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The Social Effects of Economic Adjustment on Arab Countries

Edited by Taher H. Kanaan

Papers presented at a seminar held in Abu Dhabi, United Arab Emirates, January 17-18, 1996

International Monetary Fund 1997

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Library of Congress Cataloging-in-Publication Data

The social effects of economic adjustment on Arab countries / edited by Taher H. Kanaan. p. cm. Includes bibliographical references. "Papers presented at a seminar held in Abu Dhabi, United Arab Emi- rates, January 17-18, 1996." "The eighth in a series of joint seminars arranged alternately by the Arab Monetary Fund and the Arab Fund for Economic and Social Devel- opment, in cooperation with the International Monetary Fund and the World Bank"—P. Original language work not published. ISBN 1-55775-605-8 1. Structural adjustment (Economic policy)—Social aspects—Arab countries. 2. Arab countries—Economic policy—Congresses. 3. Arab countries—Social policy—Congresses. 4. Arab countries—Economic conditions—Congresses. 5. Arab countries—Social conditions—Congresses. I. Kan'an, Tahir Hamdi. II. International Monetary Fund. HC498.S65 1997 97-2497 306'.0917'4927—dc21 CIP

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©International Monetary Fund. Not for Redistribution Sponsoring Organizations

• The Arab Fund for Economic and Social Development • The Arab Monetary Fund In cooperation with • The International Monetary Fund • The World Bank

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©International Monetary Fund. Not for Redistribution Foreword

Jassem Al-Mannai

am pleased to present this report containing the papers and pro- I ceedings of the seminar on the Social Effects of Economic Ad- justment on Arab Countries, held in Abu Dhabi on January 17—18, 1996. It was the eighth in a series of joint seminars arranged alternately by the Arab Monetary Fund and the Arab Fund for Economic and Social Development, in cooperation with the International Mon- etary Fund and the World Bank. Previous seminars in this series have dealt with a number of issues related to economic reform in the Arab world, including privatization, structural adjustments, investment and foreign trade policies, prospects for development in the Arab countries in the 1990s, their fiscal and money market policies, and, finally, the General Agree- ment on Tariffs and Trade (GATT) and its effects on the Arab world. This seminar was particularly timely because it addressed another important aspect of economic reform that has attracted the attention of economic policymakers, scholars, and others interested in reform issues: the close connection between developing human resources and raising the standard of living, which is considered to be the basic objective of development. This issue also affects popular acceptance of reform programs, which is a necessary condition for the success and sustainability of such programs. The social effects of economic reform programs are a sensitive issue. Social indicators in the Arab world show that large portions of the population suffer many hardships in terms of health care, education, incomes and standard of living, unemployment rates, and inflation. Any eco-

©International Monetary Fund. Not for Redistribution JASSEM AL'MANNAI nomic policy or measure liable to increase the severity of the hardships measured by these indicators must be subjected to careful and objective scrutiny before any judgment can be made concerning its beneficial effects. Although economic reform policies and measures are considered fundamental conditions for achieving sustainable economic growth, experience has shown that these policies and measures can have a high social cost in certain cases, at least during the transitional stage, which may last for some time before the anticipated positive results of reform become apparent. Policies designed to restore economic stability may cause a reduc- tion in real incomes and levels of consumption in the short term, while reform measures in the public sector, including privatization of public enterprises, may require letting some workers go. This is reflected in the increased attention being given to the social effects of economic reform programs, which are being designed to include measures to reduce the suffering of the people affected, such as social safety nets and development funds. Health care is an area where much remains to be done before the desired objectives can be met. Several Arab countries have begun implementing economic reform programs, to varying degrees. Some countries have met with a certain degree of success, especially in terms of reducing their budget deficits, containing their balance of trade deficits, and achieving relative stability in exchange rates. There has also been some im- provement in the general investment environment and increased in- centives for investment, although the situation still leaves much to be desired. But regardless of the results achieved in these areas, the most important question that arises is what these countries have achieved in improving the standard of living, health care, education, and incomes of their populations and, in particular, in providing employment opportunities for an ever-increasing number of workers. Studies and evaluations of the social effects of economic reform programs, together with appropriate measures to reduce the severity of negative effects on the people affected, can add greatly to the credibility, popular acceptance, and sustainability of adjustment efforts. These issues constitute some of the most important challenges facing policymakers in the Arab countries that have implemented reform policies. They may also explain, to a certain extent, the hesita- tion and slowness with which certain important reform measures— such as the privatization of public firms—are being implemented.

©International Monetary Fund. Not for Redistribution FOREWORD

This report provides an opportunity for those interested in the social effects of economic adjustment in the Arab world to review the findings of this conference. I would like to thank the distinguished group of experts who participated in preparing the studies and who greatly enriched the related discussions, as reflected in the various documents presented and the deliberations held during the course of the conference. Elisa Diehl of the External Relations Department of the International Monetary Fund edited the volume and coordi- nated its production. Alicia Etchebarne-Bourdin, also of the IMF's External Relations Department, was responsible for composition.

