Salim Sayouri EMBA7 solvay Ponts MBA

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Solvay Ponts MBA

Module: Business Economics

Professor: Pr. Dermot McAleese

Assignment: Individual project

Professor Assignment Evaluation Grid:

Criterion Very Good Good Satisfactory Unsatisfactory N/A

Professor comments:

Grade: /20

Declaration of Authorship

“I (We) hereby declare that I (we) have neither given nor received unauthorized help on this assignment,

that all work is my (our) own unless otherwise stated, and that all sources used in the preparation of this

assignment have been properly cited.”

Name of participant(s):

1. Salim SAYOURI

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3.

4.

5.

Salim Sayouri EMBA7 solvay Ponts MBA

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Topic discussed in this project:

Democracy and economic growth: enemies or allies? Economic analysis of the effects of “the Arab awakening” on economic prospects for the countries affected.

The Arab awakening or the Arab Spring The Arab awakening or the Arab spring is the uprising in the Arab world that followed the self-immolation of the Tunisian street vendor, Mohammed Bouazizi1, on 17 December 2010. People all over the Arab world feel a sense of vengeance in shaking off decades of cowed passivity under dictatorships that ruled only to satisfy their interest and those of their circle. The people wishes and aspirations, once it was considered, were almost relegated to a second degree.

The causes of the Arab Spring is widely believed to have been originated by dissatisfaction with the rule of Arab governments. A multitude of factors have led to the protests, people are fed up with dictatorship and absolute monarchy, daily cases of human rights violations, corruption is commonplace, unemployment is a painful reality for large part of highly educated people, extreme poverty and extreme wealth are coupled together,

Decades of autocrats ruling have resulted in the concentration of wealth in the hands of the few as well as the political power, insufficient transparency in the wealth redistribution and widespread corruption in all sectors of the economy and at all levels of the state apparatus.

The relative success of the democratic Republic of Turkey, with its substantially free and vigorously contested but peaceful elections, fast-growing but liberal economy, secular constitution but Islamist government, created a model (the Turkish model) if not a motivation for protestors in neighboring states.

Many changes have been occurred as a result of this civil society uprising; in Tunisia, Egypt, Libya and Yemen, the rulers had been forced from power; In Syria a Civil war has broken out and major protests have erupted in the rest of the Arab world. But also the economy in the region was badly hit by this event leading to a great macroeconomic and political instability.

In this document we will analyze the economics performance in the MENA before and after the Arab Spring and try to outline their financial and economic impacts on the region.

The culture effect After the end of the colonial period, almost all Arab countries have inherited from an autocratic system that has emerged immediately or couple of years later through putsches and regime change.

1 http://en.wikipedia.org/wiki/Arab_Spring

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The lasting essence of this autocracy government in the Arab world relies largely to the Arab culture. Geert Hofstede [G. Hofstede, G. Jan Hofstede, M. Minkov, 2010] has commented the Arab culture2 through the Hofstede’s 5-D model3:

Figure 1: The Arab World through the Hofstede’s 5 -D model; Source: THE HOFSTEDE

CENTRE

The high score of Power of Distance (PDI) reflects the image of society accepting hierarchical order in which everybody has a place and which needs no further justification. Hierarchy in an organization is seen as reflecting inherent inequalities, centralization is popular, subordinates expect to be told what to do and the ideal boss is a benevolent autocrat.

The low score in Individualism (IND) places the Arab culture in the collectivistic society case. This is manifest in a close long-term commitment to the group, be that a family, extended family, or extended relationships. Loyalty in a collectivist culture is paramount, and over-rides most other societal rules and regulations. The society fosters strong relationships where everyone takes responsibility for fellow members of their group.

And the high score in Uncertainty Avoidance (UAI) places the Arab countries among those avoiding uncertainty and maintaining rigid codes of belief and behaviour and are intolerant of unorthodox behaviour and ideas.

Hofstede précised that the Arab culture is characterised by having a large power distance, a quite strong uncertainty avoidance, high collectivism, and a moderate Masculine/Feminine society. This kind of culture treats is more likely to foster and encourage the creation and maintaining of authoritarian forms of governments that include monarchies and dictatorships.

In addition to this cultural side-effects concern, the Arab region was suffering from two major deficits; a deficit of freedom, and a deficit of knowledge (figure 3). Most experts, whether from academic circles or international organizations such as UNDP (Arab Human Development Reports series), tended to fagree that these two deficits were correlated with another weakening condition: poverty. It is an undeniable fact that the majority of Arab states either live off oil incomes (the Gulf countries) or tourism incomes (Egypt, Morocco, Tunisia, Jordan), and manufacture little of significance to the world economy; their citizens lead lives of poverty,

2 based on scores for six Arabian countries: Egypt, Iraq, Kuwait, Lebanon, Libya, and Saudi Arabia 3 http://geert-hofstede.com/arab-world-egiqkwlblysa.html

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ignorance and in some cases, extremism. Corruption is common place in the Arab world (see

Figure 2). Graycar and Smith [A. Graycar & R. Smith, 2011] ] gave many evidences that shown how poor governance and corruption can be harmful for the standard of living and the distribution of income of citizens, reducing income per capita, literacy, while increasing infant mortality. Further, poor governance distorts public expenditure and increases poverty, reducing investment efficiency and degrading the growth potential.

