The Arab Spring arrived so suddenly it has been difficult to predict what effects this burgeoning demand for Middle Eastern democracy will have on the world economy
WHEN FRANCIS FUKUYAMA wrote his famous book, The End of History, in 1992, it was assumed that all countries would adopt some form of liberal capitalism and democracy – the "perfect" system. Since countries would then be singing from the same hymn sheet, there would be no more history, that is, conflicts and wars would come to an end.
This optimistic theory ignored two crucial factors. One was religious fundamentalism, particularly in the Islamic world. The second was the innate tendency for capitalism to go haywire – as it did in 2007/8 – causing a major worldwide recession. An additional complication was the fact that Western countries only owned a small fraction of the world’s supply of oil, which was, in any case, beginning to run out.
We may never know what effect Fukuyama’s book had on the US administrations but it certainly seems as if they formed the view that they should help other countries embrace democracy sooner, rather than later. This was ironic, since the US form of democracy is questionable. It costs hundreds of millions of dollars for a candidate to become president of the US. The system is a plutocracy rather than a democracy – one that would now exclude candidates such as Abraham Lincoln. Big business, along with their professional lobbying firms, run everything. (That, incidentally, is why Ireland is allowed to retain its low rate of corporate profit tax and its various tax treaties.)
Does the Arab Spring mean that Islamic countries are at last willingly and spontaneously beginning to adopt liberal democracy? It is far too soon to answer this question and it is unlikely that the military enforcement of democracy on Iraq would be seen as an encouraging precedent. But it is clear that, beginning with the “Jasmine” revolution in Tunisia, there is a groundswell in favour of less autocracy and more personal freedoms. In Tunisia and Egypt considerable progress has been made, but in countries such as Libya, the old guard is putting up tough resistance to change, despite the intervention of the US and Nato.
Not everyone sees it as a historical or “natural” drive towards liberal democracy. David Cameron, for example, has warned of the possibility of a descent into “poisonous extremism”. The truth probably lies somewhere in the middle. Things will get worse before they get better. To the extent that tribal behaviour conflicts with democracy, it may take some countries a very long time to get on a stable progressive path.
With all of these uncertainties it is unusually difficult to get a handle on economic consequences. In its recent World Economic Outlook,the IMF devotes a few paragraphs to the Middle East and North Africa area (Mena). This region as a whole is expected to grow by about 4 per cent in 2011 and by about the same in 2012. This is the kind of growth rate Ireland would dearly like to have, but it should be remembered that this geographical area includes oil-exporting countries such as Saudi Arabia, Iran and Iraq.
The rate of inflation in Mena is expected to be about 10 per cent, mainly because of rising commodity prices. The current balance of payments will remain comfortably in surplus – because of oil exports – while the unemployment rate, insofar as it is measured, does not seem to be problematic. The disruption in oil production in Libya is expected to be made good by the other Opec countries, so that no diminution of world oil supply is expected. This could prove optimistic. Much depends on how the US behaves. If the US adopts a heavy-handed approach towards some of the smaller Arab countries, the biggest oil producers in the region might restrict the supply of oil. This could very easily trigger a second recessionary dip worldwide.
Of the oil-importing Mena countries, Egypt and Tunisia will experience low growth of about 1 per cent in 2011. They will suffer particularly from falling tourist earnings and capital inflows. Bad loans in their banking sectors are also coming to the fore. Higher bond spreads are also considered to be an inhibiting factor. Egypt is expected to have the highest inflation rate (12 per cent) in this group of countries.
Other countries such as Morocco, Lebanon and Jordan are not expected to be too badly influenced by the prevailing turmoil. All of these countries are expected to see growth of about 3 to 4 per cent in 2011. Yemen is not discussed by the IMF but it is known from other sources that it is experiencing major dislocations in supplies of water, food and public utilities. Subsidies from Saudi Arabia have been reduced, and one estimate puts the fall in Yemen’s GDP at a massive -17 per cent.
Israel is worth mentioning because from an economic perspective it is a model of stability – growth of about 4 per cent, inflation well below 4 per cent, a comfortable balance of payments position and an unemployment rate of only 5.5 per cent. The latter no doubt reflects widespread military service.
Many Mena economies have increased food and fuel subsidies (Jordan, Tunisia, Kuwait), social welfare transfers (Sudan, Syria, Tunisia, Yemen) and public spending (Egypt, Jordan, Saudi Arabia, Yemen.) It is clear that these expenditures are designed in part to moderate public turmoil. The may, however, create even greater expectations in the future. With rising bond spreads it may prove impossible to finance any such additional demands in the poorer Mena countries.
For the Mena region as a whole, the main problem to date is inflation but the IMF, despite the paucity of good data, seems to regard youth unemployment – averaging close on 30 per cent – as a major issue for the future. It reflects rigid labour markets and a serious educational mismatch. One wonders if the IMF is concerned that with high levels of young, educated unemployed people, the region will remain in turmoil for some time to come.
If the Arab Spring does result in a workable form of democracy and free enterprise, it does not follow that this will result in a sudden upturn in economic prospects. Those countries which do not have the benefit of oil must develop an entrepreneurial class relatively free of bureaucratic interference. This does not happen overnight. The experience of glasnostand the fall of the Berlin Wall show us that this process can take quite some time.
When it comes to the Middle East it is difficult to disentangle economics from politics, and both of these are inextricably bound up with religion. The behaviour of Israel is an additional complicating factor. The US will have to act in a skilful, diplomatic manner if it is not to alienate the major oil-producing countries in the region. The situation would be far less worrying if the United Nations were a better run and more authoritative organisation.
Michael Casey is an economist and author. His book, Ireland's Malaise, was published by Liffey Press last year