Ahmed M. Jiyad
University of Bergen[*]
|
Some of the Arab countries (generally speaking they are Egypt, Tunisia, Morocco, Sudan, Jordan - to some extent - and, more recently, Algeria) adopted economic reform policies in which stabilization, structural adjustment and privatization programmes were integral components of the economic packages negotiated and agreed upon with the International Financial Institutions (IFIs), namely the World Bank and the IMF. Others, had "voluntarily" implemented such reforms as a way out of an increasing and acute economic crisis (Iraq and Syria) or simply they found it necessary to join the rest (the rich Arab countries member of the GCC)
Though the social impacts of privatization are, empirically, rather speculative and inconclusive there is growing body of evidence that such impacts are negative, direct, and effective in the short run. The medium and long term impacts are, as claimed by the proponent of privatization, expected to be positive and beneficial to the entire society including the poor. Though, possibly, this might be the case, nevertheless, such desirable impacts will be seriously influenced by the dynamics of the adopted policies to deal with the "transitional costs" associated with privatization in the short run on one hand and on the social, political and economic environment within which privatization programme is functioning on the other hand. But the short term impacts of privatisation and economic reforms were played down and less emphasised and some had even diverted the attention away from those who were hardhit by the hardships of these programmes.
This paper shares the wide-spread view that there is no viable alternative to structural adjustment, as controlled and administered process, since structural changes, as gradual and accumulative process, are bound to take place reflecting the dynamics of development in societies. Nevertheless, the paper does not share the views which advocate that "there is no alternative to the packages of stabilization and structural adjustment proposed by the IFIs" since, in spite of some meagre progress, such packages did not bring about the desirable or foreseen benefits despite the wide application of these programmes for more than a decade, probably because of its over-emphases on market mechanisms. On the contrary, the social/transitional cost associated with these programmes have been high and not been compensated or offset by tangible progress somewhere else. While this paper maintains the position that privatization, as an integral element of structural adjustment programmes or as independent policy option, is also necessary to bring economic discipline to the state operating enterprises and to reduce unnecessary and octopus expansion of the state in the economic domain, the paper believes that the categorical wholesale of SOEs (State Owned Enterprises) and the ideological attack on state led development contravenes with the socio-economic development of the Arab countries, and will lead to more poverty, unemployment and social polarization.
I will outline first the different phases of state involvement as an economic agent in the national economies of the Arab countries leading towards privatisation. Then explore what privatisation really means, how it was perceived, and briefly list various arguments for such programmes. I will address afterwards, at some length and elaboration, the major components of social balance sheet of privatisation and adjustments programmes such as: prices and subsidies, employment and wage reduction, gender issues, urban-rural poverty, informal sector, and income inequality and property concentration. Finally, some concluding remarks shall be made.
Generally speaking the role of the state in the national economies of the Arab countries, and for that matter in most countries, has been as an economic agent and as regulating agent.
As an economic agent the state acts as a decision maker over resource allocation, as investor, and as producer of goods and services. In the realm of production of goods and services, the state can replace, compete, or share with private sector in these activities. Hence, the State-owned enterprise represents the basic instrument and element of state engagements in the field of economic activities. As a regulatory agent the state intervenes in the activities of other non-parastatal entities such as those of private sector, mixed sector, cooperatives, and foreign owned enterprises.
Privatization, therefore, is directly connected to the role of the state as an economic agent in general and to the SOEs in particular. This in a sense means that privatization is designed to substantially reduce the role of the state as an economic agent and, possibly, enhance its regulatory agency.
Like many developing countries the state in the Arab countries has been playing central and pivotal role in their national economies since independence until today. The centrality and importance of the state in the respective national economies is nothing peculiar to the Arab countries of the Middle East and North Africa or it is a regional invention. However, the economic and leading role of the state in general and the public sector in particular had came about in a gradual pattern as a consequence of the interaction between many international, regional and national factors and for variety of reasons.
Though the engagement of the state in the economic affairs of the Arab countries had followed, more or less, similar pattern in other countries, nevertheless, the SOEs or the public sector in this region have gone through the following four stages/phases.
The infancy-expansion phase. This stage which began after WW II and lasted till the end of 1950s, had witnessed a modest but growing influence of and intervention by the state in the national economies of most the Arab countries.
Influenced by a multiplicity of international/ external factors (such as socialism in East Europe or nationalisation in West Europe), domestic considerations (development and planning requirements, national sovereignty), or regional ideologies (Nassirism, Bathism, Arab Nationalism and Pan-Arabism) the decade of the 1960s witnessed a significant evolution and considerable expansion of the government and public sector, and the emergence of State-Owned Enterprise. That decade constituted a distinct and noticeable second consolidation-domination phase of the state's economic domain.
