The Economic Determinants of Arab Democratization

1. Introduction.

A defining movement for democratization is currently underway in the Arab World. Self immolation by Mohamad Bouazizi, a young unemployed graduate, on December 17, 2010, in Sidi Bouzid,  a small town in Tunisia, in protest against police mistreatment and economic hardship may have set into motion the “fourth wave” of global democratization; the “authoritarian persistence” of the Arab world appears to have started to slip away. So far four autocratic regimes—Egypt, Tunisia,  Libya, and Yemen—have fallen and a number of others are being threatened by often violent rebellion against authoritarianism.[1] The unintended economic consequences of these developments—fall in output, rise in unemployment, market uncertainty, and worsening macroeconomic imbalances which could worsen the medium and long term outlook—have turned out to be significant.

Economic factors have been found to be an important determinant of demands for democratization. While the rebellion for democratization can be explained by the confluence of a number of factors, including excessive political repression in the face of a freer and globalized world, economic deprivation and the associated rising income inequality appears to have played an important role in reaching the tipping point. However, experience of democratic transformation in different regions has shown that economic factors, while a necessary condition, are not a sufficient condition for igniting movements for democratization.  Similarly, political repression, in the absence of institutional structures to redress political demands, while important, is not sufficient in fanning rebellion against autocratic rule. It is only when both political and economic factors are present that a home grown democratic movement becomes viable.

The Arab World—Middle East and North Africa—is no exception to economic and political forces. It is a diverse region, and economic factors appear to be relevant for democratization in a number of these countries. Political repression in Egypt, Libya, and Tunisia, which had been increasing over the past two decades. when combined with the recent economic weakening and rising income inequality, appears to have spurred democratic rebellion. Opening up of these economies to the globalized world economy has also been an important factor in the ongoing transformation.

Economic effects of change have been significant. Could  adverse economic consequences of democratic rebellion,  in the three countries and other Arab countries undergoing change in governance,  be avoided? Why have most democratic movements so far proven to be violent.[2] Are there options for economic policy reform which could facilitate a more orderly and peaceful transition to democracy?  While this paper attempts to address these issues, it makes no effort to look at non-economic factors which are doubtless spurring the democratic movement.

Section II evaluates economic determinants inhibiting or fostering democratization. Section III classifies Arab countries by their economic characteristics in order to assess their sensitivity to democratic transition; it also analyzes economic policy changes in the three countries that may have amplified opposition to authoritarianism. Section IV assesses sensitivity of countries to a violent change for democracy and identifies economic policy and institutional reforms which could facilitate a peaceful and orderly transition to democracy.

2. Economic Theory of Democratization.

Democratization is a transition from authoritarian/autocratic rule to a more representative government. Democratization bestows on the new mode of governance the power to change policies that have been used by authoritarian rulers to extract “economic rent” for the elites.[3] It is the product of a large number of often conflicting economic and non-economic determinants. Therefore, it is difficult to develop a general theory to conclusively and uniquely determine choice between democracy and authoritarianism.

Economic factors, though critical, provide only a partial explanation of forces which affect the choice between democracy and authoritarianism. The significance of economic factors’ role is also country-and region-specific. History, culture, and ethnic/religious/tribal mix of a society have also cast long shadows on struggle for democracy.[4] However, broad conclusions can be drawn from developments in economic variables to explain the likely path toward democratization. Hence, the importance of economic policies in generating conditions which would facilitate  an orderly and non-violent transition to a more representative governmental structure. Although pace of economic development is not directly related to the mode of government, economic and political changes that instill sustained growth while promoting income equality have been found to support an orderly transition to democracy.[5]

There is rich theoretical and empirical literature on the economic determinants for democratization. Seymour Lipset, as early as 1959 stressed that societies democratize as they modernize: there was strong correlation between the rise of per capita income and representative government.[6] Building on Lipset, Moore broadened the determinants of democracy to encompass initial social conditions and the economic structure; democracy flourished in societies that transformed from feudal characteristics to more market-oriented resource allocation.[7] More attention was also paid to inter group conflict and the rise in the cost of sustaining authoritarian regime through repression (Dahl).[8] The democratization of Eastern Europe in the 1980s and turmoil in Latin America has spawned new research emphasizing that structural determinants—a la Lipset and Moore—were not a sufficient determinant of choice for democracy. It was argued that poor and the working classes were pro-democracy because it gave them the power to influence change in policy in their favor. In 1995, Haggard and Kuafman stressed the importance of economic crisis, and the resulting discontent, in the democratization process, linking economic policy reform and democracy. [9]

More recent research has found income inequality, economic structure, and the role of globalization to be increasingly important in spurring democratic process. In their seminal work in 2000 and 2006, Doran Acemoglu and James Robinson have developed the most comprehensive and testable political economy model for democratization and its consolidation. [10] They argue that, of the many factors, there are three important determinants of democratization:  inter-group inequality, structure of the economy, and nature and extent of integration with the globalized world economy.

