A de facto “Davos consensus” was the dominant policy paradigm in the pro-West, ostensibly pro-market constellation of Arab states in the past decade. Its salient features were high economic growth, a reliance on offshore credit and FDI, rampant property speculation, the control of privatised assets by a coterie of pro-regime oligarchs, a tolerance for huge income inequalities. Egypt, Morocco and Tunisia were hailed as the new Arab world’s economic tigers in the past decade. Hosni Mubarak’s regime even used its ex IMF/World Bank technocrats and pro-reform agenda to boost its legitimacy in the diplomatic chancelleries of its Western backers. President Ben Ali’s cronies were often joint venture partners of the French corporate elite in Tunisia. Even Colonel Gaddafi’s Libya set up sovereign wealth funds, offered oil concessions to BP, Shell and Total, licensed private banks and took stakes in ENI and Unibanco, the crown jewels of Italian business.
Autocratic regimes desperate for political survival resort to economic populism, not free market reforms and budget discipline. This is the message of Egypt’s Supreme Military Council’s crackdown on the prominent “crony capitalists” of the Mubarak era or the $80 billion fiscal stimulus announced by the princes of the House of Saud. After all, $125 Brent crude oil is a windfall for the oil exporting GCC, Iraq and Algeria but a public finance black hole for Egypt, Jordan, Morocco, Syria, Lebanon, Tunisia and Yemen. Food inflation, endemic youth unemployment and crony capitalism were the lethal cocktail that led to the overthrew of Mubarak and Ben Ali. These macro risks will only be exacerbated by the oil shock.
Economic shocks will define the choices made by Arab rulers. Anwar Sadat’s regime was almost swept from power by street protests due to “IMF bread riots” in the 1970’s, riots that convinced him to fly to Jerusalem, and address the Israeli Knesset in exchange for Uncle Sam’s billions and the Sinai’s gas fields. It is no coincidence that bread has been heavily subsidised since Pharonic times, a policy choice continued by the later Roman, Byzantine, Arab, Mamluk, Ottoman, British and modern military rulers of Egypt. Inflation rates in the Arab world are set to soar once governments engage in deficit spending, subsidise food (Egypt is the world’s largest importer of wheat) and create make believe jobs in bloated bureaucracies for a younger generation empowered by Facebook, Twitter and Al Jazeera satellite television. The conclusion is as depressing as it is obvious. Populism will generate, not end, economic malaise, social unrest, inflation, deficit and joblessness. The Davos consensus will only survive in the fabulously wealthy petrocurrency enclaves of the Gulf, such as UAE and Qatar, where ruling elites can afford the luxury of pro-market capitalism.
The Arab world faces its greatest geopolitical convulsion since the death rattle of the Ottoman empire a century ago. Its impact on Arab economies, banking systems, cross-border trade and FDI will be equally seismic. Joseph Stieglitz’s “oil curse” destroyed Saddam’s Iraq and Gaddafi’s Libya in the past generation but petrodollar wealth is a mixed blessing for all oil exporting states because it concentrates power in governments, not in an embryonic private sector. State capitalism and planned economies are simply no longer formulas for success in the Internet Age, with its networked global economy and unfettered capital markets. Real FDI must create jobs and industrial values, not just add froth to property bubbles or lubricate financial Ponzi schemes.
Sadly, the Arab spring will not midwife an economic renaissance. Privatisation is simply too risky for governments, terrified about street protests and mass youth unemployment. Assad’s Syria, Saleh’s Yemen and Gaddafi’s Libya have shed their pro-market flirtation veneer and reverted to their controlled state DNA. Bahrain’s role as the Arab world’s financial centre is at risk. The Arab spring promises a democratic dawn but its volatile geopolitical spasms will dampen appetites for its financial souks.