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LSE: Public lectures and events
Middle East and North Africa Regional Economic Developments and Outlook
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A
Thank you all very much for taking the time to come and spend an hour on this topic today here. It's always nice to be back at lse and as Danny was saying, I spent many years here in different capacities and it's always very nice to come back to the school. I want to talk a little bit today about how we see the current economic situation and the challenges facing the particularly the Arab countries in transition. But just to spend maybe one minute on the MENA region more broadly and then I'll come to the focus which is on the Arab countries in transition. If you look at the MENA region more generally, there's essentially two groups of countries. There's the oil exporting countries, most of which are capital surplus, and then there are the oil importing countries, most of which are now going through some form of transition. And if you look at the oil exporting countries this year they expected to grow at around 3.5%. But that 3.5% is not very meaningful number. Why? Because for oil exporting countries growth is essentially driven by two dimensions. Oil production and what's happening in their non oil economies. And the oil production number this year is flat. So essentially it's no growth in that. But the non oil economy, which is really what is a better measure of the level of economic activity? Employment, it's growing more like 5%, some countries a little bit higher. And so in those economies essentially really they're doing better than most parts of the world. Employment still doing good. They have a set of challenges, but their challenges are more medium term. Their challenges are how do you create jobs for nationals. You look at some of these countries actually there's plenty of jobs, but most of them are being done by expatriates. And you've got a growing body of young nationals who are coming in with increasing education levels and questions how you find jobs for them, which is then a question of not where's the job, but how do you match the skill set of the nationals with the demands of the job. There are other big challenges. How do you develop and diversify your economies to reduce dependence on oil over time. But both of these are challenges they're facing which are medium term structural challenges. Short run, the financial numbers are looking good, they run large. Current account surpluses 250, $300 billion a year and their reserves are large. They can weather even a short term fall in oil prices. They've got the reserves to be able to finance their way through that. So that's the sort of oil exporters put them Aside for now, come back to the oil importing countries in the region. You look at the oil importing countries, as I said, most of them are going through some form of transition. And it's those countries that I want to focus on particularly and the ones that I've got up on that map, essentially Morocco, Tunisia, Egypt, Jordan, Yemen, and then what's happening in Syria. Tragedy in Syria is obviously a big human tragedy more than anything else, but its consequences are affecting not only the Syrian people directly, but now more and more having an impact in the region. I'll come back to how that's affecting it now. These countries, about two and a half years ago went through a series of either political revolutions, change of regime, or in the case of Jordan and Morocco, it was more a recognition that they had to accelerate the pace of economic and political transition. So it wasn't so much revolution, change of regime, but a managed process of accelerating reform. And now, two and a half years later, where are they? How do we see the economic situation facing these countries? That in one slide is the sort of basic story. Now, the basic story is that over the last two years, the economic challenges facing these countries have actually been quite hard for a variety of reasons which I get into. And they're not getting any better. First of all, international environment hasn't been very good for them. High commodity prices, Europe has been slow. Big trading partner for Morocco and Tunisia. For Tunisia, 70% of their exports go to Europe. Trade, remittances in investment flows, tourism, all linked with Europe. So the slowdown in Europe had a big impact on them. Their own domestic and social pressures have been rising in this period. Young people increasingly impatient that after the big political revolutions of two years ago, they still don't see an improvement in their living standards. And so government's under pressure because of that. And the private sector confidence, and therefore private sector investment has stagnated. So these three factors, international private sector confidence and social pressures, political pressures, all been acting on these governments over the past two years. And the result of this has been that they have responded by trying to spend to keep people, if not happy, at least less dissatisfied. And this spending has resulted in a depletion of their economic cushions or the buffers that they had two years ago. And so now their ability to respond to these pressures by government spending is much more constrained. And at the same time, despite this spending, the growth levels in these economies over the last two years have been very low or zero. And as a result, unemployment levels have risen even as governments have depleted their own ability to respond to these pressures. So now they find themselves, two and a half years later, faced with two big challenges, which is one, how do you try to stabilize the economies in the short run? Because they've now used up the buffers to the point where they become quite vulnerable and they have to change the government spending