The Economic and Political Outlook for the Middle East in Turmoil

The Middle East and North Africa have seen more change in the last four months than in the previous fifty years. The current turmoil will have far-reaching effects as well as short-term economic implications, both within the region and beyond. How will these economic consequences impact the political landscape?

Marwan Muasher and Michele Dunne of the Carnegie Endowment and the IMF’s Masood Ahmed discussed the economic and political outlook for the region. Carnegie’s Uri Dadush moderated.

Mixed Economic Outlook

The turmoil is clearly having an adverse economic effect on the region, but high oil prices are helping buoy oil exporters.

• Oil importers most adversely affected: The political turmoil has disrupted economic activity the most in oil-importing countries such as Egypt and Tunisia, argued Ahmed. Generally, oil-importing countries are facing a number of pressures arising from sharp increases in international fuel and food prices, declines in tourism, lower foreign direct investments (FDI), and higher borrowing costs.
   
• Government support: The effects on the population have been mitigated by increased spending on food and fuel subsidies, cash transfers, and housing. However, Ahmed warned that the additional fiscal spending will strain public finances and lower future growth.
   
• Stronger growth among oil exporters: Oil-exporting countries are expected to have stronger fiscal balances and higher growth, boosted by the sharp increase in oil prices and production, noted Ahmed. They can now afford the increase in government spending to ease social pressures.
   
• Regional feedback: The economic strength of oil-exporting countries benefited oil importers indirectly through increased FDI and remittance flows, Ahmed said.

Can Economic Reforms Succeed?

The Middle East faces significant long-term economic challenges. Faster economic growth is needed to create jobs for the region’s rapidly growing labor force. However, with governments losing credibility, the free-market economic reform that would help generate this growth has little chance of success, unless it is tied to political reform, argued Muasher.

• Little support for top-down economic reform: With popular concern over corruption taking center stage, Dunne argued that people will no longer be willing to support top-down reform from autocratic leadership.
   
• Privatization: People have not seen widespread benefits from privatization, said Ahmed. As a result, many people are beginning to shift their support toward state-controlled production, further undermining reform efforts.
   
• Elected leaders face challenges: Ahmed noted that in countries that are undergoing a democratic transition, political leaders will have a stronger mandate to make the difficult decisions surrounding reform. However, politicians must also be more responsive to the public, which has little appetite for reforms.

For reforms to succeed, political leaders must shift the narrative to one that emphasizes why changes are fair, sensible, and good for the country, rather than why they must be imposed, panelists agreed.

• Political reform: Muasher noted that without an effective system of checks and balances, people will be unwilling to endure economic reforms such as lower fuel or food subsidies. They must be convinced, for example, that the government is also doing its part to fight corruption.
   
• Universal issues: Policymakers should focus on shared, universal concerns, Ahmed said. Highlighting why reforms are necessary for job creation, or arguing in favor of cutting subsidies on the grounds that they are unfair rather than fiscally burdensome, would help generate popular support for reform.
   
• Inclusive reform: With perceptions of inequality increasing prior to the uprisings, reforms should also aim to be inclusive. Since inclusive reforms are difficult to achieve in practice, policymakers must promote reforms that encourage inclusive decision making, said Muasher.

The Political Transition is Key

• Transition still ongoing: Dunne emphasized that the political transitions in the Middle East are still in motion. In some countries—most notably Libya, Syria, and Yemen—Muasher suggested that the turmoil may last for an extended period.
   
• Outcomes are uncertain: In many countries, leaders are currently focusing on political transitions, Dunne said. The success and scope of economic reform will depend on how these highly uncertain transitions evolve, what forms of governments are created, and who comes to power.
   
• Economic results are critical: Dunne noted that economic outcomes, however, play a vital role in political transitions. If economic problems emerge—particularly in Egypt—they could undermine political progress and stability.

What should be the role of the rest of the world?

International actors must clearly define their support for countries in transition, but should not attempt to impose reform from the outside, argued panelists.

• Favor democratic transitions: The United States and Europe need to unambiguously state their support for democratic transitions in the region, noted Dunne. They need to provide incentives—such as debt relief and trade—to encourage successful political transitions, while being clear, at least privately, that support comes with some conditionality.
   
• Support serious reforms: The United States and EU have favored stability over democracy promotion for years in the Arab world, resulting in a process of ad-hoc, but ultimately unserious, economic reforms, Muasher acknowledged. Now, the international community needs to support serious political reforms that include opportunities for power sharing.
   
• Long-term partnership: Drawing lessons from the 1989 revolutions in Eastern Europe following the collapse of the Soviet Union, Ahmed called for supporting countries in transition by building a long-term partnership that covers a broad spectrum of issues, such as trade, labor movements, and financial aid.
   
• International financial institutions: Given the limited domestic financing ability of oil-importing economies―which have a combined budget deficit of about $40 billion in 2011―international financial institutions such as the World Bank and IMF must provide financial support to prevent these countries from becoming fiscally unstable, suggested Ahmed. However, he argued that this support should come from a broad coalition, including the oil-exporting economies in the region.