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Paper presented during my Masters studies at Alliant International University
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Abdelhamied El_Rafie 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
Abdelhamied El_Rafie 2
بدمىاللهىالرحمنىالرحومى
ى(قوليىىوفقكواىلدانيمنىىرقدةاحللىىوىامرىىليوىودرىىصدريىلياللكمىاذرحى )
تربوتيوىلمعاناتكماىفىىىلدرائكمىالمدتمرىلىىميأإهداءىإلىىأبىىوى
وىإلىىدعادةىالدفورىالعظومىإبراهومىركديىخورتى
جدتوراكمالىالمداندنيىوىذجعنيىالدتالذيى
الدنواىىفيىليارزىماىىإلىوى
وإبنىىوادونىهانيىابني
Abdelhamied El_Rafie 3
Introduction:
My research topic will be: “Economic Policy of the World Bank in the Egypt during the
period 2000-2010: Is it Politicized?”
Main theme:
The basic idea of the research is to examine whether there are direct or indirect political
impacts 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?
6. What are the targets and goals of such operations?
Abdelhamied El_Rafie 4
Hypothesis of the research:
The World Bank role in Egypt is conditioned by the international and regional political
situation, the policies of development investments and the policy-making process of the
board 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 economic
integration in the Middle East region.
Structure of the Research:
Part I
The 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.
Part II
Abdelhamied El_Rafie 5
The 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 III
The 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
Abdelhamied El_Rafie 6
Part I
The World Bank from Inside
Mission of the World Bank (according to the Bank itself)
“The World Bank (WB) is a vital source of financial and technical assistance to developing
countries 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 International
Development Association (IDA). Each institution plays a different but collaborative role in
advancing the vision of inclusive and sustainable globalization. The IBRD aims to reduce poverty
in middle-income and creditworthy poorer countries, while IDA focuses on the world's poorest
countries.”2
Historical background:
After the end of the Second World War, the US found itself superior in every form. The
US was trying to invest the superiority in which it ended the war as an acquirer of nuclear
weapons, so the US was superior on the military side and politically it was the leader of
the Pact who won the war. After the war, the US put its economic and military power to
confront the Soviet Union. On the economic side, the US had funded through the World
Bank the reconstruction of Western Europe and Japan; on the military side, it gave a
smooth direction towards the creation of a western military alliance named NATO.
1
http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,pagePK:50004410~piPK:36602~the
SitePK:29708,00.html
2http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,pagePK:50004410~piPK:36602~the
SitePK:29708,00.html
Abdelhamied El_Rafie 7
The US used its economic and military dominance to manage and control the world
economy. The key features of that world economy were that it has the features of both
liberalism and multilateralism; the system was based on liberal economic principals.
Western states participated in three international organizations which were created to
achieve the capitalist economic order. These three organizations are the International
Monetary Fund (IMF), the International Bank for Reconstruction and Development
(IBRD) (effectively the World Bank (WB)) and the General Agreement on Tariffs and
Trade (GATT) which was transferred recently to the World Trade Organization (WTO).
Not only this, these western countries had put restrictions on the memberships of these
organizations and didn’t allow any country that was not following free-market principals
in their internal economic management to have membership.
Under this economic system, the United States, Western Europe and Japan have achieved
under this economic system what has been called a golden era of economic growth during
the 50s until the early 70s.
Countries (apart from the developed world) have not been protected from the pressures of
the global market. Two developments happened during the 70s and 80s which led to
economic competition between developing states. The first was the decision of China to
begin an era of trade and foreign direct investment to allow trade and foreign investment
into China by the west. The second development was the debt crisis in the 1980s.3
3 Robert O’Brien and Marc Williams, Global Political Economy, 2004, pp. 113-134.
Abdelhamied El_Rafie 8
The World Bank was founded in an international conference after the end of World War
Two aiming for a framework of international economic governance. The target was
stability of the world economy: for this reason, the International Monetary Fund was
established as the core of the system, the World Bank (then
the IBRD) was to provide governments with assistance to offer the private sector
especially 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 France
with a value of US$250 million. The number of member countries of the Bank then was
38; now after more than sixty years it has reached 185 member states. During this same
period, the Bank had 11 Presidents and it supported countries with more than US$500
billion 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 loans
currently of more than US$100 billion; it has average yearly profits of US$1 billion since
its foundation in which allowed itself to make grants to other organizations within the
WB including the International Development Association.4
The WB is supposed to meet social necessities in which the private sector will not be able
to fulfill; the WB should also face market failures which could happen through three
phases: the first is capital deficiency, the second skills know-how deficiency, and the
third a complex of resources scarcities.
