On the whole, the Middle East seems to have been quite resilient to the global financial crisis thus far. Both the energy commodities exporters and the countries that do not enjoy large oil reserves have mostly been able to maintain healthy annual growth rates, even though they suffered the inevitable setbacks, especially during the most acute phase of the credit market meltdown.
For the Gulf Cooperation Council countries, the performance was driven mainly by the public spending capacity accumulated during the years of climbing energy commodity prices, which has allowed governments to maintain an unabated flow of funds into infrastructure investments. But for the Middle Eastern countries that do not enjoy substantial commodity resources, the resilience came from a structural shift in economic policy.
In particular in the Levant (Egypt, Jordan, Syria and Lebanon), the economy was able to withstand the impact of the global crisis thanks to the long lasting effects of the structural reforms enacted during the past decade (and in some cases even earlier), plus the improvement of the security situation, notably in Lebanon.
Economic liberalization spurs enormous gains in efficiency and productivity when the dynamics of free markets spring powerfully back to life. Sectors dominated by inefficient public management or widespread red tape are swiped by performance gains and innovation. The results are often stunning: double digit growth, stronger exports, strong capital inflows, creation of small companies, improved services and so on.
This notable feat, however, cannot hide the fact that the effect of the reforms have been considerable for certain segments of the general population, but have rarely translated into a broad based improvement in living standards, especially for the lowest income brackets. The pattern we often observe in the Middle East has a familiar tinge, as it tracks the experience of many places where economic freedom sprouted after decades of repression, including Eastern Europe, China, India and parts of South-East Asia. The most blatant example was the so-called Russian oligarchs, who made exorbitant fortunes acquiring the crown jewels of the Soviet Union’s state-owned enterprises during the dismantling of the Soviet’s control and command system, benefiting from opaque procedures brought in by hasty privatization.
The failure of the ‘trickle down’
But even where the excesses that characterized Boris Yeltsin’s time as the Russian premier were largely avoided, the process of liberalization tended to favor those with better connections to decision makers, family ties, the right professional skills (finance or engineering above all) and plenty of money, or simply those who happened to be in the right place at the right time.
The consequence is often that income disparities fuel resentment from those excluded or left at the margins. A middle class fails to emerge and actually, when buoyant growth leads to price increases, notably in real estate, the living standards of the salaried might even decline. Adding to the plight, with faster growth infrastructure becomes obsolete and overwhelmed, environmental problems are exacerbated, chaotic urbanization creates congestion and, at times, social tensions, while social services struggle to adjust.
The reaction to these woes is often a political backlash against the reforms and the reformists – in Eastern Europe and India, for example, governments that had pushed for liberalization ended up losing elections – but even where elections are not held resentment and cynicism can mount.
Hard to handle
Obviously, the authorities are not completely blind to these dynamics and effectively redistribute in some form the larger revenues resulting from additional tax collection and privatization receipts. Egypt doubled civil servant wages between 2005 and 2009, while Jordan and Syria also doubled public sector wages and pension outlays over the same period. Sometimes the tax windfall is channeled into less laudable areas; the doubling of defense expenditure in Jordan over the last five years, for example, is hardly justified by intensified security threats.
The redistribution of economic benefits through public expenditures, whether justified or not, carries two risks. On the one hand, expenditures and entitlements are politically difficult to undo, especially if exceptional economic growth is taken for granted – when it inevitably slows, governments are suddenly saddled by unsustainable deficits. Also, public expenditure tends to favor certain groups, resulting in patronage, dependency and complacency toward mismanagement of funds.
More generally, redistributive public policies represent a quick fix that might work in the short run but fail to address the key issue: why doesn’t the economic liberalization extend to the lower segments of the population through private sector mechanisms?
The reason, in my view, lies in the fact that liberalizing economic reforms are relatively easier to engineer, if only because extensive literature and widespread international experience outlines the practical steps to take. But liberalization is just the first step to extend opportunities and welfare.
The second, most critical and difficult task is to create a level playing field for all, not just for the privileged or canny few. A level playing field requires independent institutions that prevent special interests exerting an undue influence on the decision making process, assuming a dominant position in key sectors or hijacking resources for their own use. In short, it requires the establishment of an adequate system of economic governance hinging on three planks.
Foremost is a judicial system that carries justice without particular regard for the powerful and enforces property rights without being prone to external influences. Second are public bodies which are impartial and do not shy away from tough decisions, even when they upset the government or anyone in a prominent position. Third, since institutions are not abstract entities but result from the actions of men, it must be assured that those who perform public duties are shielded from political pressure and must not be penalized when they disappoint the rulers. Other policy actions ought to complement the governance framework, such as sound regulation, appropriate labor market laws, credible monetary and financial supervisory authorities, consumer protection and a business environment open to foreign investments.
In essence, the journey toward full economic freedom requires impartial institutions whose decisions cannot be subjected to the interests of individual or groups, however prominent they might happen to be. In the absence of these basic rules, reforms risk a dire destiny. They will end up substituting an old oligarchy with a new one, though not necessarily a better one.