Egypt had initiated the move and began a process of establishing a pattern which proved to have wide implications and far reaching consequences on the role and magnitude of state intervention and the growth of the public sector in the national economy of Egypt and other Arab countries.
After a series of Egyptianization and nationalizations since mid 50s, Egypt embarked on a programme of social reform on the basis of "Arab Socialism" which was introduced and put forward by the "National Charter" of 1962. According to the ideology of Arab socialism, the whole society was expected to rally behind the government which pursued the interests of all. This involved and was translated into public ownership of public service, commercial activities such as banking and insurance, communications, heavy, large and medium size industries, foreign trade. A set of "socialist laws" were enforced to put in practice what was envisaged by the Charter and Arab Socialism. Soon the influence of such development in Egypt began to emerge in other Arab countries namely Syria and Iraq.
With the formation of United Arab Republic between Syria and Egypt (1958-September 1961) all Syrian banks and insurance companies and three industrial enterprises were fully nationalised and twenty four others were partially nationalised in June 1961. Though most of these nationalisation were lifted after the secession of UAR, a wide ranging nationalisations and re-nationalisations were taking place in 1964 and 65. [1]
In Iraq, many "socialist laws" were enforced in July 1964 aiming at increasing the role of public sector in order to first facilitate the planning for and implementation of government policies and second to promote and accelerate economic development of the country. A new "Economic Organization" was created according to Law No. 98 of 1994 the aim of which was to participate in developing the national economy by virtue of its economic activities in the public sector. Some 30 private companies were nationalised according to Law No. 99 of 1964 and all of them were annexed to and came under the control of the "Economic Organization". Another economic entity was created, "The General Organization of Banking" after all banks, both national and foreign, were nationalized pursuant to Law No. 100 of 1964.
Somewhere else in the Arab World other developments had taken place which brought regimes and rulers committed to strong government and expanding public sector; after Algeria gained independence in July 1962 attention was directed towards the nationalisation of banks and of the farms formerly owned and managed by the French settlers and confiscated, in 1964, the landed property of Algerians who collaborated with the French regime prior to independence. The Bath party recapture power in Iraq in 1968, in Libya al-Qadafi overthrew the monarchy in 1969, and a Marxist group came to power in South Yemen in 1969.
Such trends were not peculiar to these radical regimes alone. In Tunisia, for example, the 1960s was characterized as the decade of "state-led industrialization" where the state had established more than 80 public sector industrial enterprises, producing everything from sugar, clothes, and icecream to phosphates, oven, and tractors. [2]
By the end of the 1960s the public sector enterprise had consolidated its position in many, but not all, Arab countries and hence the second stage has ended with more and more involvement of the state in various aspects of economic life.
The third Stop-go/defensive phase which lasted during the 1970s till early 1980s brought with it mixed and opposing trends not only among the Arab countries at large but within some of the countries themselves as well.
The significant adjustment of oil prices and the nationalization of foreign oil companies provided oil exporting countries with substantial financial resources and hence furnished strong incentive for the government to expand its domain over the national economy, embarked on ambitious development programme, increased welfare standards, and expand government bureaucracy. This was not only in the countries claiming socialism or radicalism such as Iraq, Algeria and Libya, but also in countries most committed to private sector such as the Gulf states where oil industry was nationalised, state controlled oil or oil related companies were emerged and the largest new industrial enterprises were owned by the state. Extensive nationalization of private and industrial enterprises were undertaken in the Sudan too in the 1970s.
Associated with that trend was the emergence and creation of many intergovernmental joint ventures in oil and other sectors as well as establishment of many intergovernmental and non-governmental organizations. This development in itself meant increasing the role and importance of the state beyond the political boundaries of the country concern though such role is rather theoretical.
Other Arab countries found themselves strained: their economy is deteriorating, external debt is increasing, the balance of payment is worsening, the budgetary deficit is raising, and financially unable to sustain the expansion of the public sector. This had happened in spite of the development boom in the oil rich countries which had provided reasonable employment opportunities for thousands of expatriates, trade and financial assistance to this group of countries.
