Macro-Economic Issues (A) R&W Chapters 5 - pp. 133-142 (Labor),

7-9, and 13 (Defense - postponed) Beinin and Galal readings

Link to WDI

Link to Syllabus

Outline

Labor Markets Real Wages (not much) Poverty and Income DistributionUnionsTotal Factor Productivity

State-Led Growth (Chapter 7)Contradictions of State-led Growth (Chapter 8) Influential EconomistsReforms: Washington Consensus (Chapter 9) Rodrik’s amendments

Inflation and Real Exchange Rates

Real Wages in Manufacturing

Mixed Bag

Source: WB (2008)The Road Not Traveled

Poverty and Income Distribution

Figure 10.4 p. 276. Incidence of Poverty in 2000, by Regions

% of Population.

Figure 10.5 P. 277. Poverty Trends in MENA

MENA: Incidence of Poverty (%)

19851987

19891991

19931995

19971999

20012003

20052007

0

5

10

15

20

25

30

35

40

45

50 Algeria

Egypt, Arab Rep.

Iran, Islamic Rep.

Iraq

Jordan

Morocco

Syrian Arab Republic

Tunisia

Turkey

Yemen, Rep.Poverty defined as income < $2/daySource: WDI

Poverty Trends: Morocco, Tunisia, Egypt. R&W Chapter 10

Rural vs. Urban Poverty Rates

Source: World Bank/Farrukh Iqbal (2006) Sustaining Gains in Poverty Reduction…MENA Page 15

Table10.8 p. 279. Distribution of Income, 2005

In this comparison, Egypt and Jordan have the lowest inequality. The US has above average inequality.

US 2 5 11 16 22 46 30

Income Distribution

Source: WB (2008)The Road Not Taken

Gini Coefficient of Inequality

19851987

19891991

19931995

19971999

20012003

20052007

25

30

35

40

45

50Algeria

Egypt, Arab Rep.

Iran, Islamic Rep.

Israel

Jordan

Morocco

Qatar

Syrian Arab Repub-lic

Tunisia

Turkey

Yemen, Rep.Source: WDI

Source: Nadia Belhaj HassineInequality of Opportunity inEgypt: ERF 2010

Inequality of opportunity is foundto account for thirty percent of totalearnings inequality...The share of inequality of opportunitiesis decreasing. A sharp decline isobserved in 2006.

Egyptian labor painting

Mohammed Hamed Ouwis (1919-)End of Working Hours 1963

Right to work statements p. 32

Source: World Bank (2004) Unlocking the Employment Potential in the MENA page 32

Total Factor Productivity

TFP by Regions p. 78

Source: World Bank (2004) Unlocking the Employment Potential in the MENA page 78

TFP in MENA p. 80

Source: World Bank (2004) Unlocking the Employment Potential in the MENA page 80

The Debate about State Led Growth and Reform

Historical background to state-led growth in MENA (Chapter 7 of R&W)

• Ottoman territories had been free trade; due to treaty with UK in 1830s.

• Until 1930s, MENA elites espoused liberal projects, modeled after England and France. Reaction to Protectorates led to a rejection of liberalism. Palestinian Arab Revolt of 1936-39 marked a transition. Another was the 1942 incident in Cairo, in which British tanks forced the Wafd to support UK. Also, rejection of French tutelage in Northern Africa

• This led to the emergence of the public sector in the 1950s and later, that can be described as an interventionist state [Turkish Paradigm –subsequently replicated elsewhere], thereby differing from the western (classical) liberal tradition of a minimalist state.

• Examples: Ataturk. Pahlavi Shahs of Iran, Nasser, Bourguiba (Tunisia). Also Ba’th party, Hafez al-Assad, Saddam Hussein, Ben Balla/ Boumedienne (Algeria). Kadafi (Libya)

Background (ii)

• First emphasis on agriculture, then during the Depression, a push for industrialization, ‘etatism’ - ISI - and eventually SOEs. (R&W call this the “Turkish Paradigm”).

