Compared to other regions of the world, the Middle East was once unique in its combination of authoritarianism and stultifying stability. No longer. Beginning in Tunisia, a wave of political upheaval has rolled across the region, reaching Egypt, Bahrain, Libya and other countries caught between rising expectations and their antediluvian political systems, abetted by pan-Arab news channels and social networking media.
Political liberalization will not make the underlying economic problems disappear, and indeed, it could usher in an era of unprecedented instability.
Harnessing the energy of the region’s millions of young people is the single most critical long-term challenge facing its governments. It is this generation that has risen up to change the status quo, and no wonder. Labor forces are growing at 3.5-4.0 percent annually. Past economic performance, while respectable by global standards, is inadequate to deal with demographic pressures on job markets. The region has the world’s lowest employment rate—less than half of adults are formally employed—and youth unemployment is estimated at roughly 25 percent–double the world average.
The unemployment problem is concentrated among urban, educated youth. In contrast to the pattern in the US and elsewhere, joblessness rises with educational attainment. In Egypt, for example, a young college grad is nearly ten times as likely to be unemployed as a young person with only an elementary school education. And while Egypt is an extreme case, the same phenomenon is evident elsewhere: a young Moroccan college grad is five times more likely to be unemployed than is primary school educated neighbor, three time more likely in Iran, and 25 percent more likely in Jordan. This demographic imperative will remain a challenge however the current political struggles are resolved.
How, then, might the post-breakthrough dynamics play out in these countries?
Obviously there are profound differences between, say, Tunisia and Yemen, and events will be driven by local conditions and cross-border linkages. (Yemen receives little popular attention, but it is arguably the most dangerous case of all: it has weak institutions, multiple societal fissures, and a significant al-Qaeda presence. A collapse in Yemen, moreover, could induce a pre-emptive tightening of control in Saudi Arabia, and even endanger Oman.)
In the short-run, all these countries, particularly those without oil resources, could face financial crisis, capital flight, contraction, and the need for external balance of payments support, either from the International Monetary Fund (IMF) or some less conventional source like Saudi Arabia, perhaps channeled via the Gulf Cooperation Council, the Arab Monetary Fund or the Islamic Development Bank.. They could also turn to China, which presumably might be interested in seeking enhanced diplomatic influence and access to critical energy supplies.
In the medium- to long-run, however, the underlying structural challenges will return to the fore. There are two broad possibilities as to how these regimes might respond.
In the optimistic scenario, enhanced political legitimacy could create the political space for reform. In “normal” countries or those lacking rich resource endowments, such as Syria, a new government could begin dismantling the rent-creating economic distortions used to create political machines that have contributed inter alia to inefficiency and corruption. . In countries of super-natural resource abundance, like Libya, resource-derived rents could be redirected away from vanity projects and in more constructive directions. Political liberalization could unleash entrepreneurship and dynamism, reversing the brain drain that has greatly afflicted many countries and drawing in new foreign investment and technology.
A more negative outcome is also possible, however. A newly responsive political system could actually impede or reverse reforms already under way across the region over the past decade, worsening the long-term prognosis. It is increasingly evident that, rightly or wrongly, these reforms, which have been undertaken with varying degrees of intensity, are widely regarded as contributing to inequality, corruption, and in the context of rising world food prices, poverty.
Which way might the emerging new political forces go?
If you listen to what the publics of the region say, they do not appear to be particularly anti-market. But they do appear to be skeptical of neo-liberal reforms and globalization. In a Pew poll, for example, only about a third of Egyptian respondents indicated support for closing large inefficient factories — even if doing so brought greater prosperity in the future.
Islamist groups in most countries, which constitute the single most organized opposition faction, have varied economic views, ranging from moderate (encouraging Islamic finance while grandfathering existing secular institutions) to dramatic (banning tourism, at least of a non-Islamic sort).
Like everywhere else, people in the Middle East tend to vote their pocketbooks when given the chance. In the national capitals, a prime source of extra-electoral instability could be unemployed urban youth, and whoever ends up heading these new, less politically secure regimes would be sensitive to their needs, regardless of ideology. One obvious response would be Keynesian-cum-populist policies.
Despite a lack of populist tradition, it would be hard to imagine that no politician would advance a platform catering to unions, public employees, and subsidies for all (including those pesky students). Peronism of the East. The problem is that a key constituency to be mollified is urban educated youth, many of whom have majored in subjects that do not easily match the demands of private employers. While a Keynesian program of public investment might be defensible, and self-limiting, a natural temptation will be to permanently expand public employment and the size of government. And while macroeconomic management in the region has generally been good, countries without the resources to fund such binges could face a collapse of the exchange rate, bringing the IMF into play, along with revived concerns about globalization, neo-colonialism, etc.
(One interesting implication of the unrest is the employment potential latent in the role of social media, which has fueled the recent protests. The public employment possibilities from that phenomenon should not be discounted. Governments, ministries, and offices throughout the region are now busily constructing Facebook pages. Tweeting cannot be far behind. Such activities could be scalable, bringing in people to construct and maintain Facebook pages; tweeters; supervisors and editors to monitor the content of this activity; people to monitor and respond to the pages and tweets of rivals. The employment possibilities, especially for hard-to-employ literature majors, could be infinite.)
The internal discord that would likely accompany a macroeconomic crisis could work the other way, however, contributing to higher assessments of risk, more (not less) of brain drain, and reduced foreign investment.
The wild card in all of this is the path of commodity prices. Depending on how instability spreads (or does not spread) among the oil and gas suppliers, one can imagine a variety of paths for energy prices. If, for example, oil production in Libya is seriously disrupted, but other major producers are unaffected, world oil prices would jump significantly. But other producers could actually benefit. The price move would then generate greater revenues available to buy off local opposition – or help the state repress protests, and shore up shaky neighbors as Saudi Arabia is attempting to do in Bahrain. The region’s oil importers could be made worse off. Second-order general equilibrium effects on the global economy could generate a slowdown in investment, remittances, etc., which would be felt unevenly across the region.
Rising food costs have contributed to discontent, but the region’s governments exert little if any control over grain prices which are determined in global markets. Further increases could aggravate instability while declines could amount to a political windfall.
In short, the region faces real economic challenges. It is possible that the political honeymoons associated with the removal of longstanding authoritarians could create greater leeway for governments to implement reform. But it is at least equally likely that political disruptions could set off internal and external dynamics that would make addressing the underlying economic issues more difficult and contribute to an environment of political instability for a sustained period.