Arab spring needs economic reform

Economic factors cannot entirely explain the Arab Spring, though they certainly played an important role. Whether positive change ultimately prevails will depend on the economic policies advanced by leaders emerging from revolutions and their counterparts in still stable Arab states.

Yesterday at Carnegie, a panel of economists and political scientists, including Marina Ottaway from Carnegie, Caroline Freund of the World Bank, Masood Ahmed from the IMF, and Undersecretary of State for Economic, Energy and Agricultural Affairs Robert Hormats, discussed these issues while Uri Dadush moderated.

There is general agreement that economic conditions did not trigger recent upheaval in the Arab world on their own. On par with other developing countries, macroeconomic indicators in Tunisia, Egypt, and Libya, did not by themselves augur revolution, Hormats points out. Due mainly to what Freund characterizes as regional and international economic segregation, these countries weathered the global recession far better than developed Western states. Of course, as Ahmed reminds us, if economic indicators are disaggregated, this idyll gives way to a gloomier picture of high youth unemployment rates, rampant corruption, and highly stratified inequality. But this problem is as much political as it is economic or demographic, a balance that is visible in the broader contours of the recent revolutions.

Where economic conditions become far more crucial is in the future trajectory of the Arab Spring. Most of the panelists agree that regional instability will keep growth rates and other indicators down for the near future. Oil importing states such as Egypt and Tunisia traditionally received billions in private investment, but large capital outflows are starving these countries of cash. For Ottaway, wariness over accepting loans from international institutions such as the IMF, as was the case in Egypt, only exacerbates this shortage. Freund insists that the World Bank is prepared to help, but isn’t sure that the money will be spent wisely or, as in Libya, is even necessary. Now that countries have exhausted their own resources, as well as loans from GCC neighbors, Ahmed predicts that governments will turn increasingly to the World Bank, IMF, and international markets. Unfortunately, as Hormats interjects, the tragic coincidence of the Arab spring with the European debt crisis and budget cuts in the U.S. may prevent an Arab recovery from resembling that of Eastern Europe after 1989.

However, there are important steps that governments, both inside and outside the region, can take to ensure long-run growth. In line with previous recovery programs, Hormats emphasizes the need to differentiate between stabilization and structural reform. Stabilization of fiscal conditions must come first, and international institutions will have to provide significant financing. Equally important will be shifting subsidies away from energy, which tend to be inefficient and overly concentrated on the middle and upper classes, toward food and other basic necessities. This will help reduce budget deficits to more sustainable levels.

In terms of structural reforms, facilitating intra-regional trade must be a centerpiece. Not only will trade allow countries to exploit comparative advantages, Ahmed points out, but it will also provide the basis for economies of scale that enable new global trade opportunities. Similarly, Fruend adds, attraction to large markets will bring investment from the West and Asia. In light of the failed attempts to create a free trade bloc, Ottaway is skeptical that regional politics will allow for such integration, but she nonetheless supports the plan in theory.

Investing in entrepreneurship will also be crucial. Too often, states favored large corporations run by well-connected individuals over SMEs more representative of the middle class. This was partly a failure of education systems, which did not equip graduates with the skills they needed to be competitive in the modern labor market. But it was also a matter of priorities, both on behalf of regional governments and assistance donors. Governments must abandon the theory that corruption is a source of power and align themselves with the movement towards transparency and accountability. And donors must ensure their funds are directed towards the same purposes.

Structural economic reform will be particularly difficult in the Arab world, since it will require governments to embrace an ideology that helped catalyze revolution in the first place. Mobilizing the private sector will be crucial to future growth, but privatization, especially in Egypt, is precisely what led to corruption and inequality. Freund is nervous that privatization and the private sector have become pejorative terms, and that this will make socialist economic policies politically expedient. Leaders will thus have to convince citizens, as Ahmed argues, that the implementation of economic liberalization, and not the process per se, caused the economic conditions protesters so forcefully rejected.