1. NS4301 Summer Term 2015 Overview: Arab Spring

2. Outline Part I – Economics of the Arab Spring Overview Economic Impacts Challenges Ahead Part II – The Arab Spring Transition Countries Patterns of Governance, Economic Reforms Country Case Studies Tunisia Libya Egypt Part III 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. Country Assessments Countries With Regime Change Tunisia Libya Egypt Yemen Countries in Regime Transition Syria Monarchies Jordan 37

38. Tunisia I The economic crisis following the January 2011 revolution and a variety of external shocks increased the vulnerability of the Tunisian Economy Real GDP contracted by more that 2% in 2011 Foreign direct investment (FDI) and tourism receipts declining by more than 30% Economic downturn – Together with return of Tunisians from Libya brought unemployment to record levels and Weakened an already fragile financial sector. In response the authorities implemented an expansionary monetary and fiscal policy Higher wages and subsidies, Lower interest rates and bank reserve requirements Relaxed regulatory measures 38

39. Tunisia II Policies resulted in Wider current account deficit Instability in exchange rate Loss of 20% reserves in 2011 alone despite important bilateral and multilateral budget support Widespread social and economic disparities and high youth unemployment remain key challenges Tunisia’s pursuit of relatively prudent fiscal and monetary policies and open trade regime produced the highest per capita GDP growth among MENA oil importers Its macroeconomic management relied on extensive state intervention and fostered the development of an export- oriented low value added industry – intensive in unskilled labor 39

40. Tunisia III The country’s economic model also characterized by: An inefficient banking sector Pervasive price and capital controls Directed lending Weak governance, and Rigid labor markets The result was High structural unemployment particularly among the youth where it averaged 30 percent in 2010 Unfair distribution of economic gains among the population and Widespread disparities across regions The country’s pursuit of reforms in the middle of a political transition process faces important risks 40

41. Tunisia IV Comprehensive economic reforms needed in the immediate future to overcome Tunisia’s structural rigidities and promote inclusive growth Many reforms will generate resistance from vested interests Will require time and effort for building broad political support Reforms may not yield benefits immediately despite high aspirations of the population As a result reform process faces both risk of delayed implementation and social tensions Other sources of risk: Escalation of domestic tensions from political uncertainty Security concerns 41

42. Tunisia V In past two years the country has experienced A slowing economy (although a modest recovery is underway) Continued unemployment and periodic labor disturbances However opportunities are emerging in select sectors of the economy as a result of: Increased transparency and Improving legal frameworks which will attract interest from foreign and local investors Still investors may opt to stay away at least until the elections looking for increased political stability The sale of assets from the Ben Ali family, could provide the state with some important financial support However weak economic conditions in Europe a problem: Normally accounts for 80% of Tunisian exports and Is an important source of foreign investment and workers’ remittances 42

43. Tunisia VI Main opportunities Due to location, good scope for “near shoring” arising as European companies seek to limit the size of their inventories Tourism sector picking up although revenues have yet to reach 2010 levels Reconstruction in Libia could generate contracts and employment for Tunisians although these have been slow to materialize Main challenges ahead 1. Fiscal Pressures – 2012 fiscal deficit around 7% of GDP – increased public sector wage bill Current account widening into double digits – modest recovery in tourism and continued weakness in Europe. Options – financing from IMF, Islamic bonds, bilateral financing from the Gulf 43

44. Tunisia VII 2. Unemployment – high and still rising unemployment main risk to economic and political stability Immediate outcome of 2010 revolution – increase in unemployment to 19% due to downturn in economy Declined to 17.6% in 2012 but job creation still a major challenge Government hoping improvements in investor climate will create jobs – also expanding number of public sector jobs 3. Underdevelopment – big problem in te interior reions given most of Tunisia’s wealth and jobs are on he coast. Government focus in more on regional development with infrastructure and schools Main question – how long can the government maintain stability without delivering significant economic and employment gains? Unions increasingly impatient. 44

45. Tunisia Drop in Creditworthiness 45

46. Tunisia: High Twin-Deficits 46

47. Libya I Libya is at a crossroads. Decisions taken today will have profound implications for the future. The country could follow A roadmap for sustainable inclusive growth or Face deepening hydrocarbon dependency In the short term sustainable growth would require Managing the political transition and addressing security challenges while Maintaining budget discipline and macroeconomic stability Severe institutional capacity constraints need to be addressed, particularly in the areas of economic management and statistics 47

48. Libya II Over the medium term, structural challenges include improving: The quality of education Rebuilding infrastructure Putting in place an efficient social safety net and Developing domestic financial markets Private sector-led growth is a precondition for sustainable job creation Reducing regulatory uncertainty and establishing a well- functioning financial sector are essential to foster private sector development 48

49. Libya III Outlook and Risks Hydrocarbon output should reach pre-conflict levels in 2013 while Reconstruction and private demand should facilitate an improvement in the non-hydrocarbon sectors. Oil price volatility makes economic performance vulnerable and complements fiscal management Necessary reconstruction and development spending will eventually push the budget into deficit in the absence of a curb on current spending The hasty legislation prohibiting interest poses risks to the financial sector Until Libya generates private employment and makes progress in curbing corruption it will not address the key causes of the revolution 49

