Arab World in Economic Fix

If Middle Eastern countries do not start making real progress on fundamental political and economic reforms, further regional turmoil is inevitable.

With the rentier systems that governments have maintained for decades now at a breaking point, policymakers must begin the difficult, but not impossible, process of establishing new social contracts, EJInsight reported.

That contract in Arab countries started to erode at the turn of the century, when governments with inflated budgets and bloated bureaucracies could no longer provide an adequate supply of basic services such as health care and education, create a sufficient number of jobs, or sustain food and fuel subsidies.

But, despite diminished state benefits, most leaders have continued to insist that their countries’ people uphold their end of the contract by not participating meaningfully in public life.

Arab governments were able to sustain inefficient economies for decades because they were propped up by oil revenues.

Hydrocarbon-producing countries used their profits to buy their citizens’ loyalty and establish what were effectively welfare states; and non-oil producers enjoyed the benefits of aid, capital inflows, and remittances sent back by their nationals working in resource-rich countries.

Because the governments of oil-producing countries used revenues to provide for most of their people’s needs—including jobs, services, and favors—these governments fostered a culture of dependency, rather than encouraging self-reliance and entrepreneurship to expand the private sector.

Challenges Ahead

What’s more, because they did not need to tax their citizens to generate revenues, people had little recourse to challenge authoritarianism. The political culture reflected a simple principle: “no taxation, no representation.”

Now that oil prices are declining and likely to continue to remain low for several years, if not permanently, the Middle East’s rentier systems face a significant challenge.

Saudi Arabia, for example, is raising taxes, cutting domestic subsidies, and shifting its foreign-aid paradigm away from grants and toward investments.

The kingdom has long provided financial support to Egypt, Jordan, and other countries in the region, so this shift will put pressure on those governments to pursue private-sector growth to improve their own countries’ economic performance.

But, while the Arab world’s governments have reached the limits of their ability to employ more people, raise public debt, and attract outside grants, members of these countries’ political and economic elite, whom the current rentier system privileges, are likely to resist efforts at substantive reform.

And one should expect to see further opposition from state bureaucracies, which lack any vision for a transition to an inclusive and sustainable economic model.

Untenable Situation

After relying on resource rents for decades, these governments must switch not only to new growth models, but also to more representative governance.

When Arab societies are asked to accept reduced subsidies, fewer government jobs, and less from the state in general, they will demand a larger share in the decision-making process.

As it stands, the Arab world is stuck between an unsustainable economic and political status quo and the inclusive, merit-based economic system that less myopic people in the region know must replace it.

Too many Arab governments have put themselves in this untenable situation, having given little consideration to building the governance institutions their states need.

In today’s perfect storm of declining oil prices and closed political systems, a new wave of protest could well emerge, particularly where governments have not recognized that the end of rentierism marks the end of the old social contract.

A Matter of Survival

For these governments, economic reform is now a matter of survival. In a more open system, Arab governments will need to privatize many state-controlled companies, and make it far easier for entrepreneurs to register start-ups and launch new businesses.

And, ultimately, Arab states’ economic reforms will succeed only if citizens gain a more powerful voice in governance.

Tunisia is the one country where a new social contract has begun to replace rentierism.

The rest of the Arab world faces two alternatives. Its leaders can begin fighting the cancer of an unsustainable status quo, with all the pain and uncertainty that such a struggle entails; or they can wait for the cancer to become a terminal condition, and be devoured by it.