3 Structural Adjustment in Selected Arab Countries: Need, Challenge, and Approaches

Saíd El-Naggar
Published Date:
September 1987
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Parvez Hasan

International economic conditions have been highly volatile during the past 15 years. In sharp contrast to the 1950s and 1960s when the world economy enjoyed unusually high growth and relative stability, the international economic system in recent years has been jolted by a series of unexpected and sudden changes or economic shocks. Sharp fluctuations in exchange rates among key currencies, the price of oil and other commodities, and real interest rates are key examples of this economic volatility. World growth has slowed down appreciably since 1973—in part because of the economic shocks and the inability of both industrial and developing countries to adjust quickly and smoothly to major changes in external economic conditions. Industrial market economies grew by 4.7 percent a year during 1965–73, but during 1973–84, their economies expanded by only 2.4 percent a year. The economies of developing countries as a group had grown by 6.6 percent a year during 1965–73. Since 1973, this average annual growth rate has slowed to 4.5 percent. Even more serious, during 1981–85, developing countries’ growth fell off to less than 3.5 percent a year. Meanwhile, the external debt burden of capital importing developing countries rose from 110 percent of exports of goods and services at the end of 1980 to 163 percent at the end of 1985. It is the servicing of heavy external debt that, in many cases, has become a principal constraint to growth.

The highly volatile economic conditions after the early 1970s posed a major challenge to economic management in developing and developed countries, regardless of whether the particular economic shock was initially favorable or not. Country responses to challenges have varied widely.

The purpose of this paper is to focus on the structural adjustment problems facing six Arab countries1 which are active borrowers of the World Bank. In doing so, we shall examine the following questions: How successfully have these Arab countries adjusted to sharp changes in the external economic environment since the early 1970s? What is the nature of the structural adjustment challenges they face today? What are the adjustment policies which can ensure sustained growth over the medium term?

Meaning of Structural Adjustment

Before answering these questions, it is useful to consider what economic adjustment means and what distinguishes stabilization policies from structural adjustment policies. Negative economic shocks imply a loss of national income and/or import capacity. This leads to the emergence of macroeconomic imbalances; unsustainable current account balance of payments deficits; and fiscal deficits. Stabilization policies aim at restoring macroeconomic balance through monetary, fiscal, exchange rate, and income policies. The objective is to both reduce national expenditure and switch expenditure to foreign exchange saving or earning activities. Structural adjustment policies, in contrast, aim at encouraging more efficient use of economic resources and maintaining economic growth at a reasonable level. Discussions on economic growth often imply that the relationships between economic growth and investment and between economic growth and import capacity are more or less fixed. In fact, substantial changes in incremental capital/output ratios (ICORs) and import elasticities can and do take place over time. If a reduction in ICOR and/or import elasticity can be achieved, a given growth rate can be achieved with lower investment and/or lower imports. An important object of structural adjustment should be to improve efficiency in use of scarce economic resources, especially foreign exchange, energy, and capital. The efficiency issue is linked with appropriate prices of economic factors, but is broader. For instance, the effectiveness in the use of public investment resources and the government efforts to encourage human resource development and technological change can be important elements in improving the growth response of the economy somewhat independently of severe price distortions.

Structural adjustment policies thus concern those things which influence production, trade, and distribution decisions—i.e., incentives and government institutions—as well as allocation and priorities in public investment programs. Obviously, stabilization and structural adjustment policies overlap and complement each other. An exchange rate adjustment not only stabilizes the current account, but also will increase the share of exports in domestic output. Similarly, restructuring a public enterprise may improve its efficiency and also reduce the public sector deficit. Sometimes the two policies work against each other. A rapid reduction in distortionary trade taxes can, if there are no new revenue-raising measures, increase the budget deficit in the short run. Unless macroeconomic policy is consistent with longer-term structural aims, governments run the risk of having to reverse or abandon policy reforms for the wrong reasons.

Growth and Debt: An Overview

For countries negatively affected by external economic circumstances, the objectives of stabilization and structural adjustment policies can also be defined as maintenance of reasonable overall growth rates while avoiding an unmanageable external debt burden. For countries that benefit from external economic developments, strengthening of the basic economic structures and improving long-term growth can be an important test of successful adjustment.