First, deepening inter-group inequality, mainly worsening income distribution, has a greater likelihood of encouraging revolt against the ruling predatory elites.[11] In contrast, holding other conditions unchanged, a decrease in inequality, the growth of middle class, and a build-up of human capital would spur orderly transition to democracy by raising the cost of repression to the elites.  Second, closely associated with income inequality is the relative efficiency of markets in allocating resources and prices. The economic structure, which determines sources of income for the elites and the rest of the economic classes, has a direct bearing on the cost of repression of the majority. In particular, democracy is more likely in an urbanizing society with elites owning industries rather than land and with greater dependence on human capital. Such an economic structure would allow a greater role for the market forces to allocate resources and returns to factors of production. In contrast, a heavily land-based structure would accord dominant power to the land-owners—the ruling elite—in determining use of resources and returns to landless workers; the same would apply to societies endowed with   natural resources such as oil. Prolonged economic slowdown or crisis could also weaken the informal contract between the elites and selected interest groups supporting autocratic rule, thus, spurring demands for change. Last, globalization works in a more complex fashion. While increasing awareness of freedoms abroad, and external political pressures could spur demands for change, greater integration with the global economy—both through freer trade and capital account liberalization—could reduce income inequality and also reduce the potential cost of democratization to the elites.

The effectiveness of political and civil society institutions is crucial in furthering a non-violent transition by harnessing economic variables through efficient markets to reconcile the conflicting economic interests of competing groups—elites, middle class, and masses.[12] Such institutions influence the allocation of political power, both in the short run as well as the long run, to either facilitate or retard efficient markets, thus, determining whether the change is peaceful, welfare- and efficiency-enhancing, or not.[13] The efficiency-enhancing outcome, by simultaneously improving resource allocation and income distribution, would help support and consolidate democratic change.  While it is difficult to establish a testable relationship between the stage of development and the form of government, economic and political institutions which promote sustained economic growth, development of the middle class, and human capital would make transition to democracy more orderly.

1. Inter-Group Inequality

Inter-group inequality, mainly income distribution , is a crucial determinant. Inequality of income distribution in terms of returns to factors of production (particularly, labor) being not in line with freely competitive market conditions, is perhaps the most important economic determinant of demand for democratization. At low levels of inequality, the cost of repression for the elites is low and autocratic rule can be sustained with limited concessions to the disenfranchised. However, as inequality increases, the cost of repression to sustain the existing pattern of income distribution goes up. In the event, pressures for transition to democracy increase.  Other factors remaining unchanged, advent of democracy becomes threatening to the elites, including through a potential increase in taxation or expropriation following change in regime to correct adverse income distribution. Increased aversion to the correction of income inequality, under these circumstances and the subsequent increase in repression, would make violent rebellion for democratization more likely. In contrast, democratic societies, by facilitating change in government, allow change in policies, thus, obviating the need for violence against the established order.

Emergence or existence of a large and growing middle class reduces inter-group inequality , thus providing the much-needed buffer between the elites and economically deprived.[14] The existence of such a group would imply room for mobility out of poverty and a more market-based return to economic effort. Typically, development of the middle class is associated with the acquisition of human capital which, unlike land or natural resources, cannot be stored, redistributed, or transferred. Therefore, the cost of violent change would be significant to this group. Thus it is in the economic interest of the middle class to support a gradual and orderly transition to democratic rule. Conversely, refusal of the elites to accommodate interests of the middle class, or repress development of middle class, would cement the latter’s interests with those of the poor and make a violent and disruptive change to democracy more likely.[15] Moderate levels of inter-group inequality, which would be associated with a growing middle class, is most conducive to non-violent or orderly transition to democracy; evidence of recent democratic change in East Asia, parts of Latin America, and Eastern Europe confirms this assessment.[16]

2. Structure of the Economy

Economic structure, to the extent that it determines resource allocation and compensation to factors of production, affects inter-group conflicts. Economic policies and development of economic and financial institutions that support resource allocation through efficient market forces, avoid monopolies, and provide for solution of market failure— particularly, externalities and collective action problems—would help eliminate “economic rent” of the elites and reduce inter-group inequality, thus, supporting non-violent transitions to democracy.

The impact of economic structure on democratization and its consolidation is perhaps felt the most through the role of economic institutions and related policies in the allocation of resources and determining prices, wages, and return to capital. Monopolistic controls and the supporting sub-optimal policies would artificially keep returns to capital owners and land holders higher than would be possible under competitive market conditions. Such an economic structure would keep wages below labor’s productivity, thus, perpetuating inter-group inequality. In the event, repression will have to be increased to maintain flow of economic rents to the elites, lowering growth outlook. Moreover, interests of different segments of elites would start to diverge since the cost of repression to capital holders will increase faster than to others. In particular, unemployment of human skills which, unlike financial and physical capital, can neither be stored nor transferred, would increase pressures for policy reforms.

