Economic Reforms in Egypt and Tunisia: Revolutionary Change and an Uncertain Transition Mongi BOUGHZALA University of Tunis ElManar Prepared for the ARD Annual Conference, 26 & 27 April 2012 Democratic Transition and Development in the Arab World Introduction What is happening in Egypt and Tunisia is not just an uprising, it is much more dramatic; it is bringing historic change. Not just spring, nor winter or autumn. We should compare it to a very strong seismic shock or even to a great storm causing a lot of destruction along with constructive change Obviously, it is deeply impacting the Economic Development Prospect of these countries. It may be expected to unlock an enormous economic development potential but the prospects remain highly uncertain. The losses are there but the potential gains although much more important are yet to come and remain uncertain. In spite of the relatively rapid growth and development in terms of per capita income, education, international integration and emancipation, it was clear that the situation was explosive and something was to happen Many contradictions and indicators show that the previous political regime could not be sustainable. Political change in Egypt and Tunisia The underlying factors (few words): • In spite of their apparent stability, Egypt and Tunisia’s autocratic political systems have, over the last two decades, become increasingly unsustainable and have ended up cracking quite visibly. They were highly repressive and unable to cope with the deteriorating socioeconomic conditions, to provide jobs and a decent life to their angry youth. They were also weakened by their open corruption and by their people yearning for freedom. Economically, the relatively good macroeconomic performances were hiding major failures: unemployment, income and regional inequality, much more poverty and deprivation than the numbers used to say... a growing informal sector offering mainly low quality jobs • The on-going political transformations • Political transformation is ongoing in Egypt and Tunisia: No way back to the initial situation • No well set project and no initial strong leadership • As a result no clear direction; the revolution has not opened the way only for the revolutionaries, and has not been guided by any well pre- established vision. The most opportunistic are actually the first to move and to try to position themselves and to take advantage, starting with the most excluded and the least integrated. Short- term challenges • Gangs, the unemployed, tribal and regional rivalries, labor movements more or less organized, new parties and repressed ideologies, religious groups, vested interests…Social forces that seemed completely suppressed and sedimented… All have come to the surface and have tried to benefit or to gain legitimacy. • Risk of chaos • Costly consequences Management of the transition period extremely challenging The fragile current situation: the security issue, The disruption of production, more unemployment and less income Budget deficit, public debt and macroeconomic instability Main indicators Growth fell sharply: from about 5% to 1% in 2011 in Egypt and from 4% to -2% in Tunisia Fiscal deficit, a serious problem especially for Egypt where it reached almost 10% in 2011 and close to 12% in 2012; it is going from 3 to 7% in Tunisia International reserves are falling sharply in Egypt from $43 billion in 2010 to about $15 billion currently as a result of a very high current deficit and net capital flight, a very serious threat. Inflation is on the rise and becoming a serious concern around 12% in Egypt, and close to 6% in Tunisia, up from 3 to 4% previously. Unemployment is up from 14% to about 20% in Tunisia; instead of creating jobs about 200 thousand additional jobs were lost. The numbers are different in Egypt but the problem is basically the same. Employment indicators In both countries youth, between 15 and 30, are about one 3rd of the labor force and a little more of the unemployed. Their number is still increasing quite rapidly. About 75% of the unemployed belong to this category, with much higher rates for young woemen. Unemployment by education level Out of these unemployed youth an increasing share is constituted of university graduates with no professional experience. However, there is an even larger number of young people wit secondary education, who are the most desperate and the most excluded. Most of them can only hope for an informal More education leads to lower employment probability Unemployment by education level in Tunisia 2005 2007 2009 Mai 2011 none 6.3 4.4 6.1 8 Primary 14.3 11.5 10.4 12.4 Secondary 13.3 13.5 14.0 20.6 Higher 14.0 18.2 21.9 29.2 Unemployment Duration Distribution 7.7% < 1 year 8.4% 1-2 years 2-3 years 22.6% 61.3% > 3 years 2011 Regional inequality Unemployment Rates 35 30 25 20 15 10 5 0 Greater TunisNortheast Northwest Center EastCenter WestSoutheast Southwest In Egypt and Tunisia, so far, little has been done to respond to these