Monthly Mind August 2014: "Economics after the Arab Uprisings"

"In the last couple of years, our focus was on political instability and religious extremism. It is now time to redirect it to the socio-economic underpinnings of successful political change", Wolfgang Ischinger writes in his latest column about the Arab world.

Wolfgang Ischinger, the chairman of the Munich Security Conference (Photo: Kuhlmann).

The countries of the Arab world have so far paid a heavy economic price for their attempts to gain economic freedom. The picture is particularly grim for the non-oil exporting countries in the region. In the five years before the Arab uprisings, average GDP growth in these countries was over 5%. Since then, it has been just 2 to 3%. That is roughly in line with population growth, which means that average per capita GDP is stagnating. In reality, there are no average incomes. Stark differences in income and wealth have contributed to the Arab uprisings. These differences are not narrowing. 

 

Traditionally, Arab governments have sought to counter these inequalities through public job creation and generous subsidies for fuel and other basic goods. They did so again after 2011, which is why budget deficits have exploded to unsustainable levels. 

 

In future, growth and job creation will have to shift back from the public to the private sector. This is not happening at the moment. Recorded unemployment in Tunisia has risen to 17% and in Egypt to over 13%. Youth unemployment is much worse: at 25% across the region it is the highest in the world. Although the youth bulge passed its peak almost 20 years ago, millions are pushing onto the region’s rigid and ill-functioning labor markets each year. To absorb these new entrants, and also the unemployed, the non-oil exporting countries in the region would have to create over 18 million full-time jobs over the next decade (IMF estimate, 2012).

 

Limited influence of the European Union and Germany

 

How can we help? The European Union redesigned its neighborhood policy at the time of the Arab uprisings. It promised a "more for more" approach of increased aid, trade liberalization and work and student visas. The EU summed this approach up under the 3 Ms: Money, markets and mobility. Given that the EU’s objectives were to support peaceful political transition to democracy and balanced economic growth, it is fair to say that this approach has not delivered.

 

But perhaps our expectations were inflated to start with. The European countries have long been divided about how to deal with their southern neighbors; the EU’s resources for influencing such a large number of different countries are limited; and the euro crisis has made the EU feeble, inward looking and less generous. 

 

Even stronger obstacles exist on the other side of the Mediterranean. Unlike in Ukraine, the people of Tunisia and Egypt did not go into the streets wearing EU flags. New and self-confident Arab governments often see EU conditionality as unwelcome interference. And they have alternatives. Saudi Arabia, the UAE and Kuwait have given almost 14 billion dollar in assistance to Egypt. That allows Egypt to say no to Western money and conditionality. Jordan, Morocco and Tunisia have also received support from their oil exporting neighbors in the region. Algeria and Libya, themselves oil and gas exporters, have massively expanded their own government spending. EU money simply does not buy change in this environment.

 

Giving the MENA countries better access to the European single market is a good idea - although for most sectors, they already enjoy tariff-free access. And that holds true even for 80% of agricultural goods. But bilateral trade is asymmetric. For many countries in the region, the EU is an important trading partner. But for us, the region is not (yet) a key market. 

 

What is more promising perhaps, is the direct engagement of German companies in the region. Over 80 German companies in Egypt employ over 24,000 people. Some 250 German companies are in Tunisia, mostly members of the German Mittelstand. And - unlike some of the French and Italian companies there - they stayed put even during the recent political turmoil. These companies can perhaps help to build a more vibrant private sector, which brings me to my last point. 

 

Small enterprises are key 

 

The Arab model of creating jobs on the public sector payroll is no longer sustainable. Only private enterprise will be able to take up the slack. Although there are lots of start-ups in the region, these companies struggle to grow and create employment. 

 

The business environment in Northern Africa is not helping. It takes two months to set up a business in Libya and getting connected to the electricity supply costs three times the average salary. In Egypt, setting up a business can be done in a week or two. But then your average entrepreneur will spend almost 400 hours a year dealing with his tax bill and over 1,000 hours trying to enforce contracts with his suppliers and other business partners (World Bank Doing business database 2014). 

 

Governments are, if anything, a hindrance to enterprise growth rather than a help. Corruption is one problem. Tunisia is perceived to be the least corrupt country in the region. But even Tunisia ranks 77th in the Transparency International index, well below Cuba or Saudi Arabia. Morocco and Algeria follow at places 91 and 94 with Egypt even worse at 114. 

 

Moreover, all governments have reacted to the turmoil of 2011 with increased public spending. Public borrowing is crowding out private lending. Only 8% of bank credit goes to smaller companies in the MENA region (World Bank/Union of Arab Banks survey, 2011). It is therefore encouraging that the European Union, through the EIB and the Commission’s budget, is now contributing to an SME financing facility that is to bring up to 800 million euros in credit.

 

SMEs need a well developed financial sector that can help them invest and expand. They need more flexible labor markets, non-corrupt and fast government services and efficient tax systems. These are areas where the EU and Germany can do more to help, through technical assistance, institution building and strengthening of the financial sector. 

 

Another idea might be to support those actors in the Arab world who would like to bring positive change - not by encouraging an even bigger public sector, but by directly supporting private enterprises. Majid Jafar, for instance, the CEO of Crescent Petroleum, has called for a Marshall plan for the Arab world, financed by the rich Gulf countries and spent on infrastructure projects. These projects are to be realized by private enterprises or public-private partnerships. 

 

Conclusion: performance, not ideology 

 

In the last couple of years, our focus was on political instability and religious extremism. It is now time to redirect it to the socio-economic underpinnings of successful political change. It is perhaps no coincidence that Tunisia - the country with the best economic data before 2011 - has also been the most successful in its political transition so far. 

 

The way towards balanced economic development will be long and hard. Expectations are high. Governments are under extreme pressure to deliver quick results.  And of course, economic growth and jobs are not sufficient conditions for successful political transition but they are necessary ones. 

 

Events like this one, where leaders like Mohamed ElBaradei can voice their visions for peace and prosperity and encourage others to think hard about it, are essential as we move forward. I hope that this series of speeches here at the Frauenkirche - a symbol of "rebuilding peace" from the ashes of war and conflict - will over time become, as one might say, the "Lindau" for Nobel Peace Prize Laureates. 

 

Ambassador Wolfgang Ischinger is Chairman of the Munich Security Conference and Global Head of Governmental Relations at Allianz SE. This text is based on a speech he gave at an event in honor of Nobel Peace Laureate Mohamed ElBaradei on 18 March 2014 at the Frauenkirche in Dresden.

 

 

28 August 2014, by Wolfgang Ischinger

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