Transition experiences of Europe and CIS: an overview and opportunities for cross-regional sharing with the Arab States

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1 Dr. Marek Dabrowski 1, CASE Fellow, CASE Center for Social and Economic Research, 61 Jana Pawla II Ave., WARSAW/ POLAND tel.: , fax: Transition experiences of Europe and CIS: an overview and opportunities for cross-regional sharing with the Arab States Background paper commissioned by UNDP for the Special Session: Cross-regional Knowledge and Experiences Sharing between Europe and the Arab States held during the First Arab States South-South Development Expo February 20, 2014, Doha, Qatar Warsaw, January - February 2014 The views expressed in this paper are those of the author and do not necessarily reflect the views of the United Nations Development Programme. 1 Marek Dabrowski is a CASE Fellow and former President of CASE. Since the late 1980s, he has been involved in policy advising and research in Central and Eastern Europe, Central Asia, Africa, and the Middle East, and international research projects on monetary and fiscal policies, currency crises, international financial architecture, EU and EMU enlargement, European integration, European Neighborhood Policy and the political economy of transition.

2 Table of contents List of tables and figures 2 1 Introduction 3 2 Political transition Legacy of dictatorship Mixed results of political transition in CEE/CIS Arab Spring Comparison of political systems in CEE/CIS and Arab countries The role of civil society in political transition 8 3 Economic transition Comparing Arab socialism and Soviet-type socialism Differing economic agendas Deterioration of economic situation since The subsidy challenge 17 4 Long-term developmental challenges Common challenges Challenges specific to Arab countries 20 5 Lessons to be learned 23 References 25 List of tables and figures Table 2.1: FH Freedom in the World scores, 2014, CEE/CIS and Arab countries 7 Table 2.2: FH Nations in Transit Civil Society scores, Table 3.1: Basic macroeconomic indicators in selected Arab countries, Table 3.2: Total reserves in selected Arab countries, SDR million, end of period, Figure 3.1: Pre-tax energy subsidies and spending on education in MENA countries, in % of GDP 17 Table 4.1: HF Index of Economic Freedom 2014 in CEE/CIS and Arab countries 19 Figure 4.1: GDP per capita in PPP terms, current international dollars, Table 4.2: Literacy rates in Arab countries, compared to worst-performing post-communist country (Albania), in % of respective population group 21 Table 4.3: Indicators of Gender Inequality in selected Arab countries 22

3 1 Introduction More than three years have passed since the start of the political uprising against the authoritarian regimes in the Arab world called the Arab Spring. The protest movement started in Tunisia in December 2010 and then spread to Egypt, Yemen, Bahrain, Libya and Syria. Indirectly, it affected other countries in the region, most of which had to accelerate domestic political reforms to avoid political destabilization. The entire region has been also affected by the negative consequences of civil wars in Syria and Libya. Unfortunately, collapse of the previous autocratic regimes has not led to establishing viable democratic regimes able to ensure elementary political stability and responsible economic management yet. On the contrary, most of countries directly affected by the Arab Spring have suffered from domestic political, economic and social instability and insecurity. Tunisia is perhaps the only exception sustaining relative political stability and democratic form of government which has started to implement the economic reform program supported by the IMF Stand-by loan in June On January 26, 2014, the National Assembly approved the new constitution (Al Jazeera, 2014) which gives Tunisia chance to complete its political transition from dictatorship to liberal democracy. Situation in other countries is much worse: Egypt, Libya, Yemen and Iraq (which started its political transition already in 2003) continue struggling with domestic political instability, deep splits of their societies along sectarian, regional, ideological and cultural lines, and tribal insurrections. All these developments have negative impact on current business activity, investment, and incoming tourism. Syria experiences the third year of bloody civil war with no prospects of fast resolution. The country is in fact territorially divided between pro-government forces and rebels of various ideological and political profiles. Negative economic and political consequences of this conflict, for example, large number of refugees, blocked transit routes, declining tourism and FDI flows, have affected neighboring countries, in particular, Lebanon, Jordan and Turkey (IMF, 2013, Box 2.1, pp ). Similarly, civil war in Libya in 2011 and following domestic instability negatively affected neighboring Tunisia and Egypt through a large flow of refugees and returning migrant workers. Overall, three years after the beginning of Arab Spring the process of political and economic transition is far from being completed with the negative consequences for the entire region. In this context the question on how to manage successfully such complex transition and which kind of experience of other regions can be useful for Arab countries remains actual and of high importance. At the onset of Arab Spring many experts pointed to its similarities with post-communist transition of the early 1990s (e.g., Basora, 2011). Some advised the new Arab governments to learn directly from this experience. In particular, the governments and emerging aid industry in Central and Eastern Europe (CEE) believed in relevance of their transition related experience for emerging Arab democracies 2. Others expressed more nuanced opinions 2 See Mikulova & Berti (2013) for an interesting overview of CEE advisory and experience-sharing effort.

