In an article published in the July 2010 issue of Executive, I wrote that although economic reforms that foster an entrepreneurial spirit are important for improving the livelihood of emerging countries, the critical ingredient for sustainable growth and the strengthening of social cohesion is the institutional capital of a country.
By that I meant the complex tangle of governance tools, primarily in the legal and judicial areas, which form the foundations of a level playing field for all — not only for those who happen to be in a position of privilege and have access to decision makers. It is interesting to note that the countries being swept by public unrest, or where political opposition is gaining strength, had been quite resilient to the global financial crisis thanks to the effects of structural reforms during the past decade. In a number of cases they had enjoyed a rather successful record in terms of macroeconomic indicators, such as gross domestic product, foreign investment, currency stability and central bank reserves.
The macroeconomic picture, however, tends to hide a grimmer reality. For example, the gains in efficiency in privatized companies and banks translate into job losses as the state-owned companies, which are traditionally overstaffed, slim down. If new jobs are not created in other sectors, the overall effect on the general population is dim. In other words, there are asymmetric effects of economic reforms that need to be addressed to create a broad-based improvement in living standards.
For political stability it is crucial that the improvements reach the lowest income brackets and guarantee a real chance for social mobility. People are more willing to accept sacrifices if they bear fruit for themselves or for their families; less so if they are perceived as perpetuating a permanent hopeless condition.
The process of liberalization must not favor a few to the detriment of many. To avoid widespread resentment, small enterprises must be nurtured; above all, social services, health and education must improve. Redistributive measures through public handouts, on the other hand, are the typical response to popular angst: in Egypt, civil servant wages doubled between 2005 and 2009. But such moves tend to favor selected groups already seen as beneficiaries of patronage while at the same time nurturing a culture of dependence.
The political backlash of resentment and cynicism can be delayed where rulers are not subject to a voting public, but the lid cannot be kept on indefinitely. The Tunisian uprising that triggered the “Arab Spring” was brewing for years; it took a relatively minor detonator with powerful emotional impact — a street vendor’s self-immolation — to ignite the popular anger.
Economic and financial liberalization represents a necessary condition to promote opportunities and welfare, but hardly a sufficient one. To ensure that everyone has a concrete possibility to benefit from the progress, an adequate system of economic governance must be established, in particular an efficient and independent legal system. When individual rights, property rights and access to a legal system are denied, economic freedom is meaningless and is perceived as perpetuating an oligarchy.
In Egypt, few homeowners have property titles; very few households have a bank account, let alone a credit card. A social safety net is virtually non-existent; most are subject to the greed of corrupt officials and law enforcement is arbitrary. These factors help make up the frustration that turned into visible manifestations of anger. Now that Mubarak and Ben Ali have abandoned the scene, a new phase can begin. But pragmatism should be observed because the illusion following the upheaval is dangerous. Remember the fate of the orange revolution in Ukraine; years of convulsion ended up with the power returning to the ousted autocrat.
In Egypt, where the military retains its political clout and economic influence, as well as in Tunisia and other countries that are shaking off serfdom, the road toward real enfranchisement will be long and bumpy. Rights and freedoms need to be nurtured continuously. Entrenched privileges enjoyed by the elite will not disappear unless they are put in check at every step.
Fabio Scacciavillani is chief economist at the Oman Investment Fund