The Arab Recession

They may be cheering for democracy, but for most countries affected by the Arab Spring the economic news will have them crying. 

By Ty McCormick


The Arab Spring did not bring economic prosperity

Mohammed Bouazizi's final act of hopelessness -- setting himself ablaze in front of a government building in Sidi Bouzid, Tunisia, on Dec. 17, 2010 -- touched off a wave of civil unrest that toppled two governments, threatens to bring down at least three others, and has redefined the relationship between the ruler and the ruled across the Arab world. But the protests, which were spurred by rising food prices and unemployment, have bequeathed a cruel irony to their makers: A worsening of the very same conditions that sparked the Arab Spring.

The economies of Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia are projected to shrink by a collective 0.5 percent this year, reversing 4.4 percent growth in 2010, according to a report published by the Institute of International Finance in May. In Yemen and Libya, which are still in turmoil, the numbers will likely be worse; and the growth forecast for the North African region as a whole has fallen from 4.5 percent in 2010 to less than 1 percent this year, according to the African Central Bank.

Even among the Gulf Cooperation Council (GCC) countries, some of which enjoyed revolution-induced oil windfalls, the Arab Spring has produced economic losers. Bahrain, in particular -- which sent capital and bank employees scuttling when it violently quelled protests, killing at least five demonstrators, and declared a three-month state of emergency earlier this year -- could potentially forfeit its position as one of the region's financial hubs. As Marina Ottaway, director of the Middle East Program at the Carnegie Endowment for International Peace, told Foreign Policy, many of the international banks that were headquartered in Bahrain "have just pulled up and gone. And they are probably not going to come back."

Capital flight has also hamstrung other Arab countries. Jordanian Finance Minister Mohammed Abu Hammour recently estimated that $500 million is "leaving the Arab world" every week as a result of the unrest. But not all the economic news is bad. Before the revolution, governments across the region were playing an "impeding role" in the economy, said Ossama Hassanein, senior managing director of Newbury Ventures, who argued that macroeconomic growth in the old regimes "came at the cost of great corruption and inefficiency." Today, he estimated that the number of entrepreneurs in the Middle East has multiplied by a factor of ten, fueled by "interest in promoting a private economy led by entrepreneurship and innovation."

The revolutionary fervor of the past year has no doubt affected the Arab word's diverse economies differently. Here is a look at some of the Arab countries that were hit the hardest during this revolutionary season -- and some that seem to have weathered or even gained from the storm.

Libya

It goes without saying that Libya's civil war has wreaked havoc on its economy. Africa's third-largest oil producer before the outbreak of unrest in February, Libya's gross domestic product grew by 10.3 percent in 2010, according to the International Monetary Fund (IMF). It is projected to contract this year, but by how much is anybody's guess. The Qaddafi government in Tripoli has already estimated that conflict has cost Libya some $50 billion dollars. 

For the rebel Transitional National Council in Benghazi, things aren't much better: Billions of dollars worth of frozen Libyan assets remain off limits and the only major source of income, oil, remains trapped beneath the Arabian Gulf Oil Company's (Agoco) damaged drilling equipment. According to Agoco information manager Abdeljalil Mayouf, who spoke with Al Arabiya last week, "We are not producing. Everything is under repair. I can't tell you a date to restart." The gas pipeline that normally fuels power plants in Benghazi and other eastern Libyan cities is also shut down, forcing the former petro-giant to import fuel, for which it has so far been unable to pay. Several European oil tankers have left Benghazi without unloading when the rebels were unable to put up the cash, the Los Angeles Times reported. 

Yemen

The economic situation in Yemen after months of unrest is, well, "shit" -- according to a Yemeni man quoted in the Economist. Persistent fuel, electricity, food, and water shortages have all but paralyzed the country's industrial output, which is responsible for roughly $17 billion in losses over the last six months, according to the deputy chairman of the Yemeni Chamber of Commerce.

To be sure, Yemen's economy was struggling before protests against the government of President Ali Abdullah Saleh erupted in January, but subsequent unrest has pushed its financial situation to the brink of collapse. Last month, the IMF downgraded its outlook for Yemen, predicting a contraction in gross domestic product, although it declined to say by how much. It also warned that inflation could reach as high as 30 percent, compounding the hardship faced by Yemenis, 40 percent of whom already live on less than $2 per day.

Syria

President Bashar al-Assad's brutal crackdown on demonstrators bodes about as well for Syria's economy as it does for democracy. The bloody affair has spooked investors and derailed at least three major Gulf investment projects, according to Al Arabiya. It has also virtually extinguished the tourism industry, previously one of Syria's fastest-growing sectors.

The IMF lowered its growth projections for Syria in April to 3 percent, down from 3.2 percent in 2010, but the Institute of International Finance's prediction that the Syrian economy will shrink by 3 percent this year is starting to look more likely. U.S. and European sanctions -- some directed at Assad and his top aides -- could make things worse for the cash-strapped country. Syria, which has no credit rating, cannot borrow on the international lending market and has traditionally relied on Gulf monarchies such as Kuwait for cash infusions. But according to a recent report, Iran, Syria's ally to the east, may help keep Damascus afloat with a $5.8 billion loan.

