The Social Effects of Economic Adjustment on Arab Countries

INTERNATIONAL MONETARY FUND

• Editorial: INTERNATIONAL MONETARY FUND
• Año: 1997
• ISBN:
  9781557756053

NONE

1 Economic Reforms, Growth, Employment, and the Social Sectors in the Arab Economies

Patricia Alonso-Gamo and Mohamed A. El-Erian

Most Arab countries have embarked on, or are in the process of formulating, medium-term economic reform policies with an important common objective: sustaining a high level of economic growth. This objective reflects policymakers’ increasing recognition that structural changes and financial stability are needed if their economies are to (1) provide sustainable employment opportunities for the un- and underemployed, as well as for the increasing number of nationals entering the labor force; (2) progress further in improving basic social indicators; and (3) benefit from the important changes taking place in the regional and international economies.

The Arab countries are not alone in this regard. A large number of industrial and developing countries are undergoing a similar process. These experiences, as well as increasing theoretical and cross-country analytical studies, have resulted in a considerable body of work to draw on in considering country-specific issues. This paper sets out the key issues in assessing the relationship between economic reforms, growth, employment, and social sector performance.

Comment

Galal A. Amin

Apart from the introduction and the conclusion, this paper consists of three sections: one analytical or theoretical, one dedicated to the Arab countries as a whole, and one to the individual experience of Jordan. I have serious problems with each of the three sections, but most of my problems stem from my basic disagreement with the whole philosophy of the so-called structural adjustment and stabilization programs. I will try to express these problems in dealing, one after the other, with these three sections of the paper.

Analytical Issues

In a paper titled “Economic Reforms, Growth, Employment, and the Social Sectors,” presented to a symposium titled “The Social Impact of Economic Reform,” one is justified in expecting the discussion to concentrate on the impact of economic reforms on the poor. Simple common sense would lead one to think as follows: since almost all of the suggested reforms imply a smaller role for government, and since the government is supposed to intervene to protect the poor, there is at least a strong presumption that these measures of stabilization and adjustment could very well harm the poor. To discuss this impact one would expect the following questions to be raised:

• How likely is it that the suggested measures for reducing the budget deficit, including cutting or eliminating subsidies for essential goods and reducing expenditure on social services, will harm the poor, since the poor are more likely to need this public expenditure than the rich?
• How high is the devaluation of the exchange rate likely to raise the prices of essential goods and services?
• How likely is it that raising interest rates will discourage investors who cannot afford to pay higher interest rates?
• How much unemployment is trade liberalization likely to cause by displacing domestic production, and how likely is it that it will lead to higher-quality but more expensive imports displacing domestic goods that are of lower quality but more accessible to the poor?
• How likely is privatization to increase unemployment, when a good part of government and public sector employees is economically dispensable?
• How likely are the measures, designed to encourage a greater flow of private foreign investment, to have a negative impact on income distribution and employment by creating a new consumption pattern, applying more capital-intensive technology, displacing domestic competitors, and making the tax system less progressive?

It is a pity that in the analytical section of this paper, most of these questions are not raised or are mentioned in passing with hardly any discussion. An eclectic approach was followed in deciding which issues were to be discussed, emphasizing those aspects that could support the view that the poor are not going to suffer or that, if they do suffer, their suffering is only in the short run.

What do we get instead? Either we get a discussion of the relationship between economic growth in general and poverty, which is not really what we are interested in, or we get statements that are indeed related to our main concern—the impact of adjustment measures on the poor—but that are so cautiously worded that they turn out to be uninteresting tautologies or half-truths. I will try to show what I mean by those two criticisms. First, the paper spends quite a long time discussing the relationship between growth and the reduction of poverty before reaching the readily acceptable but not very interesting conclusion that it is not growth per se that determines what happens to the poor but rather the pattern of growth and the policies associated with it. Or, to put it differently, you can have any type of income distribution with any rate of growth.

We are not concerned with how growth affects the poor, but with how structural adjustment and stabilization measures do. I am inclined to think that the reason the authors give so much attention to this largely unfruitful question (which incidentally is to be noted in much of the IMF and World Bank literature on our subject) is to suggest that economic growth, even though it is not a sufficient condition for reducing poverty, is a necessary condition, which gives extra support to the advocation of structural adjustment and stabilization measures, since it is more likely that these measures raise the rates of growth than help the poor. Hence, if we find that the short-term impact of such measures on the poor is negative, it is concluded that they will have a positive impact in the long run since, by enhancing growth, they will help the poor.

But I am not happy with this line of thought for at least two reasons. First, the contrast to be made should really not be between growth and no growth, but between higher and lower rates of growth. Of course, if there is no growth at all, the poor (as well as the rich for that matter) must suffer in the long run. What about a modest rate of growth, not as high as 8 percent or 10 percent but only 4–5 percent, without the so-called economic reform measures? Is it not conceivable that the poor would not suffer either in the short run or in the long run? What I am suggesting is that to persist in showing that growth is a prerequisite for improving the condition of the poor is not only an uninteresting exercise because it states the obvious, but also a misleading one because the real choice, and the interesting one, is between high and low rates of growth. Put like this, it appears at once that a high rate of growth is by no means a necessary condition for improving the lot of the poor.