• Not socialist [‘controls but does not own’] but used ‘5-year plans’• Hostility towards Foreign Investment• Modernization of tax system; new taxes were progressive • Comment that the Turkish example helped inspire Arab Socialism

• Nationalist, and Urban Social Radicalism (Authoritarian Populists) – breaking with liberalism. Was secular. Corporativist, large unions.

Core attributes of State led growth (etatism):

• Preference for redistribution and equity• Preference for states over markets in managing economies• ISI & State planning• Encompassing vision of role of the state in provision of welfare• Vision of the political arena as the expression of the organic

unity of the nation—rather than site of political contestation or aggregation of conflicting preferences

• R&W draw comparisons and contrasts with the ‘Liberal” Monarchies of Iran, Jordan, Morocco, and with

the ‘conservative’ monarchies of the Arabian Peninsula.

Contradictions of State Led Growth – R&W Chapter 8

• Protectionism didn’t work: Infant industries didn’t grow up Companies remained dependent on imported inputs• SOEs never became efficient• Failure to generate sufficient new jobs• “Two gaps” – savings/investment, and foreign trade

• Agrees with Joel Beinin بنين جول an American leftist historian at Stanford, who has taught at AUC. Beinin gives more emphasis to class conflict.

There could be a lengthy discussionabout the role of politics in this.

Samir Amin, 1931 -Samir Amin is an Egyptian political author, born in 1931. He currently lives in Dakar, Senegal. Amin was trained in Paris, and is one of the region’s best-known Neo-Marxian thinkers, both in development theory as well as in the relativistic-cultural critique of social sciences. He is the director of the Forum du Tiers Monde(Third World Forum), based in Dakar. He is a promoter of the conscious self-reliance of developing countries, particular for the Arab world.His numerous books include Eurocentrism (1988), L'empire du chaos (Empire of Chaos, 1991) and Spectres of Capitalism, 1998.

Two authors, both Egyptian Economists. AUC and ERF

Hazem Beblawi, 1936Born Cairo, Ph.D. ParisHead of UN-ESCWARentier bookPrime Minister until Feb.

Ahmed GalalPh.D. Boston Univ.Worked at World BankDirector of ERFFinance Minister until Feb.

Dani Rodrik

Born in Istanbul in 1957.Studied at Harvard and Princeton. Recently left the Rafiq Hariri Chair at the Kennedy School at Harvard, for the Institute of Advanced Study at Princeton. Author of many books and articles, focusing on policy-making in emerging markets.

Curiously, his father-in-law was one of the Turkish generals who forcedPrime Minister Erbakan (Welfare Party ~Islamist) to resign in 1997, and who was jailed for the Sledgehammer coup plot, whose validity isnow (early 2014) being questioned.

Is generally regarded as one of the most influential US-based economists who are critical of globalization.

Timur KuranBorn in 1954 in the US, while his parents studied at Yale U.

Spent his early childhood in Ankara, where his father taught. BA from Princeton, Ph.D.from Stanford.

For many years held the ‘King Faisal’ Chair at USC, now is a Professor of Islamic Studies at Duke.Argues that the economic and educational institutions of Islam, though well-suited to the era in which they emerged, were poorly suited to a dynamic industrial economy. These institutions fostered social equilibria that reduced the likelihood of modern capitalism emerging from within Islamic civilization. His recent articles have identified obstacles involving inheritance practices, contract law, procedures of the courts, the absence of corporations, the financial system, and the delivery of social services.

Kemal DervisBorn in Istanbul in 1949.

B.A. LSE; Ph.D. Princeton.Minister in various cabinets in Turkey. Also, past head ofUNDP, 22 years at World Bank, currently at Brookings.

Is described as the chief architect of Turkey’s anti-inflation program in 2001.

Was a candidate to be head of the World Bank; that position has always been held by an American. The person selected is an American medical doctor of Korean descent.

Reforms - Chapter 9 of R&W.

