What does 2012 hold for the economies of the Arab World?

Published March 13th, 2012 - 03:06 GMT
The Middle East and North Africa will never be the same
The Middle East and North Africa will never be the same

What does the New Year hold for the Arab World? More democracy, political instability, economic slowdown but also a lot of hope, says Hedi Larbi, Director, Middle East Department, World Bank, when he spoke to Aparna Shivpuri Arya.

In 2011 the Arab world witnessed a tsunami change. Arab People overcame their fear, overthrew a few of the prevalent regimes, and took upon themselves to drive the political change they have been longing for since the Ottoman Empire. Let us look back at the last 12 months and try to preview what could 2012 hold for our region.

Politics

It is too early to draw some lessons as the political transformation is still unfolding both within and across countries. Political transition has just started in few countries (Tunisia, Egypt and to a less extent Libya). At the same time, revolution is still ongoing in other countries (Yemen, Syria).

Objective analysis of the prevalent economic and social situation in these countries, and extensive discussions with constituencies and popular base of the political parties can help shed some light.  For the majority of the people, the future of any political ideology will depend on how much those who are elected will deliver on both the political and economic demands of the people.

Economic

2011 was a tough economic year for revolutionary and evolutionary countries. Growth was flat or negative in Tunisia, Egypt, Yemen, Libya and Syria. It was sluggish in Morocco and Jordan. Unemployment, the central reason of the Arab Spring, soared especially in Tunisia and Egypt. Tourism income took a plunge with little sign of recovery (-35% in Egypt, -45% in Tunisia and even worse in Syria). Foreign Direct investment (FDI) has more than halved.

Domestic investors were willing to engage but were restrained by political uncertainty, social unrest and volatile security. Trade, though resilient in the first half of the year, declined thereafter. External accounts deteriorated. Foreign reserves declined, though for policy purpose, they still seem to be at reasonable levels but not for a long time. And most of all, available fiscal space at the beginning of the revolution was depleted, and fiscal deficits start soaring again (around 5% in Tunisia and Morocco, 8 to 10% in Egypt, Jordan and Yemen.

The prospects in 2012 remain very challenging, if not worse than 2011. In addition to the huge pile of inherited political and economic problems, and those developed in 2011, the region will not be able to avoid the severe impact of the persistent global crisis, especially in Europe. Indeed, even under the best of assumptions, Europe is likely to see a shallow recession, which will take many years to resolve and growth to recover. This will definitely affect the economies of the region for few years to come, especially North Africa countries, through the usual channels of trade, investments, tourism and remittances.

In the absence of external financial support (which doesn't seem to be forth coming in spite of the repeated promises of the G8), the combination of the euro crisis and the persistent social unrest and risk factors perceived by the private sector, will further compound an already challenging economic situation of countries in the middle of difficult political transition. Therefore economic recovery in most countries, especially Tunisia, Egypt, Morocco and Jordan will be delayed.

Once again, exports, tourism income, remittances, and investment could be hard hit. The fiscal space will further shrink in a context of rising borrowing costs. This will seriously limit the capacity of the countries to deploy appropriate fiscal measures to stimulate growth and preempt economic recession at this very sensitive juncture.

I am afraid, the unbearable high levels of unemployment is posed to further aggravate. On another front, it seems to be clear that there is an issue of credible leadership with enough policy experience to assure private sector and who is able to stand up to popular demands and mobilise public and private sector capabilities to immediately start the implementation a well designed development programme. This is the real threat I see, not only to the political Islam but, above all, to the Arab Spring and its noble objectives, says Hedi.

What lies ahead

Two brief conclusions can be inferred from the above. Democracy will likely be an important moderating factor over time. But Arab people will also discover that political Islam is not necessarily a viable alternative that can address their economic and political woes. Therefore, these first free elections in the region are not the end of the transformation process, but only the beginning. If so, we should expect future elections to bring political Islam back to its real weight.  It is too early to judge the ongoing political transformation process or to predict its final outcome. However, the observations made above and what has been achieved so far lead to think that the journey will be very difficult but it seems to have well begun. Indeed, some positive signs are worth noting.

Post-revolution countries are well engaged in their democratic transition. New and solid political awareness is developing and has been reflected in a first time free and fair elections in Tunisia, Egypt and Morocco. There is the foundation of numerous political parties. Tunisia, where all this started, is offering a home-made blue print for managing a democratic transition process, which could inspire other Arab countries.

Ultimately, Egypt will complete this first stage of transition and could offer another model. Libya, due to the lack of political and state institutions, will go through ups and downs, but will find its way with or without the help of its neighbour. Morocco offers a reasonable example of evolutionary reform which could inspire other monarchies of the region. If these countries eventually emerge as stable democracies, they will exert a tremendous influence on the internal politics of the region, by demonstrating successful alternative models to the autocracies and theocracies that have previously been the only choices on offer.

We can debate the impact of the 2011 Arab Spring forever and under or overestimate the depth of its political transformation, but what happened in 2011 will have profound consequences for the future of the region, and beyond.

The Middle East and North Africa will never be the same. The forces that have been unleashed are likely to continue driving regional politics for decades to come. The ongoing changes will also fundamentally alter the geopolitical map of the Middle East.


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