The Economic Fallout from the Arab Spring

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Mohsin Khan

This post is written by Mohsin Khan , Nonresident Senior Fellow, Rafik Hariri Center for the Middle East, Atlantic Council.

The promise of democracy and self-determination was the driving force in the uprisings in the Arab world in 2011 that led to regime changes in Egypt, Libya, Tunisia, and Yemen, as well as the granting of greater political freedom by the rulers of Jordan and Morocco. The “Arab Spring” of 2011 was viewed as an inflection point that would put these countries on the path of political openness and pluralism. However, economic issues were an equally important factor in the uprisings. The explosive combination of undemocratic regimes, corruption, high unemployment, particularly youth unemployment, crony capitalism, high poverty levels, and widening income and wealth inequalities all created the conditions for the uprisings.

Unfortunately, over the past five years since the uprisings, economic issues have largely taken a backseat to politics. Governments of Arab transition countries were late in realizing that politics and economics move in tandem, and political stability is very difficult, if not impossible, to achieve if the economy is in turmoil. As such, the period since the uprisings has been pretty bleak for the economies of the Arab countries in transition, marked by large external and budget imbalances, high inflation, slow growth, and rising unemployment.

Economic growth fell sharply relative to their own past performance, as well as compared to Middle East and North Africa (MENA) countries as a group. The average annual growth rate of the Arab transition countries declined from nearly 5 percent in the previous decade 2000-10 to just over 2 percent during 2011-15. This low-growth equilibrium was not sufficient to absorb new entrants into the labor force, let alone make any dent in the existing stock of the unemployed.

Governments in the Arab transition countries, although preoccupied with political and security issues, understood that tackling unemployment had to be the main economic priority. But jobs cannot be created out of thin air. The only way to create jobs in the short run is by expanding government employment, which is what several countries did despite the fiscal strains they faced. So far, the public sector remains the largest employer in all the Arab transition countries.

Looking ahead, the growth picture in 2016 does not appear particularly promising for the Arab transition countries, even though some modest improvement is expected. International agencies, like the IMF and the World Bank, are projecting increases in economic growth to a little over 3 percent. Clearly, they are not out the woods.

What should these countries do to become dynamic and vibrant economies that can compete in a globalized world and create sufficient jobs for their young and growing labor force? The first order of business is to bring about macroeconomic stability. Essentially, this means bringing public finances under control, reducing external imbalances, and increasing foreign exchange reserves. But growth and employment are the primary long-term objectives, and governments have to strike a balance between the sometimes competing goals of macroeconomic stabilization and those of fostering higher growth. Furthermore, political leaders have to do this in an environment where populations are highly impatient and are demanding immediate improvements in their standard of living.

The challenge for the governments is to balance short-term populist measures that they feel politically pressured to take while keeping on a clear long-term economic reform path. High and sustained economic growth that leads to significant job creation will only come about if the Arab transition countries reform their economies to become more market-oriented and allow the private sector to take a leading role. Without these reforms and an expedited economic turnaround, the stability of countries will be threatened. Economic failure could lead to another round of major political uncertainty and upheaval and perhaps new uprisings by the now emboldened populations.

Don’t Blame the Abundance of Oil! The Volatility in Oil Revenues Combined With Poor Governmental Responses to these Volatilities Drives the Resource Curse

This blog is written by Kamiar Mohaddes, Senior Lecturer and Fellow in Economics at Girton College, University of Cambridge, UK.

According to the resource curse paradox, abundance of oil (natural gas, minerals and other non-renewable resources) is believed to be an important determinant of economic failure. But is the poor performance of resource-rich countries, when compared to countries which are not endowed with oil, due to the abundance of oil in itself or is the curse instead due to price volatility in global oil markets and production volatility due to political factors (such as wars and sanctions)? More importantly, is there a role for institutions and the government (in particular fiscal policy) in offsetting some of the negative growth effects due to the curse?

