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Thesis final

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Research presented at Alliant International University Master Program Of IR as a thesis for graduation

Research presented at Alliant International University Master Program Of IR as a thesis for graduation

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  • 1. Thesis“Economic Policy of the World Bank in the Egypt during the period 2000-2010: Is it Politicized?” Presented By Abdelhamied Hany El-Rafie Under the Supervision of Stephen Murray Director of the Marshal Goldsmith Program Alliant International University Mexico City Campus 1 Abdelhamied El_Rafie
  • 2. ‫بسم ا الرحمن الرحيم‬‫اللهم اشرح لي صدري و يسر لي امرى و احلل عقدة من لساني يفقهوا‬ ‫) ) قولي‬ ‫إهداء إلى أبى و أمي لدعائهم المستمر لى و لمعاناتهما فى تربيتي‬ ‫و إلى سعادة السفير العظيم إبراهيم عهدي خيرت‬ ‫الذي ساندني و شجعني لستكمال الماجستير‬‫و إلى زوجتي التي تحملت الكثير من اجل هذه الدراسة منذ أن ارتبطنا‬ ‫و إلى اعز ما لي في الدنيا‬ ‫ابني هاني‬ ‫2‬ ‫‪Abdelhamied El_Rafie‬‬
  • 3. Introduction:My research topic will be: “Economic Policy of the World Bank in the Egypt during theperiod 2000-2010: Is it Politicized?”Main theme:The basic idea of the research is to examine whether there are direct or indirect politicalimpacts of the economic policy and operations of the bank in Egypt.Time period:The research will focus on the operations of the Bank during the Period 2000-2010.Questions I will try to answer in my thesis: 1. What is the official mission and the real role of the World Bank in today’s world? 2. Does this role or mission have political impacts in the world? 3. What is the Economic system imposed by the World Bank in the region? 4. Is the role of the World Bank affected by the political situation in Egypt? 5. What are the historical backgrounds of the WB operations in Egypt? 3 Abdelhamied El_Rafie
  • 4. 6. What are the targets and goals of such operations?Hypothesis of the research:The World Bank role in Egypt is conditioned by the international and regional politicalsituation, the policies of development investments and the policy-making process of theboard of directors of the Bank.Although World Bank operations will help Egypt to reach sustainable economic growth,those operations might face obstacles due to the lack of political and economicintegration in the Middle East region.Structure of the Research:Part IThe World Bank from inside: 1. Mission of the WB according to the Bank itself. 2. Historical background. 3. The voting power in the Board. 4. Structural adjustment programs. 5. Reforms within the WB. 6. The bank assistance programs. 7. The relation between the WB and The United States. 4 Abdelhamied El_Rafie
  • 5. Part IIThe World Bank and Egypt 1. Historical background about the relation between the WB and Egypt. 2. Egyptian Economic progress. 3. The WB evaluation to the economic situation in Egypt in 2001. 4. The WB evaluation to the economic situation in Egypt in 2005. 5. The WB evaluation to the economic situation in Egypt in 2008. 6. Developments from 2008 till 2010.Part IIIThe final analysis 1. The current International Economic system. 2. Has Egypt followed the WB ?and what about the social and political prices? 3. Is there another option for Egypt? 4. Economic integration in the Middle East and its future with regards to the deterioration in the Peace process. ‫ــــــــــــــــــــــــــــــــــــــــــــــ‬ 5 Abdelhamied El_Rafie
  • 6. Part I The World Bank from InsideMission of the World Bank (according to the Bank itself)“The World Bank (WB) is a vital source of financial and technical assistance to developingcountries around the world. The mission of the WB is to fight poverty by providing resources,sharing knowledge, building capacity and forging partnerships in the public and private sectors.”1“The WB is made up of two development institutions owned by 187 member countries:the International Bank for Reconstruction and Development (IBRD) and the InternationalDevelopment Association (IDA). Each institution plays a different but collaborative role inadvancing the vision of inclusive and sustainable globalization. The IBRD aims to reduce povertyin middle-income and creditworthy poorer countries, while IDA focuses on the worlds poorestcountries.”2Historical background:After the end of the Second World War, the US found itself superior in every form. TheUS was trying to invest the superiority in which it ended the war as an acquirer of nuclearweapons, so the US was superior on the military side and politically it was the leader ofthe Pact who won the war. After the war, the US put its economic and military power toconfront the Soviet Union. On the economic side, the US had funded through the WorldBank the reconstruction of Western Europe and Japan; on the military side, it gave asmooth direction towards the creation of a western military alliance named NATO.1 http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,pagePK:50004410~piPK:36602~theSitePK:29708,00.html2 http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,pagePK:50004410~piPK:36602~theSitePK:29708,00.html 6 Abdelhamied El_Rafie
  • 7. The US used its economic and military dominance to manage and control the worldeconomy. The key features of that world economy were that it has the features of bothliberalism and multilateralism; the system was based on liberal economic principals.Western states participated in three international organizations which were created toachieve the capitalist economic order. These three organizations are the InternationalMonetary Fund (IMF), the International Bank for Reconstruction and Development(IBRD) (effectively the World Bank (WB)) and the General Agreement on Tariffs andTrade (GATT) which was transferred recently to the World Trade Organization (WTO).Not only this, these western countries had put restrictions on the memberships of theseorganizations and didn’t allow any country that was not following free-market principalsin their internal economic management to have membership.Under this economic system, the United States, Western Europe and Japan have achievedunder this economic system what has been called a golden era of economic growth duringthe 50s until the early 70s.Countries (apart from the developed world) have not been protected from the pressures ofthe global market. Two developments happened during the 70s and 80s which led toeconomic competition between developing states. The first was the decision of China tobegin an era of trade and foreign direct investment to allow trade and foreign investmentinto China by the west. The second development was the debt crisis in the 1980s.3The World Bank was founded in an international conference after the end of World WarTwo aiming for a framework of international economic governance. The target was3 Robert O’Brien and Marc Williams, Global Political Economy, 2004, pp. 113-134. 7 Abdelhamied El_Rafie
