, if not impossible, to obtain, and local residents lose confidence in the currency, which leads to large-scale capital flight. In these situations, adjustment is forced on a country in circumstances that are sometimes socially and politically hard to bear, as well as being disruptive to the economy.

There is also no evidence to support the contention that adjustment exerts a negative impact on income distribution. In the short run the reorientation of policies may involve immediate losses in income and employment, but this is more than made up for by gains in productivity in the medium term. Neither the Fund nor the Bank, it is pointed out, opposes subsidization per se of essential consumers’ goods. In many cases, however, subsidies go well beyond the necessities and represent a major source of price distortions throughout the economy. In the area of consumers’ necessities, subsidized items are made available across the board to all consumers irrespective of their income level. Accordingly, a good portion of subsidies goes to benefit those far above the poverty line. Moreover, subsidies are in most cases financed by inflationary means. Statistics show that subsidized items account on average for no more than 30 percent of low-income family budgets. The benefits derived from subsidized prices are more than offset by losses inflicted by the fast-rising prices of nonsubsidized goods and services accounting for 70 percent of family budget. If elimination of subsidies is accompanied by reduction of inflation, adjustment would clearly have a positive impact on income distribution.

The charge that Fund-supported programs are based on a single development model with the same prescription for all countries was questioned. It was pointed out that the Fund has no particular model of development. It does have an adjustment strategy which does not allow for quantitative import and foreign exchange restrictions as a desirable means for correcting external imbalances. In the context of adjustment, policy instruments are by necessity the same, but the policy mix varies a great deal from one country to another. It is recognized that Fund-supported programs do sometimes place emphasis on market-oriented solutions. This is not necessarily a reflection of ideological bias. It is based on empirical evidence which goes to show that efficiency is enhanced by giving greater scope to market forces. It is noteworthy that the Fund is required by the guidelines laid down by the Executive Board in 1979 to “pay due regard to the domestic, social and political objectives, the economic priorities, and the circumstances of the members, including the causes of their balance of payments problems.” Surely, adjustment programs for countries like China, Yugoslavia, Hungary, or Romania, all of which are Fund members with centrally planned economies, would be quite different from programs for countries with market-oriented economies such as Côte d’Ivoire, Kenya, or Venezuela.

The Changing Role of the Bretton Woods Institutions

Developments in the world economy, as well as in the nature and magnitude of the problems facing developing countries, have had far-reaching implications for both the World Bank and the International Monetary Fund. The subject is taken up by Azizali Mohammed in his paper “The Role of the Fund and the World Bank in Adjustment and Development.”

In the case of the World Bank, one of the most important developments during the last decade has been a marked shift from project financing to so-called policy-based lending, namely, structural adjustment and sectoral lending. Up to the late 1970s and early 1980s more than 90 percent of World Bank lending was directed to the financing of specific investments. Structural adjustment lending was introduced in 1980 in response to the markedly deteriorating prospects that were then foreseen for developing countries during the 1980s. The objectives of structural adjustment lending are to support a program of specific policy changes and institutional reforms designed to reduce current account deficits to more manageable proportions over the medium term while maintaining the momentum of growth and development. Because of its high degree of conditionality, structural adjustment lending stands in strong contrast to conventional program lending. Program lending was generally designed to meet the immediate consequences of crises such as reconstruction activities in the aftermath of war or natural disasters, or sharp deterioration in terms of trade, or severe shortage of foreign exchange causing serious underutilization of capacity. As a result, program lending typically concentrated on measures dealing with immediate difficulties rather than on finding solutions to a country’s underlying, long-term structural problems. Sectoral adjustment lending was put in place at the beginning of the 1980s to be available to countries which are unable to undertake the more comprehensive structural adjustment. It was designed to support programs of policy and institutional changes in specific sectors. Both structural and sectoral adjustment loans have taken the Bank into areas of macroeconomic policy which have traditionally been of primary concern to the Fund.

Changes in the Fund were prompted by the recognition that problems of external imbalance facing developing countries were as much structural as monetary in character and that solutions would require a period longer than that available under existing tranche policies. As a consequence, the extended Fund facility was introduced in 1974 with an implementation period of three years or more and a repayment period that could be as long as eight years after each purchase. In 1979 the repayment period was extended to ten years.