• Fiscal discipline• Reorientation of public

expenditures• Tax reform• Interest rate liberalization• Unified and competitive

exchange rates (that means devalue)

• Trade Liberalization• Opening to Foreign Direct investment• Privatization• Deregulation• Securing Property Rights

Washington Consensus – (IIE) (p. 229 of R&W)

Symptoms of Problems

• Inflation (and perhaps “excess” unemployment)• Gov’t deficit• Balance of payments deficit Excessive borrowing; foreign debt Inability to refinance debt

mt comments that, viewed from 2012, the R&W book hasprecious little to say about lack of democracy. Many would say this is not surprising for an economics book.

But in the new Middle East of 2014, the new democracies will have to decide what sort of economic policies they wish to pursue. Options are a revised version of statism (Nasserism/Bathism), and neo-liberalism. Will military and Political Islam be fundamentally pro-market?

Standard Textbook Solutions:• Contractionary fiscal and monetary policy• Devalue exchange rate (or remove exchange controls)• Eliminate controls on the capital account

• Borrow from IMF or World Bank• Structural Adjustment Program The term implies something more aggressive than merely devaluation, such as: Eliminate minimum wage. Eliminate subsidies. Break up unions. Privatize State-Owned Enterprises

Operationally, the IMF and World Bank have different loan policies for countries undergoing structural adjustment programs.

Further Complications, revealed by recent experiences• Issue of sequencing reforms• Negative Consequences of standard textbook recipes:

Some policies worsen inflation (devaluation, indexing) (Is inflation a result of fight over income distribution?)Many examples of worsening of income distribution, and unemployment caused by contractionary policies

Evident negative political consequences, both because of domestic effects, and because of foreign effects (appearing to sell out)

“Heterodox” Economic Policies – whose success is debated. Price controls. Exchange rate controls (or even dollarization). De-indexation. Limits on short term capital flows (“Tobin tax”). Incorporate an anti-poverty element

Rodrik’s amendments to the Washington Consensus. Also listed on page 229 if R&W

• Corporate governance• Anti-corruption• Adherence to WTO• Following international

financial codes and standards

• Prudent capital account opening

• Non-intermediate exchange rate regimes

• Independent central bank/ inflation targeting

• Social Safety nets• Targeted poverty

reduction

R&W also mention Stiglitz, Easterly

Link to Rodrik’s blog http://rodrik.typepad.com/

Typical review of Reforms

No factories: no problems

World Bank’s Composite Index of Reform

Source: Dasgupta et al.(2002), Reform and Elusive Growth in the Middle East…

MNA - MENA EAP – East Asia LAC – Latin American SAR – Sub-Saharan Africa

MENA slow to start, has done less.

Change in Composite

Reform Index

Source: Dasgupta et al. (2002), Reform and Elusive Growth in the Middle East…

Impact of Structural Reforms

Source: M.K. Nabli and Véganzonès (2004) Reforms and Growth in MENA Countries

World Bank Judges Egypt Top Reformer, 2008

Link to summary

Inflation

Textbook Theory of Inflation

Caused by too much demand: Gov’t spending (and monetary policy) or too little supply: inadequate investment, low technology (inefficiency) high wages…Indexing allows inflation to affect the entire economy more rapidly.Possible view of inflation as result of sectoral clashes

International effects: (less important in US) exchange rate devaluation raises costs of imported inputs, either raw materials or manufactured products exchange rate devaluation lowers imports, encourages exports and local production

Borrowing from foreigners can help finance domestic demand and imports. Paying off foreign debt may be painful.

Inflation, by RegionsInflation (GDP Deflator) by Regions, %/yr.

0

5

10

15

20

25

30

35

1960 1970 1980 1990 2000 2010

Middle East & North AfricaHigh income: OECDEast Asia & PacificLatin America & CaribbeanSouth AsiaSub-Saharan Africa

Source: WDI data

Inflation-CPI MENA Countries

-25

0

25

50

75

100

1960 1970 1980 1990 2000 2010

Inflation (CPI) MENAAlgeria

Egypt, Arab Rep.

