Argument

Liberté! Equalité! Economy!

After they've toppled their dictators, Arabs will need to build a functioning free market.

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Egyptians line up at an ATM machine in Cairo on February 03, 2011 on the 10th day of a popular uprising to oust President Hosni Mubark. AFP PHOTO/PATRICK BAZ (Photo credit should read PATRICK BAZ/AFP/Getty Images)

Within days of President Hosni Mubarak’s resignation on Feb. 11, the Cairo-based investment bank, EFG Hermes, issued a report on the Egyptian economy, predicting short-term deterioration in economic conditions. Although light on details, the bank was optimistic for the long term, not least because of strong balance sheets at the state and company levels. Of course, that analysis depends on a stable economic climate in the immediate future — an uncertain assumption at a time of revolutionary upheaval. (One need only look at the planned reopening of Egypt’s stock exchange, which has been closed since Jan. 27. This week, just hours before the scheduled opening, it was postponed for the second time.)

The Arab revolutions have undoubtedly brought immense political changes, but equally important will be the economic policy choices that are made in their wake. The young men and women who are leading the revolts across the Arab world need to protect their intended democratic reforms by liberalizing their markets, too.

Economic change is long overdue in the region. For decades, the Arab world has suffered from state-managed economies that breed corruption and inefficiency and have impaired people’s social and political freedom. Like the Soviet Union, Arab regimes have used state capitalism largely to finance and maintain authoritarian police states. In addition to channeling funds into their repressive security apparatuses, Arab rulers amassed vast personal fortunes offshore through basic, if profligate, corruption at state-owned enterprises (SOEs). Only some of what was left over went to much-needed investments in infrastructure, and the remainder was allocated to the real economy via inefficient subsidies to dependent populations. Regimes picked almost all the major participants and winners in the private sector, while the state provided most of the jobs.

In fashioning newly free economies, Arabs should draw lessons from similar periods of transition in the former Soviet bloc. The Russian experience provides a cautionary tale. After the Soviet Union’s collapse, Russia’s new leaders had two strategic goals: eliminate the Communist Party while enriching a new handpicked economic elite. With international help, the post-Soviet Kremlin devised a mass privatization process that distributed vouchers to all Russian citizens for the purpose of facilitating the purchase of SOEs on the newly established stock exchange. Unfortunately, most ordinary Russians, having little financial education or hope in the outcome of the political process, sold their vouchers for kopeks in schemes arranged by the country’s nascent financiers. In turn, these bankers went on to buy SOEs in rigged auctions that enable many to control billion-dollar fortunes to this day.

Former Soviet satellites in Central and Eastern Europe also migrated away from command economies in the 1990s. In varying degrees, all these countries made the transition to capitalism at a more measured pace. All successfully moved toward full-fledged market economies, not least because the neighboring European Union held out the prospect of eventual accession if all went well. Today, Eastern Europe is vibrant, with a wide spectrum of political parties vying for leadership roles in almost every parliamentary election.

In some ways, the Arab Middle East is in an even better economic position. Arabs are long familiar with market institutions such as banks and stock markets. While distorted, labor and product markets in the Middle East do function. Tunisia and Egypt have made particularly rapid economic progress in recent years, heeding the advice of institutions such as the International Monetary Fund. Although both countries have seen strong gains in GDP, neither has taken full advantage of its market infrastructure. Many important industries have been deliberately kept outside the public markets or been dominated by elite insiders, such as the reviled Egyptian steel magnate and ruling party boss Ahmed Ezz, who is now in prison awaiting trial for allegedly rigging the 2010 parliamentary elections.

But Egypt still has a full stable of state-owned enterprises ripe for privatization. Scores of firms that do business in minerals, metallurgy, pharmaceuticals, chemicals, and food processing are owned by state holding companies. Libya’s important oil-and-gas industry and the rest of its economy have been in the grasp of a small clique for the last 40 years. The economy’s potential restructuring and liberalization would be an especially massive undertaking if the regime there collapses.

But many of the old elites will survive into the new Middle East, and they will have to be convinced to participate in, rather than resist, a decentralizing economic transformation of this sort. The youth that have led the revolutions will have to convince the old guard that change will ultimately benefit everyone. A reform agenda pushed too quickly could result in the state’s top resources ending up in the hands of the same elites who ruled before. On the other hand, proceeding too slowly will enable domestic and international stakeholders to organize against the interests of the region’s vast youth populations.

Before anything else, Arab publics need to be educated about their countries’ common economic realities and goals. Only after these countries have a clearer picture of the true underlying value of their businesses should they list firms on a stock exchange or allow privatization shares to be freely traded. Fortunately, to varying degrees, the region already has capable financial professionals and judiciaries who can help with the necessary procedures.

But other institutions may have to be created wholesale. Freedom of speech and the press requires a legal framework to foster transparency in these new economies. Also, in the 1990s, the promise of European Union membership was a powerful incentive for the countries of Central and Eastern Europe to be disciplined in their reform agendas. While the oil-producing states of the Persian Gulf already have the Gulf Cooperation Council, the non-petroleum producers of the Middle East could establish a common market initially modeled on the early days of the European Community. The cooperation would establish an economic union, one that would eventually lead to enhanced security cooperation as well.

As the region’s new governments try to find their footing, there will obviously be a turbulent transitional economic period. But the Arab liberation movements should not lose their focus. They have already flattened the once-steep political hierarchies of their respective countries, but until they do the same for their national economies, their revolutions will not be complete.

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