Reforming Arab economies in times of distrust

Throughout the Arabic-speaking world—in Algeria, Egypt, Jordan, Kuwait, Lebanon, and Iraq—citizens have once again been taking to the streets. Although the triggering events of the protests vary from country to country, as do their intensity, the common, fundamental cause is a pervasive distrust of government.

These protests signal the need for dramatic economic and social changes to spur economic growth and create the hundreds of millions of jobs needed to employ the young people who will enter the labor market over the next several decades.

Yet little has been done to address those needs. Nearly all governments have failed to implement the deep structural reforms, such as fair competition, required to transform hidebound, rentier economies into modern and productive ones.

Indeed, growth in 2019 was a mediocre 2.2 percent—a trivial increase in per capita terms—while most Arabs still work in the precarious informal sector.

Considering the prevailing distrust of Arab governments, this piece argues for a different approach to reform. The main priorities should be to root out corruption through radical transparency in government and cut the implicit subsidies benefiting producers—as opposed to poor consumers—including state-owned utilities and cronies.

Rising aspirations, timid reforms

After the regional slowdown in growth that followed the start of the Arab Spring, authorities in 2011 mostly focused on macroeconomic stabilization efforts that had been delayed until they became inevitable. These policies—which included cuts in consumer subsidies and increased taxes—were deeply unpopular and eroded the purchasing power of the middle class. According to the Arab Barometer, only 26 percent of the surveyed population find the economic situation favorable and 37 percent think it will improve soon. Distrust in government is high: 25 percent of the population has a positive view of government performance, while 84 percent believe there is corruption in state institutions and only 41 percent believe the government is addressing the issue.

The rising aspirations of an overwhelmingly educated and young Arab population contrast with the poor performance of governments to modernize their economies and create jobs. Arab governments’ inability to deliver quality and affordable public services, coupled with the perception of official corruption that enables a crony private sector, exacerbates distrust among citizens. Social media amplifies the discontent. The technology allows citizens to swiftly react to missteps by often-secretive governments and can easily spread anti-government sentiments.

Needed: A new approach to reforms

Economic reforms in Arab countries typically happen after a period of bonanza from higher oil prices like in the 2000s—which benefits both oil exporters and indirectly importers in the region through foreign direct investments, remittances, and grants from the exporters. In turn, poor economic management and delayed macroeconomic stabilization precipitate the economic downfall when oil prices stay persistently low as they have starting in 2014. Governments then call on international organizations to support the rescue efforts to save the country from the perils of macroeconomic instability.

The urgency often justifies the focus on specific actions that mask their wider effects. For example, there is a strong rationale for moving away from universal consumer subsidies, especially for fuel—at a minimum because of how heavily subsidies weigh on the budget. Yet, attempts at reforms have caused protests, at times violent, even when measures were taken to mitigate the effect on the poor.

Opposition to subsidy reform is so strong because consumer subsidies are at the heart of the unspoken social compact in which Arab citizens give up their voice and tolerate low government accountability in exchange for subsidies, free education and medical care, and public jobs. That social contract is being tested by a burgeoning youth population and emptying budget coffers. Dissatisfaction is exacerbated by the failure of many Arab states to deliver adequate services in the subsidized sectors such as public transportation. In many Arab countries, private and mostly informal operators provide the lion’s share of transportation services. These operators stepped in where the state failed to deliver and in many ways the fuel subsidy was a transfer in kind to compensate the non-state operators for doing the state’s job. The removal of fuel subsidy is perceived by the often-large number of small operators as a transfer from their pockets to those of a state that has done nothing to deserve it.

A new approach to reform is thus needed to account for the dynamics of the constantly evolving social contract between the (political and economic) elites and the people. Reform of consumer subsidies cannot be considered independently of the implicit producer subsidies including to inefficient state-owned enterprises and exclusive access to public contracts by cronies. The approach should articulate the broader vision of economic transformation toward a more genuine private sector and therefore address both consumer and producer sides. Transformation should also be complemented by a more vibrant social protection system that cushions individuals from bad economic shocks and poverty. Currently, protection systems in Arab countries are limited, inefficient, and fragmented. Well-designed and well-implemented systems can encourage more individual risk-taking and the development of entrepreneurship and sustainable private sector development.

Transparency, data, and process to ensure government accountability

The inability of many Arab governments to deliver reliable basic services such as electricity, water, waste management, public transportation, and telecoms is at the heart of the distrust. While universal subsidies should be reformed promptly, it is appropriate that the government first improve its performance and encourage competition in key sectors on which citizens depend. Such reforms would improve the quality of services making it easier to justify to consumers the higher tariffs that would result from reduced subsidies.

Transparency and data disclosure is essential to reform in the public sector and to create accountability mechanisms to limit corruption. In too many Arab countries, there is limited open government, which reduces the likelihood of achieving open markets that have no barriers to entry. For instance, the lack of transparent public procurement and the failure to digitalize government payments and receipts encourage red tape and the capture of markets by elites with connections to the government. What is more, inadequate disclosure of data and statistics prevents evidence-based policymaking and limits the ability of governments to self-correct and avoid big mistakes. In other words, the burden of reforms in Arab countries should fall first on governments to help ensure that citizens will accept the burdens occasioned by transformative reforms.

It is also about the “little things”

In designing reforms, authorities should also pay attention to the little things like the consequences of removing price controls on certain popular staple foods such as bread. Even if they are not significant budgetarily for the government, these staples carry a hugely symbolic character for the population as a whole. A common thread in the massive protests in the Arab world is the importance individuals place on preserving their dignity—in big and small ways.