The Economics of the Arab Spring

The Middle East is certainly not the only region to have witnessed such demographic changes; other emerging market economies have successfully harnessed their youth bulges for development. Why should then the demographic transition in the Arab world be feared?
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After emergency laws are lifted, constitutions are drafted, and elections are held, policymakers in the Middle East will be faced with a tough practical challenge: how to create economic opportunities for the region's teeming millions? Arab revolutions had a clear economic underpinning: they were fueled by poverty, unemployment, and lack of economic opportunity. At the heart of these uprisings is a search for social and economic justice. While political repression in the Middle East remains a subject of continuous discussion in media and academic circles, the scale and intensity of the region's economic repression has gone relatively unnoticed. The Middle East has long been trapped in a vicious development cycle. The region's excessive dependence on natural resources has prevented the emergence of a strong private sector, which, in turn, has prevented the emergence of a strong constituency for economic diversification.

It is clear that the Middle East's political dilemma cannot be properly understood without its economic underpinnings. In this brief article we argue that the current turmoil in the region is fed by two economic undercurrents. First, there is an inherent tension between the region's demographic and economic structures. As the Middle East undergoes an unprecedented demographic transition, its economic structure remains rigid -- unable to generate productive employment opportunities for new entrants to the labor force. Second, and perhaps more importantly, recent happenings in the region call into question the very sustainability of a development model based on a leviathan state and greased by oil and aid windfalls. An evolving demography but a rigid economic structure

There is a vivid mismatch in the Middle East between demography and economic structure. The Arab Spring has brought into sharper focus the profound implications of the region's youth bulge. Long before the current uprisings, one of the Arab world's leading economic minds, Tarek Yousef, co-edited a book with a prophetic title: The Generation in Waiting (Brookings Institution Press, 2009). Delineating the demographic trends in the Middle East, Yousef and his colleagues highlighted the challenges of economic and social integration for one of the "largest youth cohorts" in the region's history. This youth bulge is truly unprecedented: an overwhelming proportion of the region's population -- in many countries about three-quarters -- now consists of young people under the age of 30. Not only a growing number of these are young, but also female and educated.

While Arab countries may have failed on multiple fronts, if there is one area where they have had a resounding success it is in expanding access to education. Even if there are questions about the quality of education imparted, many Arab countries, especially those in North Africa, have made impressive strides in educating their young and closing the gender gaps in education. In fact, of the top 10 countries that made tremendous progress in human development during the last 40 years, five were from the Arab world. The key problem, however, is that there are few jobs to go around for these young people. The Middle East today has one of the highest rates of youth unemployment. Many of these young people are not only unemployed, they are also unemployable. This is clearly a failing of both the education system and economic structure. Educational institutions churn out graduates whose skills and preferences are more aligned with that of the public sector. At least, in the oil-rich Gulf, this results in a perverse division of labor between the public and private sectors. While the public sector generates high wage jobs for nationals, the private sector relies mostly on expatriate workers who are more willing to be part of a competitive job market. Such segmentation in the labor markets has profound implications. Importantly, it allows neither citizens nor the state to develop real stakes in private sector development.

While coping with these demographic trends is a challenge, it is also an opportunity -- especially at a time when population growth rates are falling across the developed world. The Middle East is certainly not the only region to have witnessed such demographic changes; other emerging market economies have successfully harnessed their youth bulges for development. Why should then the demographic transition in the Arab world be feared? As mentioned above, the irony in the Middle East is that while the demography is evolving, the economic structure is unresponsive to the needs of its growing populations. With few exceptions, the private sector is generally weak and dependent on state patronage. With the public sector as the main engine of job creation, the region suffers from a precarious employment strategy. Furthermore, whatever limited economic opportunities do exist, they are rationed by connection rather than competition. This leads to tremendous economic injustice for the young who see no hope for economic and social mobility. The issues of job creation and social justice are ultimately tied with the very model of development that governments in the region have long pursued.

A failed development model

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, jobs, shelter, and public services, the state is the provider of 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. While a centralized, bureaucratic system has worked well for ruling elites and the narrow clienteles that thrive with their support, it has failed to deliver prosperity and social justice to ordinary citizens. The interests of governing coalitions have proved more enduring than the force of ideology. Neither socialism of the 1960s and 1970s nor the neoliberal economic reform of the 1990s has been able to dismantle this system of centralized control, discretion, and privilege.