4 presenting both similarities and differences between post-communist transition and the Arab Spring (Meyersson, Olofsgard & Roine, 2011; Slay, 2011; Dabrowski, 2012; Rohac, 2012). At the beginning of 2014 there is no longer doubt that geopolitical and socio-economic context of the Arab revolution appeared to be different, in many respects, from that of former Soviet bloc countries more than twenty years ago. Thus relevance of post-communist transition for Arab countries and reform advice based on that experience can be only partial. Perhaps experience of other emerging market economies in their transition to democracy and market oriented reforms can be of equal or even higher value. Nevertheless, learning from others experience (both positive and negative), including that of CEE and CIS 3 region may be a useful exercise especially if the differences between regions are not forgotten. One cannot also exclude sharing experience in the opposite direction. The three-year history of the Arab Spring, sometimes very dramatic, may serve as a good lesson for those postcommunist countries which have not completed their transition to democracy yet, find difficulties in building domestic political consensus, suffer from unresolved ethnic, sectarian and territorial conflicts, inability to pursue responsible economic policies, etc. The purpose of this paper is to analyze major similarities and differences of political and socio-economic transition in both regions and suggest areas of cross-regional experience sharing. The paper is structured as follows: Section 2 discusses the process of political transition, including the role of civil society, followed by Section 3 on economic transition and Section 4 on long-term development challenges. Section 5 presents major lessons from post-communist transitions which can be useful for Arab countries. In geographical terms our analysis covers 29 post-communist countries of CEE/CIS region and 22 member countries of the Arab League. The statistical data are drawn from IMF, World Bank, other international databases and rankings or results of other research projects. 3 CIS stands for the Commonwealth of Independent States, the regional cooperation block created after the collapse of the former USSR in December Currently it consists of 11 post-soviet countries: Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. Georgia belonged to the CIS between 1993 and However, for analytical convenience and because of its geographic location in the Southern Caucasus region and historical legacy as part of the former USSR it is considered as part of the CIS region.

5 2 Political transition 2.1 Legacy of dictatorship From the historical perspective, the similarities between Arab countries before the Arab Spring and former communist countries before 1989 seem compelling. The hegemony of one political party controlled by a dictator or ruler and his entourage meant a lack of democracy and political pluralism, manipulated election processes, the political dependence of the judiciary, the excessive power of the army, security agencies and police, censorship and tight administrative control of grass-roots citizen initiatives, massive violations of human rights and the organized repression of certain social, political, ethnic or sectarian groups. However, similar characteristics have also been seen, to varying degrees, in many authoritarian regimes outside the former communist bloc and outside the Arab region in Asia, Africa and Latin America. In this respect neither the communist system nor Arab authoritarian regimes were unique. Nevertheless when political transition started countries and societies in both regions have to deal with similar legacies of authoritarianism such as complete lack of tradition or very distant memories of democratic government, absence of institutions of liberal democracy and effective legal guarantees of civil rights and liberties, systemic checks and balances between branches of government (including independent judiciary), rule of law, culture of free speech, democratic public discourse, tolerance for ethnic, religious, sexual and other minorities, etc. All these components of contemporary regimes of liberal democracy had to be built from the scratch, often drawing from other countries experience and importing their institutions. In this effort CEE countries (including Baltic ones) found themselves in the privileged position because (i) they possessed relatively fresh historical and institutional memories of the rule of law, political pluralism and some other elements of liberal democracy (dated back to the interwar or even early post-war World II period), (ii) their geographical and cultural ties with Western Europe were relatively close, (ii) they became eligible to apply for membership in the European Union (EU) and the North Atlantic Treaty Organization (NATO), both setting high membership criteria in respect to civil rights and liberties and democratic institutions 4. CIS countries found themselves in less privileged position (especially Central Asia) but still they can, at least partly, refer to some modern (i.e. post-feudal) political and legal institutions of the Russian empire (before the Bolshevik revolution), contemporary democratic institutions in other European countries, and draw from institutional standards offered them by the Council of Europe and Organization for Security and Cooperation in Europe (OSCE). Arab countries cannot rely on even such weak historical and external anchors. Most of them inherited historical and institutional legacy of the Ottoman Empire and, in some cases, were influenced by the institutions of colonial powers (example of French cultural and, partly, institutional influence in the Maghreb countries). The latter, for obvious reasons, have limited appeal to Arab societies. 4 Among others, NATO accession requires prior resolution of territorial disputes with neighbors and ethnic conflicts and ensuring the effective civilian control over armed forces (see Section 2.4).

6 2.2 Mixed results of political transition in CEE/CIS Looking at the potential lessons of post-communist political transition for the Arab region one must start from the pessimistic observation that the former proved only partly successful. Among 29 countries of CEE and CIS one can distinguish three groups depending on results of political transition (Dabrowski, 2013): 1. countries of which democratized their political systems in the early 1990s and sustained democratic regime until now; this group includes countries that joined the EU in 2004 and 2007; 2. countries of the Western Balkan region which recorded limited progress in democratization in the 1990s but substantially improved their performance in the next decade after resolving ethnic and territorial conflicts and overthrowing authoritarian or semi-authoritarian regimes; here the prospects of joining the EU also played a mobilizing role; 3. most of CIS countries which, after the short period of political freedom and democracy in the early 1990s, moved back towards authoritarian or semi-authoritarian regimes. In the third group one could notice several spontaneous social protests against authoritarian or semi-authoritarian regimes: the Rose Revolution in Georgia in 2003, Orange Revolution in Ukraine in 2004 and Tulip Revolution in Kyrgyzstan in However, the results of these revolutions became largely mismanaged by post-revolutionary political elites, perhaps with exception of Georgia which seemed to accomplish some sustainable although limited progress on its way to liberal democracy. The social disappointment and renewed authoritarian trends led to the new revolutions in Kyrgyzstan (2011) and Ukraine ( ). On several occasions, anti-authoritarian protests have also been noticed in Belarus, Russia ( ), Armenia and Azerbaijan but never gained the sufficient critical mass to guarantee democratic changes. 2.3 Arab Spring The wave of revolutionary movements in the Arab world was initiated by the mass protests against the regime of the President Zine El Abidine Ben Ali in Tunisia in December Then it quickly spread to other Arab countries: Egypt, Yemen, Bahrain, Libya, and Syria. The Arab Spring has affected mostly the secular republican regimes that emerged in the 1950s and 1960s, as a result of either military coups or anti-colonial resistance; those that tried to refer, at least in their early stages, to some kind of socialist ideology (sometimes termed Arab socialism). This political characteristic applied to Egypt, Libya, Yemen, Tunisia, Syria and Iraq (where regime change followed the US-led military intervention of 2003), Sudan and Algeria (both have not been affected by large-scale political unrest as of yet) 5. To much lesser degree, the Arab Spring has affected so far the Arab monarchies. Most of them have followed conservative ideologies and policies. Among them, only Bahrain, Jordan, Morocco and Kuwait experienced social protests in In Bahrain, the protest movement (called the Pearl Revolution) was pacified by the government with the support of 5 One must remember, however, that Algeria experienced unsuccessful attempt of democratization in early 1990s followed by almost decade-long civil war see e.g. Martinez & Entelis (2000).