One of the early and significant development against state dominated economy in the Arab countries toke place, again, in Egypt in mid 70s: the Infitah (policy of the open door which was symbolized by Laws 43 of 1974 and 32 of 1977). For various reasons the late President of Egypt, Sadat, issued October Paper in 1974 according to which legislations were introduced to provide incentives for private investment (domestic and foreign), opened foreign trade to private companies, eliminated most controls on workers emigration and reduced, to a varying degrees, government control over the agricultural and industrial sectors. [3]
During this phase many Arab countries began negotiations with the IFIs and thus the process of structural adjustment. Egypt concluded agreements with the IMF in 1976, which led to the famous food riots of January 1977 and in 1978. The Sudan had concluded, during 1978/79, with the IMF one Stand-by Agreement and three year Extended Fund Facility agreement. These agreements were complemented by a three year World Bank structural adjustment programme. In 1978 the Moroccan government introduced some reforms by reducing state investment, increase taxes, reduce credit, and freeze wages. But the attempt was abandoned in the following year due to the price increase of both domestic and imported goods and the social unrest that was instigated by those measures. Then in October 1980 Morocco embarked on a second stabilisation programme and concluded an agreement with the IMF according to which the food subsidies were reduced and that had led to 50 per cent increase in the prices of essential consumer goods. Again these price increases had sparked widespread riots in Casablanca in the spring of 1981 and, together with other factors such as drought and falling phosphate prices, forced the government to abandon the programme.
By early 1980s the public sector domination has reached the end of its honeymoon.
Approximately during mid 1980s the fourth, Retreat-Privatization, phase has began and continued until today. During this phase the public sector and many state owned enterprises have been on the retreat and went defensive. Serious developments on the international, regional and national levels have expedited the moved towards privatization and consolidated the position of its advocates.
On the international level the calls for privatization and denationalization of public enterprise become even stronger due to the Thatcherism in the UK and Reaganism in the US and their influential impacts on the Bretton Woods institutions, namely the IMF and the World Bank. The outbreak of international debt in 1982 and the need to reschedule the debt made it easy for these two institutions to insist on certain policies known as Stabilization and Structural Adjustment Programmes to be implemented by those countries asking their assistance. Many governments found it impossible to continue with their increasing budgetary deficit. This has been coupled with further decline in export revenues due to deterioration of export commodity prices, terms of trade, and shrinking market. Decline in foreign aid and private foreign capital made the situation even worse for many countries with fragile economies.
The collapse of the socialist systems in East European countries and the former Soviet Union had furnished the path towards privatization in those countries in an unprecedented manner and, thus provide strong zeal for the move toward privatization world-wide. These dramatic developments had their direct impacts on the Arab countries who had relied on the Soviet block for economic assistance and cooperation. Not only such assistance was ended but the former donors and assistance providers began to compete with them for Western aid, private capital investment, and officially supported export guaranties.
On the regional level, the Iran-Iraq war, the decline in oil prices in monetary as well as real terms, and the Gulf war were added factors in the move towards reducing state role in the economy by opening the doors further for the private sector.
At this stage one general observation on privatization in the Arab countries is made: the agricultural sector was the first to experience privatization, or some form of state deregulation of land market, in many of them Arab countries such as Egypt, Algeria, Iraq etc. The services, trade, and industrial sectors' state owned enterprised have been subjected to privatization. The privatization of infrastructure and natural monopolies have not yet been touched by privatisation.
Reform, liberalization, or structural adjustments, more or less and in general terms, refer to a package of measures intended to bring about changes into the economic policy of the adjusting country in order, or hopefully, to improve their economic performance, increase efficiency and, hence, lay the foundation for sustainable development on the basis of market mechanism. To be more specific, Structural Adjustment is widely recognized as the set of package of macroeconomic reforms introduced and insisted upon by the two Bretton Woods Institutions, the World Bank and the International Monetary Fund (IMF).
The macroeconomic ingredients of such programmes are divided between the twin institutions were the IMF is concerned with the Stabilisation programmes while the World Bank is concerned with the real economy or Structural Adjustment programmes.
Though the detailed components of each specific package are dependant on the conditions of the adjusting country, nevertheless the standard and general components of these two packages are as follows:
The IMF Stabilization Programmes are designed to reduce basic monetary and fiscal imbalances. These programmes by definition, nature, and intent refer to short term issues and policies. They aims to reduce both the balance of payments deficit and inflation through, for example, exchange rate management and devaluation of currency, contraction of aggregate demand, tighter monetary policies, raising interest rates, budgetary cuts including subsides cuts and price increases.
The World Bank Structural Adjustment Programmes are of longer-term changes aims to eliminating structural imbalances in the national economy. They seek to achieve a structural transformation of the productive sectors through a shift from non-tradeable to tradeable sectors, reform public sector inefficiencies, reduce state domination and increase the role of private sector through privatization and or liquidation of the SOEs, removal or relaxation of government control over trade policies, reform tax systems, etc.
