x Abu Dhabi, UAESaturday 20 January 2018

No quick fix for economic malaise of many Arab countries

Analysts warn that unless Arab governments make serious efforts to address issues from climate change and infrastructure development to corruption and education reform, region will spiral deeper into crisis.

WASHINGTON // There are no quick fixes to the underlying economic malaise of many Arab countries, where structural economic weaknesses in part caused the demonstrations that have already led to the removal of one Arab leader.

Rising food and fuel prices, young populations, unemployment and weak education and health services are vast challenges for the resource-poor countries of the Middle East and North Africa, the region most vulnerable to popular discontent.

Economists and analysts warn that unless Arab governments make serious efforts to address issues from climate change and infrastructure development to corruption, cronyism and education reform, the region will spiral deeper into crisis.

Some suggest it may already be too late. "The best way to describe it is that the game is largely played," said Uri Dadush of the Carnegie Endowment's International Economics Programme and a former World Bank director of international trade.

"Those countries that are ripe for change will find it is too late."

Arab countries, say some, need to eschew a piecemeal approach to economic reform and view political reform as a necessary complement to economic development and stability.

Samer Shehata, an assistant professor of Arab Politics at Georgetown University, said the main conclusion to be drawn from the upheavals was that political reform had to go hand-in-hand with economic reform, because "economic reform without political reform is also incomplete economic reform".

"You really can't have good economic reform unless you have rule of law, unless you get corruption under control, unless appointments to bureaucracies are based on merit as opposed to nepotism and so on," he said.

Observers further warn that knee-jerk reactions to raise subsidies and increase public sector hiring, already evident in Jordan, Algeria and Egypt, may hurt those economies in the long-term, even if political expediency makes them appealing in the short term.

Ragui Assaad, a professor at the University of Minnesota's Humphrey School of Public Affairs and fellow with the Brookings Institution, said: "Subsidies and short-term giveaways to the population are unsustainable and will only have short-term effects."

He called energy subsidies in Egypt "a scandal". Mr Assaad said they cost more than the state spends on education. And they are hard to eliminate, he added.

"Fragile, illegitimate regimes are unable to take the correct economic decisions because they are afraid of the political backlash, and that's been a serious problem."

Structural economic flaws have so far had their clearest expression in Tunisia and Egypt, both countries that have taken part in World Bank initiatives and International Monetary Fund programmes.

Egypt implemented aggressive economic reforms over the past decade and enjoyed some success. GDP growth averaged nearly 7 per cent in the middle of the past decade and the level of foreign direct investment grew in tandem. The country was viewed favourably by international development institutions and largely escaped the global financial crisis in 2008.

But inflation remained rampant, and economic growth failed to trickle down, while food and fuel prices spiked in 2008 and then again in late 2010. Based on GDP, Egypt fell somewhere in the middle of the world's nations in 2010, according to the CIA's World Factbook, but its inflation rate was among the highest. Egypt ranked 211 of 224.

"The macroeconomic indicators looked wonderful," Mr Shehata said. "The reality of the situation, however, was that poverty and income inequality were increasing largely as a result of out-of-control inflation that was eating away at real wages."

But Tunisians and Egyptians went to the streets not only to demand subsidies or jobs; they wanted wholesale political change.

"Governance problems are what's causing the economic problems in some sense," Mr Assaad said. "The rules essentially don't apply to everybody and that creates an economic environment in which a few benefit at the expense of the many."

Mr Dadush made a distinction between what he called first and second generation economic reforms, where the former, including opening economies to outside investment and controlling the money supply, could be implemented without political reform.

Developing an economy further, however, by decreasing the role of the state and creating a vigorous private sector, needs predictability and rule of law.

"It is much tougher to do those second-generation reforms if you have a system that is largely arbitrary and controlled by a relatively small elite. So there I do see a connection between governance reforms, democratisation and economic performance."

While all those interviewed were careful to stress that individual countries had different problems, weak governance was viewed as an endemic flaw.

The World Bank declined to comment, but officials are understood to be frustrated with governments that are slow to embrace reform and cherry-pick changes when they do.

The World Bank has tried to promote regional projects in the belief that together, individual countries can better overcome the challenges facing them.

Among these are infrastructure projects to ease trade in the region, measures to remove obstacles on the movement of workers from country to country, and a solar-power project with stations from Morocco to Jordan that would produce enough energy to sell to European markets.

So far these initiatives have yet to catch on and Mr Assaad suggested Arab countries had a chequered record on economic co-operation. Mr Dadush said the nation state had to remain the focus, even if, in some cases, the problems run too deep.

"At this stage, there is no quick fix. At this stage, the disease advances to a certain point that what you do tends to be too little, too late. You just have to have a very, very different approach."