Most of the Arab countries enjoyed large gains in foreign exchange availability between 1973 and 1984 related either to growth in oil revenues (Egypt, Algeria, Tunisia, and the Syrian Arab Republic), or to a rise in workers’ remittances (Egypt, Jordan, and the Syrian Arab Republic), or to a rise in concessionary assistance (Egypt, Jordan, and the Syrian Arab Republic). Even in Morocco, Jordan, and the Yemen Arab Republic—net oil importing countries—the terms of trade loss resulting from higher oil prices was substantially offset by compensating flows. As a consequence of a large inflow of external resources, the average growth rates during 1973–80 were quite high for all the Arab countries which are World Bank borrowers. The growth rates, however, slowed very considerably during the first half of the 1980s. In 1986, there was probably very little positive growth in output per capita in these countries. At the same time, the external debt burden has become quite heavy in a number of countries. In Morocco, total external debt is equal to 3.5 times annual foreign exchange earnings. With the decline in price of petroleum, Egypt’s total debt also exceeds three times foreign exchange receipts. Taking the last 15 years together, the record of Arab countries, with the exception of Jordan’s, in coping with admittedly large and unexpected changes has, at best, been mixed. While high growth rates have raised living standards, the basic adjustments to the deterioration of terms of trade were not made in the oil importing countries as a result of the oil price increases of 1973 and 1979–80. In the oil exporting countries, the non-oil economy has not been strengthened, while the debt burden has become sizable with the result that many of these countries find themselves ill-prepared to face the drastic reduction in oil revenues resulting from the drop in oil prices after January 1986.

Table 1.GDP Growth in Selected Arab Countries(in percent per annum)
Jordan12.3 5.34.2
Syrian Arab Republic9.24.00.4
Table 2.Debt Burden in Selected Arab Countries1
Gross Debt Outstanding

(billions of U.S. dollars)
Net Debt Outstanding

as Percent of

Total Exports
Syrian Arab Republic0.43.5–4.3130.4

The fact that debt figures used in working out ratios are net of reserves explains negative ratios.

The fact that debt figures used in working out ratios are net of reserves explains negative ratios.

Policy Objectives

Arab countries discussed in this paper face in varying degrees the following economic challenges:

  • Sustaining growth at a reasonable level to ensure at least a modest increment in per capita consumption in light of high population growth.

  • Reducing the high burden of debt. In some countries, the current account balance of payments deficit as a percent of gross domestic product (GDP) is still too high and needs to be reduced to lower the growth in indebtedness.

  • Increasing the viability of the balance of payments by reducing the relative dependence on oil revenues (Algeria, Tunisia, and Egypt), phosphate (Morocco), worker remittances (Egypt and Jordan), and large concessional aid flows (the Syrian Arab Republic, Egypt, and Jordan). In many of these cases, reduction in exogenously determined foreign exchange inflows appears inevitable, thus making adjustment unavoidable.

In order to achieve these objectives, nontraditional exports would have to be expanded and growing deficits in foodgrains would have to be reversed by removing the bias against agriculture. Prices of energy, foreign exchange, and capital must be rationalized in order to improve economic efficiency, encourage exports and efficient import substitution. Effectiveness of public investment programs must be improved and a fresh look at the role and contribution of public enterprises must be taken. Finally, macroeconomic management must be strengthened and made more flexible. The failure to adjust could be very costly. Stabilization measures would be forced on countries just because of lack of financial resources. External debt burdens, already high in many cases, cannot grow indefinitely. But a recourse to austerity measures, without solving fundamental structural problems would make, in many cases, the prospects of restoring even moderate growth in per capita incomes doubtful. Similarly, the long-term viability of the balance of payments will remain problematic. On the other hand, determined efforts to tackle the underlying structural issues with the objective of improving productivity and efficiency of factor use would dramatically improve prospects of growth beyond the transition period of perhaps three to five years. Some of the key elements of structural adjustment and the policies being pursued (or debated) to promote economic reform are discussed below. The discussion draws heavily on World Bank experience in selected Arab countries.

Diversification of Exports

Arab countries face an uphill task in diversifying the source of their foreign exchange earnings. In Algeria, 90 percent of the earnings are from oil exports. In Egypt in 1984/85, less than $1.5 billion of sizable foreign exchange earnings of $13 billion (including remittances, Suez Canal revenues, and oil earnings) were attributable to non-oil exports. In Morocco, nontraditional exports account for a fraction of foreign exchange earnings. There is need for sharply accelerating the growth of nontraditional exports just to achieve very modest growth rates of overall exports because, in many cases, traditional sources of foreign exchange earnings will either show decline in real terms or grow slowly. For instance, in Tunisia, net oil exports which financed a sizable portion of merchandise imports in the early part of the 1980s will largely disappear by 1990. In the Syrian Arab Republic, net oil exports have already disappeared and will re-emerge only slowly.