What do we know about the curse?
Although the early literature showed the existence of a negative relationship between real GDP per capita growth and resource/oil abundance, more recent evidence is not so clear cut. Firstly, the early literature used cross-country analysis that fails to take account of dynamic heterogeneity and error cross-sectional dependence, and this could bias the results. Secondly, the early analysis ignores the effects of oil revenue volatility on growth, which turns out to be important.

Figure 1 shows that for major oil producers, there is a positive relationship between the volatility in oil revenue and GDP growth (measured by its standard deviation over the full sample), but a clear negative relationship between real GDP per capita growth and its volatility. This suggests that the excess volatility in oil prices and production is associated with higher volatility in GDP growth, which in turn has a negative effect on output growth. We shall see now whether these results continue to hold when we use more advanced econometric techniques.

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It Takes Two Functioning Cylinders to Operate the Macroeconomic Locomotive: The Fiscal-Monetary Interdependence in Oil-Dependent Arab Economies

This blog is written by Ibrahim Elbadawi, director of the Macroeconomics Research and Forecasting Department at the Dubai Economic Council

As part of the ERF research theme on “natural resource management and economic diversification”, the research project on “Monetary and Fiscal Institutions in Resource-Rich Arab Economies” addresses, among other issues, the interdependence between fiscal and monetary institutions. In this context, the research considered the two central policy questions of the fiscal foundation of the choice of exchange rate and monetary regimes and the capacity of fiscal and monetary institutions to conduct counter-cyclical fiscal policy during oil busts and booms. These two issues are of profound policy relevance to the oil-dependent Arab economies. Also, they have been the subject of high profile academic research in the context of the paradigm shift of monetary economics research toward focusing on the fiscal-monetary policy interdependence and on institutions and regimes rather than just policies.

What is fiscal dominance?

In fiscally dominated economies (FD), exchange rate regimes are determined by fiscal, not monetary considerations. This is because such countries are likely to be characterized by persistent and high deficits; limited capacity to raise tax revenues; limited capacity to rein on public expenditure; and hence likely to try to maximize the inflation tax. To stem the tendency of the economy to experience persistent inflationary pressures, they resort to exchange rate stabilization by adopting fixed or heavily managed exchange rate regimes. However, due to the high inflationary inertia (i.e., inflation today fueling expectations of higher inflation in the future), exchange rate stabilizations in FD economies often times fail, leading to devaluation crises and further inflationary pressures. Therefore, credible monetary and exchange rate regimes require that economies be free from fiscal dominance.

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Institutions, Oil and Macroeconomic Management… What Does it Take to End the Resource Curse?

This blog is written by Hoda Selim, an economist at the Economic Research Forum

Natural resource wealth has been often blamed for the poor economic and development outcomes in oil-rich Arab countries. It has been claimed that the special characteristics of natural resources, such as price volatility, uncertainty and exhaustibility, pose challenges for effective macroeconomic management. Symptoms of the oil curse are many, and include: overall macroeconomic volatility, excessive borrowing during resource busts, Dutch disease, excessive consumption, and low or inefficient total investment.

In this context, policymakers were advised to improve the management of their wealth. But, could it be that long-standing and deep-rooted but weak institutions in the Arab World are the root cause of the oil curse?

Research has attempted to show that it was oil that hurts democracy through the creation of a rentier state. However, the current literature has almost reached a convergence that the resource curse is conditional on the quality of institutions (i.e., that resource-rich economies with strong political checks and balances are able to turn the resource curse into a blessing). In other words, political institutions shape incentives for economic institutions or, alternatively, they affect how resource rents are collected, allocated and used, and therefore influence macroeconomic management and economic outcomes.

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ERF to Hold Kuwait Conference on Monetary and Fiscal Institutions in Resource-Rich Arab Economies

The Economic Research Forum (ERF) will hold a conference on Monetary and Fiscal Institutions in Resource-Rich Arab Economies on November 4-5, 2015, in Kuwait City, Kuwait. The event, being held in cooperation with the Arab Fund for Economic and Social Development, is intended to address the challenges facing macroeconomic institutions in oil-rich Arab countries, particularly those responsible for monetary and fiscal policies.

