This paper is part of ACW’s fourth book, titled The Arab World Beyond Conflict.
The global economy is undergoing considerable structural shifts that will affect the Arab states’ trajectory of economic development. Increasingly, governments across the globe are constrained in taxing corporate wealth because tax avoidance has become entrenched in many jurisdictions as a legal mechanism of corporate wealth planning. Arab governments, particularly oil-importing states, no longer have the luxury of depending on state-led economic incentives to spur economic growth. Simply put, a pro-free market global economy is a fact with which Arab states need to reckon, and this requires a shift toward increasing sales and personal income taxes on their citizens.
While this shift already has taken hold in many western countries and is a condition pressed on Arab governments by donors, international financial institutions, and global markets, the reality is that it will also require a change in the Arab social contract. The Arab public will want to see services and accountability of finances in exchange for complying with tax payments. To do so, Arab governments will need to build institutions, promote inclusive economic development, and recognize their citizens’ legitimate calls for enhanced rights. Arab governments could also help rural communities, women, and those working in the informal sector to facilitate inclusive economic growth.
Pressure of Structural Economic Shifts on Arab States
After years of state-directed development strategies and relative trade protectionism, many Arab countries embarked upon economic and institutional reforms in order to pursue greater integration with the world economy and open their economies to foreign direct investment. These neoliberal policy choices were further shaped by conditions imposed by the International Monetary Fund and the World Bank, western donors, free trade agreements signed with western countries or regions, and global corporate interests. These policies included exchange rate liberalization, devaluation of currency, restrictions on budget deficits, decreased interest rates, increased energy prices, lower government subsidies, revised labor laws that favor employers, implementation of sales and income taxes, privatization and selling of state-owned enterprises, banking and trade liberalization, removal of rent control, and facilitation of foreign investment. Such liberalization policies were meant to decrease state intervention in the economy and encourage a climate that allowed the private sector in Arab economies, be it domestic or foreign, to prosper.
While these pro-market economic policies were adopted in many Middle East and North Africa (MENA) countries, high levels of cronyism allowed elite businesses connected to the state or its leader to receive access to cheaper land, subsidized energy prices, lucrative license deals, special financial arrangements, or inside information.1 Ultimately, many of MENA’s liberalization reforms resulted in a transfer from state ownership to crony elite ownership in the hands of a few politically connected people.
Despite decades of attempted neoliberal reforms, Arab economies lag in their efforts to attract foreign investment, particularly when compared to other emerging market economies and developing countries.2
While many pro-market economists advise Arab countries to entice or promote foreign development investment in the region, there remain challenges with seeing this as a panacea to Arab states’ economic development. After all, the strategy of labor-intensive production for exports, which has been successfully adopted in Asian countries, would be difficult to apply in the Arab region as there are now many lower cost competitors in populous countries such as India, China, the Philippines, and other East Asian nations. Some relatively populous Arab nations like Egypt and Morocco have been moderately successful in producing labor-intensive manufacturing goods for export, particularly in the textile market, but most regional countries do not possess the cheap labor required to be globally competitive in this regard. Moreover, Arab countries also had a difficult time attracting international investors because of the negative “neighborhood effect” of regional insecurity.
That said, there has been an influx of billions of dollars in direct foreign investments coming from oil-rich Arab Gulf states with large capital surpluses to many non-oil-exporting Arab states.3 As a result, several Arab cities have become replete with high-rise towers and mega-development projects like malls and resorts. Although many Arab governments and elites publicize—and aspire to attain—this so-called “modernization” of their countries and cities, many people in the Arab region have remained disconnected from these rapid attempts at urban development. And while we do not yet know the specific causes for the Arab Spring––let alone its long-term consequences––the non-inclusive urban development experienced throughout the Middle East may have been a contributing factor to a social sense of frustration that led, in part, to the events of the Arab revolts. This is in keeping with the view of scholars who have argued that the revolts were the Arab people’s attempt to reclaim public places as a result of a profound sense of social exclusion and alienation.4
Arab cities are becoming fractured into glamorous, shiny, and modern urban centers with clear official and private investment as well as poorer and neglected and dilapidated areas. The latter are also on the rise as governments increasingly rely on private capital to fund and finance public works projects and developments. Moreover, private investors gravitate toward the affluent areas, thus increasing the discrepancy of services and development within cities. Throughout the 2000s, the Middle East experienced competition for regional and international real estate companies, consulting firms, and urban consultancies to create neoliberal and large-scale urban developments.5 Finally, as cities are forced to compete for private and foreign investment, land and business taxes need to remain low and competitive. This decreases potential revenue earnings and creates incentives to direct limited tax revenue into urban areas, where investors predominate.
