In this paper I will try to present my views of the expected economic performance of the Arab World over the medium term.
I will break the Arab World economically into two parts; GCC and Non-GCC. I will be very brief on GCC and focus my thoughts on the Non-GCC (Arab spring nations).
G.C.C.
The GCC should muddle through reasonably well driven by:
Good oil revenues
Healthy public finance
Expanding Gov. Budgets
Good local demand
But dragged by:
Weak local financial markets
Burdened an emotionally exhausted private sector
Limited credit expansion
With reasonably stable politics the GCC should do average.
But the new Non Arab / GCC is what I will focus on (particularly the Arab Spring Nations).
Let me first attempt to draw a picture of the general environment then draw some comparison to other recent experiences.
The Non-GCC Arab world is going through a period of major structure change. Change in the TOP regulatory bodies (parliaments etc.) and change of TOP leaderships (Presidential and Priministerial positions).
While the new parliaments and the new political parties have broadly set or defined the new regulatory environment, such as the need for broader political participation, accountability, transparency and equal opportunity. They are nowhere near setting the agenda for economic priorities other than the immediate need for order and security.
Further those new supervisory bodies have not yet produced the leaders (CEO’s in the Non GCC Arab World are primarily Presidents and not Prime Ministers) that are needed to manage and lead the nation building process. Leaders that can coach a nation through the tough road of nation building, leader’s that can sell a national dream and drive a public audience that is expecting a lot through a road that will deliver much less initially but more eventually.
It will actually take finding the right leader, and obtaining a public audience that is much more realistic about their expectations. An audience that realizes that there are no easy fixes but a lot of hard work and belt tightening before things start to look a little better.
This situation is compounded further by a global economy in recession, highly indebt nations and tight global credit markets. So, it will not be easy to export one’s problems or borrow to ease them.
Now, if we are to draw comparisons, I would say the Arab Spring nations will have an experience closer to that of Indonesia, but more challenging.
The Arab spring nations would not have it as easy as Turkey, where the transition of power was much smoother and much less destructive. The ruling party although new to leading has transitioned from local municipal leadership to national leadership.
While the Turkish economy was in deep recession, the global economy was healthy and prosperous and most important the new leadership had other key advantages:
A public audience that was ready, and did not expect any magical solutions.
Most important, Turkey had national consensus to want to join the EU and the EU had a documented list of what Turkey had to do to qualify for membership in terms of economic and political reform and the many benefits on the road to that goal.
Indonesia on the other hand had:
A military backed dictatorship that was removed violently by masses with no clear leadership (very similar to Egypt/Tunisia)
Change was destructive
It occurred during the Asian region economic crises
Conservative political parties were on the rise
The CEO is the president and not the prime minister
No E.U membership to provide documented road map to walk post changes period.
Yet it’s even more difficult in the Arab Spring Nation’s than the Indonesian example as Indonesia had reasonably operating neighbors for a model to emulate (Singapore / Malaysia etc.) Arab Spring Nations don’t have that. This is why I would strongly support the success of Tunisia both on the political & economic front’s so it can act as a model to Egypt and Libya and those could then do the same to Yemen an Syria. Further in the Indonesian case, Asia was in crises but not China and the Global Economy.
Based on that, I would expect 4-6 years of very difficult economic performance in the Non-GCC Arab world (except Algeria & Lebanon). Earlier years with major drop in GDP and approaching small growth in late years.
They would experience during that period:
Very weak Government finances and shrinking budgets
Weakening local currencies
Very tight credit markets local and international
Departure of talent to GCC, EU & USA
Weak local demands
Weak export markets
Weak tourism
Large private industry will need government intervention and help at a time when some will be taken back for re-sale as a result of perceived corruption in the initial privatization.
A very difficult period indeed for business in this part of the Arab world, many will not survive.
Any Hope or Light at the end of the Tunnel:
If I had to make a bet, I would say YES..
Humans, societies and business organizations seem to excel when challenged to edge of the cliff.
In business look at Apple / GM (or the USA auto industry) / IBM
In nations:
Look at UK as Margaret Thatcher took office
Look at China and India
Look at Indonesia and South East Asia
Look at Japan and Germany after world war 2
Regionally look at Dubai
In practical terms those nations will find their way aided by:
New social dynamics, increased freedoms, increased public transparency, cheaper production inputs, and cheaper local currency.
A new political elite that need to prove itself with a new energy
The old regimes did some good that they have left behind. They have done some serious work (although with a lot of corruption and personal benefits). In trimming down the dead public sector, privatizing the inefficient public operators and opening up those economies, including liberalizing exchange rates etc.. Things that will help a turnaround come easier.
While no direct clear single documented agenda like in the case of Turkey decision to join the E.U. exists, there will be an agenda to follow if they want to join the world economy. GCC/USA/Europe and World Bank will lend a helping hand and will demand a economic and political reform agenda to be followed. This will keep those nations agree a reasonable consensus on a road to follow.
As they reform and stabilize, the global economy will slowly recover which will be a help. Their export markets should improve and they should be able to compete better aided by their reforms, cheaper inputs and cheaper currencies.
Capital flows should improve aided by their improved local growth (demand) and competitive (cheaper) valuations.
So, at some point down the road possibility 4-6 years things may start to improve, look for the following signs:
Leadership settling in.
Convergence in political spectrum policies ( a shrinking gap in the political agenda of , the major parties (not extremists) talking a language that is closer to each other’s agendas).
Liberals talking more socially conservative to appeal to the larger population
And conservatives talking more socially accommodative to avoid confrontation and maintain the needed majority and both adopting quite similar economic agenda’s since the much of that would be mandated by the global lenders and investors.
All signs of political maturity.
World Bank / creditor nations putting forward a clear economic and political reform agenda requirement, if aid (finance and investment capital) is to be made available this is critical as political parties will cling to it as a requirement to join the world economy.
Global markets and global economy starting to recover.
Higher productivity and improved competitiveness as a result of:
Living the harder times
More transparency and accountability
Improved global economy
Cheaper local inputs
Cheaper local currency
Increase foreign investment flows as a result of interesting prospectus and valuations.
What can help make the recovery faster and the gap between oil producers and the other smaller?
The first and most important thing is to put together maybe under the World Banks leadership and support of GCC/USA/Europe a support package with a clear set of requirements and agenda. Sort of similar to Turkey’s requirement of joining the E.U. That would help them reach faster national consensus on critical issues. Then the world would need to open markets for their export and support the private industry with credit and assistance.
The world must not make it too easy for them otherwise no change will happen, nor too difficult that they give up.
But, there is one reality that there is no progress without a price.