The WB role at the beginning was concentrated on finance and it started in Europe as a
reconstruction financier, then the WB started in the fifties to do the same job with poor
4 David A. Phillips, Twenty Years of Trial – and Error, pp. 1-6.
Abdelhamied El_Rafie 9
countries. Later the WB changed its priorities: it moved beyond finance towards
economic structure and models of economic growth. That is why the IDA was established
but still the major role of the WB was to finance but it went further towards infrastructure
projects such as telecommunications, power and industry. The working strategy of the
WB became more diversified over the next decades: it included social sectors, support to
economic reform, technical assistance projects, training and research.
The shift towards investing in the infrastructure started during the presidency of Robert
McNamara (1968-1981) through his belief that investments and direct financing alone
were not addressing correctly the problem of poverty. The scope transferred during the
eighties into the issues of debt, structural adjustments and restoration of private
investments and financial flows to the developing countries; thus it was a transfer
towards macroeconomic adjustments. The WB role was important in international
financing but this importance was reduced during its lending expansion during the debt
crisis 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 developing
nations in the form of direct investment and portfolio investments.
Under the presidency of Paul Wolfowitz there was another shift, towards what is called
the “Knowledge Bank” which was first declared in 1996. This was a transfer from
infrastructure and macroeconomic adjustment towards so called “Institution Building”,
which is concerned with the regulations of the market and legal frameworks.5
The voting power in the Board:
5 David A. Phillips, Twenty Years of Trial – and Error, pp. 6-9.
Abdelhamied El_Rafie 10
The way the Bank is ruled is very important in order to understand the management of
the Bank. The Bank consists of lenders, shareholders and informal activist groups, and
each group is divided into sub-groups. The Bank’s creditors target is to get repaid so they
are concerned about profits and security. Due to this the United States (because it is the
largest shareholder) uses the bank for its foreign policy objectives more than other
members. The board of governors has 24 individuals representing 185 countries and G5
are permanently represented by their own government. The governors are the final
decision-makers by they only meet two times a year, then power is given to the executive
directors. These directors are permanently available in the bank; this has led to
management problems in the bank because of the contradiction in management between
the top level and the executive level.6
Table 1. Board voting power
1965 1975 1985 1995 2006
Countries
102 125 149 178 185
Board
members
20 20 21 24 24
G7 votes
54.9% 51.3% 49.7% 43.3% 43.0%
OECD votes 67.6% 64.7% 63.6% 57.5% 55%
6 David A. Phillips, Twenty Years of Trial – and Error, pp. 11-13.
Abdelhamied El_Rafie 11
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:
The structural adjustment programs of the World Bank and the International Monetary
Fund (which started in 1980) have taken significant percentage of the World Bank’s
lending power which was above the originally set budget by 25%. The idea of adjustment
was accompanied with the policies of liberalization during the period of the presidency of
Ronald Reagan in the US. The basic idea was to find the solution for the poor economies
to face their 1979-1980 shock of booming oil prices. The idea was to recycle the revenues
of selling petroleum to the poor economies in the form of low-cost loans to help them to
save their economic structure. The first part of the solution was implemented by the IMF
by financing the economies and by cutting public spending. But on the other hand, these
reforms were having high political sequences: at the beginning the SAPs (Structural
Adjustment Programs) was shorter from three to five years, but suddenly these programs
were longer as a result of difficult political conditions.7
Reforms within the WB
7 David A. Phillips, Twenty Years of Trial – and Error, pp. 27-29.
Abdelhamied El_Rafie 12
The target of the 1990s reforms in the World Bank was to reorganize the operation areas
of the Bank and address issues like the huge numbers in the bureaucracy which have
greatly increased the cost of doing business within the WB and led to slowness of the
organization; so the basic element of change was introduced, what is called “the matrix
management system”.
