A quarterly magazine of the IMF

March 2003, Volume 40, Number 1

WHO IS ACCOUNTABLE?

Eberhard Reusse

University of Chicago Press, Chicago, Illinois, 2002, 127 pp., $20.00/£14.00 (cloth).

This delightful little book should be required reading for all who work on poor countries. Reusse, a plucky fighter, wins your sympathy as he parries and thrusts at the foreign aid business. He describes how the "techno-managerial elite" defines foreign aid through assessments of need, which can be met only by this same elite. The good ship Foreign Aid ferries gold in a never-ending round-trip between the aid organizations and the technocrats in the aid-recipient countries, without much opportunity for the intended beneficiaries to climb on board or influence direction.

Based on his experiences at the Food and Agriculture Organization (FAO), where he worked for many years, Reusse offers examples of how aid technocrats have been misguided in

• condemning pastoralists' resource exploitation, which was later endorsed by scientific ecology;
  
  
• advising nomads to settle in the Somali desert, which was decidedly unfavorable to a sedentary lifestyle;
  
  
• recommending that farmers use centralized storage facilities to reduce grain losses from pests and humidity when their traditional practices yielded minimal waste and central storage was financially unviable; and
  
  
• suggesting that villages establish cereal banks to centralize marketing and secure better prices for farmers—these banks not only did not raise farm prices but operated in the red, while stored grain succumbed to the pests and humidity the banks were created to avoid.

Reusse argues that these mistakes occurred because aid agencies, woefully, are not accountable to anyone: "With project outputs so far detached from the donor-country taxpayer's control and so opportunistically or passively watched by the Third World population and their overtaxed and frequently bypassed governments, almost anything goes." Perhaps he should have said "powerless and voiceless" Third World population. The shameful lack of independent evaluation of aid programs and projects has allowed mistakes to live on long after they should have been obvious to all.

Reusse is no kinder to nongovernmental organizations (NGOs), seeing them as having the same mentality as the aid agencies, with the technocratic elite in NGOs both assessing and fulfilling aid needs. The high demand for NGOs in aid-recipient countries led to the predictable result of a mushrooming supply of Southern NGOs at the service of their Northern partners, with just as little accountability or impact evaluation as the official aid agencies.

As is almost unavoidable in this literature, Reusse is much stronger in criticizing foreign aid than in suggesting how it can be fixed. He could also be faulted for generalizing from a very narrow slice of foreign aid, mainly FAO projects. His examples are valuable, but we would need many more examples of failed aid projects to generalize to the big picture of "the ills of aid." I know of many such failures, although surprisingly few systematic studies have been done of foreign aid projects—of either the successes or the failures. Still, Reusse's insights ring true on a much broader scale. He provides a needed wake-up call to the hubristic aid professionals designing development interventions for supposedly malleable societies.

William Easterly
Professor of Economics, New York University, and Senior Fellow,Center for Global Development

GLOBALIZATION'S DARK SIDE

Roger Porter, Pierre Sauv�, Arvind Subramanian, and Americo Beviglia-Zampetti (editors)

Brookings Institution Press, Washington, 2001, xvi + 444 pp., $50.95/£37.75 (cloth), $22.95/£16.95 (paper).

It is widely acknowledged that free trade has contributed substantially to global prosperity over the past half century. Despite this record, different interest groups intent on putting a halt to globalization have become increasingly vocal, mounting highly visible protests during meetings of world leaders in Seattle, Prague, Genoa, and Washington, among other places. Their concerns are multifaceted and relate to what they see as the adverse side effects of globalization: exploitation of children, workers, and the environment in low-income countries, where labor and environmental standards are lower than in industrial countries; loss of national cultural identity; and support for governments that violate human rights.

Given such widespread concerns about globalization, those who would make a case for further trade liberalization must find reasons beyond global efficiency gains and comparative advantage in trade.

