Arab Spring: Good for the Economy?

Michael O'Sullivan

If you are worried about the economic consequences of the Arab Spring, Michael O’Sullivan, head of portfolio strategy and thematic research at Credit Suisse, has good news. His analysis of 83 cases, over 53 years, shows that regime change is not just good for civil liberties, it is also good for the economy.

Nearly one year after the start of the Arab Spring, which has already brought regime change in Egypt, Tunisia, and Libya, O’Sullivan spoke on the topic at the CFA Institute Middle East Investment Conference in Qatar on 26 March 2012. While the Arab Spring is a sensitive issue, O’Sullivan approached the topic like a financial analyst would approach a research project: he sought to remain objective and politically neutral whilst backing his statements with data and arguments.

O’Sullivan asserts that his comparison of before-versus-after data for selected regime changes reveal that the rank of these countries in terms of GDP per capita tend to move up within 5-10 years (see graph below). Their growth rates increase, unemployment and inflation diminish, and foreign direct investment (FDI) and market capitalization rise.

O’Sullivan explained that findings from the dataset on regime changes are partly intuitive. That is because typically unemployment and inflation weaken the economy and often contribute to regime change. Once in power, the new regime then faces much pressure to bring in economic reforms to reduce unemployment and inflation.

His presentation highlighted that regime changes often come in waves and within one country as one change may be followed by another if the economic situation of the people does not improve quickly. He emphasized that the initial period after regime change is particularly vulnerable and requires urgent economic reform. O’Sullivan’s analysis showed that in countries where inequality is low, regime change has less chances of being reversed but in countries where inequality is high, entrenched elites have a greater chance of reversing the change.

O’Sullivan complemented his quantitative research with qualitative research by interviewing leading figures who have closely observed regime changes in their own countries. These interviews with people from Chile, Eritrea, Turkey, Georgia, and Serbia, revealed insights that the data could not. Interviewees highlighted the importance of avoiding financial crisis after regime change, communicating effectively to different groups, and successfully fighting corruption, all of which are relevant for the Arab Spring countries.

Data Michael O'Sullivan presented on GDP per capita increases post-regime changeOverall O’Sullivan was hopeful. He stressed that despite having low GDP per capital growth – even lower than that of Sub-Saharan Africa – and lagging behind in economic competitiveness, countries in Middle East and North Africa (MENA) have a better chance of progress than many cynics suggest. In fact, he cautioned against paying excessive attention to short term political and military conflicts, such as a potential attack by Israel on Iran, at the cost of long term economic planning and institution building.

He believes that some important indicators in MENA are superior to those of the Eastern European countries who experienced transition in the early nineties. For instance, in 1991, life expectancy in Russia was about 68 years whereas in Tunisia it is currently around 74 years. He gave the example of Poland, which supposedly had bleak economic prospects when it broke away from communism but has since had 20 years of uninterrupted economic growth and has come a long way in economic development.

O’Sullivan shared seven ideas to spur an economic revival:

  • Make use of finance through Islamic finance and a Mediterranean Investment Bank.
  • Unlock human capital by having more women join the work force.
  • Get more out of social media and mobile technology.
  • Invest in infrastructure including rail and shipping links.
  • Boost trade.
  • Develop a pan regional body to help protect the region from financial crisis.
  • Set up new institutions for arbitration and harmonization of different laws.

O’Sullivan contends that because of the financial crisis of 2007 onwards, the West has less economic resources or prestige to influence policy making in the Arab Spring countries. He gave the example of his native Ireland where within a matter of few years, the economy has moved from being an example of “how to” to “how not to.”

O’Sullivan concluded that there is not going to be a Marshall Plan for the Arab Spring countries. He believes that to move from the “spring” to an “economic revival” in this vulnerable period, instead of following a model prescribed by the West, Arab Spring countries will have to follow their own unique path on their own terms.

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