  • 8. stability of the world economy: for this reason, the International Monetary Fund wasestablished as the core of the system, the World Bank (thenthe IBRD) was to provide governments with assistance to offer the private sectorespecially in the field of reconstruction and investment and attracting direct investments.The IBRD started its work in September 1946; the first loan of the Bank was to Francewith a value of US$250 million. The number of member countries of the Bank then was38; now after more than sixty years it has reached 185 member states. During this sameperiod, the Bank had 11 Presidents and it supported countries with more than US$500billion in the form of investment in the resources and loans for poorer countries.The IBRD, which is the major lending part of the World Bank system, holds loanscurrently of more than US$100 billion; it has average yearly profits of US$1 billion sinceits foundation in which allowed itself to make grants to other organizations within theWB including the International Development Association.4The WB is supposed to meet social necessities in which the private sector will not be ableto fulfill; the WB should also face market failures which could happen through threephases: the first is capital deficiency, the second skills know-how deficiency, and thethird a complex of resources scarcities.The WB role at the beginning was concentrated on finance and it started in Europe as areconstruction financier, then the WB started in the fifties to do the same job with poorcountries. Later the WB changed its priorities: it moved beyond finance towardseconomic structure and models of economic growth. That is why the IDA was established4 David A. Phillips, Twenty Years of Trial – and Error, pp. 1-6. 8 Abdelhamied El_Rafie
  • 9. but still the major role of the WB was to finance but it went further towards infrastructureprojects such as telecommunications, power and industry. The working strategy of theWB became more diversified over the next decades: it included social sectors, support toeconomic reform, technical assistance projects, training and research.The shift towards investing in the infrastructure started during the presidency of RobertMcNamara (1968-1981) through his belief that investments and direct financing alonewere not addressing correctly the problem of poverty. The scope transferred during theeighties into the issues of debt, structural adjustments and restoration of privateinvestments and financial flows to the developing countries; thus it was a transfertowards macroeconomic adjustments. The WB role was important in internationalfinancing but this importance was reduced during its lending expansion during the debtcrisis of the eighties, although it was responsible for less than 50% of international flows.Currently the WB is responsible for about 85% of the total flow of capital to developingnations in the form of direct investment and portfolio investments.Under the presidency of Paul Wolfowitz there was another shift, towards what is calledthe “Knowledge Bank” which was first declared in 1996. This was a transfer frominfrastructure and macroeconomic adjustment towards so called “Institution Building”,which is concerned with the regulations of the market and legal frameworks.5The voting power in the Board:The way the Bank is ruled is very important in order to understand the management ofthe Bank. The Bank consists of lenders, shareholders and informal activist groups, and5 David A. Phillips, Twenty Years of Trial – and Error, pp. 6-9. 9 Abdelhamied El_Rafie
  • 10. each group is divided into sub-groups. The Bank’s creditors target is to get repaid so theyare concerned about profits and security. Due to this the United States (because it is thelargest shareholder) uses the bank for its foreign policy objectives more than othermembers. The board of governors has 24 individuals representing 185 countries and G5are permanently represented by their own government. The governors are the finaldecision-makers by they only meet two times a year, then power is given to the executivedirectors. These directors are permanently available in the bank; this has led tomanagement problems in the bank because of the contradiction in management betweenthe top level and the executive level.6Table 1. Board voting power 1965 1975 1985 1995 2006Countries 102 125 149 178 185Board 20 20 21 24 24members 54.9% 51.3% 49.7% 43.3% 43.0%G7 votesOECD votes 67.6% 64.7% 63.6% 57.5% 55%US votes 26.3% 22.7% 19.7% 17.0% 16.4%(David A. Phillips, Twenty Years of Trial – and Error, p. 16)Structural adjustment programs:6 David A. Phillips, Twenty Years of Trial – and Error, pp. 11-13. 10 Abdelhamied El_Rafie
  • 11. The structural adjustment programs of the World Bank and the International MonetaryFund (which started in 1980) have taken significant percentage of the World Bank’slending power which was above the originally set budget by 25%. The idea of adjustmentwas accompanied with the policies of liberalization during the period of the presidency ofRonald Reagan in the US. The basic idea was to find the solution for the poor economiesto face their 1979-1980 shock of booming oil prices. The idea was to recycle the revenuesof selling petroleum to the poor economies in the form of low-cost loans to help them tosave their economic structure. The first part of the solution was implemented by the IMFby financing the economies and by cutting public spending. But on the other hand, thesereforms were having high political sequences: at the beginning the SAPs (StructuralAdjustment Programs) was shorter from three to five years, but suddenly these programswere longer as a result of difficult political conditions.7Reforms within the WBThe target of the 1990s reforms in the World Bank was to reorganize the operation areasof the Bank and address issues like the huge numbers in the bureaucracy which havegreatly increased the cost of doing business within the WB and led to slowness of theorganization; so the basic element of change was introduced, what is called “the matrixmanagement system”.This matrix was to prevent relocation of power and conflicts within the management andto improve the flow of business and information. The restructure includes engineeringindustries and software development. The matrix has had some success in 96 countries inAfrica.7 David A. Phillips, Twenty Years of Trial – and Error, pp. 27-29. 11 Abdelhamied El_Rafie