youth expectations and to regional unbalance. Unemployment has increased. Little attention has been paid to these key economic issues; political bodies have been concentrating more on political and electoral issues. Elections yielded odd and sterile political formations unable to address the real issues, with a predominance of Islamist groups. • In the short run a large part of the population may have been manipulated, the most likely to belong to this group being the illiterate, the poor and the rural population, This is more obvious in Egypt where literacy and urban population rates are higher. • Yet, in spite of this confusing landscape, a main pattern emerges and allows for some reasonable predictions: Driving forces Guiding forces and institutions Real performances and the capacity to respond to people’s expectations are in the long run the main determinants. the key drivers comefrom the widespread call by Arab publics for better governance. Central to this call is an emphasis on karāma, meaning dignity, which reflects a desire for political leaders who respect their country’s citizens and care about their welfare Frustrated and angry, the young people are demanding change in Egypt and Tunisia and all over the world Youth the main driving force Youth, unemployment and exclusion, especially the angry and unemployed youth, the educated and the less educated. While, so far, most of the focus has been on the educated, not enough attention is paid to those hundreds of thousands of angry young people most of whom with some education but little skills, those who have been rather ignored, the least integrated and the more or less hopeless. They are either unemployed or working in the informal sector. Most of them have not participated in the electoral process, yet connected to social networks and expressing their concern. They are involved in most of the current persistent forms of unrest. The challenges of gender are essential And so is managing the expectations of young people, and ensuring that the young are better socially integrated and more equitably treated. That requires the creation of enough good jobs. It is also important that institutions and policymakers really listen to what young people are saying. Government assistance and jobs are key in the current situation until the labor market recovers. Need for a new economic paradigm It is important that institutions, policymakers, and society as a whole really listen to what young people are saying. Communities, cities, provinces, and countries can set up forums for the purpose of listening to the concerns and ideas of adolescents and young adults and stimulating change. Success on the political front is what will make it possible for Egypt and Tunisia to make progress on the economic development front. Actually, it also goes the other way; there is a dynamic dialectical relation. Responding to youth and to legitimate popular demands through credible programs is necessary to convince and encourage political forces to accept a new political deal. This include a reasonable package of measures regarding: employment property rights, rule of law, fiscal policy, economic openness and the distribution of roles between the market and the state… Capital and large private businesses Private businesses remain the most powerful and determinant force but are more accommodating and least adventurous. They run the show but behind the scene Small businesses and the informal sector The least stuctured, the most volatile and uncertain generating low-quality, informal jobs. With a great deal of heterogeneity, informality is widespread in Egypt and Tunisia, and more generally in MENA. Ennahdha and F&J have been more successful in reaching this category even though they do not propose any development scheme for dealing with the informality issue Other main driving forces Labor and labor orgaization Civil service Organization: more and more vibrant and effective in both countries The military authority: predominant and a major actor (and challenge) in Egypt, not at all in Tunisia The main guiding forces Political parties: Is the political landscape shifting to the right? Islamist vs. secular regimes? New institutions and governance mechanisms are yet to be fully shaped. Institutionalization of rules plays a crucial role in transition to democracy and development. The Egyptian case is more confusing: the sequencing problem and the role of SCARF. Domination of the constituent assembly writing the constitution by the Brotherhood and more extreme Salafist parties. There is the question of whether the presidential election will take place as planned. •The principal political problem facing Egypt is its military vs. its Islamists, •The weakness and slow development of the secular parties is common to both countries. •The Tunisian outlook seems less uncertain •How these societies will evolve over time? Nobody has the answer. •After the euphoria, people expect a better life (growth) and more justice.