This book does exactly that. It brings together the views of leading trade policy scholars on how to make the multilateral trading system benefit all members of the international community. Its central message is that, although antiglobalizers may have legitimate concerns, their proposed solution—trade protection—will harm not only global prosperity but also the very causes the antiglobalizers espouse. Jagdish Bhagwati of Columbia University argues convincingly that, because trade liberalization is beneficial, policymakers should tackle any adverse side effects directly rather than indirectly by blocking further liberalization. For example, to address fears that multinational companies will take advantage of lower environmental and labor standards abroad, industrial countries could impose domestic standards on the foreign operations of their multinational companies.

The book is organized around four themes related to the multilateral trading system: efficiency, equity, legitimacy, and governance. As for the last two themes, the contribution by Pierre Sauv� of the OECD and Arvind Subramanian of the IMF offers an interesting analysis of the new challenges the World Trade Organization (WTO) is facing from within. The United States and the European Union, traditional proponents of further trade liberalization, appear to be pushing that agenda less and using the WTO more as a referee in trade disputes between them, while developing countries have become increasingly dissatisfied with the outcome of WTO negotiations. The various contributors present some thought-provoking proposals for adapting the governance of the WTO to meet the needs of a changing world economy, including ways to increase the representation of different countries and interest groups.

This highly readable book presents a variety of perspectives and offers the reader up-to-date and in-depth insights into key globalization issues.

Dalia S. Hakura
Economist, IMF Institute

DEMOCRATIZATION WOULD HELP

Clement M. Henry and Robert Springborg

Cambridge University Press, New York, 2001, 258 pp., $55 (cloth).

Clement M. Henry and Robert Springborg, academic scholars based, respectively, at the University of Texas and the American Research Center in Egypt, were commissioned to write this book. They chose to interpret their subject broadly and to ground it in historical context. Their main thesis is that the politics of development manifests itself in the different responses of the countries in the region to the challenges—both opportunities and risks—of globalization. They avoid debating whether globalization is good or bad, either in general or for the MENA countries, but stress that it should be the starting point for understanding economic change in the region. In this context, debates between aspiring globalists and reactive moralizers provide a backdrop for a discussion about implementing reforms.

Henry and Springborg note that, as the colonial period was waning (in the post–World War II period), some of the advanced MENA countries (such as Egypt and Lebanon) compared favorably with war-torn countries in southern Europe, like Greece. Other newly established countries—Iraq, for example—were widely seen as having good prospects for balanced development. However, the decades of the Cold War (1946–89) were not kind to the region, and most MENA countries fell behind. In explaining this phenomenon, the authors stress the legacies of colonialism, which has left native cultures deeply suspicious of foreign advisors and their prescriptions. Now, with globalization replacing colonialism, the countries of the region have to make new choices.

In reviewing how the different countries have responded to the challenges of globalization—including improving living standards while dealing with external shocks and various domestic pressures—the authors divide the countries into categories. These are bunker states (Iraq and Libya), bully praetorian states (Egypt and Tunisia), globalizing monarchies (the states of the Arabian Peninsula), and fragmented democracies (the Islamic Republic of Iran, Lebanon, and Turkey). In reading about the developments in individual countries and their shifts in policies, however, one wonders whether this particular categorization obscures more than it illuminates.

The authors write clearly and put forward abundant facts to support their hypothesis, giving them ample opportunity to demonstrate their deep knowledge of the region's history, politics, and economics, as well as their acquaintance with analytical work done at the IMF. In analyzing the links between external pressures, domestic economic traditions and developments, and the rulers' political agendas, Henry and Springborg draw attention to the region's large and inefficient public sectors. They also pay particular attention to the financial sectors and how the different institutional choices (German, French, or Anglo-Saxon) have contributed to different outcomes.

The authors' main finding is that further liberalization and democratization would benefit MENA economies. It is difficult to disagree.

Susan Creane
Assistant to the Director
IMF Middle Eastern Department

LESS GOVERNMENT IS BETTER

Samiha Fawzy (editor)

The Mediterranean Development Forum and the World Bank, 2002, 278 pp. $35.00 (paper).

