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How Nascent Democracies Of The Arab World Are Stuck In A Maze Of Economic Crisis

Posted on August 14, 2014 in GlobeScope

By Anant Mishra:

What emerged as an initiator to free the Middle East from the harsh authoritarian regime, has been lost in the labyrinth of problems ranging from political instability to economic crisis. Today, the nascent democracies and some going-to-be democracies of Arab world have been stuck in the maze of economic crisis giving rise to problems of inflation, unemployment, fragile fiscal policies making people sceptical about their move to usher in democracy. Arab spring uprooted 42 years rule of Muhammad Guddafi in Libya, threatened the 41 year rule by the Assad family in Syria, seized Ali Abdullah’s power in Yemen, Hosni Mubarak’s 30 years of rule in Egypt and the list continues. The only thing that Arab spring has not yet obtained is stability in terms of politics, economy etc. in those countries which had been roasted in the fire of autocracy. The Arab world faces the following economic challenges:

arab spring

1. Large budget deficits in the countries associated with Arab Spring
2. Lack of vision about the economic reform in the post-democratic phase
3. Rise in oil prices due to instability in Middle Eastern economies
4. Decrease in FDI in the countries affected by the Arab Spring
5. Increment in the rate of unemployment in the countries afflicted by the Arab Spring
6. Insecurity attributing to low inflow of tourists in the economies significantly backed by tourism
7. Impacts of ongoing civil war in Syria in the economies of Arab world
8. Impact of Arab spring in the economies of the world

The set of protests attributed by the economic and social disparity seems to create a hurdle itself in the path of economic development. However, countries like Saudi Arabia, Kuwait, and UAE saw increase in revenues and GDP as an oil exporter due to high oil prices. Nevertheless, increase in oil prices is not beneficial in any way to any other country as an oil importer. Citizens of other countries are finding their future blur being under the yoke of turbulence for quite a long time. Countries like Egypt, famous for their antediluvian ambiences have lost large part of their national revenue with the decrease in the level of inflow of tourists due to onset of the Arab spring. Foreign Direct Investments have plunged significantly as investors have become highly sceptical about their investments in those countries where the political and economic scenario is extremely unstable. The clear sky that was expected to be seen in the Arabian countries in the post-democratic phase has been gloomy; experts around the world are concerned about the economic reform and development in the Middle East and North Africa (MENA) region where in some countries dictatorship is replaced by democratic representative and some are still echoing with protests.

History of the problem
Humans having a well-developed conscience have always shunned being directed by any external force. Each individual desires freedom, be it in small decisions in life or governance of the country. This has somehow attributed the emergence of democracy. The times when people are oppressed by the oppressors, they are deprived from their fundamental rights, a revolution starts- revolution for democracy; revolution for freedom. The whim of democracy has so overwhelmingly affected the modern world that the vast empires of brutal dictators have been penetrated by the glare of democracy.

Following the similar fashion, a siren of democracy was blown in Middle East with the series of events pioneered by protests in Tunisia from 18th December 2010.

Mohamed Bouazizi, a street vendor, soon grew into a pioneer of the revolution that shook the foundations of the dictatorial regimes of the Middle East and blunted the sharpness of harsh totalitarian rule. After continuous harassment from local policemen, he finally self-immolated after the dam of tolerance was destructed due to the overflowing feelings of inferiority within him. People then realized how the government authorities were continuously ignoring the rights of citizens. Soon, people’s grumbling discontent towards the dictatorial government grew into one of the largest agitation that the world had ever witnessed. Following the same fashion, in Egypt, people came out on the roads to show their contempt towards the government after Khaled Sayeed’s mangled corpse’s photo went viral on the internet. That agitation ignited through Facebook dealt the coup de grace to a nearly three decades long regime in Egypt. Gradually, most of the countries of Middle East got tangled in civil war.

The main reasons behind Arab uprising are:
– dissatisfaction with the rule of local governments, and
– possibly low income levels
– issues such as dictatorship or absolute monarchy
– human rights violations
– political corruption economic decline
– unemployment
– extreme poverty
– a number of demographic structural factors, such as a large percentage of educated but dissatisfied youth within the population.

Two countries, Tunisia and Egypt, which were the first to witness protests, differ from other North African and Middle Eastern nations such as Algeria and Libya as they lack significant oil revenue, and were thus unable to make concessions to calm the masses.

The revolutions and uprisings that are taking place in Arab world have unpredictable and unforeseen consequences. Industries and businesses are constantly suffering loss and hence are grinding to a halt. The famous tourism sectors have stopped operating because of insecurity to tourists and the entire business has dried up. Add to this the high cost of disruptions, strikes, civil war in Libya and the exodus of the foreign workers and the flight of inward investments. The economy in general stagnates and normal economic life ceases to function. The people are demonstrating against high food prices, high unemployment and corruption which in turn impede economic development. The young people are particularly badly hit by lack of job prospects and economic progress. Unemployment in the region among the young is very high. According to economic experts unemployment in Syria is 25% but the government own figures show that unemployment is only 11-13% Most observers believe the experts and don’t believe the government. In Egypt 90% of the unemployed are young people (age 15- 24).

