With the fall of the Moammar Gadhafi regime in Libya, the Syrian one in trouble and elections due in post-revolutionary Tunisia and Egypt, what are the chances that the positive political change of the Arab spring will be followed by equally positive economic developments?
Many fear that these countries could slip into the category of so-called “fragile states”, in which social and religious tensions lead to continuing civil conflict and economic stagnation. But the real threat is not a fragile state, but an over-mighty state, where the economy remains a closed system run by insiders for their own benefit.
The dictatorships of North Africa have been described as capitalist economies, but in reality they were “corporatist” economies, where privileges and connections were the key to personal success, and where open competition and meritocracy were absent. In Tunisia, the insiders were those well connected to the ruling family; in Egypt, they were members of the military with a share in the ownership or management of privatized enterprises.
In corporatist economies, masses of ordinary citizens are denied the chance to achieve their potential. While demands for social justice lay behind the uprisings in Tunisia and Egypt, they were less concerned with inequalities of income or wealth as with inequality of opportunity. The young people protesting in Tunis and Cairo wanted to start businesses, enter industries, compete for places in companies and see an end to excessive licensing.
But it is by no means clear they can achieve these aims even under new governments. The Egyptian army is reluctant to give up its powerful role in the economy. And in Tunisia, foreign bankers are teaming up with local insiders to launch new infrastructure projects, including questionable initiatives in the desert. Such projects will not contribute to the advancement of young Tunisians, who are looking for careers, not temporary construction work.
The system that would be most appropriate for Tunisia and Egypt is the basic capitalism developed by Britain and the US in the first half of the 19th century on the way to building their highly successful economies. The foundations of this system are civil liberties, property rights, secure contracts, an independent judiciary able to restrain the government, local banks linked with local entrepreneurs, financial firms that supply venture capital and ease of market entry by new companies.
Today’s Western economies are some distance from providing such a textbook model of capitalism. Indeed, continental Europe might still be accused of pursuing classic corporatism, in which the state takes whatever measures it deems desirable in the name of “solidarity” and “social protection”, constrained only by the need to show efforts to restore growth whenever the economy flags. Certainly, Europe retains many examples of economic rigidity, a deficiency of entrepreneurialism and conspicuously high unemployment— all hallmarks of corporatism.
Meanwhile, in the US there are disquieting signs of growing rigidities— gridlock in Washington, a politically powerful financial sector able to circumvent fuzzy new regulations and huge expenditures on lobbying by all sorts of interest groups seeking a champion in the nation’s capital. When the US economy seemed to be dynamic and performing well, particularly during the glorious Internet revolution, these problems could be ignored. But over the past decade, the US has undoubtedly passed into the land of corporatism.
The dissatisfied populations of North Africa eventually showed their feelings about overweening state controls in public protests. But such movements have not been confined to Arab dictatorships. On the other side of the Mediterranean, Greece and Spain in particular have had a series of demonstrations, not all peaceful, in response to austerity measures and high unemployment.
This summer also saw violent riots in some British cities, in part it seems a result of the thwarted ambitions of disillusioned youth. And perhaps ahead of their time in 2006, there was serious civil unrest among disadvantaged young people of North African origin in the “banlieues” of several French cities.
The Arab countries can hardly look to the economies and societies of the West right now as an example of true capitalism. So what should be their way forward? It is certainly not Tunisia’s “cathedrals in the desert”, the vast infrastructure projects promoted by the International Monetary Fund. Nor necessarily is it education: Huge unemployment among educated Tunisians was one of the drivers of the revolution.
The only solution is to do everything possible to promote enterprise and innovation. That means establishing the right for people to start up their own businesses, enabling new entry and entrepreneurship, and encouraging a more meritocratic way of hiring people in existing businesses. And it means ending support for sclerotic state-backed businesses and removing the blocks on people’s initiative in pursuing even the humblest enterprise.
We understand at least intellectually what the solutions should be. But in the shadow of severe economic challenges in the West and political and religious tensions in North Africa, there are many obstacles in the way of helping the Arab countries move beyond corporatism to achieve a new liberal, capitalist economy.
But particularly at a time of global economic crisis, it is too easy to be pessimistic. The countries of the Arab spring are undergoing dramatic political change. We must hope that their populations—especially the excluded younger generation—can experience economic change on a similar scale, bringing the opportunities for careers and personal development that they rightly demanded when they first took to the streets.
Edmund S Phelps is McVickar professor of political economy at Columbia University and the winner of the 2006 Nobel Prize in economics. This piece is based on his lecture at the 4th Lindau Meeting on Economic Sciences at Lindau, Germany in late August
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