Efficient and competitive markets  are the most effective mechanism for ensuring equity. The restoration of efficient markets and elimination of monopolies and the associated implicit subsidies would, as a fundamental principle of economic analysis, facilitate equilibrium pricing of goods and services, and factors of production.[17] These developments, combined with well-defined property rights and equality before law, would reduce income inequality and assurances about the future course of economic policy, thus, facilitating an orderly transition to democracy. This would call for important shifts in economic policies and related institutions.

3. Globalization

The role of globalization in promoting democratization is much more nuanced. While the “demonstration” or “contagion” effects in spurring demands for change are recognized, the path through which greater global economic integration affects choice of the mode of government remains ambiguous.

Integration with the global market through freer international trade and financial flows are likely to ease fears of violent democratization for the ruling elites. Freer trade under efficient market conditions would spur growth and reduce income inequality by raising returns to the more abundant factor of production—typically, labor--in countries currently demanding change to democratic rule.  Such a development could ease demands for redistribution through violent change in the mode of government. However, if freer trade were to increase returns to owners of human capital without also increasing returns to the more abundant unskilled labor, it could worsen income inequality and have an obverse effect.

The impact of financial liberalization is country-specific and unpredictable. Such liberalization—easing of restrictions on transfer of financial assets across borders-- could also increase the capacity of elites and capital holders to diversify their assets abroad, reducing the risk of expropriation in the event of political change, and, thus, lessening resistance to democratization. Increased integration with the global capital market, by increasing dependence on external capital, may increase the cost of sustaining ongoing policies in the event of repression, thus, potentially promoting reforms. However, increased capital mobility, by facilitating capital flight  in the event of increased market uncertainty , could, potentially, slow growth and negatively impact incomes of the majority  and aggravate political conflict. Such a development could hamper non-violent transformation.

The relative importance of the various aspects of globalization as discussed above for fostering or inhibiting democratization is, therefore, country-specific. Nonetheless, to the extent that global factors do not increase the cost of repression to the elites, they could be impediments to democratization.

4. Overview.

 Inter-group inequality is a primary determinant of demand for democratization.. Non-violent and orderly transition is more likely where inequality is kept in check through the development of middle class, accumulation of human capital, and economic diversification away from an agrarian base and toward industrialization. Moreover, structure of the economy matters. Development of efficient and open markets for goods, services, and factors of production (capital, labor, and land) is central to not only sustained growth but also— and more importantly—to an autonomous reduction in income inequality and, thus, to an orderly transition to democracy and its consolidation. Openness to the global economy, through expansion in the market size, easier access to foreign capital and technology, and ease of asset diversification abroad, could help loosen elites’ control over the economy while promoting equality.

The needed economic transformation for democratization would require pursuit of appropriate policies to ensure efficient markets. Resistance to monopolies, correction of “externalities,” and elimination of implicit subsidies, supported by effective property rights and rule of law, would allow the market forces to allocate resources in a more equitable and optimal fashion.[18] In particular, properly regulated financial markets that ensure due returns to savers and market-based access to credit, without implicit or explicit subsidies diverting allocation to suboptimal activities favored by elites, would be critical. Similarly, market determination of wages, including unhindered increase in returns through freer international trade, and development of human skills, leading to the development of a growing middle class, would go a long way in improving income equality. Such a market environment would need to be supported by pursuit of macroeconomic ( monetary and fiscal) policies that would control inflation and maintain external stability, thus laying the foundations for sustainable growth.

In the absence of the policy stance summarized above, growth would likely be slower and inequality would deepen. Given the underlying economic weaknesses, political dislocation resulting from a violent change would likely worsen the economic situation, including a worsening of inter-group inequality, at least, in the short run, and make the path to democracy even more arduous. The sharp reversal of growth in Egypt, Tunisia, Libya, and Syria following the revolts for democracy is an important reminder for appropriate economic policies. It is also critical that political and civil society institutions are developed along with economic reforms, to ensure that market forces are not subverted by the elites and related interest groups with the aim of preserving their hegemonic control over the economy.

3. Economic Structure and Policies of Arab Countries

The Arab countries are diverse in terms of their economic characteristics and challenges. They differ widely in terms of resource endowment and integration with the global economy. Given the sharp differences in the accumulation of capital, especially human capital, they have differing levels of inter-group inequality, and resistance to political repression. The region can be classified in two broad groups based on economic characteristics and the policy stance—oil and gas exporters, and oil importing economies. These can be further classified according to their level of economic development and the degree of dependence on oil and gas.

