Friday, January 27, 2012

Economic Underpinnings of Arab Spring

Adeel Malik and Bassem Awadallah discuss "The economics of the Arab Spring" in a working paper (WPS/2011-23) for the Center for the Study of African Economies at the University of Oxford. They point out that despite rapid growth in education levels, access to water, and urbanization--all patterns that are often associated with sustained economic development--the region has failed dismally to develop a robust private sector. As a result, well-educated and youth-heavy populations see little chance for economic advancement. Here are some excerpts: 

On large numbers of young and unemployed workers: 

"Over the last few decades, the Middle East has witnessed an unprecedented youth bulge that has dramatically changed its demographic profile. An overwhelming proportion of its population--in many countries about three-quarters--now consists of young people under the age of 30. Together with a greater female participation in the labour force, these demographic trends have greatly enhanced the number of people looking for jobs. During the period 1996=2006, labour force in Middle East and North Africa has grown three times as much annually as in the rest of the developing world, resulting in one of the larges rates of youth unemployment in the world."

On the collision between rising education and thwarted aspirations:

"Of the tip 10 countries that made the most impressive strides in human development during the last 40 years, five were from the Arab world. Starting from one of the lowest levels of educational achievement in the 1960s, adult education rose faster in the Middle East during the 19890-2000 period than any other region in the World. Despite reservations about the quality of education imparted, even this quantitative expansion of education has led to a silent revolution of sorts. It is a revolution of aspirations. Even as aspirations have become more mobile with the new gadgets of globalization, the local systems of governance are ossified and offer limited economic mobility to the region's youth." 

On the centrality of government in the economic sphere:

"The state in most Arab economies is the most important economic actor, eclipsing all independent productive sectors. When it comes to essentials of life, such as food, energy, jobs, shelter, and other public services, the state is often the provider of both first and last resort. The functioning of this system rests on a heavy dose of subsidies, economic controls, and a variety of other uncompetitive practices. ... The state-centred development paradigm rests on an uninterrupted flow of external windfalls. In fact, many of the region's pathologies--whether it is a weak private sector, segmented labor markets, or limited regional trade--are ultimately rooted in an economic structure that relies overwhelmingly on rents derived from fuel exports, foreign aid, or remittances. Reliance on such unearned income streams is the "original sin" for Arab economies."

On the paucity of intra-Arab trade:

"With a population of 350 million people that share a common language, culture, and a rich trading civilization, the Arab world doesn't function as one common market. ... Few Arab countries consider their neighbors as their natural trading partners. Pan-Arab trade is noticeably insignificant. Despite having tripled between 2000 and 2005, the share in intra-Arab trade in total merchandise trade still hovers around 10 percent. ... The share of intra-Arab imports, despite having fluctuated widely, is only marginally higher than that in 1960. ... Even this limited trade is geographically clustered, with countries in the Gulf and North Africa trading predominantly within their own sub-regions."

Location and water access don't seem to be helping: 

"The Arab world is well-positioned to be a global trade and production hub. Geographically, it lies at the cross-roads of major sea and trading routes with easy access to Europe, Africa, and the near East. ... Strictly speaking, there is not even a single landlocked country in the Arab world, even if Iraq and Jordan have narrow coastal strips. ... It is ironical that a region that connects Asian merchants with European markets is itself stuck in primary production. Everywhere in the world proximity to coasts tends to be associated with lower transport costs and better access to global markets. The Arab world defies these forces of gravity, however."

Urbanization doesn't seem to be helping:

"[C]ities offer a range of mutually supportive activities. Bringing together machinery, skills, suppliers and resources together in a single location can be tremendously advantageous for firms. Such agglomeration economies are missing in the Middle East, even if it is more urbanized today than several developing regions: 58 percent of the region's population lives in urban areas, compared to 30-37 percetn in sub-Sarharan Africa and south Asia. ... Yet, Arab firms are failing to reap the cost advantages that growing urbanization confers on them."

The jobs challenge and the private sector:

"The private sector is at once the most despised as well as the most desirable aspect of reform. Business in the Arab world is often comfortably embedded within the state, wtiht eh result that it invokes images of crony capitalism. At the same time, an estimated 100 million jobs need to be created in the MENA [Middle East and North Africa] region in the next decade or so. This employment challenge cannot be addressed without a strong private sector. .. An independent business sector will also serve a vital political function: it can generate a middle class that can serve as a powerful constituency for political reform. ... Viewed in this light, the struggle for a new Middle East will be won or lost in the private sector."

Malik and Awadallah lay particular emphasis, among all the policy steps that might be taken, on policies that would help to create a regional market across the Middle East: that is, policies and investments to make travel, shipping, business, and communication cheaper and easier. Such policies might be more politically acceptable (that is, less upsetting to local elites) than attempts to open more directly to the global economy. Riding the wave of discontented and well-educated young adults, such policies might also help to harness the power of Arab spring in a productive manner.