behavior to be able to respond to the increased vulnerability. And at the same time, how can you revitalize the economic activity outside government, which is going to start generating some jobs and some prospects for better living standards for people? So that's where they find themselves now. So let me take a few minutes to walk you through the different elements of this, and then what I'd like to do is to have a discussion on how you actually manage that challenge, because quite frankly, it's not obvious how you can do that. It's easier to lay the problem out than it is for governments to be able to navigate their way to a solution. So this is a sort of basic chart on simple version of the global economy, the global outlook. And the interesting number here, the two numbers that are interesting for us, is that if you look at what's been happening in the euro area, and as I said, the euro area is a big trading partner for Morocco, for Tunisia, and then to a lesser extent for the other countries in the region, both last year and this year, euro area is in recession. And even next year and the years after, the level of recovery in the euro area is expected to be quite modest. So the world economic outlook, although we see a modest recovery in the world next year, euro area is not doing too well. And that's important for this region because, as I said, their links are strongly with Europe. And if you look at commodity prices, particularly oil prices and food prices, notably wheat, these still are quite high, have been high for the last couple of years and remain quite high by historical standard. And this is important because countries in this region are the world's largest, among the world's largest importers of food and oil is a big part of their import bill. So if you look at what happens, oil prices go up, Morocco, Tunisia less, but Morocco, Jordan heavily affected. And then when food prices go up, Egypt, Morocco, all big importers of wheat. So commodity prices have been high, their trading partners have not been doing so well, and the external environment therefore, hasn't been all that good for them. Now, domestically, as I said, the political transitions that were started, and I think we all thought that the process was going to be faster and smoother, but two and a half years later, these political transitions have Turned out to be much more complex, much more prolonged, in some cases much more contested. And the result of that is there are two interesting features that I want to point out. If you look at the left hand panel on that slide, which is essentially measures of government stability, you can get different indices of government stability. But if you look at these measures of government stability, and this is from the international country risk guide, you see that in all of these countries where virtually, except for Morocco and even there, there's been a sharp drop and it hasn't yet picked up. And if you look at the right hand side of that panel, that tells you that with the exception of Morocco and now Jordan recently, all these other countries still have governments whose horizons are short. In fact, they are still in the process of transition. So the revolution that started two years ago led to phase one, which was to bring in transition governments who are supposed to be putting in new constitutions, organizing a new way of doing business, organizing elections, and then there would be a government that would have a longer horizon. In most of these countries, we are still in phase one and phase one governments have two difficulties. One, that their horizons are short because they have elections coming up. They themselves are often going to participate in those elections. So their interest is partly to organize the election, but partly also to prepare themselves to win that election, which means that they're not going to take difficult decisions which might hurt their popularity before those elections are done, because they would then end up taking the blame. Particularly in societies that have become more and more polarized. If you look at what's happening in Egypt today, you saw the FT today, a big front, whole page story. As I read coming in from the airport today, the level of polarization in these societies has become quite high. So those governments in phase one want to be the people who take the difficult decisions and end up paying the price for it. And the second problem is that they don't yet have the legitimacy to take the difficult decisions because they're in a contested society. And because in many of these countries, the process of democratic formation is still in its early stages. The relationship between governments, opposition parties, society is still one that is being worked through. And in this period, their ability to take economic decisions is harder. And it's particularly harder because today I don't believe you ever could impose economic decisions on people successfully. But today you can't do so in these societies without explaining why it is important to do what needs to be done. And the process of communication with people in a way that is credible, in a way that is Compelling is also a new thing for many people in these societies, because governments are not used to the process of actually using communication to persuade people about policy reform rather than to make policy changes. And if you feel like it's a good thing, you might inform them about it. There used to be a time when people attempted to make policy decisions on weekend evenings, thinking nobody would respond to it. And if you recall, last year, they did try to raise petrol prices on a Friday in a country, and on a Saturday morning, there were taxis who had basically come out on strike all over the city. And the decision had to be reversed because people had not prepared the ground as to why it was important