This matrix was to prevent relocation of power and conflicts within the management and
to improve the flow of business and information. The restructure includes engineering
industries and software development. The matrix has had some success in 96 countries in
Africa.
The problem was lost synergy but there was a problem in the managerial control which
was reduced to the minimum level in the country units and increased at the level of the
specialist department, which led to span of control of around eight senior management
levels.
A letter was published in The Financial Times about the matrix system, saying that it had
failed and improvement stopped, staff were talking about confusion and stress among
them and the mangers. The staff association claimed that the management had a lack of
understanding of the concepts of management. In 2001 in an official bank newsletter, it
stated that the matrix system could be credited with an increase in country focus by
improving technicalities and having a capacity of rapid response.
Abdelhamied El_Rafie 13
The following table shows the administrative budget of IBRD in million dollars.8
Table 2. The administrative budget: IBRD and IDA ($ millions)
1997
1998
1999
2000
2001
2002
2003
Regions
(direct operations)
651
710
740
779
708
775
816
Of which ´regional functions´
50
78
83
100
140
Regions less ´regional functions´
690
701
625
675
676
Networks
61
86
107
124
119
147
159
8 Taken from David A. Phillips, Twenty Years of Trial – and Error, pp. 67-71.
Abdelhamied El_Rafie 14
Other (quality and support)
2 11 13 19 23 24 31
Training and research
88
92
97
87
93
97
110
Other net overheads a
354
357
366
364
387
365
396
Administrative budget b
1156
1256
1322
1373
1330
1407
1511
Administrative budget plus Board
costs c
1126
1329
1397
1453
1414
1490
1604
Of which OED (IEG)
15.5
16.0
16.8
18.5
19.2
19.8
20.3
Board and Secretariat
54.2
57.1
58.1
61.8
64.9
63.2
72.8
Abdelhamied El_Rafie 15
a Consists of finance administration and management services and contingencies.
b There are various different measures of administrative costs. This figure is before counting
reimbursable fees, and the last line excludes the development grant fund and the costs of
pensions.
c This includes the board, corporate secretariat and IEG (OED)
Source: Annual reports and estimates
The Bank Assistance Programs
The bank assistance programs could be perceived through three stages: A) capital
deficiency, B) capital efficiency and related skills / know-how deficiency, C) capacity,
know-how and information deficiency. By this kind of assistance, the Bank transferred
from the initial role of financial aid and infrastructure assistance to those social sectors
such as macroeconomic activities, market regulations, legal reforms and anti-corruption
programs. These programs were delivered through financing and not financial tools. On
the financing side, it includes loans for sector investment, adjustment and poverty
reductions and adjustment lending; knowledge assistance, training and research have
been also involved by focusing on technical projects to the countries instead of just
economic policy. The structural adjustment lending had been remade into development
policy lending and it was extended to support poverty reduction.9
9 David A. Phillips, Twenty Years of Trial – and Error, pp. 119-121.
Abdelhamied El_Rafie 16
During 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 1996
about the Structural Adjustment Programs and another dialogue was held in 2001.
During the process of reform of the SAPs there was disagreement between meeting the
targets 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 a
stronger participation from inside and outside the government, and that was a normal
change in the WB’s work, involving a transfer from adjustment lending towards
introducing knowledge projects and services.10
Knowledge services had serious setbacks they have many losses plus their excessive
costs which needed to be subsidized by the WB through loans or income investment, or
financed outside the normal processes, there was smaller efforts to put in priority the
knowledge bank because the charging fees for that system took place in 1997 was not
justified because according to that system only few countries could pay those fees.11
NEW FINANCIAL PRODUCTS
Table 5. The Bank´s financial products in 2007.12
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.
Abdelhamied El_Rafie 17
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 2007
Figure 2. IBRD and IDA: administrative cost burden.
