This short text is my contribution to the Arab Horizons report recently published by the Carnegie Endowment for International Peace.
Before planning for what comes next, we need to understand the consequences of economic policies implemented in the Middle East and North Africa (MENA) region before 2011.
These policies—including a reduced role for the state, lower fiscal deficits, and foreign trade liberalization—were largely liberal in nature and helped generate relatively high growth rates. However, they also had negative consequences. Fewer, not more, jobs—in Syria, the labor participation rate fell from 52.5 percent in 2002 to 42.7 percent in 2010; increased income inequality; and a continued brain drain. Since 2011, the destruction of several Arab countries has cost hundreds of billions of dollars, which has only added to the region’s woes.
Better governance and an improved business environment, as is often recommended by international institutions, may generate higher growth. But if growth does not create jobs or reduce inequality, how will that solve our problem? The MENA region must rethink its economic development model by challenging orthodox views and well-entrenched economic and business interests.
Three broad policies must be pursued:
- Investing in governance through state institutions will be key for the successful reconstruction of Arab countries. The role of the government should be maintained not decreased. The fabric of Arab societies has been largely destroyed and the populations brutalized and impoverished. The state, as a guarantor of public interest, should continue to play a leading role in the economy, particularly through investment in capital-heavy infrastructure projects, education, and health as well as spending on safety nets. In addition, only central states have the capacity, means, and legitimacy to manage the massive financial and human efforts that will be required to rebuild these countries.
- Ambitious industrial policies, in particular focusing on labor-intensive sectors, should be pursued through a combination of infant industry policies, favorable taxation (in many MENA countries, taxes on financial revenues are much lower than those on business profits and wages), and support for investment, for instance through subsidized loans or research and development. The industrial sector provides significant added value and is potentially a major employer of qualified individuals, which will help reduce the brain drain. Investments in that sector also tend to be more stable, with a longer-term outlook.
- The income distribution between capital and wages must be rebalanced. Competition should not be a reason to push for ever-lower labor costs and flexibility in the management of the workforce. Higher wages and more stability and protection for the workforce means more incentive to spend in the economy and save, which encourages investment. In many countries in the region, wage earners pay income taxes at a higher rate than businesses. Fairer taxation and better collection only ensure more revenues and legitimacy for governments.
For economic development in the Arab region to succeed, the young men and women of this region must be put back to work under terms that raise their incomes and preserve their dignity.