The structural character of external imbalances was reflected in the Fund decision in 1986 to establish the structural adjustment facility. Members eligible to use the facility are low-income countries that are currently eligible to receive credits from the International Development Association (IDA). The resources are available on concessional terms to eligible countries that are facing protracted balance of payment problems and that enter into arrangements with the Fund in support of a medium-term program of structural adjustment. The use of structural adjustment facility resources is on the basis of a policy framework paper (PFP) which describes the major economic problems and challenges facing the country, the objectives of a three-year medium-term program, the priorities, and the broad thrust of macroeconomic and structural adjustment policies. The PFP is prepared by the country concerned in collaboration with the staffs of the Bank and the Fund and is reviewed by the Executive Boards of both institutions. The establishment of this facility has clearly taken the Fund into areas of longer-term policy which have traditionally been of primary concern to the World Bank.

The emergence of overlapping responsibilities has highlighted the need for closer cooperation between the two institutions. According to the World Bank Annual Report, 1985:

The issue of collaboration between the Bank and the Fund was of particular importance in the context of the recent economic environment because it had become readily apparent that any sustainable solution of balance of payments problems (the concern of the Fund) was linked to the issue of a resumption of growth (of particular concern to the Bank). The Bank and the Fund share the common objective of removing impediments to growth and development; to best attain this goal, however, it was felt that greater coherence in the analysis of policy issues was needed, that the complementarity of country adjustment programs needed to be strengthened, and that efforts to mobilize resources to support those programs required closer coordination.

The onset of the debt crisis in the early 1980s gave impetus to these developments. It also emphasized the importance of the catalytic role of the two institutions. Neither the Fund nor the Bank was in a position to meet the enormous financing needs of the debtor countries out of its own resources. They were called upon to mobilize additional resources from other sources of finance whether official or private. The Fund was able to arrange the concerted financial packages in support of debtor countries in return for the implementation of adjustment programs by them. The commercial banks undertook to provide an agreed amount of financing. This arrangement gave birth to “involuntary” lending by the commercial banks, which constitutes the essence of the catalytic function of the Fund. In the case of the World Bank, cofinancing with both official and private sources of finance assumed a growing importance in its lending activities.

In the discussion of recent developments in the Bretton Woods institutions, participants raised a number of issues related to the functioning of the international monetary system. Some participants were apprehensive about the implications of too close a collaboration between the Bank and the Fund. It was recognized that while cooperation may be desirable or even necessary, the institutionalization of such cooperation as envisaged in the structural adjustment facility carries the risk of cross-conditionality. This is defined as a situation in which acceptance by the borrowing country of the conditionality of one financial agency is made a precondition for financial support by the other. Cross-conditionality was seen as inherent in a situation where the two institutions cooperate in the preparation of a joint document—the policy framework paper—on the basis of which the country concerned would be allowed to use structural adjustment facility resources. Under these circumstances, concerted pressure could be brought to bear on the country seeking help from either institution. The dilemma involved in the issue of cross-conditionality was succinctly stated in a report by the Commonwealth Secretariat:

If the institutions disagree on a common problem and persist to the extent of offering contradictory advice, they can be accused of inconsistency; if they reconcile disagreement and act on agreed positions, through a common approach to conditionality, they can be accused of bringing concerted pressure to bear on borrowers; if they try to limit that interaction and stick to their traditional complementary and independent roles, they can be accused of failing to carry out their enlarged mandates.

It is recognized, however, that there is need to explore ways and means for protecting the interests of the borrowers against the risk of concerted pressure or undue interference in a country’s decision-making process.

Apart from the issue of cross-conditionality, some participants expressed concern over the lack of symmetry in the adjustment process. Conditionality in the use of Fund resources had significantly affected developing countries, while surveillance had little practical effect on the countries with a major impact on the world economy. The burden of adjustment has thus fallen disproportionately on those least capable of carrying it. It is ironic that liberalization of foreign trade is consistently advocated by the Bank and the Fund for developing countries while the industrial countries pursue protectionist policies which undermine the adjustment efforts of developing countries. It was pointed out, however, that asymmetry in the adjustment process, while real, is by no means due to a bias on the part of the Fund in favor of surplus countries. It is simply a systemic shortcoming reflecting the fact that the Fund has little leverage on countries which do not use its resources. It was also pointed out that efforts are being made to enhance Fund surveillance over domestic policies of the industrial countries. It is now recognized that there is need to broaden the coverage of policies subject to surveillance and to integrate the assessment of exchange rates and domestic policies within a medium-term framework. It is further recognized that indicators could be used to help the detection of inconsistencies and deviations from appropriate policies of the industrial countries. There is also wide support for proposals to strengthen the multilateral setting of surveillance through various techniques including the participation of the Managing Director of the Fund in meetings among the industrial countries.

