Structural Adjustment and Crony Capitalism: Economic Reforms in the Arab Region

1. NS4053Spring Term 2017Cammett: Chapter 8Structural Adjustment and the Rise of Crony Capitalism

2. Overview I • Economic imbalances caused by years of unsuccessful state-led strategy of ISI made status quo no longer possible without continual borrowing • Without some sort of reforms and fundamental restructuring likelihood of a vicious circle of debt, default and economic collapse • At best countries forced to live within their means • Problem – by itself • Stabilization not a strategy for growth or • Even regime preservation

3. Overview II • Chapter examines • Systems that emerged from restructurings undertaken in • RPLA and • RRLA • Focus is on the the 1990s • Question if state-led growth did not work as a development model what would? • In early 1990s most economists felt a return to market forces best way to allocate factors and revive growth • Collapse of the Soviet Union • Discredited centrally planned economies and • Supporters of the status quo • At same time globalization had become a formidable force

4. SAP Programs I • Challenge facing autocratic government governments: • Getting growth going and • Maintaining control over society • A common economic prescription to treat macroeconomic imbalances and other contradictions of state-led growth was the Washington Consensus • Washington Consensus centered on three pillars • Macroeconomic stability – especially price stability and real exchange rate devaluation • Relying on the market mechanism to allocate finance, labor and inputs and relying on the private sector to drive growth and • Greater openness to international trade and export led growth

5. SAP Programs II • Mechanism – by • Getting prices right and • The state out of the way • Hoped that private capital would • flow into productive investment • Produce exports and • Create jobs • While also stimulating efficiency thus enhancing international competitiveness • This would create a virtuous circle of • Inflows of foreign and direct investment • Bolstering financial soundness and in turn • Create more investment, exports jobs and wealth

6. SAP Programs III • Between mid-1980s and 1990s with support of the IMF and World Bank most of the countries of the region had adopted many of the Washington Consensus policies • By end of the 1990s • Region’s macroeconomic imbalances were reduced and • Economies were much more private-sector dricen • Problem – • What emerged was quite different than neoliberal model imagined by architects of the Washington Consensus

7. SAP Programs IV • The economic path of the RPLA and RRLA countries diverged further after the 1980s • In RPLA countries – Tunisia, Morocco, Egypt, and Jordan needed to find a way to • Consolidate their rule and • Get the economic growth process restarted. • From their perspective SAP loan programs and economic policies of IMF and World Bank offered means to • switch from old social contracts with bureaucrats, farmers and workers • Toward a new alliance with business elites

8. SAP Programs V • Ultimately, SAPs did not deliver sufficient growth • Ran into very competitive export markets after the 1980s when • Asian exporters had established a wide lead and • Economies of Eastern Europe were rising • Politically connected firms that replaced public enterprises performed poorly • In the RRLA countries • Very little structural adjustment was undertaken • Given their oil revenues – relied more on repression than promise of economic prosperity • Narrowing alliance with security forces and cronies • Led to even lower economic growth and rising political instability

9. Crony Capitalism I • By 2011 clear the economic reforms had failed to transform the region • Principal weakness of new economic regimes that had emerged was the low demand for skilled workers • Governments stopped hiring • Jobs were not replaced by strong private sector demand • While the public sector had declined since the 1970s, size of formal private sector remained marginal • Only 10-15% in Morocco, Tunisia and Yemen • Better in Jordan at nearly 20% of labor force had formal private sector jobs

10. Private sector’s lack of dynamism seen in low rates of investment • Idea of state retrenchment was to make resources available for the private sector to invest based on market signals • But as public sector investment collapsed, private investment did not rise sufficiently to pick up the slack • In the RPLA countries public investment fell to 5.2% of GDP in the 2000s from nearly 12% in the 1970s • At 18.7% private investment in 2010 was only about 5% higher than in the 1970s • Level not sufficient to • Compensate for the rollback of the state or • Create type and number of jobs needed

11. Except in Lebanon coming out of its long civil war, total investment actually decreased everywhere • Can the Arab region’s economic underperformance be attributed to the type of state-business relations that have developed since the SAP reforms that began in the 1980s? • Some economists have argued the reforms did not go far enough • Political scientists have pointed to the rise of “networks of privilege” and “crony capitalists” with myopic short-term interests as the central reason for low economic growth

12. On paper reforms look impeccable on paper • Problem – difference between de jure an de factor rules • Detailed studies however show that governments have dispensed privileges only to a select few thus reducing the competitiveness and dynamism of the economy • Many stories of favoritism and insiders – resulted in political cronies controlling large chuncks of the private sector