CONFERENCE

The Egyptian Economy: Challenges and Future Prospects

CAIRO, EGYPT FEBRUARY 23, 2013

Successful Economic Reform in the Context of Poland's Transition to Democracy

Dr. Andrew C. Kondratowicz

Lazarski & Warsaw University, Poland

Forecasting Committee of the Polish Academy of Sciences

MOTIVATION & INTENDED RESULTS

I am NOT "a foreign adviser" to give you answersto your problems

I can only humbly present a story of our experiences in the past 25 years

Perhaps you will find it relevant for applicable to your situation.

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A possible subtitle of my presentation:

The Arab & East-European „refolutions” compared:

a refolution = reform + revolution[after Timothy Garton Ash]

A revolution = a 1789 modelA refolution = a 1989 model

Hypothesis 1

revolutions are like cars: it is better to have a newer model

1989 > 1789

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Hypothesis 2

the newer model is worth the price(the price being „a rotten compromise”)

accept a [rotten] compromise

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from Polish experience:if you don’t accept a compromise

you will have to retry your revolution again and again- It is costly!

(of course, all parties have to compromise)

Hypothesis 3

a compromise is possible, if there is some consensus about the future shape of the economy

can you unite behind a number of common goals even if only for a short

time?

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from Polish experience:back in 1989 quite everybody hated communism and quite everybody embraced capitalism and the

market

(not necessarily now)

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HISTORY

THE POLISH TRANSITION PROCESS

The Polish background

For the record:over twenty years ago an abrupt political regime switchover took place in Poland [June 1989]

– and then spread to other then-communist countries of the region [East- and Central-Europe = ECE]

– and then even further to various parts of the then Soviet Union.

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The starting point of the Polish transition:

There was no blueprint "which way to go", no previous experience.

It was the "sailing onto unchartered waters"

A. There was no economic transformation theory

B. There was no macroeconomic stability (equilibrium) internally

C. There was a broadly understood stability externally (i.e. on the global scale) – except that created by the breakdown of the communist system itself

• The A + B + C above were construed in economic terms, but they are also valid from a political perspective

Now, what about Egypt (& its neighbours) now?

How does Egyptian economy and society of today compare with Poland in 1989?

The starting point: A+B+C =

• better knowledge of "transformation theory" +

• internal instability +

• larger external instability

__________________________________A = existence of theory; B = no internal equilibrium; C = weak external equilibrium

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THE DEPARTURE POINTS COMPAREDECE & AW (ECONOMY, POLITY, BOTH?)

Poland 1989+(East-Central Europe)

Egypt 2013(Arab World)

A (EXISTENCE OF THEORY) NO YES (?)

B (INTERNAL EQUILIBRIUM) NO NO

C (EXTERNAL EQUILIBRIUM) YES NO

GRAPH 1 EFI values ECE14 1990-2009, chained

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EFI DATA

GRAPH 2 EFI values for AW11 1990-2010, chained

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EFI DATA

GRAPH 3. EFI values for AW11 & ECE14,1990-2009

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EFI DATA

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Graph Y. POLIT Index 1971, 1980 & 1989-2010; Min, Max & Mean values for ECE_19 and Mean value for AW_11

2010

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-10

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-6

-4

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ECE_19 mean

AW_11 mean

2010

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ECE_19 mean

AW_11 mean

ECE_19 MAX

ECE_19 MIN

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Graph Y. POLIT Index 1971, 1980 & 1989-2010; Min, Max & Mean values for ECE_17* and Mean value for AW_11

2010

2009

2008

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2006

2005

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-10

-8

-6

-4

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0

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ECE_17 MAXECE_17 MINECE_17 averageAW_11 average

*) ECE_19 without Ukraine & Russia

Successful economic transformation called for changes in the following

areas

i. Ownership structure & the allocation mechanism

ii. Economic policies

iii. Formal economic institutions

iv. Informal economic institutions this is the biggest question mark! What could be a "role model" for Egyptians? What values will be accepted/adopted in the SR & LR?

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• Reform has 3 dimensions: political, economic, social – in 1989 we "designated" 3 political leaders to deal with them separately – seems a good idea

• When privatizing the conomy the privatization of SOEs was less important and in Poland came later – the endogenous growth of small and medium sized enterprises (SMEs) was crucial in combatting transformational recession – but this requires deregulation (PL 1988 / 1997)

• People can do it! Let them do it! Deregulate & promote economic freedom. SMEs will not solve all problems ,but they are vety important

3 strategic points (from Polish experience)

Alternative scenarios of the tranformational recession paths, depending on the SME sector dynamics

source: Winiecki (2004), p.51 & his Publisher

Final remarks 1/6

International economic ramifications are today not as good for the Arab transforming economies, as they were for Poland/ECE 20+ years ago – the world economy was then more stable.

Global political situation may be actually working for the Arab countries – they are new big players on the scene. This creates opportunities.

Economic experience of the post-communist transformation is around - perhaps some lessons may be learned (technically).