Iran, Islamic Rep.

Iraq

Israel

Jordan

Kuwait

Lebanon

Libya

Morocco

Oman

Qatar

Saudi Arabia

Syrian Arab Republic

Tunisia

Turkey

Yemen, Rep.

Source: WDI dataVery high in Turkey, Israel; next is Lebanon.

Inflation Theory for MENA (i)

In the 1960s, there was a big debate on inflation in Latin America.

Orthodox/Monetarists/los Chicago Boyz/ said inflation was bad, andwas caused by excessive Money, caused by gov’t deficits –financed by domestic borrowing, because they couldn’t get foreign loans.

Structuralists/ECLA/CEPAL were more accepting of inflation, arguing that it helped break structural bottlenecks (e.g., agriculture). Some also believed that inflation was caused by struggles over the distribution of income (workers vs. bosses). More broadly, the so-called Structuralists were less impressed with market- based models, felt that supply elasticities were very low, pushed land reform and ISI, and generally adopted more populist, nationalist, positions.

Inflation Theory for MENA (ii)

There is no MENA school of economics. Certainly there is no special corpus of writing on inflation in the MENA countries.

One might think of possible components, derived from textbook economics of such a school, perhaps emphasizing the supply side:1) Differentiate oil exporters (especially labor importers) from the rest Dutch disease/Sovereign wealth funds2) Violence – wars – always threaten supply, causing inflation3) Agriculture is less important in MENA than in other regions4) Inflation in very open economies should be low, approaching international levels.5) The informal sector has yet to be incorporated into studies of inflation.

Calculated RERs

Real Exchange Rates

25

50

75

100

125

150

1960 1970 1980 1990 2000 2010

EgyptJordanTunisiaTurkey

Calculated as x-rate x PUS/Plocal. Increase in RER should increase exports

Turkey kicks the habit of high inflation

Source: IMF Survey, September 20, 2004

Turkey: Real Exchange RateGRAPH: REAL EFFECTIVE EXCHANGE RATE INDICES

708090

100110120130140150160170180190200

Jan-

80Ju

l-80

Jan-

81Ju

l-81

Jan-

82Ju

l-82

Jan-

83Ju

l-83

Jan-

84Ju

l-84

Jan-

85Ju

l-85

Jan-

86Ju

l-86

Jan-

87Ju

l-87

Jan-

88Ju

l-88

Jan-

89Ju

l-89

Jan-

90Ju

l-90

Jan-

91Ju

l-91

Jan-

92Ju

l-92

Jan-

93Ju

l-93

Jan-

94Ju

l-94

Jan-

95Ju

l-95

Jan-

96Ju

l-96

Jan-

97Ju

l-97

Jan-

98Ju

l-98

Jan-

99Ju

l-99

Jan-

00Ju

l-00

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08

CPI Based Real Effective Exchange Rate (1995=100)

PPI Based Real Effective Exchange Rate (1995=100)*

Source: Central Bank of Turkey

RER is measured as E*Pfor/Plocal: increases in RER increase local exports

Turkey: Real Exchange Rate

GRAPH: REAL EFFECTIVE EXCHANGE RATE INDICES

708090

100110120130140150160170180190200

Jan-

80Ju

l-80

Jan-

81Ju

l-81

Jan-

82Ju

l-82

Jan-

83Ju

l-83

Jan-

84Ju

l-84

Jan-

85Ju

l-85

Jan-

86Ju

l-86

Jan-

87Ju

l-87

Jan-

88Ju

l-88

Jan-

89Ju

l-89

Jan-

90Ju

l-90

Jan-

91Ju

l-91

Jan-

92Ju

l-92

Jan-

93Ju

l-93

Jan-

94Ju

l-94

Jan-

95Ju

l-95

Jan-

96Ju

l-96

Jan-

97Ju

l-97

Jan-

98Ju

l-98

Jan-

99Ju

l-99

Jan-

00Ju

l-00

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08

CPI Based Real Effective Exchange Rate (1995=100)