The very small size of the nontraditional exports means that diversification will be difficult and will take time. But it must be afforded a high priority as an essential element in long-term development strategy. The focus will have to be on expansion of labor-intensive manufactured goods. In recent years, manufactured goods from developing countries have been growing more slowly than in the past.2 This reflects both the slow growth in the international economy and intensified protectionist pressures. Still, manufactured exports remain the most dynamic element in international trade. While international markets are more uncertain than before, it is interesting to note that countries such as Turkey were able to achieve a major breakthrough in exports with volume more than trebling over the five years 1980–85, once its strategy shifted from inward-looking to outward-looking. Exchange rate adjustments to correct for overvaluation, more liberal import policies, and balancing the incentives between exports and import substitution were the key elements in the phenomenal rise in Turkish exports in recent years, although the export drive was also helped by developments in the Middle East. Morocco, with assistance from the World Bank and the International Monetary Fund, has also initiated a program of trade reform and liberalization. The effective real exchange rate was adjusted more than 17 percent during 1982–85. Trade reform also involved a reduction in the special import tax, rationalization of the tariff structure, the elimination of quantitative import restrictions, and introduction of export incentives. Reflecting these policy improvements, exports of manufactured goods, although still small, have grown by 22 percent per annum during 1982–85. Tunisia is another country which is emphasizing export-led growth because of the limited size of the domestic market and the fact that the most obvious import-substitution industries are already well developed. Exchange rate policies have become more flexible since mid-1985, resulting in a gradual depreciation of the real effective exchange rate by 15–20 percent, thus considerably strengthening the competitive position of Tunisian exports as well as tourism. The Government has also initiated a major rationalization of the tariff system and gradual import liberalization. As a result of these improvements, the growth rate of exports (excluding petroleum) is expected to double from 3.3 percent per annum in 1981–86 to 6.5 percent per annum during 1986–91, although a large part of the increment would merely offset the decline in petroleum exports.

Improving Food Balance

While strengthening export incentives is clearly important, substantial possibilities of efficient import substitution also exist. The agricultural trade balance has deteriorated sharply in many Arab countries during the last decade as exchange rates became overvalued, economic policies generally discriminated against agriculture, and cheap food imports were readily available. A number of countries have faced a widening food gap as domestic food production failed to keep pace with increased demand generated by a combination of rapid population growth, rising levels of income, a high rate of urbanization, and consumer price subsidies. In Egypt, the agricultural trade deficit had increased to $2.6 billion in 1984/85 from modest levels in the early 1970s. In Tunisia the self-sufficiency ratio for cereals has declined from about 75 percent to 50 percent over the last decade. In Algeria the food self-sufficiency ratio in 1984 was 40 percent, compared with 70 percent in 1962.

Policy Framework for Agriculture

A reversal of these trends is possible, provided there is a reform of the policy framework for agriculture. The World Bank has been assisting the Governments of Morocco and Tunisia in their efforts to adjust agricultural sector policies and programs, and has also been involved in discussions with the Government of Egypt on reform of the agriculture sector. A major objective of the programs in Morocco and Tunisia is to improve the incentives for cereal production. In Morocco, effective protection for cereals has been substantially negative (10–20 percent), notwithstanding an overall effective protection of 25 percent for the agriculture sector as a whole. While official producer prices for grains have been close to world market prices, actual producer prices in good production years were 30–40 percent below official prices, owing to administrative rigidities and financial constraints. The Government’s agricultural adjustment program is attempting to bring about a greater balance in the incentives between cereals and livestock production on the one hand, and irrigated agriculture on the other. This objective is grounded both on economic considerations of long-term comparative advantage and growth potentials and on equity considerations since incomes in rainfed agriculture are substantially lower than in the irrigated sector. Costs of inputs and subsidies, which are preferentially consumed in irrigated farming, will be gradually adjusted to bring them closer to their real economic value. At the same time, the Government is improving the effectiveness of the price support program for all cereals. The Government’s investment program for agriculture is also being rationalized by stressing projects with a high economic rate of return. In Tunisia also, the effective protection for cereals has been substantially negative (ranging from minus 30 percent to plus 10 percent), while irrigated farmers have been favored. Cereal prices have been consistently set below border price levels even at the official exchange rate.

