Your excellencies, distinguished guests, good morning.
My name is Oliver Cornock and I am Oxford Business Group’s editor for the Middle East region. OBG is a UK based publishing, research and consultancy company, covering 31 countries with 36 publications. I’ve been lucky enough to have spent the vast bulk of my professional life so far in this region, which is also my passion. It is my privilege to oversee our editorial output for this exciting region – in many senses an editor’s dream as there’s rarely, if ever, a day without a decent news story and that has been no truer than in the last year.
I would like to speak to you today about the MENA region from a combined perspective, one which takes into account both political and economic developments, and which hopefully joins up a few of the dots linking the last, excellent, presentation with the next one from our friend at QNB!
Obviously, a great deal has changed in the region in the past 12 months. Indeed, we are currently witnessing an upheaval quite unlike anything previously seen in the Middle East and North Africa. Our prior points of reference – for example, the Free Officer and Ba’athist coups which removed many of the Arab monarchies in the 1950s and 1960s – may have reflected popular sentiment, but were largely top-down transformations involving a small cadre of army officers. They were also spread out over time – from the first in Egypt in 1952 to the last in Libya in 1969 we have a gap of 17 years. It’s also worth considering just how young the Gulf states are, and how far they have come. It was in the 70s that Oman had few paved roads, and the last vestiges of British protectorate were shaken off. Now these countries are in many senses booming and have the capacity to quite literally in some cases bail out banks in western markets that are considered “too big to fail”. But back to the difference between the free officer revolutions of the nationalist period....
By contrast, the “Arab Spring” swept through the region like a bolt of thunder – surprising not just professional analysts, but perhaps most importantly the people of the region themselves. This is the first point I would like to draw your attention to: regardless of the future course of the Arab Spring, and the fate of the new regimes which it has created, the sensation that the MENA region has been suddenly unglued from decades of authoritarian stagnation will continue to reverberate for many years to come. Our proximity to these events should not blind us to their significance: they have transformed the expectations of the people of the region, something which rarely occurs in whichever place or time.
The second point I would like to draw your attention to regards the MENA region itself. For a long time, analysts such as myself have questioned the continued usefulness of grouping such disparate states as Saudi Arabia, Syria, Egypt and Morocco together under the same geopolitical marker. The failure of pan-Arabism in the 1950s and 1960s, and the growing economic and social disparity between the Arab nations of North Africa and the Middle East seemed to counsel a quite different dividing principle – perhaps between the Gulf, the Maghreb and the Levant, with Egypt sitting uncomfortably somewhere between the latter two.
The Arab Spring has clearly demonstrated two things however: on the one hand, the continued use of the MENA region – referring as it does to a broad “Arab world” does remain relevant as a unit of analysis. The cultural contiguity of the Arab world has been a powerful factor in the spread of protest, meaning that events in Tunis can influence those in Sana’a or Damascus just as easily as they did those in (the much geographically closer) cities of Benghazi and Cairo. Similarly the universal language of Arabic combined with the universality of Facebook, Twitter and the other social networking mechanisms have meant that the momentum of protest remains faster than ever before.
On the other hand however, the Arab Spring has also demonstrated that we must be cautious in extending the usefulness of MENA beyond this cultural level. The quite different trajectories of protest we have seen in countries such as Libya, Syria, Yemen and Bahrain, coupled with the relative absence of protest in countries such as Saudi Arabia and Algeria, remind us that at the socio-economic level these are highly diverse nations. This growing diversity at the socio-economic level will be a key theme in my speech today.
Before going too much further into the diversity of the MENA region however, I should draw your attention to one final area where the countries of the Middle East and North Africa are closer to each other than they are to the rest of the world.
As we can see from this data gathered by the International Labour Organisation, the Middle East and North Africa (measured separately) share highly similar characteristics when it comes to youth participation in the labour market. In 2010, only 36% of young people in the Middle East, and 38% of young people in North Africa, participated in the labour force. This compares with a global average of 51%. Needless to say, the MENA figures placed this region at the bottom of the global table for youth participation in the workforce.
Figures for female participation are even further behind: less than one quarter of young women participate in the labour market in the MENA region, twenty percentage points lower than the global average.