7 Saudi troops. In Jordan, Morocco and Kuwait it led to changes in government and partial political reforms (or promise of them). Three years after beginning of the Arab Spring the situation falls short of revolutionary expectations. Although protest movements and popular appraisals overthrew former authoritarian rulers in Tunisia, Egypt, Yemen and Libya only Tunisia seems to have chance to build stable democratic regime in a near future. In Libya the new government although more democratic and liberal as compared to the Kaddafi regime continuous to struggle with various guerilla groups which challenge country s territorial unity and manageability. In Yemen and Egypt one can observe reinstating military-backed authoritarian regimes with new rulers. 2.4 Comparison of political systems in CEE/CIS and Arab countries To assess progress in political reforms in both regions (CEE/CIS and the Arab countries) we use the Freedom House (FH) rating Freedom in the World (FIW) (Table 2.1). Each country in this rating is evaluated by two criteria: political rights (PR), and civil liberties (CL), both measured on the scale of 1-7, with 1 representing the highest degree of freedom and 7 - the lowest. Table 2.1: FH Freedom in the World scores, 2014, CEE/CIS and Arab countries CEE/CIS PR CL Status Change Arab countries PR CL Status Change Albania 3 3 PF Algeria 6 5 NF Armenia 5 4 PF Bahrain 6 6 NF Azerbaijan 6 6 NF Comoros 3 4 PF Belarus 7 6 NF Djibouti 6 5 NF Bosnia & Herzegovina 3 3 PF Egypt 6 5 NF Bulgaria 2 2 F Iraq 5 6 NF Croatia 1 2 F Jordan 6 5 NF Czech Republic 1 1 F Kuwait 5 5 PF Estonia 1 1 F Lebanon 5 4 PF Georgia 3 3 PF Libya 4 5 PF Hungary 1 2 F Mauritania 6 5 NF Kazakhstan 6 5 NF Morocco 5 4 PF Kosovo 5 4 PF Oman 6 5 NF Kyrgyzstan 5 5 PF Qatar 6 5 NF Latvia 2 2 F Saudi Arabia 7 7 NF Lithuania 1 1 F Somalia 7 7 NF Macedonia 3 3 PF Sudan 7 7 NF Moldova 3 3 PF Syria 7 7 NF Montenegro 3 2 F Tunisia 3 3 PF Poland 1 1 F UAE 6 6 NF Romania 2 2 F Yemen 6 6 NF Russia 6 5 NF Gaza Strip 7 6 NF Serbia 2 2 F West Bank 6 5 NF Slovakia 1 1 F Slovenia 1 1 F Tajikistan 6 6 NF Turkmenistan 7 7 NF Ukraine 4 3 PF Uzbekistan 7 7 NF Notes: NF non-free, PF partly free, F free, - deterioration, - improvement Source: %20Countries%20and%20Territories.pdf