As to the catalytic role of the institutions, it is recognized that it does serve to mobilize a significant amount of additional financing. However, the catalytic role should not detract from the need to augment the resources at the disposal of the two institutions. In this context the special needs of the least developed countries were emphasized by a number of speakers. It was pointed out that the proposed size of the Eighth Replenishment of IDA falls far short of the requirements of the low-income countries. The same can be said of the recently established structural adjustment facility. A case was made for increasing resources available to the facility through further sales of gold in the possession of the Fund.

In discussing the Fund-Bank role, many participants expressed concern over the problem of external debt. In both middle-income and low-income countries the external debt burden has reached intolerable limits. The experience of the last few years clearly shows that debt-service payments constitute a major obstacle to growth-oriented adjustment. In the case of the middle-income countries, external indebtedness continues to pose a serious threat to the international financial system. Doubts were expressed regarding the effectiveness of the Baker Plan as a solution to the debt problem. Many of the assumptions on which it was based have not materialized. This is particularly the case with respect to commercial bank lending. There is a need to explore alternative approaches, including the possibility of debt relief as well as substantial liberalization of rescheduling terms.

Some participants deplored the fact that the SDR has not assumed a major role in the international monetary system. No SDR allocation has been made since 1981 despite a strong global need for reserve supplementation. As a result, no progress has been made toward the objective of making the SDR the principal reserve asset in the international monetary system as stated in the Fund’s Articles of Agreement.

Case Studies

Three case studies on adjustment and development in the selected Arab countries were presented at the seminar. The first paper, by Galal Amin, focused on Egypt; the second, by Jawad Anani, dealt with Jordan; the third, by Bachir Hamdouch, examined the case of Morocco.

Because many issues raised in the case studies have been covered in the preceding pages, this section is limited to the presentation of other points.

In the case of Egypt, Mr. Amin notes that the last decade was one of rapid growth associated with serious structural imbalances. The recent decline in oil prices and related sources of foreign exchange earnings such as workers’ remittances and Suez Canal dues has only highlighted the growing weaknesses in Egypt’s balance of payments and in its economic structure. The weakness of the Egyptian economy is reflected in the rising share of services in output and employment at the expense of commodity sectors, growing budget deficits, sluggish growth of non-oil commodity exports, and rising deficits on current account matched by an alarming growth of external indebtedness. The author refers to two schools of thought with regard to the interpretation of Egypt’s economic problems over the last ten years. One school is influenced by a market-oriented, outward-looking approach to adjustment and development. The other gives an opposite interpretation based on an interventionist, inward-looking approach. In his view, both schools betray an ideological bias. Instead of adhering to either school, the author offers two criteria by which to assess the effectiveness of economic policy:

  • That it should be in line with international and domestic reality. Thus a liberalization policy is valid at a time of growing world economy, high flow of foreign investment, and a relatively stable political climate. On the other hand, a higher degree of protection would make much more sense, it is argued, when the country is faced with a depressed world economy, a sluggish flow of foreign investment, and a highly volatile political climate.

  • That there should be a minimum degree of consistency among its essential components. “There is probably no worse economic policy,” states the author, “than one that attempts to pursue conflicting objectives simultaneously.”

