The Economics of The Arab Spring– the case of Egypt

1. The Economics of The Arab Spring– the case of Egypt

2. The whole region now in turmoil – can Tunisia and Egypt show the way?

3. Agenda 1. The present 2. The past 3. The revolutionary decision? 4. Transition 5. Economic reforms 6. Policy options

4. How can economists be useful? • Economic gains in the past modest, future looks worrisome given demographics and education • Rising discontent related to perceptions of rising corruption, lack of liberties, increased repression, unpopular external postures • Economic gains not good enough to sustain an autocratic bargain The revolts may be mainly driven by political factors, but old economic ills remain and will continue to frustrate popular aspirations There are risks of populism and bad closures if economics do not come to the rescue Can a more democratic order allow for more pro-active reforms and more successful growth policies?

5. 1. Understanding the present • High unemployment, especially among the youth (20 to 30%) – the youth bulge • Rising inequality – the result of economic liberalization • Bad governance – low voice and accountability • High levels of corruption

6. A young population (Egypt) .

7. Very high unemployment (Egypt) Asaad 2007

8. Especially for women Asaad 2007

9. The unemployed tend to have higher education • .

10. Deteriorated governance • .

11. Corruption and democracy

12. Large increase in Inequality Egypt 1998-2006 Nadia Belhaj, 2011

13. Inequality of opportunity Source: Nadia Belhaj 2011

14. 2. Understanding the past • SLI of the 60-70 – Arab nationalists revolutions led by armies and appealing to MC -- Oil and rentier states – the autocratic bargain • By mid-1980s, decline of oil prices and Forced economic liberalization and reforms start, but unlike LAC after debt crisis, political liberalization is aborted • 1980-2000, performance declined but on average economic growth not inferior to other regions except for East Asia

15. Modest economic performance Not the worst, but modest over the LT, worsened in 1980s (esp for oil based), but improved in some cases in the 2000s

16. Oil explains a lot of the variability

17. ..

18. Rising incomes translate into improved life chances…

19. Human capital accumulation, 1960-2000, resource endowed economies Years of education 7 6 Algeria 5 4 Iraq 3 Indonesia 2 Nigeria 1 Venezuela 0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 2000 1982 1984 1986 1988 1990 1992 1994 1996 1998 Note: Mean years of total education of the population age 15 and over. Source: Iraq, Nigeria, and Venezuela: Nehru and Dhareshwar (1993); others: Bosworth and Collins (2003) .Increased educational attainment…

20. But low quality: average math scores of eighth grade students 2003

22. Percentage of University Age Students Studying Engineering and Science in Universities

24. Manufactured Exports • MENA nations as a group have disappointing growth despite proximity to EU – especially surprising given that major low resource/labor nations are on the Mediterranean and have low transportation costs • Competition by Eastern Europe after 1990 • Increasingly stringent global conditions - rise of China and India imply increased competitive pressures

25. Why job growth slow after reforms? • Structural factors • LF rising fast – at over 3.5% even before accounting for any increase in female LF participation • Gains in education faster than gains in new skilled jobs • MIC glass ceiling • Political factors • Economic reforms have not gone far enough – or were not politically feasible as the old order favored the status quo • Given perceived political risk and corruption, supply response was weak • Unequal model of growth: Poor left behind, lagging regions (SidiBouzid, upper Egypt)

26. Political economy linkages • Need to control street (esp after 911) led to police state: liberties curtailed, institutions corrupted (justice, market regulation, finance) • Economic w/o political liberalization: • Exclusion processes at center: initially, to prevent constitution of autonomous power centers. Over time, led to corruption among insiders, under guise of liberal policies (privatization, preferential access to capital, tax exemptions, state contracts, monopoly rights) • Inability to regulate grew over time – logical destiny, hubris, moral decay? Regional contagion at work?

27. Evolution of political systems Repressive autocracies with corrupt liberalism 1960s – 70s 1980s – 90s 2000s – 2011 * failed peace process * Iranian revolution * Iran-Iraq war * Gulf war * Islamic movement * 9/11 Issues - evolution of the “political settlement” - consequences of economic without political liberalization - corruption in repressive autocracies State led industrialization fails Infitah – young leaders Towards political and economic liberalisation revolution

28. A low equilibrium “Old” political settlement a low equilibrium : elite gets a large share of a small pie -- keeps the street angry but under control, and scares external actors and middle class to support regime. A weak state • Slow growth, consumption expenditures (salaries for diploma holders, subsidies to middle class) led to inability to pay decent wages and to spread of petty corruption in bureaucracy. • Predatory and inefficient bureaucracy delivering poor quality social services • Muselled civil society reducing the potential for activism and social accountability at all levels A weak economy • Restricted state budgets led to less investment in infrastructure, especially away from the centers of power -> lagging regions • Private activity repressed: large transaction costs push SMEs into informality; private sector starved for finance • Artificially created political/security instability leading to low and foot-lose investments and loss of savings (capital flight:$5b in Egypt, $1b in Tunisia/yr over past decade). • Misallocation of effort into rent seeking rather than productive activities