8 The picture which arises is gloomy for the Arab region and only partly positive for the CEE/ CIS region. There is no politically free Arab country. Only few of them are ranked as partly free (Comoros, Kuwait, Lebanon, Libya, Morocco and Tunisia). The FH FIW ranking reports several deteriorations, including Arab Spring affected Bahrain and Egypt (in the latter most of 2011 political freedom gains were reversed in 2013). In the CEE/CIS region situation is highly polarized with three subgroups of countries as analyzed above. In CIS the negative trend continues with downgrades of Azerbaijan, Kazakhstan and Ukraine in the 2014 ranking. Two CIS countries (Turkmenistan and Uzbekistan) and four Arab countries (Saudi Arabia, Somalia, Sudan and Syria) are rated as the Worst of the Worst with the lowest possible ranking (7) in both PR and CL categories. An important observation relates to the form of political regime. All CEE countries which record sustainable progress in building liberal democracy represent either parliamentary or parliamentary-presidential form of government. The same concerns those countries from the CIS region which avoided full-scale authoritarian trap (Moldova, Georgia, Kyrgyzstan). Interestingly, after the Orange Revolution in 2004 Ukraine moved from the presidential to parliamentary-presidential regime and the new authoritarian trend after the 2010 presidential election was associated with reversal of this constitutional change. Looking outside the CIS/CEE region, experience of several Latin American, Asian and African countries confirms that presidential form of government is prone to authoritarian degeneration especially in the environment of weak legal institutions and civil society. In this context, the choice of the parliamentary-presidential regime in the new Tunisian constitution approved on January 26, 2014 may be seen as the promising sign for building a sustainable democracy in this country. And one of basic political recommendation for both Arab and CIS countries should be developing parliamentary form of government based on a strong system of constitutional checks and balances. Another conclusion concerns ensuring the effective civilian control over army and security agencies by the democratically elected government and parliament. Achieving such goal often requires deep reorganization of both, redefining their constitutional and legal mandate, and sometimes their downsizing. The challenge of excessive political and economic power of the military and security forces and institutions is faced by several CIS and Arab countries, for example, Russia, Egypt, Syria, Algeria and Yemen. Besides both analyzed regions this was or still is a serious problem in many Latin American, African and Asian countries. 2.5 The role of civil society in political transition The concept of civil society has various practical meanings and is not easy to define. For purpose of our analysis we use the following Dictionary.com's 21st Century Lexicon definition: the aggregate of non-governmental organizations and institutions that manifest interests and will of citizens; individuals and organizations in a society which are independent of the government (Civil society, n.d.). If one interprets the above definition in a flexible way, i.e., by including various spontaneous non-governmental movements, initiatives and organizations (not necessarily legalized in a given country) it becomes clear that civil society played an enormous role in triggering

9 democratic changes in CEE and CIS in (especially in Poland, Hungary, former Czechoslovakia, Bulgaria, Romania, Baltic countries, Russia, Southern Caucasus countries, Moldova) and after (Serbia in 2000, Georgia in 2003, Ukraine in 2004 and 2013/2014, Kyrgyzstan in 2005 and 2011). The same happened in case of the Arab Spring in and concerned Tunisia, Egypt, Yemen, Bahrain, Libya, Syria and, to a lesser extent, Morocco and Jordan. Table 2.2: FH Nations in Transit Civil Society scores, Source: However, going beyond revolutionary periods, civil society organizations (CSO) need a respective political, legal and economic environment to be able to develop themselves in a sustainable manner and contribute to society wellbeing. Not surprisingly, the environment for

10 civil society activeness and development is closely correlated with the degree of political and economic freedoms (see Sections 2.4 and 4.1 respectively). Measurement of civil society development and assessment of its constraints is another tricky task, especially in cross-country comparative context. These difficulties result from above mentioned conceptual and definition ambiguities, methodological problems to quantify any qualitative social and institutional phenomena (common to most cross-country comparative rankings of this type) and scarcity of research on civil society. Being aware of the mentioned constraints one can use the existing, usually imperfect and incomplete analyzes, which largely refer to political and institutional environment of CSO activity in individual countries (and less so to its actual size and accomplishments). Table 2.2 presents FH Nations in Transit (NIT) scores on civil society in CEE and CIS region based on a scale of 1 to 7, with 1 representing the highest level of civil society progress and 7 - the lowest. The rating for a given year reflects the situation in the previous year (i.e., 2013 scores illustrate situation in 2012, etc.). Similarly to the FH FIW scores (Section 2.4) one can observe a strong polarization within the CEE/CIS region. The new member states of the EU represent the best scores (between 1.50 and 2.50) although with certain deterioration since 2007 in case of Hungary, Slovakia, Slovenia, Romania, Czech Republic, Poland and Lithuania. On the other hand, Bulgaria, Croatia, Estonia and Latvia noted some improvements. Serbia with the score of 2.25 and notable improvement since 2010 belongs to the same group in spite of being the EU candidate only. The next intermediate group consists of remaining countries of Western Balkans and four CIS countries (Ukraine, Moldova, Georgia and Armenia) with scores between 2.75 and Some countries recorded recent improvements (Albania, Bosnia, Moldova and Montenegro) while other - deteriorations (Armenia, Georgia and Kosovo). The remaining eight CIS countries represent very poor scores, some of them (Turkmenistan, Uzbekistan, Belarus, Kazakhstan and Tajikistan) close to the end of the ranking scale (between 6.25 and 7.00). Furthermore, Azerbaijan, Belarus, Kazakhstan, Russia and Tajikistan record the downward trend in this ranking. There is no a comparable recent analysis of civil society development and its political and legal environment in Arab countries. Another regular FH analysis Countries at the Crossroads 2012 includes only seven Arab countries and no CEE/CIS country to compare (Tucker, 2012). One of the ranking subcategories Civic engagement and monitoring can be considered as the proxy of civil society role. It is measured on a scale from 0 to 7 with 0 meaning no civil engagement and monitoring and 7 its highest level. Among Arab countries ranked only Tunisia represents a high score of 6.00 followed by Lebanon (5.00). Others represent poorer performance: Yemen (3.67), Egypt and Jordan (2.00), Bahrain (1.33) and Saudi Arabia (1.00). According to CIVICUS analysis of civil society restrictions (Tiwana, Hodenfield & Pegus, 2013) several threats and negative developments were recorded between January 2012 and October 2013 in both analyzed regions (CEE/CIS and Arab countries). Algeria, Azerbaijan, Egypt and Russia adopted the additional legal restrictions in respect to CSO. They concerned,

11 among others, access to foreign funding, for example, the infamous law on foreign agents in Russia. The CIVICUS analysis also reports practices of CSO administrative closures in Sudan, Tajikistan and Yemen, imprisonment of civil society activists in Azerbaijan, Bahrain, Saudi Arabia and Uzbekistan and various forms of repressions for CSO cooperation with UN agencies in Bahrain, Oman, Russia, Syria and United Arab Emirates (UAE). Overall, most of CIS and Arab countries require a fundamental improvement in their political and legal environment of civil society activity. The experience of the EU new member states and some of the EU candidates may serve as positive example to follow. However, the latter must also make an effort to remove remaining shortcomings of their legal environment and stop negative trends observed in recent years in some countries.