Jassem Al-Mannai Director General and Chairman of the Board Arab Monetary Fund

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©International Monetary Fund. Not for Redistribution Contents

Foreword Jassem Al-Mannai v Opening Remarks Ahmad Hamid Al-Tayer 1 Said El-Naggar 4

1. Economic Reforms, Growth, Employment, and the Social Sectors in the Arab Economies Patricia Alonso-Gamo and Mohamed A. El-Erian 7 Comment: Galal A. Amin 37

2. Social Safety Nets: Experiences of Some Arab Countries Faris Bingaradi and Adda Guieciour 48 Comment: Abdul-Shakour El-Rayes 84

Additional Comments on the Experiences of Some Arab Countries Jordan: Taher H. Kanaan 92 Algeria: Abdoulatif Benachenhou 94 Egypt: Ismail Sabri Abdullah 96

©International Monetary Fund. Not for Redistribution CONTENTS

3. Social Safety Nets: The Social Development Fund in Egypt Khalifa Ali Dau and Hussein M. El-Amach 98 Comment: Mabid Al-Jarhi 128

4. Social Development During Adjustment in the MENA Region: Contradiction or Opportunity? Jacques van der Gaag 137 Comment: Abdoulatif Benachenhou 179 Ali Tawfik Sadik 189

5. Privatization and Labor Issues in the Context of Economic Reform Rolph van der Hoeven, Massoud Karshenas, and Gyorgy Sziraczki 193 Comment: Nader Fergany 229 John Page 241

6. Main Themes and Highlights of the Discussions Taher H. Kanaan 244

List of Participants 251

The following symbols have been used throughout this book: ... to indicate that data are not available; — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist; - between years or months (for example, 1991-92 or January-June) to indicate the years or months covered, including the beginning and ending years or months; / between years or months (for example, 1991/92) to indicate a crop or fiscal (financial) year. "Billion" means a thousand million; "trillion" means a thousand billion. Minor discrepancies between constituent figures and totals are due to rounding. The term "country," as used in this book, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statis- tical data are maintained and provided internationally on a separate and inde- pendent basis.

Ahmad Hamid Al-Tayer

am very pleased to welcome you to our country and to convey to I you the greetings of Sheikh Zayed Bin Sultan Al-Nahyan, President of the United Arab Emirates, and of Sheikh Maktoum Bin Rashid Al- Maktoum, Vice President and Prime Minister, both of whom have ex- pressed their sincere wishes for the success of your seminar, being held here in Abu Dhabi. It is indeed a pleasure to meet with such a distinguished group of experts and specialists, who have gathered here to discuss a number of issues that are important from both the economic and social viewpoints, especially in light of the increasing number of economic reform policies and programs being implemented in the Arab world. The economic adjustment efforts currently being carried out in a number of Arab countries and the encouraging results they have produced to date are certainly worthy of praise. In the end, adjustment cannot be avoided and should not be delayed too long, because al- lowing fiscal imbalances and structural deficiencies to accumulate in various economic sectors will only aggravate the situation and make it harder to resolve future crises. The basic objective of economic development is to raise the standard of living, and people must be ed- ucated about their country's adjustment policies and programs in order to overcome the negative impressions they often have of such programs, especially in the low-income sectors of society. These negative impressions of economic adjustment can create many dangers that may threaten the entire process of economic reform. There is no doubt that the social effects of the reform process

©International Monetary Fund. Not for Redistribution AHMAD HAMID AL-TAYER can increase poverty among those with limited incomes or already living near the poverty line. Social tensions increase as a result of rising unemployment rates and declining employment opportunities, especially for young people. This leads to further social insta- bility and increased violence, which greatly limit the possibilities for economic stability and creation of a favorable climate for attracting the investments needed to finance economic development. The success of economic reform therefore depends to a large extent on appropriate policies that lower the risks of adjustment. Such policies must be designed to reduce the suffering of society's most vulnerable sectors by attempting to meet their basic needs and providing the resources needed for social expenditures. Programs must be developed for education, vocational training, and health services to prepare people for the new requirements of the labor market. In addition, other policies are needed in various areas of social concern. The Arab states have placed a great deal of importance on the social aspects of development. The United Arab Emirates, like the other countries of the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, and Saudi Arabia), has allocated considerable resources to provide basic social services, in the belief that developing human resources is the most important element in the process of economic development. This focus has produced tangible results, as shown by development indicators in a number of different sectors. With the steady decline in oil revenues since the early 1980s, it has been necessary to make better use of the resources available and to look for ways of developing resources other than oil in order to maintain the level of progress achieved thus far. Knowing how important it is for the Arab countries engaged in economic reform programs to take steps to alleviate the negative social effects of these programs, the countries of the Gulf Cooperation Council, despite their reduced revenues, have continued to provide assistance in this area to the other Arab states by offering them grants and concessional loans. In this context, we appeal to the international community, and especially to the industrial countries, whose development assistance is still only a fraction of the amount required, to help provide the support needed to reduce the social effects of economic adjustment in the countries that are implementing such programs. Their assistance can help these countries through the difficult initial stages of adjustment and enable them to come closer to their goal of sustained economic growth without