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Final remarks 2/6

1. Polish/ECE most important lesson: Gradualism in reforming has its beauty, but ...„political time" for reforms is short." Use it while you can.

2. The deeper the crisis, the longer the political window of oportunity for reforms (i.e. of social acceptance of dramatic changes).

3. Later, the Olsonian [re: Mancur Olson] redistributive coalitions re-emerge and they block reforms (since their vested interests are hurt).

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Final remarks 3/6

A comprehensive change in formal institutions and policies is a necessary condition for economic success (and it shows in the EFI scores), but

Informal institutions are crucial for solidifying the early changes / successes – if they do not change we get "unfinished transformation" (like some former USSR Republics) or regime reversals.

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Final remarks 4/6

The ROW – especially the EU – has been helpful (in Poland & the ECE):

1. It provided some funding when it was especially needed

2. It provided some technical assistance when it was especially needed

3. It provided a "role model" for many Poles and ECE citizens

4. It provided common institutions for the entire region, thus decreasing the transactions costs

Could it work the same/similar way for Egypt?

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Final remarks 5/6

1. "The money from the EU" has been important but not crucial for Polish/ECE reforms – these funds came much later.

2. Nevertheless, the early debt cancellation (by 50%) by the Clubs of Paris and London were crucial for stabilizing the economies in crisis.

3. So was the technical assistance (in building modern economic institutions) in the early phases of transformation

4. Therefore, foreign aid cannot and should not be underestimated

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Final remarks 6/6

Informal institutions must change in order to solidify the early reforms (i.e. the changes in policies and formal institutions)

It has been believed until recently, that informal institutions generally are very slow to change

Fortunately, recent research shows that some of them may change relatively quickly – this is a chance for the Arab countries

It remains to be seen if their societies be willing and able to do it.

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30Ras al Jinz, Sur, Sultanate of Oman

31Will it be like this?Or like this?

32Or perhaps like this – 1956, 1968/70, 1976, 1981 & 1989 – the Polish way?

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THE END

Closing remarks 1

Q: Have the roads to prosperity passed through the Land of Economic Freedom?

A: For most core EE14 – yes. - Ukraine is a notable negative exception.- Russia another one, although with some improvement in 2008.- China's EFI is improving >Russia! - non-EU Balkan economies (5) are doing worse than EE14 (except for Montenegro & Macedonia)- ex-Soviet republics from Asia are doing well (6,99) except non-measured Turkmenistan, Tadjikistan, Uzbekistan which are considered transformational fiascos (as is Belarus)

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Closing remarks 2

Those considered transformatonal failure have also failed in improving EFI.

Oleh Havrylyshyn in Divergent Paths in Post-Communist Transformations (2006) classified the above as countries of either limited / reversed reforms or as gradual but delayed reforms.

In both groups the likelihood of rent-seeking activities of new olygarchs was very high; in some cases it ended up in what he called "the state capture" by those olygarchs colluding with one another. 38

Closing remarks 3

The positive scenarios present in the EE14 were to a large extent (and may still continue to be) made possible and amplified by beneficial institutional changes caused by accession to the EU.

What counts is not only "goodness" of some EU institutions but also their spread over a sufficiently large economic area. As Douglass North was stressing (1986) not only good, but common institutions decrease transactions costs, thus positively influencing economic growth of a given region.

Those beneficial institutional changes have been reflected by increasing levels of EFI.

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A final question

In EE14 we have witnessed quite dramatic economic changes over the past 20+ years. They resulted in enormous increase in the standards of living within just one generation.

The forces at work may be characterized as a push-pull process: an initial push toward a liberal free market-based economy and a subsequent pull toward the institutions of EU (read: WE) that generally mean higher levels of EFI (except for Area I).

Can the Arab countries find and implement some similar ways to boost their EFI and economic prosperity?

This remains to be seen, but examples of some Arab economies – like Oman, its economic policies and institutional changes – are encouraging. 40

THE END

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Emerging economies of ECE:economic freedom vs economic performance:

Economic freedom has increased, but what about economic performance?

In most of ECE there has been a dramatic change in economic prosperity: 25 years ago average monthly salary in Poland was below $20 now is well above $1000

Those post communist countries that are considered transformatonal failure have also failed in improving EFI

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Some examples of weak performers among post-communist economies

(in terms of EFI)

Ukraine is a notable negative exception Russia another one, although with some

improvement in EFI over recent years China's EFI is improving >Russia! non-EU Balkan economies (5) are doing worse than

EE14 (except for Montenegro & Macedonia) ex-Soviet republics from Asia are doing well (-7.0)

except non-measured Turkmenistan, Tadjikistan, Uzbekistan which are considered transformational fiascos (as is Belarus)

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A threat of unfinished and reversed reforms

Oleh Havrylyshyn in Divergent Paths in Post-Communist Transformations (2006) classified the above as countries of either limited / reversed reforms or as gradual but delayed reforms.

In both groups the likelihood of rent-seeking activities of new olygarchs was very high; in some cases it ended up in what he called "the state capture" by those olygarchs colluding with one another (a menace to the Arab Spring?).

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