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14 feb 13

Changing economic paradigms
By  Raphael Thelen

World leaders will be mulling over the lessons of the global economic crisis for years. Last week, the United Nations International Labor Organization (ILO) took the effects of the crisis into account in its latest report on the Arab World, “Rethinking Economic Growth.”

Compiling data from various UN agencies as well as financial bodies like the World Bank and the International Monetary Fund (IMF), the report states the need for Arab states to move away from policies that purely focus on the growth of their GDP. Instead, the ILO calls for the implementation of an “alternative development paradigm.”

“There was a general policy pattern undertaken by the Arab countries,” Mary Kawar, senior employment specialist at the ILO, told NOW. “This pattern said that if you have economic growth there will be a trickle-down effect and everyone will benefit. But that is not the case.”

The ILO uses Tunisia as an example. Over the past decade of high GDP growth, “wages grew annually by a mere 2 percent, while average annual productivity growth was 50 percent higher,” reads the report.

Tunisia was one of many countries across the region that favored a liberal trade policy while paying little heed to local production or the overall state of the national economy. Economic frustration in Tunisia was one of the drivers of the revolution that unseated president Zine el Abidine Ben Ali two years ago.

Many of these policies were encouraged by pro-market international institutions like the IMF. The privatization of public companies in countries like Egypt and Tunisia did not lead to an improvement in performance, as many companies were handed over to businessmen close to the ruling regimes, who kept profits in their own pockets. Public investment in human development and social security programs was reduced, and the hope that government money would be replaced by private schemes did not materialize.  

Between 2003 and 2010, two-thirds of the foreign direct investment in the Middle East went into areas like mining and real estate. And even though overall unemployment has declined across the region, the jobs that were created were often unattractive to jobseekers.

“The problem is not only about unemployment,” said Kawar. “It is also about the quality of the jobs. Many of those jobs don’t lead to a career or allow a person to live a dignified life and have a family.” Despite rising levels of education among Arab youths, large parts of the population work in low-income jobs or in the informal sector. “Job quality is about hours of work, [decent] minimum wages and implementation of labor regulations,” Kawar added.

Another major problem the report identifies is the lack of government accountability in Arab countries. The traditional social contract in the region had the state providing social security by creating public-sector jobs in exchange for the people giving up political freedoms. According to the ILO, this led to bloated bureaucracies, strain on state finances and low productivity. The elimination of these practices is one of the key demands of the report. “There is a lot of waste in these kind of social security systems. They must be more targeted,” said Kawar.

Saifedean Ammous, a professor at the Lebanese American University’s School of Business, disagrees. “The problem with the ILO is that they look at the failures of government intervention and use this as a reason for more government intervention,” he told NOW.

According to Ammous, the economies of the Arab world need less, not more, regulation. “If you look at unemployment, the surplus of labor force, it is the outcome of minimum wages. The ILO is still following the 1960s model of central planning,” he said. Ammous argues that free markets are the best way to unleash entrepreneurial forces, while minimum wages keep all those with low productivity out of the labor market.

“Opening markets is important,” conceded Kawar. “We are not arguing for strict regulations. But most countries we looked at that have taken the model of pro-market reform and privatization without balancing it with the right social policies failed.”

“What we envision is a social-democratic model that features free markets with social security programs like decent wages, pension funds and free health insurance.”

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