Arab Spring Will Not See an Economic Boom
by Arvind Subramanian, Peterson Institute for International Economics
Op-ed in the Financial Times
February 21, 2011
© Financial Times
The forces of youth disaffection and technological openness are seeing protests against repressive authority spreading from Tunisia to Egypt to Bahrain and Libya. Iran, Yemen, and Saudi Arabia may be next. But even if the regimes fall, these seemingly unstoppable forces will quickly run up against an immovable object that has long conferred power upon regional authoritarian regimes: economic rents. And unless this is addressed, the chances of a true democratic "Arab spring" are slim.
Most Middle Eastern countries are nondemocratic, despite relatively high standards of living. Libya, Iran, and especially Saudi Arabia are fairly rich countries, although all come close to the bottom of the World Bank's table of voice and accountability. Bahrain does little better. And this discrepancy between political and economic development is especially apparent in the Middle East because of the curse of rents.
Rents are easy money: unearned wealth that flows to governments with little effort. In the Middle East much of this is about oil. In Bahrain, Libya, and Saudi Arabia, for example, oil revenues account for a large share of exports and state revenues. Egypt is not a large oil and gas exporter, but it produces reasonable quantities of both. This, in turn, provides the means to stifle dissent and perpetuate the regime.
The rent curse, however, is not about oil alone. Egypt, for instance, has numerous other sources it can tap. Vast flows of foreign aid, especially from the United States, keep it afloat. Rents also come from a fluke of geography, the Suez Canal. Tourism, too, sees travelers lured by pyramids, not wise policy. Finally, remittances are sent by Egyptian workers, often living in nearby oil-exporting countries.
The history of economic development suggests that rent-ridden countries create governments with few incentives to build strong political institutions or listen to their people. In Egypt, for instance, these various rents account for about two-thirds of foreign exchange earnings. Directly or indirectly they generate at least a third of government revenues. This is not as large as other oil exporters in the region, like Libya, but substantial nonetheless. And Egypt's state, in common with others across the Middle East, has used these rents to appease and suppress dissent, creating circumstances in which they have little need to develop competent political institutions.
Even if the people of Libya and Bahrain join those of Egypt and Tunisia in overcoming their cursed political systems, the economic manifestations of their rent curses will remain. Even if they become more democratic, because these countries benefit from substantial rents they will have less need to tax their citizens. This precludes the need to reform state-controlled industries to create private-sector wealth. It also will stop the development of genuine democratic systems, the usual basis for the legitimate taxation of citizens.
Weak economic institutions will be the consequences of these nations' ongoing reliance on rents. These will fail to deliver essential services, such as education and skill creation, in turn limiting the pool of entrepreneurial talent. Such institutions also create bloated bureaucracies, weak legal enforcement of property rights, and obstacles for starting businesses, especially for those outside the regime's inner circle. Without reforms the private sector will still likely thrive only through connections to a rent-addled state, not because of the raw dynamism found in many Asian countries.
On this reading the long-term economic prospects for these nascent Middle Eastern democracies remain gloomy. The economic challenge they face is much more fundamental than the often-heard prescription of greater globalization and more markets. A decisive break with their own national histories is needed, and this means ending their reliance on rents as a first step. Only then can economic institutions be developed that create job opportunities in the private sector for their large, young, and unemployed populations.
Venezuelan politician Pérez Alfonzo once said that oil's effect on development should see it labeled the "devil's excrement." This counts double for economic rents in general. Political change in the Middle East is well under way, but the economic clean-up job is barely begun.