Reform or Recklessness? Which Path for the Arab Region?

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The COVID-19 pandemic in 2020 and the Russia-Ukraine war, which began in February 2022, deepened the economic crises that many countries in the Arab world were already facing, while helping others, especially in the Gulf region. Today, hydrocarbon-importing countries are having to deal with unprecedented increases in food and energy prices, as well as soaring levels of unemployment, debt, and inflation. In contrast, hydrocarbon exporters are enjoying surpluses as a result of resurgent oil and gas prices, even if temporarily. Successive political and economic shocks in the last thirteen years since the start of the Arab uprisings are signaling that political and economic orders across the region are no longer viable.

The uprisings throughout the region signaled that the old Arab political order, grounded in authoritarianism, was seriously contested. But the inadequacies of Arab political and economic systems were also shown by their inability to deal with successive shocks, such as the food crisis in 2007–2008 and later, and most importantly, the decline in oil prices in 2014, which pointed to the fragility of the old Arab economic order based on systems of rentierism.

Notwithstanding the most recent short-term increase in oil prices due to the Russia-Ukraine war, the combination of political and economic shocks is already beginning to transform the Middle East and North Africa in different ways, and will have long-term effects on the region’s political and economic systems. As a result of the diverse consequences of all these crises, as well as the divergent paths adopted by different Arab countries to address them, we can no longer look at the Arab region as monolithic. Rather, Arab countries can be subdivided today into three distinct categories—those countries that are thriving, those that are struggling, and those that have become failing or failed states. In all of these groups, it is apparent that the old Arab order is dead. The main question today is what kind of new order, or orders, will replace it?

Three Categories of Arab States Today, or the Good, the Bad, and the Ugly

Until recently, most Arab countries, those that produced hydrocarbons as well as those that imported them, used two main tools to maintain social peace—the security forces and financial resources made possible by oil and gas. Today, both these instruments have been seriously depleted. The realization of this fact, as well as the political will to employ new and effective tools to maintain social peace, will largely determine the future of countries in the region.

The decline in oil prices below $100 a barrel in 2014, followed by years of budget deficits in the Gulf countries, did not mean the end of the region’s dependency on oil. Gulf states still have significant financial reserves, bolstered recently as a result of the windfall from the Russia-Ukraine conflict. But it did indicate that continued reliance on patronage mechanisms was no longer sustainable regionally. The high unemployment rate in the Arab world (which is double the global average), inflated public sectors, and low economic growth in many countries underlined that patronage economics and politics were no longer adequate for addressing rising challenges. The move to more diversified, merit-based systems has become crucial to those countries willing to read the writing on the wall. However, is the region actually doing so?

The answer is not simple. Let us look at the three subgroups in the region today and examine their responses to the developments of the last decade. The first group is made up of states that have thrived. These are mainly the hydrocarbon-producing countries of the Gulf. The decline in oil prices in 2014 led many to embark on the diversification of their economies and the adoption of long-needed economic reforms—introducing taxes, lifting subsidies, and liberalizing the investment climate. This was most evident in Saudi Arabia and the United Arab Emirates (UAE), but other countries have also implemented key economic reforms, such as Qatar. Saudi Arabia in particular instituted crucial social reforms as well, such as allowing women to drive, curbing the power of the conservative religious police, and generally easing many of the social restrictions on its citizens. The UAE had been doing that for a much longer period.

More recently, these countries have also changed the model of assistance to other countries in the region. They have moved from a model of largely providing grants for budget support to becoming more selective about the countries they are funding, while also imposing conditions for assistance, such as subsidy cuts and the privatization of state-owned companies. They are basing their aid on common political and economic visions between themselves and the countries they are financing, as well as demanding equity with state institutions of the other countries whose projects they are supporting. Meanwhile, the Gulf states’ recent surpluses due to rising oil and gas prices have largely been used to finance domestic development projects.

Such reforms have won approval from a significant portion of Gulf populations, particularly the younger generation. This perhaps has allowed political elites to evade the question of attempting meaningful political reform for now to allow greater citizen inclusion in decisionmaking. In the long term, it is doubtful that the present centralized model of governance, with decisionmaking in the hands of one or a few, can succeed in addressing all the needs of citizens. Lasting success will necessitate the greater inclusion of the population in decisionmaking, promoting domestic innovation instead of focusing on import-consumption models, developing competitive private sectors, and moving society beyond cronyism.

The second group of states is made up of the hydrocarbon-poor, labor-rich countries. These are oil or gas importers that have benefited from remittances from their workers residing in the Gulf. Therefore, the culture of patronage that oil helped to propagate has been extended to these countries as well. Revenues from oil in the form of grants from the Gulf states, remittances, and investments by Gulf investors or entities have been used by these countries to live beyond their means. They have often been used to expand public sectors unnecessarily and buy loyalty by offering privileges to certain groups, thereby placing loyalty above merit, treating the two as if they were mutually exclusive. Egypt, Jordan, Tunisia, and Morocco are examples of such countries. All witnessed major uprisings, resulting in changes of leadership in Egypt and Tunisia. Jordan’s and Morocco’s leaders survived because the monarchy remains popular in both countries.

All these countries are struggling today. Changes to the aid model previously used by Gulf countries mean that this group can no longer depend on Gulf largesse to sustain inefficient economic—and by extension, political—systems. Gulf aid either has been channeled away from budget support, or ended altogether. Suddenly, hydrocarbon-poor countries can no longer hire more workers for their bloated public sectors, have been forced to lift subsidies, and have seen the quality of major public services, such as health, and education, deteriorate significantly.