Until recently, in Egypt, procurement prices were set for the most important agricultural commodities. Even now, rice, cotton, and sugarcane are procured at official prices. But even at official exchange rates, prices paid to farmers for wheat and cotton have in recent years been well below international prices. The result has been that the relatively uncontrolled subsectors of fruits and vegetables and livestock have enjoyed generally higher profitability and have grown much more rapidly. It is doubtful that Egypt’s economic interest has been best served by stagnant or declining areas under cotton, rice, and wheat while areas under sugarcane, berseem, and maize expanded.

The overall macroeconomic and trade policies in Egypt have also affected agriculture adversely. In particular, heavy protection of industry relative to agriculture through import tariffs and quotas severely undermines agriculture incentives in Egypt, even in comparison with other Arab countries. There is a clear need for strengthening agricultural incentives especially by raising the procurement prices for wheat and cotton and by transforming procurement prices into support prices. At the same time, there appears considerable room for increasing institutional support to agriculture by reorganizing extension, research, and marketing and by delinking input supply and credit systems and greater involvement of the private sector. Despite the severe land constraints facing Egyptian agriculture, a long-term agricultural growth rate of 3 percent (which exceeds the historical growth rate of 2.6 percent) can be achieved, provided major improvements are made in agricultural pricing and production policies and exchange rate and trade policies provide more support for agriculture than in the past.

Energy Intensity and Role of Energy Prices

Increasing nontraditional exports and raising foodgrain output will not only strengthen the balance of payments position but will also increase economic efficiency and thus growth in Arab countries. These and other gains in efficiency can be seen as a shift in the focus of industrial and economic strategies toward economizing scarce resources such as capital, foreign exchange, and energy and toward using to the fullest the natural resource endowment and relatively abundant labor supplies. Greater effectiveness in the use of energy supplies can be an especially important source of improvements in productivity. The quadrupling of petroleum prices at the close of 1973 ended the era of cheap oil. Notwithstanding the more than 50 percent decline in the real price of oil in 1986 compared with 1985, it would be a mistake to assume that energy prices will remain stable at around the present relatively low level. Indeed, the World Bank commodity price assumptions imply a substantial real increase in the price of oil over the next decade to more or less the average level, in constant prices, prevailing during 1974–77. While substantial uncertainty is attached to any future forecast of energy prices, the fact remains that, notwithstanding wide fluctuations, the average real price of oil during 1974–86 was fourfold the level in 1972–73. In general, the Arab countries, like many other developing countries, have been slow in adjusting to the reality of expensive energy. A rational response to the higher economic price of energy should have been a slower rate of growth of energy consumption and/or a reduction in the energy intensity of output. This generally did not happen. As Table 3 shows, energy intensity increased substantially in all countries except Morocco. Also in all countries except Morocco the rate of growth of energy consumption during 1973–84 was substantially higher than in 1965–73. Encouraged by low and falling energy prices, energy intensity of output increased particularly rapidly in Egypt. Real energy prices declined by 50 percent over the last decade and were on average less than 20 percent of international prices in 1985. In 1986, even after the considerable drop of international energy prices, domestic prices were only about one third of economic prices. Consequently, the economic subsidy on domestic sales of energy has grown enormously and, at prevailing world economic prices, probably amounted to almost 10 percent of GDP in 1985. This has impacted very unfavorably on both the fiscal position and the balance of payments. The direct effects of cheap energy prices on the fiscal and the balance of payments position were compounded by the increased domestic and foreign exchange costs of the large power investment program which was required to meet rapidly growing demand.

Table 3.Trends in Energy Consumption
Energy Intensity1

Growth of Energy



Per Capita
Percentage(percent per annum)(Kgoe)
Syrian Arab Republic0.380.54429.711.8212799
Source: World Bank, January 1987.

Caution should be used in comparing the level of energy intensity between countries because such comparisons are influenced by economic structure, climate, types of fuel used, energy efficiency, and exchange rate distortions.

The ratio of kilogram of oil equivalent to one dollar of GDP. GDP in local currency in constant 1980 prices was converted to U.S. dollars at average exchange rates of 1980.

Source: World Bank, January 1987.