1. Oil and gas exporting countries

The majority oil and gas exporting countries are less susceptible to early democratization. Algeria, Kuwait, Libya, Qatar, Saudi Arabia, and the United Arab Emirates (“UAE”) do not exhibit economic attributes as discussed above for a quick and autonomous transition to democracy. However, non-economic factors and social conditions—as in the case of Libya—could complement economic factors for catalyzing unanticipated political change. They are sparsely populated and structurally simple economies, with elites (mainly, monarchies) effectively in control of the primary source of income, oil. Income inequality is contained by a widespread system of subsidies through the budget which depends solely on oil export receipts rather than taxation. Economic rent is partially shared with the masses through subsidies.  In most of these countries, such subsidies cover a wide range of consumer demand such as food, housing, utilities, and energy; for the productive sectors, subsidies are typically provided through subsidized credit and energy, and favorable government procurement practices.

Rapid economic progress has also moderated demands for political change. Ample economic opportunities for the private sector supported by government policies, combined with the availability of human skills at internationally competitive wages, mainly from other Arab countries and South Asia, have coalesced interests of the elite and the rapidly growing middle class in most of these economies. Moreover, they are deeply integrated with the global economy and the financial system allowing free trade and capital flows under a neutral monetary policy, thus facilitating asset diversification and containment of inflation. Political and civil society institutions are rudimentary and generally aligned with the elites. The medium term outlook is for these countries to contain income inequality, and continue pursuing liberal economic policies under internationally competitive prices for goods, services, and factors of production.  However, these countries will be called upon to ease the economic costs of political change in the regional oil importing countries. Such adevelopment could reduce resources available for addressing domestic challenges while allowing regional developments to affect the domestic political landscape.

Other oil and gas exporting countries—Bahrain, Oman, Sudan, and Yemen—exhibit a more mixed picture. Their economies face widely different challenges. Quite apart from the negative economic effects of internal conflicts and security issues, these economies have been adversely affected by policies which have been applied to preserve economic interests of elites including through protected and inefficient large public sectors.  Fiscal and monetary policies and restrictions on competition, both domestic and external, have been used to extend implicit subsidies to elite groups in these countries, resulting in growing inter-group inequality in many of these countries. Large public sectors and collusion between the public sector and private investors, supported by administrative controls over-riding the role of the market in resource allocation, have kept growth in the non-oil sector in some of these countries below the optimal path. These developments have led to rising unemployment, especially of skilled workers, and have eroded the middle class.  

 Oman, for example, has endeavored to address the potential consequences of declining oil exports by diversifying its economy toward non-oil activities with macroeconomic stability. Over the past decade, the authorities have supported private sector investment in the non-oil sector and development of a skills-based middle class, while remaining open to the global economy under a liberal exchange and trade system. As a result, income inequality has remained manageable. In addition, notwithstanding the limited role of the political and civil society institutions, given the relatively less pervasive control of elites, the authorities have been able to show flexibility in accommodating demands for income redistribution without violence.

Bahrain is a unique case. With a sharply contracting oil sector, the Bahraini economy has been diversified over the past two decades into a large and efficient regional banking and financial services center and fully integrated with the global economy.  While there has been a steady improvement in the overall economic well-being, income inequality appears to have remained unchanged and has have heightened inter-group inequality. Objective conditions for democratization exist and, in the absence of the planned shift toward a constitutional monarchy and policies for a sustained redistribution of income toward the majority, violent democratization cannot be ruled out.

The ongoing civil conflict in Yemen is symptomatic of stunted to economic reforms. Resistence to changes in economic policies needed to address the sharply declining oil exports has worsened growth outlook. Sudan, on the other hand, has taken steps to address the likely decline in oil export receipts, following the independence of South Sudan, and has maintained appropriate macroeconomic policies. However, the emerging economic pressures are challenging and, if not addressed, could ignite demands for political change.

2. Oil importing countries.

Economic determinants of democratization are perhaps most relevant for the oil importing countries. Their economies differ not only in terms of linkages to the global economy and with each other, but also by the role of the market in resource allocation. Mode of government in these countries reflects varying stages of limited representation. In most of these countries, the will of people through elections for policy change to redress economic deprivation of the masses has been countermanded by the governing elites. The power to make economic policy resides with a largely unrepresentative executive, supported by elites consisting mainly of a large public sector, security agencies with growing interest in commercial activities, and a closely knit and dependent private sector that is protected from competition through varying levels of implicit government subsidies and trade restrictions. Consequently, a growing majority of alienated people have turned against the authoritarian rule.

