Gouda Abdel Khalik: Cairo University ERF 24th Annual Conference The New Normal in the Global Economy: Challenges & Prospects for MENA July 8-10, 2018 Cairo, Egypt

1. Laying the Foundation for Sustained
Economic Growth under the New
Normal: Lessons learned from the
Asian experience
Gouda Abdel-Khalek
Cairo University
ERF Annual Conference 2018
Plenary Session 1
7/11/2018 1

2. INTRODUCTION
The topic of discussion in this session is what
MENA countries need to do in order to lay
the foundation for sustained growth under
the New Normal (low oil prices), and what are
the lessons learned from the Asian
experience.
7/11/2018 2

3. INTRODUCTION
Inspired by the presentation of Prof. Lee, I will
address two questions.
1- what explains structural transformation in
MENA or lack thereof?
2- what should be the optimal role of the state
in effecting structural change in the MENA
region and what industrial policies could be
derived from the new structural economics?
7/11/2018 3

4. INTRODUCTION
These two questions will be addressed following a
necessary note on definitions and initial
conditions.
Therefore, my intervention will be oranized as
follows:
1- Introduction
2- Definitions and initial conditions
3- Structural transformation in MENA
4- Issues of industrial policy
7/11/2018 4

5. DEFINITIONS AND INITIAL
CONDITIONS
To start with, what are the MENA countries?
According to the World Bank, the following 21 countries are
typically included in MENA:
Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Israel, Jordan,
Kuwait, Lebanon, Libya, Malta, Morocco, Oman, Qatar, Saudi
Arabia, Syria, Tunisia, United Arab Emirates, West Bank and
Gaza, and Yemen.
18 Arab countries (leaving out Mauritania, Sudan and Somalia) +
3 non-Arab countries
ERF’s region: Arab countries + Iran + Turkey
7/11/2018 5

6. DEFINITIONS AND INITIAL
CONDITIONS
According to the IMF, the regional the
corresponding group is called MENAP
The Middle East, North Africa, Afghanistan, and
Pakistan
But the core of both WB and IMF regional
entities is the group of 21 Arab countries.
Most of them belong are middle-income
countries, according to World Bank criteria
7/11/2018 6

7. DEFINITIONS AND INITIAL
CONDITIONS
Sustained growth or sustainable growth?
There is a big difference between the two terms.
In the present context of the MENA countries, I
prefer to use the concept of sustainable growth.
Sustainable growth for this region should be both
conducive to social justice (inclusive), and in
conformity with environmental constraints.
7/11/2018 7

8. DEFINITIONS AND INITIAL
CONDITIONS
The Concept Note emphasizes maximizing
growth.
Why is maximizing/targeting growth so
important? Growth could be non-inclusive
(see analysis and equations in my Madrid
ASFER paper)
Targeting optimum growth rather than
maximum growth
7/11/2018 8

9. DEFINITIONS AND INITIAL
CONDITIONS
The “New Normal” of low oil prices
Is it New Normal”, given the recent surge in oil
prices?
The price jumped from $65.71 in June 21 2018 to
$74.14 in July 4 2018.
We just have to be careful about “trend” oil prices.
7/11/2018 9

10. DEFINITIONS AND INITIAL
CONDITIONS
Conventional and non-conventional oil
Non-conventional oil: oil from tar sands, heavy
oil, and shale oil
Conventional oil production will peak during
2020-2050
7/11/2018 10

11. DEFINITIONS AND INITIAL
CONDITIONS
Initial conditions:
Neo-liberal policy stance (Augmented
Washington Consensus).
Lack of food security (neglect of agriculture)
High illiteracy rate
7/11/2018 11

12. DEFINITIONS AND INITIAL
CONDITIONS
The Neo-liberal policy stance/Augmented
Washington Consensus (usually under loan
agreements with the BW institutions):
Fiscal discipline; redirection of public investment to
soft infrastructure; tax reform (by lowering the
rate and broadening the base); trade
liberalization; liberalization of FDI flows;
privatization; deregulation; corporate
governance; non-intermediate exchange rate
regime; independent central bank; capital
account opening; and social safety nets.
The conduct of industrial policy becomes
more complicated.
7/11/2018
12