The problem is that while oil-rich Arab countries account for close to half of global oil reserves and a quarter of natural gas reserves, they have neither achieved economic prosperity nor approached the ranks of developed nations. The efficiency (or lack thereof) of monetary and fiscal institutions in resource-rich Arab economies could explain this phenomenon, at least partially.

More than 100 participants from the region and abroad will examine the prospects and policy options for achieving fiscal and monetary stability in oil-rich Arab countries. Over five sessions and a panel discussion, experts will try to understand the rules and procedures governing fiscal and monetary policies in oil-rich Arab countries, the degree of independence and interaction between fiscal and monetary institutions, and the influence of politics on both.

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Religion: A Plural Reality with Multiple Meanings

This blog is written by Political Science Professor and former Parliamentarian Dr. Mona Makram-Ebeid

 

The effects of the restructuring of traditional state power engendered by globalization on the political, economic and security processes of different countries in the Arab World, particularly after the Arab spring uprisings, are still in the making.

The changes in each of the countries represent different paths leading toward a shared model of the “new” Arab state. Since the 19th century, religious life has witnessed changes of different kinds, but was unable to settle into a constant and sustainable model that could serve as the basis for a new religious order.

There is no doubt that disillusionment with government and religious authorities is helping fuel a re-examination of religious discourse. As citizens begin to read religious texts with critical intelligence they will see through the myths, the inconsistency with principles and the cultural prejudices and literary devices imposed by humans on interpretation of the text. A new understanding of religion is the pre-requisite of any social change.

Majority Muslim countries are today faced with a three sided “prison,” namely: an archaic Islamic past, a seductive Western future, and the problematic present.

Half an ounce of gold

In the seventh century, that is how much most of Eastern Christians had to pay for the privilege of living under the protection of the Caliphate. If they did not want to pay the Jizya (the levy) they could convert or “face the sword.” Today, in the 21st century, many Christians (mainly in Syria and Iraq) are given the same choice! But this time the offer comes from the Islamic State (ISIS also known as Daesh)! whose objective is to have a Christian- free Middle East.

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The Empowerment of Women in the Household starts with their Empowerment in the Market

This blog is written by Dr. Zafiris Tzannatos, Senior Consultant for Strategy and Policy

 

A precondition for effective bargaining (or, as some put it, negotiation) is to have some kind of power. This power can derive from “voice,” whereby you put your claim out in the open and hope to get a favorable response (think of shaming your spouse or seeking legal recourse).  Or, if you have an acceptable alternative, power can take the form of “exit” (voting with your feet: think of divorce or emigration when political/economic conditions deteriorate).

Women did not have much of either option in the past. Their voices were silenced by patriarchal institutions, work opportunities were few and exit options (to where?) were limited. Of course, individuals can rise or fall depending on the circumstances they face and their own deeds.  However, collectively we are bound by the constraints imposed by prevailing economic, societal and political institutions, or, in other words, the laws, regulations, norms, culture, customs, and religion that provide the framework within which two fundamental human activities take place: production/market and reproduction/family (both in their broadest sense, i.e., including all transactions and types of households).

Production and reproduction have for long been characterized by a strict division of labor. This division started becoming blurred in high-income countries after World War II. In the 30 years that followed the end of the war (“Les Trente Glorieuses”), fast economic growth led to full employment conditions.

As the limited supply of male workers started to be exhausted, real wages started rising and, with them, family incomes. Rising incomes reduced the need for women to work in what used to be their main “employers” before the War (farming and domestic service) or to even work at all. On the other hand, rising wages made staying at home increasingly expensive for women.  The issue thus became an empirical one: Would the wage carrot win over the stick of need?

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