12 3 Economic transition 3.1 Comparing Arab socialism and Soviet-type socialism The unique features of Soviet-type socialism related mostly to its socio-economic model: the dominance of politics and ideology over economic rules, far-reaching centralization of all key business decisions at government level (the central planning system or command economy), the monopoly or predominance of public ownership of productive assets, political nominations for managerial positions, administrative pricing and wage setting (which led to chronic market shortages, rationing of both consumer goods and production supplies and often to shortage of labor resources), currency non-convertibility and multiple exchange rates, public monopoly in foreign trade, government-driven investment processes based on a country s self-sufficiency (autarchy) principle, socially motivated full-employment and income-equalization policies (which did not necessarily produce actual income equality), the heavy burden of military and security spending and the subordination of the economy to military and security goals. When we consider the experience of so-called Arab socialism, especially in its early stages (from the 1950s to 1970s), we may see analogies to the Soviet model. Some Arab countries tried to emulate the Soviet experience of central planning, especially with respect to investment processes driven by political considerations and import-substitution industrialization strategies. In particular, oil-producing countries such as Algeria, Libya, Iraq, and, to a lesser extent, Syria, had the financial capacity to pursue such policies (the political, military and economic support from the Soviet bloc also played an important role here). Several countries, especially those involved in regional or internal conflicts, allocated a large share of their public expenditure to military and security programs. Price controls and large-scale subsidies, especially with respect to basic food and energy products, have also been a common feature. The same concerns currency non-convertibility and trade protectionism. The importance of public ownership in many Arab countries grew quite rapidly out of both outright nationalization (especially of foreign-owned firms) and government investment programs. And, as in communist countries, state-owned enterprises remained ineffective, overburdened by social employment and managed by political nominees, many of whom were recruited from among retired military and security officers. Again, the presence of oil wealth created more financial leeway for such policies. Nevertheless, nationalization policies never went as far as they did in the countries of the former Soviet bloc. The major sectors of the Arab economies, such as agriculture, trade, services, and small and medium size manufacturing remained largely in private hands, even in the most socialist countries. Private ownership was never ideologically condemned and market institutions and legal infrastructure, even if less well developed, remained largely in place, contrary to the practice in communist countries. In spite of price controls, subsidies, and exchange and import controls, the internal price structure remained less distorted than, for example, in the former USSR, and the market shortage of basic consumer goods less acute. Similarly, in spite of industrialization driven

13 by import-substitution and trade protectionism, the Arab economies largely avoided the massive structural distortions (and artificial over-industrialization) that characterized the Soviet Union and Eastern Europe. The same goes for the stronger trade and cultural ties with the Western world. Furthermore, since the early 1980s (Egypt) and 1990s (Algeria and Tunisia), individual countries started, at least partially, to depart from administrative dirigisme in the economic sphere, usually with the active engagement of the IMF and World Bank. This process was driven both by external factors (fall of oil prices in mid-1980s, the collapse of the Soviet bloc, economic reforms in China, India and other developing countries) and domestic policy needs (combating macroeconomic instability and the desire to avoid political unrest). In the decade of the 2000s, even the most closed and statist countries, such as Libya and Syria, started to conduct more flexible economic policies and limited market reforms (Dabrowski & De Wulf, 2013). However, these reforms, due to their limited agenda and rather slow pace of implementation, failed to produce the expected results. Economic growth, in particular, in per capita terms continued to be disappointing in 1990s only slightly accelerating in 2000s on the top of high commodity prices and global emerging-market boom. Unemployment especially of youths remained high, the same concerned income and wealth inequalities (Dabrowski & De Wulf, 2013). Lack of democratic control and government transparency could not help in conducting fair privatization or effective measures against corruption and nepotism. As result the limited economic liberalization and privatization agendas were captured by powerful politicalmilitary-business groups which distorted them in their favor (the phenomenon of crony capitalism). This produced the fertile ground for social frustration and disappointment which eventually led to the Arab Spring. 3.2 Differing economic agendas Since the economic legacies of the Arab and Soviet-type socialisms are different, Arab countries cannot simply copy the experience of the post-communist transition of the early 1990s. True, some economic problems appear similar, at least at first glance. For example, most Arab economies need to eliminate direct and indirect subsidies to domestic food and energy products in order to reduce excessive budget deficits (which threaten their macroeconomic stability see Section 3.4), eliminate market distortions and, sometimes, market shortages. And they must replace subsidies with targeted social assistance to those who really need support as it has been done in a number of post-communist countries (Clements et al., 2013). Without a doubt, these are difficult reforms that involve great political and social risk. Nevertheless, their scale seems much smaller than the macroeconomic stabilization and price liberalization agenda in post-communist countries of the early 1990s. The latter faced severe balance-of-payment crises and high inflation/hyperinflation, while the macroeconomic situation of Arab countries in the aftermath the Arab Spring was not so turbulent. Unfortunately, since 2011 some countries experienced a sharp deterioration in the macroeconomic sphere (GDP stagnation or decline, higher unemployment, larger fiscal deficits, shrinking international reserves, etc.) as a result of either violent internal conflicts (Libya, Syria, Yemen, Iraq) or post-revolution political instability (Egypt and, to lesser extent, Tunisia see Section 3.3).