There is little question that the countries of the Middle East and North Africa (MENA) cannot simply sit back and observe as other countries move toward increasing economic integration. However, there is considerable debate about how the region will manage this process. In this book, the contributors take radically different views of the role of government policies, ranging from advocating active intervention to suggesting less involvement in support of small and medium entreprises. Three of the 11 papers are particularly interesting.

In the first one, Dorsati Madani and John Page describe the trends and forces pushing the MENA countries toward increasing integration and ask whether these countries are ready. Predictably, their answer is no. The description of the integration process and, especially, of the plethora of bilateral agreements these countries have entered into—the most important of which is with the European Union—gives a good idea of the complexity of the process and reveals an inverse relationship between the number of agreements and the slowness with which trade integration has progressed. The authors suggest that MENA governments can be more effective partners of the private sector by both specifying the changes required for greater economic integration and promoting the institutional changes needed to implement the new rules effectively and fairly.

This reader was left wondering why the region had not adopted a more productive approach toward integration. For example, complementing the existing bilateral trade agreements with multilateral trade liberalization could help speed up the process and limit distortions, such as "hub and spoke" and trade diversion effects. Given that regional integration has lagged well behind integration with European countries, would more trade within MENA enhance local competitiveness?

The second paper, "Global Competition and the Peripheral Player: A Promising Future," by Taieb Hafsi, is surprising and controversial. After a lengthy discussion of globalization and the niche opportunities it provides, the author comes to the startling conclusion that identifying these niches requires highly sophisticated strategic analyses of the relevant industries that are out of the reach of smaller enterprises. They are, however, within the reach of government bureaucrats, who could help "smaller firms discover and occupy the interstice markets of each industry." Mysteriously, the belief that government decisions have an advantage over market signals persists despite the systematic failure of industrial policies in both industrial and developing countries. The author does not explain his lack of trust in market signals.

The third standout paper, "Beyond Credit—A Taxonomy of Small and Medium-Size Enterprises and Financing Methods for Small and Medium-Size Enterprises and Financing Methods for Arab Countries," by Mahmoud El-Gamal and others, makes a radically different point. The authors suggest that government support for small and medium-size enterprises in the MENA region should be less direct than it is and that these governments should concentrate on creating an environment conducive to private sector development.

The remaining papers support the idea that a country's competitiveness depends on a predictable business environment in which basic institutions and markets function effectively. The papers also document that government intervention in the region has generally hampered private activity and resulted in high transaction costs and unclear relations between government and business, factors that have held growth performance well below potential.

Domenico Fanizza
Deputy Division Chief
IMF Middle Eastern Department

FROM FIXED TO FLEXIBLE

Elina Cardoso and Ahmed Galal (editors)

Egyptian Center for Economic Studies, Cairo, 2002, xi + 338 pp. (paper).

These papers offer comprensive coverage of the issues that emerging markets must consider in choosing an exchange rate regime and supporting monetary and institutional frameworks. They are all written in nontechnical language and are accessible to a general audience.

Papers by Andr�s Velasco and John Williamson offer different views of flexibility. Velasco advocates substantial exchange rate flexibility as a better way to respond to external shocks and reduce the risk of banking crises. He recognizes, however, that a pure float is not feasible in emerging markets, if only because central bankers need to keep a close eye on the exchange rate for high pass-through to inflation and welfare effects of devaluations.

Williamson argues that all officially announced floats in emerging markets are actually intermediate regimes with varying degrees of management. In his view, a key advantage of an intermediate regime is that it reduces exchange rate volatility, which is harmful to investment and growth, while using policy to limit exchange rate misalignment. But he recognizes the difficulty of avoiding speculative attacks against the hard edges of bands.

In a review of the prerequisites for a successful transition to a flexible exchange rate arrangement supported by an inflation targeting framework, Ugo Panizza stresses the importance of a strong financial system; an independent and credible central bank with a technically skilled staff; the lack of commitment to any other nominal variable, such as the exchange rate; the absence of a relatively high pass-through from the exchange rate to inflation; the lack of fiscal dominance; and a high degree of fiscal and monetary policy coordination. Although few emerging market countries meet these conditions, the author argues that the successes of some of them (Chile and Poland) provide hope for countries, like Egypt, that meet some, but not all, of the conditions.