precipitating major upheavals in the social structure. This is in the joint future interest of all parties concerned, as it will help promote stability and reduce the danger of increasing migration from countries experiencing difficult economic and social conditions. As we approach the twenty-first century, we find that the Arab countries are faced with great challenges and significant risks in a world that makes no allowances for weak economic performance. In order for our people to assume their rightful position in the world of tomorrow, we must concert our efforts and sharpen the minds and skills of our sons and daughters, who will lead our people along the road to progress and prosperity. I would once again like to express my thanks and appreciation for your participation in our discussions of these vital issues. I am confident that this seminar will produce many highly valuable results. Finally, I wish to commend the Arab Monetary Fund and the Arab Fund for Eco- nomic and Social Development for their efforts in organizing these annual joint seminars to discuss the important topics and issues of interest to government officials and others concerned with economic matters in the Arab world.

Said El-Naggar

would like to begin by offering my thanks to the Arab Monetary I Fund and the Arab Fund for Economic and Social Development, which have provided us with this opportunity to discuss a very important and timely issue in this eighth in a series of seminars spon- sored by the two organizations, each dealing with an important issue related to economic and social policy. The topic to be addressed by the present seminar is the social effects of economic reform programs. This topic has become the number one agenda item for all those concerned with economic reform, including economic policymakers in the Arab world, leaders of international development agencies— in particular the International Monetary Fund and the World Bank— and members of academia and other learned organizations concerned with economic policies. There is little I can add to the valuable opening statements by His Excellency the Minister of Econ- omy and Industry and by the Chairman of the Arab Monetary Fund; however, I would like to present for your consideration a number of points that may help you make a more accurate and balanced assessment of the social effects of economic reform. First, the international economic climate in which developing countries and the Arab states must function demands high levels of productivity and competitiveness. It is characterized by rapid tech- nological advances and a great degree of interdependence and globalization. Markets, both commercial and financial, have become truly global, and this vast planet has become like a small village,

©International Monetary Fund. Not for Redistribution OPENING REMARKS where barriers to the flow of goods and capital have all but disap- peared. It is also characterized by the appearance of enormous economic blocs. In this environment, we have no choice but to become more productive and competitive if we are to keep pace with foreign competition and penetrate international markets. Second, if we consider the current situation of the Arab states in particular and developing countries in general, we find that a number of countries have made considerable progress in their economic reform efforts. However, there is still a long way to go before we achieve the levels of productivity and competitiveness required. Many Arab states and other developing countries still suffer from significant economic imbalances, including rising inflation, inflated exchange rates, and large deficits in the budget and balance of pay- ments. Many countries in the Arab world and other developing countries continue to be plagued by highly inadequate production structures. These distortions result in falling levels of economic production, whether measured in terms of growth rates, unemployment rates, or the quality and quantity of services provided to citizens. In other words, the distortions that exist before economic reform programs are implemented produce social effects that are harmful to the poor and the middle- and low-income sectors of society. Third, in light of the present circumstances, economic reform has become an absolute necessity for transforming an unsustainable situation into a sustainable one. However, economic reform programs that involve a number of measures required to raise levels of productivity and competitiveness often include at the same time economic measures that are harmful to the poor and middle classes. For example, most economic reform programs entail eliminating or reducing subsidies on basic consumer goods that are widely de- pended on by the population. Most economic reform programs also include measures to privat- ize a number of public projects, which may require laying off re- dundant workers. We also find that many economic reform programs include measures to reduce the budget deficit, which may require reducing public expenditures for education, health, and low-income housing. Thus, we can see that economic reform efforts have social effects that cannot be ignored. In the early 1980s, when economic reform programs were just beginning, international development agencies did not assign a high priority to this issue because, at that time, the focus was on the problem of indebtedness.

The principal goal was to achieve economic viability and sustainability by correcting economic imbalances and structural distortions, without much thought to the social effects. But as we know, the position of the international institutions and the governments concerned changed significantly during the second half of the 1980s. Reducing and trying to eliminate the harmful social effects of economic reform has become the top priority of these institutions and governments. The fourth important point is that the situation that prevailed before economic reform programs were implemented was itself harmful to the poor and lower classes, just as economic reform efforts often have negative social effects. But the essential point is that the social cost of the situation prior to the implementation of economic reform was far greater in terms of severity, extension, and duration than any social cost that may result from implementing these reform programs. Therefore, when assessing the social effects of economic reform, we must not ignore the harmful social effects of the situation prior to the implementation of reform. It is extremely important that we keep this in mind when discussing the accurate and balanced assessment of social effects.