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Friday, May 6, 2011

Arab economic reform could make political reform look easy


The Egyptian Stock Exchange was drastically affected by the Egyptian revolution. (File photo)

The Egyptian Stock Exchange was drastically affected by the Egyptian revolution. (File photo)
Demands for political reform dominate the massive anti-government protests sweeping the Middle East and North Africa. Lost in the debate are protesters’ calls for greater economic opportunity. Yet, economic reform could prove to be far more divisive than efforts to introduce greater representation and transparency across the region.

Transition in Egypt and Tunisia, the two countries where protesters succeeded in toppling their authoritarian leaders, is focused on parliamentary elections scheduled for August and a presidential poll in September. Parties and faction may disagree on the modalities but all demand a pluralist system with free and fair elections.

That sort of consensus is absent when it comes to economic reform. In fact, the debate about reforms needed to create an economy capable of creating jobs, improving standards of living and reducing inequalities in incomes is likely to prove far more contentious than the one about political reform.

The economic debate runs the gamut of opinions. Some in the Arab world are calling for liberalization of trade and finance and greater opportunity for private initiative. They argue that authoritarian rule produced a renter economy, encouraged corruption and benefitted only a close-knit group around the ruler.

The role of the state, the prospect of privatization and the rise of a market economy are at the core of the debate.

Proponents of continued state intervention in the economy have been strengthened by the recent global economic crisis, which is widely blamed on the irresponsibility of major financial institutions.

As a result, the Arab world, according to a recent analysis of the Beirut-based Carnegie Middle East Center, is at a disadvantage compared to Eastern Europe, which transited in the 1990s from communism to capitalism.

Economic transition in the Middle East is therefore likely to be far more bumpy and contentious than in Eastern European where nations were able to build on the successful examples of their Western European counterparts.

Just how bumpy is evident from a recent survey of labor strikes in towns along the Nile conducted on a mid-week workday by Egyptian daily Al-Masry Al-Youm.

The paper recorded 350 butane gas distributors demonstrating against the Ministry of Social Solidarity in the town of Takhla; 1,200 bank employees striking to demand higher wages in Gharbiya; 350 potato chip factory workers walking off work in Monufiya; 100 nursing students holding a sit-in in the medical syndicate in Beheira; 1,500 villagers in Mahsama protesting against the city council’s closure of a subsidized bread bakery; workers at a spinning and weaving factory striking in Assiut; 30 teachers blocking the education ministry in Alexandria to demand tenure; and 200 tax authority employees occupying the collector’s office in Cairo to demand better wages and benefits.

The widespread labor unrest reduces productivity and scares off potential investors. Egypt’s military rulers, already taxed by their mandate of guiding the country towards democracy, a task they were unprepared for, have failed to quell the unrest with a ban on labor-related manifestations. The military and Egypt’s post-election government will have to be far more transparent about their plans for economic transition to ensure that various segments of society and the economy buy into what promises to be a complex and painful process.

The credibility of economic reform is likely to ride on the credibility of governments’ campaigns to root out corruption and dismantle the building blocks of their renter economy. The post-revolution governments of Egypt and Tunisia have catered to popular demand by taking legal action against former presidents Hosni Mubarak and Zine Abedine Ben Ali and their associates.

Mr. Mubarak and his two sons, Gamal and Alaa, have been in detention for the last three weeks. A slew of former Egyptian officials and businessmen, including the former prime minister and the speakers of both houses of parliament, face corruption charges while Tunisia has charged Mr. Ben Ali, who opted for exile in Saudi Arabia.

An Egyptian court sentenced this week the former interior minister who oversaw the expansion of the Mubarak regime’s vast security apparatus to 12 years in prison for corruption, in the first conviction of a senior former regime official since the ousting of Mr. Mubarak. The conviction of Habib al-Adly for money laundering and profiteering stems from a fraudulent land deal. Mr. Adly pleaded not guilty.

Mr. Adly’s conviction and the high profile arrests are but the tip of the iceberg. Post-revolution governments will have to root out corruption throughout the bureaucracy and introduce legislation and degrees of transparency that create the environment needed to guard against a resurgence of corrupt practices.

Human-rights activists charge that the anti-corruption campaign is being waged in an ad hoc manner that avoids exposing the full breadth of crimes committed by the old regime. Some activists want the formation of a truth and reconciliation commission that would take a more systematic approach towards holding former officials accountable.

Egyptian businessmen warn that the campaign is scaring away investment and slowing the country’s economic recovery.

Beyond corruption, successful economic reform will also ride on the ability of governments to introduce legal and administrative procedures that encourage private sector development, eradicate red tape and ease access to funding. Small and medium-sized enterprises are likely to be the drivers of economic growth. Carnegie notes that small and medium-sized enterprises account for 99 percent of all companies in Turkey and South Korea and 90 percent of all employment as opposed to Egypt where the figure is 50 percent.

This would allow post-revolution governments as well as Arab leaders who have so far been able to prevent protests from demanding their resignations such King Abdullah of Jordan and King Mohammed of Morocco by entertaining demonstrators’ demands to restructure their economies so that they are not primarily dependent on tourism revenues, migrants remittances and in the case of Egypt, renter income from the Suez Canal.

It would also allow them to reduce their trade deficits, develop their agricultural and industrial sectors and introduce deregulation, strengthened regulatory agencies and greater competition.

Privatization or closure of loss-making state-owned enterprises governed by corrupt management, patronage employment and crony capitalism is likely to prove to be a major lightening rod of economic reform as it will entail lay-offs in the short term.

Failure to embark on economic reform that produces desperately needed growth and increased employment could undermine the strides countries like Egypt and Tunisia are making towards political change.

Newly elected leaders will have to risk their political capital to embark on a road of economic transition that is inevitable, but painful and will demand at times tough decisions.

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