Caution should be used in comparing the level of energy intensity between countries because such comparisons are influenced by economic structure, climate, types of fuel used, energy efficiency, and exchange rate distortions.

The ratio of kilogram of oil equivalent to one dollar of GDP. GDP in local currency in constant 1980 prices was converted to U.S. dollars at average exchange rates of 1980.

A steady increase in energy prices consistent with the declared Egyptian Government goal of reaching international prices by 1992 would provide strong support not only to the balance of payments but also to the fiscal situation. By 1994, the annual savings in foreign exchange could well be $1.5 billion (equivalent to 12 percent of export earnings) and the increase in budgetary revenues would amount to LE 12.5 billion (equal to 17 percent of total revenue).

Energy prices are also an important issue in the Syrian Arab Republic. Because of the multiplicity of exchange rates used in Syria, comparison with international prices poses a special problem. If comparison is made at the tourist exchange rate of LS 9.75 per U.S. dollar, it appears that until 1985 all petroleum product prices (except gasoline) were considerably below international levels. In the case of fuel oil and liquefied petroleum gas, domestic prices are even more of a problem. Electricity prices, in real terms, have decreased by more than 25 percent during the last decade and do not cover operating costs much less capital costs. It is hardly surprising that the demand for electricity expanded at 20 percent per annum during 1974–84—double the rate of growth of GDP. A very substantial real increase in electricity tariffs may be warranted and will help to slow down growth of demand; improve the financial position of the electricity authority; and reduce the required level of power investments. While distorted energy prices contribute to macroeconomic imbalances, they also have adverse impact on the pattern of industrial growth. Large subsidies on energy can encourage the establishment of capital-intensive and energy-intensive industries, such as aluminum smelting and fertilizers, which under economic energy prices may not be viable.

Improving efficiency in the energy sector is not a matter only of economic prices. For instance, electric transmission losses are extremely high in Syria: in 1984 they were 38 percent of gross generation, whereas in an efficiently run system they should not have exceeded 15–17 percent of gross generation. The imbalance in the investment program, as between generation, transmission, and distribution, may have contributed to the situation.

Improving the Effectiveness of the Public Sector

Greater reliance on market mechanisms will certainly help to improve economic efficiency. The effective management of the public sector, however, goes beyond correcting the price signals. In most Arab countries, the public sector is very large. In Egypt, for instance, it accounts for over 50 percent of gross national expenditures. Direct allocation decisions as well as the strength of the public sector institutions can thus be critical for growth. There are three related aspects of management of resources in the public sector which deserve special attention in the current context of the need for adjustment:

  • Managing the decline in public investment by a sharper focus in investment priorities.

  • Redirecting the constrained recurrent expenditures not only to achieve greater efficiency but also to protect the access of the poor to key social services such as basic education and health.

  • Increasing the contribution of the sizable public enterprise sector to reducing financial imbalances and to increasing productivity.

Managing Declining Public Investment

In the 1970s there was a rapid growth of investment, especially public investment. This rapid growth combined sometimes with distorted price signals and loose internal controls engendered waste. The quality and effectiveness of public investments in Morocco, Egypt, and Tunisia during the last decade tended to deteriorate. The economic climate is very different today. Because of the need to reduce macroeconomic imbalances, public investment faces sharp cutbacks. Indeed, in Morocco, the public investment program has already been drastically reduced since 1980. In Algeria, total investment may fall as much as 35 percent between 1985 and 1988. In Egypt, the level of real public investment may decline by as much as 20 percent between 1985 and 1990, and a similar fall is likely in Tunisia. A major restructuring of the public investment program may thus be required in many Arab countries. In general, this requires bringing more order to investment planning, completing ongoing projects, and concentrating on the productive sectors.

In broad terms, such a reordering would result in a change in the sectoral composition of public investment. In Egypt, for instance, there is a need to increase the level of investment in the energy sector to supply power generation more economically, to foster the development of Egypt’s gas resources, and release petroleum for export. In agriculture, there is scope for reducing the size of the land reclamation program. This will mean shifting emphasis from efforts for horizontal expansion based on land reclamation plans to vertical development in terms of intensifying production on land already under cultivation. Improvement and extension drainage, rehabilitation, and modernization of the irrigation system deserve very high priority and would have high economic payoff. In contrast, the program of new lands which absorbs over half of public investment in agriculture has low economic returns and long gestation periods. In Tunisia, the pruning of the public investment program should be possible through postponement of a number of projects which have low economic priority and a greater focus in regional development strategy on cost-effective spatial decentralization consistent with implementation constraints. The universal existence of overcapacity in public infrastructure will help to minimize the adverse impact on growth. However, in Morocco, the compression of the public investment program may have already proceeded too far and will inevitably affect future growth. Still in a large number of cases there are few alternatives to scaling down and reorienting the public investment program. To continue to spread the inadequate resources across the whole investment program, thereby delaying the completion of all projects, will needlessly tie up too much of scarce resources in unfinished projects and delay benefits.