The relation between the WB and the United States:
Abdelhamied El_Rafie 18
The targets of the US with regard to the WB was driven more by its foreign and domestic
policies than by its interests in achieving WB targets; indeed it might be argued that US
pressures have put some limit on the good functioning of the Bank. Another observer has
noticed that any dissatisfaction by the US executive director sends a direct signal and
impact on the actions of the WB. The US was supportive of the WB for the first twenty
years; then during the 70s this support was variable due to the assistance policies of the
US; then the support was reduced during the Regan administration at the White House
during which it started to oppose certain WB strategies.13
The president of the WB is not only the most prominent figure but he is also the chief
executive so he is the most important person at the institution; but the selection of that
leader is critical towards the effectiveness of the WB and his selection has not been up to
the present day under any part of the process of reform of the Bank.14
Article 5 of the Bank’s agreement states that the executive directors elect the President
but this article was never accurately used, but some writers cite it ironically as it is the US
president who chooses the Bank’s president.15
13
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.
Abdelhamied El_Rafie 19
Part II
The World Bank and Egypt
Historical Background
The Egyptian economy witnessed several phases of development since the 23rd
of July
Revolution of 1952. It started by the Agricultural Reform in September 1952 which
reallocated the agricultural wealth and stated that by law no person can own more than 50
feddans (1 feddan equals 0.42 hectares); then in 1954 there was what we call the “state
direct investment in the economy”, that was in the iron and steel company. At that time
the country was planning to build a high dam at Aswan to prevent the flood of the Nile
and to produce electricity for the country and it got a promise from the World Bank to
finance the building of the dam, but due to the Egyptian decision in 1955 to buy Soviet
weapons from Czechoslovakia and with pressure from the United States, the World Bank
withdrew its offer to finance the dam. This led the Egyptian President (Gamal Abdel
Nasser) to nationalize the Suez Canal. The consequences of this led to more state
intervention in the economy by creating the National Planning Commission in 1957.16
The second transformation in the economy started in 1960 on what was called by the
public the socialist decisions, by which the State played more of a role in comprehensive
national planning and application of trade with the Eastern Block.
The third stage started in 1967 which we can call the economy of war where the
government faced problems in financing its policies under the pressure that it had lands
16
State Information Service, http://www2.sis.gov.eg/Ar/Economy/introdaction/Development/050101000000000003.htm
Abdelhamied El_Rafie 20
occupied by Israel due to the 1967 War; military spending increased from 5.5% of GDP
in 1962 to 10% in 1967 and up to 20% in 1973.17
The fourth phase started in 1974 which was what was called the “economic openness
era”: this witnessed a lesser role of the State in planning and more Arab direct
investments. The country witnessed a growth rate of 9.8 % but this growth was in the
service sectors without real production.18
The next stage was in the period 1982-1990, which was a mixture between planning and
economic openness; there was huge spending on infrastructure and it was a slow
movement towards the market economy. In 1990 there was a big shift towards market
economy mechanisms which witnessed policies addressing fiscal imbalances, interest
rates, liberation and floating of the currency. In short, real reform started during the
period 1991-1997 which witnessed the start of policies of structural adjustment but the
results of this reform were affected by the 1997 financial crisis in East Asia. Then a new
period of economic reform started in 2004 until now.19
The WB Evaluation of the Economic Situation in Egypt in 2001
The Bank's focus on that report was in areas where (a) government commitment to
projects is strong; (b) the Bank has a long and positive experience (water sector and
irrigation; human development); (c) it can bring knowledge management and experience
of other countries to guide Egypt's policy reforms; and (d) it can serve as a catalyst for
17
State Information Service, http://www2.sis.gov.eg/Ar/Economy/introdaction/Development/050101000000000003.htm
18 State Information Service , http://www2.sis.gov.eg/Ar/Economy/introdaction/Development/050101000000000003.htm
19 State Information Service, http://www2.sis.gov.eg/Ar/Economy/introdaction/Development/050101000000000003.htm
Abdelhamied El_Rafie 21
mobilizing financing packages 2-3 times that of Bank loans for well-designed and high-
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 the
services sector which was the major participant to GDP growth, in particular tourism and
construction. The growth sectors in Egypt were not technology-concentrated projects and
they had no improvements in their productivity. Interestingly, there was no concerted
policy that was directed towards poverty eradication though poverty in the mid-1990s
affected between 22-48% of the total population.
