Authorities in Tunisia and Egypt are unwinding political and economic vestiges of the ousted regimes, from abolishing the apparatus of former ruling parties to seizing assets of officials accused of corruption. The Egyptians are also revoking multi-million dollar deals foreign investors had inked in previous years. Egyptian courts have scrapped several land deals and also annulled the sale of Egypt’s iconic department store Omar Effendi to Saudi investment firm Amwal Al Khaleej, which took place in 2006 amid public outcry.
Tunisia, Egypt, and other countries affected by the Arab Spring are expected to put an emphasis on increasing accountability of political leaders and businessmen, and ensuring future economic growth benefits a wider portion of their populations. To achieve these goals, leaders are likely to roll back privatization, keep subsidies high, increase public sector wages, and work to ensure equitable distribution of wealth. Although the economic policy in countries such as Egypt and Tunisia have yet to be defined and will depend on the outcome of elections, governments are unlikely to completely shed the free market economy platform.
"In places like Egypt and Tunisia addressing economic grievances will be first and foremost for governments, including job creation, lowering inflation and providing long term stability, but these are structural problems the governments can’t address within a manner of months," says Mehran Kamrava, Director of Center for International and Regional Studies at Georgetown University in Qatar, Doha.
"Any change in economic policy will not mean a retreat from the market economy, however more intervention and regulation to increase public revenue and redistribution can be expected,’ adds Ibrahim Awad, professor of practice in the Public Policy and Administration Department at the American University of Cairo.
"Even the economies of the industrialized countries, during the global economic crisis, saw intervention by the state in order to guarantee a better outcome of economic activities," Awad notes. "You have to consider that privatization is not only an economic issue; it is also a political issue that has altered the distribution of wealth and power within the society. It also has generated considerable corruption."
Centralized Control Dead
Before Hosni Mubarak’s ouster, Egypt last witnessed regime change in 1952, when Gamal Abdel Nasser and the free officers toppled the monarchy. Nasser would later seize the Suez Canal, signaling an end to Western regional control. His success spawned a movement of pan-Arabism, moving the region to socialism and nationalization policies.
That legacy slowly eroded over time. Much of Egypt’s civil bureaucracy is now considered some of the Arab world’s most corrupt and inefficient systems, while state-controlled infrastructure ages badly. "The importance of Egypt as an economy and in terms of political leadership was much more substantial than it is today, and the actions of Abdel Nasser came at a time when the Soviet Union was growing its power and you had a number of countries in the region that went socialist,’ says Nasser Saidi, chief economist at the Dubai International Financial Center Authority. "That is a world that is over. Socialism and centralized control is dead and whatever actions taken by the Egyptian government will not have a signaling effect."
In the last decade, Egypt and Tunisia began releasing state-controlled assets, and were hailed by the World Bank, the International Monetary Fund (IMF) and Western states for freeing the economy through lower tariffs, privatization, and other investor-friendly measures. In its 2010-2011 Global Competitiveness Index, the World Economic Forum ranked Tunisia as 32nd on the list, beating countries such as Brazil and Italy.
As the most populous Arab state, Goldman Sachs economist Jim O’Neill, the man who coined the term ‘BRIC,’ included Egypt in the club of countries that were set to rival the G7. In the World Bank’s ‘Doing Business in the Arab World 2011’ report, Saudi Arabia and Bahrain were the top two ranking countries. Countries in the region may have scored high points on ease of business–which institutions such as the World Bank advocate for fostering job creation–the measures did not improve living standards or lead to stability. One missing ingredient was inclusivity and having a say in social, political and economic policy.
"The prescriptions of international financial institutions are neither working in developing nor in industrialized countries: high youth unemployment is not confined to countries such as Tunisia and Egypt, you also have it in Greece, in Spain and even in France,’ Awad says. "The global economic crisis had already brought out the shortcomings in the functioning of the world economy.’
The IMF and the World Bank are often blamed in the Arab world for pushing policies that boost the economy, but fail to create greater benefits for more people. Sensitive to its reputation in the region, the IMF is now using language such as "socially-inclusive growth" as it promotes its aid offers. The IMF has said it would also distribute up to US$35 billion in loans to oil-importing countries in the Middle East and North Africa to help them plug any financing shortages.
Despite the stigma of association with the IMF, Egypt was the first country to request loans and was set to receive US$3 billion, before it announced in June that it would not require the funding. Tunisia has garnered US$500 million from the World Bank. Arab countries, the G8 and other donors have pledged billions of dollars in aid and loans have also stepped in.
