How can the Middle East and North Africa region (MENA) survive and grow in the “new normal” global economy?

That was a question that economists at the Economic Research Forum’s (ERF) 24th annual conference held this week in Cairo attempted to find answers to.

The “new normal” is a phrase coined by Egyptian-born economist Mohamed Al-Erian to describe the subdued growth of the global economy in the aftermath of the global financial crisis in 2008.

In a column penned ahead of the conference, Ibrahim Al-Badawi, managing director of the ERF, showed that the MENA region had experienced several episodes of short-term commodity and capital booms throughout its recent history, but that these had had a relatively limited effect in boosting sustained growth.

The booms had been associated with large inflows of foreign currency in the form of natural-resource exports for oil-exporters that were then redistributed to oil-importers through remittances and short-term capital flows.

But since 2008 several factors had affected the region, according to Al-Badawi. First, there had been the global financial crisis with the slowdown in economic activity and trade, “causing a temporary dip in growth”. Then had come the political and social uprisings of the 2011 Arab Spring, followed by an “unexpected plunge in oil prices — 50 per cent since their peak in mid-June 2014 — marking the end of the commodity super-cycle that began in the early 2000s.”

Under these circumstances Al-Badawi argued that the region needed to achieve sustained growth and to apply an appropriate macroeconomic framework for absorbing shocks associated with the “new normal”.

The Asian Model

One model the region can learn from is that of East Asia, particularly South Korea. Keun Lee, an economics professor at the Seoul National University in South Korea, spoke at the conference of the necessity of framing industrial policy to improve the structure of domestic industry to enhance international competitiveness. 

Lee told Al-Ahram Weekly that it was important to create industries which could export to bring in foreign-currency earnings.

These could then be used to import capital goods to build more factories to generate further hard-currency earnings, eventually balancing the trade deficit and turning it into a surplus.

In the 1950s, South Korea had been emerging from a civil war which had destroyed all industrial capacity. “We did not have enough food and relied on food aid from abroad,” Lee said.

South Korea had then mobilised its resources into certain industries, using them as growth engines before moving onto new sectors. It had started out with the textiles and clothing sector and later moved to technology-based sectors such as telecommunications.

Lee stressed the importance of adding value to natural resources. “Processing raw materials… that is what industrial strategy should aim at,” he said, explaining that oil-exporting countries should aims to have the facilities to process oil into products with added value rather than simply exporting it as a raw material.

He suggested that countries in the MENA region could prioritise and promote certain sectors and give them incentives in the form of loans or tax exemptions. “Private companies cannot do everything alone, so governments should help by providing incentives,” Lee said.

Regarding how exports from the region could find a foothold in an increasingly protectionist global market, he said that countries like Egypt could first try to sell their goods within the regional blocs they were part of.

If the products were competitive in terms of quality and price, there would be demand for them on the global level, he said.

Lee stressed that besides being linked to the global value chain and having strong institutions, innovation and capacity building had been driving forces in the Asian growth model.

However, Diaa Noureddin, a professor of economics at the American University in Cairo, said that it might not be easy to replicate the experience of South Korea.“We underestimate the disruptive nature of today’s technologies. The duration between discoveries is becoming shorter and planning state intervention around these technologies is very difficult,” he said, adding that the private sector could be better placed to do so. 

The US companies General Motors and Exxon Mobil had at one point been the two highest-growing firms in the world, Noureddin said, but today their place had been taken by technology-based firms like Amazon and Google.

What was important for MENA was to focus on the quality of institutions. “We lack basic infrastructure, and this needs to be in place before we can talk about industrial policy,” Noureddin said, adding that the MENA countries needed to avoid industrial policy in the classic sense and instead provide a suitable environment for innovation.

Strong Institutions

Raimundo Soto, a professor at the Universidad Catolica de Chile in Chile, offered his take at the conferences on the threats to the global economy and MENA in particular.

One of these was the retreat in cross-border economic integration through the rise in protectionism, nationalist European political parties and anti-immigration sentiment, he said.

He highlighted destablising factors to the global economy, such as the threat of European Union disintegration and the exit of Britain from the economic bloc.

Regional conflicts were also taking their toll on the economies of various parts of the world, including the Middle East, Russia and China and its neighbours, he said. There were also further risks from technological change.

These could “alter dramatically the production landscape and even the social contract”, he said. He said artificial intelligence could induce massive changes in labour markets and company operations. “The kind of regulations we pass will make a difference on how these changes could impact us,” he said.

Soto said that new Chilean labour laws were rigid on issues such as hiring and firing and encouraging automation.

He expected “faster, continuous, deep and far-reaching changes and challenges to be the norm for policy-makers” and recommended that they be prepared for them through macroeconomic institutions for sustainable growth.

Lessons from Egypt

Reporting on collaboration between the Economic Research Forum (ERF) and the Egyptian Centre for Economic Studies (ECES), Paul Makdissi, a professor of economics at the University of Ottawa in Canada, presented evidence on the distributional impact of recent subsidy reforms in Egypt during the ERF conference.

In a blog written ahead of the conference, Makdissi said there was widespread agreement that development policies should aim to promote inclusive growth. He stressed that more inclusive economic policies were important to help promote economic growth.

This was evidence that “a low level of inequality is as important as low inflation, a sustainable public budget and financial regulation in maintaining sustainable high levels of economic growth,” Makdissi said.

He added that there may be a link between polarisation in the distribution of incomes and social unrest and that “therefore having a more equitable distribution of economic outcomes can be instrumental in protecting a country’s stability.”

To reduce such inequality, he suggested a combination of policies. In the long run, policy-makers could help reduce inequalities of opportunity through investment in high-quality public education and health systems, he said. In the short run, the direct taxation of income and direct transfer programmes aimed at increasing the income of the poorest could help reduce inequalities. Another suggestion would be to tax or subsidise consumption.

Makdissi showed that the MENA countries have historically relied most on consumption subsidies for reducing inequality. They spent $237 billion in 2011 on such subsidies, he said, representing 8.6 per cent of the region’s total GDP and 22 per cent of government spending.

Makdissi looked at Egypt’s efforts to tackle growing subsidy expenditures. Except for subsidies on butane gas cylinders, the fuel subsidies in Egypt had been found to increase the level of inequality, he said.

Fuel subsidies had more than doubled over a decade to reach 22 per cent of the total government budget in 2012, or seven per cent of GDP. In comparison the combined spending of the government on education and health represented five per cent of GDP, he said.

Food subsidies represented two per cent of GDP, food-ration cards represented 0.5 per cent, and direct transfers to the poor 0.17 per cent of GDP.

According to Makdissi, the reforms implemented by the government since 2014 and more aggressively since 2016 in terms of fuel subsidy cuts and increased subsidies on food had pointed in the right direction.

Of the application of the value-added tax (VAT) in 2016, he said that “depending on the distribution of expenditure on goods that are excluded from the VAT, this measure could be socially desirable or not.” The same thing applied to the recent increase in the metro ticket price, but “the capital-gains tax freeze for three years is almost certainly regressive”.

Makdissi commended increases in subsidies on infant formulas and paediatric medicines and the expansion of coverage of the Takaful and Karama cash-transfer programmes to support the vulnerable and elderly, as well as the introduction of free school meals and new gas connections in poorer areas.

“Although many of the reforms implemented by the Egyptian government seem to move in a socially improving direction, more research is needed to assess the overall impact of these changes,” Makdissi concluded.

*A version of this article appears in print in the 12 July 2018 edition of Al-Ahram Weekly under the headline: MENA trials and tribulations