Moustafa El-abdallah Al Kafry
2022 / 2 / 23
Economic reform, Structural adjustment and transformation to the market economy are considered to be focal issues in the Arab World. This paper explains to us the relationship of economic development with structural adjustments in national economies and transformation to the market economy-;- how this will raise economic growth rates and improve quality standards in the production of commodities and services, and will it lead to scaling back the budget deficit? Consequently, will tax burdens imposed on citizens be reduced, will the adverse impact of inflation be overcome? Will this lead to increased savings and consequently to increased investments? Will affording shares to small savers and investors lead to more justice and better economic performance?
First: Market instruments and the possibility of their implementation in Arab countries:
The market philosophy in political economy is based on a number of hypotheses, the most important are:
• The presence of an economy based on the private ownership of production means, on specialization and division of work, and on wide ranging exchange of currency commodity.
• This economy allows the freedom of ownership, work, production, transformation, movement and exchange by means of its existing institutions, systems, legislation s and laws in force.
• It also provides for the freedom of making decisions which enables the possibility and freedom of choice.
• In order to complement these assumptions, the concept of the market is based on the principle of a perfect market which implies the domination of the normal condition of the market, namely total competitiveness as a fundamental condition for the efficient performance of its instruments.
(These theoretic, economic and neo-classical hypotheses which were the bases for the structure of the -function-ing of market instruments indicated in a number of laws interpreting the attitude of the individual producer and consumer, which is the interaction of supply and demand forces for the attainment of balanced prices at the level of commodity and market. It also presented a perspective for social progress based on these partial laws. Moreover, it gave a generalized concept of efficiency in utilizing and employing resources and production elements and in the distribution of production revenues.) 2
The neo-classical economic theory deems that the producers, in their quest to achieve the highest possible profit and consumers who seek the highest satisfaction within available capabilities, can achieve optimum utilization of resources and distribution of production revenues among those who contributed to this process. This is called acting covertly in the market economy. Is this correct?
The evaluation of the historic model of capitalist growth in accordance with market instruments indicates two fundamental phenomena.
1 - Waste of available resources
2 - Destruction of the environment as a result of unethical utilization.
Both are the natural results of working according to the concept of achieving maximum profit, which is a principal requirement within the market economy. Moreover, the quest for attaining maximum profit has played and is continuously playing a major role in shaping the art of production in compliance with this law, and not for the protection of the environment,´-or-social requirements and sustainability.
If we accept the validity of the neo-classical market concept and its instruments in the center countries, and advanced capitalist countries (matters that often require evidence), then to what extent will it be possible to accept and implement the same concept and same instruments in Arab countries? The implementation and acceptance of market instruments in Arab countries are linked to several factors, most important are:
1 - The realistic extent of market conditions.
2 - The social and economic framework of this market.
3 - Division of international action and organization of international markets.
4 - System of managing the national economy.
5 - Actual economic and social structure of every Arab country, and all Arab countries together.
The question is: Is it possible to implement the concept of the neo-classical market in Arab countries respectively? Is it possible to implement this concept in the Arab nation as a whole? It is a controversial question. It is worthy to note that the efficiency of the operation of market instruments depends on the nature of this market, its specificities, size and development of its institutions.
Market economy does not imply that management of economic activity´-or-most of it is left to the private sector. In fact, it is an integrated system with economic, social and political dimensions, and presupposes the availability of information, and its rapid and free dissemination, that markets are free and accessible to all. The system should also provide for competitiveness, a factor which does not exist in developing and Arab countries.
Second- Structural Imbalances that obstruct the establishment to the market in Arab countries.
As we have noted that there are general factors for the establishment of the market, we can discern the existence of structural imbalances that could hamper this establishment in terms of the economic context presented in an Arab country´-or-at the level of the Arab nation. These imbalances are foremost as such:
1 - Local production is not sufficient enough to cover the needs of society specially it we observe the population density in the Arab world as well as distortion of consumption trends due to blindly copying the West.