Economic reform in many of these countries has been slow and uneven. In the initial stages, most of these economies were heavily public sector-oriented, where real and financial resources were rationed through government-owned development agencies and banks at non-market interest rates. External bilateral financial assistance which was aimed at supporting the governments in power, supplemented the limited domestic resource mobilization to sustain the existing economic structure. Restrictions on trade with the rest of the world and absence of large domestic markets kept growth rate at an anemically low level. However, owing to its monopolistic position, the public sector earned a large economic rent through its control over resource allocation and shared part of it with the citizens to manage income inequality and suppress demands for democracy. The availability of job opportunities in the major oil exporting countries in the region eased unemployment pressures and the inflow of workers’ remittances helped keep income inequality in check.

Over the past two decades or so, many of these countries have experienced mounting economic difficulties.  They have encountered rising unemployment, especially of the educated youth, partly in light of mismatch between the skills needed and produced under the existing educational system.[19]The ratio of unemployed is positively correlated to the level of education. In addition, growth has remained anemic resulting in stagnant employment opportunities.  Therefore, it became difficult to maintain the status quo.  With the cost of repression rising, change in the policy framework became necessary so that the rate of economic growth could be accelerated and employment opportunities increased. The cornerstone of such reforms was privatization of the large public sector entities, including banks and manufacturing activities, relaxation of controls on foreign capital, easing of price controls, and allowing market forces to influence determination of important prices such as the exchange rate and interest rates. However, the pace and direction of reforms have varied significantly among these countries.

In many cases, economic reforms may have had unintended negative effects on income distribution. In particular, “economic rent” previously extracted by the public sector and then partially shared with citizens now accrued to the private sector which did not have to share it with workers. In addition, the widespread collusion between the government and the private sector in most of these countries following privatization did not allow the market forces to work efficiently to ensure returns in line with productivity growth.  Much of the collusion centered on restrictions to entry of new competitors, holding wages down by resisting wage increases in the public sector, and private sector support to the political status quo.

It is important to note that the domestic socio-political and religious structure remained broadly unchanged, which highlights the significant role of economic factors in spurring political change. This is not to say that non-economic factors had little role in this process. As noted by Jack Gladstone, non-economic conditions had to be ripe for the worsening economic conditions to tip the balance.[20] The governments in many of the Arab countries had curbed institutions which could have helped resolve economic disputes and facilitated economic well-being for the masses. Similarly, absence of avenues for expressing dissatisfaction with the status quo and trampling of basic human “dignity” by the established autocratic rule compounded public resentment of the  rulers. In addition, the alienation of security forces from the established order appears to have spurred the revolt.

4. Analysis

        The framework developed in Section II above can be drawn upon to determine Arab countries’ evolution toward democratization. As noted in Section II, a persistent and worsening income inequality and resistance to integration with the global economy would encourage violent transition.[21] Similarly, a structure of economy that does not allow operation of efficient markets to optimally price goods and services and factors of production would increase income inequality and discourage an orderly transition to democracy. On the other hand, accumulation of human capital and an expanding middle class, would facilitate an orderly democratization process.

Analysis of developments in the Arab countries is constrained by data constraints. A rigorous application of this framework calls for comprehensive and consistent data on a wide variety of economic and institutional variables, especially on markets, productivity growth, implicit and explicit subsidies, accumulation of human capital, unemployment by skill categories, and policy instruments for affecting resource allocation. Unfortunately, in most Arab countries such detailed data are lacking. Therefore, this paper draws on available proxy indicators to assess developments in income distribution, market effectiveness, and integration with the global economy to draw tentative conclusions. These indicators are summarized in Tables 1-6.[22]

In the absence of consistent series for most Arab countries on the GINI coefficient that measures income inequality, this study uses unemployment rates, rate of inflation and developments in the ratio of minimum wage to income per capita in order to assess income distribution.[23] A higher GINI coefficient and a declining minimum wage/income per capita ratio imply worsening income distribution.[24] Similarly, rising inflation and unemployment result in a transfer of income from the low income to the higher income segment of population.[25] Finally, a high and rising workers’ remittances/GDP ratio would, by supplementing income of workers’ families, suggest an improvement in income distribution.[26]

 Efficiency of markets in allocating resources and optimally pricing goods, services, labor, and capital can be approximated by the share of the private sector in total credit. Moreover, the level and spread between the real lending and deposit interest rates would not only measure the implicit rate of subsidization to the investors and a cost to savers, but also the relative effectiveness of the credit market to allocate financial resources. The smaller the ratio of credit to the private sector to total credit and the larger the interest rates spread, the less efficient the market in allocating resources; thus, generating implicit transfer of income to investors from savers inconsistent with market forces. Similarly, a large excess of lending rate over deposit rate would imply suboptimal returns to savers who are generally small savers. In addition, a higher Doing Business Index, as calculated by the World Bank, would imply higher barriers to entry, thus, perpetuating monopolistic tendencies and inefficient markets, which are inconsistent with appropriate income distribution[27].