The link between poor governance, corruption and economic growth. The cross-country evidence has shown how poor governance and corruption can be harmful for the standard of living and the distribution of income of citizens, reducing income per capita, literacy, while increasing infant mortality. Further, poor governance distorts public expenditure and increases poverty, reducing investment efficiency

Figure 2: Corruption in the world; Source World Bank 4

Figure 3: Global literacy rates in the world; Source: UN HD Report 2011

4http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPUBLICSECTORANDGOVERNANCE/0,,contentMDK:23493111~pagePK:148956~piPK:216618~theSitePK:286305,00.html

Source: UN Human Development Report

2011

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The economic analysis For ease of analysis and exposition, I’m using the same division of MENA region used by the World Bank. It consists in dividing the MENA region into three main groups: High Income mainly GCC oil exporters: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The second group the Upper middle income contains mainly developing oil exporters, Algeria, Iran, Iraq, and Libya in addition to Jordan, Lebanon and Tunisia. The third group lower middle income holds mainly oil importers, Djibouti, Egypt, Morocco and West bank of Gaza in addition to Syria and Yemen.

More generally, The Arab world is rich in natural resources, with particularly enormous oil and natural gas reserves. However a significant difference exists between the rich and the poor countries in the Arab region. On the one hand, the rich oil and/or natural gas states with enormous reserves, and on the other hand, the poor countries devoid of any wealth or natural resources like Mauritania and Djibouti.

For instance, the GDP per capita of the wealthiest Arab Country, Qatar, is 33 times higher than that of Yemen, the poorest Arab Country.

Figure 4: Evolution of GDP per capita, PPP in the last decade (current international $)

Arab economics approach vary immensely in their quest for Macroeconomic stability. The high income and oil exporters countries, largely oil and/or gas producers, continue to depend heavily on oil revenues and have less diversified economy. The upper middle income countries, Jordan, Lebanon and Tunisia are conducting more or less diversified economy based on tourism, services, FDI and light manufacturing. In third stage we have the countries devoid of oil resources or with insignificant reserve, like Morocco, Tunisia, Egypt and Jordan. The common trend of these countries is their policies to attract direct foreign investment to develop tourism and improve services. Yet different challenges to face the region, from a devastating civil wars that destabilized the economy for decade in both Lebanon and Algeria, to the two terrible armed conflicts of Iraq passing by the UN sanctions that weakened for years theirs oil’ dependent economies, and recently the 2008-2009 financial crisis and the newly turmoil that covered almost every states in the region.

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Evolution of GDP per capita, PPP in the last decade (current international $)

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2007 2008 2009 2010 2011 2012

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Figure 5: Total natural resources rents in some MENA countries (% of GDP); Source: World Bank

In almost all Arab world (Figure 5) the growth performance was volatile for some and majorly on downward trend. The financial crisis has a direct impact on the growth for many GCC economies, while the Arab uprising has impacted almost all the region.

Oil importing countries are facing external financing difficulties and fiscal pressures. Although developing oil exporters do not have the same balance of payment and budget deficit pressures as the oil importers, their macroeconomic vulnerabilities have been growing due to persistent political instability. In Libya, militia activity and strikes over the summer led oil production to plummet. In Iraq, oil production has been constrained by technical issues and attacks on infrastructure. In Iran, sanctions have limited oil exports, while high inflation and currency weakening and volatility have depressed private consumption. In Algeria, long-term underinvestment in infrastructure in the resource sector and security concerns, which flared up during the hostage crisis in the Tagantourine natural gas facility in early 2013, have limited export and fiscal revenues from the resource sector.

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Figure 6: GDP Growth in MENA region; Source: world Bank

Recovery from the financial crisis in transition economies has been interrupted by bursts of domestic unrest. Egypt and Tunisia, for example, experienced several episodes of sharp decelerations in industrial production (IP) and merchandise exports since the contractions associated with the Arab Spring uprising (Figure 6). In Libya, there have been two episodes of extreme macroeconomic volatility since the Arab spring. The first one was associated with the regime change in 2011. The second one reflects severe oil disruption due to spurts of violence.

Syria data has not been included in the graph due to the economy collapse as the conflict and the civil war intensified.

Figure 7: Industrial production index in Tunisia and Egypt ; Source Trading Economics

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The amplification of domestic political instability and growth of policy uncertainty, and the intensification use of crude oil exports to cover imports and debts have weakened the economy in many developing MENA countries and contributed to macroeconomic volatility.

Developing MENA countries were just recovering from the last financial crisis, but in the fly lost momentum due to political and social instability and the difficult external environment (Figure 7).

Figure 8: Exports of goods and services in some MENA countries; source World Bank

Political instability and security problems coupled with persistent social and political upheaval has hurt macroeconomic stability for the region. Governments responded to social demands by increasing current public spending, including subsidies, wages, and pensions, and public sector employment. The increased spending stoked inflationary pressures, while weaker currencies exacerbated the situation, especially in Iran, Syria, and Egypt (Figure 7 & Figure 8).