PPI Based Real Effective Exchange Rate (1995=100)*

Source: Central Bank of Turkey

50%

100%Inflation in Turkey

Israel: REERIsrael-REER

40

60

80

100

120

140

1970 1975 1980 1985 1990 1995 2000 2005 2010

Israel

Source: Data from WDI

RER in Egypt and Jordan

RER is measured as E*Pus/Plocal: increases in RER increase home exports

Source: Domac and Shabsigh IMF (1999)

Evolution of RER in Morocco and Tunisia

Source: Domac and Shabsigh IMF (1999)

RER is measured as E*Pus/Plocal

GDP per capita, 1990 PPP $: mt’sTable 7 Year 1870 1913 1930 1940 1950 1973 1998

Algeria 1,028 1,104 1,397 1,365 2,356 2,688Bahrain 2,104 4,377 4,620Egypt 732 732 718 1,022 2,128Iran 1,720 5,445 4,265Iraq 1,364 3,753 1,131Israel 2,817 9,646 15,152Jordan 1,663 2,389 4,113Kuwait 28,834 26,674 11,273Lebanon 2,429 3,157 3,445Libya 8,169 4,757Morocco 807 1,040 1,455 1,694 2,693Oman 622 3,278 7,267Qatar 30,520 43,859 7,304Saudi Arabia 2,231 11,040 8,225Sudan 821 780 880Syria 2,409 4,018 5,765Tunisia 822 1,164 1,115 2,221 4,190Turkey 1,370 1,304 2,017 1,818 3,753 6,552UAE 15,694 24,908 13,857West Bank + Gaza 950 2,236 5,671Yemen 976 1,757 2,298Palestine 589 847 1,993 of which: Jews 1,435 1,463 3,144 Arabs and others 421 584 949

GDP in 1990 PPP $ (billion)

1913 1920 1930 1950 1973 1998

Algeria 6,738 7,307 8,96312,136 35,814 81,948Bahrain - - - 242 1,046 2,846Egypt 8,891 - -15,224 36,249 140,546Iran - - -28,128171,466 274,695Iraq - - - 7,041 39,042 24,564Israel - - - 3,623 30,839 85,520Jordan - - - 933 3,999 18,313Kuwait - - - 4,181 23,847 21,565Lebanon - - - 3,313 8,915 12,077Libya - - - - 18,298 25,398Morocco 3,630 4,683 6,73913,598 28,800 78,397Oman - - - 304 2,809 17,179Qatar - - - 763 6,228 5,091Saudi Arabia - - - 8,610 73,601 170,972Syria - - - 8,418 27,846 96,112Tunisia 1,651 2,089 2,786 3,920 12,051 39,306Turkey 18,090 16,58729,12438,408144,483423,018UAE - - - 1,130 9,739 31,913W Bank + Gaza- - - 965 2,455 14,807Yemen - - - 4,353 12,431 37,656Palestine - 325 584 4,588 - - of which: Jews - 67 237 3,468 - - Arabs and others - 258 348 1,120 - -

mt’sTable 8

Egypt: Real Wages, 1988-2006

Source: ERF Forum Vol.13 #2, Winter 2006.

Prof. mt isvery scepticalof this data

Gini CoefficientsGini Coefficients of Inequality

0

10

20

30

40

50

1980 1985 1990 1995 2000 2005

AlgeriaEgyptIranIsraelJordanTunisiaYemen

Source: WDI

The gini coefficient for the US in 2000 was 41

Macro Indicators: Real GDP Growth & Sectoral Distribution of Production, Exports

Average Growth Rates of GDP/Capita, by Regions p. 36

Source: World Bank (2004) Unlocking the Employment Potential in the MENA page 36

Table 3.1 p. 46 (R&W). Population and GDP/Cap

Table 3.3 p. 59 Structure of Production, by Sectors

Table 3.6 Shares of Manufacturing Value Added

Table 3.7 p. 63. Sectoral Distribution of the Labor Force

Dominance of services. More on this below.

