Appendix I. Key Structural Reforms, July 2004–February 2007
Appendix II. Growth Constraints and Second-Best Theory
Appendix III. The Technological Classification of Products
Aghion, Philippe, and Peter Howitt, 2005, Appropriate Growth Policy: A Unifying Framework, Joseph Schumpeter Lecture, mimeo (http://post.economics.harvard.edu).
Blavy, Rodolphe, 2006, “Public Debt and Productivity: The Difficult Quest for Growth in Jamaica,” IMF Working Paper No. 06/235 (Washington: International Monetary Fund).
Creane, Susan, Rishi Goyal, A. Mushfiq Mubarak, and Randa Sab, 2006, “Measuring Financial Development in the Middle East and North Africa: A New Database,” IMF Staff Papers Vol. 53 No. 3 (Washington: International Monetary Fund).
Dobronogov, Anton, and Farrukh Iqbal, 2004, “Economic Growth in Egypt: Constraints and Determinants,” ERF Working Paper No. 200420.
The Egyptian Center for Economic Studies (ECES) Business Barometer 2002–2006 (http://www.eces.org.eg).
Galal, Ahmed, and Samiha Fawzy, 2001, “Egypt’s Export Puzzle,” Egyptian Center for Economic Studies, Policy Viewpoint No. 9, July 2001.
Hauner, David, 2006, “Fiscal Policy and Financial Development,” IMF Working Paper No. 06/26 (Washington: International Monetary Fund).
Hausmann, Ricardo, Dani Rodrik, and Andres Velasco, 2005, “Growth Diagnostics,” Working Paper available at http://ksghome.harvard.edu/~rhausma/new/growthdiag.pdf.
Hausmann, Ricardo, and Bailey Klinger, 2006, “Structural Transformations and Patterns of Comparative Advantage in Product Space,” mimeo.
International Finance Corporation, 2006, Micro, Small, and Medium Enterprises: A Collection of Published Data (July 2006 Update), and Companion Note.
International Monetary Fund, 2006, Arab Republic of Egypt: 2006 Article IV Consultation, IMF Country Report No. 06/253 (Washington: International Monetary Fund).
Lipsey, R.G., and Kevin Lancaster, 1956, “The General Theory of Second Best,” The Review of Economic Studies, Vol. 24, 1 (1956–57).
Psacharopoulos, George, and H.A. Patrinos, 2002, “Returns to Investment in Education, A Further Update,” Policy Research Working Paper Series 2881 (Washington: World Bank).
Reinhart, Carmen, Kenneth Rogoff, and Miguel Savastano, 2003, Debt Intolerance, Brookings Papers on Economic Activity, Vol. 1 (Washington: Brookings Institution).
Subramanian, Arvind, 1997, “The Egyptian Stabilization Experience: An Analytical Retrospective,” IMF Working Paper No. 97/105 (Washington: International Monetary Fund).
World Bank, Doing Business, Annual Reports (2004, 2005, 2006, 2007).
World Bank, 2005, “At the Frontlines of Development: Reflections from the World Bank,” edited by Indermit S. Gill and Todd Pugatch (Washington: World Bank).
Zettelmeyer, Jeronimo, 2006, “Growth and Reforms in Latin America: A Survey of Facts and Arguments” IMF Working Paper No. 06/210 (Washington: International Monetary Fund).
Middle East and Central Asia Department, IMF. The author would like to thank Nicole Laframboise, Andreas Billmeier, Todd Mattina, Gerard Almekinders, Domenico Fanizza, Enrique Gelbard, Cyrus Sassanpour, Nadeem Illahi, Nihal Magdy, Shehadah Hussein, and Lorenzo Pérez for useful comments and suggestions; Judith Rey and Estefanía Fallas for secretarial support; Anna Maripuu for research assistance; and Luisa LaFleur for editorial help.
This focus on a few relevant constraints is sometimes contrasted with the straw man of an IFI economist armed with a long laundry list (“Washington Consensus”) of textbook reform recommendations that governments have neither the administrative capacity nor the political capital to implement.
“Theory of Second Best” (Lipsey and Lancaster, 1956); see Appendix II for some conceptual clarification. The theory of second best would constitute a sound theoretical underpinning of the “laundry-list” approach to reform, because it implies that the only completely certain way for reforms to remove growth constraints is removal of all distortions at once.
The approaches are complements rather than substitutes: growth regressions can help identify the variables that potentially reflect growth constraints and thus inform the growth diagnostic of a particular case.
Business surveys have intrinsic methodological limitations. For example, concerns about corruption may increase not because of an increase in actual corruption, but because reforms have moved the country onto the radar screen of international investors and, as a result, the group responding to the survey has changed and now includes businessmen who look to the country as a potential destination for investment, and naturally pay greater attention to corruption issues.