Another main problem in the Arab countries is that the wealthy citizens have all transferred their funds to Europe and North America. It is an undisputed fact that investors are nervous and afraid of uncertainty. One Arab newspaper estimated that some $30 billion has left Egypt since the onset of the Arab Spring. To overcome the transformation that has taken place in the area, reforms in education and the introduction of literacy programs are urgently needed. In Egypt, only 15% of women and 70% of men are literate. Fighting of corruption must accompany political and social reforms. There is a great need for urgent economic reforms to reap the benefits of the political reforms. Though the chances are low, the countries are slowly improving and some countries have come much forward in the process, which include Saudi Arabia, Morocco, Tunisia etc. but the political instability is still a major hurdle in the economic reform.

As talking about 2014, the Arab spring has taken a more violent form and is still ongoing.

Current situation
Exports from North Africa and the Levant could be stimulated by establishing closer ties with fast- growing emerging markets. Actually, over the last decade, the importance of emerging markets for the region’s exports has already started to increase. The trade share with the Middle East countries increased from about 7% to 12% over the last decade and with Asia it doubled from 6% to 12%.

The BRIC (Brazil, Russia, India and China) countries are becoming more important trading partners. China and India have an interest in the natural resources of the region, which includes some of the world’s top producers of oil (Algeria and Libya), gas (Algeria and Egypt) and phosphates (Morocco and Tunisia). China is also a source of some commodity imports for the region, such as water-intensive foodstuffs, while Russia is a key supplier of wheat to Egypt, covering 50% of Egypt’s demand (Egypt is the world’s largest wheat importer). Overall, the BRICs are key suppliers of manufactures to the region. For example, Tunisia is now the largest market for Brazilian cars in the Arab world.

Not only trade but also investment ties with the BRICs have strengthened. China has secured 80% of infrastructure contracts in Algeria in recent years. As a result, Algeria hosts today the biggest Chinese Diaspora in northern Africa, of about 35,000 people. China was also the largest foreign investor in Egypt in 2009, with investments totalling more than US$500mn. India is active in Egypt, too, with investments in the services and assembly industry sectors. Russia and Brazil have engaged in oil extraction and upstream investment. Russia’s Gazprom has signed a memorandum of understanding with Sonatrach, the state-owned Algerian oil company, and Brazil’s Petrobras has invested in oil-exploration ventures in Libya. High-level official visits, business fora and technology transfer projects are likely to enhance further economic relations.

North Africa and the Levant offer a bridgehead location into Europe, Africa and the Middle East as well as preferential trade agreements with third countries as competitive advantages supplementary to low labour costs. If countries embrace trade and investment liberalization more forcefully, these advantages will translate into concrete improvements in living standards for the region’s population.

Intra-regional trade currently makes up only around 3% of the region’s total trade. Trade barriers between the countries are among the highest in the world (if only non-tariff barriers are considered, they are the highest). Logistical bottlenecks such as high transport and communication costs, an underdeveloped transport infrastructure and inefficient trade procedures hamper trade in general but especially intra-regional trade.

Regional trade agreements exist, but most of them have had limited impact and lack political momentum. All countries have agreed to establish a Greater Arab Free Trade Area (GAFTA) under the leadership of the Arab League. Egypt, Jordan, Morocco and Tunisia went a step further and signed the so-called Agadir Agreement in 2004. Another cooperation framework, the Arab Maghreb Union (AMU) made up of Algeria, Libya, Morocco and Tunisia, has stalled since its creation due to political tensions between the members, for instance between Morocco and Algeria. The border between these two countries has been effectively closed for the last 16 years. AMU might be revived by the new political leaders, as hinted by a meeting of the members’ foreign ministers in February 2012. Jordan and Morocco were invited to join the GCC in May 2011. The accession process is still open, with Jordan having finalized an Action Plan in November 2012, and both countries receive economic support packages from the GCC.

Unlocking intra-regional trade and investment can bring substantial benefits to the region. Estimates put the annual economic cost incurred by the lack of integration at around 2% to 3% of GDP. Potential gains could also be had by liberalizing trade in services such as finance, communication and logistics. Further benefits could come by enhancing labour mobility between labour-abundant and resource-rich countries. And finally, the greater region is in a globally competitive position to provide solar energy. Co-operating on trans-border power infrastructure might be a starting point for successful economic integration.

In Egypt, the privatization agenda remains unfinished and weak institutional capacity (such as lack of judicial and competition authority independence), together with continued state involvement in many sectors have hampered business growth (as has similarly been the case in Bulgaria and the Russian Federation). To a lesser extent, Jordan and Morocco also need to improve competition policy and the business environment in key industrial sectors (and face similar challenges to those of FYR Macedonia and Georgia, for example). However, privatization efforts have generally proceeded at a faster pace in Jordan and Morocco than in Egypt. Meanwhile, Tunisia’s successful reform efforts— from price and trade liberalization to privatization and tax incentives — have created a thriving offshore sector, although the onshore sector’s development is hampered by legal complexities, such as weak contract enforcement and low investor protection.