Understanding reforms in the regional context

The word reform occupies a prominent position in discussions of current issues in the Arab region.

It is reported the word was repeated more than 3,000 times during the recent Arab Strategic Forum, held in Dubai.

Frequent use of the word, however, does not assure a common understanding of the concept. I think the word means different things to different people. Consequently, the elements of political reform are not well defined, as is the case when people speak of economic reform.

Economic reforms are concerned with short- and long-term adjustments. In the short term, adjustment means stabilisation to restore internal and external macro economic balances. Internal balance is attained when the economy produces output equal to or close to its capacity level. This means production at low levels combined with low inflation, or rapid growth with high inflation, indicating a lack of internal balance.

External balance is attained when the current account position of the balance of payments of an economy can be sustained by autonomous capital flows, without resorting to restrictions on trade and payments. Indicators for internal imbalance are: high inflation rates; high unemployment rates; and low growth rates of the gross domestic product (GDP). Indicators for a state of external imbalance are: current account deficits; an increasing external debt; and dwindling international reserves.

Key components

In the past two decades, all Arab countries, except the GCC states and Libya, adopted at least one economic reform, supported by the International Monetary Fund and/or the Arab Monetary Fund.

A generic economic reform consists of two components. The first is a stabilisation programme, intended to improve the internal and external positions of the economy in the short run by managing aggregate demand in the economy by adopting appropriate fiscal, monetary and exchange rates policies.

The second is a structural programme intended to manage aggregate supply in the economy in the long run by adopting appropriate policies. These policies should expand the productive base of the economy.

Arab economies experienced changes in the past two decades, including a rising role for the private sector, privatisation of public enterprises and introducing new or modifying legislations for foreign direct investments.

Their relative economic performance, however, is unimpressive, as indicated by the relatively low-growth rates of per capita income compared with its potential 1 per cent per annum compared with a potential of 2.6-3.2 per cent. Unemployment rates range from 7 to 26 per cent, excluding GCC member countries. Several Arab countries still experience external current account deficits and government budget deficits, in addition to mounting external debts.

Human development

Only four Arab countries Bahrain, Kuwait, Qatar and the UAE have achieved high human development, as measured by the Human Development Index reported in the United Nations Development Programme's Human Development Report for 2004. Three other Arab countries Yemen, Mauritania and Djibouti have low human development ratings. The rest of the Arab countries achieved medium levels of human development.

This lacklustre performance of Arab economies raises a question: Can economic reforms sustain development in Arab countries in the absence of political reforms? This question provokes a series of additional questions. What are the elements of political reform? What are the steps required to implement political reform? Who initiates political reform? Who supports political reform?

The rationale for economic reforms is understandable: governments face external deficits, mounting external debt, budget deficits, and high unemployment rates, in addition to high inflation and the possibility of social unrest. They thus adopt economic reforms. What is the rationale for political reforms? Could it be a failure to deliver the promised increases in people's living standards?

The writer is an economic and financial consultant.