Author Archives: Brandon Nickerson

Iran’s New Government Moves Ahead with Economic Reforms

Sanctions on Iranian oil exports have strained the country's already fragile economy.

Sanctions on Iranian oil exports have strained the country’s already fragile economy.

Because of sanctions and a host of other fundamental issues, the newly-elected Iranian government faces serious economic challenges — including a shrinking economy, double-digit inflation, and high unemployment — that it will need to overcome in order to fulfill the high hopes for reform that led to its unexpected victory at the polls in June.

With the latest round of P5+1 talks coming to a close last week, and a new round scheduled in early November, the state of negotiations between Iran and the West have been closely followed for any signs of a sanctions deal and what terms that deal might include. But whatever happens with the sanctions, Iran’s underlying economic problems urgently need to be addressed.

Last week, the Center for International Private Enterprise (CIPE) hosted Bijan Khajehpour, Managing Director of Atieh International, for a discussion on the economic challenges facing new Iranian President Hassan Rouhani. The event provided CIPE staff and guests with a look inside the Rouhani administration, the economic challenges facing Iran, and policy recommendations that could help overcome these challenges.

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An Entrepreneurship Spring or Winter for the Arab World?

This fall, I had the opportunity to attend the U.S. Egypt Business Council Luncheon honoring Entrepreneurship Scholars from the MENA Region at the US Chamber of Commerce. It was incredible to witness the level of optimism shared by these young entrepreneurs, and to hear firsthand from them on their ideas to promote job growth and encourage entrepreneurialism in their respective countries.

As I and several of my colleagues interviewed these young entrepreneurs about their thoughts on entrepreneurship and the barriers faced by young entrepreneurs in their countries, it was evident that many of them will go on to do great things.

Whether you describe it as the “enabling environment for entrepreneurship” or the “entrepreneurship ecosystem,” job growth across the region will remain sluggish unless reforms are made to the barriers and challenges facing young entrepreneurs. Whether your business idea is contingent upon outside financing or an entrepreneurship support program, without significant reforms made to the areas that affect starting a business — property rights, access to finance, bankruptcy laws, market exit, corruption — no amount of optimism will deliver on the promise of opportunity and dignity for the average citizen.

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Egyptian Doctors and Freedom of Information

Egyptian doctors on strike. (Photo: Mai Shaheen/Ahram Online)

With all that is going on in Egypt these days, it is hard to take our eyes off of the Constitutional Assembly and the constitution drafting process. Yet if you look around the country, you will begin to see that the members of the constituent assembly are not the only ones mobilizing to secure support for broad-based reforms in the country. Last month, Egyptian doctors began to protest to demand better pay and working conditions.

Doctors have been on a partial strike since October 1 to demand an increase in health spending to 15 percent of the state budget, wage increases, and better healthcare standards and security at hospitals. A salary for a recently graduated doctor is 200 Egyptian pounds ($32.70) a month. But low pay is not the only thing new doctors have to worry about. Recently, there were two separate incidents where assailants attacked hospitals in Shubra (Cairo), and in the Al-Qantara Sharq (governorate of Isamaila).

The problems that plague the healthcare industry are endemic to the public sector as a whole, where public sector employees are paid very low salaries compared to other industries. With the dire state of the economy, it will be difficult for the Morsi Administration to raise salaries for doctors and other public sector employees without significant cuts in other areas. So where should the money come from? In the long run, the only solution will be to fix the underlying issues of corruption and bad governance.

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The Arab League and the New Middle East

Baghdad hosts its first Arab League summit since 1990. (Photo: Carnegie Endowment)

Last month, leaders from across the Middle East and North Africa were invited to Baghdad for a glitzy three-day Arab League summit meeting, their first in two years. Many of the changes of the Arab Spring were unforeseen, however, and it is becoming very clear what the aspirations of the people are – and that governments across the region can no longer afford to ignore them.

What was most interesting, given the magnitude of what has happened and with the political wrangling that went on behind the scenes, was a missed opportunity to put together an economic plan to help stabilize their respective governments. Instead they produced the “Declaration of Baghdad,” a list of 49 declarations covering everything from adopting a comprehensive vision for political reform for all member states to expressing solidarity and support for the governments of Sudan, Somalia, and the Comoros Islands. However, while some reports suggested that the summit was a failure, there were also positive signs of an agreement as to where these economic reforms should be made.

In the declaration, the Arab League highlighted the role that reforms targeted at small and medium sized enterprises (SMEs) can play in improving the business environment, making Arab industries more desirable for foreign direct investment:

  • Declaration 27. Evaluation of actions taken by the Arab League to review the Unified Agreement for the investment of capital in the Arab countries to modify the form, which is consistent with international economic developments, and to emphasize the importance of holding an Arab conference to study the investment climate in Arab countries, and the importance of taking steps that would be given more attention SMEs because of their importance in reducing unemployment in Arab countries. And to provide facilities for Arab businessmen to engage in investment projects in order to achieve common interests and promote intraregional trade among Arab countries.