to do that. So that makes this whole process much more difficult. Now, the other thing is, as a result, if you look at what's been happening to confidence and to the region, well, the first thing that's been happening is, of course, Syria. A year ago, Libya had a big impact in terms of spillover effects. People who were working in Libya, from Egypt, from Sudan, from Tunisia, all had to leave. So there was spillover effects from Libya. Now, actually, the spillover effects from Libya are positive in some ways and negative in others. But there are people coming back into Libya as well to work. Tunisians are finding not just employment but also markets for Libya. But at the same time, there are negative spillovers because there are some problems of security that are coming from Libya, which are now affecting countries around it as well. But now, the big issue, of course, is Syria, in the sense that, you know, it's important not to, in saying there's a big spillover problem from Syria, not to forget the. The point that the real issue of Syria is Syria. I mean, the spillovers are important, and that's what I'm talking about. But the real tragedy is what's happening inside Syria. But the spillovers are not just in terms of refugees. Although the refugees in Jordan is half a million people, there's probably close to a million Syrians in Jordan now, population of 6 million. So it's not just numbers in the sense of cost of the budget, but you hear more and more stories of social unrest and tensions that are coming from having people who are looking for jobs, and consequently people are Jordanians who are there, feel that their jobs are now being done by people who are refugees. And so it's creating a climate of not very hospitable in some ways, in a country that has a tradition of being very hospitable, which is Jordan. And then you see also the impact of Syria in terms of transit trade. In terms of the spillover impact on tourism, a lot of tourists not going to Jordan, not going elsewhere because they're not quite sure about the region. People don't distinguish as much if you don't follow the region. And then the private sector confidence on the right hand side, if you see that there are three lines there. One is if you look at their ability to raise money from capital markets, have these countries been able to raise money from capital markets? Not really very hard for them right now to raise money from capital markets. The only money that they raised from bond markets, for example, in the last year has been Morocco being able to float a bond. Morocco, by the way, in all of these countries seems to be managing its issues and challenges most effectively. But Morocco managed to raise its bond and then Tunisia did something guaranteed by the US but their access to capital markets quite limited. Now, if you look at net foreign direct investment, all people that we talk to for foreign direct investment are sitting on the margin because they're waiting for that phase one transition to end politically because they want to talk to the governments who are going to be there for four years. Because unless they're there for four years, it's hard for the investors to have a clear sense of what is the economic direction and the rules of the game under which they're going to be working. Plus, there is one other issue which is a very tricky issue in many countries, not just in the Middle east, when you have a big regime change. The domestic private sector, all the people who've done well are almost by definition people who have links with the old regime. If there's been a regime in a country for 25 years, it's very hard to have done really well in the private sector, be a big investor without having had some links or support from that regime. Now new regime comes in. One of the reasons they're there is because people were unhappy about the fact that the previous governments were they felt there was an unfair allocation of opportunity. And that was one of the reasons why people came out on the streets is because they felt that people before were able to get favored treatment because they had good connections. So they want some restitution for this popular demand for it. And so on the one hand, the governments that are there now both want to and are under pressure to do some accounting for the past. And on the other hand, until this accounting is completed, all the people who think they might be subject to some accounting from the past are sitting on the sidelines, certainly not putting any more money. And many of Them are living around here, actually not very far from lse. So they've all come to live in London or in Dubai or in. And they are waiting for this process to be sorted out before they decide whether to go back in or not. So now you have this dilemma of how do you draw a line on the past in a way that is both fair because you want that restitution for wrongs that have been done, but also fair in the sense that you are not penalizing people just for having done well. And it's done so people can move beyond the past and look to the future. And that's very hard to do. And as I say, it's not something that's only in the Middle East. Every country where there's been this kind of change, historically, it has been quite difficult to find that balance. Some countries have taken a bit longer than others, but that process is still underway. So you see investment, and if the domestic investors don't come back, the international investors aren't going to come in. So they're sitting there. Tourism, which is a big driver of jobs, also has gone down. And although the aggregate, the red, that's the red one, it doesn't look so bad. Country by country, there are a lot of differences. So Morocco's been doing quite well on tourism, but if you look at other countries, it's not the case. In Egypt, some of the resorts are doing okay, but tourism in