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Arab Economic Transformation Amid Political Transitions

The International Monetary Fund released today a new paper entitled “Toward New Horizons—Arab Economic Transformation amid Political Transitions.”

The paper makes the case for the urgency of launching economic policy reforms, beyond short-term macroeconomic management, to support economic stability and stronger, job-creating economic growth in the Arab Countries in Transition—Egypt, Jordan, Libya, Morocco, Tunisia, and Yemen.

These countries face the risk of stagnation if reforms are delayed further.Economic conditions have deteriorated from transition-related disruptions, regional conflict, an unclear political outlook, eroding competitiveness, and a challenging external economic environment.

As economic realities fall behind peoples’ expectations, there is a risk of increased discontent. This could further complicate the political transitions, impairing governments’ mandates and planning horizons and, consequently, their ability to implement the policies necessary to catalyze the much-needed economic improvements.

How can these countries create jobs, lift growth, and foster fairness? Here are seven lessons from the report:

1)     There’s a need for a medium-term vision to set policies for the economic future. Countries need prudent economic management, paired with bold reforms to create an enabling environment for private sector–led growth, to safeguard the promise of the Arab transitions for better living conditions and job creation on a meaningful scale. Better economic conditions can then help reduce discontent and thereby smooth the political transitions.

2)     One size does not fit all. Individual countries should design specific reform programs based on their starting positions and reform goals. A number of reform areas, however, will be common for them, including deeper trade integration, a focus on business regulation and governance, labor market and education reform, improved access to finance, and better social safety nets.

3)     Near-term policies need to focus on quickly creating jobs. Delays in the revival of private investment, in the context of impaired economic confidence, indicate a need for governments to shore up economic activity in the near term. Experience from other countries suggests that well designed infrastructure projects can create jobs and lay a better foundation for private sector activity.

4)     Fiscal reforms should aim to foster fairness. Expenditure-side reforms should include redirecting social protection from expensive and inefficient generalized subsidies to transfers that better target the poor and vulnerable. Some countries also have room for raising income tax progressivity and increasing excise and property tax rates, and the closing of tax exemptions and loopholes. Together, these policies would enhance equity while freeing scarce resources for priority expenditure in infrastructure investment, health, and education.

5)     Budgets need to be anchored in strong medium-term policy frameworks. In some cases, there may be room to scale up deficits in the near term, when adequate financing is available, but all countries will need to consolidate their budgets in the medium term to buttress economic stability. The slower the pace of adjustment, the larger the financing needs will be, underscoring the need to anchor policies in medium-term consolidation plans that will help secure the continued willingness of creditors to provide the necessary financing.

6)     Effective communications need to be front and center. Communications are critical as governments transform their economies. Governments must be able to explain persuasively the reasoning behind difficult decisions if people are to support them.

7)     The international community needs to step up support. Even as countries need to stay in the driver’s seat and plan their policy programs through wide national consultation, there is a need for the international community to support policy efforts. Such international support can be in the form of finance, technical assistance, or access to trade.

Building the future

This report will serve as an important input to the upcoming regional conference organized by the IMF, in collaboration with the Jordanian government and the Arab Fund for Economic and Social Development, in Amman, Jordan titled “Building the Future: Jobs, Growth, and Fairness in the Arab World,” during May 11-12.

The conference, which will be attended by Ministers and Governors from the region, as well as the IMF Managing Director Christine Lagarde, will provide an opportunity for high-level policymakers, leading private and public sector executives, development partners, civil society representatives, and academics, to enrich the dialogue on the main elements of an economic vision for the 6  Arab Countries in Transition including by drawing on regional expertise and vision, and on lessons from similar episodes of fundamental economic transformation in other parts of the world.