Revolutionizing Arab Economies

ISTANBUL – The ongoing showdown in Egypt between the country’s Islamists and its military rulers is a clear reminder of how difficult democratic transitions in the Arab world are likely to be. Obviously, failure to reach a power-sharing agreement will prolong political instability. But the resulting economic inaction would be just as damaging to the consolidation of democratic rule.

Emerging Arab leaders, from Islamists to re-invented former regime officials, are keenly aware of the need to improve their countries’ economic prospects. They know full well that their popularity can be sustained only if they are able to deliver growth, employment, and higher living standards. This would be a difficult challenge under any circumstances – and is all the more daunting against the backdrop of the Arab Spring’s destabilization of the economic systems across the Middle East and North Africa.

Even in countries like Tunisia and Egypt, where the transition to democracy is more advanced, political uncertainty has tended to plague economic achievements. For the first time since 1986, Tunisia’s economy shrank in 2011, by 1.8%. Unemployment reached 18% last year, up from 13% in 2010. Meanwhile, the Egyptian economy contracted by 0.8%, and one million Egyptians lost their jobs. Egypt’s foreign-investment inflows have also dried up, falling from $6.4 billion in 2010 to a mere $500 million in 2011.

The combination of these negative trends is affecting these countries’ fiscal as well as external balances. Egypt’s budget deficit reached 10% of GDP, while its foreign-exchange reserves have fallen to $15 billion – barely enough to cover the country’s import bill for the next three months. In Tunisia, too, the budget deficit has widened sharply in the wake of the revolution, rising from 2.6% of GDP in 2010 to 6% in 2011.