NS3040 Winter Term 2013 Economics of the Arab Spring

1. NS3040 Winter Term 2013Economics of the Arab Spring

2. Arab Spring Overview • Arab spring resulted in increased political pluralism and new democratic institutions but led to: • Instability • Setbacks in the transition towards democracy • Mass protests • Clashes among former revolutionary allies and • The rise of political Islam • Instability taken a toll on the region’s economies • Sharp slowdown in • Economic activity • Deteriorating external and fiscal accounts • Decreasing reserves

3. Economic Impact of Arab Spring

4. Arab Spring Impacts I • Long term challenges remain as pressing as ever: • High unemployment (especially among youth) • Inefficient subsidy regimes • Low trade diversification • Main impacts of Arab Spring • Sharp drop in growth, slow recovery underway • Average real growth in region fell from 4.2% in 2010 to 2.2% in 2011 – lowest in a decade • Making matters worse, • global economy sluggish • Eurozone crisis hit region hard given tight economic links

5. Arab Spring Impacts II • Slowdown affected all countries • Hardest hit initially were those countries at center of the Arab Spring • Libya • Tunisia • Egypt • Syria and • Yemen • Morocco was only country were GDP strengthened in 2011 • Economic recovery subdued in 2012 • Average real GDP growth increased slightly to 2.4% • In 2013 should increase to 3.5% but remain below pre-revolutionary growth rates.

6. Political Turmoil/External Pressures Take Toll

7. Arab Spring Impacts III • Production stoppages caused by political upheaval were severe. • In Libya oil production decreased from 1.65 m bpd in 2010 to only 0.47 m bpd in 2011 • In Egypt widespread demonstrations and strickes paralyzed production process and deterred investments for months • In Tunisia labor unrest lead to a substantial decline in mining sector (-40% va) and oil and phosphate production. • In Syria oil production declined by 60% from level at end of 2010 to 0.16 m bpd in September 2012 – sanctions and ongoing civil war • In Yemen economic activity hit by attacks on electricity facilities and pipeline sabotage – led to severe energy shortages.

8. Arab Spring Impacts IV • Sharp drop in tourism • Have recovered but remain well below pre revolution levels • Given tourism accounts for 20%GDP in Lebanon, 12% in Jordan and between 5% and 8% in Morocco Tunisia and Egypt, decline had a significant effect on growth.

9. Arab Spring Impacts V • Foreign direct investment (FDI) flows down sharply • Accelerates a trend that started with financial crisis 2008-09 • Between 2010 and 2011 FDI inflows fell by 46%

10. Arab Spring Impacts VI • Weakening of currencies • Strongest depreciation experienced by Tunisian dinar.

11. Arab Spring Impacts VII • Foreign exchange reserves (FX) • Stronger depreciation in many cases could only be averted by substantial interventions of national central banks – sold FX and bought local currency • Relative stability in FX came at the expense of reserves • Fall most dramatic in Egypt

12. Arab Spring Impacts VIII • Aid-Assistance • To avoid a balance of payments crisis, international community stepped in to support the region • G8 and the international financial organizations founded the “Deauville Partnership” in May 2011 to coordinate aid to afflicted countries • Members pledged up to USD 70 billion • To date only a fraction of promised aid has been disbursed • IMF has also committed to provide loans to Morocco ($6.2bn), Jordan ($2bn), Yemen($93mn) and Egypt ($4.8bn).

13. Arab Spring Impacts IX • Governments in region responded to political unrest and weakening of economic performance by increasing public spending • Highest increases in government expenses relative to GDP – Tunisia and Algeria • Most fiscal measures aimed at sustaining social cohesion and mitigating effects of high food and fuel prices • Popular steps – • Increase subsidies on energy and food • Raise public sector wages and pensions • Expand unemployment benefits

14. Arab Spring Impacts X • With flat revenues, the result was rapidly growing fiscal deficits and associated debt

15. Arab Spring: Challenges Ahead I • Youth unemployment, skills mismatch • MENA region faces structural employment gap – especially among younger workers • Regional unemployment rates around 10% • Youth unemployment closer to 30%

16. Arab Spring: Challenges Ahead II • Labor market inefficiencies a key problem in the region • MENA lowest score in the WEF Global Competitiveness Index for labor market efficiency • Region also faces widespread skill mismatches – inefficient education systems produce unprepared market entrants • Firms operating in region regularly list insufficient labor skills as a major constraint • Public sector accounts for an outsized portion of employment in region • (.8% compared to global average of 5.4% • Taking only non-agricultural employment in 2010, public sector accounted for 70% of labor force in Egypt

17. Arab Spring: Challenges Ahead III • On average public sector salaries accounted for 35.5% of government expenses in 2009 for regional governments • Expanded government has crowded out the private sector • Most youth find a public sector job prefereable that in the private sector

18. Arab Spring: Challenges Ahead IV • Large public sector has bred a lack of economic dynamism in region – further setting back employment • World Bank found (2010) that MENA has some of the lowest firm entry density rates in the world • Suggests a lack of entrepreneurship with rate almost four times lower than of Europe and Central Asia

19. Arab Spring: Challenges Ahead V • Region generally scores very low on World Bank’ Ease of Doing Business Index – even lower after 2011

20. Arab Spring: What Needs to Be Done? I • Numerous ways to address the employment problem • 1. Governments must transition from being primary employers to creating the right environment for the private sector to provide jobs • Unfortunately several countries moving in the opposite direction • Egyptian government announced a 15% increase in base wage of all civil servants • Tunisian government announced an employment plan that would add 20,000 new jobs in the pubic sector • 2. Improving the business environment can stimulate private sector growth and increase job opportunities • 3. Education systems must be reformed in order to better prepare graduates requirements of private sector

21. Arab Spring: What Needs to Be Done? II • Subsidies inefficient and unaffordable • Already very high before Arab Spring • Egypt’s subsidies were 9.3% GDP, Algeria’s 6.6% • After Arab Spring subsidy bills increased rapidly • In 2012 subsidies absorbed 42.8% Egypt’s annual revenues and almost 10.4% GDP

22. Arab Spring: What Needs to Be Done? III • Despite large size, subsidies have done little to address their stated goals – numerous unintended consequences • Studies – beneficiaries of energy subsidies are largely in the top fifth of the population • In Jordan and Morocco the bottom fifth benefits from less than 10% subsidies

23. Arab Spring: What Needs to Be Done? IV • Subsidies have led to high energy use rates • Over past two decades energy intensity has declined in all regions of world except MENA • Subsidy Reform • Some progress in Egypt and Jordan -- however • When Jordan abolished fuel subsidies completely in November 2012 – largest protests in country since start of Arab Spring • Biggest obstacle governments face in reforming subsidies is potential for political instability • Need to explain carefully to public what the rationale is and take small steps • Might want to switch from blanked subsidies to targeted programs while reducing overall level of spending