It also noted the importance of more deeply integrating Arab economies into an Arab Customs Union and an Arab Common Market:

  • Declaration 29. Emphasize the importance of integration of Arab economies through free trade and investment and activating the role of the private sector and civil society to contribute actively in the process of comprehensive development in the framework of the Greater Arab Free Trade and move towards the establishment of the Arab Customs Union and leading the Arab Common Market in 2020.

With millions of unemployed youth across the region, real reforms to outdated trade barriers, crumbling infrastructure, and a weak private sector are a few places where governments can start if politicians hope to remain legitimate. Including the private sector in these reforms will also help to incentivize foreign direct investment. This will provide jobs and economic security in the short term, and more efficient and market-friendly trade networks with fellow Arab League members in the long term.

Lowering barriers to entry, reducing tariffs, and creating favorable conditions for entrepreneurship are some reforms to the business environment that all member states can make. According to a recent report, The Economics of the Arab Spring, published by Oxford University, “the private sector in the MENA region is notable for its limited export presence. Overall, the region holds less than one percent of the world market share in non-fuel exports — compared to 10 percent in East Asia, and 4 percent in Latin America.”

Recently, the Tunisian government released its “Jasmine Plan” to rebuild the country’s economy. The plan, which focuses on three central themes: 1) political reform, 2) carrying out the democratic transition, 3) setting conditions for sustained social and economic development in the medium term, could form a model for other members of the Arab League. Highlighting the role that the private sector can play in reforms, the economic plan cites the importance of making much-needed reforms to improve the business environment and support SMEs.

Using the Tunisian “Jasmine Plan” as an example, and the “Declaration of Baghdad” as a framework, the Arab League can help guide and coordinate the economic reforms that the region so desperately needs. With the third summit session already scheduled to be held in Riyadh in 2013, the Arab League now has a place where it can submit draft reforms to integrate the Arab economies, and activate the role that the private sector can play in economic development across the region.

Egypt’s Food Subsidies and the IMF

Egyptians wait to buy subsidized bread. (Photo: Reuters)

This week, the IMF is back in Egypt to meet with government leaders to discuss a proposed $3.2 billion loan to the country’s transitional government. So far, the package has yet to garner support from either the Muslim Brotherhood or leading Salafist party Al-Nour, both of whom are waiting to hear more details about the economic measures related to the package.

One of the reforms being considered is an end to the billion-dollar food subsidy program, an issue that the has historically proved contentious in Egypt. However, with the right reforms, the Egyptian Government may finally be able to improve an unsustainable program without causing civil unrest or creating uncertainty that would drive away the outside investment the country so desperately needs.

The Egyptian government has long been dependent on food subsidies to shore up popular support. In 1977, President Sadat tried unsuccessfully to end subsidies on flour, rice, and cooking oil, which brought hundreds of thousands of people into the streets to protest. In 2008, people again took to the streets in Cairo, as in other cities around the world, to protest the skyrocketing price of food. In response, the Egyptian government increased its food subsidies. Egypt is now the world’s largest buyer of wheat on international markets.

Today, according to a recent Wall Street Journal article, subsidies absorb at least 28% of Egypt’s state budget, and when combined with fuel subsidies account for over 10% of GDP. This increase in food subsidies is the result of a number of structural problems stemming from the weakness of the private sector. As Egypt’s new governing institutions develop, space needs to be created for the private sector to grow and play a role in providing feedback on any economic reforms made by the government.

According to the World Bank’s Logistics Performance Index, Egypt ranks 106th globally in its quality of trade and transport related infrastructure. Weak port infrastructure and a lack of cool storage facilities at ports increase the cost of staple goods such as rice and grain, which factor into the cost of food subsidies.

A second problem, which is endemic across the region, is a highly segmented and regulated regional trade network. Barriers to trade and other complicated trade logistics, which vary on a country-to-country basis increase transaction costs, which add to the value of important staple goods. According to a research paper by Oxford University, The Economics of the Arab Spring, “a better infrastructure, by connecting the region’s agricultural markets, can mitigate fluctuations in food prices, since transport costs can make up as much as 40 percent of the overall food price in the region.”

Removing barriers to trade, modernizing infrastructure, and developing regional trade networks are much needed reforms that the Egyptian government and newly elected parliament should quickly embrace, especially in labor-intensive industries such as in agriculture. Recently, the Turkish government has stated their intention to pump over $1 billion into Egyptian investment projects in the next few years. Egypt’s Minister of Industry and Trade has recently disclosed plans for a shipping route between the port of Alexandria and Mersin on Turkey’s Mediterranean coast. Investments related to ports and other trade-related infrastructure must be coupled with any IMF-mandated economic reforms.

As we have seen in the past few months, there is a global interest in seeing that the IMF loan is signed, and these much needed reforms are made to an increasingly unstable food subsidy system. The EU, African Union, and multinational companies from all around the world have expressed interest in making investments into Egypt. However, most of these outside investments are contingent upon the Egyptian government signing the IMF loan. By making structural reforms to solve problems stemming from a weak private sector, and making investments in infrastructure and other trade-related industries, the government may be able to reform the food subsidy system, and put itself back on a path of short-term budget sustainability and long-term economic growth without losing the backing of the Egyptian people.