The protesters who are transforming the Middle East have a long list of grievances. At the top, of course, is the suppression of democratic aspirations by authoritarian regimes. But also important is the dangerous state of the region’s economies. Income growth and business productivity are low. Economic growth and job creation have been too slow to keep up with an expanding workforce, and this has led to high unemployment, particularly among the young. In Egypt, at least twenty-five per cent of young workers are jobless. Inflation, even before the recent spike in food and fuel prices, has been a persistent problem throughout the region, and corruption is endemic. The autocracies of the Arab world have been as economically destructive as they’ve been politically repressive.
That’s no coincidence. Healthy economies need a thriving and independent private sector, where resources are allocated by markets and competition, and where small and medium-sized businesses can flourish. But in most of the Middle East the state and big business are so tightly intertwined as to be indistinguishable, and competition has been discouraged in favor of central planning and private monopolies. It’s hard for entrepreneurs to start and run a business. Minimum capital requirements tend to be high, so you can’t get started without lots of cash, and getting business licenses and registering property are frequently arduous. Political favoritism is rampant, and byzantine regulations are difficult for outsiders to navigate. It’s instructive that the young man whose self-immolation helped set off the protests in Tunisia had had his fruit cart confiscated for violating some government rule.
The stifling of entrepreneurship shrinks opportunity for the young. It has also, the Yale economists Ian Ayres and Jonathan R. Macey have argued, held down the region’s growth rate. The state’s intrusive presence forces much economic activity off the books—in Egypt, eighty-five per cent of small businesses are in the “informal” sector—and this reduces growth, since informal businesses have a hard time getting credit or expanding beyond a certain size. Thus the region’s economies are growing more slowly than they should, and the benefits of economic growth tend to be concentrated in the hands of those lucky enough to work for, or own, companies favored by the state.
Since weak economies eventually give rise to discontent, one might have thought that self-interest would impel autocrats to embrace reform. But, while clinging to the status quo can be dangerous for autocrats, real reform comes with its own risks. After all, in a system of state-controlled capitalism without a large, independent private sector, huge numbers of citizens are dependent on the state for their livelihood in one way or another. In the Arab world, an estimated thirty per cent of the workforce is employed by the state. Strict regulations enable the government to protect its friends in the private sector from competition, and bureaucrats line their own pockets, becoming further indebted to the system. The reliance in most of these countries on food and fuel subsidies likewise increases people’s dependence on the state. The big risk of reforming the system is that it weakens the state’s economic hold over its citizens.
Not surprisingly, when autocratic regimes in the region have tried to change their economies they’ve done so primarily with an eye toward maintaining power. In the past decade, countries like Egypt, Jordan, and Algeria have made vaunted public commitments to reform. But, as a recent study by the political scientist Oliver Schlumberger shows, reform did not, for the most part, aim at introducing genuine free-market competition, the most important feature of a healthy capitalist system. Instead, it strengthened what he calls “patrimonial capitalism”—a system in which the key determinant of success is how close you are to those in power. This helps explain the widespread resentment in Egypt at Gamal Mubarak’s reform program. The program did include real reforms, which made it easier to start new businesses and the like, but it also enriched Mubarak’s cronies, solidifying the hold of powerful insiders on the economy and confirming people’s sense that the system was rigged.
The rising democratic tide in the region might seem to make genuine economic reform more likely. That’s how it worked for much of Eastern Europe after 1989, after all. Yet, in the Middle East, translating political reform into economic progress may be easier said than done. Patrimonial capitalism’s legacy is that many people see reform as a euphemism for corruption and self-dealing. And the dependence on the state that the patrimonial system created has not vanished. Government employment is still the easiest route to a job, and subsidies have become more, not less, important. Indeed, nervous rulers have been less keen to offer real reform than simply to bribe the population into quiescence. Hosni Mubarak, before he left, promised to boost public-employee salaries, as Ali Abdullah Saleh has done in Yemen. In Libya, Muammar Qaddafi has promised to boost some public salaries by a hundred and fifty per cent, and has offered every family in the country four hundred dollars. King Abdullah of Jordan fired his cabinet and increased subsidies, and King Abdullah of Saudi Arabia is giving his people some thirty-five billion dollars in various benefits. What the region needs is less crony capitalism and more competition. What it may get is political reform accompanied by economic stasis. When it comes to solving people’s economic woes, toppling the tyrants could turn out to be the easy part. ♦