The author proceeds to apply the two criteria to the economic policy of Egypt between 1956 and 1984. According to him, the two criteria are satisfied with respect to the period 1956–65 when economic policy was characterized by a high degree of government intervention, central planning, and strict control of foreign trade. They were also satisfied during the period 1967–73 when the Government resorted to drastic reduction in the rate of investment and accepted a much lower rate of growth in the face of a highly unfavorable international climate following the 1967 war. On the other hand, the two criteria were not satisfied in the years following 1973. In his view the sudden shift toward greater liberalization in 1973–76 was unwarranted under the economic conditions prevailing at that time. On the other hand, liberalization was timid and halfhearted in the period 1977–81 when conditions became highly favorable for this kind of policy following a considerable increase in income from oil and oil-related activities. After 1981, economic conditions became again unfavorable to greater liberalization owing to the decline in oil revenue, sluggish exports, and stagnant flow of private foreign investment. “Under present conditions” says the author, “the burden that would be incurred by further drastic cuts in subsidies to essential consumer goods would be particularly severe. The abandonment of government commitment to guaranteed employment would be more difficult in the face of shrinking employment opportunities both at home and abroad. . . . Further devaluation is unlikely to be sufficient to bring a quick relief to the balance of payments.” He warns against optimism that “setting the prices right,” including the adjustment of exchange rates, would attract a greater flow of foreign capital. Nor is there a bright prospect for Egyptian exports given the depressed state of the world economy and rising protectionism. He argues that the answer to the present impasse is not in “setting the prices right,” nor is it in market-oriented outward-looking solutions. The author makes a case for adjustment through a reduced rate of capital investment coupled with a human resource-oriented strategy.

There seem to be good reasons . . . for arguing that if Egypt is to get out of its current economic crisis and to lay the foundation for a more balanced development in the coming decade, . . . some sacrifice in terms of a lower rate of investment and slower growth rate is justifiable . . . . But it would also be wrong to assume that sacrificing a high rate of investment must necessarily entail a proportionate sacrifice in the rate of growth. With widespread underemployment, particularly in the government sector, and with ample unutilized capacity in manufacturing there is wide scope for raising the overall level of labor productivity . . . . Over the last ten years, Egyptian economists have been complaining that the high rates of growth achieved were merely “growth without development”. . . . One may wonder whether we can turn the remaining years of this century into a period of “development with little growth,” turning the curse into a blessing.

The discussion of the Egyptian case raised a number of issues. Some participants were not as opposed as the author seems to be to adjustment through elimination of price distortions and the application of an export-oriented strategy, arguing that while it did not constitute a sufficient condition, it was surely a necessary condition. Others shared the author’s skepticism regarding the Fund’s approach to adjustment, particularly the use of devaluation as an equilibrating instrument given the structure of Egypt’s foreign trade.

Some observations were made with respect to the criteria for assessing national economic policies during different periods from 1956 to 1984. There was no quarrel with the proposition that there is need for consistency among different components of economic policy, nor with the requirement that policy should take into account international and domestic constraints. However, such a proposition is too general to offer any guidance as to the appropriateness of alternative strategies. It was also pointed out that economic policy cannot be expected to go back and forth between opposing strategies of adjustment and development following changes in the international and domestic environment.

There were also questions regarding the proposed solution of reduced rate of investment coupled with a human resource-oriented strategy. In a country like Egypt with high rates of unemployment and population growth, adjustment with growth is of crucial importance both economically and politically. A relatively high rate of investment is necessary to cope with a considerable backlog of unemployment as well as to provide annual employment opportunities to nearly 400,000 newcomers to the labor market. Under current conditions, a prescription of “development with little growth” is neither feasible nor desirable.

Presently, the Egyptian economy suffers from many pressing macroeconomic and structural imbalances: unsustainable deficit on current account, loss of competitiveness in export markets, external debt-service burden absorbing more than one third of export receipts, widespread price distortions, and an inefficient public sector. It is not clear to what extent reduced investment and growth would contribute to the solution of these problems.

In his study on Jordan, Jawad Anani presents a general review of adjustment and development policies during the period 1952 to the present. The period under review was divided into six phases according to the principal characteristics of each phase. On the basis of the author’s analysis as well as the discussion of the Jordanian experience, the following observations would seem to be in order.

Jordan is not well endowed with natural resources. Moreover, the period under review witnessed some extremely adverse developments, the most important of which was, of course, the impact of the 1967 war. The war resulted in the occupation of the West Bank and the loss of 40 percent of agricultural income, 80 percent of income from tourism, and 20 percent of industrial production. Nevertheless, the country was able to sustain such a severe adversity and achieve rates of growth well above the average for all non-oil Arab countries. It was able to control the rate of inflation and maintain a viable balance of payments position with little recourse to external borrowing. Two factors seem to have played an important role: the quality of the labor force and the relative stability of the political and economic framework.

