By Henry Azzam
Financial Times
When young Arabs took to the streets of Cairo, Tunis, Damascus, Tripoli and Sana’a this year, they hoped that bringing down autocratic regimes would not only end corruption and restore dignity but also generate employment and pave the way for a more prosperous future.
Their expectations have not been met. On the contrary, conditions have worsened as businesses have retrenched and labour-intensive sectors such as tourism, services and transport have been harmed by civil strife.
During these transitions, there are several risk elements that need to be managed.
Uncertainty and instability are to be expected during transition periods. Economic conditions in countries experiencing revolts and civil strife are likely to worsen before they improve. It generally takes several years for a new government to consolidate and for economic reforms to be implemented.
People’s expectations. Transition governments should send a clear message that reforms will be implemented and measures introduced to create jobs. However, the effects of such measures will be felt over a longer period rather than immediately. Managing people’s expectations requires presenting a clear road map of the reforms and a specific time frame as to when their results will become visible. If communicated clearly by a legitimate leadership, using effective social media channels, young people may be convinced to be patient and accept short-term sacrifices. If expectations are mismanaged, the region risks seeing another wave of protests in the months ahead.
The credibility of private sectors. In countries that have seen uprisings, private-sector businesses have lost credibility. Cosy relationships between previous regimes and businessmen led to corruption and nepotism. There is a prevailing impression that privatisation and liberalisation introduced during the past two decades have benefited only a small minority and did not generate employment. Governments should resist the temptation to treat all businesses that dealt with previous regimes as necessarily corrupt.
For their part, private-sector businesses need to reach out to young people and convince them that they are willing and able to provide the support they need to break cycles of poverty and unemployment. Businesses should become more proactive in mentorship, skill training and funding innovative ventures.
The rise of political Islam. It is plausible that the more organised Islamic parties will gain ground in the first round of elections as we have seen in Tunisia, where the Nahda Islamic party won the largest block in the recent elections. It will take time for the “Facebook liberals” to organise themselves and win seats in newly elected parliaments. Eventually, new forward-looking secular parties with young and progressive leaderships will make their presence felt. In the meantime, the Islamist parties will be obliged to take responsibility and thus take the blame for policies they promote rather than criticising from the sidelines.
In countries such as Turkey, Indonesia and Malaysia, political Islam and democracy have been cohabiting fairly comfortably. There is no reason why the Arab world cannot emulate the Turkish model of governance. The world has to accept the realities on the ground that Islamic parties are bound to play a pivotal role in the new governments of the region.
Macroeconomic stability. With the first sign of discontent, several governments in the region rushed to provide generous packages, including more pay for public-sector employees, increased subsidies and creating jobs in the government and security forces. The measures announced amounted to 5 per cent of gross domestic product in Jordan, 10 per cent of GDP in Egypt, and 25 per cent of GDP in Saudi Arabia and Algeria. In the near term, such counter-cyclical expansionary fiscal policy is needed to maintain social cohesion and mitigate the impact of the downturn. However, these policies are not sustainable. They fuel inflationary pressures, add to budgetary deficits and lead to higher government debt in oil-importing countries, while they deepen the rentier economies of the oil-exporting countries.
Reducing dependence on foreign borrowing. The global economy is heading into a period of weaker growth. Measures to cut budgetary deficits in the US, Europe and the emerging countries will add to contractionary pressures next year. This is likely to reflect negatively on oil prices, tourism, trade and foreign direct investment. Furthermore, large European banks are under pressure to improve their capital adequacy ratios, forcing many of them to deleverage. This will make it more challenging for highly indebted corporates and countries to refinance maturing debt. Alternative sources of funding will have to be explored, including local and regional banks, export credit agencies, Islamic finance and capital markets instruments.
Henry Azzam is chairman, Middle East & North Africa, Deutsche Bank
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