Megaprojects throughout the Middle East have attempted to reshape urban cores, such as Solidere in Beirut, Lebanon; Dreamland and Citystars in Cairo, Egypt; and Jabal Omar in Mecca, Saudi Arabia.6 This regeneration of urban development in a western, neoliberal fashion is what Adham refers to as “Oriental vision of Occident.”7 Similarly, the creation of exclusive resort towns along Egypt’s coastline—such as Marabella and Marina—was little more than the building of fantasy towns that remain disassociated from the daily lives of most Egyptians. This universalizing trend in urban design throughout the Middle East is also related to the fact that much of the capital and investment that is flowing into the region comes from the same relatively small pool of developers and financiers in the Arab Gulf who reproduce similar models and plans throughout the Arab world.
Arab urban transformations are also emblematic of class inequalities. As Mona Abaza notes about Egypt, “walled off, protected areas, gated communities, condominiums, private beach resorts, leisure islands of peace, snow cities in the desert and amusement parks, monitored by private security forces and advanced technology to protect them against the ‘barbarians’ outside, are no longer just futuristic fantasies.”8 In some urban projects, such as Saifi village in Beirut’s Solidere district, many people are excluded from entering wealthy neighborhoods and shops based on markers of social class. The “Dubai model” of economic development, where malls and towers overtake the urban landscape, is not an inclusive form of development. Such projects are in overabundance in most Arab states and produce an added source of youth frustration. Moreover, as Rami Khouri explains, the premise of this model views Arab people as consumers, as opposed to citizens.9
We saw this come to a head during the Arab Spring, when people protested because they were not advancing materially and politically. The Arab Spring was started by educated, unemployed, disenfranchised, and likely lower-middle-class youth of the region who took to the internet and the streets to protest being squeezed for more and more taxes as their income per capita diminished, while their governments were providing inadequate services and curtailing—or not improving—political rights. Notably, the Arab Spring began in countries that were experiencing some measure of economic growth; some were also viewed as lead economic reformers, having successfully liberalized their economies to a certain degree. Nevertheless, despite economic expansion in the Arab world, rebellions transpired because the diffusion of the gains from growth did not keep pace with the rising expectations of educated youth. The region was experiencing what is known as non-inclusive economic growth.10
With unequal distribution of economic growth across Arab countries, people perceived a gap between their present circumstances and what they believed they deserved. In other words, on a psychological level, Arab youth viewed their socioeconomic situation as unjust, particularly in comparison to where they thought it ought to be. This is known as “relative deprivation,” a concept developed by Ted Gurr.11 The Arab Spring was a reminder to governments that economic growth, for its own sake, is not enough if its benefits are not adequately distributed to people so that they feel their lot is improving. Otherwise, people will rebel or revolt against governments for the lack of wealth that they perceive should reach them personally.
Undoubtedly, the Arab world needs foreign investment to provide technology and technical knowledge (which are in short-supply throughout the region’s production value-chains and energy facilities), to create labor-intensive jobs, to augment the technical and post-secondary education sector, and to invest in infrastructural development projects that meet urbanization challenges such as transportation, housing, food security, and sewage systems.12 This chapter does not suggest that foreign direct investment is wholly bad. However, Arab governments need to get the right balance between promoting the private sector and extracting more income and sales taxes, while providing services and institutions that Arab citizens feel are adequate for their needs. Simply put, inclusive economic growth is good for Arab economies, people, and governments.
