Dean Noha El-Mikawy chats with Hafez Ghanem
Noha El-Mikawy, dean of the School of Global Affairs and Public Policy, chats with Hafez Ghanem, a non-resident senior fellow in the Global Economy and Development Program at the Brookings Institution and a Senior Fellow at the Policy Center for the New South. Before that, he was the Regional Vice President for Eastern and Southern Africa (July 2020 - July 2022). Ghanem also served as Vice President of the World Bank for the Middle East and North Africa (2015 – 2018) and Assistant Director-General at the Food and Agriculture Organization of the United Nations (FAO) (2007-2012). He holds a bachelor’s and master’s degree in Economics from the American University in Cairo and a PhD in Economics from the University of California, Davis.
Question 1: Efforts to reform the global financial system (World Bank and IMF) are underway. You think these efforts are not enough. What is needed to move the needle and make the global finance system more equitable and effective?
Ghanem: On-going reforms do not tackle the key issue of governance. Governance of the Bretton Woods Institutions (the IMF and the World Bank) do not reflect the realities of today’s world. The Bretton Woods agreement was negotiated 80 years ago among 44 countries, but today there are 190 members of the IMF and World Bank. Voting rights at the two institutions do not make sense anymore. For example, India’s GDP is today larger than that of the UK, but the UK’s voting rights at the IMF are nearly double those of India. Switzerland has a larger voting right than much bigger African economies.
Adjust voting rights at the two institutions is very hard to do. It is a zero-sum game. Increasing votes for one country will mean lowering the vote of another. Reaching agreement will be very difficult if not impossible--just like the reform of the Security Council.
At the same time the selection process for the heads of the two institutions (an American for the World Bank and a European for the IMF) needs to be modernized and become more merit-based. Again, changing that rule which implies that Europeans and Americans agree to lose their privilege would be difficult.
Luckily, it is not necessary to wait for agreements on voting rights and changing the way the heads of the institutions are selected before some improvement in governance can be achieved. We can consider some interim measures that are politically feasible and that would improve governance. For example: (1) introduce a double majority rule (majority of votes and majority of member states) for some decisions which would give more voice to the Global South; (2) separate the roles of the executive head of the institution from that of the chair of the board of directors and selecting chairpersons of the board from the Global South, while keeping the executive heads from the Global North. You can read more about governance reforms of the Bretton Woods Institutions here.
Question 2: Our region is not likely to achieve the SDGs in the next 6 years. Efforts are made difficult because of the cost of conflict and reconstruction in at least 8 countries in our region. Also ODA and FDI flows into our region are dwindling. Regionalization seems to be back on the agenda as a solution. Do you agree and if yes, what feasible opportunities for regionalization do you see today?
Ghanem: At the ERF conference in Rabat, we heard Prof. Jeff Sachs say that the geopolitical situation today is the most dangerous since the Second World War: financial crises, persistent inequality, superpower competition, wars in Ukraine and Gaza, rising populism, closed borders, pandemics, climate change, and many conflicts and civil strife around the world and particularly in our region. It is cause for concern. That is why there are many calls for renewing cooperation and multilateralism to reduce tensions, which you could read here and here.
Globalization seems to be over. The world is breaking up into blocs. According to the IMF, since 2022 trade between blocs has fallen by 5% and even trade within blocs fell by 2.5%. Accordingly, world growth has fallen to 2.9% - well below the historical average of 3.8%. Official development assistance (ODA) has effectively declined as countries in the Global North are now counting money used for in-country refugees as well as support to Ukraine as ODA. Moreover, net private flows to developing and emerging countries were minus $125 billion in 2022 and minus $193 billion in 2023; i.e. $318 billion in two years. The world is far from achieving the SDGs.
Regional cooperation is necessary to survive in this deglobalizing world, and we are seeing greater efforts at regional integration in Asia, Latin America, Africa, and Europe. The Arab region is probably the least integrated in the world, and past attempts at regional integration--which focused on political as well as trade integration—have failed. We must try again, otherwise the Arab world will continue to be marginalized.