  • 12. The problem was lost synergy but there was a problem in the managerial control whichwas reduced to the minimum level in the country units and increased at the level of thespecialist department, which led to span of control of around eight senior managementlevels.A letter was published in The Financial Times about the matrix system, saying that it hadfailed and improvement stopped, staff were talking about confusion and stress amongthem and the mangers. The staff association claimed that the management had a lack ofunderstanding of the concepts of management. In 2001 in an official bank newsletter, itstated that the matrix system could be credited with an increase in country focus byimproving technicalities and having a capacity of rapid response.The following table shows the administrative budget of IBRD in million dollars.8Table 2. The administrative budget: IBRD and IDA ($ millions) 199 199 199 200 200 200 2003 7 8 9 0 1 2Regions8 Taken from David A. Phillips, Twenty Years of Trial – and Error, pp. 67-71. 12 Abdelhamied El_Rafie
  • 13. (direct operations) 651 710 740 779 708 775 816Of which ´regional functions´ 50 78 83 100 140Regions less ´regional functions´ 690 701 625 675 676Networks 61 86 107 124 119 147 159Other (quality and support) 2 11 13 19 23 24 31Training and research 88 92 97 87 93 97 110 aOther net overheads 354 357 366 364 387 365 396 bAdministrative budget 115 125 132 137 133 140 1511 6 6 2 3 0 7Administrative budget plus Board 112 132 139 145 141 149 1604 ccosts 6 9 7 3 4 0 13 Abdelhamied El_Rafie
  • 14. Of which OED (IEG) 15.5 16.0 16.8 18.5 19.2 19.8 20.3Board and Secretariat 54.2 57.1 58.1 61.8 64.9 63.2 72.8a Consists of finance administration and management services and contingencies.b There are various different measures of administrative costs. This figure is before countingreimbursable fees, and the last line excludes the development grant fund and the costs ofpensions.c This includes the board, corporate secretariat and IEG (OED)Source: Annual reports and estimatesThe Bank Assistance ProgramsThe bank assistance programs could be perceived through three stages: A) capitaldeficiency, B) capital efficiency and related skills / know-how deficiency, C) capacity,know-how and information deficiency. By this kind of assistance, the Bank transferredfrom the initial role of financial aid and infrastructure assistance to those social sectorssuch as macroeconomic activities, market regulations, legal reforms and anti-corruptionprograms. These programs were delivered through financing and not financial tools. Onthe financing side, it includes loans for sector investment, adjustment and povertyreductions and adjustment lending; knowledge assistance, training and research havebeen also involved by focusing on technical projects to the countries instead of just 14 Abdelhamied El_Rafie
  • 15. economic policy. The structural adjustment lending had been remade into developmentpolicy lending and it was extended to support poverty reduction.9During the 1990s the issue of conditionality had put the WB neutrality into question,which is why the then president of the Bank, Paul Wolfensohn, started a dialogue in 1996about the Structural Adjustment Programs and another dialogue was held in 2001.During the process of reform of the SAPs there was disagreement between meeting thetargets of these programs and the need to commit countries themselves; as it turned out,less than half of the countries had well-planned medium-term strategies.There was a huge need for local participation in the process of adjustment. This needed astronger participation from inside and outside the government, and that was a normalchange in the WB’s work, involving a transfer from adjustment lending towardsintroducing knowledge projects and services.10Knowledge services had serious setbacks they have many losses plus their excessivecosts which needed to be subsidized by the WB through loans or income investment, orfinanced outside the normal processes, there was smaller efforts to put in priority theknowledge bank because the charging fees for that system took place in 1997 was notjustified because according to that system only few countries could pay those fees.11NEW FINANCIAL PRODUCTSTable 5. The Bank´s financial products in 2007.129 David A. Phillips, Twenty Years of Trial – and Error, pp. 119-121.10 David A. Phillips , Twenty Years of Trial – and Error, pp. 124-128.11 David A. Phillips , Twenty Years of Trial – and Error, pp. 148-149.12 David A. Phillips , Twenty Years of Trial – and Error, p. 152. 15 Abdelhamied El_Rafie
  • 16. Product Outstanding ($ billion) Fixed spread loans 32.1 Variable spread loans 42.1 Multicurrency pool (variable) 9.3 Single currency pool (variable) 6.6 Single currency loans (fixed) 4.8 Special development policy loans 2.3 Other 0.6 Source: Annual Report 2007Figure 2. IBRD and IDA: administrative cost burden.The relation between the WB and the United States:The targets of the US with regard to the WB was driven more by its foreign and domesticpolicies than by its interests in achieving WB targets; indeed it might be argued that USpressures have put some limit on the good functioning of the Bank. Another observer has 16 Abdelhamied El_Rafie
  • 17. noticed that any dissatisfaction by the US executive director sends a direct signal andimpact on the actions of the WB. The US was supportive of the WB for the first twentyyears; then during the 70s this support was variable due to the assistance policies of theUS; then the support was reduced during the Regan administration at the White Houseduring which it started to oppose certain WB strategies.13The president of the WB is not only the most prominent figure but he is also the chiefexecutive so he is the most important person at the institution; but the selection of thatleader is critical towards the effectiveness of the WB and his selection has not been up tothe present day under any part of the process of reform of the Bank.14Article 5 of the Bank’s agreement states that the executive directors elect the Presidentbut this article was never accurately used, but some writers cite it ironically as it is the USpresident who chooses the Bank’s president.1513 David A. Phillips, Twenty Years of Trial – and Error, pp. 233-235.14 David A. Phillips, Twenty Years of Trial – and Error, pp. 263-264.15 David A. Phillips , Twenty Years of Trial – and Error, pp. 274-277. 17 Abdelhamied El_Rafie
  • 18. Part II The World Bank and EgyptHistorical BackgroundThe Egyptian economy witnessed several phases of development since the 23rd of JulyRevolution of 1952. It started by the Agricultural Reform in September 1952 whichreallocated the agricultural wealth and stated that by law no person can own more than 50feddans (1 feddan equals 0.42 hectares); then in 1954 there was what we call the “statedirect investment in the economy”, that was in the iron and steel company. At that timethe country was planning to build a high dam at Aswan to prevent the flood of the Nileand to produce electricity for the country and it got a promise from the World Bank tofinance the building of the dam, but due to the Egyptian decision in 1955 to buy Sovietweapons from Czechoslovakia and with pressure from the United States, the World Bankwithdrew its offer to finance the dam. This led the Egyptian President (Gamal AbdelNasser) to nationalize the Suez Canal. The consequences of this led to more stateintervention in the economy by creating the National Planning Commission in 1957.16The second transformation in the economy started in 1960 on what was called by thepublic the socialist decisions, by which the State played more of a role in comprehensivenational planning and application of trade with the Eastern Block.The third stage started in 1967 which we can call the economy of war where thegovernment faced problems in financing its policies under the pressure that it had lands16 State Information Service, http://www2.sis.gov.eg/Ar/Economy/introdaction/Development/050101000000000003.htm 18 Abdelhamied El_Rafie
