Arab Spring (2013): Two Years of Arab Spring
Oliver Masetti, Kevin Körner, Magdalena Forster and Jacob Friedman, Frankfurt am Main.
This article appeared in the February 2013 issue of Current Economics with permission of the author.
Key Concepts: Arab Spring| Political Instability| Mass Protests
Key Economies: North Africa and the Middle East
The Arab Spring
In this study, we analyse some of the political and economic consequences of the Arab Spring and assess opportunities and challenges facing the affected countries. We focus on the Arab countries in North Africa (Algeria, Egypt, Libya, Morocco and Tunisia) and the Levant region (Lebanon, Jordan and Syria) as well as Yemen.
Political Consequences of the Arab Spring
Transition Countries: Pluralism Increasing, Political
In Egypt, the number of parties represented in the first post-Mubarak parliament increased from 9 to 15. In the parliamentary elections which took place in several rounds from November 2011 to January 2012, the Muslim Brotherhood’s Freedom and Justice party enjoyed a landslide victory, gaining 46.3% of the vote. Together with the radical Salafist Nour party they dominated parliament with over 70% of all seats. Liberal movements that were the driving forces behind the anti-Mubarak revolution performed poorly, due to their fragmentation and internal quarrelling. The newly elected parliament was dissolved after a few weeks of existence by the Supreme Court and the military in early June 2012 on a technicality. However, the result of the election still matters for Egypt’s future as prior to its dissolution parliament elected the Constitutional Assembly, the body that has drafted a controversial constitution. The strong showing of Islamic forces also continued in the June 2012 presidential elections, which were won by Mohamed Morsi, the candidate of the Muslim Brotherhood.
In Tunisia, the number of parties represented in the constituent assembly rose to 19 from formerly 7 in the unicameral parliament (see chart 1, above). Under the autocratic regime of ousted President Ben Ali, only 25% of the seats were granted to the opposition. The moderate Islamist Ennahda party came first in the elections in October 2011 with 41% of the vote and formed a coalition with two secular leftist parties. Tunisia saw several violent clashes between Salafi Islamists and secularists in 2012. The often fraught relationship between the ruling Islamist party and Salafis is sure to remain a key stress point in Tunisian politics in coming years.
In Libya, the first-ever direct elections to a General National Congress took place in July 2012. 80 representatives from 21 parties were elected by lists to the General National Congress; another 120 representatives were elected on a constituency basis. Against the regional trend, Libya elected a mildly Islamist, pro-business party with 48.8% of the vote. The Muslim Brotherhood offshoot Justice and Construction party came second with only 10.3%. Cleavages in the Libyan population follow tribal and regional lines as well as religious/secular ones, increasing the complexity of Libyan politics. Libya faces radical Islamist influence as well: some of the revolutionary brigades, which still control large parts of the country, fly the black flag often associated with radical Islamism.
In Yemen, the previous vice-president, Abdurabu Mansour Hadi, was elected as new president in February 2012. He replaced Ali Abdullah Saleh, who resigned from his 33-year presidency in a GCC-brokered plan following more than a year of protests. Hadi and the interim government that equally consists of members of the opposition Joint Meeting Parties and the previous ruling party, General People’s Congress, need to lead Yemen through a difficult political and economic transition exacerbated by a high level of social unrest. The interim government still faces struggles with secessionist movements in the south and a renewed insurgency by Houthi rebels in the north. The strong presence of al-Qaeda in southern parts of the country remains a severe threat to security.
Gradual Reformers: Steps Towards Meeting Protesters’
Of all the countries covered in this study, Algeria has remained closest to its status quo. The collective memory of the 1990s civil war and the security threat emanating from al-Qaeda in the Islamic Maghreb (which became evident in the recent hostage crisis in an Algerian gas plant) seem to have contained major political unrest. The ruling National Liberation Front party has been confirmed as the largest political force after parliamentary elections in 2012. The most visible consequence of the Arab spring was the lifting of the state of emergency which had been in place for 19 years.
Still in Violent Conflict: Syria and its Contagion
Drafting of Constitutions Remains Key Pending
In Egypt the drafting process was hastily completed in early December 2012 despite strong protests by the liberal opposition and the judiciary, in part due to Islamist worries that the drafting assembly would be dissolved by the courts. The draft constitution was approved by a popular referendum in mid-December with nearly 64% of total votes, with a low voter turnout of less than 33%. Opposition groups joined forces in a National Salvation Front and announced their intention to contest some provisions in the new constitution. Controversial issues include the role of Islam, the rights of religious minorities and women, as well as the separation of powers between parliament, the president and the military. Parliamentary elections are expected to take place by April, although there is no official date yet.