14 What concerns external economic relations Arab economies must undoubtedly become more open, both among themselves (in spite of the Greater Arab Free Trade Area, GAFTA, they still have a long way to go) and with the wider world (Ghoneim et al., 2012). However, much progress in this sphere has already been made in the last 15 years. Most of the Arab countries are WTO members; they concluded free trade agreements among themselves, with the EU and some of them also with the US. Their currencies are already convertible for current account transaction purposes (Dabrowski & De Wulf, 2013). Privatization policies will also differ because there is less to privatize in Arab countries compared to the post-communist countries in the early 1990s. First, as mentioned above, nationalization in the Arab world never went so far as in the Soviet bloc countries. Second, a substantial part of public ownership involves the oil and gas industries assets which, most likely, will not be the subject of outright privatization for political reasons, at least not in the near future (even if opening the door to transnational corporations is critically important for developing new production capacities). Third, most Arab countries already started privatizing several years ago and some of them, Egypt, Jordan and Tunisia, for example, seem to be quite advanced in this process (Woodward & Safavi, 2012). Rather, they must now avoid the revolutionary temptation to reverse some of the past privatization deals considered flawed or unfair by the broader public. As demonstrated by Ukraine s experience after the Orange Revolution, such a reversal may be devastating for the business and investment climate. Instead the effort should be put to ensure greater openness, transparency and fair competition of future privatization deals. Finally, privatization methods will also differ. Most Arab countries have functioning capital markets and enjoy access to international financial markets. Thus they can privatize for money, to strategic investors or through initial public offerings (IPOs), and they do not need to give away ownership, for example, in the form of artificially invented coupon/voucher programs or heavily leveraged employee/management buyout schemes, as was done in several post-communist countries. On the other hand, the already existing private sector and new prospective entrepreneurs should be relieved of the burden of bureaucratic red tape, corruption and nepotism (see Section 4.1). Poor governance and various symptoms of crony (or oligarchic ) capitalism are perhaps the most serious obstacle to growth in many Arab countries. This makes their problems similar to those currently experienced by some CIS and Balkan countries (see Section 4.1) rather than to the early post-communist transition agenda. I.e., they are like Russia or Ukraine, for instance, which managed to build the foundations of a market economy but failed to ensure its fair and effective functioning. 3.3 Deterioration of economic situation since 2008 The global financial crisis of followed by the European sovereign debt and financial crisis of hit hard most of CEE and CIS economies (see Dabrowski, 2010) but it had rather limited and short-living impact on Arab economies. However, they have suffered seriously from the Arab Spring. Political destabilization and violent conflicts in the region have negatively affected business activity, investment, and incoming tourism, an important industry in Lebanon, Jordan, Egypt, Tunisia and Syria (Languar, 2011 and 2012).

15 The fear of popular unrest has also made most Arab governments reluctant to conduct badly needed economic reforms such as reduction or elimination of subsidies (see Section 3.4), public sector modernization and restructuring, continuation of privatization, and opening countries to foreign investors. Worse, aftermath the Arab Spring several governments backtracked on the previous reforms, for example, increasing energy and food subsidies again, increasing public sector employment or revising previous privatization deals. Table 3.1: Basic macroeconomic indicators in selected Arab countries, Country Indicator Annual growth of real GDP, % End-of-year inflation, % Algeria GG net lending/borrowing, % of GDP GG gross debt, % of GDP Current account balance, % of GDP Annual growth of real GDP, % End-of-year inflation, % Egypt GG net lending/borrowing, % of GDP GG gross debt, % of GDP Current account balance, % of GDP Annual growth of real GDP, % End-of-year inflation, % Jordan GG net lending/borrowing, % of GDP GG gross debt, % of GDP Current account balance, % of GDP Annual growth of real GDP, % End-of-year inflation, % Lebanon GG net lending/borrowing, % of GDP GG gross debt, % of GDP Current account balance, % of GDP Annual growth of real GDP, % End-of-year inflation, % Libya GG net lending/borrowing, % of GDP GG gross debt, % of GDP Current account balance, % of GDP Annual growth of real GDP, % End-of-year inflation, % Morocco GG net lending/borrowing, % of GDP GG gross debt, % of GDP Current account balance, % of GDP Annual growth of real GDP, % n/a n/a n/a End-of-year inflation, % n/a n/a n/a Syria GG net lending/borrowing, % of GDP n/a n/a n/a GG gross debt, % of GDP n/a n/a n/a Current account balance, % of GDP n/a n/a n/a Annual growth of real GDP, % End-of-year inflation, % Tunisia GG net lending/borrowing, % of GDP GG gross debt, % of GDP Current account balance, % of GDP Notes: yellow field IMF estimate Source: IMF WEO database, October 2013 The negative impact of the Arab Spring on economic growth in Tunisia, Egypt, Libya and Lebanon is clearly visible in Table 3.1. Data on Syria after 2010 are not available and one can