Egypt

The 18-day revolution that deposed President Hosni Mubarak and left more than 800 protesters dead may have excited the animal spirits of Egypt's youth, but it's caused a marked downturn in the economy. Tourism, which brought in $12.5 billion last year, has suffered mightily as vacationers from Europe and the Gulf have opted for more stable destinations. With 90 percent of the country's wealth controlled by some 200 families, according to Hassanein, Egypt has also seen much of its capital disappear in recent months. "A number of wealthy families have fled the country to avoid investigation [for corruption]," he says.

The Egyptian military council now in control of the country poses yet another impediment to economic recovery. The military runs numerous enterprises -- from seaside resorts to car manufacturing plants -- and enjoys tax exemptions, employs conscripted labor, and buys public land at below-market prices. Such distortions are likely to persist in the "new Egypt," as the military has already moved to shield its budget from public oversight. And joblessness, up 3 percent in 2011, will continue to plague Egypt, which had its growth projections lowered to 1 percent by the IMF in recent weeks. But analysts remain hopeful that the Egyptian economy will right itself in the coming months. "Egypt is not a basket case economically," said Ottoway. "The fundamentals of the Egyptian economy have not changed," she said, suggesting that pre-revolution growth levels could again be achieved.

Tunisia

The first country to oust its authoritarian ruler, Tunisia has had a bumpy road to economic recovery. Just last week, Tunisia's National Office of Tourism announced that 3,000 jobs have been lost since President Zine al-Abidine Ben Ali was sent packing to Saudi Arabia on January 24. Tourism typically accounts for 7 percent of Tunisia's gross domestic product. According to Finance Minister Jalloul Ayed, the "Growth for the whole of 2011 is forecast between zero and one percent." The Tunisian economy grew 3.7 percent in 2010, by comparison.

But with its small, well-educated and relatively homogeneous population, Tunisia may bounce back faster than Egypt, which faces more significant structural challenges. "The underlying assumption [of those watching events in Tunisia] is that things will improve," said Ottoway. "The things that were working before economically, will work again in the future."

Bahrain

Protests erupted in the tiny Persian Gulf island of Bahrain in mid-February, sending the regional financial hub -- and the capital for Islamic banking -- into a tailspin. When a three-month state of emergency was declared on March 15 and Saudi Arabian troops streamed across the causeway into the capital city of Manama, many international banks scrambled to relocate elsewhere in the Gulf. The result, some analysts fear, is that Manama may follow the path of Beirut, which lost its position as the region's financial hub after the Lebanese civil war.

Suzanne Maloney, a senior fellow at the Saban Center for Middle East Policy at the Brookings Institution, told FP in an email, "As it stands now, Bahrain's appeal for Western investors and companies has been significantly eroded by events." The postponement and subsequent cancellation of the Formula One motor race scheduled for March of this year highlights "the reputational consequences of conducting business as usual even well after the crackdown on protestors," she said.

Still, Bahrain's growth outlook for 2011 -- which at 2.7 percent makes it the worst performer in the GCC, according to analysts in a Reuters poll -- is better than most countries affected by the Arab Spring. Moreover, with Saudi Arabia eager to maintain stability (it spearheaded a GCC pledge of $20 billion to stabilize Bahrain and Oman) the home of the U.S. Navy's 5th Fleet is unlikely to sink anytime soon.

Qatar

Despite hosting regional media-giant, Al Jazeera -- known to many as the voice of the Arab revolutions -- Qatar has remained the picture of quietude over the past few months. And perhaps more spectacularly, the tiny Arab emirate is set to grow by 20 percent this year, giving it the distinction of the world's fastest-growing economy. But the long-term outlook for Qatar and other Gulf monarchies that initially benefitted from oil windfalls may not be as rosy. Indeed, Qatar's growth rate is projected to slow to a more modest 7.1 percent in 2012. And according to Maloney, the increase in social spending used to co-opt restive populations can't be sustained by temporarily inflated oil prices alone. "It seems highly unlikely that the massive infusion of social spending will eliminate the fundamental problems that these states have in creating competitive non-oil economies," she notes.

But mounting domestic financial obligations haven't kept Qatar from funneling petrodollars elsewhere in the region: Emir Hamad bin Khalifa al-Thani was one of the earliest supporters of the Libyan rebels -- supplying cash and weapons -- and was instrumental in marshalling Arab support for a no-fly zone. Qatar has also expressed interest in establishing a Middle East development bank that would assist countries undergoing democratic transition, although there has been no real movement on the issue following Prime Minister Shaikh Hamad bin Jasem al Thani's announcement in May. Such a bank would be modeled after the European Bank of Reconstruction that aided Eastern European countries after the fall of the Berlin Wall, according to the Christian Science Monitor. But when the fight for democracy came a little closer to home, however, Qatar had no qualms about being on the other side of a revolution: It readily deployed troops along with Saudi and Emirati forces to help put down the Shiite-led protests in Bahrain. 

For now, at least, the Gulf states -- and their economies -- seem to have dodged a bullet.

-This article was published in The Foreign Policy on 22/07/2011
-Ty McCormick is an editorial researcher at Foreign Policy