Targeting of Social Expenditures and Subsidies

The opportunities for restructuring are, of course, not limited to public sector investment spending. Typically, government recurrent costs are a much higher proportion of GDP than investment spending. But there are rigidities in recurrent costs related to wage bill, debt service, and transfers to local authorities. Also, the expenditures on defense and national security are politically very sensitive. Nonetheless, opportunities exist for better targeting social expenditures and subsidies on the poor and improving the effectiveness of current outlays. The World Bank is currently supporting a reform of the education sector in Morocco through a structural adjustment loan. Because of the constraints imposed by the stabilization, education expenditures in Morocco are expected to decline in real terms by 25–30 percent between 1985 and 1990. The education reform program is designed, financial constraints notwithstanding, to increase literacy among Moroccans by improving the equity of access to basic education, to improve efficiency of the education system, and to meet more effectively the country’s employment needs through the redirection of a greater proportion of students into vocational training instead of general, higher education. Controlling public sector education costs is a vital part of the program and would be achieved by increasing the minimum hours for teachers; strengthening the presence of the private sector in education, building a more cost-effective program of teacher training, reducing boarding in university facilities, lowering unit costs of school construction, and by lowering repeater rates. The reform program will require more selectivity in student entry into higher levels of education after basic schooling. The reform involves a significant change in the objectives of the education system which could face resistance from key participants, teachers, students, parents, and school administrators. The Government is aware of the risks and has conscientiously sought to minimize them by situating the reform in the context of restructuring in other sectors by involving key interest groups (including teachers’ unions and political parties) in early deliberations on the reform and by testing public receptiveness on a number of key reforms before committing itself to the full reform program.

Morocco is also attempting better to target food subsidies. Estimated food subsidies were equivalent to 2.6 percent of GDP or 11.6 percent of government current expenditure in 1985. But only 16 percent of the budget cost of the subsidy program goes to help the lowest 30 percent of expenditure groups. The Government of Morocco has proposed eliminating consumer food subsidies by 1990 in order to decrease the budget deficit and to increase the efficiency of government spending. Even if all the supply-side measures are implemented, a major adjustment in consumer prices of soft-wheat flour and vegetables (about 10 percent per annum in real terms) from 1986 through 1989 will be required following elimination of subsidies. It is thus necessary to protect the poor from a drastic curtailment of subsidy outlays. It is believed, however, that impact on the poor can be minimized by expanding existing underfunded food aid programs.

Until relatively recently, large public sector spending on health in Tunisia has been heavily directed toward hospital-based curative care in urban areas while primary health care has been relatively neglected. The concentration of resources on construction and operation of hospitals has resulted in waste, both in terms of the priority needs of the sector and of cost-effectiveness. Disparities in access to basic health services especially between rural and urban areas may explain why Tunisia’s infant mortality rate of 79 per 1,000 live births in 1984 was substantially higher than in Jordan (50 per 1,000) and the Syrian Arab Republic (55 per 1,000), and only moderately below Egypt (94 per 1,000) and Morocco (91 per 1,000).

The Government is now planning a drastic curtailment of hospital construction and consolidation of hospital capacity to avoid major financial problems. Concentrating investments on rehabilitation, re-equipping and major maintenance of health facilities as well as reallocating operating resources away from additional staffing toward drug purchases, information and management incentives, supervision, preventative maintenance, and staff incentives will clearly have high economic payoff.