The contents, assumptions, and results of such programmes were not left unchallenged, and therefore they have been improving gradually though not very substantially. Many scholars, experts and observers of international development have challenged these programmes from theoretical as well as empirical grounds. [4]
Privatization has been defined and perceived in different ways by various authors and institutions. However, one need to differentiate between the various definitions and the various forms of privatization.
Privatization has been defined as:
"a transfer of ownership and control from the public to the private sector,
with particular reference to asset sales"; [5]
"a transfer of ownership from the public to the private sector"; [6]
"the transfer of public sector activities
to the private sector"; [7]
"the sale of the
assets of state-owned enterprise to the private sector"; [8]
"a new policy initiative geared to alter
the balance between the private and public sectors"; [9]
"a new division of labour between the
public and private sectors". [10]
Obviously there seems to be a lack of consensus even on the definition of what privatization really means. The first four definitions are specific but narrow and the last two are broad but mix up between the meaning and the final objective of privatization from their view points.
Furthermore, while all the first four definitions listed above see privatization as a process of "transfer", they disagree to transfer "what": "ownership" according to Naqavi and Kemal; "ownership and control" as seen by Walle; "activities" in views of Hemming and Ali Mansoor. Three of them talk about transfer from "public sector" which include the SOEs, while Bhaskar emphasized the transfer from the "state-owned enterprise" only not the public sector.
According to the UNCTAD Ad Hoc Working Group on Privatisation the term is elaborated and expanded in the following manner:
Privatization is part of a process of structural adjustment of the public sector of the economy. It involves redefining the role of the state by disengaging it from those activities which are best done by private sector, with the overall objective of achieving economic efficiency. It is first and foremost a political process, although it has to be carried out as an economic and commercial exercise.
Privatisation may involve non-divestiture and divestiture options. The non-divestiture option include: (a) Management privatization, including management contracts, leasing and operating concessions; (b) Restructuring and commercialization or corporatization, to be combined or not with management privatization; (c) Joint ventures between public and private enterprises/ sectors; (d) Contracting out of public service. The divestiture option include: (a) Direct sale, full or partial, to general investors; (b) Private placement with "strategic" investors or joint venture partners (c) Public share offerings on stock markets (usually for profitable, large-scale public enterprises); (d) Public auctions (usually for small or medium-sized public enterprises which do not require technology transfer); (e) Sales to employees or management teams through employee share ownership plans, management or employee buy-outs ("internal privatization"); (f) Sales to investment or mutual funds; (g) Mass privatization; (h) Liquidation, followed by the sale of assets. [11]
It is worth mentioning in this respect that the IFIs had gave noticeable preference to the divestiture option and made the liquidation of "nonviable" enterprises as a condition of structural adjustment lending for many developing countries. Between 1980 and 1987 the World Bank had approved some 41 projects which include elements supporting the divestiture of state-owned enterprises. [12] This preference for divestiture option even for the profitable SOEs and the insistence on liquidating the nonviable enterprises without exploring other options represent ideological stand of "destateisation" by IFIs. As observed by Boratav (p. 28) that the " attempt to seek rational solutions to the actual problems of SOEs seems to have clearly shifted to the background; consequently, ideological factors disseminating mainly from international agencies have been playing a determining role". [13]
Boratav (p. 29-30), categorized the "official" objectives of privatization in the Middle East and elsewhere in two groups: two main and many secondary objectives. The two main objectives are first improving the efficiency of the enterprise by changing its ownership (i.e. the first two arguments identified by Nyong) and second improving the public sector finance by the sale of SOEs (the fiscal/structural adjustment argument identified by Nyong). The secondary objectives: the contribution to the development of capital markets, improving the distribution of wealth (Turkey), external debt reduction through debt-equity swaps involving SOEs (Morocco and Tunisia).
On the "official" level, the arguments for or the objectives of privatization can be many and different reflecting the characteristics and the structure of the countries concerns and the prevailing political environment. Interesting and rich information on various national privatization programmes; their objectives, means to achieve them, legal requirements, institutional arrangements etc have been made available by UNCTAD. [18] However, one need to be aware of the possibility that such "official" presentations tend to give rosy picture and bright image of privatization which can be contested empirically.
Government budgets in all Arab countries were in deficit though the amount of deficit was less in 1991 than it was in 1985 for all Arab countries except Saudi Arabia and Kuwait, for reasons related to the Gulf War, and Morocco, Tunisia and Sudan.
