Arab Spring countries suffer a financial hangover

The turmoil following the Arab Spring uprisings has all but decimated the affected countries’ economies. Political assassinations and polarization in Tunisia, civil unrest and a military coup in Egypt, terrorist attacks in Yemen, 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.

Worse, most of the Arab Spring countries lack buffers to withstand further economic shocks. But such shocks are likely, given that, 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 Spring 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 G-8 Deauville Partnership — which brought the European Bank for Reconstruction and Development (EBRD) to the region — pledged that the international financial institutions (IFIs) would provide $38 billion to the transition countries over three years.

But 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, while bilateral support from the G-8 and the European Union has been disappointing.

The Gulf Cooperation Council (GCC) countries — especially Saudi Arabia, the United Arab Emirates, Qatar, and Kuwait — have contributed roughly $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.

To give the Arab Spring countries the needed space to transform their economies alongside their political systems, while avoiding destabilization or collapse, the international community must scale up financial, policy, and institutional assistance. This should include:

• New financial assistance linked to long-term reforms, amounting to $30 billion to 40 billion annually for about three years;

• Technical support to ensure that these funds are channeled toward productive public investment in short-term public-works programs that create jobs and longer-term infrastructure projects that eliminate supply bottlenecks;

• Broad frameworks for trade, regulatory reform, and investment provided by, for example, deep and comprehensive free-trade agreements with the EU;

• Policy and institutional support to restore trust between governments and their citizens, including by eliminating red tape and nepotism in business transactions, enabling poor people to hold public-service providers accountable, and enhancing social protection for the most vulnerable citizens.

This combination of assistance plays to the strengths of bilateral and multilateral partners like the GCC, the EU and the U.S., as well as IFIs like the World Bank, the International Monetary Fund, the EBRD, the African Development Bank, the Islamic Development Bank, and Arab development funds. These players complement each other in terms of systemic knowledge, implementation capacity, and available financial resources.

The upcoming gathering of finance ministers in Washington for the World Bank-IMF Annual Meetings is an ideal opportunity to begin building consensus around this much-needed effort.

Without urgent action, there is a good chance that those who took to the streets — indeed, risked their lives — in the struggle for dignity and opportunity will have done so in vain.

Erik Berglof is chief economist at the European Bank for Reconstruction and Development. Shanta Devarajan is the World Bank’s chief economist for the Middle East and North Africa. © 2013 Project Syndicate

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