2 - The dominant impression in the markets of Arab countries takes various forms:
• the public sector monopolizes most products and imports.
• Some private economic institutions monopolize foreign imports agencies particularly food commodities.
• The public and private sectors have respectively divided the monopoly of basic intermediary goods, especially energy sources and agricultural production requirements.
• Foreign trade in Arab countries is linked with market monopolies at the international level. (grain-petroleum-cotton).
3 - The institutions of the market suffer from immaturity´-or-distortion such as relative weakness in the stock market. Moreover, the currency system is not capable of containing cash flow transactions. The existence of obscure laws governing the activity of the market and sometimes contradictory, particularly trade and tax laws, organization of banks and prices and even sometimes the form of ownership of production means, in addition to the economic hegemony parallel to certain market elements,
the overwhelming increase of parasitical activities at the expense of real activities and investing revenues outside Arab countries (t light of capital).
4 - The release of market instruments was accompanied with the spread of corruption that usually occurs with the existence of economic and financial imbalances, inefficient and weak market institutions due to lack of supervision and regression of the State’s role within the activity of the market economy.
5 - Prices in most Arab economies are exposed to distortion owing to the difference between actual and real prices that should have prevailed under the conditions of a natural market. Such as the different prices of industrial products and actual components of actual prices due to protectionism, exaggerated evaluation of the prices of food stuffs, certain industrial products and energy in the local market at a price lower than its value due to subsidization and the State’s monopoly of internal trade. Furthermore, the imbalances of currency rates due to administrative determination (official rate) as well as distorted prices culminating from the centralized decision by the State regarding salaries and interest structure. The major source affecting prices continues to be the interference of the State in fixing prices either through public ownership of certain production means and -dir-ect control over them´-or-by means of monopolizing activities such as marketing and distribution, compulsory supplies, labour employment, bank ownership and through employing the tools of currency and financial policies.
Professor Galal Amin indicates that there are two schools of thought in Egypt to interpret the imbalances of the 80’s and how to deal with them: the first subscribes to liberal thought and advocates dependence on market forces in the reform and development process. The second tends to support government interference and adhering to a developmental policy that sanctions self-reliance and internal trends. He believes that the interpretation of imbalances and proposed solutions by both school’s stem from an ideological position, and that both schools should not be considered. Two factors should be available for a sound economic policy.
1 - (that it should be in harmony with internal and international conditions. For example, liberalization of external trade is a sound policy if undertaken at a time when international economy is at its peak and that there were low flows of foreign investments, along with internal political stability. On the other hand, resort to a high degree of protectionism is sound if a country was faced with recession in international economy, shrinking foreign investments and political disturbance at the internal level.
2 - There should be minimum-limit- of accommodation between the basic elements of economic policies. He said that the worst policies are those that seek to achieve conflicting objectives simultaneously).
- With respect to restructuring and economic reform we can differentiate between three groups of Arab countries.
The first group: includes Arab oil exporting countries such as Kuwait, Libya, Oman, Qatar, Saudi Arabia and the Emirates. These countries have to face the fluctuations of oil prices. Therefore, reform is necessary at two levels:
a) to maintain a policy of diversifying the productive base carried out since the mid 70’s and which reduces their great reliance on oil.
b) to undertake necessary measures to confront the change from one situation where oil revenues reached two hundred billion dollars to one where such revenues dropped to 60 billion dollars.
Due to such a situation, the countries in this group suffer from a tangible deficit in their governmental budgets and in the balance of their current transactions. Therefore, they should reduce this deficit in both cases to a tolerable level.
The second group: medium income Arab countries such as Algeria, Egypt, Jordan, Lebanon, Morocco, Syria and Tunisia. These countries are not totally homogenous because they differ from one to the other, in terms of population, oil revenues and per capita income. The number of the population varies from 4 million to more than 50 million. Also, the average per capita income ranges from less than 800 dollars annually to more than 1500 dollars annually. Yet these countries have certain specificity s in common that justify their grouping. For they enjoy a relatively diverse productive base and possess advanced financial and economic institutions.
