Tag Archives: market economy

A Trinity of Trade: Africa soon to Launch TFTA

Map of TFTA

By Otito Greg-Obi

Recently, African heads of state gathered together in Egypt to sign the Tripartite Free Trade Area agreement (TFTA) which will join the forces of the East African Community (EAC), the Common Market for Eastern and Southern Africa (COMESA), and the Southern African Development Community (SADC).

Free trade is crucial to global economies because it reduces tariff barriers which in turn results in trade creation. The benefits of trade for developing nations in general are numerous. To name a few: first and foremost, trade allows for specialization meaning countries can build a comparative advantage by focusing on producing goods with low opportunity costs. Secondly, trade encourages healthy competition which incentivizes businesses to increase efficiency and cut costs. Lastly, trade can reduce dependence on existing markets and stabilize countries affected by seasonal changes in markets.

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Riinvest Institute Celebrates 20 year Anniversary

Riinvest 20th Anniversary 2

CIPE’s long term partner Riinvest Institute for Development Research is celebrating their 20th anniversary this year. To mark the occasion, Riinvest held a conference on May 15 and 16 titled, “Activating the Sources of Economic Growth in Kosovo”. The conference brought together an impressive audience— the President and the Prime Minister of Kosovo*, the Deputy Minister of Finance, the World Bank Country Manager, other high level public officials, academics, business people, NGO leaders, the donor community, and members of the media.

*Kosovo’s newly-elected Prime Minister, Isa Mustafa, is the former President of Riinvest.

Riinvest leaders presented awards to a number of partners, individuals, and organizations who have supported the organization since its inception. CIPE had the honor of being presented the first two awards, one for Executive Director John Sullivan and one for the organization as a whole. CIPE Senior Consultant Carmen Stanila kindly received both awards on behalf of John and the organization.

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Celebrating International Youth Day

We have all witnessed over the last two years that youth are shaping the political landscape of their countries. I have seen young people driving innovations and economic and social entrepreneurship in every region of the world. I believe the best solutions to our shared challenges will come from harnessing the energy and creativity of youth.
– Secretary of State Hillary Clinton

This year International Youth Day highlights the theme “Building a Better World: Partnering with Youth.” The importance of engaging young people in political, economic, and civic spheres is evident just by looking at the numbers: more than one in six people on the planet are between the ages of 15 and 24. Yet these adolescents and young adults are all too often neglected when it comes to opportunities to lead a fulfilling and prosperous life.

One reason is the pace of demographic change: according to the UN Population Division, the number of young people globally has been steadily increasing since 1950 and will continue to rise – with a concentration in low- and lower-middle-income countries – for at least another two decades. As the Arab Spring shows, if governments cannot provide satisfactory prospects for their growing populations, social unrest may follow.

Beyond economic exclusion, which manifests itself in high youth unemployment (or employment in the informal sector), political exclusion of youth is another reason why young people often feel neglected. In many countries political parties and state institutions remain dominated by older officials who may not understand the needs and concerns of youth, and are unwilling to seek out the views of young people. CIPE works with local partners in countries around the world to counteract the exclusion of youth in all aspects of public life and to partner with the next generation of leaders. Here are a few examples:

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State vs. Market – a False Dichotomy

This Economist chart shows the relationship between rule of law and GDP per capita.

Reasonable people can disagree about the role of state in economic affairs, especially in times of crisis, and what types of services governments should provide to citizens. It is up to each society, through its political process, to formulate economic and social policies that fit each country’s unique situation. However, what’s often lost in these debates is a key aspect of the role that any state plays in the economy: establishing the rules of the game.

In a market economy, that means creating and supporting institutions such as property rights, contract enforcement, freedom of enterprise, etc. States must also be able to provide basic infrastructure to facilitate economic activity in order for these institutions to meaningfully function. In most Western countries, the impulse fueled by the global financial crisis has generally been to reduce the size of the state. Yet for many developing countries the real question is not whether to reduce the size of the state but how to make the state perform better, whatever its optimal scope may be.

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The other transition

Egyptians in Tahrir Square during the presidential election (Andre Pain/European Pressphoto Agency)

The turmoil engulfing Egypt’s presidential election has been a stark reminder of the difficulties the Arab Spring countries face with challenging political transitions. In countries where democracy has little precedent and where popular will was long suppressed, the new political opening has brought much anticipated civil liberties but also juxtaposed competing forces and diverging interests. Yet, among all the attention that headlines give to the political process, the story of another equally crucial transition – economic one – is often lost.

It is important to keep in mind that the roots of MENA revolts were both political and economic in nature, including demographic pressures, inefficient public sector, and constrained private sector. In other words, the lack of political freedoms was compounded by the profound lack of economic freedoms. That in turn fueled unsustainable levels of government employment and swelled the ranks of young people like Tunisia’s Mohammed Bouazizi who, without other viable options, strive to earn a meager living in the informal sector. A year and a half after Tunisia ousted its long-time authoritarian ruler, political transformation is underway but the economy struggles.