13. STRUCTURAL TRANSFORMATION IN
MENA
In the MENA region (with minor exceptions), the structure of
production is mainly centered around primary and tertiary
activities. Manufacturing plays a relatively minor role.
2015 GDP shares:
Manufacturing 10%,
Agriculture 6%
Oil & gas 23%
Services 51%
Structural transformation for MENA is very important:
(i) Away from services and towards both agriculture and
manufacturing;
(ii) Moving into more productive industries within each
sector.
7/11/2018 13

14. STRUCTURAL TRANSFORMATION IN
MENA
Hence, an important structural feature of MENA
is the they are food insecure.
Self sufficiency ratio in wheat and flower (the
main stable food in the region) is about 47%
average for the region.
Food as a wage good.
7/11/2018 14

15. STRUCTURAL TRANSFORMATION IN
MENA
With minor exceptions, the MENA region has
the highest illiteracy rate in the world- except
sub-Saharan Africa.
Implications oh high incidence of illiteracy.
Importance of institutions
7/11/2018 15

16. STRUCTURAL TRANSFORMATION IN
MENA
What explains lack of structural transformation
in MENA region?
Primacy of oil; early de-industrialization
Various candidates:
Dutch disease/Resource curse model.
Social order
Lewis model
7/11/2018 16

17. STRUCTURAL TRANSFORMATION IN
MENA
Cultural Factors:
stressing status-quo in popular songs and
religious teachings
Political Factors:
nature of ruling elites
Social factors:
Interest Groups: mercantile and comprador class
7/11/2018 17

18. ISSUES OF INDUSTRISL POLICY
could be derived from the new structural
economics?
7/11/2018 18

19. ISSUES OF INDUSTRISL POLICY
What industrial policies and the optimal role of
the state in effecting structural change in the
MENA region?
A quick answer: by designing and implementing
an appropriate industrial policy.
Space for Industrial policy under WTO
7/11/2018 19

20. ISSUES OF INDUSTRISL POLICY
What is industrial policy?
I will use the definition suggested by Rodrik (2004), as it
is more relevant to our discussions about economic
restructuring and transformation. In contradistinction
with the mainstream definition, it concerns
restructuring policies anywhere in the economy.
According to him the term “applies to restructuring
policies in favor of more dynamic activities generally,
regardless of whether those are located within
industry or manufacturing per se”.(Rodrik, 2004)
7/11/2018 20

21. ISSUES OF INDUSTRISL POLICY
According to Rodrik, what stands in the way of
coherent industrial policy is the willingness of
governments to deploy it, not their ability to do
so.
I would like to underscore Rodrik’s statement
Discuss Egypt’s case.
7/11/2018 21

22. ISSUES OF INDUSTRISL POLICY
Limits of IP under WTO
The real issue here is the boundary or interface
between national action and international
discipline.
State autonomy in conducting national
economic policy has been significantly
reduced, especially regarding subsidies and
IPRs. (Abdel-Khalek, 2000)
Impact of the trio IMF-WB-WTO.
7/11/2018 22

23. ISSUES OF INDUSTRISL POLICY
I concur with Rodrik who maintains that “There
is plenty of scope for industrial policies in the
present international economic environment.
In fact, contrary to general belief, the last two
decades have seen a tremendous amount of
industrial policy.”
Rorik gives many example.
The presentation of Professor Lee about the
Asian experiance is also very illuminating.
7/11/2018 23

24. ISSUES OF INDUSTRISL POLICY
IP instruments under WTO regime (Lee)
1) Production subsidies or SOEs for initial
promotion (instead of local contents requirement)
2) Under-valued currency for export promotion
( explicit export subsidies prohibited)
3) R&D subsidies for innovation capability-
building
4) Public-private Joint R&D for leapfrogging
7/11/2018 24

25. ISSUES OF INDUSTRISL POLICY
But in the case of MENA countries, WTO
discipline is not the only one; we should add
the limits imposed by conditionality in ERSAP
agreements with the IMF and World Bank:
Simple conditionality
Cross conditionality
7/11/2018 25