Second, how short is this short run that is always mentioned as the duration of the increased suffering of the poor? No precise length of time is given; we are supposed to rely on the assumed positive impact of economic growth in the final analysis. With high growth rates, we are told, come greater investment rates, which will lead to higher employment and higher incomes all around. This is of course based on the experience of Western countries over the last century and most of the present one. It is the famous finding of Kuznets and is the essence of the trickle-down theory. But this is hardly a source of comfort for Arab countries or the third world today, not only because of the familiar criticisms addressed to the trickle-down theory, but also because these conclusions are based on historical statistical correlations that can hardly be confidently taken as a guide to the future. So many things have happened at the same time that economic growth was taking place and that could explain the trickling down much more than growth itself, but there is no guarantee that such events will be repeated. Strong trade union movements, for example, as well as colonialism could be responsible for much of the trickling down, much more than economic growth itself, so that Arab countries that have neither strong trade unions nor colonies must wait much longer before any trickling down can take place.

Turning now to the few statements that do address the question of the impact of adjustment policies on the poor, we find that they tend to be selective and often half-truths. What is more, the experience of the industrial countries themselves over the past 20 years, with Thatcherism and Reaganism, suggests that the trickle-down effect could easily be reversed, so that growth could very well be accompanied by worsening income distribution and increasing poverty. Take for example the statement on the impact of adjustment policies on income distribution: “Such policies can also remove some of the reasons for highly unequal income distribution” (p. 9). One reason given is that adjustment policies would eliminate or reduce the “rent” created by entry barriers to private activity.

This statement is perfectly true as formulated, but also uninteresting and misleading because it is a half-truth. The statement is true because there is hardly any economic measure that is unlikely to have some positive impact on income distribution, including bribery and corruption. The issue, however, is whether the net impact on distribution is positive or negative, and there are many reasons for believing that the net impact of adjustment policies on distribution is negative, as I suggested at the beginning of my comments. Hence, I believe that the paper is utterly unjustified in saying that “more generally, structural reforms (particularly, price and trade liberalization, privatization, and labor market and tax reforms) tend to promote equitable economic growth over the medium and long term” (p. 9). Such a statement is based only on the belief that growth must ultimately benefit the poor, but we have just seen that this is not always true.

Another example of this tendency to state half-truths is what the paper says about inflation, the argument being that since the poor suffer most from inflation, and since stabilization policies reduce inflation, the poor must benefit from these measures. But there are so many ways to reduce the rate of inflation, each with a different impact on the poor. You can reduce inflation by making income taxes more progressive or by spending less on education and health or by introducing a sales tax on essential items. The poor may benefit from the first measure but many suffer from the other two.

In the section called “The Role of Government,” the paper makes the sweeping generalization that “developing countries that have followed export-promoting strategies (and have thus been able to benefit from a shift in trade and production toward labor-intensive goods) have generally registered increases in real wages and more equitable income distribution” (p. 13). This statement may be true as a description of some empirical finding that is not as general as the phase “generally registered” may imply. But more important, it would surely be wrong to take this as grounds for advocating trade liberalization as a means of achieving greater equity, as the paper is obviously trying to do. For one thing, export promotion may rely on exporting “more labor-intensive goods,” but these may be more labor intensive than what is being produced in the importing countries while not necessarily more labor intensive than what would have been produced in the exporting country if production were mainly for the domestic market.

Second, trade liberalization is not only export promotion, but also includes the liberalization of imports, which could have detrimental effects on income distribution if it leads, for example, to the decline of domestic industries competing with imports. The authors seem to have felt that the statement was perhaps too sweeping, so they add “openness must therefore be accompanied by other policies aimed at increasing opportunities for the poor” (p. 13), which amounts to saying that trade liberalization is a good thing for the poor provided that something else is done at the same time to help them. This brings to mind a remark by Voltaire that it is possible to kill a flock of sheep through witchcraft, provided that you give them plenty of poison at the same time.

The Arab Countries

In the section entitled “Key Characteristics of the Arab Countries,” our main concern, namely, the impact of adjustment policies on the poor, is again hardly touched upon. What we get instead is a discussion of the performance of Arab countries in economic growth on the one hand, and in social indicators on the other. The message that emerges from ...

Índice

• Cover Page
• Title Page
• Copyright Page
• Content
• Foreword
• Opening Remarks
• 1. Economic Reforms, Growth, Employment, and the Social Sectors in the Arab Economies
• 2. Social Safety Nets: Experiences of Some Arab Countries
• 3. Social Safety Nets: The Social Development Fund in Egypt
• 4. Social Development During Adjustment in the MENA Region: Contradiction or Opportunity?
• 5. Privatization and Labor Issues in the Context of Economic Reform
• 6. Main Themes and Highlights of the Discussions
• List of Participants
• Footnotes