Carnegie Asks: “Will Economic Difficulties Derail the Economic Spring?”-Part 1

By: Mehrunisa Qayyum

Washington, DC- On Monday, November 7th, the Carnegie Endowment for International Peace (Twitter handle: CarnegieEndow) asked the question: Will economic difficulties derail the Arab Spring? Uri Dahash moderated an economic discussion that snowballed into a political analysis of gains and losses. Panelists included: 1) Catherine Freund, Chief Economist of the MENA region at the World Bank, 2) Masood Ahmed, Director of the Middle East & Central Asia Department of the International Monetary Fund (IMF), 3) Robert D. Hormats, Under Secretary of State for Economic, Energy, & Agricultural Affairs, and 4) Marina Ottaway, Senior Associate of Carnegie’s Middle East Program. As Dadush further broke down the discussion by asking, “Politically, I’d like to understand: are transitional countries ready to be helped, do they want to receive (foreign aid/assistance)?” I could not help by following up with: do we have any experts that can dig deeper into the political culture analysis if we’re going to revert back to viewing through the political lens?

Will the Economic Difficulties Derail the Arab Spring?
In summary, most of the panelists offered a “no”, with caveats–as economists generally do. As Dr. Freund elaborated, the issue is not so much about the economics as it is the political and security concerns and cited the country example of Angola.

Under Secretary Hormats and Dr. Ahmed concurred, by offering some economic policy advice that essentially emphasizes the GCC nations and G-8 nations to support the economic transition with aid and assistance with the hope that this will EASE the political transition in parallel. In particular, other nations may assist by helping to stabilize the financial situation in Egypt, Tunisia–and hopefully Syria, advance trade opportunities, and provide economic assistance. However, Marina Ottaway expressed concern with the exact question as it presumes that the Arab Spring is supposed to follow a “pre-determined track that can experience derailment”–in essence, economics plays a significant role in the mid to long-term fates of countries in transition. Ottaway reasoned that some social problems will be addressed through economic reforms, but the degree to which social problems resolve afterwards will determine how the political transition facilitates further participation.

Even in the Short-Term, Economics Does Weigh-In…
The consensus argued that the economic difficulties will not derail the Arab Spring in part because the uprisings have noted corruption. However, Freund did elucidate the macro-economic indicators that do raise concern for countries in transition. For example,

⁃ Tourism dropped about 40% in Tunisia and Egypt;
⁃ Consumption is deteriorating;
⁃ Many countries have expanded civil service, raised wages, and keep the subsidies;
– Foreign Direct Investment is down; and
– Unemployment is still in double digits despite transitional reforms.

Furthermore, previous systems worked in an environment socially and economically many recognize that this cannot be sustained. Given these economic issues, Dadush probed further by asking: Can the World Bank do more, e.g. give money, although countries like Libya have Sovereign Wealth Fund to support transition? Freund and Hormats generally referenced the positive historical examples of Europe post WW II and the Eastern European countries transitioning in the 1990s. Essentially both timeframes recognized that political and economic reforms moved best together. Nonetheless, Freund noted how the global economy was much healthier in the more recent case of Eastern Europe–and it didn’t hurt that ascension into the European Union and NATO provided “fresh carrots” to incentivize various reforms regarding governance, participation, and overall redressing corruption charges.

On that note, Ahmed proposed a regional trade affiliation–and the more interesting question of when could the international community expect to see this. Since many of the oil-importing and oil-exporting regions offer little comparative advantage over one another, a free trade zone provides other benefits. Ironically, a regional trade entity– accompanied by various free trade zones for Arab countries (or the larger MENA region)–could serve as more a signal to foreign investors that the environment can support investment without as much bureaucracy.

Given the policy recommendations, Egypt might reconsider international aid or accepting an IMF loan. However, the terms of accepting the packages would have to acknowledge that conditionalized aid operates much more differently when it’s not the binary world circa “Cold War era” or the transitional countries are not looking to obtain membership with any economic cliques…