Now For An Arab Economic Revolution

BEIRUT – Revolution across the Arab world has forced the region’s peoples and governments to grapple with the need for change. Years of sclerosis have given way to a frantic push for reforms to match the aspirations and discontent of millions.

But reform momentum is tugging in two, quite opposite, directions. One push is for governments to provide for their people; the other calls for governments to stop restricting their people’s freedom, particularly their economic liberty. The first type of reform will likely only exacerbate the Arab world’s grave problems; the second offers hope for positive and sustainable change.

In several Arab countries, most notably Saudi Arabia, rulers have sought to quell popular discontent by providing a combination of cash, subsidies, guaranteed jobs, and free goods and services. Such largesse betrays a fundamental misunderstanding of the causes of today’s discontent, because it assumes that these causes are purely material.

But any examination of the protesters’ slogans and demands clearly indicates otherwise. The protests are much more about political and economic freedom than about material needs, reflecting a keen awareness that such needs are merely a symptom and consequence of the absence of political and economic freedom.

The dominant “handout approach” is not sustainable, and, if continued, would likely exacerbate the Arab world’s current economic malaise. Economic wealth cannot be created by government decree; it comes from productive jobs that create goods and services that people value.

Governments that hand out benefits are not making their citizens richer by generating new wealth; they are simply redistributing existing wealth. This also applies to government-created and guaranteed jobs: if a job is indeed productive, its output would be rewarded by other members of society who benefit from it, without the need for government subsidies and guarantees. The fact that government guarantees a job implies that its output is not wanted. Such jobs are a liability for society, not an asset.

As citizens start relying on redistribution, productive work is discouraged, and real wealth creation suffers. Economic rot sets in as the ranks of dependent citizens grow, productive citizens dwindle in number, and society eventually runs out of other people’s money.

But the popularity of the handout option raises an important and instructive question: just how did the ruling classes in these countries amass fortunes so large that people are clamoring for them to be redistributed?

Government officials and their cronies did not necessarily engage in straightforward theft or pillaging. Through innocuous-sounding government “supervision” and “regulation” – and under the guidance of the major international financial institutions – ruling elites managed to run entire sectors of the economy as personal fiefdoms. While this pattern of official behavior is reprehensible, the real disaster is that it destroyed Arabs’ economic productivity and initiative.

This economic totalitarianism has been legitimated by government charity. Arab elites have been engaged in a false embrace of economic reforms for decades, with countless ministerial shuffles, five-year plans, and elaborate World Bank and International Monetary Fund programs. But all these reforms involve government handouts or government-created jobs and opportunities; rarely do they involve removing the government’s grip over people’s lives. By framing the debate on reform as being about the type of handouts, governments evade tackling the real problem: their control of economic activity.

State handouts can be reliably financed only by controlling the economy’s productive sectors.  But in the Arab world, as everywhere else, this leads to theft, corruption, uncompetitive monopolies, a stifling of enterprise, and, eventually and inevitably, to decline and decay. The toppled Tunisian and Egyptian regimes spent decades providing handouts while denying citizens economic freedom.

As Arabs confront far-reaching change, they must not be distracted into fruitless debates about the right types of government support for citizens. What is needed is a root and branch transformation of the way that economic activity is carried out in all Arab nations.

Arab countries need to become places where people can create their own productive jobs, pursue their own opportunities, provide for themselves, and determine their own future. This freedom obviates the need for the charity of those in power, and more importantly, takes away from them the excuse for maintaining their iron grip over the economic lives of their citizens.