The Impact of the Crisis on Economic Growth in 2009 in ESCWA Countries By Mahmoud ABEL- FADIL Professor of Economics at Cairo University - Egypt A presentation

The Impact of the Crisis on Economic Growth in 2009 in ESCWA

Countries

By

Mahmoud ABEL- FADILProfessor of Economics at Cairo University - Egypt

A presentation to the Regional Meeting on the Impact of the Financial Crisis on ESCWA Countries

Damascus: (5- 7 May 2009)

Contents The Differential Impact of the Crisis on Growth

Prospects in Countries of the ESCWA region

The Sectoral Impact of the Crisis

The mechanism of the recessionary cycle

The way forward

1- The Differential Impact of the Crisis on Growth Prospects in Countries of the ESCWA region

3 Depressing Factors Affecting Growth in ESCWA Countries

ProspectiveGrowth

in 2009 - 2010

(3)The oil income effect

(2)Impact of the

Negative "Wealth Effect"

(1)The Impact of Skewed

Income Distribution

a) The oil income effect

The "income effect" of the decline in oil revenues would exercise a depressing effect on

GDP growth in ESCWA countries. Such impact would vary across countries of the

region according to the degree of dependence on oil revenues. The impact would be

most felt in countries of the GCC, and to a lesser degree on other ESCWA countries

more dependent on worker's remittances (i.e. Syria, Lebanon, Egypt, and Yemen).

Oil prices currently fluctuate within the range 40 – 60 US dollars per barrel. According

to some estimates, a more fair and stable price should revolve around 75 US $ per barrel

through 2010.At any rate , such decline in oil revenues would result in major delays in

planned mega projects financed by public expenditure in Gulf countries, thus affecting

GDP growth.

The impact of the crisis on growth prospects in countries of the ESCWA region in 2009 and beyond:

b) The Dampening Impact of the Negative "Wealth Effect" on Private Spending

Decisions

The impact of the negative "wealth effect" on the household and the corporate sectors

was severe in many countries of the ESCWA region. The great decline in prices of

financial assets and real estate. would certainly affect future spending decisions by the

private and the corporate sectors, compounded by the low state of expectations and the

prevailing mood of risk- aversion during the years 2009 – 2010.

That would signal the end of the bubbles in real state and financial markets which

prevailed during 2006 – 2007 and most of 2008.

Cont.


c) The Impact of the Skewed Income Distribution on Consumers Demand

As a result of the highly skewed income distribution pattern in most ESCWA countries,

consumer demand in such countries is highly segmented. We can identify at least three

main segments:

Cont.

(i) The subsistence consumption:for the poor strata of the population, which is most likely going to suffer a major decline due to higher rates of unemployment and the decline in the level remittances due to "return migration";

(ii) The middle class consumption demandwhich most likely is going to suffer a major squeeze due to the recession and the end of windfalls derived from the previous boom in real estate and financial markets;


(iii) The affluent consumer demand Which is mainly confined to the upper strata (10 – 15 top percent of the population), which may prove to be resilient, given the irreversibility of the prevailing consumption patterns which are mainly fuelled by "business income" and by drawing upon old savings.

In the light of such composition of consumer demand in ESCWA countries, there would be little room for consumer demand expansion throughout 2009 – 2010, given the high "import – intensity" of the consumption baskets of the affluent sections of the society.

The differential impact of the crisis on the growth forecasts for countries of ESCWA region is summarized in table (1).

Cont.


Segments of Consumer Demand in ESCWA Countries

(3)Affluent

Consumption“Persisting”

(2)Middle Class Consumption

“Squeeze"

(1)Subsistence Consumption

“Declining”

Table (1)Forecasts of Real GDP Growth rate in ESCWA countries

CountryForecasts

(2009)*

Bahrain 2

Kuwait0.7

Oman1.5

Qatar7

Saudi Arabia0.7

United Arab Emirates

0.5

GCC countries1.01

* March 2009 forecasts.Source: Summary of the survey of Economic and social Developments in the ESCWA region 2008- 2009.

CountryForecasts

(2009)*

Egypt4.5

Iraq5

Jordan3.6

Lebanon3

Occupied Palestinian Territory

-1

Sudan4.2

Syrian Arab Republic3.2

Yemen2

Total ESCWA region2.1

The forecasts for Egypt, Iraq and Sudan seem to be a bit optimistic. On the other hand, the forecast for Saudi Arabia seem to be too low, given the diversified nature of its economy. The UN World Economic Situation and Prospects for 2009 forecast a rate of 2.8% for real GDP growth for Saudi Arabia in 2009, and 2.7 rate of growth of real GDP for the whole region of Western Asia in 2009 (including other non – ESCWA countries).

Hence, an average 2% real GDP growth for the whole ESCWA region in 2009 seems to be a realistic assumption.

