At the recent CFA Institute Middle East Investment Conference, hosted in the modern economic miracle that is Dubai,Adeel Malik from the University of Oxford and Bassem Awadallah, founder and CEO of Tomoh Advisory, analysed the deep roots of the relative economic failure of the wider Arab world. Their diagnosis and proposed reform held the audience spellbound. Against the backdrop of the Arab Spring and the tragic implosion of Syria, their message held an urgency.
Their argument, based on their paper “The Economics of the Arab Spring“, is that the political economy of the Middle East and North Africa (MENA) region has allowed the centralisation of much political and economic power, leading to a weak private sector, low productivity, and anaemic intra-regional trade. Combined with a population spurt, this mix has led to high youth unemployment and the pressure for social unrest.
Malik and Awadallah believe the source of the malaise lies in the centralisation of the state, with its interests served by a strong public sector, and that the state became the “provider of first and last resort” for food, housing, utilities, and jobs. A stream of external revenues through oil, aid, or remittances funded such a structure, with little need to develop the private sector. They stated that these rents have distorted economic incentives so that returns to patronage are higher than returns to production.
While such a situation was maintained for a long time, they argued that a new factor has made it more precarious. The resources of the state are being stretched by a fast growing population. The public sector cannot create the extra jobs needed, nor provide the expected subsidies. As a result, they think the prevailing economic model is not sustainable.
The usual remedies that are suggested for growing the private sector include improving access to capital, cutting red tape, and providing incentives to invest. However, Malik and Awadallah fear that such a prescription may not cure the patient. They believe that two other chronic problems need to be solved instead.
First, the incumbent regimes must learn to share power with a growing private sector, which would create new streams of wealth, and potentially use that to call for greater freedoms and compete for authority. They added that without striking a better political bargain, an economic remedy would not be possible.
Second, they contended that the environment for manufacturing must be radically improved in order to create sufficient jobs. Critically, a closer integration of the region, with lower barriers to trade and higher connectivity through roads and communication, is needed to create the economies of scale required to compete in the market for manufactured goods. By contrast, they argued that the present fragmentation of the regional economies results in high costs, monopolistic predation, and uneven distribution of wealth.
Clearly, a better environment for the private sector and more liberal trade would challenge incumbent advantages. While private sector development is, therefore, much needed, it may also be feared. However, without genuine economic reform, Malik and Awadallah warned that “stable autocracies” may simply be replaced by “precarious democracies” and the revolutionary promise of the Arab Spring would then be wasted.