Perspectives in Development: Middle East North Africa

1. Perspectives in Development: Middle East North Africa Joseph E. Stiglitz Senior Vice President & Chief Economist The World Bank Cairo, Egypt October 29, 1999

2. Outline I. Introduction: Unique Characteristics of MENA II. Positive Trends in MENA III. Globalization and Increasing Pressures IV. Government Alone Less Able to Respond to Increasing Pressures V. Need to Change the Social Contract VI. Reforming - The Example of Egypt

3. I. IntroductionMENA Distinctive From Other Regions • . High Volatility (Dependence on Oil) • . Large Size of State • . Least Integration into World Markets

4. A. High Dependence on Oil • Greater dependence on single commodity -oil - than any other region of the world • Disparities in economic and social indicators large within region

5. Even non-oil exporting MENA countries affected by oil price volatility

6. Creating Higher Volatility Than in Other Regions Average Standard Deviation of GDP Growth Rates (1970-1998) % Source: SIMA database, World Bank.

7. B. Size of Government Is Large n/a

8. While State Large on Average, Differences Across Region

9. C. Low Integration in World Markets Trade liberalization leads to growth (Sachs and Warner) Source: World Bank, 1997. Source: World Bank

10. High Trade Barriers in MENA 1999 Weighted Average Tariff % Source: World Bank East Asia: Indonesia, Korea, Macau, Malaysia, Philippines, Thailand; Latin America: Argentina, Brazil, Chile, Colombia, Jamaica, Mexico, Peru, El Salvador, Uruguay, Venezuela; Central Europe: Czech and Slovak Republic, Hungary, Poland, Romania; Sub-Saharan Africa: Senegal, Zimbabwe; MENA: Jordan, Lebanon, Morocco, Syria, Tunisia

11. And Low FDI Flows In MENA Percentage share of GDP Note: Egypt, Turkey, Morocco, and Tunisia account for more about 74% of FDI flows into MENA Source: World Bank

12. II. Positive Trends in MENA • Large strides in alleviating poverty • Drop (in percentage and overall poor) impressive against backdrop of high population and low GDP growth, growth volatility, and high unemployment

13. Other Successes: Large Drop in Infant Mortality

14. Declining Illiteracy Rates

15. Significant Gains in Life Expectancy

16. III. Globalization and Increasing Pressures • Globalization, population growth, diminished resources - especially water - and high volatility have resulted in greater development pressures on the region. • Slow GDP growth rates have intensified growing pressures

17. Population Pressure Crucial, Given Low Growth Rates and Education Levels • Population growth declining, but total population projected to increase by 50% over next four decades • Burgeoning population exerts downward pressure on GDP per capita and strains government education budgets Source: SIMA database, World Bank.

18. MENA’s Unemployment Creating Pressures...

19. 50% 45% 40% 35% 30% 1990 1997 . . . In Spite of Low Labor Force Participation... Latin America Caribbean Non-Gulf E.Asia Pacific South Asia Sub-Saharan Africa MENA Gulf OECD Source: World Bank

20. …and Robust Growth of Employment

21. IV. Government Alone Unable to Response to Increasing Pressures • Historically, large government able to absorb much of pressure. Size of the state in past and present larger than any other region in the world. • But with declining revenues and increasing pressures, state cannot keep up.

22. Slowing GDP Growth Rates

23. Public Spending on Education High...

24. …but Widespread Concern about Quality • Despite spending, Iran and Kuwait (only participating MENA countries) placed between 37th & 39th out of 41 countries in international assessments of math and science knowledge.

25. Growing Unemployment Likely in Near Future Source: World Bank Report

26. V. Need to Change the Social Contract • Government can no longer serve as “Employer of Last Resort” with slowing GDP growth rates and increasing population growth rates. • Need to focus on how government budget is spent Source: SIMA database

27. Infant But Growing Privatization Program • Need to encourage private sector growth to better absorb pressures Note: 95% of total privatization revenues in MENA come from Egypt, Morocco, Tunisia, and Kuwait Privatization in MENA still lags behind other developing countries LAC, ECA, and EAP. But MENA shows highest growth rate in privatization when compared to other developing countries (Source: ERF) Source: SIMA database, World Bank.

28. Region Lags in Institutional Development • Evidence exists that "development transformation," in key areas has not occurred. • Financial Markets • Property Rights • Gender Gap in Education • Corruption • “Development Transformation,” to last, must be comprehensive.

