Sat, Oct 19, 2013 - Page 9 News List

Economic reform needed to finish the Arab Spring

By Erik Berglof and Shanta Devarajan

The turmoil following the Arab Awakening has all but decimated the affected countries’ economies. Political assassinations and polarization in Tunisia, civil unrest and a military takeover in Egypt, terrorist attacks in Yemen, sectarian strife and an institutional vacuum in Libya and civil war in Syria have contributed to a sharp fall in investment, tourism, exports and GDP growth, aggravating macroeconomic imbalances. For example, Egypt’s fiscal deficit now stands at 14 percent of GDP, with public debt approaching 100 percent of GDP. Most of the Arab Awakening countries lack buffers to withstand further economic shocks.

Worse, beyond the removal of individual autocratic leaders, few of the problems that fueled the uprisings have been addressed. Indeed, unemployment is higher today than in 2010. Untargeted fuel subsidies and the public-sector wage bill have increased, crowding out much-needed public investment and relief to poor families, while impeding the development of a dynamic and competitive private sector, and limiting new firms’ access to finance. Meanwhile, public-service delivery has deteriorated.

Moreover, the political situation remains unsettled, with transitional or interim governments, unfinished constitutions and uncertain timetables for future elections. In short, the Arab world’s transition countries are much more vulnerable today than they were at the height of the protests in 2011.

Against this background, an external shock could bring these fragile economies to a sudden stop, leading to devastating poverty and hardship, and imbalance-correcting policies – such as sharp tax increases, spending cuts, or currency devaluation — could backfire, fueling political unrest, delaying elections further and exacerbating the very imbalances that they were meant to rectify.

Even if governments managed to restore macroeconomic balance gradually, the structural problems of high unemployment, poor investment climates and inadequate provision of public services would likely remain unaddressed.

Growth would be insufficient to create jobs for the millions of young people entering the labor market. The Arab Awakening could become little more than a blip in the affected countries’ socioeconomic development.

Until now, the international community’s response has been piecemeal at best. In 2011, the G8 Deauville Partnership — which brought the European Bank for Reconstruction and Development (EBRD) to the region — pledged that international financial institutions (IFIs) would provide US$38 billion to the transition countries over three years.

However, that promise was based more on existing IFI pipelines than on transition countries’ emerging needs. Furthermore, poor macroeconomic fundamentals, slow progress on reform and political turmoil have constrained the use of these resources. From the transition countries’ perspective, bilateral support from the G8 and the EU has been disappointing.

The Gulf Cooperation Council (GCC) countries — especially Saudi Arabia, the United Arab Emirates, Qatar and Kuwait — have contributed roughly US$28 billion to the transition countries. While these resources have helped to finance budget shortfalls, stabilize reserves and calm nervous markets, they have not been sufficiently leveraged to improve the policy framework, strengthen implementation of public investment projects or, more generally, put the transition countries on an inclusive and sustainable growth path.

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