"As far as the IMF is concerned, countries feel it is like surgery," says Uri Dadush, senior associate and director in the International Economics Program at the Carnegie Endowment for International Peace. "If countries are in financial trouble, they will go to the IMF. The World Bank tends to give larger number of loans, of long-term maturity and not in crisis type of situations like the IMF and that’s why probably Tunisia preferred to go to the World Bank not the IMF.’
Help With Conditions
Seeking help from the IMF comes with conditions, which often include measures that are unpalatable to the population. But in the wake of the Arab Spring, analysts do not expect the IMF to press hard for stipulations. "There is a consciousness at the level of the IMF and others that you need to be very careful, and any kind of conditionality needs to take into account the social situation,’ Saidi says. "The IMF, World Bank and others are faced with a fact that this is an area that is strategic, given its energy resources, and the possibility that if you don’t address the economic and social problems this (unrest) could develop elsewhere in central Africa and Asia.’
To mollify social grievances, governments across the region, from oil importers to oil exporters, have reacted with a quick fix of an increase in public sector wages and more generous subsidies and social benefits. In oil-rich Saudi Arabia the government has entrenched public sector employees, raised public sector wages and announced social benefits and cash handouts worth about US$130 billion. In the protest-free United Arab Emirates, authorities have raised army pensions and subsidized rice and bread prices, and said they would spend US$1.6 billion in the country’s poorer northern emirates.
"There is a great sensitivity to the economy and to the economic source of popular grievances in particular," Georgetown’s Kamrava says. "What we are going to see across the board–in Egypt, Tunisia, Algeria, Morocco and Jordan and we’ve already seen it in Persian Gulf states, Saudi Arabia, Bahrain and Kuwait–is governments pumping money into the economy in a much more direct fashion and we’re likely to see a greater degree of statism and a more proactive role of the state in the economy."
The higher wages and subsides will be politically difficult to remove once the region settles down, analysts note, making it harder for oil exporters to wean themselves off high oil prices, which are needed to keep their budgets in balance. "Regardless where we are in terms of supply, demand appears to be falling raising the risk that when oil corrects, it will correct below US$70-US$80 a barrel, which most GCC countries need to balance their budgets,’ says Farouk Soussa, chief economist for the Middle East at Citibank.
A larger public sector workforce will also exacerbate government bureaucracy and impede private sector growth, while greater government spending will crowd out the private sector and stymie efforts to increase its share of the economy. Higher public sector wages will give Gulf citizens little incentive to seek private sector jobs, which are needed to create sustainable growth and diversify the economy away from energy. In Qatar, there are 10 jobs for every Qatari of working age and in Saudi there is more than one job for every Saudi, according to Soussa.
"Foreigners are a very cheap source of labor for GCC countries and in many ways, the commerce and service sectors have become addicted to cheap foreign labor,’ Soussa adds. "Governments should work toward liberalizing the job market and reducing the ability of companies to hire foreign labor through tighter immigration. During that time, productivity may go down, and cost of business will go up and the impact on the economy will be important.’
While financial aid, subsidies and increased wages may be needed measures for the time being, they are not a panacea for social and economic problems, many analysts and local media commentators have argued. North Africa is in greater need for unfettered access to its agricultural products and workers to Europe, which is clamping down on immigration and turning quite protective of its markets. For instance, just months before the Arab Spring begun, Spanish farmers lobbied European Parliament to scrap a trade agreement for dairy and tomatoes between the EU and Morocco. "Would Europe make those concessions? It is difficult to tell because immigration and agricultural reform are politically sensitive issues in Europe, but Europe has vital interest to have stability in the Middle East and North Africa and to avoid disruption to its energy supply coming from the region,’ Dadush says.
Some analysts even suggest Europe and its economic policies contributed to the economic problems in North Africa, where a more open economy to European goods didn’t lead to reciprocal prosperity. Akin to pre-Nasser times, they suggest that European states propped up regional rulers that had a monopoly over the country’s riches. To aid reform, they argue Europe will have to rethink its trade, aid, investment and immigration policies with North Africa.
"The first people who got thrown out of jobs in Europe were from North Africa and that exacerbated the unemployment problem,’ Saidi says. "On the agricultural side, many of those goods from North Africa were viewed as competing with goods from Europe and what that does is drive people who are already poor out of agriculture, and makes them even poorer. Therefore their only exit is immigration and Europe then complains about that.’