Many Tunisians who rose in protest against Ben Ali are disappointed with slow progress of reforms. Protestor Beshar Messaoud recently interviewed by NPR says that, economically speaking, things are exactly the same and the government has brought no solutions to the problems that led to the revolution in the first place. Unemployment is officially at 18 percent but it may actually be twice as high. Another interviewee, 35-year-old Laila Turki adds that if Tunisia doesn’t get its act together and improve its economy quickly, it will undermine its chances to build a functioning democracy.

But there are many misconceptions about what is needed for the economy to improve. For one, demands for economic change often focus on populist calls for more entitlements with little consideration given to how a sound economy capable of delivering sustained prosperity to its citizens can be built. What is more, the very understanding of what a true market economy entails has been tainted by decades of crony capitalism in the region. As a recent post on the Institute of Economic Affairs’ (IEA) blog points out, the meaning of “pro-business” in MENA has been warped: the “pro-business” policies of authoritarian leaders were limited to only one type of businesses – the ones connected to the government. That’s not the same as being pro-market, which requires allowing economic freedom for all segments of the society and building institutions that enable competition on a level playing field.

Instead, MENA ruling elites built systems that monopolized economic rents and jealously guarded their own economic privileges. That, in turn, necessitated the suppression of not just freedom of political expression but economic freedom as well. The legacy of that system is clearly visible in Egypt today. During the rule of post-independence leaders Gamal Abdel Nasser, Anwar Sadat, and Hosni Mubarak – all military men – the military has amassed a huge business empire in sectors from agriculture to electronics. Current estimates show that military-connected enterprises account for 10 to 40 percent of the Egyptian economy; meanwhile, more than 40 percent of Egyptians continue to live on $2 a day or less. Therefore, the real question of Egypt’s political transition is whether the formal return to civilian rule will translate into meaningful boost to pluralism on the economic front (pun intended).

The same goes for transitions in other MENA countries as well. Their success will depend on the degree to which the economic undercurrents of political turmoil are better understood and more effectively addressed, and the degree to which the misconceptions about the nature of market-oriented reforms are overcome. As the IEA blog emphasizes, a deeper reflection on the central place of the entrepreneur in economic development is needed, since “the future of the Arab Spring depends on the capacity of the new democratically elected governments to implement measures to prevent crony capitalism, restore the rule of law and promote economic freedom, in order to ensure general prosperity.”

Democracy and Prosperity: The Inevitable Link?

Participants at the Wrocław Global Forum (photo: www.wgf2012.eu)

The question about the link between democracy and economic prosperity is key for scholars and policymakers alike, especially when it comes to transition economies. The Arab Spring brought the challenge of building democracies that deliver into a new, sharp focus and emphasized the need for sharing lessons learned from the experiences of others. In that spirit, Wrocław Global Forum, an annual summit organized by the Atlantic Council, the city of Wrocław, Poland, and other partners, hosted an international panel on this subject.

Radosław Sikorski, Polish Minister of Foreign Affairs, noted that there is a common assumption that dictatorships may be better at some economic tasks because they do not have to pay attention to public opinion. Yet communist governments in Central and Eastern Europe certainly failed to live up to that supposed economic advantage. Sikorski explained, “My thesis is this: contrary to received wisdom, dictatorships also have public opinion and dictatorships are usually more cowardly than democrats. That is why fundamental economic reform under dictatorships – in Chile for example – is the exception, not the rule. It is usually the democrats who have to tidy up the mess, including economic mess, left by dictatorships.”

Carl Gershman, President of the National Endowment for Democracy (NED), agreed with Sikorski’s thesis, citing the example of China where 60-80% of the wealthy want to leave the country, taking their money out, and where mass protests against government corruption and violations of individual rights – including economic rights – are multiplying rapidly and reaching 200,000 a year. “I’m fundamentally an optimist about democracy,” said Gershman. “There are new studies being done confirming the ancient wisdom of Adam Smith about the rule of law, markets, social peace. You can’t have social peace without democracy that is inclusive of all the different people. Democracy with all its problems has a deeper legitimacy [than dictatorship] — it rules by consent and therefore you can have mistakes, you can have problems. Democracy has the capacity to reform itself.”

The link between democratic and market institutions, and the challenge of building them, is especially salient to transition countries. In 1989, that was Poland’s situation. Today, Tunisia and others in the MENA region face a similar challenge. Hédi Ben Abbes, Tunisia’s Secretary of State for the Americas and Asia, shared the experience of his country. “The question now in Tunisia is how to create democracy from scratch, how to build up institutions, how to make those institutions contribute to growth. … It is not a question of the relationship between democracy and prosperity – we all know that for the most part they feed on each other. We cannot have democracy without economic prosperity because we cannot feed people just slogans, ideas, we have to give substance to those ideas and that substance should be economic and social growth. Why is it difficult? Because we need to create all that at the same time.”

Lee Feinstein, United States Ambassador to Poland, affirmed that the U.S. stands by countries in transition and supports their reform efforts, “From an American perspective, from the very beginning, our view has been that democracy and prosperity are inextricably tied.”