Inclusive Economic Growth
Inclusive economic growth is a multipronged effort that begins with understanding that economic development must be distributed to all sectors of society and this, in turn, builds momentum for bottom-up prosperity that is fair for all. As Ranieri and Ramos note:
… the emergence of the concept of inclusive growth may be seen as relating to the realization that growth processes may have different impacts not just across the distribution of income, but also among ethnic and gender groups and geographical regions, as well as that rather than outcomes being the only important aspect, whether and how people engage in the growth process matters.13
To achieve inclusive growth, Arab governments need to help create better opportunities for young people in the labor market, assist in making the informal sector a more prosperous and regulated one, and remove barriers that prevent women from fully engaging the economy.
The labor market in the Arab world has a mismatch between private sector needs and the offerings of the traditional education system. Countries need workers with genuinely marketable skills and this can often be shaped through improved quality of education, enhanced training initiatives, and better understanding of the needs of the private sector. Technological investments into sharing better job information and counseling can also be of great value. While most job growth should come from the private sector, there is a need to reform public sector hiring practices and raise wages to attract the very best to want to work for the government. In the long run, Arab countries also need to work toward providing social security for all workers.14
Many people living in rural communities, particularly young graduates, continue to face mobility barriers in finding employment.15 Investment in transportation networks that allow rural communities to seek desirable employment opportunities in more economically prosperous areas would be welcomed in rural communities. Moreover, “housing loans to help workers relocate from a rural to urban area; investing in better modes of transportation and subsidized transportation services; and encouraging job creation in areas with high unemployment through tax breaks and other incentives”16 are also policy tools that Arab governments ought to pursue.
In the typical MENA country, the informal sector makes up one third of GDP and two thirds of the total labor force. This trend is especially evident in countries with large rural populations and high population densities, and oil-importing countries such as Yemen, Egypt, and Morocco. Between 2000 and 2007, 45 percent of the Egyptian labor force and just over 50 percent of the Tunisian labor force were not contributing to social security (this is a common proxy measure for the size of the informal economy). The figure reached approximately 90 percent in Yemen and 76 percent in Morocco over the same time period.17 Indeed, the informal sector needs urgent policy attention to assist in providing inclusive economic growth. Informal sector workers are often found in low-skill service sector jobs in transportation, retail, agriculture, and construction. The ranks of the Arab region’s informal workforce are drawn disproportionately from younger generations. To be sure, reforming labor market regulation has proven exceedingly difficult for MENA countries. Personal connections are an even more important determinant of employment in the informal economy than is usually the case across the region, with young people often able to procure jobs through the contacts of older relations. Workers in MENA’s informal economy are likely to transition from informal employment to the public sector as they age. This is somewhat different from the observed pattern in other developing regions.
An enormous opportunity for increasing inclusive economic growth lies in many Arab states: the full employment of women. Consulting firm McKinsey found that an increased women’s employment (full and real gender parity) in the Arab world would contribute $2.7 trillion to MENA’s GDP by 2025, or $600 billion per year. This would lead to an increase of MENA’s GDP by 47 percent in a decade.18 A Peterson Institute study of 22,000 companies across 91 countries found that “the presence of female executives is associated with unusually strong firm performance.”19 Advanced educational opportunities for women, providing the foundation for increased female participation in the labor force, will improve the material wealth of people and stimulate bottom-up economic growth.
Arab policymakers should conduct gender impact studies that examine gendered processes within the formulation of government policies. Additionally, incentives that can cultivate greater female participation in the labor force include increasing salaries; raising the retirement age across the Arab world; enhancing maternity benefits; and providing safe and affordable public transportation. Quotas and affirmative action programs aimed at securing positions for women in traditionally male-dominated fields could help them access all positions in the job market, as would support for female entrepreneurship initiatives.20
On a national scale, data suggest that gender parity in the socioeconomic realm can lower dependency ratios in households, increase national output, cumulatively boost national savings, and allow for increased investment and productivity, thus leading to national economic prosperity. Moreover, a rise in household earnings can have a positive effect on the broader market economy, as national consumption of goods and services also increase, making markets stronger and more effective.
Structural economic changes to the global economy, combined with persistent state-level cronyism and corruption, have often led to non-inclusive growth in Arab states. An inclusive economic growth strategy “…involves improving the lot of underprivileged people in particular and overall making opportunities more plentiful while lessening barriers to the attainment of better living conditions.”21 In the opinion of this author, this is the only viable option for Arab governments to pursue for their future. Moreover, inclusive growth must be combined with offering political liberalization to a growing and educated young population to assure legitimacy. Involving women, rural communities, and youth in decision making as well as directing a fiscal stimulus toward helping them find employment would also encourage sorely needed political buy-in into Arab governments’ economic development plans. Policy choices before Arab governments are very clear: to focus economic development efforts on inclusive economic growth and provide citizens with the political buy-in to be productive, tax-paying members of society.
