ESCWA’s Perspectives Atif Kubursi Acting Executive Secretary ESCWA

1. ESCWA’s Perspectives Atif Kubursi Acting Executive Secretary ESCWA

2. I Introduction Pro-poor macro policies • Growth patterns vary. • Some growth episodes are associated with large inequality, concentrating the fruits of growth in the hands of elite and excluding the majority of the poor people. • Such episodes of growth are not sustainable as they create adverse incentive and discourage investments in physical capital, human capital and technology leading to stagnation in the future. • Sustained growth, therefore, requires the effective and wide participation of the majority of the citizens in a dynamic process guided by the state aimed at enabling the poor people to improve their health and education so as to be able to acquire assets, information, and legal standing, allowing them to become part of the socio-economic and political structure of the country. • The strategy of carrying such process of empowerment of the poor is called a pro-poor growth and is defined as that growth that reduces absolute poverty and hunger while simultaneously slimming down existing inequalities in distribution. • Pro-poor macroeconomic policies have to aim at enhancing self-sustaining growth by maintaining full employment, and price stability and simultaneously, securing tangible reductions in both the absolute poverty and the inequalities in the distribution of income. • Taking Care of GDP does not take care of the poor. Trickle down is a myth. • Functional macroeconomics has failed to address poverty structurally and ideologically.

3. II The Pro Poor Strategy: ESCWA • The present episode of high growth in the region is dependent on one unsustainable trend: a huge surge in the price of oil. • It is an episode of jobless growth that is not affecting the problem of unemployment, which is higher than any other region in the world (Table 1 )and is reinforcing the existing huge gap in income distribution within and across regional countries (Table2 ). • The governments of the region would not be able to jump from the existing unsustainable path of growth to a sustainable path by using the traditional macroeconomic policies. Adherence to the traditional policies will consign the present episode of growth to a time-bound gain similar to what happened during the previous oil-boom of the 1970s.

4. III Arab Unemployment Rates Are the Highest in the World Table (1) World unemployment rates 2006

5. IV Arab Income Inequality Is Equally High Table (2)Income distribution in the ESCWA region

6. V The Objectives of the Pro Poor Strategy • ESCWA has identified the following three elements needed for a comprehensive strategy aiming at using the oil-boom to cement the road for sustainable growth • Improvement of the investment climate: A major change in the economic environment is needed to allow the region to jump from the existing consumption-led path of growth to a higher sustainable investment-led path. Presently, countries in the region typically invest less than 25% of GDP, whereas the emerging Asian countries invest 25-30 % of GDP. China invests an incredible 40%of GDP. Ingrained high consumption with low production is not sustainable. • Empowerment of poor people: Overcoming the three deficits identified in the AHDR. First and foremost overcoming the “freedom deficit” of which most countries of the region suffer from requires a complete political reform that emphasizes three objectives. A- the adoption of a bill of rights that guarantees civil liberties to all citizens. B- the presence of institutional procedures through which citizens can choose the leaders of their government and express effective preferences about alternative policies. C- the existence of institutions that have the power of check and balance and can constrain the power of the executive branch of the government.

7. VI Objectives (cont’d) Second, overcoming the “deficit of knowledge”, narrowing the ever expanding digital divide and making deliberate entry into the new economy. Dependency on rent from oil has left the Arab economy undiversified and poorly prepared for the 21st century. Third, targeting the “empowerment of women” and arresting the feminization of poverty, unemployment and illiteracy. • Regional coordination: The ESCWA countries have lagged behind other regions in the world in adopting a regional option to integrating their economies within the global economy. Regional integration can promote economies of scale; increase intra-industry trade through further division of labour, investment coordination and product differentiation, and increase the region’s bargaining power in its trade relations with other regions of the world. Such a strategy could effectively provide them with means for dealing with the adverse effects of globalisation and overcome their limited diversification and heavy dependence on a narrow range of products with short production runs.

8. VII The Macroeconomic Tools: Fiscal Policy • The combination of fixed exchange rate regime, a tax system that relies heavily on indirect taxes, a ballooning external debt and free capital mobility renders fiscal policy in most of the countries of ESCWA quite ineffective. • A pro-poor fiscal reform should aim at enhancing the government legitimacy by paying more attention to equity. The tax system should be reformed by increasing the reliance on income progressive taxes, restructuring the property tax and introducing a wide spectrum of taxes to prevent avoidance. • A major reallocation of public expenditures should aim at allocating resources to build physical, social, intellectual infrastructure to help the poor and enable them to improve their health and education as well as their inclusion in the political structure of the country. • Build a tax collection capacity to meet the fiscal requirements for growth and equity. It requires both the upgrading of the administrative capabilities and the introduction of stringent rules and disciplinary measures on tax evasion and corruption. • At the regional level, expansion of joint venture investments and intra-regional trade requires fiscal harmonization among the ESCWA countries. Removal of capital tax differences among the counties and abolition of tax obstacles to cross border activities are essential to such harmonization. Diagonal rules of origin should be established lest joining other trade areas creating obstacles for Greater Arab Free Trade Area.

9. VIII Monetary Policy • Monetary policy in most of the countries of the region is either devoted to the sole objective of keeping inflation at a low rate, or is rendered quite ineffective because of the fixed exchange rate regime. It is rather striking that tight monetary policy is used in a region that suffers from a very high rate of unemployment. • A pro-poor monetary policy should aim at lowering the real interest rates particularly in strategic and priority sectors for poverty reduction, and expansion of the money supply that accommodates growth and financial development and deepening. Interest rate policies should linked to promoting investment and not singularly to maintain a fixed exchange rate. • A pro-poor financial reform should promote the creation of wide-spread network of financial institutions that encourage a rise in the propensity to save and pave the way for an expanded and more equitable flow of funds to impoverished locations and to small and resource- poor business and micro-enterprises. • A pro-poor financial intervention is the creation of development banks with the mandate to provide discounted ,or subsidized , credit to selected sectors like agriculture ,small–scale industries and priority industrial establishments. • Micro-credit programmes that target directly the poor and that are anchored on social cohesiveness and productive activities.

10. IX Exchange rate policy • The existing exchange rate arrangements in most ESCWA countries have the worst aspects of the two polar-type exchange rate regime. Pegging the local currencies to the US dollar renders monetary policy completely ineffective, as in a fixed exchange rate regime. On the other hand, the continuous fluctuation of the US dollar has the potential for increasing costs associated with fluctuations in exchange rates, typical of a flexible exchange rate regime. • No country in the ESCWA region is capable of moving to a free exchange rate regime and defending its currency under the present conditions of free capital movement, intensified international speculative activities and the absence of a globally monetary institutions capable of maintaining a stable world financial regime. • Tying Arab exchange rates to the dollar has cost the region over $500 billion in purchasing power losses given their high shares of imports from other currency areas. • After considering all other options (different fixed exchange rates arrangement, unilateral free exchange rate, integrating into one of the key currency area) it was found that monetary coordination among all the ESCWA countries aimed at adopting a unified exchange rate regime is most promising.

11. X Exchange Rate Policy (cont’d) • The coordination could start by linking the various currencies in the region in a common bloc floating vis-à-vis the rest of the world. This will achieve double objectives. First, it will stabilize intra- regional trade by preempting relative shifts in the intra-regional exchange rates structure. Second; it will insulate the domestic economies from external developments, thereby permitting monetary policy to concentrate on the problem of unemployment. • The GCC countries have gone a long way towards creating a monetary union and a common currency. Coordination between the GCC and the other countries in the region is essential, however, to create a more cohesive regional monetary bloc • The monetary coordination could move gradually toward the ultimate goal of creating a common super national currency.