the cities is not going anywhere at all at the moment. So there is an issue around that. And then finally, where does this lead them? Well, this used to be a dynamic chart, but I'm afraid my technology for transferring it over here didn't allow me to do that. But what it shows is that these dynamics have resulted in two changes, fiscal and debt. All of these countries have now got higher debt, higher budget deficits, because the way they've responded to the pressures, you know, when oil prices went up and food prices went up internationally, they didn't raise them domestically, so they just absorbed the difference in the budgets. And of course, as a result, subsidy bills have gone up and you've now got increased debt. And secondly, and in some ways higher source of immediate vulnerability is that their external reserves have gone down because of course, as you spend more, you're all economics student, so I don't need to spend time explaining the link to you. But obviously, for obvious reasons, their international reserves have gone down and in some cases are now at levels that you would not consider prudent, renders them more vulnerable. So now the margin of Maneuver every, I've been doing this slide now for two years in every quarter, every quarter moves a little bit further into the area where you don't want it to go. And as I said, growth rates, you know, 2012, 2.5%, 2013, about the same below 3% on average for these countries, 3% growth rate just not enough to generate, make a dent into unemployment. And if you look at the panel on the right, the interesting thing about that panel is that these countries, which are all in red already, were outliers in terms of unemployment and youth unemployment before this issue came on board. So they had a structural problem of high youth unemployment driven by demographics, driven by skill mix mismatches. And now on top of the structural problem of high youth unemployment, you have the slowdown of the economies, which has resulted in a cyclical problem of adding to the high youth unemployment. So growth rates just not enough to make an impact on what was already the underlying factor. Because if you think about now, let's go back two and a half years, you know, the people in Egypt and Indonesia didn't come out on the streets because they thought that inflation rates were too high or that the fiscal imbalances were large. Macro management in these countries actually wasn't bad. The reason why people came out on the streets is because unemployment was too high, because they had issues relating to unequal allocation of opportunities, because they felt the gains from growth were being captured by a few, and because they felt they didn't have enough voice and accountability of institutions. And all I've been talking about so far are the stabilization problems that have resulted from the worsening of the macro, which was a response to the way governments reacted to the Arab uprisings rather than dealing with the underlying issues which caused the uprising. So the bottom line is that now you have to deal with two sets of issues. First is you have to stabilize the economies because very hard to deal with the remaining structural issues while the macro vulnerabilities are rising. And stabilizing the economy, unfortunately for these countries, means dealing with their fiscal imbalances, which are unmanageable. And the only way you can deal with the fiscal imbalances, given the structure of their spending and their revenues in the short run, is by doing one thing which is very hard politically, which is to target generalized energy subsidies. Target them on the people who matter. Now, one interesting fact about energy subsidies, energy subsidies, about $450 billion in the world, if you look at subsidies worldwide on energy products, about 450 billion, half of that is in the Middle east, this is the region that has the highest use of generalized energy subsidies. A substitute for safety nets. Very low, very poor safety net systems. No social protection systems of any consequence in these countries. But subsidized food and energy is the social protection system. Now what's wrong with that? Well, there's obviously two things that are wrong with it. One is energy is not used by poor people. So the majority of the benefits of subsidized energy go to better off households. There are 5 or 6, 7 million cars in Egypt, 85 million Egyptians. Obviously gasoline isn't being used by poor people. So first problem with this is that the majority of the, and there's a lot of studies that have been done on energy. Actually it's a very nice little paper that's been done on energy subsidies by the IMF, which is on our website for anybody who's interested, which does a lot of breakdowns of different kinds. But the first thing it does is of course that it's not very equitable. So it's not an efficient form of providing safety nets for people who need it. And the other problem of course is that it's unaffordable now. They just cannot, with all these increased energy prices, continue to provide subsidized energy for middle class and upper middle class households at the expense of not investing in job creating infrastructure, at the expense of not having public works programs which would have made a dent into unemployment during the past two years at the expense of not having schools that are funded at the expense of not having medicines in hospitals. So you have all these shortages now in these economies and you have cheap energy. So you know, we sit here in this room and it's like it's such an obvious thing to do and yet it's a very difficult thing to do politically because people don't fully comprehend the distribution of the benefits. They haven't explained them. The people who do get the benefits are actually quite powerful, thank you very much, and they have, they'd rather continue to get their gasoline