How Economic Policies Affect Political Regimes? Comparing the 2020s to the 1980s in the Middle East and North Africa

In the past decade, economic performance has been low in most countries of the Middle East and North Africa (MENA), as they were hit first by the chaos that followed the uprisings of 2011, then by the subsequent fall in international oil prices in 2015, and more recently, by the Covid-19 crisis since 2020. To appease the concerns of restless citizens, fiscal and external deficits have been allowed to rise. This unsustainable and fragile situation today resembles that which came out of the 1980s: on average, growth was close to zero for the region during the 1980s, and it was not much larger in the decade of the 2010s (see Table 1). Similar to the debt crisis that forced a number of reforms at the end of the 1980s, fiscal space has disappeared as fast as public debt has ballooned. At the same time, poverty and unemployment have been on the rise in many countries.

In the 1980s, the economic policies that ended up being implemented kept autocrats in power even as they rearranged political settlements away from their popular base, and towards economic elites, such as owners of capital, and politically connected entrepreneurs (Heydemann 2004). The countries that made such reforms got generous external support that was not conditional on political opening (Schlumberger 2007). They stabilised their economies gradually, and ended up with lower state expenditures—this is exemplified by Egypt, where public expenditures fell from around 60% to 30% GDP between 1980 and 2010 (Cammett et al 2013). In parallel, however, the rise of markets was carefully controlled, leading to an inefficient form of crony capitalism, which did not create the types of jobs to which increasingly educated youth aspired (Diwan, Malik, and Atiyas 2019). This inheritance looms large: on average, only about 12% of workers are in relatively good formal private sector jobs, in a sea of informal, unprotected, and low productivity/low pay jobs, and with a shrinking pool of public sector jobs (see Table). Regimes had to increasingly rely on state repression to stay in power (Hinnebusch 2006). The combination of lower social mobility, non-inclusive growth, and rising repression ultimately led to the social explosion of the Arab Spring in 2011 (Kienle and Sika 2015).

Having managed to survive the major economic challenge in the 1980s, autocratic regimes are now back to square one because none of the structural problems of the past that gave rise to social contestation have been resolved. Again, they face the challenges of macro-instability, low growth and job creation, and high levels of popular contestation. Both stabilisation and structural reforms are however unpopular and create risks regimes seeking political survival. Reducing deficits remains, as in the past, a first challenge to overcome: austerity is unpopular, but the alternative of falling into a financial crisis threatens to bring down entire political regimes. Engaging in structural reforms to boost growth can create more jobs in the distant future, but this requires opening up to private sector competition, which also creates political risk both by weakening a regime's cronies, and by empowering more autonomous actors that can support the opposition. These policy dilemmas resemble those of the 1980s.

But an economic rebound is even harder to engineer now than it was four decades ago. The decline in oil price after 2015, coming on the heels of a long oil boom, represents a new normal for oil-exporting countries, even as oil prices continue to fluctuate. Over time, there has been further de-industrialisation (especially in Algeria, Lebanon, Egypt, and Iraq). Private investment is at a historical low in many countries. Export growth is more challenging in a more fiercely competitive global economy. Tourism is not resilient to security and health shocks. And remittances, a lifeline for millions around the region, are on the decline as the GCC Gulf Cooperation Council (GCC) replaces migrants with nationals. At the same time, external financing is now more sensitive to performance: bilateral creditors are budget-constrained at a time when geo-political rents are eroding and some countries that were too large to fail are becoming too large to bail. Moreover, a good portion of external debt is now owed to uncooperative financial markets. In some cases, the domestic banking sector is also vulnerable (for example, in Egypt and Tunisia), raising the risk of immisirizing triple financial crises (external, fiscal, and banking), such as in Lebanon.

In contrast to the 1980s, countries are confronting the challenges they face by placing their bets in a more varied way. Three categories of bets, all risky, have been placed so far by embattled regimes, the resolution of which will determine where these countries end up in the medium term:

- Back to the 80s: Egypt’s current stance towards adjustment resembles what it did in the 1980s: a gradual fiscal adjustment, with little progress on structural change, and a reversal on political opening. It is hard to see how such a policy mix can be sustainable. Private investment has fallen to around 7% GDP, lower than during Nasser’s socialist period (Diwan et al 2020, Adly 2020). Jordan too is more focused on stabilisation than on structural change. In both countries, lack of progress on growth creates high risks for macro, social, and possibly political sustainability.

- Economic voluntarists: Morocco has managed to retain very high investment rates, even as consumption stagnates and rural poverty remains high. In this, it follows, albeit in less ambitious ways, Saudi Arabia’s strategy of moderating consumption while at the same time increasing investment (Diwan 2021). In both countries, this is a dual bet modelled on the recipe of the Asian miracle and its two basic assumptions: first, that the public sector can create a private one; and, second, that partial rights (a new constitution in Morocco, a social opening in Saudi Arabia) will be sufficient to placate opposition, especially by the youth, in the face of less consumption and more effort.

- Political reformists: Tunisia was the first country to choose to bet on political liberalisation. Conceptually, a competitive political system could absorb grievances and lead over time to better economic policies. So far, however, fragile coalitions have been unable to take decisive action to address the existing economic challenges (Diwan 2019). Will the recent presidential “coup” shake up the political system enough to lead it to action, or will it instead accelerate the decent into a financial crisis? In Sudan, a fragile deal between the army and protesters also led to progress in terms of political openness. International support is now easing the country’s budget constraint, but there is strong opposition to structural reforms, including from the military and the protesters themselves. Iraq is trying to move on a similar track. In all three of these three countries, the political bets are risky, suggesting that democratic rule is not in itself the answer.

