Finding a Path to Inclusive Growth in Arab Economies

“Bread, liberty, social justice” was the rallying cry of revolutionaries in Tahrir Square and elsewhere in the Arab world last year. Democracy and freedom were certainly key demands for young Arabs protesting in the streets, but they were not the only demands. They also cried for “bread” and “social justice”.

There are high expectations for the new governments of the Arab Spring countries to improve the quality of life for their citizens. Yet, debates in the newly-elected parliaments and legislatures barely touch on economic issues. Instead, these bodies are consumed with the new politics.

In Tunisia, the transition government has taken some steps to stabilize the economy and reached agreements with the International Monetary Fund and the World Bank to fund part of the transition costs. However, longer-term institutional and structural reforms are yet to be addressed. Egypt’s successive transition governments have so far not taken the necessary decisions to stop the hemorrhaging of international reserves or to restore economic growth. Egypt has lost two-thirds of its foreign reserves since January 2011, its budget deficit is at 10 percent of GDP, and the government is borrowing heavily from domestic banks, crowding out private businesses.

New governments in Arab Spring economies, starting with the government that will take power after the upcoming presidential elections in Egypt, may end up having electoral legitimacy yet they will inherit huge economic and social challenges, including high unemployment, poor and deteriorating public services, unsustainable budget deficits, low reserves and negative or low growth. These governments will have very little room for maneuver.

Unless the political transitions quickly create economic change, based on a national dialogue that generates a sustainable path to inclusive growth, these new governments will be caught up in a cycle of short-term economic crisis management that will satisfy no one. That would not be unusual. In our new book, After the Spring: Economic Transitions in the Arab World, we found that almost half of the 103 countries that experienced rapid democratization since 1960 had a worse economic situation five years after the beginning of their transition.

The Economic Research Forum, the largest network of economists working on the Middle East, is organizing its annual conference in Cairo next week. This is an excellent opportunity for continuing the conversation in the region about how to achieve a transition to economic prosperity and social justice, and to debate whether some of the successful experiences in other countries transitioning to democracy can be adapted to the Arab context.

Although Arab economies are quite different from each other, the type of transition they are facing has similarities. We suggest that a program for inclusive growth in the post-revolution Arab countries needs to focus on opportunities for young people, reforming public institutions, promoting a competitive private sector, and integrating with the rest of the world.

Nearly two-thirds of the Arab population is less than 30 years old and youth unemployment is 22 percent. The situation is even worse for young women whose unemployment rate is 28 percent. In the short term, governments can best hope to promote jobs by encouraging small businesses, by providing large-scale semi-skilled training like the successful Chile Joven program, and by job training and matching programs like the voucher program of the National Organization of Women in Jordan that has helped young women get jobs. In the medium term, education systems need reform to provide young men and women with the skills needed to compete in a globalized economy rather than the credentials needed to get a public sector job in an economy of privilege.
 
Arab public sectors also require a modernization of state institutions to deliver better services without unsustainable deficits and untargeted subsidies, cronyism and many public employment sinecures. Arab states have been captured by elites and have mainly benefitted a few well-connected private citizens. This must change and be replaced by a new culture of responsiveness to all citizens, freedom of information, audits to combat corruption, and reforms focusing on service delivery.
 
Despite notable exceptions, much of the private sector in many Arab economies is inefficient, operating in the shadow of a large public enterprise sector and over-regulated as well as rent seeking. The private sector is also synonymous with corruption in the minds of many citizens in the Arab world. An undeveloped financial sector that funnels savings to the government and large firms does not help. The result is that most Arab economies have failed to industrialize. Arab economies need a dynamic private sector where small enterprises can compete on an equal footing and where young men and women can find opportunities as entrepreneurs as well as employees. Hence, reforms need to include support to small and medium enterprises; credit for small businesses (and especially women); upholding property rights and the rule of law; developing infrastructure; simplifying regulatory frameworks; and reforming tax systems to encourage investment and job creation.

Arab economies also will need new regional and global strategies that can help integrate their economies with the rest of the world so that they can join the ranks of fast-growing emerging economies like Brazil, China, India and Turkey. There is clearly a need to promote non-oil exports and to make better use of the instruments offered by international and regional financial institutions to smooth the costs of transition over time. But there are limits to what external donors can do. Most can only provide loans, not grants, and these are of limited use to countries that are already highly indebted. Market access to the West exists, but firms cannot take advantage of it because of the lack of infrastructure, limited regional connectivity and border barriers. Before they can help, Western donors must see their trust re-established in the region. After all, they were large supporters of the previous regimes. So they would be well-advised to be selective and humble, and provide advice when it is asked for but leave space for an Arab dialogue that should determine each country’s future path.

The young men and women who led the Arab Spring have shown tremendous energy, resourcefulness and organizational abilities. They must now find common ground on an economic platform that is financially realistic and sustainable but delivers results in terms of bread, liberty and social justice. The dialogue among Arab economists next week is precisely what is needed to ensure that these countries join the scores of other countries that have prospered economically after the democratic revolutions of the last 50 years.