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Figure 9: Inflation in MENA Low Middle Income and Upper Middle Income; Source World Bank

In Syria, inflation pointed as the civil conflict expanded, the economy contracted, and the government monetized its large fiscal deficits. In Egypt, inflation is in the downward but still important, above 7% in 2012, and it is expected to worsen by 2013 as food and energy prices increased, supply bottlenecks emerged, and the currency weakened in the context of growing macroeconomic and political instability.

Overall, fiscal imbalances have worsened in the last years across developing MENA countries, especially in oil importers economies. In addition to expansionary fiscal policies, the drop reflects the skidding in revenues due to economic weakness, growing costs of imported, with subsidized food and fuel commodities, and in some cases, increased expenditures.

Figure 10: Fiscal balance in some MENA countries. Source: World Bank

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Exposure to overseas capital markets

The most prevalent belief among scholars and policy makers is that FDI improves growth through different canals. It increases the financial capital and employment, stimulates technological transfers to local firms and help improving the productivity of host states and stimulate their economies growth.

In the other side, Political instability is widely recognized to destabilize incentives to invest, yet empirical studies have resulted in widely varying estimates of the relationship between political instability and FDI inflows. However in the case of the Arab spring, the most recent Investment Climate surveys in the MENA region done by the world bank [World Bank, MENA, 2013] revealed that political stability was the most important deterring to investing. The following graph exhibits the strong negative relationship between FDI and political turmoil. In transitions countries, Egypt, Libya, Yemen and Tunisia, the average net of FDI has decreased by more than 50% from 2007 to 2012. Also the decline in FDI was less pronounced in the 2008-2009 financial crisis compared to the social and political upheavals that followed the Arab spring.

Figure 11: Foreign direct investment in some MENA economies. Source: World Bank

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Figure 12: Foreign direct investment in GCC economies. Source: World Bank

With uninterrupted political instability and policy uncertainty, economic growth in MENA is practically in the downward slope, although the small improving for the Lower Middle Income economies in 2012. In the light of the recent events in Egypt and Syria, the region will continue with inferior performance results for some time. Evidently, not all the states will be impacted similarly, it is expected the emergence of “two-speed” post-Arab-Spring recovery categories, the one growing much faster (oil exporters) and the second struggling to meet economic performance (oil importers).

Figure 13: GDP Growth in MENA region; Source: World Bank

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GDP Growth in MENA region (% annual)

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Conclusion To the question does economic growth go hand-in-hand with democratic regimes? Not necessarily as claimed by many scholars. Correlation does not imply causation. Democracy did not lead necessarily to growth. Furthermore Political instability, as measured by past or expected changes of heads of government, the frequency of strikes and demonstrations, or riots, is much greater in democracies. However political instability affects economic performance only under dictatorships. Changes of chief executives, while much less frequent in dictatorships, are economically costly. While in democracy where institutional constraints are well developed and established, neither past nor expected changes of heads of governments affect growth. But under dictatorships economic growth slows down significantly when the tenure of rulers is threatened. Thus exactly what is happening in the region, although political transitions bring promises of greater political and economic freedom, the process in MENA stuck in the middle and is accompanied with enormous political and macroeconomic instability

This is in the addition to poor economic models and the strategic choices of most of MENA countries which may bring them in a resource trap as soon as the mineral resources have exploited. Still the only escape is to ameliorate public institutions and improve the investment climate with a fair condition for market entry and exit, protected property rights and rule of law, commitments to stable and transparent policies and the most important political and macroeconomic stability.

In my point of view, what are the most required in the Arab world is more an enlightened authoritarian system that can achieve consensus on political and structural reforms that address long-term challenges: bureaucratic patronage and favoritism, unevenly enforced regulations and last but not least quality of education and adequate skills required by the market. At the same time, the political and structural reforms should aims to lay a firm foundation for a sustainable growth and improve the welfare of population by irradiating poverty, higher education, superior health system, lower unemployment, high revenue (PPP) and high quality of life.

The outcomes of such committed policies will certainly increase and stimulate local and foreign investments, and ameliorates job creation, growth and productivity improvement and instigate the march of people towards democracy.

Reference [G. Hofstede, G. Jan Hofstede, M. Minkov, 2010]: Cultures and Organizations: Software of the Mind. 3rd Edition, McGraw-Hill USA, 2010 [World Bank, MENA 2013]: Risky Business, Political Instability and Greenfield Foreign Direct Investment in the Arab World, Martijn Burger, Elena Ianchovichina, Bob Rijkers. 2013 [World Bank, MENA, 2013]: World Bank Middle East and North Africa, Economic development and prospects, Octobre 2013 [A. Graycar & R. Smith, 2013]: Handbook of Global Research and Practice in Corruption, Edward Elgar Pub; Reprint edition (July 31, 2013) (http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPUBLICSECTORANDGOVERNANCE/0,,contentMDK:23493111~pagePK:148956~piPK:216618~theSitePK:286305,00.html)