Changes may spur Middle East growth if populism set aside

Reuters News
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Posted: Apr 16, 2011 3:25 PM

By Missy Ryan

WASHINGTON (Reuters) - The changes that have swept across the Arab world could usher in a new era of economic growth after years of inequality and joblessness, economists say, if leaders can resist pressure from the very protesters whose rage has reshaped the region.

"The problem is how do you in short run satisfy the economic demands of the people who were in the streets protesting?" said Mohsin Khan, the International Monetary Fund's former director for the Middle East who is now a senior fellow at the Peterson Institute for International Economics.

"My worry in the short run is the return to populist policy, back-tracking and undoing reforms," he said.

Interim leaders in Egypt and Tunisia, where a wave of protests fueled by chronic unemployment and deprivation forced leaders from power, are now grappling with pent-up frustration of millions of people longing for more economic opportunity.

In Syria, Yemen and Bahrain, leaders of political dynasties are facing challenges from their own citizens taking to the streets, while Muammar Gaddafi is seeking to defy an international military campaign and hold on to power in Libya.

Leaders of more affluent, oil-producing nations like Kuwait and Saudi Arabia are seeking to keep a lid on simmering discontent with handouts and new public sector work schemes.

The IMF, in the aftermath of the massive protests that shuttered businesses and scared away tourists, expects more vulnerable non-oil-exporting countries in the Middle East and North Africa to suffer this year, with growth slowing to 2 percent.

Oil-exporting nations are expected to fare better, with average 2011 growth rates seen at 5 percent.

The Fund believes that the political change facing the region's leaders could eventually -- if governance and inequality are addressed -- "actually help them realize their latent potential," said Masood Ahmed, the IMF's Middle East director.

Economists say that would require repairing some of the region's historic handicaps: making it easier for businesses to flourish, improving education systems mismatched with local job markets, shaking up bloated government institutions, and possibly privatizing calcified state enterprises.

"The immediate challenge is to make progress on their social agenda, promote social cohesion, and restore confidence without risking fiscal instability," Ahmed said in a briefing ahead of the IMF and World Bank's annual spring meetings.

JOBS, JOBS, JOBS

But economists fear the region's leaders, both those coming into power and those struggling to hang on to it, might dent prospects for long-term growth if they are tempted to roll back reforms in a bid to stave off perpetual protests.

They warn against further handouts or moves to increase subsidies for food and fuel, expand state payrolls or take other measures they believe would deter investment, damage public finances and erode global economic confidence.

Failure to act could carry its own risks, warned Wael Ghonim, the young Google executive who became a hero of the activist movement in Egypt.

"As an Egyptian I am really concerned that a counter-revolution could happen if people are not able to fulfill their basic needs," Ghonim, 30, told Reuters.

But the international community cannot solve the problem by throwing money at it. "What we really need is investments, improving the legal framework of doing business in Egypt and expertise," he said at a panel. "The solution is not the money."

Perhaps the most daunting challenge for regional leaders will be creating jobs for the millions of unemployed youths.

"They have to have economies that are going to grow 8 percent a year just to sustain unemployment levels," said Molly Williamson, a former senior U.S. diplomat and defense official. "It's sort of an 'Oh, shit' moment for everyone."

Fariborz Ghadar, an expert at the U.S. Center for Strategic and International Studies, said the area stretching from North Africa to Pakistan would have to create at least 8 million jobs a year just to keep joblessness at current levels -- over five times the number of jobs created in the United States in a year.

"That's not going to happen. No matter what regime is in power there is going to be a substantial amount of dissatisfaction" without major outside aid, Ghadar said.

At a time of uncertainty, the clock may be working against the prospects for sustainable growth. "However legitimate the claims and desires for jobs, it takes time," Williamson said.

(Additional reporting by Manuela Badawy in Washington and Shaimaa Fayed in Cairo; editing by Leslie Adler)