  • 19. occupied by Israel due to the 1967 War; military spending increased from 5.5% of GDPin 1962 to 10% in 1967 and up to 20% in 1973.17The fourth phase started in 1974 which was what was called the “economic opennessera”: this witnessed a lesser role of the State in planning and more Arab directinvestments. The country witnessed a growth rate of 9.8 % but this growth was in theservice sectors without real production.18The next stage was in the period 1982-1990, which was a mixture between planning andeconomic openness; there was huge spending on infrastructure and it was a slowmovement towards the market economy. In 1990 there was a big shift towards marketeconomy mechanisms which witnessed policies addressing fiscal imbalances, interestrates, liberation and floating of the currency. In short, real reform started during theperiod 1991-1997 which witnessed the start of policies of structural adjustment but theresults of this reform were affected by the 1997 financial crisis in East Asia. Then a newperiod of economic reform started in 2004 until now.19The WB Evaluation of the Economic Situation in Egypt in 2001The Banks focus on that report was in areas where (a) government commitment toprojects is strong; (b) the Bank has a long and positive experience (water sector andirrigation; human development); (c) it can bring knowledge management and experienceof other countries to guide Egypts policy reforms; and (d) it can serve as a catalyst formobilizing financing packages 2-3 times that of Bank loans for well-designed and high-17 State Information Service, http://www2.sis.gov.eg/Ar/Economy/introdaction/Development/050101000000000003.htm18 State Information Service , http://www2.sis.gov.eg/Ar/Economy/introdaction/Development/050101000000000003.htm19 State Information Service, http://www2.sis.gov.eg/Ar/Economy/introdaction/Development/050101000000000003.htm 19 Abdelhamied El_Rafie
  • 20. priority projects. The Bank had in this period a slight direct involvement in energy,industrial restructuring, and environment.Egypt economic performance was good in quantity terms but less good in quality terms;the fastest sectors which has good growth were based on domestic demand, especially theservices sector which was the major participant to GDP growth, in particular tourism andconstruction. The growth sectors in Egypt were not technology-concentrated projects andthey had no improvements in their productivity. Interestingly, there was no concertedpolicy that was directed towards poverty eradication though poverty in the mid-1990saffected between 22-48% of the total population.With reference to achieve International development goals by 2015, in 2001 the prospectswere positive but this needed to achieve basically two things: the first involved reducingthe number of underweight children and the second was to achieve progress towardsgender equality. Thus there came about an overall policy that sought “Sustainable HighGrowth and Poverty Reduction”. Egypts key economic governance issues were related totax policy and administration; civil service reform; legal and judicial reform; greaterinvolvement and participation of civil society in service delivery and decision-making;and corporate governance.There was a huge problem which was that the access to financial sector data was limited.Another basic problem according to the World Bank report in 2001 was that the annualloss of agricultural land due to urban encroachment was estimated at between 15,000 and 20 Abdelhamied El_Rafie
  • 21. 30,000 feddans (1 feddan = 0.42 hectares). Also there were other negative comments bythat time because of poorly protected cultural and natural heritage. According to thereport, the country was facing a problem in which 95 percent of the population lived ononly 4 percent of the land. Also water scarcity would be a critical challenge for the futureof Egypt. The report expressed the need of removing obstacles to private sectordevelopment.On the positive side, the WB noticed that the Government had consistently expressed itscommitment to integrating women fully in development. Concerning the rights ofworkers, the WB found that there was a necessity of extending the social insurance whichcovered only the formal-sector employees and the private sector also. Also it was noticedthat, during the 80s and the 90s, Egypt had invested significantly in upgrading itsphysical infrastructure but the WB pressed on the need for greater private participation ininfrastructure which in turn needed a legal reform. The Bank also noticed thattelecommunications and in particular internet infrastructure needed greater attention.WB operations were estimated in 2001 at a total of US$450-600 million. Actuallyoperations were approved by the Board for about US$580 million, a figure whichdepended on the investment climate, the availability of suitable transactions and partners,and the level of competition in funding from local banks. And finally the WB stated thatlending to Egypt during that period would be strongly demand-driven and would,therefore, inevitably fluctuate from year to year.2020 http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2001/06/29/000094946_01061404112783/Rendered/INDEX/multi0page.txt 21 Abdelhamied El_Rafie
  • 22. The WB Evaluation of the Economic Situation in Egypt in 2005The WB report about Egypt stated that Egypt had experienced high growth in the secondhalf of the 1990s following the adoption of a structural adjustment program. Alsoaccording to the report, poverty had been reduced during the second half of the 1990s.The report mentioned also that the country had a good record in providing education toits citizens. But the 2005 report stressed that safety nets for the poor, though theyexisted, had to be much improved. It also commented that the country was undergoing ademographic transition which offered both challenges and opportunities.The economic policies of the government during 2003/4 had made changes to theeconomic system and proved that the country was able to accommodate both rapid andsubstantial changes in the nature and content of economic policies; examples of that arethe flotation of the currency in 2003 and the reinvigoration of reform efforts in 2004.In July 2004 the country had a promising program, which comprised long-term policiesstarting from the mandate of the new government to improve living standards, promoteinvestment, reduce unemployment, contain inflation, and improve the performance of thefinancial system and of administrative bodies. Some bold reform measures had alreadybeen initiated while plans had been announced for others.According to its evaluation of the reform, the WB predicted then that 22 Abdelhamied El_Rafie
