Economic insularity imperils change in the Arab world

Companies do not like political uncertainty. They would forestall investments until situation stabilises.

Such raw emotions can only be sustained for so long before the mundane and complicated realities of everyday life reassert themselves. Popular imagination has been transfixed by the Arab uprisings as parables about the wages of political repression and control; about cultures of corruption and cronyism; and about millions of young and disenfranchised people clamouring for dignity and a better future. But a less appreciated facet is now emerging as perhaps the most vital: The economies of these countries and of the Arab world in general are some of the least integrated into the global economic system.

Business and political leaders in the region, and many in the West, say that the Arab Spring holds the hope of real change but that without economic activity to sustain it, the recently ignited light of political change could flicker or be extinguished altogether.

“If we let them get bogged down in economic difficulties,” said Alain Juppe, the French foreign minister, referring to Egypt and Tunisia, “the political transition will be threatened.”

Hence, the World Bank’s announcement that it was willing to provide up to $6 billion to help Egypt and Tunisia weather declines in tourism and other industries. The money is intended to seed a broader package of international support for the two countries’ post-revolution governments.

While the outcome of the celebrated revolutions there have been relatively black and white, the results elsewhere have been murkier, with president Bashir al-Assad holding on in Syria, repeated false starts at reconciliation and resolution in Yemen, and Libya torn by a civil war that increasingly appears to be a stalemate.

It’s not that these countries are notably poor. In fact, Egypt and Tunisia had both seen modestly rising living standards and decent education for many of their young people.

But with the exception of the Gulf emirates and, to some degree, Saudi Arabia, few Arab states are fully a part of the global economy. And those that are a part of the global economy have not yet faced the push for democratic reform from the street.

Other than national oil companies and the sovereign wealth funds of the Gulf states, the nations of the region have no leading multinational companies, no globally dominant or even significant financial institutions, and no centers of innovation or education. Few of the countries are hospitable to foreign businesses or foreign trade, including from other Arab countries.

The result, which analysts and economists say is predictable, is that foreign businesses rarely look to the region as a place to invest. And that isolation from the global economy is a vicious cycle, breeding further isolation.

Egypt, for instance, attracted only $5 billion to $10 billion in foreign investment over the past five years; Tunisia, with its much smaller population, attracted less than $2 billion a year. IBM alone makes nearly $10 billion in a month. Not surprisingly, Saudi Arabia led the region in attracting foreign investment, yet as the richest country in Arab world with billions in oil revenue, it arguably has the least need for it.

While some business reports show that doing business in the Arab world has become easier in the past few years, the same could be said of almost everywhere in the world save for outliers like Myanmar, Iran and parts of sub-Saharan Africa. And according to the International Finance Corporation, only 3 of the 20 Arab economies surveyed rank in the top 50 globally in “ease of doing business.”

Government-centric

Neither India nor China rank highly, either, but India has a vibrant internal investment and commercial market, and China leads the world in the pace of building new infrastructure and in the sheer scale of foreign investment and business activity.

Meanwhile, an inordinate amount of economic activity in the Arab world is generated by the state. And, unlike in China, the state has a poor record of putting capital in motion in productive ways. State spending more likely goes to food subsidies and make-work programmes than to cutting-edge infrastructure or technology, say economic analysts.

Rashid Khalidi, professor of Arab studies, Columbia University, said he believed these revolutions would fail if they could not offer “social justice and the rapid economic growth that will be necessary to provide equal opportunity, quality education, good jobs, decent housing, and desperately needed infrastructure.”

To be sure, there have been some encouraging signs of deeper change. Obama has promised billions in development aid to assist nascent democracies in Egypt and Tunisia to gain traction, and president Nicolas Sarkozy has emerged as a powerful voice for European economic engagement in the Arab world.

The private sector continues to face obstacles to doing business. Governments can set aside those issues in the name of promoting democracy or enhancing global economic security; companies can only justify investment if there is some realistic likelihood of eventual return. For now, the passion evident in Egypt and Tunisia tends toward political reform. One of the most powerful business leaders in Egypt, Naguib Sawiris, whose family business extends from hotels to telecommunications, recently formed a new political party. While such leadership is vital, it can also be seen as a loss.

Egypt has precious few economic advantages, and with a military interim government that is uninterested in renouncing its financial privileges or in reforming an economic system that made many general officers rich, Egypt is facing a summer and autumn of diminished tourism revenue — which has been one of its primary sources of foreign currency. (Arab Springs are well and good, but affluent visitors from Europe, America and Asia prefer to read about political upheaval rather than witness it from their hotel rooms.) The uncertainty of the various reform movements also creates an economic Catch-22.

Companies do not like political uncertainty and are likely to forestall investments until the situation stabilises, new governments are formed and the new rules are clear. But the absence of meaningful economic activity also inhibits the ability of these societies to deal with the very problems that set off the upheavals in the first place.

Arab business leaders and boosters say the best case is achievable. Many in the region and in the West also say it is imperative. Without an economic spur, all of the political reform and passion will eventually collide with the mundane nonnegotiables of daily life that would sap any revolution of its idealism: where will the jobs come from, the food, the homes? And analysts say that if that happens, the region will find itself back where it was but without the brutal regimes that long kept frustrations and chaos at bay.