Other countries have not been able to muster the stamina to move away from a collapsing status quo. Fragile regimes that still have foreign currency reserves left are doing little—this is the case in Lebanon and Algeria. Both will need to choose their bet as reserves evaporate. Syria, Yemen, Libya, and Palestine remain stuck in a trap of violence.

A lot has been written on how and why countries in the MENA region were resistant to democratisation in the 1980s, unlike the cases of Latin America and Africa, where economic and political liberalisation went hand-in-hand. Will the 2020s prove to be similar? Several things seem to have changed, including both that repressive tools have been upgraded and that contestation has become more widespread. Thus, there is support for the argument that this time things will be different, but there is also support for the argument that the situation will unfold similar to how it did before.

Conceptually, a combination of economic pressures and social mobilisation could—more so than in the 1980s—create incentives for regimes to bet on an opening up of the political space that allows reforms to proceed while diffusing social tensions. In the 1980s, those who lost out as a result of the reforms—public sector workers in particular—provided strong support for the political and economic status-quo, while would-be-winners among the private sector barely existed and consequently had little voice to support political change. This has since changed profoundly because much of the youth (including the educated) now find themselves in competitive markets. Moreover, social revolts have become more embedded in the political repertoire of the region; and fuelled by rising social grievances, they are unlikely to disappear—as witnessed by the flurry of revolts in Sudan, Algeria, Iraq, and Lebanon in 2019. If social movements can start laying out a broad vision for the future (and this is admittedly a big if), it would become more realistic to imagine a gradual political opening-cum economic reform path ahead.

But on the other side of the ledger, the autocrats’ toolbox has also been upgraded. Unlike during the 1980s, the success of China, and the chaos following the Arab Spring itself, have reduced the appeal of competitive systems, including in Tunisia (Cammett et al 2019). Methods of state repression have become more effective, including better control of both social and traditional media In Algeria, Egypt, and Sudan, armies are now openly involved in governing. As in the 1980s, the voice of the middle class remains fragmented as a result of divide-and-rule tactics—even though political Islam has taken a serious beating. Clientelism and cronyism have gotten upgraded, and autocrats are still trying to create new jobs without giving up political control—this now includes experiments in occupying the heights of the economy through new actors such as the military and friendly foreign investors from the GCC, China, and Turkey. These autocrats also seek to create jobs in small- to medium-sized enterprises (SMEs), which are politically voiceless. With growth stagnant, whether any of these innovations will work remains to be seen.

The future of political regimes thus seems to be on a knife-edge. How political and economic elites react to these more charged circumstances will depend on history, events on the ground, and what influential external actors do. Some regimes will resist opening up, fearing popular retribution, while others may try to selectively broaden their support base. All that we can say is that five years on, the region will be dominated by divergence. But only those who manage to improve trust among their citizens will be able to pave a road towards longer-term progress.

Table 1. Main Macroeconomic indicators - percentage points
Source: IMF REO-MENA Annex, 2020. Informal sector: ILO, 2015. Public sector: various sources. Formal private sector: by deduction.

References

Adly, Amr. 2020. “Authoritarian restitution in bad economic times Egypt and the crisis of global neoliberalism.” Geoforum.

Cammett, Melani, Ishac Diwan, and Irina Vartanova. 2020. “Insecurity and political values in the Arab world.” Democratization 27.5: 699-716.

Cammett, Melani, et al. 2013. A political economy of the Middle East. Routledge.

Diwan, Ishac. 2020. “Fiscal Sustainability, the Labor Market, and Growth in Saudi Arabia.” Luciani G., Moerenhout T. (eds) When Can Oil Economies Be Deemed Sustainable? Palgrave Macmillan, pp. 31-53.

Diwan, Ishac. 2019. “Tunisia’s upcoming challenge: fixing the economy before it’s too late.” Arab Reform Initiative September.

Diwan Ishac, Nadim Houry, and Yezid Sayigh. 2020. “Egypt after the Coronavirus: Back to Square One”. Arab Reform Initiative, August.

Diwan, Ishac, Adeel Malik, and Izak Atiyas, eds. 2019. Crony Capitalism in the Middle East: Business and Politics from Liberalization to the Arab Spring . Oxford University Press.

Heydemann, Steven. 2004. Networks of privilege in the Middle East: the politics of economic reform revisited. Springer.

Hinnebusch, Raymond.  2006. “Authoritarian persistence, democratization theory and the Middle East: An overview and critique.” Democratization 13.3: 373-395.

Kienle, Eberhard, and Nadine Sika. 2015. The Arab uprisings: transforming and challenging state power. Bloomsbury Publishing.

Schlumberger, Oliver, ed. 2007. Debating Arab authoritarianism: dynamics and durability in nondemocratic regimes . Stanford University Press.

Ishac Diwan teaches at the Ecole Normale Supérieure in Paris, and is the director of the Globalization and Development Program at the CEPREMAP. He has held in recent years teaching positions at Columbia University, School for International Public Affairs, and at the Harvard Kennedy School. His recent (co-authored) books include A Political Economy of the Middle East (Westview Press 2015); and Crony Capitalism in the Middle East (Oxford University Press, 2019).

Cover image: Episode Before an Arab Town (1923) by Paul Klee. Image in the Public Domain