Table 3.8 p. 65. Exports and Imports

Table 3.9 p. 66. Structure of Merchandise ExportsFuels:

AlgeriaEgypt (<50%)LibyaOmanSaudi A.SudanSyriaUAE

Also, Bahrain, Iran Kuwait, Qatar

Manuf. Exp.: Israel, Jordan, Lebanon, Morocco, Tunisia, Turkey

The analysis of the Market for $ in MENA (I)

Riyals/$

Foreign Exchange – US Dollars

S

D

App

reci

atio

n D

epre

ciat

ion

Depreciation of ‘your’ currency increases your exports, decreases imports, and vice versa for appreciation.Supply is generated by MENA exports, capital inflows into MENA; while demand is created by MENA imports, capital outflows.

Dutch Disease (II)How an increase in MENA exports, or capital inflows,

appreciates the Riyal, hurting other exports, and raising imports

Riyals/$

Foreign Exchange – US Dollars

S

D

App

reci

atio

n

S’

It is argued that petroleum exports do this, as well as tourist $, excessive borrowing, or inward FDI.

P. 136BadeParkintext US Labor Force Participation

Male Labor Force Participation Rates, by Region (%)

19801983

19861989

19921995

19982001

20042007

50

55

60

65

70

75

80

85

90

Middle East & North Africa (all income levels)

East Asia & Pacific (all income levels)

Latin America & Car-ibbean (all income levels)

South Asia

Sub-Saharan Africa (all income levels)

OECD members

Source: WDIDeclining in all regions

MENA: Male Labor Force Participation Rate (%)

50

55

60

65

70

75

80

85

90

95

100 AlgeriaBahrainEgypt, Arab Rep.Iran, Islamic Rep.IraqIsraelJordanKuwaitLebanonLibyaMoroccoOmanQatarSaudi ArabiaSyrian Arab RepublicTunisiaTurkeyUnited Arab EmiratesWest Bank and GazaYemen, Rep.

Female Labor Force Participation Rates, by Regions (%)

19801983

19861989

19921995

19982001

20042007

0

10

20

30

40

50

60

70

80

Middle East & North Africa (all income levels)

East Asia & Pacific (all income levels)

Latin America & Car-ibbean (all income levels)

South Asia

Sub-Saharan Africa (all income levels)

OECD members

Source: WDI

MENA: Female Labor Force Participation Rate (%)

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20080

10

20

30

40

50

60Algeria

Bahrain

Egypt, Arab Rep.

Iran, Islamic Rep.

Iraq

Israel

Jordan

Kuwait

Lebanon

Libya

Morocco

Oman

Qatar

Saudi Arabia

Syrian Arab Republic

Tunisia

Turkey

United Arab Emirates

West Bank and Gaza

Yemen, Rep.

Int’l Comparison of Unemployment Rates, 2002 p. 43

Source: World Bank (2004) Unlocking the Employment Potential in the MENA page 43

Unemployment Rates in MENA. P. 72

Source: World Bank (2004) Unlocking the Employment Potential in the MENA page 72

MENA: Unemployment – Total, and by Gender

19801984

19881992

19962000

20040

10

20

30

Algeria

FemaleMaleTotal

19801984

19881992

19962000

20040

10

20

30

Egypt

FemaleMaleTotal

19801984

19881992

19962000

20040

10

20

30

Iran

FemaleMaleTotal

19801984

19881992

19962000

20040

10

20

30

Jordan

FemaleMaleTotal

19801984

19881992

19962000

20040

10

20

30

Morocco

FemaleMaleTotal

19801984

19881992

19962000

20040

10

20

30

Syria

FemaleMaleTotal

19801984

19881992

19962000

20042008

0

10

20

30

Tunisia

FemaleMaleTotal

19801984

19881992

19962000

20040

10

20

30

Turkey

FemaleMaleTotal

Source: WDIMENA_Unemployment.xls

19801984

19881992

19962000

20042008

0

10

20

30

West Bank & Gaza

FemaleMaleTotal