Economic reform in the Middle East could prove harder than in eastern Europe. The West needs to help it along
Jun 23rd 2011 | from the print edition
IS THE Arab spring a 1989 moment? The collapse of communism remade eastern Europe both politically and economically, as vibrant market economies emerged from the rubble of central planning. Optimists argue that democratic transitions in the Middle East and north Africa could transform the region’s lousy economies (see chart). Countries such as Egypt and Tunisia don’t have to build a capitalist system from scratch. But their state-dominated economies need an overhaul, similar in nature—if not in scale—to that in eastern Europe. Unfortunately, though the task is smaller, there are several reasons why it could be a lot harder.
Unlike eastern Europe, all Arab countries (those with oil wealth and those without) have capitalist economies, in which prices and private enterprise play a big role. Yet it is a distorted, patriarchal capitalism, characterised by a dominant state, kleptocratic monopolies, heavy regulation and massive subsidies. This has fuelled corruption, stunted growth and left millions without jobs. High oil prices give petro-economies the wherewithal to counter discontent by dispensing largesse. Those without such wealth face a growing fiscal mess.
Take Egypt. Outside agriculture, over 40% of the economy is in state hands, with a hefty chunk controlled by the army. Private firms are strangled with red tape. Subsidies for food and fuel, worth some 10% of GDP, are busting the budget. The result is that Egypt faces a fiscal crunch as well as an urgent need to overhaul its economic model (see article).
Top of the to-do list is reform of subsidies, so that government handouts are confined to the needy. Next comes a set of measures needed to foster private enterprise: breaking up monopolies, reducing the size of the state and rewriting regulations so that they support rather than suffocate competition. That sounds like a slimmed-down version of the post-communist transition agenda, where privatisation and the creation of competitive markets were also priorities. Unfortunately, the Middle East faces two big problems that eastern Europe didn’t.
First, eastern Europe’s transition had a clear aim: membership of the European Union. For all the EU’s current difficulties, it provided both a powerful political motivator and a detailed reform blueprint. The economies of the Middle East and north Africa have no such lodestar. Joining the EU is not an option. And although European politicians talk of deeper partnerships with the awakened countries, they still refuse to cut the trade barriers that matter, such as those on farm exports.
Second, the appetite for reform is far feebler. East Europeans wanted economic freedom along with democracy. In the Middle East popular anger at corruption and high joblessness have not translated into demands for wholesale economic reform. Quite the contrary. In Egypt the transitional government has expanded subsidies and increased employment in state firms. Economic liberalisation has a poor reputation, thanks to reforms earlier this decade whose fruits flowed largely to the well-connected. Indeed, a desire for vengeance against fat cats helped to bring the crowds onto Tahrir Square.
Fortune and favours for the bold
So the Middle East’s economic transition could be a lot bumpier than that of eastern Europe (which was itself a pretty rough ride at times). The West’s strategy for assistance must change accordingly. Up to now the focus has been on financial help: America has offered debt relief to Egypt, the IMF has lent cash with few strings attached. That buys time but does not promote reform. In future, aid should become more conditional, aimed at helping private enterprise. And far more important than cash will be the West’s willingness to offer freer trade and real integration to the successful reformers and democratisers. Maybe not EU membership, but something close.
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