MENA: If Not Now, When?

There is no way back, the genie is out of the bottle. MENA’s shortcomings have been irrevocably exposed by the global crisis. Bold reforms are now impossible to postpone, if the region is to avoid years of stagnation and violence. Transitioning to democracy requires courage and concessions.  The opportunity is unique, and must be seized: the future can be bright.

In today’s world, there is hardly a region with more potential than the Middle East and North Africa (MENA). It has everything to succeed. First, a splendid past, with one of the richest cultural heritages in history.  Second, a resourceful present, as it sits on top of large shares – 60 percent of oil, 45 of natural gas – of the world’s proven reserves of fossil fuel, and controls over US$ 1.6 trillion in assets, more than a third of global sovereign wealth.  Third, it is set for a bright future: MENA’s population – 300 million citizens – is younger and larger than those of the EU and US.

Yet, development lags, blocked by political stasis, latent and existing conflicts, weak governance, rent-seeking, and administrative red-tape. The region’s strategic and economic importance keeps drawing undue international interference. Disputes between Morocco and Algeria, Lebanon and Syria, Iran and Iraq, Israel and Palestine exemplify the political tensions that occasionally break into war. Arms purchases deplete public budgets. Health and education outcomes are below world averages. Two-thirds of citizens have no access to financial services. Not developed at home, technology needs to be imported.  Unemployment and poverty are rampant.

In early 2011, most unexpectedly, the Jasmine revolution hit, turning hopelessness into a wave of popular unrest. Autocrats were toppled in Tunisia and Egypt. Decades-old regimes in Libya, Bahrain, Yemen, Syria, Oman, Jordan, Iran, and Sudan have come under rising pressure. Discontent is shaking the region, and brewing in Saudi Arabia, Algeria, and Morocco.

This is unprecedented, but not surprising. For decades, the Arab world was locked in a Faustian equilibrium: autocratic rulers, to stay in power, secured Western support in exchange for stability in oil supplies and Israel’s security, and redirected their citizens’ anger towards Israel and – often – Western imperialism. Steadily, the regimes cracked down on dissent, co-opting or jailing critics, unwittingly leaving political opposition in the hands of Islamists. The rise of local extremism and the fear of ensuing social breakdown along religious, ethnic, and tribal divides were exploited to reiterate the need for strong-handed rule and renewed Western backing.

With few incentives to build participatory and accountable institutions, the regimes stalled development and quickly became incapable of meeting the aspirations of a rapidly-growing and better-educated population. A paternalistic use of economic rents increased living standards whilst planting the seeds of political frustration in a gradually more aware middle-class. Nepotism widened income inequality. Strong alliances between ruling and business families impeded competition and favored rent-extraction. Monopolistic practices hampered job creation. As a result, the labor market is strained: 25 percent of the youth is out of work, while migration drains brains (more than 40 percent of skilled workers leave Lebanon, almost 20 Morocco).

Over time, the Arab street grew angry. The youth’s grim prospects (about 50 percent of the population is under the age of 25) bred economic discontent. Young Arabs and Muslims felt increasingly disaffected by decades of poor governance and social injustice. They also felt humiliated by their rulers’ handling of Palestine, Iraq, and Afghanistan. Technological openness made controlling information difficult, and enabled calls for democratic participation and civil rights.

The effects of the 2008 financial crisis provided the spark. Most MENA economies were hit in three ways. First, in the real economy: lower growth in the European Union – the region’s prime trading partner – meant lower exports and reduced service receipts (in Tunisia, tourism accounted for 7 percent of 2010 GDP), leading to even higher unemployment. Second, as food and energy prices rose because of a wave of liquidity (with slashed interest rates and quantitative easing, über-easy money chased assets), net commodity-importing countries – Tunisia, Egypt, Jordan, Yemen – suffered a drop in their real disposable income and terms of trade. Third, large budget deficits reduced the ability of policy makers to provide further fiscal stimuli, making it impossible to create employment or subsidize commodity consumption. Rising food prices hurt the poor and – as the jobless Arab street became hungry – ignited riots.

The world has seen this before. When unemployment and headline inflation rates worsen simultaneously, people lose patience. In the ‘90s, similar political unrest swept through Eastern Europe, the Soviet Union and Asia. Food shortages were a big catalyst in Romania’s 1989 ousting of Ceauçescu and the 1991 Soviet revolution. In 1998, Indonesia’s Suharto was toppled as the Asian financial crisis led to rising food prices.

However, when regime change was not accompanied by meaningful reforms, years of low growth and significant financial and political instability ensued. The unattainable demands of various economic groups led to higher public spending, larger budget deficits, and lower tax revenues. Rising debt levels led to defaults or – when money was printed – spiraling inflation. Sovereign spreads rose, capital outflows accelerated, and currencies depreciated. The economic transition in Romania, Russia, and Indonesia (but also in Turkey and Pakistan) entailed high inflation, falling real incomes, and recession. Economic recovery and political compromise were possible only with fiscal discipline and structural reforms.