Obviously, those looking for a demographic explanation of the Arab Spring need search no further. But the question which interests us today is, precisely why has the MENA region become so bad at finding work for its young?
A combination of factors are in fact responsible – and not all of them apply to each case. A partial explanation – but I must emphasise only partial – has to do with the broad demographic trends experienced within the region over the past thirty years. The legacy of relatively high population growth (a trend which in most cases has since abated) means that a number of MENA countries continue to experience labour market growth of around 3% a year. Hence, creating sufficient new jobs suggests minimum baseline growth of the same amount is required. Whereas in Europe and North America such growth was possible during the baby boom generation – prompting the so-called “economic miracles” of the 1960s – the sclerotic economic irredentism of many MENA economies was simply unable to keep pace. Liberalisation was too often seen as a threat to vested interests – a part of the problem, rather than the solution. Some have attributed this to the developing, inherently but understandably immature nature of the markets themselves. An example might be the family holdings company model of the Gulf, where the first generation have been in many cases reluctant to make significant structural changes.
Even where liberalisation was practiced – for example, during Sadat’s infitah in Egypt during the 1980s – too often the benefits of liberalisation were captured by a narrow elite. In fact, many economies continued to pull in both directions at the same time: liberalising in some areas, protecting in others. A fine example is a story I heard in Syria a couple of years ago: a private sector company supplied bottle tops to Syria’s four state-owned water bottling companies. It employed 18 people. The state decided to turn the sector into a public monopoly. It built a new factory with the same capacity as the private company. It now employs 270 people – a productivity decrease of around 1500%.
This Janus-faced approach to liberalisation was by no means universal. But – perhaps ironically, perhaps not – it is the regime which most embraced liberalisation which was the first to tumble. Zine Al Abidine Ben Ali’s government in Tunisia was the first country in the southern Mediterranean to enter into the EU’s free trade area (on January 1st 2008). While by no means a textbook case of free market reform, the Tunisian government nonetheless combined political repression with a keen eye for building a niche for Tunisia in the global economy: major investments were focussed in communications and information technology, free zones and technopoles were constructed, and Western corporations were encouraged to off-shore in Tunis and its surrounding environs.
At their peak in 2006, FDI inflows to Tunisia reached $330 per capita – compared with only $39 a decade earlier.
A great deal of this money flowing into economies such as Tunisia came not from the US or Europe, but from elsewhere in the MENA region. The second half of the last decade witnessed a fascinating trend, whereby Gulf oil economies – rather than investing in Western blue chips – instead sought higher returns through investing in their Arab neighbours. In some cases these investments intended to produce new business and financial clusters, which would hopefully result in jobs and economic growth; in most however, the preference was for unproductive luxury residential complexes.
While many of these investments proved illusory – failing to survive the crises of the global economic downturn – in many cases they nonetheless sharpened the domestic contrast between the haves and have-nots. Such developments were a very visual reminder of a highly unequal encounter with globalisation – one that seemed to be leaving millions in continued poverty, lacking the proper skills and prospects to integrate into the modern global economy, and with only a very thin elite benefitting.
After political liberties, distributing the benefits of globalisation more equitably seems to be the prevailing concern of the Arab Spring. The focus in Tunisia and Egypt on investigating the corruption of the previous regime demonstrates this clearly. A more subtle indication of the transformation though can be found in the changes which have taken place even in relatively “unaffected” societies, such as Saudi Arabia.
In recent years the Saudi government has invested billions of dollars in counter-cyclical fiscal stimulus – the target announced in 2009 was $400bn over five years. Until recently, the focus of this investment has been almost exclusively on infrastructure: on the one hand, the Kingdom is attempting to make up for lost time given its poor record of capital investment during the 1990s; on the other, however, the economic philosophy of the government also changed dramatically during the last decade. The public sector was no longer seen as the best mechanism for providing employment and security for Saudi citizens – in the long term, the demands on public resources would have grown too high.
Instead, a huge amount of effort was put into generating private sector growth, as well as increasing the number of (supposedly) highly skilled Saudi graduates. The hope was that the two trends would match up: skilled jobs would be created, and skilled Saudi youth would fill them.
Recent statistics however have demonstrated that the nature of the Saudi economy has not favoured such an outcome.
