Business Today
Anchoring the Arab Awakening

The economic situation in the so-called Arab Awakening countries is deteriorating quickly, and the imperative for large-scale coordinated action is overwhelming.

Erik Berglof is Chief Economist of the European Bank for Reconstruction and Development

Erik Berglof is Chief Economist of the European Bank for Reconstruction and Development

The economic situation in the countries of the so-called Arab Awakenings is deteriorating quickly. Egypt is running low on cash - before recent rescue loans, currency reserves covered less than three months of imports - and Egyptians are hoarding fuel and foodstuffs in anticipation of future shortages. More frequent and longer-lasting power outages foretell worse to come in an economy already struggling with mass unemployment, widespread exclusion, and deep pockets of poverty.

Short-term macroeconomic stability is the immediate priority in Egypt and the other Arab Awakening countries. In the medium term, however, the viability of the current order is at stake - and not only in these countries, but across the rest of North Africa and the Middle East.

With so much at stake, Majid Jafar of UAE-based Crescent Petroleum was right to worry at the recent World Economic Forum on the Middle East and North Africa at the Dead Sea. His proposal of an Arab Stabilization Plan, inspired by the post-1945 Marshall Plan in Western Europe, is laudable. The imperative for large-scale coordinated action is overwhelming. But is the Marshall Plan the right model?

The Marshall Plan was a macroeconomic strategy involving massive capital transfers to help reconstruct the war-ravaged industrial capacity and infrastructure of economies with well-developed institutions. But what the Arab region needs are micro-oriented, project-based, and governance-heavy investments conditioned on deep reform of a business environment that is generally considered among the worst in the world.

In a joint report on the competitiveness of the Arab countries, the European Bank for Reconstruction and Development (EBRD) and the World Economic Forum call for urgent institutional reform to support private-sector growth. Excessive red tape and ineffective enforcement of competition policy and governance rules are hampering entrepreneurship throughout the region. Massive investments are also needed in education to eradicate deep pockets of illiteracy, raise overall skill levels, and better match skills to the demands of the market.

Perhaps surprisingly, there is widespread consensus in the Arab Awakening countries that the private sector is central to sustained job creation and growth. We saw this recently when the EBRD, together with the British-based organization Forward Thinking, conducted a closed-door workshop for 27 leading representatives of parties from across the political spectrum in the region. Two days of intensive discussions revealed important differences in perspective, but also many commonalities.

Private-sector development clearly means different things to different people. The parties on the right largely embrace free-market thinking, while Egypt's Muslim Brotherhood and its kindred parties in Libya and Tunisia are deeply sceptical of the state, which they view as bloated, inept, and ultimately corrupt. Moreover, the existing banks have failed to serve these parties' small-business and farming constituencies. Achieving ambitious goals for inclusive growth and job creation quickly without an enabling state and without using the banking system will be extremely difficult.

Without question, the main responsibility for building these countries' political systems and reforming their economies rests with their citizens. Outside intervention has left too many scars in the public's collective memory. But the region can look to the successful transition in Central Europe and the powerful anchor for reforms provided by these countries' accession to the European Union. Countries like Hungary and Poland can hardly be accused of having a hidden agenda when they share their development experience. Much can also be learned from countries like Turkey, which has managed to create a dynamic and innovative private sector.
The good news is that the economies of the Arab Awakening countries do not suffer from the deep distortions that characterized post-communist Europe. Many of the early reforms have already been implemented, and reasonably sophisticated banking systems are in place. In post-communist Europe, banks had to be built from scratch out of the rubble of socialism.

As a result, while political uncertainty will take its toll on economic growth, the Arab Awakening countries should not have to face a transitional recession, as post-communist Europe did in the 1990's. On the other hand, they are unlikely to benefit from the subsequent robust growth that most European transition countries experienced.

Jafar is right that the Arab Awakening countries need a plan. But it should be a plan for private-sector-led inclusive growth, supported by efforts in the rest of the Arab world and in the EU. Most critically, it must be a plan owned by the countries themselves and based on an approach that recognizes the critical roles of an enabling state and a catalytic financial sector. The ongoing socio-political transition, underpinned by widespread public recognition of the need for change, provides a historic opportunity to embark on growth-enhancing reforms.

Erik Berglof is Chief Economist of the European Bank for Reconstruction and Development

Copyright Project Syndicate

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