A possible approach would be a new regional cooperation initiative built around facing three existential challenges: fragility and conflict, water and food security, and job creation for the millions of Arab youths entering the labor market every year.
Question 3: Please say more about each of those priority areas for regionalization.
Ghanem:
Fragility and conflict: Today 8 (Palestine, Lebanon, Syria, Iraq, Yemen, Somalia, Sudan, and Libya) out of the 22 members of the Arab League are either failed or failing states. There is no way that the region can develop and meet the SDGs amid conflict and fragility. In the short run, there is a need for political intervention to resolve disputes in Yemen, Sudan, Libya, and Somalia. And, importantly to end all proxy wars among regional powers that are leading to protracted civil wars. In the medium term, all 8 states need institutional and economic support to move out of fragility and build the foundations for stable and flourishing societies. You can read more about this here. At the same time efforts to achieve a two-state solution in Palestine need to continue and accelerate to end the suffering in Gaza and to build a stable and prosperous Palestinian state.
Water and food security: The Arab region is currently water poor, with water availability of less than 1000 cubic meters per capita. Population growth and climate change imply that by 2030 the region will be extremely poor in water with availability of less than 500 cubic meters per capita. Low water availability and poor soil quality lead to low agricultural productivity and a high dependence on imports; that means vulnerability to global shocks. In 2022, 13% of the Arab population was undernourished (24% in conflict countries) and 15% of children under 5 were stunted. An Arab initiative for water and food security could include regional water projects, coordinating water policies, joint agricultural research and development, cross border agricultural investments within the region and beyond, joint procurement and import diversification, and regional emergency food reserves. You can read more here and here.
Job creation: A 26% youth unemployment in the Arab World is a major economic, social, and political challenge. A regional jobs initiative could include joint investments in the digital economy and in green energy, both are growth sectors with high potential for job creation. At the same time, there is a need to work to modernize Arab education systems so that young graduates are better able to meet the demands of the 21st century labor market. You can read more here.
Question 4: Key countries in our region are straddled with very high debt. Servicing the debt is crowding out expenditure on basic social services and investments in human capital. This is highly undesirable, if not destabilizing. What is the way out?
Ghanem: Unsustainable sovereign debt is becoming, once more, a problem around the world. The problem of unsustainable debt is due to bad decisions by borrowers and lenders. A simple rule of thumb of good foreign debt management is that the return on the marginal investment in the country must be higher than the real cost of borrowing--which is the interest rate plus the expected rate of depreciation of the domestic currency. Many countries of the Global South borrowed from the Eurobond markets at 9% interest; at a time when their currency was depreciating at 5-10% a year against the euro. Hence, the real cost of borrowing was 14-19% and they used that money to finance consumption or very low-yielding investments. The result is clearly a debt problem. The borrower made a bad decision, but so did the lender who knew what the money was being used for.
This introduction is important because developing countries need to build their debt management and investment selection capacities, and creditors need to improve risk assessments both by credit risk agencies and international institutions.
At the same time the world must deal with the existing debt, which is proving more difficult than in the past. During the previous debt crisis, nearly all sovereign debt was held by the official lenders of the Paris Club or the bankers of the London Club. Thus, agreements on debt restructuring only needed to be reached with those two clubs. The holders of today’s debt are more diffuse. They include non-Paris Club official creditors (e.g. China) as well as large numbers of bondholders. Getting consensus among the different groups of creditors is difficult.
The G20 has put in place a Common Framework for debt restructuring, but it is facing problems and long delays to reach agreements among creditors and debtors. There are several proposals to complement the Common Framework. The first proposal is to use a “Brady Bond” type mechanism (like the initiative of the US Treasury in the 1980s) to buy down the bondholders’ debt. The second is to put in place a system of debt reduction for climate, where a country’s debt would be reduced on condition that the savings from the debt reduction be used for specific pre-agreed climate investments in that country. You can read more about those two initiatives and others in chapter two of the report here.