A tremendous number of jobs have indeed been created in the Saudi private sector in recent years – some 675,000 in 2009 alone. In the same year however the Saudi share of private sector employment actually fell, from 13.3% to 9.9%, while total Saudi unemployment rose from 9.8% to 10.5%.
A paradox, yes, but an easily explainable one. In the same year, close to one million work visas for foreigners were issued, double the number granted in 2005. In economic terms, the phenomenon can be explained by the discrepancy between public sector and private sector wages in the Kingdom, resulting in large swathes of the private sector that are not economically viable for Saudi nationals.
However, such an explanation fails to adequately describe the scale of the problem faced by a government such as Saudi Arabia’s: if it wishes to maintain living standards, it must keep an open border policy, and thus condemn itself to spending billions in stimulus without any decline in domestic unemployment. If it wishes to increase employment however, it must introduce a rigid visa regime, thus leading to a surge in inflationary pressures and a decline in living standards.
Thus far the Saudi solution has been primarily to address cosmetic factors, while leaving deep structural problems as they are. Two Royal Decrees issued earlier this year saw a massive surge in direct redistribution worth $130bn to prevent a deterioration in living standards, while the Ministry of Labour is introducing a new labour nationalisation policy called “Nitaqat”, which will introduce minimum quotas for Saudi employees to the private sector. Both policies will store up problems for the future: budgetary redistribution, once begun, is notoriously difficult to roll back, while government schemes to nationalise the workforce tend to result in a significant long-term decline in productivity and global competitiveness.
This brief outline of the Saudi case brings me back to my principle theme regarding the growing socio-economic diversity of the MENA region. In a sense, providing work for the young is the key policy challenge which every MENA government is facing. However, both the nature of individual regimes and the resources available to them has created a sort of path-dependency, which is seeing their solutions to this common problem resulting in quite different modes of incorporation into the global economy. If I can, I would like to conclude by briefly tracing the contours of these different modes, or “paths”, of incorporation, and what kind of a region we may expect to see a decade or so from now.
First of all, there is likely to be a key divide between small, “nimble” states and their more cumbersome neighbours. In some respects, this divide may become more important than the former divide between those with and without oil. In this “nimble” category we might place Tunisia and Jordan, the UAE, Qatar, Lebanon and Oman, and perhaps also Morocco and Kuwait. These states will avoid falling into a mode of incorporation that emphasises too much the role of import-driven consumption ahead of viable domestic growth.
They will specialise in different roles: Tunisia and Morocco as off-shoring hubs for Europe (in particular France), with continuing demand for tourism and a growing incorporation into European supply lines (both in terms of industrial goods and information technology). Jordan stands to play a similar off-shoring role to the Anglosphere, as well as the Gulf, while the smaller Gulf States mentioned will continue to see their roles as trade and aviation hubs expand, alongside their long-standing importance as sources of energy – in this regard, only Kuwait seems to be lagging in terms of diversification.
The more interesting question will be what happens to the other, larger States. They include Algeria, Egypt, Syria and Saudi Arabia. In the case of Saudi Arabia and Algeria, the State maintains for now the capacity to “buy off” structural pressures; however, the very act of “buying off” takes those nations’ economies down increasingly inefficient routes, and locks them into modes of global economic incorporation increasingly defined by the export of raw goods and primary inputs, and the import and consumption of finished goods.
By contrast, Egypt and Syria no longer maintain the capacity to “buy off” domestic structural pressures. Straddling as they do the divide between a North Africa increasingly incorporated into the European economy and an Arab Gulf increasingly emerging as a trade and energy hub between Europe and Asia, Egypt and Syria risk slipping through the cracks. Not only are they the most urgent cases for reform, they are arguably in most need of assistance to implement that reform.
To conclude, it is perhaps time that the EU in particular took a moment to look beyond its internal problems, and consider instead the outcome for the wider region should these two States – pivotal in geopolitical terms – be allowed to fail. While it is perhaps too much to expect the equivalent of a Marshall Plan in these troubled times, it nonetheless remains in all our interests to ensure a peaceful, prosperous MENA region – a true Arab Spring will require not only political freedom, but job-creating economic growth.