The countries of the Middle East and North Africa that went through political transitions face a grim economic future, according to the World Bank’s new chief economist for the region, Shanta Devarajan.
“The current macroeconomic situation is such that if there’s an external shock there are just no buffers left,” Devarajan said. “There’s no fiscal space in any of these countries. It’s very serious. It could come to a grinding halt.”
The region suffered from microeconomic distortions prior to the wave of revolutions that swept autocratic regimes from power, Devarajan said. The unrest caused a collapse in investment and exports, which in turn led to widening fiscal deficits.
“The danger is you might solve one and make the other two worse,” he said. Addressing the macroeconomic problems through drastic austerity could heighten political tensions and derail the process. Gradually addressing the macro, which was relatively stable before the Arab Spring, without dealing with the micro problems could be even worse, he adds.
“The distortions are still there. You still have these huge, untargeted subsidies, you have very poor service delivery, you have an industrial sector that is still based on privilege. And ... unless we do something about those, you wonder, will these brave men and women who marched in the streets have marched in vain?”
HSBC estimates that the cost of the Arab Spring for the seven most affected countries will be $800 billion by the end of 2014, as they stumble through the transition process that began with popular protests in 2011. Egypt in particular has suffered from an overt clash between conservative and liberal elements, which ended in July when the army overthrew the Muslim Brotherhood-backed president, Mohamed Morsi. The economy, which had previously been partially supported by strong foreign direct investment, has foundered.
Talks with the IMF over an extended credit facility have dragged on, and this week the United States is expected to announce a freeze to at least part of the $1.3 billion in aid it provides to the Egyptian military. Currently the country has been underwritten by billions of dollars of loans and grants from its neighbours in the Middle East.
Other countries have also experienced ongoing instability, albeit to a lesser extent. Tunisia, Morocco and Jordan have all been granted IMF support over the past two years. In the most part, though, they have struggled to uncouple themselves from their subsidy regimes, which in many cases are untargeted support for consumption of petrol, cooking gas or food, and are wound up with the populism that inspired the revolutions and the old regimes, which used them to buy popularity.
The first step to unwinding these, Devarajan says, is transparency. Governments and their international partners have to make sure that there is a popular consensus around reforms and openness in budgets that goes some way to diffusing political tension and buys them time to implement change. “There are policy reforms that don’t cost much but that strengthen the trust between the population and the government,” he says.