Change in the Middle East

Why governance counts
Middle Eastern Political Risk Consultant*

When the OECD recently co-launched a new Middle East and North Africa project (MENA) on investment and governance in Jordan in February, there was much talk in the air about change and a new era. Coming so soon after Iraq’s elections, this can only be expected, but to long-term observers in the region the rhetoric could have seemed all too familiar, not least because MENA has been promoted in various guises before. Every initiative has its time of course, but can this one work now?

It has been all too tempting to see the events of recent months in the Middle East as the result of the US-led action in Iraq, as positive evidence that democracy is finally leading peoples across the region to take to the streets in order to emulate the Iraqi experience.

The reality, of course, is somewhat different. Many Arabs will celebrate the removal of Saddam Hussein and some will hope that US or international pressure will encourage their own governments to relax the almost uniform autocratic grip on power that regimes exert from Rabat to Tehran. But few will look at the daily death toll in Iraq and firmly believe that change forced from outside is the only way forward.

In many cases, change has been coming for some time. Take the deterioration in the Lebanese-Syrian relationship, in which it should be remembered that Rafiq al-Hariri played a key role for over a decade. This is as much a result of the unwinding of the Syrian regime in the aftermath of the death of the current president’s father as it is a result of a desire to emulate the events in Iraq. Also, protests in Egypt over whether the president should be accorded a fifth term in office stem more from longstanding fears of the imposition of a dynastic succession than from a new US-inspired doctrine.

A more certain driver of change in the region is the onset of serious economic challenges that have been exacerbated by the autocratic nature of the regimes that dominate the region. It is against this backdrop that the success of MENA and indeed any transformation in the region will be judged.

Demographic pressures are building across the Middle East and North Africa but, unlike the graying OECD, the imbalance is towards youth. Total fertility rates remain above three births per woman in almost every country, the notable exceptions being Iran, Tunisia and Algeria. While governments have expressed a desire to address demographic issues, few have been willing to tackle the problem aggressively for fear of antagonising populations by appearing to trample on traditional social norms. The result is that across the region the age-distribution within populations has shifted towards a youthful majority. While this trend is typical of developing economies, in certain Arab states the imbalance has already become critical: in Saudi Arabia, for example, the fertility rate remains above five births per woman and unofficial data imply that at current rates some 60% of the population will be under the age of 17 by 2010.

Population growth in itself is not a worry; in fact, it could become a driver of economic growth. But such is the tenacity with which some of these autocratic regimes keep their grip on power that few can be expected to wholeheartedly embrace economic reforms, not least because the regimes themselves often depend on controlling access to foreign exchange.

Within oil economies such as Libya or Iraq this means retaining absolute control over the national oil company, and therefore export revenues. Within non-oil exporters like Egypt or Tunisia it tends to take the form of parceling out trade franchises to key sources of support, to tribal, familial or military interests. The result is that inward investment becomes restricted to specific, controlled areas which tend to benefit regimes’ support bases.

Governments manage their fiscal expenditure by lurching from “boom to bust”, often rescued by resurgent oil prices–non-oil exporters, like Egypt and Jordan, benefit from oil booms as Gulf states pull in extra labour. Is this short-sighted? Undoubtedly to some, but when the ambition of regimes tends overwhelmingly to be the perpetuation of the current system of government, longer-term exigencies are often relegated to a secondary order of importance. As we found under any totalitarian system, these tendencies eventually lead to broad underperformance in the region’s economies, with real incomes failing to grow at anything comparable to the experience of other emerging markets. Continuing high population growth, and slow and uneven GDP expansion underpin growing political dissatisfaction.

In economic terms there are few exceptions in the region of any note. Scholars and oil producers have long been fond of describing the dependence on energy extraction as a curse, but even among countries where hydrocarbons exports play a relatively small or negligible role, autocracy remains all too dominant. Can MENA encourage fundamental change in the pattern of economic management and therefore in the pattern of government? Are there signs of change on the ground?

It is hard to say. Supporting protests in Beirut, Cairo, or even Riyadh or Tehran, that call for greater democratic reforms plays well with television audiences in the US, Europe and Japan, though real change in the region is likely to come not from cosmetic alterations to the terms of national elections, but from the extension of real economic power beyond the autocratic centre. The expansion of capital market investment in Egypt in the 1990s did little to achieve that, and the growth of manipulated, restricted capital markets in Saudi Arabia and the Gulf will not do so either.

Free trade deals would seem a logical place to start. But while these agreements satisfy terms set by international treaties and organisations such as the WTO, they do little to broaden economic power within the signatory states. In signing “free trade” agreements that deal only with tariffs rather than the right to compete for trading rights within those economies, there is a risk of crystallising economic power in the hands of the emerging oligarchs, rather than fostering democratic change.

If it is to prove more long-lasting than similar initiatives in the past, the MENA programme will have to move beyond the well-trodden path of governance talk to creating real change and accountability in the region’s states. While the security imperatives of the present time could slow this process, the introduction of capital markets can be used to benefit the distribution of economic power away from the centre. Reporting standards for listed companies in emerging markets are often far more lax than those that would be required on the NYSE or in London. Insisting on international standards for MENA markets would go some way to clarifying the nature of economic power in many of these states.

There is hope elsewhere too. In historically highly autocratic states, such as Algeria and Morocco, the economic imperatives of relations with the EU are creating some momentum towards reform, but the danger is that, with Abdelaziz Bouteflika reveling in his electoral success of the past year and Mohammed VI in Morocco focused on addressing the cause of Islamist radicalism in the country, the impetus will be lost. It will be the task of the MENA programme, particularly through the OECD’s governance dimension, to learn from past failures.

Democratisation can be a long game; remember, not all OECD countries were democracies when they joined the organisation. They are today. Whether this kind of influence for real lasting change can be brought to bear in the Middle East remains to be seen.

*Mr Hawes is a former Middle East economist at the Economist Intelligence Unit in London and former Director Middle East and Africa at Eurasia group in New York.

©OECD Observer No 249, May 2005

Economic data


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