Adeel Malik and Bassem Awadalla’s working paper at the University of Oxford’s Centre for the Study of African Economics tells the story underlying not only the political repression in the MENA (Middle East and North Africa), but also the mostly glossed over forces behind and consequences of economic repression. The paper takes a wide arching look at the regional forces at work, focusing on the statist regimes of MENA and the dearth of a successful private sector economy.
The story today starts with the burgeoning youth population which is changing the demographic in the Middle East. This has been consistently seen in Arab Spring protests full of students and youths. A concurrent female demographic change, resulting from increased women’s labor force participation rates, and enormous gains in education, has driven youth unemployment through the roof, creating massive cauldrons of dissent and anger. The “political economy of protectionism” serves the economics needs of the ruling class, who maintain a system of rent seeking and corruption, keeping the lower classes economically repressed. This keeps an independent middle class from forming movements of resistance like seen in many MENA countries in 2011.
The Arab world’s economies are all centered around their large state apparatus. These edifices did not fall during past decade socialist or neo-liberal movements to change the region’s economic foundations. Instead, these are opportunities for the ruling class to entrench the state-run economy, bolster the state security modes of repression, and transfer even more wealth from the lower classes to themselves. The authors posit that this economy is based on oil and aid which extend the rent seeking system, patronage, and redistribution to the top. But the Arab Spring has shown that the long established system is strained due. Rising food prices have taxed the agricultural import dependent region, and the volatility of oil prices have made the countries more prone to shocks that affect remittances and investment, in a piece; “This model built on oil and aid fortunes-and a leviathan state-is fast becoming a political and economic liability.”
Malik and Awadallah point to the economic fragmentation of the region as a predominant factor in a lack of private sector capital and investment. The Arab countries as a whole partake in little intra-Arab exports compared to other intra-country export in other regions even though MENA’s geography is well suited to take advantage of international and regional trade routes. MENA countries have many geographical advantages compared to other regions which they do not take economic advantage of. Their proximity to water routes and coastline allows for access for trade with all major regions of the world, but market access has not materialized. Regional trade is strangled by a political differences which thicken economic borders. Attempts at coalescing economic cooperation has failed numerously, thwarted by “internal rivalries, dependence on external powers, and the absence of a strong domestic constituency for integration.” Fragmentation creates a host of economic woes for the region, including high barriers to entry due to political considerations and government patronage, the loss of productive spill-overs due to thick borders, the wasteful duplicity of defense spending and national security, investment uncertainty, and the inability to take advantage of economies of scale.
The authors follow the lack of a private sector back to the Ottoman Empire, where the independence of a class of upwardly mobile merchants would undermine the autonomy of the state. When markets did flourish, the merchant were largely foreign, a fact which helped the state because these foreign merchants had little cause to rise against state authority. The fall of the Empire cause many ancient trade routes to fall into disuse. Foreign merchants left the region, leaving an economic hole that was not refilled. Political boundaries of new independent states after WWII lacked the necessary constituency for private sector growth, and regional nationalization was not business-friendly; “the nationalist movement in the Arab world strengthened the state at the expense of the bourgeoisie, crowding out an important constituency for pro-business policies and regional economic integration.” The article conflated the region’s economic constrictions to the license raj of India. The fragmentation of local and regional markets due to centralized bureaucracies limits horizontal integration and segments vertical integration. As such, MENA countries have the largest percentage of non-tariff barriers compared to the rest of the world. Less people are able to start businesses and attract investment, and the businesses that are in place are much older than other regions, so the Arab world loses economic efficiency due to less market competition.
Malik and Awadallah explore the poor trade logistics that have come as a result of the region’s economic repression. Thick borders create massive transportation costs due to administrations, bureaucracy, regulations, and procedures. They run into shipping problems due to transportation, lack of good infrastructure, customs, port handling, and distribution; “Gulf countries underperform, on average, relative to countries with comparable levels of income.” Even when certain countries have well constructed infrastructure, the whole region’s lack of interconnectivity and coordination throws those gains out the window. The weak trade logistics of the region is quickly falling behind in a world where firms want to specialize different parts of their manufacturing chain. Having one link in the Arab world makes little sense with the ease of access and low costs in Asia and Southeast Asia.
The Middle East is truly caught in a vicious cycle. It has small and thin markets that increase business uncertainty, deter investment and deprive private firms from realizing economies of scale. Given that scale economies are more crucial for exports of manufactures, economic divisions prevent firms from branching out into high value added activities in the export sector. A weak private sector, in turn, lacks the political strength to meaningfully influence public policies. And, with production structures that look more similar than different, possibilities for regional trade remain limited. Taken together, this reinforces the region’s dependence on primary commodities and a growing reliance on the state for job creation. One way of breaking this development trap is to foster trade synergies across countries by creating an infrastructure of cooperation-an infrastructure that connects regional markets and facilitates trade.
The paper then points to a cooperative infrastructure as a solution for developmental growth. The Arab world stands at the crux of many of the world’s trade routes, and infrastructure would not only allow regional but international economic linkages. Infrastructure would also help subside food subsidies by connecting agricultural markets and connect the rural populace to the urban areas. Instead of working on large infrastructural changes, the authors envision a strategy of focusing on smaller incremental changes to bring about wholesale improvements. Lessening the economic impacts of thick borders and trucking standards, rather than expensive regional rail networks, for example.
They tie back the region’s economic fragmentation and its effects to the political calculus of the Arab Spring; the “region’s arbitrary trade regime serves a vital political function: by allocating monopoly right to insiders and by channeling rents to favoured groups, it cements the power of rulers. The region has favored the ease of financial linkages brought about by advances in communications rather than the more politically sea-change worthy economic linkages, another way in which insiders benefit from their own economic reforms. Interestingly, the authors point to a lack of international support for horizontally integration the region’s economic structures. The US and EU countries have made bilateral trade agreements with MENA countries, keeping them “essentially organized in a honeycomb structure, where individual cells are insulated from each other but connected to the outside world.” Foreign powers see cooperative regional pacts with suspicion, and they are “omitted from the emerging foreign policy discourse of major powers.” This is directly opposite to the discourse and development of South Asia, Silk Road, and Af-Pak countries to this day. But regional trade integration is necessary to compete on a global scale as well as to improve the region’s economic standing.
The paper concludes with the call for an “open access order”, and for the region’s powers to insert change alongside the changing demography. Improving the region’s inequality to access will morph the hierarchical entrenchments of Arab world society long fed on oil and aid. The youth and unemployment problems can be improved with a strong private sector and engender an independent middle class business constituency that will help expedite political reform. To the authors this, “can be achieved through a genuine infitah (economic opening) that dismantles entry barriers, replaces privilege with competition and ensures a decentralized and rules-based framework for decision-making.”