These countries are confronting adverse economic conditions particularly the negative effects of low oil prices and reduced remittances transferred by their nationals working in oil countries. Also, problems caused by circumstances prevailing in world economy particularly recession in raw material markets and deteriorated trade exchange conditions. This led to an increase of external debts and the burden of their servicing. It was also accompanied by deficit in government budgets which caused governments to finance this deficit by borrowing from banks. Consequently, the amount of cash flows increased thus raising inflation rates and exaggerated currency prices. Moreover, the countries of this group suffer from structural imbalances such as distorted prices, low productivity and capital and inefficient performance of the public sector that dominates a large percentage of economic activity.
The third group: comprises low income Arab countries such as Mauritania, Somalia, Sudan and Yemen. The question of restructuring and reform in these countries is more complex than the preceding group. For they largely depend on one´-or-a certain-limit-ed number of commodities and are therefore more susceptible to external debts and the amount of the burden of servicing these debts is not compatible with their economic capabilities. Moreover, the endemic deficit in the government budget, balance of trade, balance of payment and inflation rates are very high. Also, these countries have poor infrastructure and weak financial and economic institutions and a low per capita income.
The number of Arab countries who are convinced of the importance of reform and restructured policies and their sustainability has increased.
(In this context, Algeria joined Arab countries implementing comprehensive reform programs and adopted a reform programs with the assistance of international and Arab institutions. Furthermore, within this framework and for the first time, Algeria rescheduled its external debts.
Sudan is also implementing an economic reform program with a view to eliminating the imbalances adversely affecting the Sudanese economy. Other countries continued in their efforts to restructure and reform such as Egypt, Morocco, Tunisia and Jordan who announced the possibility of transferring their currencies for the purposes of current accounts in the balance of payments. Arab Gulf Cooperation Council countries continue to implement policies which they have adopted for several years in order to adapt to low revenues of oil exports and the possibility of diversifying their sources of income.
Thirdly - The International Monetary Fund’s (IMF) pre-script-ion for restructuring programs and the alternative program.
The globalization of the economy is a tangible fact. International financial institutions such as the World Bank and IMF have launched their reform policies and transformation to the market economy promoting the role of the private sector, and-limit-ing the public sector and the role of the State in economic activity. (With focus on the financial-monetary aspect considered to be the core of the problem, after hang witnessed the complex crises of development in developing countries.
Hence, this impulsive trend towards privatization from outside does not necessarily express a rational requirement. That is, it was not the result of sound evaluation of the public sector’s performance and indication of its shortcomings that called for transferring its ownership to the private sector, assuming that the latter is more capable of achieving development.
The issue requires to be studied in depth in order to learn the need for privatization at the national level in different Arab countries.
According to the IMF, the imbalances in the economies of Arab countries are basically the result of inappropriate economic and social policies because these policies restricted private initiative and narrowed opportunities before the private sector. These policies furthered foreign investment away from national economy, they gave a free hand to the public sector which stepped into incompatible areas, they isolated national economy from international capitalist economy by interfering in fixing prices and wages, raising projectionist measures in favor of domestic industries in the face of foreign competition, spreading the umbrella of social protection over a wide sector of the people by subsidization, social insurance, profit sharing, thus undermining the incentive to work and produce.
Hence the remedy proposed by the IMF by means of reform and restricting programs which aim at liberating the economy, in that it -function-s according to the free market economy and is structurally incorporated in the international capitalist system. The required task is to modify the overall demand standard in national economy and to reduce it in compliance with the overall supply standard. The more -dir-ect objective of the reform programs proposed by the IMF is to improve the situation of the balance of payments. The remedy is a pre-script-ion written by the IMF namely, to liberalize, the economy, reduce exchange rates, decrease public expenditures, sell the public sector to the private sector and end subsidization.
Prof. Dr Moustafa El-Abdallah Al Kafry