Toward a Political Economy of the Arab Uprisings

[aymaan noor]

Toward a Political Economy of the Arab Uprisings (Part One)

Melani Cammett and Ishac Diwan

A framework to explain the Arab uprisings should provide an account of the socioeconomic and political evolution of the Arab republics that would explain both the persistence of autocracy until 2011 and its eventual collapse and should do so in a way that is empirically verifiable. Different ana lysts would approach such an ambitious question in distinct ways. Some would stress contingency and agency, and undeniably, there were such elements in the particular timing of the uprisings in Tunisia and Egypt. But we contend here that there must also have been structural factors that opened up a window of opportunity from which the main protagonists in the uprisings profited.

The framework that we propose connects patterns of economic development (especially a shift toward a more market-based system, the decline of public welfare functions, and the rise of crony capitalism), social change (the rise in popular aspirations and grievances), and political change (the defection of the middle classes from the authoritarian coalition). This combination of changing economic circumstances and the attendant increase in inequality of opportunities finally unraveled the implicit bargain between authoritarian rulers and key constituents.

We develop below each of the pieces of this story in more detail, including the rollback of the state, the shifting composition of the authoritarian coalition and the rise of crony capitalism, the rising but frustrated aspirations of the middle classes, and rising inequality. We then address the role of political Islam before and during the revolts.

Prolonged Discontent: The Socioeconomic Foundations of the Arab Uprisings

Many of the characteristics of the recent Arab uprisings are puzzling and do not fit easily within popular intellectual frames. Why did they occur at the end of 2010, when there were no apparent direct triggers such as declines in subsidies or shifts in foreign alliances, rather than in the 1990s, when the welfare state began to be rolled back? Why did the revolutions start in Tunisia and Egypt, the countries with some of the highest economic growth in the region in the preceding few years, rather than in countries such as Syria or Yemen, where economic conditions were more dire and political repression more severe? Why were they initiated by secularist middle-class youth, the supposed beneficiaries of the modernizing republics, rather than by the long-standing Islamist opposition?

In the early days of the Arab Spring, debates about the relative importance of economic versus political factors permeated journalistic and scholarly discussions about the motivations for the mass protests across the region. On the face of it, economic factors hold little explanatory value. In the preceding decade, economic growth was not low in the “revolution” countries, at about four to five percent of GDP per year—although these did not reach Asian double-digit levels, which would have been needed to absorb the youth bulge in the labor market. In cross-regional comparative perspective, youth unemployment was high in the Arab world, at around twenty-five percent, but this was not a new development and therefore cannot explain the timing of the protests. The macroeconomic situation was also relatively stable after the imbalances of the early 2000s were absorbed, with shrinking budget and current account deficits and reasonable debt levels. On the eve of the uprisings, international reserves were at comfortable levels. Inequality was lower than in other region (Belhaj and Wissa 2011).

To be sure, the 2008 global recession, coupled with the oil and food crises, did affect the region. Growth slowed down after 2008, and while it had recovered somewhat by 2010, it remained below the levels reached in 2006 to 2008. Energy subsidies increased with international prices, further eroding the ability of the state to spend on public investment and wages, while inflation rose and real wages fell. But by 2011, on the eve of the revolts, there was no singular economic shock to point to as a candidate for igniting the uprisings.

The Rollback of the State and Deteriorating Economic Security

In the postcolonial period, the state played an unusually important role in economies across the Arab world. A leading family of structural narratives on the Arab uprisings focuses on a slow transition from quasi-socialism in which the rollback of the state, which began in the mid-1980s, ultimately led to the breakdown of the social contract underlying the autocratic bargain. Such accounts cannot claim that state rollback is the proximate cause of the revolts, given the long time lag. Nonetheless, to ****yze the ultimate collapse of the system we need an understanding of the mechanisms were used by autocrats to remain in power, even as market forces chipped away at their authority, and which contradictions emerged in this late autocratic period characterized by selective repression, co-optation, and cronyism.

A look at key economic performance indicators for the Arab developing countries as a group, from 1980 to 2008 shows clearly that the rollback of the state began twenty-five years ago. Government expenditure shot up in the 1970s on the back of rising oil wealth in the region, reaching more than fifty percent of GDP, but fell precipitously in the 1980s, reaching twenty-two percent of GDP in the early 1990s, a low figure by international standards. At the same time, private investment did not rise significantly to make up for the shortfall. Subsidies to agriculture were cut deeply, which was particularly damaging to the rural poor, while lower public-sector wages and hiring freezes hurt civil servants and formal-sector workers. In countries across the region, including Egypt, Jordan, Morocco, and Tunisia, protests erupted. In particular, attempts to cut subsidies on basic food items sparked “bread riots,” which often compelled rulers to retract agreements with international financial institutions to reduce these expenditures.