29. Financial Depth and Efficiency Needs To Be Enhanced

30. Relatively Poor Property Rights Source: Heritage Foundation/Wall Street Journal 1998 (maximum score is 5) Scores the degree to which private property is a guaranteed right, as it does to the extent to which the government protects, - and enforces the laws that protect - private property. Also examines the expropriation of private property. It also analyzes the independence of the judiciary, the existence of corruption within the judiciary, and the ability of business and individuals to enforce contracts. The more legal protection of property, the higher the score. The highest score indicates that private property is guaranteed by the government, and efficient court system enforces contracts; justice system punishes those who unlawfully confiscate property; expropriation unlikely.

31. Gender Gap Still Large But ImprovedGap Masks Large Disparities Across Countries

32. VI. Reforming - The Example of Egypt • Egypt: 1981- 2000 Reform Plan • Cutting of government expenditures - nearly balanced budget • Buildup of infrastructure • Increasing reliance on private sector production/investment • Privatization of most public sector enterprises engaged in industry and services, including financial services • Reforms in financial sectors • Trade liberalization • Protection and expansion of social services

33. Impressive Macroeconomic Results

34. Reforms=> Decreased Volatility in Growth Average Standard Deviation in Growth Rates (1990-1998) % Lowest Volatility in Region Source: Statistical Information Management and Analysis

35. Increasing FDI in Egypt Current US $ million Source: SIMA database, World Bank

36. Dramatic Reduction in Egypt’s Need for Debt Servicing

37. Egypt’s Investment In Infrastructure • Between 1980/81 and 1997/98, electricity generation increased 470%, enabling all villages to receive electricity • Length of paved road increased 137%, length of railway lines doubled, and capacity of sea ports tripled • Number of phone lines, faxes, telexes increased almost tenfold • Agricultural land increased by 30%, number of factories quintupled.

38. Growing Role for Private Sector • Growing investments of private sector • Slow and successful privatization program

39. Private Sector Contribution to Egyptian Economy Source: World Bank.

40. Egypt’s Privatization • Privatization • 1991-1996: Slow but stable privatization. 10 companies sold to Employees Shareholder Associations, 3 companies to anchor investors, 1 liquidated. Minority shares sold in 16 companies. • 1996-1997: Acceleration. 65 companies sold, with government emphasizing partial sale of companies (public offerings, sales to anchor investors). • 1998: Sales to Strategic Investors. Remaining porfolio containing increasing proportion of less profitable companies. 21 companies sold. • Government privatization of 91 of 314 companies by July 1998, (14% of the total book value of SOEs). • Proceeds of Privatization = LE 7.8 billion (53% transferred to banking system, 37% used to settle debts to banking system, 10% used to restructure labor)

41. Measures of Privatization Success • Based on sample of approximately 1/3 of privatized companies: • Sales increased in 71% • Before-tax earning increased in 69% • Average salary per worker increased in 98% • Balance of loans declined in 82% • IMF rates privatization over 1993-97 as fourth most successful in world, on basis of privatization receipts a year as share of GDP

42. Further Reforms • Financial Sector Reform: • Removing interest rate ceilings on domestic currency deposits • Parliamentary Ratification to Banking and insurance laws to allow full private sector ownership • Required Liquidity Ratio: 20% for local and 25% for foreign currency • Capital Adequacy Standards: Adherence to Basel accords - minimum risk ratio of 8% • Trade Liberalization • Reduction in maximum tariff from 160% prior to 1990 to 50% in 1997, and nominal unweighted tariff fell from 33% in 1988 to 24.6% in 1998 • Free foreign currency transfers

43. Protection and Improvement of Social Safety Nets • During 1981/1982 -1997/98 • Expansion in availability of drinking water from 112 to 244 liters per capita • Sewage capacity more quintupled from 1.45 to 7.75 cubic meters per day • Registered doctors grew from 52,000 to 145,000 • Growth in urban and village hospitals 169 to 236 urban, 39 to 375 rural • Pre-university students doubled from 8 to 17.5 million

44. Further Challenges: Unemployment Still High Source:SIMA database, World Bank.

45. Other Improvements Needed in Egypt When Compared to Fast-Growing Economies (Hong Kong, Chile, Singapore, Indonesia, Malaysia, Thailand, & Korea) : • Egypt still lags in education and education quality • Domestic savings relative to GDP lags (18% in Egypt compared to over 30%) • Share of Government expenditure relative to GDP remains high (30% compared with about 20%) • Egypt’s tariffs (28% average) still significantly exceeds the world average (8.2%) and even developing country average (21.4%) • Rule of law index is comparably lower in Egypt - need improvement specifically in property rights Source: Ahmed Galal - Egyptian Center for Economic Studies