Archive for February, 2014

The Real Exchange Rate and External Competitiveness in Egypt, Morocco and Tunisia

February 10, 2014

By Zuzana Brixiova (Africa Development Bank), Balázs Égert  (OECD) and Thouraya Hadj Amor Essid (Monastir University)

Disclaimer: This policy brief is based on the Working Paper of the African Development Bank No. 187

Policy Brief:

A real exchange rate that is broadly aligned with its equilibrium value is an important part of a country’s macroeconomic and external competitiveness framework. Persistently misaligned real exchange rates can cause a misallocation of resources between tradable and non-tradable sectors and negatively impact labor market dynamics. Reduced external competitiveness due to over-valued exchange rate hampers exports, aggregate demand, growth and job creation. Besides the longer-term implications, real exchange rate misalignment can lead to inflationary pressures and even trigger speculative attacks. When setting their exchange rate policy, countries also need to balance their goals of reaching competitiveness and macroeconomic stability.

In Egypt, Morocco, and Tunisia concerns about real exchange rate misalignments have prevailed for some time given the countries’ high unemployment, stagnating global export shares, and low the global financial crisis and after the 2011upheaval, with inclusive growth and job creation once again topping the countries’ economic policy agenda. By providing accurate signals to producers, the real exchange rate can help generate competitive jobs via exports. It can also help reduce income inequalities by raising the workers’ marginal revenue product. To be effective, the aligned real exchange rate needs to be complemented by other sound macroeconomic policies and enabling business environment.

As shown by their low and stagnating shares in global exports, Egypt, Morocco and Tunisia have been facing external competitiveness challenges. Low and constant (or marginally rising, as was the case of Egypt) export shares help explain why the aggregate demand growth in these countries has remained subdued and not generated enough ‘decent’ jobs in export sectors. The three North African economies are less diversified than some other emerging market economies at comparable levels of development. Europe accounts for a disproportionate share of their export destinations, reflecting geographical closeness and long-established business ties.

This paper aims to find out whether the real exchange rate misalignment contributed to the weak external competitiveness (e.g., limited export value added and diversification) in the three North African countries. To this goal, it estimates the real equilibrium exchange rate for the past three decades, using the stock-flow approach. This approach differentiates between (i) the medium-term undervaluation caused by the Balassa-Samuelson effect (productivity catch up) that is unlikely to cause abrupt adjustments and (ii) misalignment caused by other factors than productivity differentials. It is particularly suitable for emerging markets that can go through structural and productivity changes impacting the medium-term path of the real exchange rate.

The empirical analysis is based on annual data series for the past three decades, obtained from databases of the African Development Bank and IMF. The estimate results of the real exchange rate models, obtained using the DOLS and ARDL models. For each country, the baseline model linking the real exchange rate to productivity and net foreign assets was estimated first. Subsequently, additional control variables including the government spending ratio, openness, the investment ration and terms of trade were added one by one to the baseline model.

Our results indicate that in the long run, decreases in net foreign assets, equivalent to capital inflows, result in an appreciation of the real exchange rate. Regarding the impact of productivity, the coefficient estimates are generally positive in Egypt, indicating that increases in productivity lead to real exchange rate depreciation. In Morocco the impact of productivity on the real equilibrium exchange rate is significant, but negative, indicating that the increase in productivity has the traditional Balassa-Samuelson effect. In Tunisia productivity has an ambiguous impact on the real exchange rate. Further, a greater openness would lead to a depreciation of the real exchange rate in all three countries. Finally, improvements in terms of trade would lead to real exchange rate appreciation in Egypt and Morocco, most likely via inflation differentials.

Regarding the misalignment between the actual real exchange rate and the long run real equilibrium exchange rate, the paper found that: For Tunisia, the low misalignment in recent years can be explained by the abandonment of the real exchange rate targeting and gradual introduction of the exchange rate flexibility. The real exchange rate of Egypt was overvalued from the mid-1990s until mid-2000s and in recent years, following the rising inflation rate and current account and/or fiscal deficits. In Morocco, misalignment has been low in recent years. The county experienced a short overvaluation in mid- 80s entailed by the current account deficit, followed by the devaluation in the late 1980s. Morocco’s equilibrium exchange rate’s seems to have not been affected by the global economic crises, in part due to prudent monetary policy.