In the post-independence period, rulers across the region, in both the “populist” republics and the “conservative” monarchies, had expanded the public welfare infrastructure as part of state- and nation-building processes. The first few decades after independence witnessed major gains in quality-of-life indicators. In addition, poverty rates are significantly lower in the Middle East than in other regions of the Global South. In 2005, the percentage of the population living on two US dollars per day was about seventeen percent in the Middle East and Latin America, thirty-nine percent in East Asia, seventy-three percent in sub-Saharan Africa, and seventy-four percent in South Asia (World Bank, World Development Indicators, 2005). Thus, in the decades after independence, Arab citizens experienced important and tangible socioeconomic gains that arguably raised their aspirations.

Access to basic services and stable employment provided a sense of economic security, while human development gains enabled earlier generations in post-independence Arab countries to enjoy some social mobility. Formal-sector workers and especially civil servants became the main beneficiaries of the new deal and were important foundations of authoritarian bargains across the region.

The steady decline in public welfare institutions since the 1980s has affected all segments of the population beyond the wealthy elite, but it has been particularly damaging for the poor and the lower middle classes, who rely on government services. In the 1980s and 1990s, economic crises in other regions, such as Latin America and sub-Saharan Africa, had helped to provoke regime change during the near-synchronous “third wave” of democratization (Huntington 1991). In the Middle East, however, autocratic rulers did not open up the political space in order to reduce social pressures stemming from the decline in economic resources. To the contrary, the opposite may have happened. In 2010, the region was politically less open than in the mid-1980s, with the average score of citizen empowerment for the region falling from about six in 1980 to 1.2 in 2010 on a scale from zero to fourteen, with zero depicting complete dictatorship (Cingranelli-Richards Human Rights Dataset, various years).

External support for authoritarian rule is a distinctive feature of the region and therefore a key component of any explanation for the persistence of authoritarianism in the Middle East in comparison with other regions (El Badawi and Makdisi 2007; Bellin 2004; Levitsky and Way 2010). External support provided rents in the form of aid and military support but helped to fuel the militarization of the region, which in turn facilitated state repression of opposition groups.

Repression, Co-optation, and the Authoritarian Bargain

Repression is certainly a core component of any account of authoritarian persistence. The threat of harassment, persecution, imprisonment, torture, and death is a powerful disincentive for anti-regime activism. The level of spending on security matters attests that repression had become an essential tool in the preservation of autocratic regimes in the late 1990s. Average levels of repression in the region are measured by the Index of Physical Integrity on a scale from zero to eight where zero is maximum repression: between 1980 and 2010, the average value of the index for the Arab countries fell from 4.5 to 2.9 (Cingranelli-Richards Human Rights Dataset, various years).

Repression is never a sufficient tool of political control. The literature on persistent authoritarianism in the Middle East has described in detail how different regimes chose to respond with distinctive mixes of co-optation and repression to maintain their control. Autocrats aimed to maximize their dwindling assets by dividing citizens into groups that benefited from cooperation while others were subject to repression and neglect. One important strategy was to strengthen governing coalitions by co-opting the middle classes. Mass co-optation was achieved in large part through direct economic benefits in the form of subsidies for goods that were consumed relatively less by the poor, and especially for petroleum and energy. Earlier subsidies for small-scale agriculture and for basic food items that benefited the poor had been reduced.

Energy subsidies grew over time, and by 2011 they were much higher in the Arab region than in any other region of the world, representing about 8.5 percent of regional GDP and twenty-two percent of total government revenues. Within the region, levels of subsidies vary, but twelve of the twenty countries in the region have subsidies above five percent of GDP. In many countries, they now represent an expense several times higher than total spending on health or on education. This phenomenon is not restricted to oil exporters. For example, in 2011, energy subsidies represented forty-one percent of government revenues in Egypt. It is well known that such subsidies are very regressive, as oil products tend to be consumed in much larger quantities by richer people. In Egypt for example, forty-six percent of the benefits of petroleum subsidies accrued to the top twenty percent richest in 2008 (Abouleinem, Al-Tathy, and Kheir-el-Din 2009). The large cost of subsidies exacerbated economic crises and furthered the decline of public services, consuming ever-larger portions of government budgets, and limiting public investment, especially in rural and disadvantaged areas.

At the same time, fiscal regimes have become more pro-rich over time. Tax rates have been relatively low, particularly in the countries with large hydrocarbon reserves. Even in the countries with low per capita natural resources, direct taxes now constitute a relatively small share of fiscal receipts. Indirect taxes, which are inherently regressive because they are applied to consumers across the board, regardless of income level (Imam and Jacobs 2007), became a more important component of tax revenue in these countries after the reforms of the 1990s.

In the mix of co-optation and repression—or carrots and sticks—changes in the former mattered more in explaining authoritarian breakdown than the latter. If repression helped authoritarian regimes to endure, it cannot explain why dictatorships collapsed across the region: repression was constant, and had even been increasing since the 1990s. Thus, any explanation for authoritarian breakdown must probe the evolution of co-optation. In the next section, we trace the narrowing of authoritarian social coalitions—that is, the groups that were favored in domestic political economies—and describe how this factor contributed to authoritarian breakdown.