This state-centered development paradigm rests on the 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 these sources, whether derived from fuel exports, foreign aid, or remittances. Reliance on such unearned income streams is truly the "original sin" for Arab economies. More than 80 percent of total merchandise exports in many Arab countries consist of oil and gas. The dependence on hydrocarbons is so pervasive that even in economies that are otherwise considered to be relatively resource-poor, such as Syria and Yemen, exports are dominated by oil. Up until 2005, for example, around 67 percent of the total exports in Syria consisted of fuels. In Yemen fuel exports constitute 70 percent of total exports.

Where oil is scarce, foreign aid takes over. Aid revenues, much like oil, have often stifled economic and political incentives, turning economies away from production to patronage. Egypt and Jordan, by virtue of their strategic location, have derived significant external rents through foreign aid. In Egypt alone -- hardly a typical case of resource curse -- two-thirds of foreign exchange revenues are derived from oil, aid, and revenues from the Suez Canal. While the role of oil dominates the discourse on the Middle East, the influence of aid is downplayed. It may come as a surprise to many that, as a region, the Middle East and North Africa received the highest overseas development assistance on a per capita basis in 2008 ($73 compared to $49 in sub-Saharan Africa). Resource windfalls from oil and aid have given rise to an adverse political economy and sustained a social pact that trades welfare distribution for regime security. External rents have expanded the public sector, bolstering its ability to dole out subsidies and finance the essentials of life.

Traditionally, the Arab state has preserved social order through a combination of repression and redistribution. But that strategy might have run its course, partly because the forces unleashed by demography and technology have raised the cost of both repression and redistribution. With the proliferation of electronic and new social media, traditional methods of repression have become less effective. For decades the Arab state, regardless of whether it is a monarchy or a republic, has ruled through the fear of its security services and perfected the art of demolishing any commons imaginable. But, social media has generated new spaces for collective action; these are the virtual commons that cleverly evade the long arm of the state. Besides repression, the cost of redistribution has also risen significantly in the face of changing demographic structure and growing food prices. The youth explosion has stretched existing welfare systems beyond capacity. A sharp rise in food prices has further escalated the cost of this social bargain even in countries that are richly endowed with natural resources. Arab governments are now spending a vast proportion of their budgets on providing subsidized food items -- a policy that is likely to be even more fiscally unsustainable in the face of recent predictions about a long-term spike in food prices. Together with the region's demographic changes, growing unemployment, and media penetration, this provides for a combustible mix. The relative unpredictability of oil revenues, despite the present buoyancy of oil markets, also poses a structural risk to Arab economies. Public finances remain vulnerable to the vicissitudes of oil markets. In fact, when compared to countries with similar levels of development and resource riches, oil exporters in the Middle East are more vulnerable to external shocks. And these shocks are rapidly propagated to lesser fortunate neighbors through remittances and investment linkages that bind together regional economies. With limited natural resources and increasingly young populations, it is precisely these countries where the states' ability to provide essentials is especially strained.

Recent events in the region provide an apt reminder that the prevailing development model has outlived its usefulness. This model, built on a leviathan state and financed by oil and aid fortunes, is fast becoming a liability. The region needs a new social and economic paradigm that is based on a competitive, entrepreneurial, and inclusive private sector. It is true that the region's private sector has witnessed an impressive growth recently, but the question remains as to how genuinely private this private sector is. Public investment still remains the central driver of private economic activity, especially when oil prices are high. The private sector is usually a mirror image of the state: inefficient, controlled by a tiny clique of elite families tied to ruling regimes, and part of an extensive network of patronage. Its profits depend less on entrepreneurial abilities and more on access to power. Exploiting new economic opportunities therefore becomes a game of insiders. With few exceptions, major business fortunes in the region are accumulated through privilege and patronage. There are familiar echoes of this in the Arab Spring -- be it the Trabelsi family of Tunisia, Ahmed Ezz of Egypt, or Rami Makhlouf of Syria. Such crony capitalism denies a level playing field to potential aspirants and restricts economic mobility. That is a running theme in the Arab world and becomes a rallying concern for those who are systematically excluded from the system. Adeel Malik is the Globe fellow in the economies of Muslim societies at the Oxford Centre for Islamic Studies, fellow of St. Peter's College, Oxford, and a lecturer in development economics at the University of Oxford. Bassem Awadallah is the Secretary General of the Islamic Chamber of Commerce and Industry and a former Finance and Planning Minister and Chief of Royal Court of the Hashemite Kingdom of Jordan. This blog is based on a joint paper, Malik and Awadallah, "The economics of the Arab Spring." It can be downloaded from the website of the Centre for the Study of African Economies (CSAE).