Governance and Growth in the Arab Transitions

Examining the economic fallout of the Arab uprisings is critical as societies struggle to move past the upheaval and fight for a measure of stability and security. Unemployment rates in the region have climbed in the last two years: Egypt’s official unemployment rate is now 13 percent, with nearly 80 percent of the jobless holding either high school or university degrees. Unofficial figures put that rate much higher. Growth barely hit two percent in 2012, well under half its rate before the uprisings. In Tunisia growth is declining while frustration and hopelessness grow. Official unemployment shows the jobless rate reached 19 percent in May 2012, up six points in two years. As a Brookings Institution paper noted, “youth, between 15 and 30 years old, make about one-third of the labor force and three-quarters of the unemployed.” Their unemployment rate tops 30 percent.

Understanding, monitoring, and supporting the economic transitions of these countries is critical to the stability of both the region and the global economy.

A new IMF Working Paper on the “economics of political transition” notes that “past episodes of political instability were characterized by a sharp deterioration in macroeconomic outcomes and a sluggish recovery over the medium term. Recent economic developments in the Arab countries in transition seem to be unfolding along similar lines, although the weak external environment and large fiscal vulnerabilities could result in a prolonged slump.”

While much discussion about economic transition has focused on the Eastern European experience, the IMF notes that the Arab uprising countries are quite different. They are “characterized by intense political instability, which is manifest through changes in government and large-scale social unrest.” Reserves have shrunk and external current account deficits have worsened. For all the countries studied, including Jordan, Morocco, and Yemen, “actual output is now below 
potential, and unemployment rates have 
increased from already high levels.” These grim numbers are exacerbated by the risk of “spillovers” from Syria and already significant fiscal deficits.

So what can be done to reverse the declines and restore growth? The IMF notes that in the medium term Arab countries in transition face a slew of challenges: “weak external demand (especially from European trading partners), high food and fuel prices, and the need for sizable fiscal consolidation due to weak initial fiscal positions.” Policy actions can help, but weak governments now in power will find it tough to implement the often-painful measures required.

As the IMF writes:

But another IMF paper notes that the biggest driver of economic recovery in the transition period is one that is often hardest to achieve: good governance. When governance is sound, growth returns.

“The medium-term effect of political instability and social conflict on output growth is differentiated across countries, depending on their ability to implement reforms that improve governance within the first 2-3 years in the aftermath of an episode of conflict,” according to the paper. “More specifically, countries that improve their levels of governance after periods of conflict experience, over the medium-term, output growth that is significantly higher than in those countries that do not improve their governance.”

And that sparks a virtuous cycle.

“As populations see new governments deliver higher standards of living, this will also reduce the likelihood of a recurrence of political instability,” write the authors of the first paper.