The Economic Fallout from the Arab Spring - Economic Research Forum (ERF)

The Economic Fallout from the Arab Spring

The Economic Fallout from the Arab Spring

By Mohsin Khan, nonresident Senior Fellow, Rafik Hariri Center for the Middle East, Atlantic Council

The promise of democracy and self-determination was the driving force in the uprisings in the Arab world in 2011 that led to regime changes in Egypt, Libya, Tunisia, and Yemen, as well as the granting of greater political freedom by the rulers of Jordan and Morocco. The “Arab Spring” of 2011 was viewed as an inflection point that would put these countries on the path of political openness and pluralism. However, economic issues were an equally important factor in the uprisings. The explosive combination of undemocratic regimes, corruption, high unemployment, particularly youth unemployment, crony capitalism, high poverty levels, and widening income and wealth inequalities all created the conditions for the uprisings.

Unfortunately, over the past five years since the uprisings, economic issues have largely taken a backseat to politics. Governments of Arab transition countries were late in realizing that politics and economics move in tandem, and political stability is very difficult, if not impossible, to achieve if the economy is in turmoil. As such, the period since the uprisings has been pretty bleak for the economies of the Arab countries in transition, marked by large external and budget imbalances, high inflation, slow growth, and rising unemployment.

Economic growth fell sharply relative to their own past performance, as well as compared to Middle East and North Africa (MENA) countries as a group. The average annual growth rate of the Arab transition countries declined from nearly 5 percent in the previous decade 2000-10 to just over 2 percent during 2011-15. This low-growth equilibrium was not sufficient to absorb new entrants into the labor force, let alone make any dent in the existing stock of the unemployed.

Governments in the Arab transition countries, although preoccupied with political and security issues, understood that tackling unemployment had to be the main economic priority. But jobs cannot be created out of thin air. The only way to create jobs in the short run is by expanding government employment, which is what several countries did despite the fiscal strains they faced. So far, the public sector remains the largest employer in all the Arab transition countries.

Looking ahead, the growth picture in 2016 does not appear particularly promising for the Arab transition countries, even though some modest improvement is expected. International agencies, like the IMF and the World Bank, are projecting increases in economic growth to a little over 3 percent. Clearly, they are not out the woods.

What should these countries do to become dynamic and vibrant economies that can compete in a globalized world and create sufficient jobs for their young and growing labor force? The first order of business is to bring about macroeconomic stability. Essentially, this means bringing public finances under control, reducing external imbalances, and increasing foreign exchange reserves. But growth and employment are the primary long-term objectives, and governments have to strike a balance between the sometimes competing goals of macroeconomic stabilization and those of fostering higher growth. Furthermore, political leaders have to do this in an environment where populations are highly impatient and are demanding immediate improvements in their standard of living.

The challenge for the governments is to balance short-term populist measures that they feel politically pressured to take while keeping on a clear long-term economic reform path. High and sustained economic growth that leads to significant job creation will only come about if the Arab transition countries reform their economies to become more market-oriented and allow the private sector to take a leading role. Without these reforms and an expedited economic turnaround, the stability of countries will be threatened. Economic failure could lead to another round of major political uncertainty and upheaval and perhaps new uprisings by the now emboldened populations.

About the Author

Mohsin Khan is a nonresident Senior Fellow in the Rafik Hariri Center for the Middle East at the Atlantic Council in Washington, DC. Prior to joining the Atlantic Council in May 2012, Khan was a senior fellow at the Peterson Institute for International Economics since March 2009. Previously, he was the director of the Middle East and Central Asia Department at the International Monetary Fund. Khan’s publications and presentations cover macroeconomic and monetary policies in developing countries, Middle East economies, economic growth, international trade and finance, Islamic banking, oil markets, exchange rates, and IMF programs. He holds an MA from Columbia University and a BS and PhD from the London School of Economics.