cheap. The people who think that there might be savings don't believe that the savings will be used in a way that would be any better. So there's no trust in how the money would be used by government. There's this lack of trust and there isn't the communication to explain why these things have to be done. So having said that, actually a number of countries have started to make inroads in, into trying to address this issue and so net you see some reduction in savings. So it's now about 5% of GDP. But even that, if you can target this and replace these generalized subsidies by safety nets for people who need the money, not only can you begin to address your fiscal imbalance, but also you begin to actually provide some resources for creating jobs in the short term. But that's challenge one in my mind, and challenge two, which is my last slide, is that they have to start laying out more articulate vision in a way of how do you move beyond the stabilization agenda to create jobs? Because it's the. Otherwise, the policy package that you're selling is essentially a negative package. It's all about austerity, it's about cutting energy. And then you sort of explain that actually it's targeting. But you know, the targeting part is less obvious to people than the fact that something's being taken away. You talk about protecting reserves, which often means you have to act on the exchange rate, so people worry about the impact on inflation. You have to also say, well, what are you going to do that is going to deal with the underlying reasons why people came out on the street? And in the short run, some of these things take a long time. There's a list of things up there, some of them take a long time. But in the short run, you can move on trying to deal with the public works programs which can create jobs, but you could also move on the private sector to try and deal with the impediments that are stopping small businesses through red tape to actually create. And today you hear all manner of stories of small things that could be done that would make it easier for small businesses to try and create jobs. You can also move forward in the short run to try and see how you can get the tourism business, which is a big driver of jobs in these economies, to address some of the constraints that are stopping them from operating. So there is a short term agenda on job creation, and then there is a short term agenda on transparency accountability. So if you could move on making government budgets more transparent, government institutions more transparent, that process will at least give people a sense that some of the things that they were objecting to are beginning to be addressed, rather than just finding that the issues that they're being asked to deal with are about postponing gains while they take a higher short term cost. This issue has not been developed so far very much in the countries, mainly because the governments have been preoccupied with the political transition and the short term economic management, and also because transition governments don't have a horizon for structural reform. None of this stuff is going to pay off if Your horizon is six months results. It's only when you think four years that you say if I have to be winning the election four years from now, that I better start doing some of these things because they'll begin to show results before that election. But if your focus is six months or less or a year, it's very hard to get energized and motivated around some of the difficult structural issues going forward. Having said that, there are people in governments who are attempting to move forward on this, but it's further behind than the issues around stabilization. Now we've been talking mainly about what governments need to do inside countries and what people in the countries need to do. And that's where the change is going to be driven by. But the rest of the world can help. And the question is, how can the rest of the world help? Well, in the short run, there are three things that I think are very useful for the rest of the world to provide. One is market access. Even in the short run, there are market access, quick wins that people have worked on that have identified where you could begin to give the people from those countries where there's a drop in domestic demand, an opportunity to export more easily. So if you could actually allow them to export tomatoes during the season rather than off season into the European Union, you know, that would be helpful. So I think that's the kind of thing that, you know, in a way that are short run measures. People are working on this, but I think the pace of that can be accelerated. Secondly, finance, obviously there's been a big extra impact on shock. That's an external shock that the countries have been affected by and external finance would help to ease the adjustment process. So the imf, for example, we've now got financial support in the case of Morocco, in the case of Jordan, in the case of Tunisia, we've been working with Egypt, but haven't yet got an agreement on a program of financial support. Third, on sharing the experience of other countries. The issue I talked about earlier about how do you deal with the past in terms of the investors is just one issue. But there are a number of areas where these governments are asking for advice on how other countries have dealt with this issue. And of course international institutions can do some of this work, but it's much more compelling for countries themselves to directly share the kind of experience they had and how they addressed it. And finally, in terms of strengthening new institutions, particularly institutions which will improve the public financial management, for example, the effectiveness with which public expenditure is, is allocated and the transparency associated with it managing the central banks at a time