The role of government subsidies in affecting market efficiency is more complex. While in the major oil exporting countries, much of the government subsidies are aimed at reducing income inequalities, they tend to have an unintended effect in the oil-importing countries. In the latter countries, the bulk of such subsidies have been aimed at reducing cost of fuel/energy which primarily benefit the more affluent, and thus, worsen income distribution by transferring real income to the relatively rich who are the primary consumers of subsidized products.. However, other things remaining unchanged, the higher the government subsidies relative to Gross Domestic Product (“GDP”), the more inefficient the market. Unfortunately, little information is available on the accumulation of human capital and the development of the middle class, the growth of which is typically associated with a non-violent transition to democracy. The study assumes that rapid economic growth accompanied by improvement in income distribution would reflect an increase in the role of human capital in the growth process.

Finally, this study uses the trade openness index—a ratio of total trade in goods and services (sum of both imports and exports) to GDP— as a proxy to determine integration with the globalized world economy. A high and rising index would imply a positive effect of globalization on returns to the more abundant factor of production—labor in the oil importing Arab countries—leading to better income distribution. It would also imply relative ease in the diversification of financial assets by the elites and foreign direct investment, thus, moderating resistance to democratization.

1. Oil and Gas Exporting Countries

Evidence from major oil producers confirms the significant role of economic factors in political transition. Application of the above methodology to oil and gas exporting countries shows very interesting results. Among the major oil and gas exporting countries, Libya—and to some extent, Algeria—have exhibited conditions for intensified demands for democratization.[28] While economic growth has slowed over the past five years between 2006 and 2010, inflation has picked up and unemployment—though falling—has remained high. Moreover, both countries—especially Libya—have experienced a  significant drop in wage/ per capita GDP ratio which, together with the above developments, implies deterioration in income distribution. However, policy variables as summarized in Table 2 show diverging influences in the two countries: the real interest rate spread has fallen and credit to the private sector has grown in the case of Algeria in contrast with Libya, implying a greater market orientation and falling implicit subsidies to capital in the former country.[29] Such developments appear to point to lower economic dissatisfaction in Algeria relative to Libya. Data on ease of doing business—a proxy for policy toward monopolization—and the influence of globalization are inadequate for any meaningful analysis.

Developments in other major oil exporting countries—Kuwait, Qatar, Saudi Arabia, and the UAE—point to beneficial effects of globalization and market-based allocation of resources. Income distribution has remained manageable and involuntary unemployment minimal (see Table 1). While declining as a share of GDP, government subsidies have been directed primarily at containing any adverse effects on income distribution.

Other oil and gas exporting countries present a mixed picture.. In particular, Bahrain does not meet some of the economic conditions for a violent transition to democracy—notwithstanding the ongoing political turmoil. Growth has remained strong with relatively low inflation, and falling unemployment. However, despite an increase in government subsidies, there has been measurable deterioration in income equality[30] as shown by a relatively high GINI coefficient (36) and an almost halving of the minimum wage/GDP per capita ratio during 2001-08, the latest period for which such data are available (see Table 3). Oman appears to have broadly similar characteristics but seems to have addressed political discontent by adjusting its fiscal policies to respond to demands for equity, thus, easing pressures for democratization. It is also likely that, in contrast to Oman, inter-group inequality in Bahrain (relatively poor Shia majority versus more affluent Sunni minority ruling elite) was reinforced by income inequality, thus heightening demands for democratic reforms.

Yemen meets much of the economic conditions for a violent transition.[31] Economic growth has slowed while inflation has remained high. Unemployment is estimated to have remained high and rising while remittance inflows relative to GDP have contracted sharply. In the process, income distribution has worsened. The large government subsidies, which are mainly for the consumption of fuel, have actually amplified income inequality. In addition, credit to the private sector has fallen and interaction with the global economy has contracted and the domestic economy has exhibited a weakening role of the market. Such developments, in the presence of political discord, would—as it did—encourage violent demands for more democracy as a route to policy reforms. Interestingly, notwithstanding low exposure to the global market and imperfect market conditions, Sudan appears to have—so far—followed policies to avoid a worsening of income distribution.