With reference to achieve International development goals by 2015, in 2001 the prospects
were positive but this needed to achieve basically two things: the first involved reducing
the number of underweight children and the second was to achieve progress towards
gender equality. Thus there came about an overall policy that sought “Sustainable High
Growth and Poverty Reduction”. Egypt's key economic governance issues were related to
tax policy and administration; civil service reform; legal and judicial reform; greater
involvement 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 annual
Abdelhamied El_Rafie 22
loss of agricultural land due to urban encroachment was estimated at between 15,000 and
30,000 feddans (1 feddan = 0.42 hectares). Also there were other negative comments by
that time because of poorly protected cultural and natural heritage. According to the
report, the country was facing a problem in which 95 percent of the population lived on
only 4 percent of the land. Also water scarcity would be a critical challenge for the future
of Egypt. The report expressed the need of removing obstacles to private sector
development.
On the positive side, the WB noticed that the Government had consistently expressed its
commitment to integrating women fully in development. Concerning the rights of
workers, the WB found that there was a necessity of extending the social insurance which
covered only the formal-sector employees and the private sector also. Also it was noticed
that, during the 80s and the 90s, Egypt had invested significantly in upgrading its
physical infrastructure but the WB pressed on the need for greater private participation in
infrastructure which in turn needed a legal reform. The Bank also noticed that
telecommunications and in particular internet infrastructure needed greater attention.
WB operations were estimated in 2001 at a total of US$450-600 million. Actually
operations were approved by the Board for about US$580 million, a figure which
depended 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 that
Abdelhamied El_Rafie 23
lending to Egypt during that period would be strongly demand-driven and would,
therefore, inevitably fluctuate from year to year.20
The WB Evaluation of the Economic Situation in Egypt in 2005
The WB report about Egypt stated that Egypt had experienced high growth in the second
half of the 1990s following the adoption of a structural adjustment program. Also
according 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 to
its citizens. But the 2005 report stressed that safety nets for the poor, though they existed,
had to be much improved. It also commented that the country was undergoing a
demographic transition which offered both challenges and opportunities.
The economic policies of the government during 2003/4 had made changes to the
economic system and proved that the country was able to accommodate both rapid and
substantial changes in the nature and content of economic policies; examples of that are
the 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 policies
starting from the mandate of the new government to improve living standards, promote
investment, reduce unemployment, contain inflation, and improve the performance of the
20
http://www-
wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2001/06/29/000094946_010614041127
83/Rendered/INDEX/multi0page.txt
Abdelhamied El_Rafie 24
financial system and of administrative bodies. Some bold reform measures had already
been initiated while plans had been announced for others.
According to its evaluation of the reform, the WB predicted then that
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.21
The Bank also noticed that the Egyptian financial sector was characterized by
inefficiency and weaknesses in intermediation due primarily to the dominance of state
ownership; the Bank mentioned the actions of the government to improve the
performance and soundness of the financial sector. Subsequently, the government
proposed a series of measures: in the banking subsector, reform objectives included
merging the six most poorly performing banks with larger, better-performing banks; in
the insurance subsector, reform objectives included privatizing one of the state-owned
insurance companies, improving corporate governance
Though the Bank had hailed the government policies in trade policy reforms during the
1990s, Egypt's export performance deteriorated in this later period, contributing to the
slowdown in overall economic growth. To regain momentum in this area, the government
21
http://www-
wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2005/06/24/000012009_200506241026
18/Rendered/INDEX/321900rev3.txt
Abdelhamied El_Rafie 25
adopted a floating exchange rate system in 2003 and took steps to improve the
functioning of the interbank foreign exchange market in 2004.