  • 23. The success of the reform effort will depend, in part, on its social consequences. The success of the reform effort will partly depend on public support which, in turn, will depend on whether the consequences of the reforms are perceived to be inequitable and burdensome for vulnerable groups A more open and competitive political system is in prospect. Recently, at the recommendation of the President, Parliament changed the relevant clauses in the Constitution to allow for multiple candidates to run for the office of the President with the winner to be chosen in a direct and secret balloting procedure. It is likely, therefore, that a more competitive political system may develop in the future, providing a new vent for the full range of public opinion.21The Bank also noticed that the Egyptian financial sector was characterized byinefficiency and weaknesses in intermediation due primarily to the dominance of stateownership; the Bank mentioned the actions of the government to improve theperformance and soundness of the financial sector. Subsequently, the governmentproposed a series of measures: in the banking subsector, reform objectives includedmerging the six most poorly performing banks with larger, better-performing banks; inthe insurance subsector, reform objectives included privatizing one of the state-ownedinsurance companies, improving corporate governanceThough the Bank had hailed the government policies in trade policy reforms during the1990s, Egypts export performance deteriorated in this later period, contributing to theslowdown in overall economic growth. To regain momentum in this area, the governmentadopted a floating exchange rate system in 2003 and took steps to improve thefunctioning of the interbank foreign exchange market in 2004.The Cabinet, according to the report, intended to follow an asset-management approachwith the objective of maximizing returns from the restructuring or sale of state-ownedcompanies. In short, the basic idea was to reduce the number of state-owned companies21 http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2005/06/24/000012009_20050624102618/Rendered/INDEX/321900rev3.txt 23 Abdelhamied El_Rafie
  • 24. in order to reduce the involvement of the state in areas where private sector enterprisescan function.22The WB Evaluation of the Economic Situation in Egypt in 2008The executive mangers council submitted on June 2005 and discussed the strategy ofassistance for Egypt for the period 2006-2009, and the 2008 report evaluated theexecution of this strategy. The latter report mentions that Egypt is considered a middleincome country and the Egyptian government was capable during the last years to obtaina strong record as one of the countries of Middle East and North Africa that implementseconomic reforms.The country had reduced trade barriers through three phases in 2005, 2006 and 2007 byreducing average customs fees from 14.6% to 6.9%. It had also engaged in reforming thetaxation system, reducing subsidies for power, improving financing and debtmanagement, reforming the financial sector and improving the environment of doingbusinesses; there were also some early steps towards executing reforms in the socialsector.Total investment in the different economic sectors rose from 17.6% GDP during theperiod 2001-2004 to 21.2% during the period 2004-2008, while foreign direct investmentrose to 8.6% in 2008; also investment in the private sector increased from 5.3% in 2005to 7% in 2008, which indicates strong and positive economic performance. Reserves offoreign currencies reached US$33 billion. The report welcomed the government efforts inreducing the budget deficit which was a protracted problem throughout the history of the22 http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2005/06/24/000012009_20050624102618/Rendered/INDEX/321900rev3.txt 24 Abdelhamied El_Rafie
  • 25. Egyptian economy: in recent years this deficit reached 7.7% of GDP by the end of 2007while it was 9.2% of GDP in 2006.Although the country achieved strong performance during the last decade on themacroeconomic level, and despite the improvement in social indicators, the reportmentions that poverty in Egypt in 2008 still affected around 20% of the population.About the relation between the WB and Egypt, the Bank mentions that, despite the factthat Egypt had better access to more financial resources from other internationalorganizations, it preferred to deal with the Bank because of the way of management ofthe Bank and its programs in Egypt during the years of experience the country had withthe WB. Starting from 2005, the IBRD allocated a sum of US$1.797 billion in theform of 15 projects of technical support provided to some sectors. There was also supportprovided by the World Bank Institute especially for social responsibility endeavors of theprivate sector.The WB at the end of the report stresses that there were social and economic challengesfacing the country, particularly the achievement of justice with a leading role for theprivate sector and the eradication of poverty. It mentioned that the Bank was committedto continue providing its package of services to the country.23Developments from 2008 till 201023 http://web.worldbank.org/external/default/main?pagePK=51187349&piPK=51189435&theSitePK=256307&menuPK=64187510&searchMenuPK=4962310&theSitePK=256307&entityID=000333038_20081024013450&searchMenuPK=4962310&theSitePK=256307 25 Abdelhamied El_Rafie
  • 26. 1. The President of the WB stated that there were two main challenges: tackling unemployment and absorbing the social implications and development of banking and the financial sector. The WB was working with the IMF in the implementation of a program aimed to restructure the financial sector and confront the increasing budget deficits, inflation and public debt.24 2. World Bank report on growth in 2009 expected contraction of world trade for the first time since 1982, and lower growth rates in Egypt from 7.2% that year to 4.5% the following year. The report estimated the current account deficit of the state that year at some 5.1% of GDP and the deficit was expected to decline to 2.7% in 2009 and then to 1.3% in 2010. The report said that after a long period of strong growth, led by developing countries, the global economy was undergoing a transition to one of great uncertainty and ambiguity, as a result of the severe impact on global markets caused by the financial crisis in developed countries. The report stated that world GDP increased by 2.5% in 2008 and 9.0% in 2009, with a low rate of growth in developing countries at 7.9% in 2007 and 4.5% the following year, while high-income countries would see negative growth.25 3. A report of World Trade Indicators in 2008, issued by the World Bank, said that Egypt has achieved a real growth rate of trade up to 8.1% in 2007. Egypt had achieved a reduction in import restrictions since the beginning of the decade at the Middle East and North Africa.2624 Ahram Newspaper, http://www.ahram.org.eg/Archive/2006/9/23/ECON2.HTM25 Ahram, http://www.ahram.org.eg/Archive/2008/12/8/ECON3.HTM,http://www.ahram.org.eg/Archive/2008/12/8/FRON6.HTM26 Ahram, http://www.ahram.org.eg/Archive/2008/6/18/ECON7.HTM 26 Abdelhamied El_Rafie