Today, the Arab world seems to be embarking on a similar path. In the years to come, quite a few countries are likely to experience income volatility and economic hardship. From Bahrain to Egypt, incumbents and hopeful candidates – in order to keep or grab power – need to promise “everything to everybody”. No doubt, this is not the moment to push tax rises and spending cuts. At the same time, aid money is likely to be scarce for the poorest countries, from Morocco to Yemen. Europe and the US, amongst MENA’s largest donors, need to reduce fiscal deficits and manage huge debts. The Gulf countries – declarations of intent aside – do not seem committed to finance the region’s needs.

Still, MENA’s biggest concern is not money, but the lack of strategic vision its leaders seem to display. Tragically, rulers across the region were unable to realize that political frustration got to a “point of no return”.  As a result, political instability is now part of the landscape. In Tunisia, to maintain control Ben Ali could have passed the baton to a care taker. In Egypt, Mubarak could have appointed a vice-president or accelerated the transition to his son. In other words, reforms that just a year ago would have been saluted as bold and progressive, today are seen as insufficient. Softening draconian emergency laws in Syria – or appointing a new prime minister from within the Al-Khalifa family in Bahrain – would have silenced protestors before the onset of the Jasmine revolution. No longer.

The status quo is not a viable option. If history is a guide, without bold structural changes a peaceful transition to democracy is highly improbable. As vacuums of power get filled, the ongoing turmoil is likely to morph into a deeper, structural crisis plagued with strongman politics, social instability and economic stagnation.  Countries where the army is strong and secular are likely to follow Turkey’s model. Others might drift towards a Pakistani impasse or, as Algeria did, a prolonged civil war.

To prevent the situation from deteriorating, can MENA’s rulers swiftly enact credible, meaningful reforms? If not now, when? At this point, naïve optimism is a must: if unlocked, the potential is enormous. The region can get on the world map as an emerging market. Today, China, Brazil, India, Russia have an advantage, but the century is young, and the region must give it a try. So, what to do concretely?

First, get the house in order. The region’s autocratic regimes need to cede power and open access to wealth. It is essential to build participatory institutions, limit élite-capture by amending rent-capturing regulations, create a viable private sector, and – last but not least – enable job-creation. The management of national resources with increased transparency and accountability is also crucial.  The young citizens who took the streets are unlikely to be risking their lives to see the status quo unchanged. They are also unlikely to be satisfied with wealth redistribution alone. It is time to change.

Second, integrate and bet on domestic demand. To succeed, the region needs to become a block, by building infrastructure – good roads, better internet, and air-transport connectivity – and by fostering trade links and free movement of capital, labour, and technology. Simplified product regulation and administrative harmonization (i.e.: common visa policies) are key priorities. Then, MENA needs to unchain local consumption as a growth driver. Its young population, urbanization growth, and rising middle class will create demand in real estate, energy, and services (in the fields of finance, health, and education). Telecoms and utilities are likely to attract the interest of foreign investors. Finally, MENA’s leaders need to start thinking about the benefits of a free trade area, a common market and a currency union. The potential size of the market is stunning: MENA’s 300 million consumers can be scaled up to the 460 million of the “Union for the Mediterranean”, and could reach 600 million if integrated with Europe through trade agreements.

Third, invest in innovation and services. There is no reason why MENA, with its sun and wind endowments, cannot be the Silicon Valley for alternative technologies, and export ideas once again. Sectors with a “comparative-advantage-in-learning” are renewable energy (think of solar power in the desert), water management and desalinization (i.e.: Jordan’s efforts to face water scarcity can make it a world leader), and hub logistics – the region is in “the middle”, and should exploit its geographical advantage by building adequate infrastructure. The port of Agadir should become essential for shipping European manufacturing into Africa and Latin America. The GCC financial system is the natural money-box for China’s investments into Africa, and for Europe’s flows into Asia. The recipe is clear-cut: each country – and MENA as a block – needs to attract capital, train labor, and get at the frontier in technology. To attract capital the region need coordinated development plans, credible implementation, and instruments (e.g.: structured funds) to attract investors. To retain talent and reduce unemployment, it is essential to align the education system with the job market. To enhance productivity, technology should be initially imported, but subsequently developed by creating centers of excellence.

The task is difficult, but not impossible: MENA’s countries are relatively homogeneous, with a majority of the population sharing the same language and religion. It is a worthwhile effort. As shown in the case of the EU, while increased interdependence helps, building a middle class with supra-national interests, economic development and integration bring about peace and its dividend, prosperity.