The Cabinet, according to the report, intended to follow an asset-management approach
with the objective of maximizing returns from the restructuring or sale of state-owned
companies. In short, the basic idea was to reduce the number of state-owned companies
in order to reduce the involvement of the state in areas where private sector enterprises
can function.22
The WB Evaluation of the Economic Situation in Egypt in 2008
The executive mangers council submitted on June 2005 and discussed the strategy of
assistance for Egypt for the period 2006-2009, and the 2008 report evaluated the
execution of this strategy. The latter report mentions that Egypt is considered a middle
income country and the Egyptian government was capable during the last years to obtain
a strong record as one of the countries of Middle East and North Africa that implements
economic reforms.
The country had reduced trade barriers through three phases in 2005, 2006 and 2007 by
reducing average customs fees from 14.6% to 6.9%. It had also engaged in reforming the
taxation system, reducing subsidies for power, improving financing and debt
management, reforming the financial sector and improving the environment of doing
businesses; there were also some early steps towards executing reforms in the social
sector.
22
http://www-
wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2005/06/24/000012009_200506241026
18/Rendered/INDEX/321900rev3.txt
Abdelhamied El_Rafie 26
Total investment in the different economic sectors rose from 17.6% GDP during the
period 2001-2004 to 21.2% during the period 2004-2008, while foreign direct investment
rose to 8.6% in 2008; also investment in the private sector increased from 5.3% in 2005
to 7% in 2008, which indicates strong and positive economic performance. Reserves of
foreign currencies reached US$33 billion. The report welcomed the government efforts in
reducing the budget deficit which was a protracted problem throughout the history of the
Egyptian economy: in recent years this deficit reached 7.7% of GDP by the end of 2007
while it was 9.2% of GDP in 2006.
Although the country achieved strong performance during the last decade on the
macroeconomic level, and despite the improvement in social indicators, the report
mentions 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 fact
that Egypt had better access to more financial resources from other international
organizations, it preferred to deal with the Bank because of the way of management of
the Bank and its programs in Egypt during the years of experience the country had with
the WB. Starting from 2005, the IBRD allocated a sum of US$1.797 billion in the form
of 15 projects of technical support provided to some sectors. There was also support
provided by the World Bank Institute especially for social responsibility endeavors of the
private sector.
The WB at the end of the report stresses that there were social and economic challenges
facing the country, particularly the achievement of justice with a leading role for the
Abdelhamied El_Rafie 27
private sector and the eradication of poverty. It mentioned that the Bank was committed
to continue providing its package of services to the country.23
Developments from 2008 till 2010
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,
23
http://web.worldbank.org/external/default/main?pagePK=51187349&piPK=51189435&theSitePK=256307
&menuPK=64187510&searchMenuPK=4962310&theSitePK=256307&entityID=000333038_2008102401
3450&searchMenuPK=4962310&theSitePK=256307
24 Ahram Newspaper, http://www.ahram.org.eg/Archive/2006/9/23/ECON2.HTM
Abdelhamied El_Rafie 28
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.26
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
25
Ahram, http://www.ahram.org.eg/Archive/2008/12/8/ECON3.HTM,
http://www.ahram.org.eg/Archive/2008/12/8/FRON6.HTM
26 Ahram, http://www.ahram.org.eg/Archive/2008/6/18/ECON7.HTM
27 Ahram, http://www.ahram.org.eg/Archive/2009/11/14/ECON8.HTM
28 Ahram, http://www.ahram.org.eg/Archive/2009/11/17/ECON1.HTM
29 Ahram, http://www.ahram.org.eg/Archive/2009/12/14/EGYP2.HTM
Abdelhamied El_Rafie 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 .
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.32
30
Ahram, http://www.ahram.org.eg/81/2010/02/18/5/8077/219.aspx
31 Ahram, http://www.ahram.org.eg/115/2010/03/24/5/12755/219.aspx
32 Ahram, http://www.ahram.org.eg/119/2010/03/28/4/13284/219.aspx
Abdelhamied El_Rafie 30
Annexes to Part II
Figure 1. These figures show the following: the first figure, which is concentrated in
doing business on the macropolicy level, shows that Egypt was ranked among the lowest
countries in the MENA region in terms of doing business, while Egypt comes fourth in
the region when we talk about the trade index. Also as the third figure shows, Egypt was
the lowest country in the region with regard to ease of doing business.33
33
MENA Development Report, “From Privilege to Competition”, p.8.