  • 27. 4. The WB was calling for some protection policies to face the negative social impacts of economic reform.27 5. The WB welcomed the efforts made by the Government to improve the business environment by helping the private sector to have more investments by removing business constraints.28 6. The Prime Minister of Egypt, Dr Ahmed Nazif, admitted that the impacts of the world financial crisis affected the tourism sector but the sector was now recovering. The WB was committed to help the Egyptian government in achieving development in the main sectors of the economy.29 7. The external debt was US$31.5 billion during the year 2009-2008 which is lower by US$204 million by comparison with the period 2007-2008.The total debt service had increased in 2009 by 449.1 million dollars over 2008. The WB classified Egypt with the group of countries with relatively low foreign debt and among those who were secure in terms of debt service.30 8. According to the Egyptian ministry of economic development, the World Bank reports show that there was a positive economic growth in Egypt and also a decline in the number of the poor people. In 2005 there were 7 million Egyptians under the poverty line, in 2009 the number had gone down to 6 million people .27 Ahram, http://www.ahram.org.eg/Archive/2009/11/14/ECON8.HTM28 Ahram, http://www.ahram.org.eg/Archive/2009/11/17/ECON1.HTM29 Ahram, http://www.ahram.org.eg/Archive/2009/12/14/EGYP2.HTM30 Ahram, http://www.ahram.org.eg/81/2010/02/18/5/8077/219.aspx 27 Abdelhamied El_Rafie
  • 28. however , the number is big according to officials in both the WB and government of Egypt.31 9. Egypt has launched in 2010 an index of the corporate social responsibility (this index had taken two years of preparation). The index will evaluate companies and their ability to cover the humanitarian issues and the rights of their workers. According to WB officials, there is a shared responsibility between the private sector and society in general to achieve benefits to both sides.31 10. Economic polls have shown that 20% of the population of Egypt owns over 80% of the national wealth and that, among these, 5% owns more than 50% of the country’s wealth.32Annexes to Part IIFigure 1. These figures show the following: the first figure, which is concentrated indoing business on the macropolicy level, shows that Egypt was ranked among the lowestcountries in the MENA region in terms of doing business, while Egypt comes fourth inthe region when we talk about the trade index. Also as the third figure shows, Egypt wasthe lowest country in the region with regard to ease of doing business.3331 Ahram, http://www.ahram.org.eg/115/2010/03/24/5/12755/219.aspx32 Ahram, http://www.ahram.org.eg/119/2010/03/28/4/13284/219.aspx33 MENA Development Report, “From Privilege to Competition”, p.8. 28 Abdelhamied El_Rafie
  • 29. Figure 2. This figure shows that there were increases in the level of the private sector inleading the economy and there was an increase in 2005 by comparison to the previousdecades, but there was not much difference because of the economic policies taken by thegovernment during the 1990s.3434 MENA Development Report, “From Privilege to Competition”, p. 26. 29 Abdelhamied El_Rafie
  • 30. Figure 3. This figure shows that the participation of private investment in the GDP was, on theone hand among the lowest in the region and, on the other hand, was very low inside Egypt itselfbecause the economic environment reforms which started in 2004 did not reach their ultimategoals.3535 MENA Development Report, “From Privilege to Competition”, p. 53. 30 Abdelhamied El_Rafie
  • 31. Figure 4. The figure shows that the structure of foreign direct investment in Egypt isconcentrated in the sectors of tourism, energy, finance, telecoms and manufacturing, butit is clear it does not include high-tech services due to the lack of such services 31 Abdelhamied El_Rafie
  • 32. development in Egypt. This explains why the country is increasing its budget fortechnology, and specially information technology, nowadays.36Figure 5. The figure shows that the export rate has increased from 5-6% during the period1990-1999 to around 15% during the period 2000-2007. This could be due to the tradeagreement with the US, trade with the EU and joining the COMESA, all of which haveintroduced new markets to the Egyptian products.3736 MENA Development Report, “From Privilege to Competition”, p. 55.37 MENA Development Report, “From Privilege to Competition”, p. 60. 32 Abdelhamied El_Rafie
  • 33. Figure 6. Overall, the business environment in MENA countries looks “Average”, as itdoes in many fast-growing economies.3838 MENA Development Report, “From Privilege to Competition”, p. 81. 33 Abdelhamied El_Rafie
  • 34. Figure 7. MENA Development Report, “From Privilege to Competition”, p. 82. 34 Abdelhamied El_Rafie
  • 35. Figure 8. MENA Development Report, “From Privilege to Competition”, p. 126. 35 Abdelhamied El_Rafie
  • 36. 36 Abdelhamied El_Rafie
  • 37. Part III Final Analysis 1. The Current International Economic SystemAccording to the International Monetary Fund Economic, "globalization" is a historicalprocess, the result of human innovation and technological progress. It refers to theincreasing integration of economies around the world, particularly through themovement of goods, services and capital across borders. The term sometimes also refersto the movement of people (labor) and knowledge (technology) across internationalborders. There are also broader cultural, political, and environmental dimensions ofglobalization.”39What we are witnessing today is a result of the victory achieved by the Western blocklead by the US ending the Cold war when Gorbachev reached power in Moscow in 1986.In my opinion this represented the real shift in international politics, as most scholarsagree, and also in the international economic system – that is to say, the victory ofcapitalism and the free market economy because nowadays in 2010 more than 90% of thecountries of the world have chosen the powers of demand and supply to rule theireconomies.In terms of the three leading international organizations which are dealing with economicand trade relations all over the globe, they are talking about economic integration, free39 http://www.imf.org/external/np/exr/key/global.htm 37 Abdelhamied El_Rafie