While these countries understand that the old economic model is no longer sustainable, they are still resisting any moves, even gradual ones, to shift to new economic approaches based on merit, inclusive development, rule of law, and more open political systems. Doing so would threaten the traditional constituencies on which their regimes depend. And while reformers argue that moving to a merit-based system would improve productivity, boost growth, and create more jobs, thereby widening the constituencies loyal to regimes, the political and security elites are reluctant to put their countries on a path that would rob them of their privileges. The prevailing conventional wisdom of these elites is that the status quo, as bad as it is, remains better than a reform process that might lead to unpredictable results. The upshot has been a war of attrition among various constituencies—interest groups, reformists, and security elites among others—amid economic decline. This has dashed hopes for economic recovery.

There are many examples of this reality. In Egypt, the military does not want to reconsider its role in the economy, while the security forces in Tunisia have supported President Qaïs Saied’s populism. In Jordan, the political and security elites have resisted all plans to transform the country’s political and economic models and end its dependency on outside aid. Egypt has tried to make up for the loss of Gulf aid by borrowing heavily and building infrastructure, often for enterprises with limited productivity. In 2023, the Egyptian debt has quadrupled from $37 billion in 2013 to more than $160 billion. The country has trouble servicing its debt and the pound has plummeted. Tunisia’s economic woes and the lack of political will to address them have resulted in a reversal of the political and societal gains made after the uprising of 2010–2011, as well as a reinstatement of autocratic rule. Jordan has done better, but is still engaged in ad hoc reforms without a clear plan to extract itself from dependency on outside aid.

So long as hydrocarbon-poor, labor-rich countries refuse to internalize that their old reliance on foreign sources of funding is unsustainable, therefore that they need political will to develop an inclusive, merit-based system with equal opportunity for all, they will continue to struggle. This will exacerbate the situation and make it more difficult for them to emerge from their predicament.

Then there is the third category of Arab states, namely failing and failed states. Lebanon, Libya, Syria, Sudan, and Yemen are all prime examples of such states. Ironically, all of them have diverse societies ethnically and religiously. But instead of realizing that diversity is a source of strength, which should result in a healthy exchange of ideas and openness of minds, these countries have allowed diversity to divide their societies, with different communities fighting or in conflict with each other, a process that is often difficult to reverse.

Lebanon offers a particularly stark example. Even though it is not presently a victim of civil war (it has gone through several already) its dysfunctional political system, characterized by corruption across the political spectrum, has led the country to economic disaster. Yet no matter how bad the situation becomes, the political elite is unwilling to do anything, including agreeing to the implementation of a much-needed International Monetary Fund reform package, preferring to ruin the country rather than give up any of its privileges.

In Syria, the sad lesson learned from the Arab uprisings is that if a regime is brutal enough in the treatment of its own citizens, and if it can sustain this brutality long enough, it may survive. Democracy, human rights, and respect for the civilian population have not been imposed as conditions for accepting Syria back into the Arab fold. Meanwhile, Libya, Sudan, and Yemen are still involved in civil strife, partly fueled by outside countries. This has caused major loss of life and has had a devastating impact on generations of development.

The Need for a Holistic Approach

What do the three groups of countries have in common? All of them show that piecemeal measures no longer work. Instead, countries need to embrace a holistic approach, built on a realization that meaningful reform must address political, economic and social development. States also must adopt a new political framework in which citizens are seen as resources, not threats, and are treated as an equal and necessary part of the decisionmaking process.

Such an approach must also acknowledge that environmental sustainability and human development are necessary. Resource-rich countries are buying themselves time with economic and social reforms devoid of any meaningful inclusion of citizens in taking decisions. Hydrocarbon-importing countries are engaging in ad hoc reforms that only address limited aspects of their problems, which are otherwise insufficient for dealing with the successive economic and political challenges their countries face. And failed states are simply that—states waiting for a miracle from the international community to save them, but unwilling to save themselves.

Transitioning out of hydrocarbon-based rentier systems also requires a political will to champion inclusive settlements among the different components of society and adopt institutional reforms. This will widen constituencies favoring change by offering them real chances for development, not just coercion or financial buyouts. It also requires proper attention to devising new educational systems, able to graduate generations who think critically, accept different points of view, and are ready to find employment outside government, but also to deal with the changing complexities of life. Such transitions require proper legislation allowing the private sector to grow, encouraging small and medium enterprises, and creating real jobs.

Moving to merit-based systems also means putting in place social safety nets to take care of the underprivileged in society and ensure smooth transitions. And the issue of women rights needs to be addressed seriously as well. The time has come for the Arab world to enshrine gender equality both constitutionally and through practice. Without full and equitable political and legal rights, there can be no path toward sustainable economies and prosperous societies.

The last time such a holistic approach was planned—though not implemented—was in Jordan, through the inclusive National Agenda initiative in 2005. It was immediately torpedoed by the political elites, however, who were unwilling to lose their privileges. Jordan today is in a far worse economic situation than at the time. The public debt has soared from $6 billion to $50 billion and unemployment has risen from 13 percent to 23 percent. However, the elite across the country—much like the elite in the wider region—has so far refused to be troubled by facts.

A dialogue is also needed among the different stakeholders in Arab countries. These not only include governments, the private sector, and civil society, but also the security services, who often are the real decisionmakers and who must be convinced of the perils of the status quo. As hard as such a dialogue is—the security forces are not known to be open to such conversations—it has become necessary to find ways to achieve this and, therefore, avoid a very bleak future.

Today, the Middle East and North Africa is going through what is, for most countries, a difficult period. It is not impossible to extricate the region from its current predicament. However, this requires a totally different mindset than the one prevailing today, and a holistic approach to development. This can no longer be avoided, if it ever could be, especially in countries without financial resources.

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