Source: Italian Institute for International Political Studies
Much of the debate over the “Arab transitions” has focused on politics and often on polarized views of “Islamists” and “secularists” and their divergence over core values, identity and other socio-cultural issues. The economics of the “Arab transitions” has mostly concentrated on short-term consequences of the uprisings, and governments have been doing “business as usual”, often tempted by quick fixes: offering more jobs in the public sector, sticking to inefficient fuel subsidies and cutting capital spending to curb budget deficits. On the other hand, no noticeable progress has been made in dealing with the fundamental political economy factors that ignited the Arab uprisings, such as removing barriers to equitable access to economic opportunities, fighting corruption and privileges and creating a friendly business environment for a vibrant, innovative and socially responsible private sector.
This paper argues that beyond toppling authoritarian rulers and electing “new leaders”, the shift towards politically pluralistic and economically competitive yet inclusive Arab societies entails more than wisdom and tolerance among the owners of different societal projects. First, new economic dynamics conducive to shared and inclusive economic prosperity require the dismantling of the “authoritarian rentier model” that prevailed over decades. The latter was built on a resilient network of alliances entrenched in the business sector, within state institutions such as the security sector and bureaucracy, in the media and the judiciary. Second, in addition to domestic resilience to change, regional conservative forces, as well as international skepticism regarding the “rise of Islamists”, has not been supportive enough to set off and sustain new economic dynamics in the Arab transitions.Almost three years after the beginning of the Arab uprisings, the pillars of the authoritarian economic paradigm have not been reformed and there is little down the road to indicate that the “ongoing transitions” could reach critical institutions and set the scene for a new socio-economic order. The recent developments in Egypt and the deadlock in Tunisia, Libya and Yemen show that supporters of authoritarian regimes have not suddenly vanished from the scene. They have succeeded in galvanizing their arms in the business community, bureaucracy and media, by magnifying the failures of a short-lived transition.
The Past: Economic Dynamics of Arab Authoritarianism
In their quest for legitimacy in the sixties and seventies, authoritarian rulers in Arab countries provided rents and privileges to large segments of their populations. Nasser's regime in Egypt and the Baath regime in Syria, for instance, enjoyed most of their legitimacy due to their land reforms that benefited landless and small farmers. They also offered, as did other Arab autocrats, lifetime jobs to secure the loyalty of the educated elite and urban dwellers. Heavy subsidies of basic goods and services were another ingredient of the authoritarian economic paradigm in the region.
During that era, the region’s countries enjoyed sizeable financial flows to pay for their populist policies, achieve relatively high economic growth and improve the living standards of their people. Egypt, Syria and Tunisia were small oil producers by international standards but oil represented a significant share of their exports and state revenues. Morocco and Jordan were major producers of phosphates, the price of which increased five-fold in the mid-seventies.
The authoritarian bargain, however–loyalty in exchange for rents and privileges–had shown its limits since the early eighties under demographic pressure and growing public debt. In order to pursue the transition to “market economy” the authoritarian governments were compelled to implement structural adjustment programs and to slash economic benefits to large segments of their traditional supporters. The regimes gradually shifted their core social base from the masses of workers, peasants and civil servants to a minority of influential urban rent-seeking bourgeoisie, rural landed elite, and high officials in the bureaucracy and the security sector. They were able to build new networks of patronage through privatization and other pro-private sector policies. In 2008, the top ten companies on the Egyptian stock exchange, accounting for more than 45 percent of market capitalization, were controlled by less than twenty families and some 40 percent of private sector credit went to just thirty companies1.
This system worked, by and large, until recently. The Arab regimes seemed to maintain a significant level of political stability and secure sufficient support. Over the six years before the uprisings, their economies expanded at higher rates than in the 1990s and most of them seemed to have curbed the impact of the international economic crisis. The inability of the authoritarian regimes to buy the loyalty and obedience of large segments of their populations or offer them any meaningful political opening to express their interests, eroded their legitimacy and “raison d’être”, which in the end led them to rebel against the status-quo. Moving forward, however, interests must be organized in order to be effective.
The Present: Domestic Resilience, Regional Hostility to Reform and International Skepticism
Domestic Resilience
Beyond toppling authoritarian rulers or formally introducing constitutional reforms, the shift towards a new economic model based on competition and merit cannot occur without pulling apart the foundations of the authoritarian bargain. The latter relies on a strong network of alliances entrenched in the business sector and within a wide range of state institutions, among which are the security sector, bureaucracy, media and judiciary.
The faith, but also the economic incentives, of the security apparatus have been an obstacle to the Arab transition. The military’s involvement in the Egyptian economy is clearly a barrier toward a different socio-economic model. The Egyptian armed forces have their own hospitals, stores and manufactories. Their activities can lead to unfair competition with the private sector and it is not clear how much they are subjected to outside audit and transparent accounts including paid taxes2. The background of Egypt’s governors also reveals the military’s hegemony; more than half of them come from the military and the police3. Military officers have routinely been deployed to ministries, government agencies and localities and used to exercise political control of Egyptian bureaucracy4. In Morocco and Tunisia, the army has not been a major economic actor. But the origin of wealth of the security sector members remains opaque. Officers have usually had access to privileges such as the acquisition of permits for sand pits, marble quarries, fishing concessions and exceptional bank loans.
By institutionalizing corruption and promoting rent-seeking, poor rule of law and lack of transparency, the business environment in Arab countries impeded the process of structural transformation and sector diversification, and led to a growing informal sector and high unemployment rates. The private sector’s image has been tarnished by scandals of corruption and misuse of public resources. The last edition of Transparency International issued in 2013 revealed that perceived corruption has risen in several Arab Spring countries in the past two years.
