PM Siniora speech in High-level Meeting on the transition to democracy: economic challenges and opportunities away from populism Rabat, Morocco- February5, 2013
The speech given by the President of the Future Parliamentary Bloc Fouad Siniora
In High-level Meeting on the transition to democracy: economic challenges and opportunities away from populism
Planting the Seeds for Democratic Success: The Economic and Fiscal Challenges for Countries in Transition
Ladies and Gentlemen
The topic of our panel today, “planting the seeds for Democratic success: the economic challenges for countries in transition” hits right on the difficult trade-offs that need to be tackled in the short and medium term in order to ease and pave the path of the transition towards a stable democratic process and sustainable growth and development. The short-term problems that are imposed by the fragile political, economic, and security situation for the countries in transition, are further compounded by the deep structural imbalances that the (outgoing) Arab regimes have failed to tackle over four decades, busying themselves in terns of economic policy, with the wealth redistribution (without making distribution necessarily and effectively fairer, mind you) as opposed to wealth creation.
Now the march to democracy has started. And democracy, as it has been proven by several experiences in the world and throughout history, does lead in the long-run to a higher economic wellbeing. Democracy nurtures accountability, and accountability nurtures better management of public affairs and good governance which in turn lead to the better and more efficient use of scarce resources and therefore stronger productivity and higher economic output. Respecting the democratic process and protecting it over repeated cycles is therefore the first building block in the quest of sustainable growth and development.
But as John Keynes famously said: in the long-run, we are all dead. The path to sustainability is paved with short-term challenges that might easily derail it if the response to the challenges is the inappropriate or inconsistent policies that are due to populist measures.
The most immediate challenge is the fact that the transition is having duel conflicting effects: on the one hand, it is worsening the economic conditions, and on the other hand, it is fueling higher expectations from the public who is demanding immediate remedies on pressing matters such as job creation, health, education, and social safety nets, all the result of pent-up and unsatisfied demand over decades.
Why is the transition worsening the economic conditions? Because the unsmooth nature of the transition combined with non clarity in terms of economic planning, is creating a confidence crisis, and is therefore having negative effects on trade, tourism, and local as well as foreign direct investment. But in the case of the Arab world, the negative confidence is also exacerbated by long lasting and deep rooted fundamental imbalances in the economies that are undergoing a transition. These include: poor institutional and judicial frameworks, heavily regulated labor markets, the inadequate business laws and weak business environment, poor public administration that is a hurdle to private sector investment and growth, inadequate infrastructure, the weak educational systems or even their inappropriateness to the needs of the market, poorly designed social safety nets, and poor governance. So imagine a balance of payments crisis or a widening fiscal deficit on top of all this, and you can understand the complexity of the situation at hand.
Tackling the long lasting issues is a must, and it has to be done through bold structural reforms that will evidently lead to some redistribution of power as well as income, which has always made it very difficult and costly. While getting rid of the old regimes was hard, dismantling the complex web of economic powers and centers of the old regimes in order to create a more competitive, productive, and fairer economic environment may be even harder. Post Arab Spring, we can expect and hope that the emerging authorities have enough of a mandate to tackle these issues. But to increase the chances of success, high economic growth should be achieved in order to minimize the cost of redistribution. So the question is how to achieve growth and how to generate more employment opportunities in the short-term, in order to simultaneously meet the higher expectations, as well as prepare the ground for the much needed structural reforms that are needed to promote sustainable development.
Some of the questions that are proposed in the introductory question in the program that has been distributed, point in my opinion, to the wrong direction: the solution to the challenges is definitely not a step back from the principles of liberalism and open fair markets; the solution is not more governments as employer of last resort and hence a fat and inefficient administration that is not held accountable to the highest standards of quality control and performance; the solution is not directed lending to favored sectors; and the solution is not blurred lines between each of monetary policy, fiscal policy and trade policy. The time now is one of great challenge for the newly elected authorities to navigate the thin line between breaking from the past, but without moving back into the failed experiences of the old times.
Ladies and Gentlemen,
Let me elaborate. Some may think that the economic freedom brought by the outgoing regimes over the last few years have failed to deliver and it may therefore make sense to go back to the economic dirigisme of the past, in one way or another. That would be a big mistake, and we need to derive the right lessons, not the rushed conclusions. The truth of the matter is that “Liberalism”, in its true meaning was never fully implemented or even proposed in the Arab world, and therefore we cannot claim that it has failed.