The Executive Opinion Surveys (henceforth referred to as WEF surveys) are part of the World Economic Forum’s Global Competitiveness Reports 2004/05–2006/07 (henceforth WEF Reports).
For Brazil, along with the very high real interest rates, this is important evidence for the diagnosis in Hausmann, Rodrik, and Velasco (2005) of access to finance as the critical constraint on growth.
As proxied by nominal rates deflated by CPI inflation over the subsequent 12 month period (Figure 3); similar trends would emerge by using annual average nominal rates deflated by average annual CPI inflation.
Part of their argument rests on low credit growth against the background of a high correlation between growth and private sector credit; however, this observation would also be consistent with, for example, low appropriability constraining private investment and hence demand for credit.
IFC (2006). Strong caveats apply to these data, in particular to comparability across countries, as spelled out in the companion note.
In the 2004 WEF report, Egypt’s financial efficiency is ranked relatively low both compared to the peer group and compared to Egypt’s global competitiveness index (GCI) ranking. In the subsequent WEF reports, a measure of financial efficiency is not reported separately anymore and becomes part of a “market efficiency” index, for which the above relatively low ranking continues to hold—another indication that access to finance obstacles have changed little over the last few years.
High public debt may affect private investment through additional channels (Blavy, 2006), such as tilting investments to projects with shorter time horizons because of greater uncertainty and/or because liquidity constraints are aggravated; by reducing the scope for complementary public investments; or by reducing reform willingness as governments perceive the benefits of reforms to accrue disproportionally to creditors.
See Reinhart, Rogoff, and Savastano (2003) for a discussion of the link between dollarization and debt problems. That paper also documents that Egypt—while one of the countries having experienced debt problems at some point in time—never resorted to the very high inflation rates ahead of default that were typical for “serial defaulters”; indeed even in the years leading to the 1991 crisis, inflation remained fairly stable at around 20 percent and reliance on the inflation tax quickly dropped thereafter (Subramanian, 1997).
Dobronogov and Iqbal (2004) argue that even the much greater macroeconomic imbalances in the early 1990s (with total public debt exceeding 150 percent of GDP) did not constrain growth as their resolution by the mid-1990s “did not help to increase private investment rates.” However, the sizeable increase in nongovernment investment rates (from an average of 11 percent of GDP during 1991/92–1995/96 to 14 percent for the subsequent five years), and the concomitant growth spurt provide some evidence that macroeconomic stabilization in the early 1990s did remove a then-binding growth constraint (possibly operating through debt overhang effects).
Strong caveats apply to the Doing Business indicators as the data reflect responses from a relatively small group of correspondents, and the methodology (or its interpretation by correspondents) may not be entirely stable over time and across countries. For example, anecdotal evidence does not confirm the dramatic regulatory deterioration implied by certain reported data, such as that the time to enforce a typical contract has quintupled (from 200 days to 1,000 days) and that the number of required procedures tripled (from 19 to 55) between 2004 and 2006. The aggregation between the indicators in the various subcategories and the aggregate may also need to be taken with a grain of salt. In the 2007 report, for example, Egypt ranked much higher in all subcategories (except for dealing with licenses) than in the overall ranking.
Despite being listed among the top ten reformers in the 2006 Doing Business report, Egypt’s global ranking (according to the 2007 report) rather counterintuitively did not improve.
There could then be a case for subsidizing such “self-discovery,” obviously with the caveat that such subsidies must be confined to innovators (who generate positive externalities) and don’t go to imitators (who don’t generate externalities). To avoid such state intervention being captured by special interests, fairly stringent budget and accountability restrictions must be in place—which in turn may require qualities of public administration that are not always available. Getting at least government-induced obstacles out of the way may then be more feasible than trying to design enlightened government intervention. However, Aghion and Howitt (2005) provide some theoretical arguments, and view the “East Asian Miracle” as well as Western Europe’s postwar growth as providing empirical evidence, that a measure of protection could support catch-up growth, and that primary and secondary (but not tertiary) education is critical for catching up.
Interview with Minister of Trade and Industry, Businesstodayegypt.com, Article 6759, September 2006.
The institutions that ensure contract enforcement, physical security, etc., could be similarly seen as complementary production factors, but have been considered above as elements affecting appropriability of returns.
Psacharopoulos and Patrinos (2002) compile country studies on education returns, which indicate that, in Egypt at least through 2000, returns (5.2 percent increase in average earnings per additional school year) were among the lowest in its peer group, with the highest returns in Morocco (15.8 percent), Brazil (14.7 percent), and India (10.7 percent). However, as the studies differ by methodology and time period covered, such comparisons need to be taken with more than one grain of salt and are at best indicative of broad trends.