Saíd El-Naggar
Published Date:
September 1987
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Mohamed Hashim Awad

Mr. Hasan’s stimulating and thought-provoking paper raises a number of complex and controversial issues. In my comments, I confine myself to four major issues.

Mr. Hasan contrasts stabilization policies with structural adjustment policies. The former, he asserts, aim at restoring macroeconomic balance through monetary, fiscal, exchange rate, and income policies. Structural adjustment policies, in contrast, aim at improving the efficiency in the use of economic resources and maintaining growth at a reasonable level. Earlier, he states that he is contemplating sustained growth over the medium term. He thinks that it is possible to achieve this goal with lower investment and/or lower imports by reducing the incremental capital/output ratio (ICOR) and import elasticity coefficients. To lower capital/output ratios, he recommends raising human and technical efficiency and using labor-intensive techniques. For lowering the (income) elasticity of imports, he proposes energy conservation measures, import substitution (in foodgrains, in particular), devaluation, and rationalization of prices, subsidies, and incentives for agriculture and industry. He also advocates export diversification by expansion of nontraditional exports. By following this strategy, the author believes, Arab countries could achieve (in the medium term) a reasonable level of growth at a time when capital flows from the industrial countries are declining, protectionism is severely curbing the growth of world trade, commodity prices are slumping, and debt-service burden is absorbing an increasing portion of export earnings.

However, Mr. Hasan repeatedly admitted that the adjustments he proposes take time to materialize. Certainly, substantial reductions in ICORs and import elasticities can be achieved in the long run. Besides, the rate of growth of gross domestic product (GDP) in middle-income oil importing countries covered by the author stood at 1.9 percent in 1984, despite an investment rate of 21 percent of GDP. One wonders how long it will take to raise GDP growth to the reasonable level of, say, 4 percent a year, while maintaining investment at the reduced level of about 15 percent. The most obvious inference that one can make from Mr. Hasan’s exposition is that he is really advocating that the Arab countries he has in mind should simply cut investment and imports so as to live (but, certainly, not to grow) within their reduced means. This simply means that these countries should aim at achieving internal and external balance, i.e., stabilize, and not adjustment with growth.

Mr. Hasan’s approach to structural adjustment is obviously based on the assumption that Arab and other developing countries should do all the adjusting that may be needed. He envisages a continuous reduction in investment and imports in response to persistent declines in capital flows and export earnings in addition to mounting debt-servicing costs. To suggest that this type of adjustment can lead to growth in the medium term is not exactly in keeping with authoritative views on the matter. Moreover, it would dilute the role of the World Bank in the adjustment process. For instance, the Group of Twenty-Four stressed in its communiqué after its meeting of September 27, 1986 that the “advocacy of growth-oriented programs is mere rhetoric unless the present high level of net transfer of resources from the developing to the developed countries is reversed.” Meeting at about the same time, the Group of Ten emphasized that cooperative efforts by borrowing countries, by the Fund and World Bank, by creditor countries, and by commercial banks would be necessary to ensure that sustained growth and financial stability would be achieved by the borrowing countries. Most committees stressed the central role which the World Bank should play in increasing substantially the net flow of resources to the developing countries. The Tokyo Economic Declaration signed by the leaders of seven major industrial countries pledged to contribute to international adjustment by reducing internal and external deficits, stabilizing exchange rates, augmenting flows to developing countries, lowering interest rates, promoting noninflationary growth, and curbing protectionism. Thus, the bases for symmetric international adjustment were laid down.