2. Oil Importing Countries

As summarized in Tables 5 and 6, oil importing Arab countries broadly have similar characteristics.[32] However, Egypt stands out as an important case study. Even though economic growth picked up in the last five years, it was associated with rising inflation, stubbornly high unemployment, and worsening poverty. While the GINI coefficient was moderate at 32 in 2007, the official minimum wage (which serves as a benchmark in the private sector) as percentage of GDP per capita is estimated to have fallen sharply from 60 percent in 1984 to 13 percent in 2007 and to less than 5 percent in 2009![33] This development was associated with a declining workers’ remittances/GDP ratio, and a sharp increase in government subsidies, including for energy, which were implicitly directed toward the middle and upper income groups. At the same time monopolistic allocation of resources appears to have increased, share of the private sector in total credit has fallen, real interest rate spread has increased, and obstacles to starting business (Doing Business Index) has continued to be high. Notwithstanding steps to liberalize the economy, the trade openness index has remained low and broadly unchanged(see Tables 5 and 6). Tunisia exhibits mixed economic indicators implying a significant role of noneconomic factors in the transition process. While inflation remained relatively low, the country was characterized by high and rising unemployment and a declining workers’ remittances/GDP ratio.[34] Income distribution worsened over the decade as implied by a high GINI coefficient of 40 in 2005 and a falling ratio of minimum wages to GDP per capita; budget subsidies, mainly for fuel, also increased and may have exacerbated income inequality. However, exposure to the global economy remained high and increased over the decade. Similarly, the role of the market in resource allocation has remained positive; interest rates and credit allocation have continued to be determined by market forces. Effective deterioration in income distribution and rising unemployment in the absence of strong civil society institutions which could have moderated the rising discontent, , may have precipitated the abrupt  and disorderly demise of the authoritarian rule. High interdependence with the global economy appear to have had a significant effect.

Data for Jordan and Morocco point to economic pressures which could support calls for increased democratization. [35] In both countries, growth has picked up and inflation has been moderate. However, unemployment, though falling, has remained stubbornly high ( see Tables 5 and 6). Even though GINI coefficients are higher than for some other countries in the region, income inequality has been contained. Worker remittances have continued to be high and minimum wages have been adjusted partially in line with the increase in per capita income. The low level of budgetary subsidies also points to smaller implicit bias against the poor. Moreover, the real interest rate spread has fallen somewhat and bank credit has been allocated mainly to the private sector in line with market forces. Finally, the strong linkages to the global economy point to incentives for a gradual and non-violent transition toward greater democratization. It is also noteworthy that Jordan and Morocco have active civil society institutions which, so far, have provided a path for nonviolent political change.

Assessment of the Syrian case is made difficult by inadequate and inconsistent data. While growth has been anemic, inflation has increased. At the same time, workers’ remittances as percent of GDP and minimum wage/per capita GDP ratio are estimated have fallen significantly during the last five years pointing to growing income inequality ( see Tables 5 and 6). Economic policy has been used to discourage competition (note the very high Doing Business Index of 144 in 2010, Table 6) and divert credit allocation toward the public sector while real interest rates have remained negative, pointing to monopoly control and inefficient markets(Tables 5 and 6). These developments, in the absence of civil society institutions needed to absorb discontentment, point to pressures for violent democratic transition as is being witnessed at present.

5.  Conclusions-Lessons Learnt

Economic forces, in addition to socio-political factors, are an important determinant of path toward democratization. Income inequality irrespective of the pace of economic growth, and the inability to correct it, are found by the above analysis to be the most significant factors associated with disorderly transition in the Arab World. The analysis also highlights the role of markets in improving resource allocation and determining prices and, thus, income distribution.  While data deficiency did not allow a more rigorous assessment of globalization, its influence is quite significant in a number of Arab countries, especially the major oil and gas exporters.

 It is evident that most of the Arab countries were not prepared to respond positively to the gathering storm. Quite apart from the inability to gauge the tipping point associated with worsening income distribution and unemployment, the authorities did not have the capacity for a timely change in economic policies to address new challenges. Events in countries such as Egypt and Libya point to the internal inertia against timely policy change. Consequently, economic conditions in many Arab countries have worsened, growth has become negative, uncertainty has increased, and popular discontent has grown, which may have narrowed options for corrective policy action. New governments in the affected countries have taken various hasty measures including increasing subsidies and government spending, while private investment has contracted sharply.  These measures may have sowed seeds for more serious economic difficulties in the medium term which may be more inimical to orderly democratization. Given that these challenges have developed at a time of profound global economic slowdown, it may be even more difficult for the newly emerging democracies to respond effectively.

Economic policy must be changed to allow an orderly democratization with growth and economic stability. What can be done to ensure an orderly transition to democracy and to consolidate it in the Arab countries? Based on the theoretical framework, evidence from the experience of countries elsewhere in the world, and recent developments in the Arab world, it is quite clear that economic policies must (a) aim at growth consistent with improved income distribution ( a la Singapore and Korea);  (b) aim at developing efficient markets to ensure equilibrium prices of goods and services, including wages; (c) minimize the emergence of monopolies and regulate them to ensure that “economic rents” are taxed away; (d) promote the development of human capital and an industrial economic structure; (e) liberalize the external sector which, combined with market-determined exchange and interest rates, would allow growth with equity; (f) reform the educational system to help develop human skills needed for sustaining growth and developing a middle class; and (g) strengthen  implementation of rule of law and protection of property rights. Openness to the global economy would be particularly crucial for the elites to loosen their authoritarian control over resource allocation and ease transition to policy reform.