While there is no simple, linear connection between democratization and economic growth, the key to realizing the link between the two lies in proper understanding of democracy. While democracy is often equated with elections, what happens between elections matters as much as voting. Do citizens have the right to information and free association? Are property rights protected and contracts enforced? Both well-functioning democracies and market economies require institutions that create transparency, hold those in power accountable, and enable broad participation in day-to-day policy making. For MENA just like for Central Europe two decades ago, there are no quick fixes: meaningful reforms take time. In the long run, successful reforms are about creating institutions that guard the principles of fairness, accountability, transparency, and responsibility in political and economic systems alike.

Wrocław Global Forum brought together important decision-makers and business leaders from the United States and Europe to discuss the role of Central Europe as a strong partner in the transatlantic community and a leader on global values. Discussing the values that underpin democracies and market economies, and how transition countries have been working to implement those values, was an important part of the Forum. So was its culmination event: a ceremony honoring the recipients of this year’s Atlantic Council Freedom Awards meant to recognize individuals and organizations that defend and advance the cause of freedom around the world. The National Endowment of Democracy was among them, honored almost exactly 30 years after President Ronald Reagan’s speech at the Westminster Palace laid the foundation for creating the NED.

You can watch on YouTube the session on democracy and prosperity as well as other WGF sessions.


The business people of Tahrir Square

Crowds in Tahrir Square. Photo: http://www.cbc.ca

There is a common misconception in Egypt and the Middle East that the business community has not been a part of the Arab Spring. The reality is that business people are an active part of the change that is sweeping the region. Egyptian middle class men and women – many of whom are entrepreneurs – were instrumental in the success of the Egyptian Revolution.

When I first showed up in Tahrir Square, I saw many business people – friends, colleagues, people working in large corporations and small business owners alike. They were all there on January 25th, the first day of the revolution.

None of us had any experience living through a revolution. All we knew, going out into the streets against the unknown, was that you try to find familiar faces and people you know, and walk together elbow-in-elbow to show strength even if what you feel is fear.

We started at the Mostafa Mahmoud mosque, which is in a neighborhood approximately five kilometers away from Tahrir Square. This is the neighborhood I come from and know well. The two familiar faces I saw first were a dear friend and colleague who owns a medium-sized ICT company, and my barber.

We walked together in the first few minutes filled with anxiety and fear. Then, more and more familiar faces appeared as we walked through our middle class neighborhood, with people coming down from their apartments to join us. We started with less than 300 people, but we ended up with nearly 15,000 after merging with another crowd coming from Nahia, a lower income neighborhood.

By the time we arrived at Tahrir Square, our group nearly doubled the total number of people already there. As we started to settle down, I saw some of the leading businessmen in Egypt, including owners of top 100 companies listed on the stock exchange. We all joined together, and we made a point to show this unity.

I was talking to the young people on the street to make sure that they understood that everyone was there, that even the rich and the famous of Egypt had joined the movement. Everybody was wearing jeans and a sweater or a jacket because it was a bit cold. There was no differentiation between who was who – everybody was an Egyptian, regardless of where they came from. Everybody equally felt the lack of freedom and democracy as well as the injustice of the existing system.

What people should realize is that all the entrepreneurs – big and small alike – who filled Tahrir Square have a greater interest in a democratic transition than anyone else, since only democracy can ensure the rule of law and accountability needed for a business-friendly environment.

Unfortunately, what we are seeing today is a populist turn that can harm Egypt’s future. In large part, it seems to be the result of government-inspired calls for social justice in order to divert the interests and goals of democracy and freedom to short-term material gains. These short-term material gains, however, often come at the expense of much needed reforms.

What brought many of the business people into the streets was the lack of transparency and the favoritism that allowed only an insider club of 40 or 50 select individuals to prosper in Egypt’s business environment. The business people in Tahrir Square had felt how tough it was to do business in such a corrupt, non-transparent environment.

More importantly, as entrepreneurs and visionaries with dreams of success, those business people in the Square felt that their successful businesses would and should help make Egypt a more successful country that could compete globally. In fact, I do not think any single Egyptian – businessperson, citizen, layman, or student – thought of him or herself as a citizen of a developing country.

Yet, many of the hopes for change that brought business people of all types to Tahrir Square remain unfulfilled. We live in a high-risk environment, both economically and politically, and nobody knows where we are heading.

But business people continue to stay engaged, both by pushing for reform and by joining political parties. For instance, Naguib Sawiris, one of the biggest businessmen in Egypt, just organized the Free Egyptians Party. Many others are forming their own parties or joining existing ones.

As business people work to build democracy in Egypt, it is important to keep in mind that they are ready to sacrifice their wealth or position for a free, democratic, and prosperous Egypt. The results of the Egyptian Revolution should reflect Egyptians from all walks of life, including entrepreneurs that form the middle class.

This is a guest post by Osama Mourad, Chairman and CEO of Arab Finance Brokerage.