Reforming the Public Enterprise Sector

As mentioned above, the large public enterprise sector coexists with the private enterprise sector in most Arab countries and is responsible for a large proportion of public investment. The rapid development of the public sector has been the result of a number of factors: the efforts to increase national participation by reducing reliance on foreign ownership and control, the perceived need to secure public control of natural resources, to provide stimulus to develop capital-intensive industries such as steel, fertilizers, basic chemicals, and petrochemicals which were deemed necessary for long-run economic development but which were seen as beyond the capacity of the private sector. In a period when government resources were not particularly scarce, the drain caused by the public enterprise sector on the fiscal position was not a matter of great concern. But as large macroeconomic imbalances have emerged, the role of the public enterprise sector has come under greater scrutiny. There is also increasing recognition that there are limits to management capacity in the public sector. Finally, the experience has been that the governments are often not quite quick enough and flexible enough to adjust investment programs to changed circumstances. For instance, the pressures for deepening industrial structure were so strong, in the post-1973 period, that they led to excesses, even in Korea, where the broad shift toward heavy industry and machinery sectors was generally well conceived. Thus, in a large number of developing countries, a much needed reappraisal is going on about the role of the public sector, especially the public sector industry. A critical look from this point of view may also be necessary in many Arab countries. But even with some privatization and divestiture of existing assets and limiting of future growth, the public enterprise sectors will remain sizable. The issue of their efficiency is, therefore, central to reviving economic growth. The goal should be to achieve financial independence and accountability of public enterprises and to develop their administrative capacity and managerial autonomy.

The World Bank is assisting the Moroccan Government in developing a program of rationalization of public enterprises and is initiating preliminary studies of public enterprises in Tunisia. Under the reform program in Morocco the bulk of the financing for key public service enterprises (such as electricity authority, national water supply company, and railways) would come by 1990 from either self-financing or capital market sources, compared with a nearly 50 percent state contribution at present. The government medium-term objective is also to eliminate the operating subsidies completely and to provide investment funds only in the form of equity contributions so as to improve debt equity ratios. For the industrial and commercial enterprises, no public financial assistance will be provided. In order to achieve these targets, flexibility in pricing of services, in line with economic criteria, will be essential. Government arrears to public enterprises will be settled. The mechanism for appraising, selecting, monitoring, and evaluating specific projects will be strengthened. Finally, the most urgent objective of the reform is to give more administrative and managerial responsibilities to even monopolistic commercial public enterprises while strengthening the Government’s ability to oversee their activities and to monitor their performance. While shifting the responsibility for current organizational and operational decisions and investment implementation to the enterprise management, the government interventions will focus on strategic development, general policy matters, major investment decisions, and performance evaluation.


Most Arab countries are likely to face a more difficult external economic environment over the next several years, even assuming some recovery in the real price of oil. The present financial crunch, however, offers important opportunities for tackling underlying structural problems and increasing the efficiency of resource use and the effectiveness of public institutions. Turkey’s case after 1980 suggests the value of alarming deterioration in the economic situation in forcing a fundamental change in economic strategy. It is an interesting question whether Turkey would have taken its economic problem so seriously and made such a major shift toward outward-oriented growth strategy if adjustment had not been so greatly neglected during 1974–79 and if the external shocks after 1979 had not been so large.

It cannot be overemphasized that a high degree of political commitment to economic development, continuity of political and economic leadership, and societal consensus are essential prerequisites for sound economic policies and economic reform programs. However, in order to deal effectively with structural problems and inherent uncertainties in the international economic situation, the macroeconomic management will also need to be strengthened substantially and key policy shifts will have to be made. Some of the policy improvements which will help economic adjustment are outward orientation of development strategies; liberal economic framework with greater reliance on market signals; selectivity and effectiveness in the quality of public sector interventions; encouragement of high domestic savings in the private and public sectors; restructuring and prioritization of public investment programs; and a high degree of flexibility and quick speed of policy responses within the framework of stability and predictability of basic policy objectives.

The essential meaning of flexibility is that countries should be willing to review the assumptions of development strategy and planning framework. Flexibility also involves relatively quick policy response to changing economic circumstances. It is often the case that as sensible economic policies work, the confidence of the policymakers in their own effectiveness increases, and they are more willing to take risks inherent in policy changes, and are less and less wedded to the status quo. In economic reform, as in other things, the first steps are often the most difficult.

Algeria, Egypt, Jordan, Morocco, the Syrian Arab Republic, and Tunisia.

During 1980–85, exports of manufactures from developing countries expanded by 7.9 percent per annum compared with 13.8 percent per annum growth during 1973–80 and 11.6 percent annual expansion in 1965–73, according to the World Development Report, 1986 (Washington: World flank, 1986), Table 3.3, p. 48.

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