  • 38. trade, reducing the role of intervention of states in the economy. This work is undertakenby the IMF, WTO and WB. There is not much choice for countries: they don’t have manyoptions but these countries are under internal stresses coming from the social costs foreconomic reforms and the international pressures of free trade. Globalization worksagainst policies that protect goods produced inside a country and in favor of cheapergoods coming from outside. The country faces penalties from WTO and, if it followswhat the WTO says, it will mean ruining internal industry. If we apply the same on thecore organization in my research – the WB – this means that some countries findthemselves obliged to have more intervention in economic policies to face the socialprices of liberalizing the economy because countries cannot just be changed in a fewyears; you cannot ask the people of these countries to forget the role of the state within afew nights, after the great intervention of states in their daily lives that has endured fordecades.40But there is an international trend of having economic policies that have some socialtrends or impacts. This is greatly influenced by the WB: according to the World Bank, itsmission is a vital source of financial and technical assistance to developing countries around the world. Our mission is to fight poverty with passion and professionalism for lasting results and to help people help themselves and their environment by40 http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,pagePK:50004410~piPK:36602~theSitePK:29708,00.html 38 Abdelhamied El_Rafie
  • 39. providing resources, sharing knowledge, building capacity and forging partnerships in the public and private sectors.41But in my humble opinion, all the strategies to fight poverty and any other social impactson economic policies are within – and I do stress this – the free market economy andeconomic liberalism. The equation includes complicated factors: it is a mixture betweeneconomic, social, political and humanitarian factors. This then leads to the next part ofmy final analysis in which how I address how Egypt would react to such an internationalenvironment. 2. Has Egypt followed the WB? And what about the social and political prices? 3. Is there another option for Egypt? The Government of Egypt is under huge pressure because, on one side, it has chosenfree-market liberalization as an economic policy but this policy has its socialconsequences (for instance, there is a huge number of Egyptians who are dependent ongovernment subsidization for many goods and services starting from the bread they areeating on a daily basis to the gasoline which is used in vehicles).One of the definitions of the science of politics, as Aly Eldin Helal mentions,42 is how thestate distributes the resources, whether these resources are physical (e.g., materials oreven rare resources); therefore according to him, the political system is a tool to distribute41 http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,pagePK:50004410~piPK:36602~theSitePK:29708,00.html42 Dr. Aly Eldin Helal, The Egyptian Political System 1981-2010 (source in Arabic). 39 Abdelhamied El_Rafie
  • 40. resources between social classes of the community and, as such, the annual budget is avery important political document because it shows the priorities of the political elite.According to Helal – and I completely agree with him – Egypt faces this issue fromdifferent angles: 1. the pressures facing the middle class (e.g., civil servants, armed forces and police): this class was a central pillar in the political system since the 1952 revolution, therefore any deterioration affecting this class will lead to a threat to political and social stability. 2. the new capitalist classes which had an increasing role recently, especially in the economy, are trying to have a parallel political power to be added to their economic power. 3. the issue of the relation between the state and the market – or in other words the relation between the decision-makers in economy and the people who benefits from these decisions (especially when we see now some businessmen are members of the government) – this relation could lead to more control to manage such a kind of relation.To sum up these factors: we could say that the one-party political system in most caseshas a direct relation with the full control of the state over the economy and, on the otherhand, the political pluralism has a direct relation with taking the dynamics of the capitalmarket and more involvement in international political economy. But what is mentionedin the previous paragraph doesn’t mean the complete withdrawal of the state but itstresses the need for reorganizing the relation between the state and the economy. 40 Abdelhamied El_Rafie
  • 41. Therefore the government is under huge pressures from different parties: on one side, thelow-income population, second the middle class which is diminishing, on the third sidethe private sector which is beginning to take a more leading role in the economy; so muchso the government is paving the way for the private sector and the dynamics of supplyand demand, and at the same time it didn’t lift its hand from the economy. However, thisis the dilemma because if the government lifts its hand completely, there will be morecorruption in dealing with economic affairs and corruption eats the fruits of economicdevelopment in a way that the ordinary person will not feel progress in the economy (aprogress indeed which all international indicators register).That is to say, Egypt is trying to maneuver between itself – and here we talk about amixture between internal, regional and international levels of analysis: 1. first, for the internal level, we have several tips: poverty + economic reform + political reform; 2. second, on the regional level we find: deteriorating situation in the middle east + weakness in Arab regional economic integration; 3. finally, if we move to international level of analysis, we will find theses elements: pressures on economic reform + pressures to fasten political reform + interference in internal affairs with or without planned political agendas + plus pressures on the country due to its role as a leading developing country at the regional and international levels. 41 Abdelhamied El_Rafie
  • 42. Figure 9. MENA Development Report, “From Privilege to Competition”, p. 93. 4. Economic integration in the Middle East and its Future with Regard to the Deterioration in the Peace ProcessThis final part is trying to link between the previous parts of the thesis: how, in myopinion, there is a direct link between internal economic reform and regional economicintegration. And it’s a two-way situation: this means economic reform in Egypt isstrongly related to the situation in the Middle East because, if there is regional stability in 42 Abdelhamied El_Rafie