50. Libya IV On-Going Issues 1. Energy exploration and supply After the 2011 conflict oil and gas production resumed and returned rapidly to pre-revolution levels However various militias and groups have been using oil installations to manipulate negotiations with central authorities Causes significant disruptions 2. Mobility and migration Government is eager to enhance Libyan mobility through visa facilitation and exchange programs However EU– with Italy and Malta in the lead wants to curb (irregular) migration from Libya 3. Trade and investment Around 70% of Libya’s oil and gas exports go to Europe and around 35% of its imports are from Europe Some European companies are seeking payment for pre-2011 contracts in Libya that they claim not to have been paid for. 50

51. Libya V 4. Constitutional delays hurting business climate The uncertainty surrounding the political process and the rule of law is impacting negatively on the economy A particular concern for foreign investors. The inability or unwillingness of the Libyan General National Congress (GNC) to review old laws and pass new legislation means investment climate not likely to improve for a year or two (until after elections) GNC has yet to revoke a law inherited from Gadhafi regime which limits foreign ownership in a Libyan company to 49%. Recent government efforts to induce foreign contractors to resume work by threatening to void old contracts without offering security and investment guarantees – very unattractive to companies. 51

52. Egypt I Deteriorating economic conditions contributed to the 2011 uprising and remain an important element in the current political upheaval. Widespread frustration with the government’s failure to create jobs, revive growth and address gaping inequalities Led to overthrow of governments in 2011 and July 2013 The risk of further disappointment remains high. Several developments already likely; Markets are very likely to remain on edge despite aid offers from several Gulf countries Egypt’s credit rating unlikely to improve so long as external financing remains dependent on oil rich neighbors A scarcity of foreign exchange is likely to lead to further fuel and electricity shortages 52

53. Egypt II Toxic combination of economic distress and frustration with leaders’ inability to address poor living standards continues to be at heart of protest movements around world Nowhere more evident than Egypt While many of opposition’s complaints centered on Morsi’s perceived undemocratic governing style, the deteriorating economy has shared some of the spotlight Power cuts, fuel shortages, and soaring food prices put pressure on the population Tentative prospects for faster growth that had emerged earlier in the year now appear endangered Morsi government had been predicting growth of 2% -- now looks overly ambitious. 53

54. Egypt III Economy struggling: Power cuts still affecting production Investment plans for both domestic and international players likely to remain on hold Weak consumer confidence and hesitant tourists also factor into weaker growth outlook Economy will have a hard time remaining in above zero growth. At the same time Unemployment a major challenge with jobless rate at 13% New leaders will be challenged to provide support for the neediest With a budget deficit that has not reached 12% of GDP little room for improving social safety nets 54

55. Egypt IV External accounts which have been under pressure since 2011 uprising also likely to suffer Capital flight likely to continue, draining international reserves. Current account deficit had actually begun to show some improvement in early 2013 However some of the improved tourism revenues could weaken once again if instability persists International reserves dropped to 14.9 billion dollars in June – less than half their pre-uprising level Continued downward pressure on reserves from capital flight may be mitigated by financial assistance from the Gulf States Still Egypt’s continued reliance on one-off solutions is likely to continue to make markets nervous about the country’s debt servicing capability. 55

56. Egypt V Many of Egypt’s current financial difficulties can be traced to subsidies The country devotes around 10% of its GDP to subsidies for food and fuel – both of which it must import. The subsidies as constructed are inefficient – do not just help the poor but also the middle class and businesses Country has tried to remove subsidies before. Sadat tried and the result was riots in which 160 people died. Subsidy reforms are also critical for attracting back private investment – Will not happen unless IMF gives country a seal of approval which they insist require reforms There are successful models – Iran substituted directed cash payments to the poor and let prices rise. Egypt can’t afford cash payments, but ration coupons to the poor to purchase food at the subsidy price would be a good alternative 56

57. Yemen VI Assessment Clearly the government will not be able to govern the country if it is unable to deal with these challenges. Likely to grow more acute the longer they are left untreated Already drift has set in as different regions of the country slip beyond government control Even as the government attempts to reclaim territory its legitimacy is being undermined by its inability to provide and act as a sole source of authority. Concerned with establishing itself politically government unlikely to adequately respond to challenges prior to parliamentary and presidential elections scheduled for February 2014 57

58. Overall Assessment I At this point in time a number of generalizations are possible concerning the Arab Spring phenomenon: 1. The Arab Spring was caused in part by economic underperformance and exclusion 2. The uprisings ushered in new hope that The economies of the region could be transformed In ways that would provide greater and more widely shared opportunities for their people Economic Performance 3. Most transition countries have experienced a deterioration or stagnation in economic performance 4. The extent and duration of such deterioration has varied by country Libya recovered more rapidly due to oil revenues Yemen supported by grants from Saudi Arabia stabilized quickly, but with many problems remaining 58

59. 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 59

60. 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 60