All Arab countries, except Saudi Arabia, Bahrain, Kuwait and Sudan have managed to reduced the ratio of their budget deficit to GDP in 1991 as compared with 1985. Nevertheless, this ratio is still high for many countries; 21.1 per cent in Egypt, 15 per cent in Sudan, 10.8 per cent in Yemen and 8.9 per cent in Morocco. [19]
Total outstanding disbursed Arab debts during the decade of the 1980s were on the increase reflecting deteriorated economic performance. In fact all the Arab countries, except the GCC (Gulf Corporation Council) members and Libya, have accumulated substantial amounts of external debt in this period.
Total Arab indebtedness, excluding Iraq, was more than doubled when it increased from US $ 61.302 billion in 1981 to a peak of US $ 134 billion in 1989 before it went down to US $129.4 billion in 1990. In fact external public debt of every one of the 12 indebted Arab countries have been worsened by the end of the 1980s in comparison with the beginning of that decade. In 1981 the heavy indebted countries, Egypt, Algeria, and Morocco, contributed by a total of US$ 45.2 billion or 73.3 per cent of total Arab debt. By 1989 total debt of these three countries plus Syria joining the rank reached US $ 101.9 billion or 76 per cent of total Arab indebtedness. [20]
The ratio of total debt to gross domestic product increased continuously from 41.5 per cent in 1981 to 87.2 in 1989. However, the picture is becoming increasingly bleak when considering this ratio on the national levels. In 1981 only one country, Mauritania, whose total debt exceeded the gross national product (109 per cent). But in 1989 five Arab countries for which their external debts exceeded by far their GDP: Mauritania 178.8 per cent, Egypt 162.3 per cent, Somalia 159 per cent, Jordan 152 per cent, and Syria 141.7 per cent.
Debt service ratio (interest plus principal repayment as a percentage of export earning) reflect the actual annual drain or burden on the national balance of payments and the surplus, if any, of the trade balance. 21.1 per cent of total export earning of the indebted Arab countries was used to service their debt in 1981. This ratio increased to 36.4 per cent by the end of the decade. Actually in 1989 Algeria devoted 70 per cent of its export revenues to service its debt, Morocco and Egypt allocated more than one-third, Syria and Somalia paid more than one-quarter, Tunisia more than one-fifth, and Jordan 19 per cent.
Obviously, increasing magnitude of external debt problem of the Arab countries constituted serious economic problem which have direct impact on the development efforts on one hand and force many of them to reschedule their debt and conclude various types of agreements with the IFIs on the other hand. Furthermore, all the indebted Arab countries, except Egypt, have not benefited from the measures taken by G7 official creditors to reduce the debt and debt-service burden of the developing countries.
Between 1979 and 1987 many Arab countries went to Paris Club to reschedule their official debt and, as a consequence of that, they were forced to conclude agreements with the IMF and hence began the process of liberalization, structural adjustment programmes or stabilization programmes. The Sudan went to Paris Club four times, in 1979, 1982, 1983, and 1984, to reschedule a total of US $ 1448 million. Morocco three times, in 1983, 1985, and 1987, and rescheduled US $ 3284 million. Mauritania also concluded three agreements with the Club one at a time in 1985, 86 and 87 totalling US $ 191 million. Two agreements were finalized by Somalia in 1985 and 1987 totalling US $ 280 million. And finally Egypt with one agreement in 1987 rescheduling US $ 5586 million. [21]
The inability of some Arab countries to service their mounting external debt forced them, as mentioned before, to be regular visitors to Paris Club, and hence their journey towards economic reforms via the avenues of the World Bank and the IMF begins. Some Arab countries such as Egypt, Morocco and Sudan had concluded many agreements with these two institutions during 1976/79.
Between 1980 and 1991 seven Arab countries had concluded 56 different agreements 26 with the World Bank and 30 with the IMF. Morocco concluded 16 agreements, Mauritania 11, Somalia and Tunisia 8 agreements each, Algeria and Sudan 4 agreements each, Egypt 3 and Jordan 2 agreements. [22]
This does not mean that all economic reforms and privatization which toke or are taking place in the Arab world were externally imposed by the above two institutions. As was mentioned earlier other countries, such as Iraq, Syria and Saudi Arabia had initiated various types of liberalization, reform or privatization programmes by their own will and without any arrangement with the World Bank or the IMF. Furthermore, the rich GCC governments were reported to have been considering plans to privatize some state owned companies. [23] And to comply with the trend the Arab Monetary Fund (AMF) had decided in 1991 to shift the main feature of its operations from providing low-interest or soft loans to granting technical support for economic reforms in member states which are making serious efforts in adjusting their economies. [24]
The individual national experiences with privatization reflect differences on what to privatize, how comprehensive privatization programme is to be, at what speed the programme should proceed, etc.
The Sudan's march on the path of privatization...