16 only speculate on the scale of economic and social damage (in addition to human loses). Situation in Syria also did not help Jordan to return to a higher growth rate. Again, Tunisia may be seen as exception: after evident growth slowdown in 2011 it picked up again although to a moderate level of 3+% in Since 2011 fiscal balances also deteriorated everywhere in the region even in oil producing Algeria, non-affected directly by the Arab Spring. Egypt recorded high fiscal deficits since at least early 2000s but they rapidly deteriorated after the Arab Spring. The combination of slower growth and higher fiscal deficits led to increase in general government (GG) debt-to-gdp ratio in countries presented in Table 3.1 apart from Algeria and Libya. In 2013 it was expected to amount to 143.1% of GDP in Lebanon, 89.5% of GDP in Egypt, 83.9% in Jordan, 61.8% in Morocco and 45.5% of GDP in Tunisia. These are pretty high numbers as for emerging market economies. Fiscal imbalances also put pressure on external accounts. Data presented in Table 3.1 signal either deterioration of current account balances (Algeria, Egypt, Lebanon, Libya, Morocco, Tunisia and, most probably, Syria) or their stabilization on high-deficit level (Jordan). In countries affected, directly or indirectly, by negative consequences of the Arab Spring (Tunisia, Egypt, Libya, Lebanon and Jordan) capital accounts have also deteriorated due to decreasing inflows of foreign direct investment (FDI) and, in some cases, capital outflows. Table 3.2: Total reserves in selected Arab countries, SDR mn, end of period, Note: a - August 2013 Source: IMF International Financial Statistics Country Q3 Algeria 95, , , , ,708 Egypt 20,659 21,910 9,800 7,651 10,351 a Jordan 7,471 8,493 7,484 5,279 7,816 Lebanon 18,887 20,786 22,300 24,518 24,566 Libya 63,137 64,865 68,391 77,173 79,985 a Morocco 14,567 14,708 12,743 10,667 11,218 Tunisia 7,061 6,150 4,862 5,445 4,702 The negative balance-of-payment trends have had their negative impact on both the size of gross international reserves (Table 3.2) and exchange rates. Since 2010, gross international reserves decreased in Egypt, Morocco and Tunisia and, temporarily, in Jordan (in 2012). In case of Egypt this decline looks dramatic, in spite of support provided by Gulf countries. Exchange rates depreciated in Algeria, Egypt and Tunisia. Currency depreciations contributed to higher inflation. Overall the importance of fiscal and macroeconomic adjustment is increasing over time and if further postponed it may become even more painful. Nonetheless, the expected scale of adjustment still remains incomparably smaller as compared to that in the former communist economies in 1990s. By the way, several CEE and CIS economies, for example, Slovenia, Hungary, Serbia, Poland, Ukraine, and Croatia also need to tighten their fiscal policies to eliminate excessive deficits and stop growing their public debt-to-gdp ratios.

17 3.4 The subsidy challenge The biggest macroeconomic and structural policy challenge in the Arab region relates to generalized price subsidies to food and energy (Dabrowski & De Wulf, 2012; Bergasse et al., 2013), which continue to absorb, directly or indirectly, large public resources, especially in Iraq, Algeria, Egypt, Saudi Arabia, Libya, Bahrain, Kuwait, Yemen, Oman, Jordan and UAE. Most of this burden relates to energy subsidies, i.e., subsidies to petroleum, electricity, natural gas, and coal. The cost of food subsidies is relatively smaller; it amounts to 0.7% of GDP of the Middle East and North Africa (MENA) region according to IMF (2013, Box 2.4, p. 42) estimates. However, in some countries (Libya, Tunisia, and Egypt) it is higher, i.e. in the range of between 1 and 2% of GDP. Consumer subsidies can be measured in two ways: as pre-tax subsidies and post-tax subsidies (see Clement et al., 2013 for details). Pre-tax subsidies are defined as the difference between the value of supplied products and services at either international prices (tradable goods) or cost-recovery prices (non-tradable goods) and domestic prices paid by their consumers, both final and intermediate. Post-tax subsidies are the sum of pre-tax and tax subsidies. The latter are measured as the difference between the efficient taxation which takes sufficient account on externalities (in case of energy this is, for example, environmental impact of its production and consumption) and actual one. The IMF (2013, Box 2.4, p. 42) estimated the total cost of pre-tax energy subsidies in MENA countries at the level of USD billion, i.e. 8.6% of their GDP and 22% of GG revenue in About half of this amount was absorbed by subsidies to diesel and gasoline. In global comparison, MENA appears as the region with highest energy subsidies, which constituted almost half of total pre-tax world energy subsidies in If one adds implicit tax subsidies the total post-tax energy subsidies in MENA region will approach the level of 15% of GDP. Generalized consumer subsidies are usually the consequence of government price controls. If government determines fixed administrative prices either on energy products or food they become almost automatically politicized as the necessity of their upward adjustment may provoke social and political tensions. When necessity of such adjustment comes as result, for example, of higher international prices, depreciation of national currency, domestic inflation, etc., government usually tries to delay setting new higher prices and, consequently, creates gap between the administratively fixed price and international or cost-recovery price. When such gap becomes large there is even less political readiness to close it. However, sooner or later it must be done and, in case of delay, adjustment becomes more painful socially, economically and politically. This was exactly the experience of former communist economies which led to their severe macroeconomic crisis at the onset of transition (end of 1980s and early 1990s). This historical lesson was taken seriously in the next two decades: CEE and CIS countries deregulated most of prices, eliminated subsidies and replaced them by the addressed social assistance where needed. There are few exceptions: Turkmenistan, Uzbekistan and, to a lesser extent, Kyrgyzstan (electricity subsidies) and Ukraine (gas subsidies). Universal price subsidies are both costly and inefficient as tools to fight poverty (their main social policy justification). In reality, higher- and middle-income groups are the main beneficiaries of those subsidies (Bergasse et al., 2013, Clement at al., 2013). In addition, the subsidies have a devastating microeconomic and structural impact. They discourage producers