Abdelhamied El_Rafie 31
Figure 2. This figure shows that there were increases in the level of the private sector in
leading the economy and there was an increase in 2005 by comparison to the previous
decades, but there was not much difference because of the economic policies taken by the
government during the 1990s.34
Figure 3. This figure shows that the participation of private investment in the GDP was, on the
one hand among the lowest in the region and, on the other hand, was very low inside Egypt itself
because the economic environment reforms which started in 2004 did not reach their ultimate
goals.35
34
MENA Development Report, “From Privilege to Competition”, p. 26.
35 MENA Development Report, “From Privilege to Competition”, p. 53.
Abdelhamied El_Rafie 32
Figure 4. The figure shows that the structure of foreign direct investment in Egypt is
concentrated in the sectors of tourism, energy, finance, telecoms and manufacturing, but
it is clear it does not include high-tech services due to the lack of such services
Abdelhamied El_Rafie 33
development in Egypt. This explains why the country is increasing its budget for
technology, and specially information technology, nowadays.36
Figure 5. The figure shows that the export rate has increased from 5-6% during the period
1990-1999 to around 15% during the period 2000-2007. This could be due to the trade
agreement with the US, trade with the EU and joining the COMESA, all of which have
introduced new markets to the Egyptian products.37
36
MENA Development Report, “From Privilege to Competition”, p. 55.
37 MENA Development Report, “From Privilege to Competition”, p. 60.
Abdelhamied El_Rafie 34
Figure 6. Overall, the business environment in MENA countries looks “Average”, as it
does in many fast-growing economies.38
38
MENA Development Report, “From Privilege to Competition”, p. 81.
Abdelhamied El_Rafie 35
Figure 7. MENA Development Report, “From Privilege to Competition”, p. 82.
Abdelhamied El_Rafie 36
Figure 8. MENA Development Report, “From Privilege to Competition”, p. 126.
Abdelhamied El_Rafie 37
Abdelhamied El_Rafie 38
Part III
Final Analysis
1. The Current International Economic System
According to the International Monetary Fund Economic, "globalization" is a historical
process, the result of human innovation and technological progress. It refers to the
increasing integration of economies around the world, particularly through the
movement of goods, services and capital across borders. The term sometimes also refers
to the movement of people (labor) and knowledge (technology) across international
borders. There are also broader cultural, political, and environmental dimensions of
globalization.”39
What we are witnessing today is a result of the victory achieved by the Western block
lead 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 scholars
agree, and also in the international economic system – that is to say, the victory of
capitalism and the free market economy because nowadays in 2010 more than 90% of the
countries of the world have chosen the powers of demand and supply to rule their
economies.
39
http://www.imf.org/external/np/exr/key/global.htm
Abdelhamied El_Rafie 39
In terms of the three leading international organizations which are dealing with economic
and trade relations all over the globe, they are talking about economic integration, free
trade, reducing the role of intervention of states in the economy. This work is undertaken
by the IMF, WTO and WB. There is not much choice for countries: they don’t have many
options but these countries are under internal stresses coming from the social costs for
economic reforms and the international pressures of free trade. Globalization works
against policies that protect goods produced inside a country and in favor of cheaper
goods coming from outside. The country faces penalties from WTO and, if it follows
what the WTO says, it will mean ruining internal industry. If we apply the same on the
core organization in my research – the WB – this means that some countries find
themselves obliged to have more intervention in economic policies to face the social
prices of liberalizing the economy because countries cannot just be changed in a few
years; you cannot ask the people of these countries to forget the role of the state within a
few nights, after the great intervention of states in their daily lives that has endured for
decades.40
But there is an international trend of having economic policies that have some social
trends or impacts. This is greatly influenced by the WB: according to the World Bank, its
mission is
40
http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,pagePK:50004410~piPK:36602~theS
itePK:29708,00.html
Abdelhamied El_Rafie 40
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 by
providing resources, sharing knowledge, building capacity and forging partnerships
in the public and private sectors.41
But in my humble opinion, all the strategies to fight poverty and any other social impacts
on economic policies are within – and I do stress this – the free market economy and
economic liberalism. The equation includes complicated factors: it is a mixture between
economic, social, political and humanitarian factors. This then leads to the next part of
my final analysis in which how I address how Egypt would react to such an international
environment.