1 Melani Cammett and Ishac Diwan, “The Roll-Back of the State and the Rise of Crony Capitalism,” The Middle East Economies in Times of Transition (London: Palgrave Macmillan, 2016), pp. 63-98.
2 Ritab Al-Khouri, “Determinants of foreign direct and indirect investment in the MENA region,” The Multinational Business Review 23, no. 2 (2015): pp. 148-166.
3 Bessma Momani, “Shifting Gulf Arab investments into the Mashreq: Underlying political economy rationales?” In Shifting Geo-Economic Power of the Gulf: Oil, Finance and Institutions (London: Ashgate, 2011).
4 Ramy Aly, “Rebuilding Egyptian Media for a Democratic Future,” Arab Media & Society 14, no. 1 (2011): pp. 1-7; Charles Tripp, “The Politics of Resistance and the Arab Uprisings,” Middle East Centre Arab Uprisings Lecture Series (February 23, 2012).
5 Rami F. Daher, “Amman: Disguised Genealogy and Recent Urban Restructuring and Neoliberal Threats,” The Evolving Arab City: Tradition, Modernity and Urban Development (New York: Routledge, 2008).
7 Khaled Adham, “Globalization, Neoliberalism, and New Spaces of Capital in Cairo,” Traditional Dwellings and Settlements Review 17, no.1 (2005): p. 19.
8 Mona Abaza, “Brave New Mall,” Al-Ahram Weekly Online, Issue no. 708 (2004): pp. 16-22, https://bit.ly/2ACiOyq.
9 Rami G. Khouri, “The Enduring, Harsher Lessons of 1967,” Al Jazeera, June 8, 2016, https://bit.ly/2VxuXh7.
10 Bessma Momani, Arab Dawn: Arab Youth and the Demographic Dividend They Will Bring (Toronto: University of Toronto Press, 2015).
11Ted Robert Gurr, Why Men Rebel (London: Routledge, 2015).
12 Bessma Momani, “The Arab Spring Can Bring a Demographic Dividend: That is Good for Business and Investors,” Global Policy Essay (August 2013), https://bit.ly/2 Fg8G2d.
13 Rafael Ranieri and Raquel Almeida Ramos, “Inclusive Growth: Building up a Concept,” Working Paper No. 104, International Policy Centre for Inclusive Growth (2013), p. 7.
14 Navtej Dhillon, Paul Dyer, and Tarik Yousef, “Generation in Waiting: An Overview of School to Work and Family Formation Transitions,” Generation in Waiting: The Unfulfilled Promise of Young People in the Middle East (2009): pp. 11-38.
15 Nadia Belhaj Hassine, “Economic inequality in the Arab region,” The World Bank (2014).
16 Momani, “The Arab Spring Can Bring a Demographic Dividend.”
17 Bessma Momani and Morgan MacInnes, “Economics: Bread, Jobs, and Beyond,” in The Societies of the Middle East and North Africa (London: Routledge, forthcoming 2019).
18 Jonathan Woetzel, “The Power of Parity: How Advancing Women’s Equality Can Add $12 Trillion to Global Growth,” McKinsey Global Institute (September 2015), https://mck.co/2twK4Kq.
19 Marcus Noland, Tyler Moran, and Barbara R. Kotschwar, “Is Gender Diversity Profitable? Evidence from a Global Survey,” Peterson Institute for International Economics (February 2016): pp. 8-9, https://bit.ly/2QIi4Sy.
20 Bessma Momani, “Equality and the Economy: Why the Arab World Should Employ More Women,” Brookings Policy Briefing (2016), https://brook.gs/2QLKWJO.
21 Rafael Ranieri and Raquel Almeida Ramos, “Inclusive Growth: Building Up a Concept,” International Policy Centre for Inclusive Growth, 2013, p. 7, https://bit.ly/2RCpF4J.