The Economics of the Arab Spring

World Development Vol. 45, pp. 296–313, 2013 Ó 2013 Elsevier Ltd. All rights reserved. 0305-750X/$ - see front matter www.elsevier.com/locate/worlddev http://dx.doi.org/10.1016/j.worlddev.2012.12.015 The Economics of the Arab Spring ADEEL MALIK University of Oxford, United Kingdom and BASSEM AWADALLAH * Tomoh Advisory, United Arab Emirates Summary. — A singular failure of the Arab world is the absence of a private sector that is independent, competitive, and integrated with global markets. This paper argues that private sector development is both a political and regional challenge. In so far as the private sector generates incomes that are independent of the rent streams controlled by the state, it can pose a direct political challenge. It is also a regional challenge, since fragmented markets deny scale economies to firms and entrench the power of insiders. We argue that overcom- ing regional economic barriers constitutes the single most important collective action problem facing the region since the fall of Ottoman Empire. Ó 2013 Elsevier Ltd. All rights reserved. Key words — Arab spring, private sector, fragmentation, protectionism 1. INTRODUCTION number of people looking for jobs. During the period, 1996–2006, labor force in Middle East and North Africa The real struggle for change in the Arab world 1 will only be- (MENA) has grown three times as much annually as in the gin when the dust from its youth revolutions has finally settled rest of the developing world, resulting in one of the largest down. After emergency laws are lifted, constitutions are rates of youth unemployment globally. Although youth unem- drafted and elections are held, policymakers in the Middle ployment is relatively lower in resource-rich countries with East will be faced with a tough practical challenge: how to cre- smaller populations, where the public sector can better absorb ate economic opportunities for its teeming millions? This chal- new labor market entrants, the challenge is more acute in la- lenge will remain unmet without a strong private sector. A bor abundant countries. This includes even fuel exporters, singular failure of the Arab world is that it has been unsuccess- such as Saudi Arabia and Algeria, where youth unemployment ful in developing a vibrant private sector that survives without is nearly 30%. In Syria and Jordan young people under the age state crutches, is connected with global markets, and generates of 30 constitute more than 70% of the unemployed work- productive employment for its young. The region suffers from force. 4 a dangerous dearth of manufacturing, best manifested in just Over time the Arab world has not only grown younger, it one statistic: in 2003 the combined manufactured exports of has also become more educated. The region might have failed the entire Middle East were less than those from just one on multiple accounts, but it has had a resounding success in South-East Asian nation, the Philippines. 2 With few excep- expanding access to, and closing gender gaps in, education. tions, the private sector is generally weak and dependent on Of the top ten countries that made the most impressive strides state patronage; success in it is determined more by patronage in human development during the last forty years, five were than entrepreneurship. With the public sector as the main ave- Arab countries (Rodriguez & Samman, 2010; United Nations nue for job creation, the region suffers from a precarious Development Programme (UNDP), 2010). Starting from one employment strategy that leaves it unprepared to deal with of the lowest levels of educational achievement in the 1960s, demographic pressures. The unfolding crisis in the Middle adult education rose faster in the Middle East during 1980– East is thus not just about the Arab state—its failed efforts 2000 than any other region in the World (Yousef, 2004). De- to redistribute, reform, and represent ordinary citizen’s inter- spite reservations about the quality of education imparted, ests. It is also about the private sector—or, more appropri- even this quantitative expansion of education has led to a ately, its absence. The centrality of the economic question is evident. Arab revolutions were fueled by poverty, unemployment and lack of * Special thanks are due to Tony Venables who provided the initial ins- economic opportunity. Over the last few decades, the Middle piration for this article and to Adrian Wood for his detailed feedback. The East has witnessed an unprecedented youth bulge that has dra- authors wish to thank two anonymous referees for their constructive co- matically changed its demographic profile. A significant pro- mments, and to Mohammad Talib, Fawaz Gerges, Francis Robinson, portion of its working age population (about 34%) consists Richard Makepeace, Eugene Rogan, Richard Auty, Donald Wittman, of young people in the age bracket, 15–24. Although this ratio Tarek Yousef, Matteo Legrenzi, Michael Hudson, Darius Wojcik, Ferd- is somewhat lower in countries with high oil rent per capita inand Eibl, and participants of the panel discussions at NYU Abu Dhabi, (e.g., Qatar, Kuwait, and UAE), all Arab spring countries St. Antony’s College, Oxford, Bonn University, LSE, and the Interna- had high youth bulges, with youth bulge in Yemen standing tional Book Fair in Algiers for helpful feedback. Rafay Khan and Rinc- 3 out at 42%. Together with greater female labor force partic- han Mirza provided excellent research assistance. Final revision accepted: ipation, these demographic trends have greatly enhanced the December 30, 2012. 