  • 43. the region, this would mean more foreign direct investments in Egypt and more tradebetween the region and Egypt and between the region and the World.Let’s now touch the issue from a broader view: the current situation in the Middle East isnot a good attractor of foreign investments for the whole region. This means less trade,less agriculture products and less industrial progress, and overall less regional projectsthat use natural resources in the region.Understanding the direct relation between social, economic and political factors in theregion will lead to admitting the fact that the region has had a protracted dispute since theestablishment of the state of Israel in 1948; effectively, this means more than 60 years ofdeterioration in the situation of the region. According to the World Bank, theMENA( Middle East and North Africa ) region is a middle-class region but, let’s agree onthe fact that according to the Bank, Egypt is making progress wth its internal economicpolicy and it is on the right track but I would say that the success Egypt is achieving is inthe short and medium terms because, for the benefit of Egypt and the region in the longterm, the country is achieving economic integration but this wont be possible withoutsolving the political situation and achieving peace – and this means solving the Israeli-Palestinian Dispute over the lands of Palestine and solving the problem of the occupiedterritories in Syria and Lebanon also. And, according to the Arab countries, they had apeace initiative in 2004 calling upon all parties to resolve these problems, then peace willhappen between Arab countries and Israel and then there might be a possibility ofnormalization of relations, and this normalization means that would be normal diplomaticrelations between countries which would include cooperation in the future. But, as wehave seen, the situation has deteriorated more and more nowadays in a way that throws 43 Abdelhamied El_Rafie
  • 44. away any hope for peace in the region, and what was achieved until now by signing theEgyptian-Israeli peace agreement in 1979, and choosing the track of negotiations whichstarted in the Madrid Conference in 1991 and all the developments after that – all this isat high risk. ‫ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬ ‫ــــــــــــــــــــــــــــــــــــ‬ ‫ــــــــــــــ‬ 44 Abdelhamied El_Rafie
  • 45. BibliographyBooks • Helal, Aly Eldin, Egyptian Political System 1981-2010 (source in Arabic) • Marshall, Katherine, The World Bank from Reconstruction to Development to Equity, Global Institutions, Routledge, 2008. • MENA Development Report, “From Privilege to Competition”, 2009. • O’Brien, Robert and Williams, Marc Global Political Economy, Palgrave MacMillan, UK, 2004. • Phillips, David A., Twenty Years of Trial – and Error, Cambridge University Press, 2009.Other Sources • Ahram, http://www.ahram.org.eg/Archive/2006/9/23/ECON2.HTM, source in Arabic. • Ahram, http://www.ahram.org.eg/Archive/2008/12/8/ECON3.HTM, source in Arabic. • Ahram, http://www.ahram.org.eg/Archive/2008/12/8/FRON6.HTM, source in Arabic. • Ahram, http://www.ahram.org.eg/Archive/2008/6/18/ECON7.HTM, source in Arabic. • Ahram, http://www.ahram.org.eg/Archive/2009/11/14/ECON8.HTM, source in Arabic. • Ahram, http://www.ahram.org.eg/Archive/2009/11/17/ECON1.HTM, source in Arabic. • Ahram, http://www.ahram.org.eg/Archive/2009/12/14/EGYP2.HTM, source in Arabic. • Ahram , http://www.ahram.org.eg/81/2010/02/18/5/8077/219.aspx, source in Arabic. 45 Abdelhamied El_Rafie
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  • 47. • http://www2.sis.gov.eg/Ar/Economy/introdaction/Development/050101000000000003.ht m)• http://www.shorouknews.com/ContentData.aspx?id=36142• http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22541126~pag ePK:34370~piPK:42770~theSitePK:4607,00.html• http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/EGYPTEX TN/0,,menuPK:287179~pagePK:959718~piPK:141116~theSitePK:256307,00.html• http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/EGYPTEX TN/0,,contentMDK:22419377~menuPK:287179~pagePK:2865066~piPK:2865079~theSi tePK:256307,00.html• http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/EGYPTEX TN/0,,contentMDK:22391906~menuPK:287179~pagePK:2865066~piPK:2865079~theSi tePK:256307,00.html• http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/EGYPTEX TN/0,,contentMDK:22384271~menuPK:287179~pagePK:2865066~piPK:2865079~theSi tePK:256307,00.html• http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/EGYPTEX TN/0,,contentMDK:20035385~menuPK:287179~pagePK:2865066~piPK:2865079~theSi tePK:256307,00.html• http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/0,,menuPK:177680~pag ePK:169643~piPK:169646~theSitePK:136917~PAGESIZE:10~COUNTRYCODE:EGT, 00.html?countrylist=EGT• http://www-wds.worldbank.org/external/default/main? pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&search MenuPK=64187282&theSitePK=523679&entityID=000011823_20060829115639&sear chMenuPK=64187282&theSitePK=523679• http://www-wds.worldbank.org/external/default/main? pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&search MenuPK=64187282&theSitePK=523679&entityID=000011823_20060829162134&sear chMenuPK=64187282&theSitePK=523679• http://www-wds.worldbank.org/external/default/main? pagePK=64187835&piPK=64187936&theSitePK=523679&menuPK=64187282&region 47 Abdelhamied El_Rafie
  • 48. =&cntry=82608&topic=644279&lang=&sortDesc=DOCDT&pageSize=10&dAtts=DOC DT,REPNME,REPNB,DOCTY,DOCNA,LANG,OWNER,ORIGU,VOLNB&siteName= WDS&callBack=null• http://web.ebscohost.com/ehost/pdfviewer/pdfviewer? vid=3&hid=17&sid=2f73b1d3-7273-439a-935c-4bf2597fdeb0%40sessionmgr11• http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?vid=3&hid=104&sid=5d02e402- ece2-478c-ab63-dbdacea6b09f%40sessionmgr14• http://web.ebscohost.com/ehost/pdfviewer/pdfviewer? vid=5&hid=10&sid=9f3a4cff-8ab8-4134-bea9-e047562fb13b%40sessionmgr113• http://website1.wider.unu.edu/conference/conference-2003-3/conference-2003-3-papers/ Burnell-2807.pdf• http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,pagePK:50004410~ piPK:36602~theSitePK:29708,00.html.• (http://www- wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2001/06/29/0000949 46_01061404112783/Rendered/INDEX/multi0page.txt• (http://www- wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2005/06/24/0000120 09_20050624102618/Rendered/INDEX/321900rev3.txt• http://web.worldbank.org/external/default/main? pagePK=51187349&piPK=51189435&theSitePK=256307&menuPK=64187510&search MenuPK=4962310&theSitePK=256307&entityID=000333038_20081024013450&searc hMenuPK=4962310&theSitePK=256307 (source in Arabic) .‫ــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬ ‫ـــــــــــــــــــــــــــــــ‬ ‫ـــــــــــ‬ 48 Abdelhamied El_Rafie
  • 49. 49 Abdelhamied El_Rafie