Crony Capitalism

By the mid-1990s, the old social contract in post-independence Arab countries was already dead but had not been replaced by a new successful model. The popular discontent that led to the uprisings can be traced to two main elements of economic policy: the rollback of the state and the consolidation of close relations between the state and particular elements of the business elite under economic liberalism. The central question of why the Arab region underperformed in terms of job creation, given what looked on paper to be impeccable market reforms, has been debated for years. Some have argued that the market reforms did not go far enough (World Bank 2009), while others hold that economics became dominated by networks of privilege (Heydemann 2004) that reduced competition and innovation, and thus job creation.

Conceptually, there is nothing intrinsically bad about close state-business relations. The case of South Korean chaebols illustrates how industrial policy can foster accumulation and the development of new sectors, even when state-business relations are characterized by cronyism (Khan 2010). To the extent that they provide the right incentives to perform, close state-business relations can form the basis for dynamic capitalism. In the Arab world however, tight state-business relations seems to have become a source of undue influence and corruption that have distorted economic and political incentives.

Popular perceptions of business elites have become quite negative in the region. Cronyism is now seen as both the key characteristic of the economic opening that started in the 1990s and accelerated in the 2000s and the source of many ills, including the job deficit, the rise in inequalities, and the perpetuation of authoritarian rule. The perceived “corruption” of the political and business elites was a key driving force of popular discontent. For example, a Pew survey reveals that in 2010 corruption was the top concern of Egyptians, with forty-six percent listing it as their main concern even ahead of lack of democracy and poor economic conditions (Pew 2011). Changes in the corruption ratings of Arab countries in the Transparency International Index confirm popular perception: for example, in 2005, Egypt ranked seventieth and Tunisia ranked forty-third out of 158 rankings on the Corruption Perceptions Index (CPI). Perceived corruption increased markedly in the following three years. In 2008, Egypt dropped to one hundred and fifteenth and Tunisia to sixty-second out of 180 rankings on the CPI.

We now know that this was not just about perceptions. In both Tunisia and Egypt, the ongoing trials of leading businessmen are starting to shed light on the ways in which influence was yielded for private gain. Cronyism entailed practices such as the granting of monopoly rights to close associates of the rulers, the selling of public firms and land at reduced prices, and the manipulation of the financial markets for the benefits of a few insiders. In Tunisia, the Ben ‘Ali and Trabelsi families monopolized business opportunities and even expropriated the real estate and business holdings of wealthy elites. Similar stories about favoritism and insiders abound in Syria, Libya, Yemen, and Algeria, where political cronies seem to control large chunks of the private sector.

The precise nature of state-business relations varied from country to country, with important ramifications for the dynamics of authoritarian stability and breakdown. In Egypt, Gamal Mubarak and his allies had gained important footholds in the Egyptian economy and profited from lucrative international deals, but this faction of the regime was counterbalanced by a strong and historically powerful protectionist bourgeoisie, which included but was not limited to the military. In the aftermath of the uprising, the importance of the military in the Egyptian domestic economy became well known, albeit in imprecise terms. The important stakes of military institutions in protected industries help to explain why the army allowed Mubarak to fall but stymied substantive democratization afterwards. In Tunisia, the elite coalition in Ben Ali’s regime appeared to have narrowed much more than in Egypt. As a result, by the time mass protests erupted against the Ben ‘Ali regime, many Tunisian capitalists who were not integrated into his networks of privilege supported his downfall.

The literature on contemporary Arab capitalism is still in its infancy. With few direct measurements of the extent of favoritism, however, there have been no serious attempts to statistically evaluate the socioeconomic impact of cronyism. A recent study of the Egyptian stock market around the momentous events of 2010 sheds some light on these issues. In evaluating the value of firms’ political connections through an event study of stock market reaction to the revolution, Chekir and Diwan (2012) estimate these to be about thirty percent of the firms’ value. They also compare the past corporate performance of connected and unconnected firms. In 2002, connected firms were about the same size as the other firms on the exchange, but by 2010 their median size had increased to seven times the median of non-connected firms, which had barely grown. Their ****yses indicate that connected firms had a larger market share than their non- connected competitors and borrowed much more than their competitors—by 2010, the top twenty-two connected firms received eighty percent of the credit going to the largest one hundred Egyptian firms. Importantly, they also found that the connected firms were less profitable than the non-connected firms. So if favors were intended as industrial policy measures, they were not particularly successful. More likely, they were run inefficiently by regime cronies who had been appointed because they were trusted rather than skilled. Their goals were to deny the heights of the economy to potential regime opponents, bankroll the ruling party, and enrich themselves. Indeed, well-connected businessmen became very rich and are central to the perception of a large rise in the one percent in Egypt in recent years.

Thus, this system channeled capital flows to relatively inefficient sectors, reducing economic growth directly, while starving small and medium-size enterprises for credit, despite the fact that they provided a disproportionate share of new jobs. Instead of a dynamic form of capitalism, what emerged from the neo-liberal reforms was a low performance economy, with private investment in Egypt never going beyond fifteen percent of GDP, large capital flight (Kar and Curcio 2011), and stagnating job creation. So besides being an important factor behind economic underperformance in the region, cronyism signaled the narrowing of authoritarian coalitions, squeezed out the middle classes, and fueled perceptions of rising inequality.