296 THE ECONOMICS OF THE ARAB SPRING 297 silent revolution of sorts. It is a revolution of aspirations. Even broad economic undercurrents and analyze the challenge of as aspirations have become more mobile with the new gadgets regional collective action. Our analysis also underscores the of globalization, the local systems of governance remain ossi- need to emphasize linkages between various levels of analy- fied, offering limited economic mobility to the region’s youth. sis—economic, political, and geo-political. We aim to capture Even physical mobility across borders is restricted. Unlike spaces within disciplines to paint a rich picture. The adage that Western Europe, where class-based struggles have historically the whole is greater than the sum of its parts holds special rel- driven political change, the Middle East is witnessing a truly evance to scholarship on the Middle East. generational struggle for inclusion. This broad characterization is not entirely unwarranted gi- While coping with these demographic trends is a challenge, ven the existence of several unifying threads. There are at least they also offer an opportunity for economic advancement. five common denominators that cut across commonly recog- Other emerging market economies in Asia have successfully nized conceptual boundaries—for example, whether an Arab harnessed their youth bulges for development. The irony in state is a monarchy or a republic, labor-scarce or labor abun- the Middle East is that there is a vivid mismatch between dant, resource-rich or resource-poor. First, all across the Arab demography and economic structure. While demography is world both economic and political power is concentrated in evolving, the economic structure is unresponsive to the needs the hands of a few. Second, the typical Arab state can be char- of growing populations. Middle Eastern economies are heavily acterized as a security state; its coercive apparatus is both dependent on hydrocarbons, dominated by the public sector, fierce and extensive. Third, the broad contours of demographic and are failing to keep pace with the growing labor force. change and the resulting youth bulges are fairly common The limited economic opportunities that do exist are rationed across the region. Fourth, Arab countries are mostly central- by connection rather than competition. This leads to tremen- ized states with a dominant public sector and, with few excep- dous economic injustice for the young who see little hope tions, weak private enterprise. Fifth, external revenues— for economic and social mobility. whether derived from oil, aid, or remittances—profoundly While the need for a vibrant private sector is widely recog- shape the region’s political economy. nized, it is less clear how to develop it. The challenge of private The remaining article is organized as follows. Section 2 high- sector development is traditionally viewed through a narrow lights the vulnerability of the prevailing development model. technocratic and apolitical lens. When it comes to the Middle Section 3 discusses the region’s puzzling economic fragmenta- East, however, the limits of World Bank’s recipes are particu- tion despite its favorable geography. Section 4 provides a larly evident. Private sector development is not simply a mat- snapshot of the pervasive trade barriers that underlie the re- ter of improving investment climate, reducing the cost of gion’s economic divide and develops the case for an infrastruc- doing business, offering cheap credit, or introducing market ture of economic cooperation. The politics and geo-politics of friendly economic reforms (World Bank, 2005). It is also a trade are discussed in Section 5. Finally, Section 6 concludes. political problem, since a private sector that generates income streams independent of the patronage network of the regime can be viewed as a political threat. 2. THE ORIGINAL SIN The absence of a vibrant private sector is also a regional failure. The Arab world remains fragmented in isolated geo- The state in Arab economies is the most important eco- graphic units with limited economic linkages between them. nomic actor, eclipsing all independent productive sectors. This fragmentation carries a heavy cost: for a private sector When it comes to essentials of life, such as food, energy, jobs, to survive and thrive, the size of the market matters. Frag- shelter, and other public services, it is often both the provider mented markets prevent firms from realizing the benefits of of first and last resort.

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