The second observation is that economic stability is partly reflected in the reluctance of the Government to resort to devaluation and interest rate variations as instruments of adjustment. During a period extending for more than three decades, devaluation as a deliberate act of policy was used only once. The explanation is to be found in the fact that the balance of payments was rarely under strong pressure. Workers’ remittances and Arab financial assistance provided an important source of foreign exchange. No less important is the need to retain the confidence of the Palestinians on the West Bank, who hold a good part of their monetary assets in Jordanian dinars. As a consequence, stability of the dinar became an important target of monetary policy.

Similarly, interest rates were hardly used during the same period as an instrument of monetary policy. This is largely explained by the fact that, except for a few years during the 1970s, the rate of inflation was kept at modest levels.

Third, despite the recent trend toward protecting certain branches of manufacturing industries, the Jordanian model has been largely market-oriented and outward looking. For most of the period under review, the private sector was allowed to play a dominant role in adjustment and development. The trade regime is not subject to extensive restrictions. A similar degree of freedom is characteristic of the foreign exchange regime. Government policy is geared toward encouraging foreign investment. At the same time, special attention was given to the development of a local capital market for the mobilization of domestic savings and the promotion of domestic investment.

The fourth observation is that the Jordanian economy is particularly vulnerable to external shocks. This is evidenced by a high degree of dependency on workers’ remittances, Arab financial assistance, and exports to the countries in the region. Recent developments in the oil exporting countries have highlighted the need for adjustment. In the words of the author:

Developments in the foreseeable future make it incumbent upon Jordan to formulate its economic policies with great care. It has passed the phase of easy addition to the economy and entered the world of tradeoffs. . . . Investments. . . must prove to be financially, economically, and socially justified. . . . Economic management should bear in mind that adjustment must be based first and foremost on domestic policies. . . . Many painful decisions should not be put off by resorting to external assistance. . . . The Jordanian economy is in pressing need of improved productivity to enhance its comparative advantage. . . . Improved quality and reduced cost of production are also required to enhance competitiveness, both locally and abroad. . . . The changes in the map of international division of labor will not therefore be in its favor, unless it can mobilize its highly qualified manpower, to become a service center based on advanced science and technology.

The final observation on Mr. Anani’s paper is that regional cooperation would greatly facilitate the process of adjustment and development. This is of particular importance to a small country like Jordan, but is no less important to the heavily indebted countries, such as Egypt, Morocco, and the Sudan as well as for capital surplus countries. This point was stressed by a number of participants. Export-oriented strategies are greatly hampered by the slow growth of the industrial countries and the upsurge of protectionism which is not likely to subside in the foreseeable future. The Arab countries could provide an expanding market for each other’s exports. Presently, intra-Arab trade is impeded by a variety of factors—political, monetary, economic, and institutional. As a consequence, intra-Arab trade is at an extremely low level for most countries. Experience teaches that progress in this area is achieved neither by grandiose schemes nor by sweeping resolutions. There is need for realism, flexibility, and a gradual approach which starts from the assumption that national interest should be the driving force behind regional economic cooperation. The same can be said with respect to intra-Arab financial flows. Both capital surplus and capital deficit countries have an obvious interest in promoting intra-Arab investment. There is great potential in this area, which as yet has not been fully exploited. The history of intra-Arab financial cooperation is a checkered one with some bright and encouraging spots and some disappointing experiences. Much still needs to be done to strengthen legal and financial institutions, build up confidence, and create the right kind of environment. The Arab Monetary Fund as well as the Arab Fund for Economic Development have an important role to play in providing support and evolving innovative approaches.

In the case of Morocco, Mr. Hamdouch examines adjustment and development plans since 1978 from the viewpoint of their impact on growth and external balance. Special attention was given to the structural adjustment program concluded with the International Monetary Fund and the World Bank in 1983. The Fund-supported program recognized that the major constraint on growth and development in Morocco is external imbalance with its corollary of rapidly rising indebtedness. Its primary objective is the restoration of a viable balance of payments position. The program lays down specific quantitative targets for reducing the deficit on current account, fiscal deficits, and investment ratios with a projected gross domestic product (GDP) growth rate of 3 percent. To achieve these targets, the program spells out a set of policy instruments in monetary, fiscal, and trade fields, including currency depreciation, increase in interest rates, control of money supply and credit, limits on growth of external debt, tax reform, and rationalization of public expenditure.