like this is quite tricky because they're faced with this challenge of how do you balance the pressures on the exchange rate on the one side with not with having the exchange rate as some anchor of stability which they've had in the past. So that's an important issue. And in a whole range of areas, capacity building is going to be a big issue also in not our business. So nothing that the IMF can get involved in but political parties. If you think about it, it's very interesting. You know, these countries were essentially, the executive was very strong, the executive part of government was very strong. Parliament was quite weak. Judiciary was often a little bit weak. There were no political parties of any consequence in some of them. And the media and civil society were also relatively aligned. And now if you look at it, you've got activist judiciaries, you've got budding political parties, you've got media which is, you know, now actually media in some ways has become progressively more active, especially with the electronic media, you've got parliaments that are taking a much more active roles today in Jordan, if you look at the, the relationship between the Parliament and government, the executive part, that's actually a very complicated relationship to manage. So there is a new. All the institutions of democratic economic and political management that sitting here in England, you know, we all take for granted are in many cases just coming up now and they're finding their space and they're finding their boundaries and, and they're finding good practice. How does the Finance Committee of Parliament function? What is its role? To what extent is this role to hold the executive branch accountable and to what extent is its role to actually start making economic policy? So all of this stuff is still being sorted out and that capacity building is, is something which I think is going to have a huge payoff in 10 or 15 years time and where in fact peer to peer learning. So people can simply explain, this is how in Parliament the Finance Committee functions. This is how political parties have internal democratic processes. And some countries are doing that. Brazil, Turkey, etc. Have been active in providing that kind of support. So I want. I'm sorry, I've taken longer than we'd anticipated, but I want to end by saying that there's a lot of opportunities for people to provide that support. And what I really welcome are not only your questions on this, but also any thoughts and advice you have on what we in the IMF could be doing to try and support this process which has many facets. Thank you. Thank You Masood.
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B
Thank you very much. Thank you for most likely an entertainment lecture to us. Now I'd like to open the floor for the question and answer session. Given the time if I could just ask you to state your name and your affiliation and ask your question briefly.
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A
And we will try and have as.
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B
Many people ask questions as possible.
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A
So, sir.
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C
Middle east and Mediterranean. One of the problems we faced after the Arab Spring is that most of the countries that experienced the Arch Spring were those, we call them, the successful stories of economic development in Zenim, particular tourists. And these countries were praised by imf. And this is the model that other countries should follow. It was the Arab Spring was a bit so a surprise, a shock to the expectation to the forecast of IMF and World bank as well as well as other international. Do you think that the criteria of assessing economic growth in the countries which you base your analysis on should be changed in order to measure growth in major economic development rather than economic growth on a more equitable, more rational way that reflects the development of the countries rather than looking at the physical policies of the states or looking at the macroeconomic indicators? I think this is probably why we're. All of the major criticisms directed towards imf. And I don't know whether you have thought of this already or you have done.
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A
Right.
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B
I think it's a very good question. You want to take three or four questions?
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A
Yeah, I'll come to that.
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B
In back, please.
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D
Thank you for the intel.
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B
Maybe you could stand up because we can't. I can't quite hear you.
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D
Thank you very much for the detail. In light of the changing of changing continued changing political landscape in North Africa particularly, I was wondering if you had any comments on the potential for enhanced regional integration in the region, particularly the mother, which was widely known as the least integrated region.
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A
Thank you. Thank you.
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B
Yes, gentlemen, over here.
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D
John Prosser, until recently with Roubini Berkowitz. Just wondering what the current situation with negotiations they could deal with Egypt are. Obviously there won't be some things you can talk about, but potentially what does Egypt look like with an IMF deal and what does it look like without imf?
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B
Okay, maybe one last question on this round. Gentleman over here. And then I'll come back to everyone.