2- The Sectoral Impact of the Crisis

The Sectoral Impact

Depressed Sectors

Most Affected Sectors

Surviving Sectors

Textiles and Apparel

Telecommunications, IT and others

construction, real estate, financial services and trade

As Gulf states are more integrated than other ESCWA countries in global trade and global financial markets, they are bound to suffer a "slow – down" in certain booming sectors, namely: construction, real estate, financial services and trade.

Such activities are likely to hit the "Recessionary barrier" with a lag effect in late 2009.

The Sectoral Impact of the Crisis

Other ESCWA countries would face balance of

payments difficulties due to the decline of foreign direct

investment and tourist income, thus exercising a

"dampening effect" on the growth prospects and

employment opportunities, with the associated negative

"multiplier effects".

The Sectoral Impact of the Crisis Cont.

On the other hand, as a sequel of the international financial Crisis, non – oil ESCWA countries would face a decline in certain important lines of export activities, notable among them the exports of textiles and apparel products from Egypt, Jordan and Syria.

Some lines of activities like telecommunications, and IT, would continue to expand at lower rate and survive the crisis in 2009 and beyond.

The Sectoral Impact of the Crisis Cont.

3- The mechanism of the recessionary cycle

3. The mechanism of the recessionary cycle

Usually the crisis starts first within the financial sector, with all its components, then after a lag period, the crisis shifts to the real economy, (i.e. production, exporting, investment, activities), and then the crisis spills- over to the social sector.

This leads to high levels of unemployment, lower wages, depletion of savings, and cultural impoverishment. In brief, these feedbacks in the social sector lead to the impoverishment middle and poor sections of the population.

Figure (1)The spill - over of the financial crisis across different

sectors

The Financial Sector

The Real Sector

The Social Sector

Contagion effect

Spill - over

2009 will witness shift of the crisis to the real economy.

In this way, the above-mentioned three sectors will suffer from the recessionary impact of the crisis through 2009, and such difficulties may persist to occur for the most of 2010.

The negative impact of the crisis on the real economy and its spills – over effects into the social sector would be severe in 2009 and 2010, as the reduced financial resources available to the states of the ESCWA region would reduce the volume of social spending on employment creation and social safety nets. This would result into a rise in poverty rates and less social protection for the vulnerable groups of the population.

The anticipated deterioration of the employment situation in the ESCWA region would have adverse effects on female unemployment rates.

From a Macro – view point, figure (2) illustrates the negative feedback effects within the recessionary cycle in ESCWA countries, which normally takes a cumulative form, as well as the role of the "liquidity squeeze" within the system.

[5] cf. summary of the ESCWA survey, p. 11.

External Sector

External Sector

Government

Government Private SectorPrivate Sector

Household Sector

Household Sector

Production Sector

Production Sector

Banking Sector

Banking Sector

Reduced Demand of Household

Sector

Decline of Workers

Remittances

Squeeze on Credit

lines

Delays in Debt Payments

Reduced Incomes and Increased

Unemployment

Demand contraction for Inputs Production

Reduced Demand for

Exports

Deterioration of

Taxes Revenues

Figure (2) The Feedback Effects of the Financial Crisis on the Economies of the ESCWA Region

Deterioration of External Resources (Oil revenue + Tourism + FDI)

Reduced Social and Public Spending

4- The way forward

To break the current recessionary cycle, as described in the previous section, a number of initiatives and corrective measures need to be taken without delay; notable among them are the following moves within the Macro Policy Space:

The way forward

First, the role of the public sector need to be enhanced in order to assist in dealing with problems of global recession in ESCWA region.

The role of the fiscal stimulus becomes crucial in this respect, and Keynesian type policies need to be pursued in order to break the current recessionary cycle.

Such types of policies would lead to a crowding – in of private investment and reduce the level of aggregate uncertainty in the system;

The way forward

Second, social spending on infrastructure, employment creation, education, and basic health care need to be expanded in order to stimulate demand for goods and services and mitigate problems of increasing unemployment and rising poverty;

The way forwardCont.

Third, there is room for more rationalization of investment policies by the private and corporate sectors by shifting away from reliance on "speculative funds" and "speculative outlets", and focusing more on the best use of "investible funds" designed to expand productive capacities and to expand sustainable employment opportunities.


Fourth, More coordination and cooperation among ESCWA countries (oil and non- oil) is badly needed to survive the crisis. New regional policies in trade and finance need to be designed to intensify inter – Arab (and intra – ESCWA countries) exchanges to compensate for the loss of export markets and financial investment outlets in Europe and USA.


Fifth, Monetary and fiscal policies, need to be closely coordinated among ESCWA countries, in order to increase their efficiency at the country level to counter the negative impacts of the crisis and stop the slippage from recession to a generalized and lengthy depression, as show in figure (3).


Figure (3)

Slow - down Contraction Recession Depression

1 2 3 4

Slippage

Scale of phases of the crisis

Thanks for your attention

Documents

The Impact of the Crisis on Economic Growth in 2009 in ESCWA Countries By Mahmoud ABEL- FADIL Professor of Economics at Cairo University - Egypt A presentation