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• IMF’s Christine Lagarde on Need for Strengthening “the Middle” – Jean R. AbiNader

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* Speaks in Morocco on challenges of post-Arab Spring economic and human development *

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Jean R. AbiNader, Exec. Dir., Moroccan American Trade and Investment Center

Jean R. AbiNader, MATIC
May 9, 2014

In Rabat on May 8, Christine Lagarde, the Managing Director of the International Monetary Fund (IMF), provided her analysis and prognosis of the “The Arab Countries in Transition—Strengthening the Economic Middle,” an insightful overview of the challenges and trends in the region.

Lagarde noted that despite the overwhelmingly economic and political nature of the demands for change, all were grounded in a basic human need for dignity. She quoted noted Moroccan author Fatima Mernissi, “Dignity is to have a dream, a strong dream that gives you a vision, a world where you have a place, where your contribution, however small it may be, will change things.”

More than three years after the Arab Spring began in December 2010, unfinished reform and development agendas throughout the region are complex, difficult to manage in the short term, and vary widely in responses and successes. What began as demonstrations about lack of jobs and transparency across the region turned political as people felt that they lacked the levers by which to effect policy changes. And now that many political participation issues are being resolved in the transition countries, some are moving forward to consolidate growth strategies.

Citing Morocco as an example she said: “Countries like Morocco are reaping the fruits of their efforts by diversifying and spurring both exports and foreign investment—especially in high value-added areas like cars, aeronautics, and electronics.”

Yet Lagarde is clear that there is much still to be done if the goals of people and governments are to be met. “So the great challenges for the next step of the transition are clear: How to create the jobs needed to meet the aspirations of a rising generation. How to create a vibrant and dynamic economy that offers opportunities to all.” It is this link between economic needs and the elusiveness of ready solutions that frustrates both governments and society. What seem at street level to be easy answers, such as increased pay, subsidies, and public employment, are in fact corrosive factors that undermine a country’s capacity for economic growth in the medium and long term. “These tasks are daunting. To make inroads, we would need to see growth rates doubling from the current levels of around 3 percent. We also need to see growth feeding into jobs to a far greater extent than is currently the case.”

Success Comes from Building the Middle

Lagarde has no illusions about the difficulties ahead, but she believes that strengthening the “middle” of the economy, society, and state economic policies can lead to progress and solutions. “Strengthening the economic middle means giving a shot in the arm to small- and medium-sized enterprises (SMEs) in the formal sector. These are the kinds of firms that form the backbone of a healthy economy, and— in other regions of the world—are the main engines of job creation.”

Note her emphasis “in other regions of the world” since, in the MENA region, SMEs generate less than 20 percent of the jobs in the formal sector. Moreover, because informal companies have no access to formal financing, are not protected by the regulatory environment, cannot guarantee labor rates and benefits, and lack the ability to access formal distribution channels, they are doomed to remain small players in creating jobs and wealth. Policies that transition the informal sector into a valued player in a country’s economic growth strategy are an essential ingredient in building the private sector and rewarding entrepreneurs.

Lagarde then addressed the importance of the second key “middle.” “Global experience tells us that we need a strong middle class to drive an economy forward. A strong middle class sustains consumption and invests in the future. A strong middle class makes societies more cohesive, and lays the groundwork for stability and prosperity. A strong middle class is also home to the kinds of entrepreneurs we need for today’s modern economy.”

One of the essential vehicles for growing a middle class is the kind of public-private partnerships Morocco is supporting that match the professional and technical expertise of private sectors with the economic and financial goals and policies of governments.  Through its incentives for investment, training, and site selection, and reforms to the education and training sectors, the government of Morocco is striving to promote entrepreneurism and mobility to the middle class through the third “middle” – balanced economic growth policies.

“Looking ahead, the state needs to step back from some areas and step forward in others. It needs to provide fewer blanket subsidies, and more of a basic safety net for people who fall through the cracks. Perhaps most importantly, it needs to become less of an employer, and more of an effective and impartial regulator and enabler of the private sector—the ultimate source of good jobs.” She adds, “Just look at Morocco. Over the past couple of years, it has managed to cut its subsidy bill while increasing spending on programs aimed at improving access to health and education for the poorest.”

Of particular interest to Lagarde is the importance of broadening opportunities for women. After recounting statistics that show the critical contribution greater female participations can make to a country’s GDP, she said “So it is imperative to let women contribute, by removing outdated obstacles and introducing enabling polices. After all, it was Ibn Rushd who said that ‘treating women like a burden to the men is one of the reasons for poverty.’ The logic is clear—greater opportunities for women mean greater rewards for everyone.”

Growth and Dignity

Christine Lagarde is no stranger to the challenges facing the MENA region and emerging economies globally. She has provided important leadership in the IMF’s response to crises ranging from the Ukraine to sub-Saharan Africa. And the IMF is evolving, with greater attention to its role as a facilitator rather than a guardian of strict and rigid growth mandates. Her focus on the “middles” represents a clear and deliberate enunciation of how Arab countries can move ahead in response to their particular needs for growing their economies and their societies.

Dignity does not derive from food and energy subsidies, shadow employment, or passive participation in society. Citizens want to feel that they are invested in by their governments and in turn they can invest in their country’s future. Valued jobs and a vibrant public space are vital ingredients in securing the stability and economic growth that nurture and protect the “middles” Lagarde describes. This is the daily agenda for the leadership and civil society in Morocco, where they are working to realize both economic and political agendas that encourage and facilitate human and economic development.

Jean R. AbiNader is Executive Director of the Moroccan American Trade and Investment Center.