1. NS4301 Summer Term 2015 Overview: Arab Spring

2. Outline Part I – Economics of the Arab Spring Overview Economic Impacts Challenges Ahead Part II Lessons Learned/Overall Assessment 2

3. Arab Spring Overview I 3

4. Arab Spring Overview II Arab spring resulted in increased political pluralism and new democratic institutions but led to: Instability Setbacks in the transition towards democracy Mass protests Clashes among former revolutionary allies and The rise of political Islam Instability taken a toll on the region’s economies Sharp slowdown in economic activity Deteriorating external and fiscal accounts Decreasing reserves Inflationary pressures in some countries 4

5. Economic Impact of Arab Spring 5

6. Arab Spring Impacts I Long term challenges remain as pressing as ever: High unemployment (especially among youth) Inefficient subsidy regimes Low trade diversification Main impacts of Arab Spring Sharp drop in growth, slow recovery underway Average real growth in region fell from 4.2% in 2010 to 2.2% in 2011 – lowest in a decade Making matters worse, global economy sluggish Eurozone crisis hit region hard given tight economic links 6

7. Effects of Domestic and External Shocks 7

8. Arab Spring Impacts II Slowdown affected all countries Hardest hit initially were those countries at center of the Arab Spring Libya Tunisia Egypt Syria, and Yemen Morocco was only country were GDP strengthened in 2011 Economic recovery subdued in 2012 Average real GDP growth increased slightly to 2.4% In 2013 should increase to 3.5% but remain below pre- revolutionary growth rates. 8

9. Political Turmoil/External Pressures Take Toll 9

10. Arab Spring Impacts III Production stoppages caused by political upheaval were severe. In Libya oil production decreased from 1.65 m bpd in 2010 to only 0.47 m bpd in 2011 In Egypt widespread demonstrations and strickes paralyzed production process and deterred investments for months In Tunisia labor unrest lead to a substantial decline in mining sector (-40% va) and oil and phosphate production. In Syria oil production declined by 60% from level at end of 2010 to 0.16 m bpd in September 2012 – sanctions and ongoing civil war In Yemen economic activity hit by attacks on electricity facilities and pipeline sabotage – led to severe energy shortages. 10

11. Arab Spring Impacts IV Sharp drop in tourism Have recovered but remain well below pre revolution levels Given tourism accounts for 20%GDP in Lebanon, 12% in Jordan and between 5% and 8% in Morocco Tunisia and Egypt, decline had a significant effect on growth. 11

12. Arab Spring Impacts V 12 Foreign direct investment (FDI) flows down sharply Accelerates a trend that started with financial crisis 2008- 09 Between 2010 and 2011 FDI inflows fell by 46%

13. Arab Spring Impacts VI Weakening of currencies Strongest depreciation experienced by Tunisian dinar. 13

14. Arab Spring Impacts VII Foreign exchange reserves (FX) Stronger depreciation in many cases could only be averted by substantial interventions of national central banks – sold FX and bought local currency Relative stability in FX came at the expense of reserves Fall most dramatic in Egypt 14

15. Arab Spring Impacts VIII Aid-Assistance To avoid a balance of payments crisis, international community stepped in to support the region G8 and the international financial organizations founded the “Deauville Partnership” in May 2011 to coordinate aid to afflicted countries Members pledged up to USD 70 billion To date only a fraction of promised aid has been disbursed IMF has also committed to provide loans to Morocco ($6.2bn), Jordan ($2bn), Yemen($93mn) and Egypt ($4.8bn). 15

16. Arab Spring Impacts IX Governments in region responded to political unrest and weakening of economic performance by increasing public spending Highest increases in government expenditures relative to GDP – Tunisia and Algeria Most fiscal measures aimed at sustaining social cohesion and mitigating effects of high food and fuel prices Popular steps – Increase subsidies on energy and food Raise public sector wages and pensions Expand unemployment benefits 16

17. Arab Spring Impacts X 17 With flat revenues, the result was rapidly growing fiscal deficits and associated debt

18. Effects of Arab Spring 2010-2013 18

19. Official Unemployment Rates 19

20. External Current Account and Fiscal Balance 20

21. Arab Spring: Challenges Ahead I Youth unemployment, skills mismatch MENA region faces structural employment gap – especially among younger workers Regional unemployment rates around 10% Youth unemployment closer to 30% 21

22. Arab Spring: Challenges Ahead II Labor market inefficiencies a key problem in the region MENA lowest score in the WEF Global Competitiveness Index for labor market efficiency Region also faces widespread skill mismatches – inefficient education systems produce unprepared market entrants Firms operating in region regularly list insufficient labor skills as a major constraint Public sector accounts for an outsized portion of employment in region (9.8% compared to global average of 5.4% Taking only non-agricultural employment in 2010, public sector accounted for 70% of labor force in Egypt 22

23. Arab Spring: Challenges Ahead III On average public sector salaries accounted for 35.5% of government expenses in 2009 for regional governments Expanded government has crowded out the private sector Most youth find a public sector job prefereable that in the private sector 23

24. Arab Spring: Challenges Ahead IV Large public sector has bred a lack of economic dynamism in region – further setting back employment World Bank found (2010) that MENA has some of the lowest firm entry density rates in the world Suggests a lack of entrepreneurship with rate almost four times lower than of Europe and Central Asia 24

25. Arab Spring: Challenges Ahead V Region generally scores very low on World Bank’ Ease of Doing Business Index – even lower after 2011 – yet the private sector will have to create most of the jobs. 25

26. Governance Patterns: Voice and Accountability 26

27. Governance Patterns: Political Stability 27

28. Governance Patterns: Government Effectiveness 28

29. Governance Patterns: Regulatory Quality 29

30. Governance Patterns: Rule of Law 30

31. Governance Patterns: Control of Corruption 31

32. Overall Index of Economic Freedom 32

33. Trade Freedom 33

34. Social Capital There are a number of interesting patterns associated with the region’s governance. An often neglected aspect is social capital which incorporates Social networks and The cohesion a society experiences when people trust one another Empirical studies on social capital have found that societies with lower levels of social capital have experienced lower rates of economic growth Unlike physical capital, social capital may take years to show significant increases For the MENA region, low levels of social capital are closely associated with low levels of governance and entrepreneurship 34

35. Patterns of Governance/Social Capital 35

36. Patterns of Social Capital/Entrepreneurship 36

37. Overall Assessment II 5. The economic conditions in transition countries have been and will continue to be affected to different degrees by combination of domestic and external factors Political uncertainties and tensions – investment, tourism Weak global growth and Eurozone crisis -- exports Increases in global commodity prices -- food Regional spillovers -- refugees Reform Agenda 6. A number of reforms needed to stabilize economies and deliver grater economic opportunities Progress in the critical governance area slow or non-existent More progress in macroeconomic stabilization but wealth created at micro level and little reforms in areas like labor markets, business environment 37

38. Overall Assessment III 7. Progress on economic reforms needed to stabilize transition economies has been limited in view of challenging political conditions Political rather than economic reforms have tended to dominate Lack of focus on the urgency of economic challenges faced – Egypt Where to go from here 8. Influencing reform agenda remains main lever available to U.S. and international community. Priority areas: Support and encourage IMF Stabilization Reforms Strengthen investment climate (Doing Business)and inclusive private sector development Focus on social protection as component of any reform Encourage subsidy reforms Governance reforms critical – anti-corruption, increased transparency critical to stronger economy 38