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 chosen
free-market liberalization as an economic policy but this policy has its social
consequences (for instance, there is a huge number of Egyptians who are dependent on
government subsidization for many goods and services starting from the bread they are
eating on a daily basis to the gasoline which is used in vehicles).
41
http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,pagePK:50004410~piPK:36602~theS
itePK:29708,00.html
Abdelhamied El_Rafie 41
One of the definitions of the science of politics, as Aly Eldin Helal mentions,42
is how the
state distributes the resources, whether these resources are physical (e.g., materials or
even rare resources); therefore according to him, the political system is a tool to distribute
resources between social classes of the community and, as such, the annual budget is a
very 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 from
different 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.
42
Dr. Aly Eldin Helal, The Egyptian Political System 1981-2010 (source in Arabic).
Abdelhamied El_Rafie 42
To sum up these factors: we could say that the one-party political system in most cases
has a direct relation with the full control of the state over the economy and, on the other
hand, the political pluralism has a direct relation with taking the dynamics of the capital
market and more involvement in international political economy. But what is mentioned
in the previous paragraph doesn’t mean the complete withdrawal of the state but it
stresses the need for reorganizing the relation between the state and the economy.
Therefore the government is under huge pressures from different parties: on one side, the
low-income population, second the middle class which is diminishing, on the third side
the private sector which is beginning to take a more leading role in the economy; so much
so the government is paving the way for the private sector and the dynamics of supply
and demand, and at the same time it didn’t lift its hand from the economy. However, this
is the dilemma because if the government lifts its hand completely, there will be more
corruption in dealing with economic affairs and corruption eats the fruits of economic
development in a way that the ordinary person will not feel progress in the economy (a
progress indeed which all international indicators register).
That is to say, Egypt is trying to maneuver between itself – and here we talk about a
mixture 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;
Abdelhamied El_Rafie 43
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.
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 Process
Abdelhamied El_Rafie 44
This final part is trying to link between the previous parts of the thesis: how, in my
opinion, there is a direct link between internal economic reform and regional economic
integration. And it’s a two-way situation: this means economic reform in Egypt is
strongly related to the situation in the Middle East because, if there is regional stability in
the region, this would mean more foreign direct investments in Egypt and more trade
between 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 is
not 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 projects
that use natural resources in the region.
Understanding the direct relation between social, economic and political factors in the
region will lead to admitting the fact that the region has had a protracted dispute since the
establishment of the state of Israel in 1948; effectively, this means more than 60 years of
deterioration in the situation of the region. According to the World Bank, the MENA(
Middle East and North Africa ) region is a middle-class region but, let’s agree on the fact
that according to the Bank, Egypt is making progress wth its internal economic policy
and it is on the right track but I would say that the success Egypt is achieving is in the
short and medium terms because, for the benefit of Egypt and the region in the long term,
the country is achieving economic integration but this wont be possible without solving
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 occupied territories in
Syria and Lebanon also. And, according to the Arab countries, they had a peace initiative
in 2004 calling upon all parties to resolve these problems, then peace will happen
Abdelhamied El_Rafie 45
between Arab countries and Israel and then there might be a possibility of normalization
of relations, and this normalization means that would be normal diplomatic relations
between countries which would include cooperation in the future. But, as we have seen,
the situation has deteriorated more and more nowadays in a way that throws away any
hope for peace in the region, and what was achieved until now by signing the Egyptian-
Israeli peace agreement in 1979, and choosing the track of negotiations which started in
the Madrid Conference in 1991 and all the developments after that – all this is at high
risk.
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