Certainly, not all the business community has benefited from the former regimes. Small and medium-sized entrepreneurs but also wealthy people who earned their money without access to state aid suffered from cronyism and unfair competition. The Islamist governments in Tunisia, Egypt and Morocco promised a “business-friendly” face for “clean” entrepreneurs and more balanced policies for small and medium enterprises. However, those entrepreneurs need to organize collectively to take part in the decision-making process and have a significant impact on policies. The literature argues that the existence of individuals with similar interests does not guarantee that organized groups will emerge to promote those interests. Organization is costly; on the other hand the incentives to free-ride are high.
Conversely, crony capitalists empowered by the old regimes and their entrenched networks act as a counter-revolutionary force. Threatened by potential economic changes, they have been slowing down the reform process by relying on their supporters embedded in the security apparatus, the media and within the state’s bureaucracy.
A sustainable job creation process needs a strong, innovative and competitive private sector. In high-growth countries, private investment typically exceeds 25 percent of the GDP. But investment struggles to reach 15 percent in Tunisia and Egypt. Governments do not have much room to maneuver and increase public investment in the years ahead, with a large part of the budget absorbed by nondiscretionary spending in order to keep both the budget deficit and public debt under control. The private sector is therefore essential. Instead of rents for patronage, vibrant entrepreneurship needs to get rid of inefficient regulation, and be offered appropriate incentives based on economic efficiency and social justice.
Countries in transition should design appropriate industrial policies with a comprehensive medium to long-term economic strategy. There are lessons that they can learn from the Turkish and South Korean experiences. Looking at the experiences of Algeria, Egypt and Morocco, it is clear that a distorted industrial policy led to a misallocation of labor and capital instead of improving long-term productivity. Such policies led to a strengthened rentier economy, and resulted in huge costs being incurred by governmental budgets in the form of non-performing loans and bankruptcy of state banks.
Economic transformation in Arab countries requires reforming the governance of their economic institutions (customs, competition authorities, tax administration etc.), subjecting them to transparency and accountability, and providing more policy space for representatives of different segments of companies. There is no doubt that changing the governance mechanisms will improve the design and implementation of effective economic policies, so that the economy can create more and better jobs and improve household incomes.
Regional Phobia of Reforms
The attitude of regional powers both in the Mashreq and the Maghreb did not help the Arab transition countries. Extensive oil rents allowed both Saudi Arabia and Algeria to invest heavily in mechanisms for averting mobilized internal dissent. The Saudi regime’s concern with the Arab uprisings went beyond the kingdom’s borders. The Gulf Cooperation Council, pushed by Riyadh, took the unprecedented decision of inviting Morocco and Jordan to join its ranks. This expansion, that had no follow-up, was intended to provide cash-strapped Jordan and Morocco with financial resources to appease angry protesters and avoid any radical political or economic reform. Following the ousting of Egyptian President Morsi, Saudi Arabia, along with the United Arab Emirates and Kuwait, provided Egypt with $12 billion in financial assistance as part of a wider strategy of resisting the Muslim Brotherhood and rolling back change in the Arab region.
International Skepticism
The international community seems confused and disoriented when faced with political, economic and social transformations in the Arab region and is unable to accompany them with adequate support mechanisms. Its confusion and skepticism peaked with the recent political developments in Egypt.
During the 2011 meeting in Deauville, the G8 launched the “Deauville Partnership” initiative in order to provide support to “free, democratic and tolerant societies” according to the official declaration of the partnership. Two years after the launch of this initiative, the results are very modest. Unlike the overwhelming support that flew to Eastern Europe after the fall of the Berlin Wall, the Deauville Partnership has fallen short of its expectations.
In the absence of appropriate instruments to support the transition, the Arab countries experiencing financial needs have to resort to the IMF. However, the IMF approach that insists on curbing deficit through the use of austerity measures does not fit with the needs of political transition, weakened by a decline in economic activity and a lack of security and stability. In addition, IMF loans are often subjected to conditionality provisions and entail unpopular measures such as cutting subsidies, increasing taxes and freezing wages. Egypt had begun more than two years of negotiations for a $4.8 billion loan, for which approval has been postponed several times.
Conclusion
The experience so far shows that toppling the political leaders has been the easiest part of the transition process. The shift in state-society relations toward a more balanced social contract requires tangible changes in the power equations. State structures that have long been dedicated to channel rents to supporters and co-opt or intimidate opponents, should be transformed into transparent entities serving people’s interests and subjected to a system of checks and balances. The scope and depth of the reforms will very much depend on the capacity of the political parties and civil society forces to take an active part in the transition process and influence the course of policies. The international community, in cooperation with international financial institutions, should engage more strongly in support of the Arab transition and provide the necessary assistance to meet pressing social needs. The cost of inaction may be huge if these countries fail in their transitions and slide into violence and extremism that can spread over the region and may last for decades.
This paper was originally published by the Italian Institute for International Political Studies.
Notes
1 T. Osman, Egypt on the Brink: From Nasser to Mubarak, Yale University Press, 2011, revised edition.
2 S. Yazid, Security Sector Reform in the Arab Region: Challenges to Developing an Indigenous Agenda, in The Arab Reform initiative, 2007.
3 S. Kadry, N. Bakr, Egypt Security Sector Reforms, in Arab Reform Initiative, 2011.
4 S. Kadry, “Egyptian Experience in Security Sector Reform”, Halki International Seminar, Greece, 2007.