In Tunisia and Libya, the constitution drafting process is still ongoing and also subject to public controversies, setbacks and delays. In Tunisia, the original end-October 2012 target deadline was pushed back to ensure an orderly process and a constitutional draft should only be ready by April 2013. In Libya, the composition of the Constituent Assembly is still disputed and a final draft constitution is not expected prior to mid-2013. In Yemen, the interim government, which was formed for a two-year transition period, is committed to draft a new constitution and organise free elections by 2014.
Economic Consequences of the Arab Spring
Production stoppages caused by political upheaval were severe. In Libya, for example, oil production decreased due to the civil war and the international sanctions from 1.65 m barrels per day in 2010 to only 0.47 m barrels per day on average in 2011,4 causing the economy to crash. In Egypt, widespread demonstrations and strikes in the wake of the anti-Mubarak protests paralysed the production process and deterred investments for months. In Tunisia, labour unrest led to a substantial decline in the mining sector (-40% added value) and in oil and phosphate production. In Syria, oil production plummeted by 60% from the level at end-2010 to 0.16 m barrels per day in September 2012 due to international sanctions and the continuing civil war. In Yemen, economic activity was hit severely by attacks on electricity facilities and pipeline sabotage, which led to painful electricity and fuel shortages.
One of the most immediate effects of the Arab Spring was a sharp decline in tourism (see chart 3, above). The number of tourist arrivals in the five main tourist destinations in the region, namely, Egypt, Tunisia, Morocco, Jordan and Lebanon fell by a quarter, from 20 million in the first half of 2010 to 15 million in the first half of 2011. The decline was most severe in Egypt and Tunisia, at about 40% each. In 2012, tourist arrivals to the region recovered, but remained way below pre-revolution levels. Given that tourism receipts account for over 20% of GDP in Lebanon, 12% in Jordan and between 5% and 8% of GDP in Morocco, Tunisia and Egypt,5 the decline had a significant effect on economic growth.
Foreign direct investment (FDI) inflows also diminished sharply, accelerating the trend that started with the financial crisis in 2008-09. Between 2010 and 2011 FDI inflows fell by 46% to US$11.4bn, their lowest level since 2004. The regional decline was mainly driven by a sharp reduction in FDI inflows in Egypt, Tunisia and Lebanon (see chart 4, above).
In 2012, a slowdown in exports kept economic activity in North Africa and the Levant depressed. A major reason for this slowdown was the recession in Europe, the region’s most important trading partner. Especially affected were Egypt and Tunisia, which saw their exports decrease by more than 5% (y-o-y) in the first half of 2012. Export growth also turned negative in Jordan and stagnated in Morocco. Against this trend, exports in Libya and Algeria increased, thanks to high oil prices.6
Widening External Deficits and Diminishing FX
Reserves, but International Aid Chipping in
The Arab Spring events led to a weakening of the region’s currencies. The strongest depreciation was experienced by the Tunisian dinar. In many cases, stronger depreciation could only be averted by substantial interventions of the national central banks, which sold FX and bought the local currency to prop up the exchange rate. These interventions, however, came at the cost of depleting FX reserves (see chart 5, below). Overall FX reserves of the oil-importing countries decreased by a quarter between early 2011 and mid-2012. The fall was most dramatic in Egypt, where FX reserves dropped from US$35bn in January 2011 to US$15bn in December 2012. In Jordan, reserves declined from US$12bn at the beginning of 2011 to US$7bn in December 2012. Only in Lebanon did FX reserves remain relatively stable and even increase over the last two years to a sizeable US$37bn, supporting the currency peg against the US dollar. In Yemen, a stronger depreciation was only prevented by intervention from the IMF and Saudi Arabia.
To avoid a full-blown balance-of-payments crisis the international community stepped in to support the region. The G8 and the international financial organisations founded the “Deauville Partnership” in May 2011 to coordinate international aid for affected countries. Members pledged up to US$70bn. However, to date only a fraction of the promised aid has actually been disbursed. One of the actions already taken was to extend the mandate of the European Bank for Reconstruction and Development (EBRD) to include Jordan, Tunisia, Morocco and Egypt. This should make available up to US$2.5bn a year for these countries. The IMF has also committed to provide loans to Morocco, Jordan, Yemen and most recently to Egypt (at the time of writing Egypt had reached IMF staff-level agreement, with IMF board approval still pending), valued at US$6.2bn, US$2bn, US$93mn, and US$4.8bn, respectively. Additional bilateral financing support is coming mainly from the wealthy Gulf countries. Qatar, for instance, supports Egypt with loans and grants of US$5bn.
