The Future of the Arab World

The wave of revolutions in the Arab world has withheld authocratic political regimes in Tunisia and Egypt after weeks of violent protests and political turmoil that eventually resulted in overthrowing some of the most bloated and corrupt political leaders in the Arab world. The final departure of Egyptian and Tunisian presidents sparked a series of political demonstrations in countries across the Middle East, from Syria to Yemen and from Algeria to Bahrain. The ongoing pressures for greater civil society and for the establishment of democratic institutions pose a major threat to long standing political dictators in Arab states. Hence, the upcoming democratic change has eventually undermined the political authoritarianism and millitary dictatorship, both of which are incompatibile with the principles of economic freedom and civil society.

After having gained independence from colonial powers in 1950s, Arab countries adopted socialist model of economic development enhanced by heavy government intervention and political nationalism. The adoption of socialist public policies led to economic stagnation, institutionalized authocracy, often marred by millitary violence and civil war as in Algeria in early 1990s. The political and economic model of the typical Arab state is known for very low level of economic freedom even though structural indicators of Arab societies might indicate the opposite. Libya has steadily enjoyed the highest per capita income in North Africa. The country is the 15th largest oil exporter and has 9th largest prooved oil reserves in the World. However, Libya suffers heavily from 30 percent unemployment rate and diminished health and education outcomes. Libya's high GDP per capita is entirely inflated by high oil prices via excessive appreciation of the domestic exchange rate. Thus, as a developing country, Libya posts trade deficit while the country is a net exporter of capital flows. Excessive appreciation of Libyan currency, following high oil prices, is a potential source of Dutch disease - a triangle of slow productivity, weak domestic manufacturing sector and artificial wealth, created by a sudden surge of prices of natural resources without sufficient productivity growth. Therefore, Arab countries, from Qatar to Morocco, will have to undergo a swift transition to a competitive market economies, based on domestic structural change, rather than on artificial wealth increases, resulted from natural resource abundance.

The majority of Arab states suffers from centralized and dysfunctional financial system - a painful legacy of decades of socialist economic mismanagement. Prior to independence from France and the UK, several Arab countries already enjoyed competitive financial systems. Raghuram Rajan and Luigi Zingales examined the reversal of financial development in the 20th century and showed that, by 1913, Egypt's stock market capitalization/GDP ratio amounted to 1.09, far ahead of many of today's advanced economies. By that time, Egypt's financial development was comparable to the UK and Belgium. In 1960, in the midst of socialist revolution, the ratio plummeted to 0.01 - a symptom of severe underdevelopment of financial market.

The Arab world is flooded by widespread corruption. In Transparency International's Corruption Perception Index, the vast majority of Arab states perform badly, hindering institutions of the rule of law and democratic governance as the essential foundation of economic growth and structural change in the long run. The fact that 75 percent of Algerian youth below the age of 30 is unemployed, calls for immediate deregulation of the labor market and better governance in private and public sector.

The revolution and civil unrest across the Arab world is nevertheless calling for greater civil liberties and for the shift from corrupt authocratic regimes into political freedom, freedom of association and democratic institutions, safeguarding free elections and a cohesive adoption of non-authocratic political governance. Without restoring a sound protection of human rights for women and men and freedom of the press and speech, the economic future of the Arab world is doomed to gradual stagnation behind fast-growing emerging markets.