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E
I'm Amr Mustafa. I'm originally from Syria and I found myself here for different reasons actually. But I'm intrigued by the question that the gentleman in the back has said that it is a time now that because of all these geopolitical and economic changes that the map of the Region has to be redrawn. And coming from Syria, I can envision that the fact that the Syrian regime has survived, in fact a new block, a socio political economic structure, strategic block is being built between Iran and Lebanon which will create in fact more benefit in the long term than it will hurt as in the case in Jordan particularly, or in one area.
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B
Can I invite you to speak?
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A
So I think the first question, very important question, you know, which is did we not were we wrong or did we miss the fact that the aggregate growth numbers didn't give you a good picture of the economy in terms of distribution, in terms of the fairness? And I think yes we were and we've actually put out, if you look at our website, there's a blog that I wrote on it not long after the Arab Spring basically saying we missed this point. It's simple central point that you can no longer measure brought home to us that to get a full sense of economic stability you have to look not just at the aggregate numbers, but go behind it in terms of looking at employment, in terms of looking at distribution, in terms of looking at fairness. And now what does that mean for our work? We have macro economy institutions. So this, it's very important not to go beyond your area of expertise, but even in our work you find much more systematically that we are linking jobs and growth in terms of looking at employment, looking at projected levels of unemployment that come about, looking at labor market issues in there. Secondly, I think we find that there's more discussion of business environment and governance as part of the fairness. But as absolutely that's important for us to recognize that we many people. But IMF also didn't make that connection, that high growth rates which were being captured by a few were not a stable economic model. So that's wonderful. Secondly, now is there any way of changing your approach? But that's what I'm saying. I think what you see now, for example, that. And if you look at. Yes, so if you look at the consequence of that in terms of our model, I would say that there is much greater focus on. In terms of looking at the link with jobs, looking at transparency now in terms of our financial support for programs and maybe it's a little bit of a link and I'll reverse that point and come to the Egypt point next, which is what is it that we want now in light of that, what would the IMF focus on? I think if we want to support nationally developed program. Why nationally developed? Because all the evidence shows that if your program is of economic program is One that does not have ownership, it won't get implemented. Well, the first few months get implemented and after that it doesn't get implemented. This is now well established economy, empirical evidence. So it has to be one that comes from within. That means sometimes it takes longer because, you know, people would rather that you came with a, you know, well defined program. Second, the program has to be what Obviously that addresses the core imbalances. So in the case of Egypt, if you have a program that doesn't do much to address your fiscal and your current account deficits, it's not going to be a program that will generate confidence. And confidence is what is needed to bring private capital in because the IMF is not going to provide money to substitute for private capital in any measurable way. So you have to actually create confidence. But third, it has to be a program that protects the vulnerable and the poor during transition. Four years ago when we did a program with Pakistan, the only condition that we had some time disputing with was to increase the share of a budget that went on the Social Protection Program program. Because we actually feel that if you don't do that, there is a fairness issue to it, but there is also an issue in terms of the sustainability of the program. So I think there's a reason, double reason for it. And the final thing is I think we need to have a program that has broad support. And one of the reasons that has been a bit elusive in Egypt is that getting broad support for a program during a period of transition is very hard because it is in the interest of people to say they oppose whatever program you put on the table, any government puts on the table because they oppose the government, not because they oppose the content of the program. But without broad support, it's very hard to move forward because you're then with a change of government, you're not going to have the support necessary to implement it. Now, in terms of regional integration and particularly in the Maghreb, I think I want to say that the issue of regional integration is that it's obviously Maghreb is a very good example where there's very little regional integration. Overall in the MENA region, there is not that much integration. There is increasing amount of economic linkages between the GCC countries and others. Finance, remittances, investment, all links that are happening now between those countries. But there's not real integration of economies in the sense that you're talking about. And I would say regional integration is something we have been pushing a lot. The impediments in many cases are political, not economic. Also, it's important that we don't think of regional integration as a substitute or alternative to integrating with the world. The fact is these economies are not integrated with the world that much and that unless you can get better integrated into the world, no amount of integration with your neighbor is going to substitute for that. So I think the regional integration is often, in the case of the MENA region, one of the necessary requirements to become effectively integrated with the world. But it is not an alternative objective.
