The Economics of the Arab Spring

The yearning for democracy evident in the Arab uprisings of 2011 has stirred the world's consciousness. The economics underlying this set of revolts, as the Financial Times explains, is based on a kind of extreme crony capitalism whose tenets will not be unfamiliar to citizens of more developed countries. The questions are whether the Arab citizenry will actually win greater access to the possibility of income growth - and whether their European and North American observers will begin to notice the similarities and act in a more concerted fashion as a result:

"The plight of Mohamed Bouazizi, a Tunisian fruit vendor who found that official harassment made his job impossible, may seem a mundane trigger for the historic Arab awakening. In fact, Mr Bouazizi’s self-immolation and the protests it unleashed prove that Arabs’ political and economic grievances are two sides of the same coin, and that democratisation in the Arab world must be both economic and political for either to succeed.

The Arab countries vary greatly in their politics – their degree of authoritarianism and prospects for change – and in their economic structure. But they all need reform and, with few exceptions, they all suffer a similar economic ailment.

The fundamental dysfunction of Arab countries is that of the rentier state. In oil- and gas-rich countries, natural resources return far more than it costs to extract them. Capturing and controlling this surplus – economic rent – is the chief source of enrichment, hence both the means and the end of power. Meanwhile the tragedy of resource-poor Arab countries is that they create rent artificially when nature has given them none. Monopolies, regulation and bullying all serve to limit access to productive activity, which generates fantastic rewards for a favoured few at the cost of holding back whole nations.

Whatever the source of the rent, the rentier economy is a vicious cycle in which the concentration of economic opportunity and that of political power fuel one another. This is why dignity and livelihood are inseparable in the demands of the excluded Arab majorities that have finally raised their voice. It is also why the political revolutions across the region will succeed only if matched by economic transformations. Even as Egypt and Tunisia grope for political transitions, the economic challenge is urgent.

The immediate priority where the regimes are in flux is to get the economy working again while preventing the flight of national wealth. For the region as a whole, the long-run goal must be to dismantle the rentier state where it is possible, and loosen its grip on the rest of the economy in the resource-rich lands where it is not.

However welcome, the opening up of Egyptian and Tunisian politics brings uncertainty that poses a threat to the economy. A clouded future keeps foreign investment and remittances away; owners of wealth may try to move it abroad. Caution is needed. It is essential to crack down on corruption, but sectors controlled by cronies must be kept operating while ill-gotten gains are retrieved. Attempts to stop capital flight can easily trigger it, so foreign swap lines are better than capital controls.

Such policies require respected technocrats to be found to hold the economic levers – for now. Where constitutional reforms succeed, economic statesmanship will be needed to chart long-term reforms, including more competition. The redistribution of opportunities this entails will be resisted by those who enjoy the easy fruits of exclusive access.

Not all reform needs to be hard. Simply removing rules and practices that restrict entry into economic activities or access to credit will be popular and good for the economy. Dispersing control of the corporate sector is trickier. A protracted tug-of-war with past regime favourites can destroy the values being fought over.

Broader ownership and competition are necessary for a more market-based allocation of resources. But full liberalisation overnight could kill the patient. Such welfare policies as food subsidies and public job schemes are inefficient, but must be kept until they can be replaced by direct support of purchasing power for the poor (which itself would boost their freedom).

The region’s corporate successes are those that escaped political meddling. Arab people power risks more populism. For democracy to be secured, however, the economy itself must be depoliticised.