Macroeconomic stabilization in the concerned Arab Spring countries over the last period of the outgoing regimes have reduced the fiscal deficit; stabilized inflation and the exchange rate and improved the balance of payments; and fed a real estate boom. But it was coupled with non-transparent privatization deals that sold state assets to favored parties; often toothless regulatory agencies and weak institutions especially in the judiciary; and development policies that revolved around expensive subsidies rather than real empowerment of the limited-income class or even effective social safety nets.
The Arab Spring was against political but also against economic and social marginalization. It was a vote of no-confidence in the economic and social policies of the past. The appropriate response to these challenges is a three track accelerated reform agenda.
The first track tackling political, institutional and judicial reforms is essential so that to ensure accountability, transparency, respect of the rule of law, as well as good governance. Only separate yet balancing powers of the executive, the legislative and the judiciary, coupled with the freedom of press can provide the system of effective checks and balances that is integral to sustainability. But also a political discourse that is frank with the people about the economic realities, and the sacrifices that need to be done today to reach the higher potential tomorrow, instead of selling them dreams, this political discourse is highly needed to manage expectations and protect the transition.
The second track is an effective policy agenda that tackles in a comprehensive and dramatic way the supra-structure, from the ease of doing business environment to the upgrade of laws related to business and labor, with a view to encouraging both local and foreign investments by the private sector. This effort should also tackle productivity enhancing measures that upgrade not just the supra-structure but also and equally important the infrastructure, which can be achieved not through the budget, but at concessionary terms through the Arab development funds, which will bring with them in addition to funding a breadth and wealth of experience and best practice. In this context, the decision to increase the capital of these funds by the latest Arab economic summit is a welcomed and timely initiative. Upgrading the infrastructure should be accompanied by the establishment and/or the empowerment of the government regulatory agencies in the key sectors such as power, telecom and transport so that to ensure the quality of the services and their competitive pricing.
Last but definitely not least, the third track consists of better designed social safety nets that move away from expensive and inefficient subsidies that help those who end up consuming the most, and closer towards targeted support that help protect those that are most affected by change and provide security to the less privileged.
Arabs have the advantage of late comers that can use the experience of other countries and freshly design social safety nets that foster the emergence of a middle class, which could significantly contribute to growth and to stability in the region. The example of the Brazilian Bolsa Familia is a model to follow, and is indeed being followed by several countries so Arab governments should take note.
Ladies and Gentlemen,
The responsibility does not only fall on the countries that are undergoing a transformation. In an increasingly interrelated world, the West and the rich Arab countries have a stake in seeing a successful transition. This would be an indirect investment in their stability and in their security. The need for success is a global and regional need because the alternative is highly costly.
It is a shame that until today, actual assistance remain significantly short of the commitment made during the G8 meeting in Deauville regarding the allocation of a sum of $ 80 billion to support the economies of the Arab spring countries. Europe, despite its crisis, has a lot to offer, and not just financially. The experience of integration of post-soviet European countries into Europe, and especially the role of the EBRD, could be very useful for the Arab countries in transition.
Strong Arab-Arab integration is also needed and in this respect, I had launched during the Arab Economic Summit that took place in Kuwait in 2009 an initiative regarding stronger Arab development and economic integrationthat touches on many sectors ranging from energy, water, transportation, environment and food security, as a way of bringing closer the Arab world and bridging the widening gaps among its people. These cross borders investment projects are a win-win situation. It is essential to note that this initiative is in no way based on a concept of charity from those who have to those who have less; but is rather based on a concept of a region investing in its own wellbeing, in its security in the broad sense, in its development and welfare.
But we need to start acting and not just talking which requires political will. The recent Arab economic summit in Riyadh has launched some initiatives, but to be honest we need to move from ideas to implementation: it is no longer acceptable to still talk about an intra-Arab railway: we need to start building it! It is no longer acceptable to talk about free economic zones: we need to start delineating them, starting from here, in North Africa where it makes most sense to open the borders for the free flow of people, trade and capital.
Ladies and Gentlemen,
The political, economic and social landscape is changing and what has happened in North Africa over the last month should be a wakeup call. So much time has been wasted. So many resources have been thrown away. The US in 2020 may no longer need Arab oil; it is time to ask ourselves what are we going to offer to the rest of the world in 5, 10 or even 20 years? What seat will we have on the global economy table? Even more pressing: what are we offering our youth, which are our greatest resource. Maybe a good place to start is by looking inward and ask how can we finally provide the needed value added. Complete and sustainable solutions cannot be designed by any Arab country alone regardless of size or wealth.
Good governance, partnership with the private sector, and intra-Arab integration are the way forward if we are serious about tackling the humongous number of challenges facing us in the years and decades to come. So are we serious enough?
I end on a question; and I thank you for your attention.
Rabat, Morocco- February5, 2013