18 of the subsidized energy and food products from increasing their output and quality parameters. They stimulate excessive and wasteful consumption, damage the environment, and hamper the development of renewable energy, etc. Figure 3.1: Pre-tax energy subsidies and spending on education in MENA countries, in % of GDP Notes: energy subsidies refer to 2011; education refers to the latest available data. Source: IMF (2013), Figure 2.4.2, p. 42 By absorbing a substantial share of fiscal resources (in case of Egypt half of its GG revenue, in case of Algeria, Jordan, Lebanon and Libya between 20 and 30%) energy and food subsidies crowd out other important expenditures, for example, for education which creates an important development bottleneck in the region. Figure 3.1 shows that public spending on education is much lower than energy subsidies in most MENA countries except Tunisia, Mauretania, Sudan, Morocco and Djibouti.

19 4 Long-term developmental challenges 4.1 Common challenges Looking at the long-term challenges of social and economic development one can find both similarities and differences between both regions (CEE/CIS and Arab countries). Table 4.1: HF Index of Economic Freedom 2014 in CEE/CIS and Arab countries Region Country World Rank 2014 Score Category Albania ModF Armenia ModF Azerbaijan ModF Belarus MU Bosnia & Herzegovina MU Bulgaria ModF Croatia ModF Czech Republic MF Estonia MF Georgia MF Hungary ModF Kazakhstan ModF Kyrgyzstan ModF CEE/CIS Latvia ModF Lithuania MF Macedonia ModF Moldova MU Montenegro ModF Poland ModF Romania ModF Russia MU Serbia MU Slovakia ModF Slovenia ModF Tajikistan MU Turkmenistan R Ukraine R Uzbekistan R Algeria MU Bahrain MF Comoros MU Djibouti MU Egypt MU Jordan ModF Kuwait ModF Arab Lebanon MU countries Mauritania MU Morocco MU Oman ModF Qatar MF Saudi Arabia ModF Tunisia MU UAE MF Yemen MU Source:

20 For example, both the resource-rich CIS economies and Arab hydrocarbon producers must address problems coming from real appreciation of their currencies and difficulties in the structural diversification of their economies, their dependence on world commodity prices, income and wealth inequalities, the presence of huge resource rents that help to consolidate authoritarian power and continue populist policies. On the other hand, low- and lower-middle-income countries in both regions face challenges of continuous poverty, poor infrastructure and social services, underdevelopment of financial sector, large outgoing migration, etc. Several Arab, CIS and Western Balkan countries suffer from the deficit of economic freedom and poor business climate as illustrated by Table 4.1, which presents Heritage Foundation Index of Economic Freedom (HFIEF) This is one of the global synthetic indexes which measures property rights, corruption, size of government and taxation, business regulations, labor market flexibility, monetary stability, trade and investment regulations, and financial freedom. There is no economically free country in both regions, i.e. having the score at least 80 or more (however, there are only six such countries in the world: Hong Kong, Singapore, Australia, New Zealand, Switzerland and Canada). The next category called mostly free (MF, scores between 70.0 and 79.9) is represented by two Baltic countries (Estonia and Lithuania), Czech Republic and Georgia in the CEE/CIS region and three small Gulf countries (Bahrain, Qatar and UAE) in the Arab region. There are 15 moderately free (ModF, scores between 60.0 and 69.9) economies in the CEE/CIS region and four such Arab economies. Six CEE/CIS economies and nine Arab economies belong to the mostly unfree category (MU, scores between 50.0 and 50.9). Finally three CIS countries (Turkmenistan, Uzbekistan and Ukraine) were classified as repressed (R, scores below 50). Six countries Iraq, Kosovo, Libya, Somalia, Sudan and Syria - have not been ranked but most of them represent extremely poor business environment due to security problems. 4.2 Challenges specific to Arab countries Arab countries face some specific development challenges which make them more similar to other developing countries rather than to post-communist economies. Part of these specific challenges originates from lower level of economic development of the Arab world as compared to CEE and CIS countries. As seen in Figure 4.1 the average gross domestic product (GDP) per capita measured in purchasing power parity (PPP) terms in the MENA region (which includes all high-income Gulf economies) is lower than in CEE (without few high-income countries) and CIS. Among other challenges, several Arab countries continue to suffer from high level of illiteracy (Table 4.2), especially in Mauritania, Yemen, Sudan, Morocco, Algeria, Egypt Comoros, Iraq and Tunisia. The continuous illiteracy among youth (15 24 year olds) means that large groups of girls and, to a lesser extent, boys remain excluded even from primary education. Furthermore, most of those who have access to schools complete only a primary education or less. Moroccan and Syrian kids are particularly disadvantaged with the average schooling period of ca. five years (see Arbak, 2012).