29. A vicious cycle of state decay and low growth … • Low econ. Transformation • Low investment • Corrupt privatization • monopolies Capital flight • Low growth • Rising middle class • Demographics • Education • Unemploy-ment • Youth frustration • Inequality timid Capital Repressive Autocracies Corruption weak State Poor quality services Subsidies Migration rents

30. 3. Looking more carefully at Egypt

31. Low investment

32. Means low growth Source: World Bank 2009

33. Shrinking credit to the private sector

34. One of many constraints

35. Most loans go to large firms • .

36. But they did not deliver the jobs! Source: Asaad 2007

37. SMEs predominate .

38. And mostly go to the rich

39. Egypt: subsidies+military= 2.5 times health plus education

40. 4. Rebelling Questions: • Unlike Latin America (1980s), Eastern Europe and Africa (1990s), Asia, South Europe, direct causes not clear • Economic reforms? Why did the revolutions start at the end of 2010 rather than in 1990s? • Recent literature – 1980s-90s: the autocratic bargain; oil rents; 2000s: how autocrats adapt, coopt middle class; repress PI; external alliances • Why experts did not see the revolution coming? Why did it start in Tunisia and Egypt? Why is it spreading to whole region?

41. Interpretation • Predications of classical autocratic bargain (Ghandi and Prezeworski 2006; Desai,Olofsgard, and Yousef 2009) do not apply • Political bargain since 1990s based on protecting liberals and West from Political Islam -- it sustained autocracies until now • Political Islam: radicalization, but also rapprochement with middle class • By 2000s, most Arab regimes openly repressive and increasingly corrupt • Revolution when MC equation tipped from support for autocrats against PI insurgency, to new democratic settlement wt PI • Mechanisms: • economic liberalization under repression led to increased corruption • over-repression in order to radicalize PI and scare liberals • nature of support from donors biased policies (social, external relations)

42. Implications of tipping point perspective • Concessions by the autocrats under pressure to keep Liberals in coalition • Includes: more space for media, “Islamization” of social policies, rise of subsidies • Tipping point: when changes take place on both sides of the equation • how attractive is it to remain in autocratic coalition • how attractive it is to enter into political settlement wt PI • Imperfect information • Regional contagion effect

43. regional variations.. • A kingdom factor? Jordan, Morocco, SA, Gulf • Ethnicity: Lebanon, Syria, Iraq, Maghreb • External relations + the Israel factor – especially active in Mashrek • The role of armies + security forces • Level of oil and other rents/ migration remittances

44. 5. Transition issues • Constitutional choices will determine shape of future majorities • Quick vs slow change to give time for parties to come to life? • alternatives voting systems (district based, proportional, to bring in lots of new parties; which parties to legalize • Economics • Revolutions represent a macro shock – capital flight accelerated, lower FDI, tourism, larger deficits – lead to ST losses • Economic choices: how much to expand, borrow, vs leaving more choices for the future

45. Average growth performance during typical transition (percent) Freund and Mottaghi (2011) based on 32 transitions

46. 6. The future: can political change lead to better outcomes? Q: can new settlement preserve some of the achievements of the past (eg macro stability) and provides for improvements? • Security and stability based on legitimacy of ballot, much better than repression from an economic perspective too • Transparency, checks and balances, and social accountability can create extra accountability mechanisms • Is it possible to include the youth more centrally in the economy as a source of entrepreneurship and skilled jobs?

47. Democracy not automatically better for growth Source: Besley, Timothy J. and Kudamatsu, Masayuki, Making Autocracy Work (June 2007). , Vol. , pp. -, 2007. Available at SSRN: http://ssrn.com/abstract=1136696

48. Creating more jobs • How to increase investment and jobs? • Reduced corruption , capital flight, leading to higher investment, better allocation • Labor intensive jobs – how to rehabilitate large private concerns? • Big push on supporting young entrepreneurs? • SME development: can Islamic finance help? • Supporting policies: competition, SMEs support, democratization of finance, pro-active labor policies • Political challenges: • Big capital accept new rules -- more investment , less capital flight, more competition • middle class embraces entrepreneurship – better regulation and access to capital, not public sector jobs; • poor accepts unskilled jobs wt inter-generational deal on education • State reduce intake of national savings

49. Fixing the state • Better services require more financing esp. higher public sector wages • Can this be financed by reducing subsidies? • Opening up to social activism and social accountability mechanisms • Ambitious bet, requires a new social contract: • middle class accepts lower subsidies before improvement of services • Civil servants work harder (for higher wages) and give up corruption rents

50. State failures and rescue Active social accountability issues: how to improve state services and root out state corruption? the role of higher wages vs social accountability The political role of state subsidies The influence of rents, foreign aid No social accountability Research: how to improve state services and root out state corruption? the role of higher wages vs social accountability The political role of state subsidies The influence of rents, foreign aid Low wages Corruption Poor services Good wages -> Higher performance Subsidies Effective social services and social protection Bad economy Good economy State X Repression Rents: Oil, Suez Tourism Foreign policy/Aid Migration/remittances