        Appropriate macroeconomic policies would be crucial. Macroeconomic policies aimed at internal and external stability and ensuring equitable burden-sharing would support an effective implementation of the above policy measures. However, in the present unsettled circumstances in the Arab world, transition to such an ideal scenario would call for a series of policy initiatives over an extended period to establish a solid basis for non-reversible change.

In the period ahead, the democratizing countries should tighten their macroeconomic policies rather than give in to politically expedient measures such as increase in subsidies and government wages to respond to demands for an immediate correction of income inequality. Any such attempt would, in the absence of enhanced domestic revenue mobilization, increase the budget deficit, accelerate inflation, and deepen external imbalances. Such developments would adversely affect growth and reverse any temporary gains in income distribution. External financing of such initiatives, unless over an extended period and linked to the needed domestic reforms, would be counterproductive since it would provide only a short-term respite.

 It would be advisable to mobilize domestic revenues to fund the  correction of income inequity while distributing the burden of adjustment more evenly. Increased contributions by hitherto under-taxed elites would be beneficial. Over the long run, the emergence of efficient markets to allocate resources and optimally price goods and services would be a pre-condition for sustaining improvement in equity. Above all, prudent macroeconomic policies would help establish an environment in which the more far-reaching reforms as set out above can be implemented.

Finally, it is in the interest of the elites to foster income equality and political power with the majority.. As shown in other countries, growth with equity has led to an orderly and gradual transition to democracy without threatening the economic interests of such groups. A violent shift always leads to catastrophic losses to the elites without a commensurate improvement in the living conditions of the citizens.

BIBLIOGRAPHY.

1. Abdih, Yasser, “ Closing the Jobs Gap”, Finance and Development IMF), June 2011; Vol. 45, No. 2.
2. Acemoglu, Daron, and James A. Robinson (2006), Economic Origins of Dictatorship and Democracy, Cambridge University Press.
3. ----------(2000), “Repression or Democratization”, European Economic Review, Vol.44, PP. 938-63.
4. Adams, Richard, and John Page, “Do International Migration and Remittance Reduce Poverty in Developing Countries”, World Development, Vol. 33, No.10, 2005.
5. Buliu, Alea, and Anne-Marie Gulde, “Inflation and Income Distribution: Further Evidence on Empirical Links”, IMF Working Paper, No. 96, 1995.
6. CIA, Country and World Yearbooks, various issues.
7. Diamond, Larry (2010), “Why are there no Arab Democracies”, Journal of Democracy, Vol.21, No. 1.
8. Dahl, Robert (1971), Ployarchy: Participation and Opposition, Yale University Press, New Haven.
9. Gill, Graeme (2000), The Dynamics of Democratization, Elites, Civil Society, and the Transition Process, St. Martin’s Press, New York.
10. Haggard, Stephen, and Robert Kaufman (1995), The Political Economy of Democratic Transition, Princeton University Press, Princeton.

, Development, Democracy, and Welfare State: Latin America, East Asia, and Eastern Europe, Princeton University Press, 2008.11.IMF, World Economic Outlook, (various issues), Washington DC.12-----, Regional Economic Outlook, Middle East and Central Asia, October 2010, April 2011, Washington DC.

11.  IMF Article IV Consultation Country Reports, 2003, 2007, 2010, 2011; IMF Website.
12. IMF, WORD ECONOMIC OUTLOOK, several annual reports.
13. IMF, Regional Economic Outlook, Middle East and Central Asia, October 2010, April 2011.
14. Lipset, Seymour (1959), Some Social Prerequisites for Democracy: Economic Development and Political Legitimacy”, American Political Science Review, Vol. 53.
15. Moore, Barrington (1966), The Social Origins of Dictatorship and Democracy: Lord and Peasant in the Making of the Modern World, Beacon Press, Boston.
16. Shiller, Robert, “ From Efficient Markets Theory to Behavioral Finance”, The Journal of Economic Perspective, Vol. 17, Winter, 2003.
17. Tarek Masoud, “The Upheavals in Egypt and Tunisia, the Road to( and from) Liberation Square”, Journal of Democracy, July 2011, Vol. 22, No.3.
18. Teo, Kelvin, “The Double Whammy of Inflation and Income Inequality”, Economics, Law, and Public Administration, June 2011.
19. World Bank (2011), World Development Indicators, Washington DC.
20. World Bank (2010, 2011), IFC, Doing Business Index, Washington DC.
21.  
22.  

[31] See Tables 3 and 4.