However, the Bank seems to have neither the power, the resources, nor the will to promote growth-oriented adjustment. Even its more powerful twin, the Fund, admits that it has no leverage on countries that run large external surpluses or that can borrow to fill a deficit. Thus the Fund can exert pressure for adjustment only on deficit countries that need to use its resources—hence the asymmetry in the adjustment process. The Bank shares this weakness with the Fund, but exceeds it with respect to paucity of resources. The Fund-Bank Development Committee estimated that the Bank’s current capital stock can support a maximum continued level of lending of $ 14.5–15 billion a year, whereas the Group of Twenty-Four considers a lending level of $21.5 billion a year by fiscal 1990 as the minimum level consistent with the developmental role of the Bank. All evidence suggests that the Bank has long abdicated this role and is now resigned to playing the Fund’s aide-de-camp. As for growth, which the Bank is supposed to focus on while collaborating with the Fund in promoting growth-oriented adjustment, its place in the overall strategy was delineated by the Fund’s Deputy Managing Director in an interview in the March 1986 issue of Finance & Development: “. . . we don’t necessarily set a target for growth, although we tecognize that a government has a certain growth objective. . . . We don’t view a particular growth rate as an abstract magnitude or target. If better conditions can be created to foster investment, make more efficient use of resources, and attract foreign resources, then the growth rate can be very high. If these conditions are not there, the growth rate is not going to be as high.”

Mr. Hasan supports his exposition by examples from the experience of six Arab countries “which are active borrowers of the World Bank.” They are Egypt, Morocco, Algeria, Tunisia, Syria, and Jordan. Like Jordan, which together with Egypt and Morocco are the subjects of the three case studies presented to the conference, they are middle-income countries. They include neither high-income oil exporting countries (Libya, Saudi Arabia, Kuwait, and the United Arab Emirates), nor low-income ones (Djibouti, Somalia, Sudan, Mauritania, the Yemen Arab Republic, and the People’s Democtatlc Republic of Yemen). Unlike most of the others, the countries mentioned in Mr. Hasan’s paper are mostly well populated, fairly industrialized, fast growing, and with relatively low inflation rates, large short-term debt, and high military expenditure. They are, also, more recently experienced in adjustment than most of the poorer countries. All these factors render generalizations based on studies relating to these countries unacceptable as guidelines for either researchers or policymakers dealing with the entire Arab region. Indeed, one is driven to questioning the wisdom of drawing such an unrepresentative sample for the deliberation of a pan-Arab colloquium.

Equally intriguing, yet puzzling to me, is the choice of a regional framework for dealing with a global theme like growth and structural adjustment when no attempt is made to adapt recommended policies to the special conditions in the region in question, or to identify areas of similarities and possible policy coordination and joint action. Indeed, it is regrettable that while the industrial countries are actively coordinating their adjustment policies with full collaboration from the Fund in the context of multilateral surveillance using quantitative indicators developed by the Fund, no such coordination is demanded or requested from Third World countries, including Arab ones. Although the possibilities for it are enormous, collective adjustment by Arab countries is not, it seems, a subject of discussion in this seminar. Hence its unfortunate omission from Mr. Hasan’s otherwise extensive coverage of the subject.

Missing from most literature on adjustment and growth is an assessment of the rebound effects on the industrialized countries of the type of adjustment described by the author of this paper. Until recently, the developing countries, particularly oil exporters, were the fastest growing markets for the exports of industrial countries. This market provided a stimulus and was an important factor in sustaining recovery and alleviating recession in industrial countries.

Eventually, developing oil importing countries were caught between rising debt-servicing costs, declining export earnings, and shrinking capital inflows. Their GDP growth slowed, and so did the growth rate of their exports. But the fall in their imports was even greater, owing to shortages in export earnings and increases in debt repayment. At the same time, the recession was deepening in the industrial world, which made developing countries even less capable of exporting to it, especially as protectionism spread, and thus increasingly unable to import its products. No doubt, both suffered from this interaction. The harm to both may be even greater if oil exporting countries undertake drastic adjustment measures. At the present time, developing countries are experiencing what is to all intents and purposes a full-fledged depression, which may well extend to the industrial world. The upshot of all this analysis is that industrial countries will be better off assisting the developing countries to revamp their declining economies than using the Fund’s conditionality to open forcibly their markets or to squeeze debt repayments out of them. Revived developing economies can help to accelerate the recovery of the industrial world’s economies more effectively than the retrieving of debts for which its flagging economies have no immediate need. In fact, only expanding economies can, as the Group of Twenty-Four and the Development Committee insist, repay debts of the magnitude that currently burden most Third World countries. This means that our aim should be the initiation of growth-oriented adjustment based on increased investment and importation, but also on continuous improvement in the use of foreign exchange, energy, capital, and other scarce economic resources, as suggested in Mr. Hasan’s paper.

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