The structural adjustment program concluded with the World Bank covers all major sectors particularly agriculture, industry, energy, finance, and public enterprises. The main thrust of the program is the elimination of price distortions, reduction of subsidies, restructuring of investment priorities, improvement in the efficiency of public enterprises including privatization of management or capital in certain cases, and liberalization of foreign trade.

In assessing the results of the Fund- and Bank-supported programs, the author points to the difficulty of reaching definitive conclusions on the basis of a short period of implementation. In the case of the general adjustment program supported by the Fund, assessment is based on data covering only two full calendar years (1984 and 1985). In the case of the sectoral adjustment program agreed with the World Bank, the task of assessment is much more difficult because the implementation period is even shorter than two years.

Apart from the limitations of data, it was recognized that assessing the impact of an adjustment program raises some difficult methodological problems. During the discussion, reference was made to three possible methods of evaluation:

  • Normative. According to this method, results of adjustment are evaluated in relation to the targets specified in the program.

  • Historical. Under this method, results are evaluated in relation to the situation that prevailed before the implementation of the program.

  • Hypothetical. In this case results of the program are compared with a hypothetical situation, namely, what would have been the results had there been no adjustment program or, alternatively, what would have been the results had there been a different set of policies.

It was recognized that the hypothetical method is too speculative to be of much practical value, and that a judicious use of the other methods would seem to be the only practical alternative.

On the basis of both the normative and historical methods, the author comes to the tentative conclusion that the results of the adjustment program in 1984 and 1985 are hardly convincing. The balance of trade has continued to deteriorate notwithstanding a sharp depreciation of the dirham. There was a slight improvement on current account in 1985, but the overall deficit remains substantial. Similarly, the fiscal deficit has worsened in both absolute terms and relative to GDP. At the same time, the rate of GDP growth decreased in 1984 to 2.1 percent but recorded a significant rebound in 1985 at 4.3 percent. Prospects for 1986 would seem to be better than the two preceding years. This is due less to the adjustment program than to exogenous factors such as an excellent grain harvest, lower oil prices, the decline of the dollar, and reduced interest rates.

According to the author, the adjustment program suffers from certain limitations both with respect to design and implementation. In his view, it illustrates the excessive importance attached to external balance at the expense of growth and development. The economic and social cost involved cannot be underestimated. “Since 1983,” says the author, “adjustment policy has coincided with zero development, which means that there has been hardly any progression in the average standard of living [if account is taken of population growth] . . . . The lowest-income groups have suffered in particular from the policies of cost pricing, wage freezes, and increases in unemployment.” Like other participants, the author is doubtful about the appropriateness of exchange rate devaluation in the context of underdevelopment and at a time of international economic crisis. He concludes by wondering about the extent to which a developing country like Morocco could sustain adjustment without development.

Taking the three case studies together, it is instructive to note the contrast between them in terms of policy response to economic difficulties. Jordan represents a case where adjustment to external shocks has been a continuous process. As a result, the country was able to overcome severe economic problems while maintaining external balance and high growth rates. In contrast, the Egyptian economy has been suffering for some time from certain macroeconomic and structural imbalances. However, the policy response has been inadequate. Consequently, the last few years witnessed a steady deterioration in the balance of payments position, excessive accumulation of external indebtedness, and a marked slowdown in the rate of GDP growth. The Moroccan economy would seem to occupy an intermediate position between the Jordanian and the Egyptian economies. Until 1983 when stabilization and structural adjustment agreements were concluded with the Fund and the Bank, the adjustment record was not consistent. At certain periods priority was given to maintaining growth at the expense of external balance. At other periods policy response lagged well behind the emerging problems. Lack of consistency in the adjustment process has been responsible for a less-than-satisfactory level of economic performance.

The experience of the three countries covered by the case studies confirms that of other countries discussed in the seminar. Adjustment is more effective and less costly when it is timely, equitable, and growth oriented.

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