Large Fiscal Costs, Rising Public Debt
As a result, fiscal deficits widened sharply. The situation was worst in Egypt, where the fiscal deficit reached 11% of GDP in FY 2011/12, and in Tunisia, where the fiscal deficit more than sextupled from about 1% of GDP in 2010 to 6.3% of GDP in 2012. In Algeria, the deficit jumped to 4% of GDP despite solid oil revenues, highlighting the effect of the sharp spending increase. The deterioration of the budget balance was less pronounced in Morocco, Lebanon, Jordan and Yemen, but nevertheless all four countries exhibited high deficits of close to 6% of GDP in 2012.
The consequences of the fiscal expansion are also reflected in increasing public debt levels. Most worrying is the situation for the countries that already entered the crisis with high debt-to-GDP ratios, like Egypt and Jordan. In both countries the public debt level has risen by more than 6 pp over the last two years and now stands at close to 80% of GDP. In Morocco and Tunisia, debt levels were lower initially but also increased sharply to 58% of GDP and 46% of GDP, respectively, in 2012. In contrast, public debt in Lebanon slightly decreased over the last two years, but at a staggering 135% of GDP in 2012 – the highest level in the region – it remains a constant source of concern. In Libya and Algeria, thanks to oil wealth, indebtedness is only in the single digits as a percentage of GDP.
Stock Markets Hit by Uncertainty
Chances and Challenges Ahead
Youth Unemployment, Skills Mismatch
The region has one of the fastest-growing workforces in the world. With a 2.7% annual workforce growth rate, the IMF has estimated that the region will see 10.7 million new labour market entrants by 2020.8 Egypt alone must create nearly 700,000 jobs a year for its unemployment rate to remain unchanged.9
Labour market inefficiencies remain a key problem in the region. In the World Economic Forum’s Global Competitiveness Index, the MENA region had the lowest labour-market efficiency ranking in the world. The highest-ranked country is Jordan, at 101 out of 142 countries. In addition, the region faces widespread skill mismatches, as inefficient education systems produce unprepared market entrants. Firms operating in the region regularly list insufficient labour skills as a major constraint.
Perhaps more importantly, the public sector accounts for an outsized portion of employment in the Middle East, 9.8% of GDP compared with the global average of 5.4%.10 Taking only non-agricultural employment, in 2010 public employment constituted 42% of total employment in Jordan and 70% in Egypt.11 On average, public-sector salaries accounted for 35.5% of government expenses in 2009 for regional governments.12
In addition to crowding out the private sector, this system has created an environment in which young job-seekers find working in the public sector more desirable. The 2003 Syrian Unemployment Survey indicated that 80% of young unemployed persons found a public-sector job preferable to a private-sector position.13
The large public sector has also bred a lack of economic dynamism in the region, further setting back employment gains. A World Bank study from 2010 found that the MENA region has some of the lowest firm entry density rates in the world, suggesting a lack of entrepreneurship, with a rate almost four times lower than that of Europe and Central Asia.14 According to the World Bank’s 2013 Doing Business report, investors in the MENA region have to deal with insufficient protection of investor and property rights. The survey also finds that business managers are particularly concerned about corruption, anticompetitiveness and uncertainty regarding regulation. With an average “Ease of Doing Business ranking” of 98,15 the MENA region as a whole finds itself in mid-range internationally. However, apart from Tunisia and Morocco to some extent, most of the Arab Spring countries in this study score relatively poorly. While in the past some governments have put bold efforts into reforming their countries’ business environment, the report states that since the beginning of the Arab Spring in 2011 the region’s reform process has lost some momentum, hampered by the problems and uncertainties that accompany the political transition processes. The combination of these factors is a formidable obstacle to boosting employment in the region.
What Needs to be Done?