- [49:05]
B
I want to be sure to get to the two questions that were up, but do you want to speak to anything else?
- [49:10]
A
No, I think that I've.
- [49:13]
B
So let's take the woman in the third row first, then I'll come out here. Given the downgrade yesterday of Jordan by rubies, how do you feel about its long term economic prospects? Well, medium term. Okay, thank you. And then gentleman here.
- [49:35]
A
It says that.
- [49:36]
D
Require the market is working quite well in especially the neighboring parts of Tunisia and Egypt and Jordan.
- [49:43]
A
Parallel market in what sense?
- [49:45]
D
Sorry, the, you know, not regular or not trading.
- [49:51]
A
You mean informal trade.
- [49:54]
D
So what is your take on that market and what about the states endorsing it rather than countering it?
- [50:02]
A
Okay, thank you, lady.
- [50:03]
B
German here.
- [50:06]
D
IR Department, lsa. I'd like to ask, what do you think? Are there political implications of IMF involvement in the region? Is there any correlation between IMF and Arab uprisings?
- [50:24]
B
Okay, thank you. I think there are explosive questions. We'll stick with those three. Over to you.
- [50:28]
A
Yes. Okay, so. So first point. I think the first question was about Jordan and Jordan. I think in the case of Jordan, they've been hit by two shocks. One is that they were hit by Syria. The Syrian economic impact was very large on Jordan in a variety of ways. Secondly, they were affected by the increased price they had to pay for energy imports. Because. Because they used to import gas from Egypt which got cut off and they had to substitute that for much more expensive fuel oil. They are now dealing with these issues and in fact, if you look at their program, they progressively started to address them by raising price of energy. They had a couple of false starts, but then they did address them. And now they're moving this year to address electricity, which is the last remaining issue. They've tried to bring their budget much more into balance. Their reserves are doing better. So at a macro level they're doing fine. But they are continually subject to pressure from what's happening in Syria. And the key for Jordan is how you can get confidence to get the growth rates back to where they were. And that's why it's important, I think, not to run down everything about the pre revolution period in the region because Jordan was one of the countries that actually was generating high growth rates and jobs. So I think the key is to go back to that. But medium term prospects, small, open economy, lots of skills. If you can get the confidence levels back, I think you should be able to get higher growth rates. Now on the second question was one about. The informal trade. The informal trade, I think, look, the informal trade is something that's a reality. I don't think it's a, you know, one should take a theological view on it. The question is why is it have to be informal? And the reason it has to be informal is because it's very expensive for small businesses to get into the formal sector. In the first, we have very high level of informal sector in the region and I would say that the reason why you have high level of informal formal sector in the region is partly because it is a, the cost of becoming formal. The regulatory burden for small enterprises is large. And I think that's one of the issues that we need to try and reduce that cost for them. And then the question of is there a correlation between the IMF and the. I don't think there's any correlation between the IMF and the Arab Spring. But what I would say is that there is a political in the sense perception issue which all international institutions, including the IMF have to deal with, which is that the IMF perhaps more than most, which is that in people's minds an IMF presence is associated with a period of difficulty. And yes it is because you know, the IMF is generally there when countries have a problem. But we've not been that effective I think historically in explaining that the reason we are there is because there is a problem. It's not that there is a problem because we are there. So I think causality is always something that, you know, between correlation and causality. I do feel that there's somehow, you know, there is a little bit of a problem of explanation that we've had to do. And the second issue I think is that historically people tend to think that the IMF arrives with kind of a one size recipe and that's a. I don't know if it's ever the case, but it's certainly not the case now. And I think that's something which we are trying to explain more and more. Okay, thank you.
- [54:21]
B
Now I know obviously there are lots.
- [54:22]
A
Of questions still, but I know what the room is gone.
- [54:26]
B
That's issue. But first, let me just thank everyone for your attention, for your presence, for your enthusiasm, for all your questions. And then, of course, if I could invite you to join me once again in thanking our speaker Masood, for this afternoon.