In summary, utilizing – for the first time for North Africa – the stock-flow approach to estimating the real equilibrium exchange rate, this paper estimated misalignments of real exchange rates in Egypt, Morocco, and Tunisia during the past three decades. While Egypt experienced protracted misalignment in the past and recent years, real exchange rates in Morocco and Tunisia stayed closer to their equilibrium values. However, in all the export growth has been lagging some other emerging market economies. The paper suggests that non-price structural factors such as labor market flexibility, skills, and investment climate are a key for unlocking the export and productive potential of the three North African countries. Intra-regional trade – both with North Africa and the rest of the continent – together with greater orientation to fast growing emerging markets could also raise countries’ external competitiveness.





Employment Status, Income Equality, and Poverty in Egypt

February 2, 2014

By Hoda Abd El Hamid Ali

Policy Brief:

The focus of this paper draws on the employment, income equality, and poverty linkages, without a better understanding of such relationship, development strategies aimed at poverty reduction, social justice may be incomplete, as employment is the principal channel through which economic growth reduces poverty. However access to employment is not sufficient to reduce poverty and inequality, the type and quality of work are also important. Many youth , housewives, or retired people are trapped in low-productivity, low or unpaid or other types of work that fall short of their aspirations and that often do not open opportunities to move to more permanent, higher-productivity and better-paid positions.

Therefore, understanding the links between different types of employment status, poverty, and social justice are critical for formulating policy, as many reforms are needed regarding labor regulations to reduce disincentives for hiring and divert job seekers in to the informal sector, where workers do not enjoy the same level of protection as in the formal economy, revisiting public sector hiring practices, active labor market polices needed also to lower unemployment and to promote youth and female employment, and reforming the education system.

This Paper aims first, to analyze and test the factors that influence different practices and participation in the Egyptian labor force, more specifically what determines an individual’s choice to work for paid employment (full or part-time or self employment), or has no paid employment (students of all kinds and levels, household duties, retired or pensioned, unemployed, and others), and to test if the impact of these factors will differ according to gender. Second, linking these employment statuses with poverty and income equality, the paper examines the impact of an individual’s choice of a specific employment status, and his/her perception regarding the importance of having more equal distribution of income on his/her perception regarding the importance of poverty, as the most serious problem in his or her country.

The results underline the importance of analyzing the factors that affect the different employment and unemployment (paid and unpaid employment) practices in the Egyptian labor force and analyzing the linkages between employment, poverty, and income equality, as nowadays the country is struggling and in its ongoing movements towards democracy. Reforming the labor market in Egypt is a major challenge for the country for poverty reduction, creating more social justice and a successful economic transition.

This paper assesses the main micro- determinants of employment status in Egypt, and the joint impact of employment status and income equality on poverty by gender applied on a sample of 3050 individuals obtained from the (2005-2008) wave of the World Values Survey (WVS), the study concludes that there is a discrimination against women’s role in the economy that make them less accessible to better education, health, and technical skills, and in returns to better work.

Women also are more affected by the inequality in distribution of income which makes them also more affected by the poverty problem in Egypt. Supporting the poor especially women, who are often poor, less accessible to better employment with specialized programs and other sorts of assistance seems highly justified. Social security should be reformed to cover all women, reforms are also needed for pensions, and unemployment insurance which was almost non-existent before 2010, to cover all retired, old age, care –giving, and unemployed individuals.

The study also finds that employment status has weak and insignificant impact on poverty; such findings are resulted from the weak relationship between employment and growth. What is needed above all is an employment policy that puts the emphasis on strengthening the growth-employment linkages through promoting highly quality jobs and the notion of decent jobs in particular for the poor. The study also concludes that there is a positive and strong relationship between females’ perceptions regarding the importance of having more equal distribution of income and their perceptions regarding the importance of the poverty problem in the Egyptian economy.