Subsidies: Inefficient and Unaffordable
Ballooning Subsidy Bills, Uneven Success
Despite their large size, subsidies have done little to address their stated goals, and have numerous unintended consequences for affected countries. Several studies have shown that the beneficiaries of energy subsidies are overwhelmingly found in the top income quintile of the population, especially in non-rural areas. In Jordan and Morocco, the bottom quintile benefits from less than 10% of subsidies.18 In addition, subsidies have led to high energy use rates, in both oil-exporting and oil-importing countries. Over the past two decades, energy intensity has declined in all regions of the world with the exception of MENA. This reflects that energy subsidies have led to a concentration of industrial activity in energy-intensive industries, as well as low rates of energy efficiency in both transportation and private consumption.19
Subsidy Reform: A Necessary But Difficult Move
Indeed, the biggest obstacle regional governments face in reforming subsidy regimes is the potential for political instability as a result of such reform. International organisations have stressed the need for methodical reform, with each step clearly articulated and explained to the public in order to avoid potential unrest. Regional governments face a trust deficit vis-à-vis their populations, and this must be addressed for the effective reform of subsidy programmes.
There are numerous potential paths for regional governments looking to reform subsidy regimes. The switch from blanket subsidies to targeted regimes through coupons or direct cash transfers helps alleviate the effects on low-income segments of the population, while reducing the levels of overall subsidy spending. Incremental reductions of subsidies on heavy industries can help mitigate the potential for sectoral damage. The fiscal space made by reforming subsidies can be used to spur economic growth in more dynamic sectors.
Strengthening Economic Ties Within the Region
and With Other Emerging Markets
Enhancing Intra-Regional Trade
Regional trade agreements exist, but most of them have had limited impact and lack political momentum. All countries have agreed to establish a Greater Arab Free Trade Area (GAFTA) under the leadership of the Arab League. Egypt, Jordan, Morocco and Tunisia went a step further and signed the so-called Agadir Agreement in 2004. Another cooperation framework, the Arab Maghreb Union (AMU) made up of Algeria, Libya, Morocco and Tunisia, has stalled since its creation due to political tensions between the members, for instance between Morocco and Algeria. The border between these two countries has been effectively closed for the last 16 years. AMU might be revived by the new political leaders, as hinted by a meeting of the members’ foreign ministers in February 2012. Jordan and Morocco were invited to join the GCC in May 2011. The accession process is still open, with Jordan having finalised an Action Plan in November 2012, and both countries receive economic support packages from the GCC.
Unlocking intra-regional trade and investment can bring substantial benefits to the region. Estimates put the annual economic cost incurred by the lack of integration at around 2% to 3% of GDP.21 Potential gains could also be had by liberalising trade in services such as finance, communication and logistics. Further benefits could come by enhancing labour mobility between labour-abundant and resource-rich countries. And finally, the greater region is in a globally competitive position to provide solar energy. Co-operating on trans-border power infrastructure might be a starting point for successful economic integration.22
Establishing Closer Ties to Other Emerging Markets
The BRIC (Brazil, Russia, India and China) countries are becoming more important trading partners. China and India have an interest in the natural resources of the region, which includes some of the world’s top producers of oil (Algeria and Libya), gas (Algeria and Egypt) and phosphates (Morocco and Tunisia). China is also a source of some commodity imports for the region, such as water-intensive foodstuffs, while Russia is a key supplier of wheat to Egypt, covering 50% of Egypt’s demand (Egypt is the world’s largest wheat importer). Overall, the BRICs are key suppliers of manufactures to the region. For example, Tunisia is now the largest market for Brazilian cars in the Arab world.
Not only trade but also investment ties with the BRICs have strengthened. China has secured 80% of infrastructure contracts in Algeria in recent years. As a result, Algeria hosts today the biggest Chinese diaspora in northern Africa, of about 35,000 people. China was also the largest foreign investor in Egypt in 2009, with investments totalling more than US$500mn. India is active in Egypt, too, with investments in the services and assembly industry sectors. Russia and Brazil have engaged in oil extraction and upstream investment. Russia’s Gazprom has signed a memorandum of understanding with Sonatrach, the state-owned Algerian oil company, and Brazil’s Petrobras has invested in oil-exploration ventures in Libya. High-level official visits, business fora and technology transfer projects are likely to enhance further economic relations.23
North Africa and the Levant offer a bridgehead location into Europe, Africa and the Middle East as well as preferential trade agreements with third countries as competitive advantages supplementary to low labour costs. If countries embrace trade and investment liberalisation more forcefully, these advantages will translate into concrete improvements in living standards for the region’s population.
Council. Members are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the
United Arab Emirates.
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