The Economic Imperatives of the Arab Spring

WASHINGTON, DC/ISTANBUL – Almost a year has passed since revolution in Tunisia and protests in Cairo’s Tahrir Square toppled ossified authoritarian regimes and ignited a much wider – and still raging – storm in the Arab world. No one can safely predict where these events will eventually take the Arab people and nations. But one thing is certain: there is no turning back. New social and political movements and structures are emerging, power is shifting, and there is hope that democratic processes will strengthen and spread across the Arab world in 2012.

Events in the Arab world in 2011 recall other far-reaching regional transitions, such as in Eastern Europe after the fall of the Berlin Wall in 1989. There are differences, of course, but the upheavals’ sweeping and contagious nature is strongly similar to that of the revolutions that brought communism to an end in Europe. So, too, is the debate about the relative contributions of political and economic factors to the eventual eruption of popular protest.

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While the yearning for dignity, freedom of expression, and real democratic participation was the driving force underlying the Arab revolutions, economic discontent played a vital role, and economic factors will help to determine how the transition in the Arab world unfolds.  Here, three fundamental and longer-term challenges are worth bearing in mind.

First, growth will have to be much more inclusive, especially in terms of job creation. The youth employment-to-population ratio was about 27% in the Arab countries in 2008, compared to 53% in East Asia. Moreover, income inequality has widened, with the global phenomenon of increasing concentration of wealth at the top very pronounced in many Arab countries. Top incomes in these countries have resulted largely from political patronage, rather than from innovation and hard work. While Tunisia was an extreme case of a regime furthering the economic interests of a small clique of insiders, the pattern was widespread.

That is why a knee-jerk, simplistic “Washington Consensus” prescription of more liberalization and privatization is inappropriate for the Arab world in 2012. There is a clear political need for a growth strategy in which inclusion is the centerpiece, not an afterthought.

Neither the old statist left, nor the rent-seeking, crony-capitalist right had policies to respond to the yearning for inclusion. New political forces in the Arab world, Islam-inspired or social-democratic, will have to propose policies that do not just perpetuate rent-seeking capitalism or reliance on a discredited state bureaucracy. It will be necessary to harness grass-roots dynamism and entrepreneurial potential to achieve social solidarity and equity.

While a truly competitive private sector has to be unleashed, the state must not be weakened but transformed, to become one that is at the service of citizens. Generous but targeted and performance-oriented social transfers, conditional on participation in health and basic education programs, will have to replace the old, largely untargeted subsidies. Public development finance will have to focus on large-scale access to housing and a people-oriented infrastructure. All of this has to be achieved within a sustainable budget framework, requiring both funds and comprehensive administrative reforms.

Accompanying inclusive growth, the second challenge is skill development, for which a performance-oriented education system must become a top priority. Many Arab countries have spent huge sums on education; the problem is that the return on these investments has been dismal. Arab students, for example, score well below average on international mathematics and science tests. Deep reforms – focused on quality and performance, rather than on enrollment and diplomas – are needed to transform the learning process and unleash the productivity growth that a young labor force requires.

The third challenge, instrumental to meeting the first two, will be to strengthen regional Arab solidarity. Many outsiders underestimate or purposefully minimize the “Arabness” of the Arab world. But the revolutions of 2011 demonstrated that a strong sense of identity, a common language, and much shared history bind Arabs together, despite huge differences in natural-resource endowments, political circumstances, and average per capita incomes. How else can one explain that an act of revolt in Tunisia led to popular revolts from North Africa to the Arabian Peninsula?

One implication of this is that the oil-rich states and leaders cannot expect to remain isolated and protected from the unfolding events. The future of the region is also their future; the transition that started in 2011 unleashed forces that cannot be stopped. But the transition can be more orderly, more peaceful, and less disruptive if states that command immense resources and wealth generously support the poorer countries – and back the reforms that all Arab countries need. Existing institutions with proven track records, such as the Arab Fund, can help, but this requires scaling up their funds dramatically.

Prosperity and peace in the region will depend on thinking big and acting fast. The revolutions of 2011 are a historic opportunity for all Arabs. Making the most of it will require realism, courage, willingness to change, and a readiness to support change, particularly among those who have the greatest means to do so.