Similarly, Lauro Vieira draws three important lessons for the Middle Eastern emerging market countries from Brazil's successful transition to a floating exchange rate regime and inflation targeting in the middle of a crisis: (1) a country should not wait until a crisis occurs to exit from an unsustainable exchange rate regime but should initiate it when conditions are stable; (2) the move to a floating exchange rate must be supported by sustainable fiscal policies; and (3) the choice of a new nominal anchor requires new institutional arrangements and procedures as part of the monetary policy framework.

Mohamed El-Erian and Mahmoud Al-Gamal investigate five Arab countries with pegged exchange rates (Egypt, Jordan, Kuwait, Saudi Arabia, and Tunisia) and find empirical evidence that, except for Tunisia, they have followed some form of Taylor rule (under which interest rates are set in response to the output gap and deviations of inflation from a target) in conducting monetary policy, thereby setting the stage for more flexible exchange regimes. A more thorough institutional analysis would be needed, however, to support such a conclusion, in particular for Saudi Arabia, whose exchange rate anchor—a de facto hard peg—leaves little room for an independent monetary policy. The authors rightly advise Arab countries to build credibility before moving to more flexible exchange regimes. Their analysis is complemented by that of Faika El-Refaie, who provides useful insights into the working of fiscal and monetary policy coordination in Egypt and the need to strengthen its effectiveness.

Overall, the papers clarify the issues and policy options available to countries in the Middle East and North Africa. This could pave the way for further analysis of the specific conditions under which Middle Eastern emerging markets could choose to adopt more flexible exchange rate regimes.

Abdelali Jbili, Assistant Director, and Vitali Kramarenko,
Senior Economist,
IMF Middle Eastern Department

THE STATUS QUO VERSUS REFORM

Merih Celasun (editor)

Routledge, London and New York, 2001, xx + 300 pp., $95.00/£68.00 (cloth).

The Middle East and North Africa have lagged well behind other regions in reforming their public sectors, especially in the privatization and restructuring of state-owned enterprises. This useful book brings together a collection of papers—cross-country and individual country studies—originally presented at a workshop organized by the Economic Research Forum for the Arab Countries, the Islamic Republic of Iran, and Turkey, in cooperation with the World Bank, and held in Amman, Jordan, in May 1996. The issues raised are as valid today as they were then.

Among the cross-country studies is a paper by Mustapha Nabli, who explores the institutional factors that prevent or favor reform of state-owned enterprises. In short, well-organized public sector workers and established business interests with a stake in maintaining the status quo are ranged against diverse consumers and taxpayers who favor reform. Nabli presents evidence showing that the former tend to prevail when the state-owned sector is very large and notes that the resulting deadlock is often broken only when economic crisis sets in. He also observes that successful public sector reform usually occurs within an overall reform framework. Ideally, he says, other reforms touching on foreign trade, domestic competition, and the financial sector would be undertaken prior to privatization.

John Page echoes this view in his paper and comments that the relatively high public sector wages in the Middle East and North Africa have combined with high unemployment rates to undermine political support for privatization, which is seen as likely to involve layoffs.

Nabli counsels against the soft option of "commercialization" of state-owned enterprises in place of privatization, a view that the book's other contributors do not share. For example, El-Khider Ali Musa suggests, in his study on Sudan, that commercialization should be considered a serious option in any reform of state-owned enterprises.

The global investment community has neglected this region for some time, largely because of its chronically low growth rates, which are due, in part, to the heavy burden of the public sector. Slow economic growth, together with rapid labor force growth, exacerbates the region's unemployment problem, which then dampens the appetite for public sector reform. This vicious circle clearly needs to be broken.

The 14 contributors initiate an extremely relevant debate (of which the above is just a flavor) that should further our understanding of the difficulties of public sector reform in the Middle East and North Africa.

Adam Bennett
Advisor
IMF Middle Eastern Department