Economic factors characterizing the explosive political transitions of the Arab Spring were the topic of discussion on October 4, 2012, as the Atlantic Council’s Rafik Hariri Center for the Middle East hosted a roundtable moderated by the Center’s director, Michele Dunne.

Hariri Center senior fellow Dr. Mohsin Khan and Dr. Zubair Iqbal of the Middle East Institute discussed how the wave of political change that has swept through the Middle East and North Africa impacted the region’s economies.

Dr. Khan opened the discussion with an overview of economic developments in the region leading up to the Arab spring, specifically looking at the 200o-2007 period. His macroeconomic analysis included variables of GDP growth, current account balance, fiscal balance, and inflation rates. He presented both a regional aggregated analysis as well as a disaggregated account, noting stark contrasts between oil-exporting and oil-importing countries. He noted that overall regional economic performance in the decade leading up to the global financial crisis in 2008 was on a positive track largely driven by the success of the oil exporting countries. Then in 2011 the political turmoil and social unrest that hit the region had direct impact on economic performance. Higher oil prices, regional spillovers, and slower world economic growth (especially in Europe) are additional external shocks that have contributed to slower growth and unemployment, particularly oil importing countries. Khan added that as tourists fled the region and imports became more expansive the economic situation continued to deteriorate. To mitigate the effects of the uprisings and to prevent the spillover effects, oil exporters making billions in revenue, were able to buy peace by “throwing” money at the problem and offering food subsidies, public sector wage increases, cash transfers, and infrastructure and housing projects. This appears to be a short-run fix because large stimulus packages are unsustainable in the long-run. On the other hand, oil importing countries, like Egypt, could not afford such massive stimulus programs and were faced with populists pressures.

Economic reforms that were started under the old regimes, with the approval of international financial institutions, are now at risk of discontinuance or reversal. Moreover, the transition countries’ new governments are being pressured to adopt populist economic policies while maintaining macroeconomic stability. To assist with economic performance the international community must provide incentives for the transitioning countries to continue with previous economic reforms, or at least not to backtrack on the reforms, Khan said. Some incentives include external debt relief, trade agreements (FTAs), World Bank projects and IMF programs. Negotiations for an IMF program are already underway in Egypt, as several already exist in Jordan and Morocco. The real task, Khan noted, is to design a sound economic program that balances the political demands of the population with the reform efforts.

Dr. Zubair Iqbal agreed with Dr. Khan’s assessment, but offered a different perspective. Iqbal asked why change was volatile in some countries and not others and questioned whether economic factors could explain the occurrence of violence. Iqbal outlined three basic economic factors that determine whether democratization was violent or non-violent based on income inequality, economic structure, and globalization. Iqbal found that in countries with high income inequality the ruling elites have ascribed themselves the power so they can make political decisions and allocate resources to maintain power. He also found that economic structure played an important role in the uprisings. In his opinion, an economy should be a profit maximizing system that allocates resources efficiently, but this is impossible when the elites in power are actively misallocating resources, thus distorting the structure of a profit maximizing system. As for globalization, Iqbal found it to be both good and bad. In his opinion, globalization is good in that it breaks down barriers for goods and capital flows, which allows for more efficient allocation. But it is negative in that it allows the elites to be less concerned about their resources because they are often beyond the realm of the opposition to inflict damage. High inequality, inefficient economic structure, and globalization are all indicators that can condition a transition towards violence.

Iqbal stressed that to avoid violence we have to look at these factors and address their fundamental issues. Clearly, growth and employment are not the whole story behind the uprisings, but they offer some insight into why distribution matters. Dr. Zubair concluded by saying that the role of the international community is to help the transitioning countries or countries at risk for violence to address these problems. If transitioning economies follow populist demands then there will be a serious problem as a result of high level of spending since its is unsustainable, especially when external financing is nonexistent.

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