Governments in the Middle East buying time

Top of the agenda for the World Economic Forum is how governments can respond to the Arab uprising. Published in MEED, 14 October 2011

Violence flared up in the town of Al-Awamiyah in Saudi Arabia’s Eastern Province in early October when protesters took to the streets. The Interior Ministry was quick to blame an unnamed “foreign country” for instigating the protests, which lead to 11 security personnel and three bystanders being injured.

Riyadh was making a clear allusion to Iran, which it tends to blame for leading its Shia minority astray, although it provided no evidence to back up its assertion. Whatever the cause of the unrest, it was just the latest sign that Arab governments are still struggling to deal with dissent, some 10 months after the first stirrings of the uprising in Tunisia last December.

As policy-makers gather in Jordan on 21 October for the World Economic Forum, how to respond to the Arab uprisings will be top of the agenda. Across the region, governments have been handing out payments and other inducements in an attempt to keep their populations off the street. On the whole these appear to have been successful, with large protests restricted to just a few countries. But the high spending levels have put huge pressure on public finances almost everywhere, which will only increase over time.

State handouts in the Middle East

According to the World Bank, the measures announced by the Saudi government, which have included bonuses for state employees, 500,000 new homes being built and 60,000 extra jobs at the Interior Ministry, are equivalent to 25 per cent of the country’s gross domestic product (GDP). The measures taken in Algeria, including public-sector pay rises and increased food subsidies, add up to 25 per cent of its GDP too.

Both countries have plentiful oil reserves to help pay for the largesse, but others without natural resources have also had to spend more. Jordan, for example, has announced measures amounting to 5 per cent of GDP, covering subsidies, pay rises and infrastructure spending.

This spending has had a positive impact on growth. The World Bank recently raised its 2011 GDP growth forecasts for the region, from the 3.6 per cent it predicted in May to 4.1 per cent, citing high government spending and increased oil revenues.

“Across the region what you’ve had is substantial new spending commitments, especially in Saudi Arabia, and economic growth is once again being fuelled by government spending,” says Jarmo Kotilaine, chief economist at Jeddah-based National Commercial Bank. “In Saudi Arabia, the increased government spending is translating into projects, into construction activity, so there is a lot going on.”

However, there has been a downside too. A consequence of all the handouts and the government jobs is that private companies now find it harder, if not impossible to compete with the state sector when it comes to hiring locals. In the process, the long-term aim of building diversified economies is significantly undermined, particularly in the Gulf.

“If you’re looking at it from the point of view of regime security and survival, they’ve been very successful,” says Kristian Coates Ulrichsen, research fellow at the UK’s London School of Economics. “They’ve tried to accommodate and absorb the pressures that were generated around the region and they’ve succeeded in deflecting much of the unrest.

“But from the point of view of economic diversification, it’s been a disaster. The creation of tens of thousands of new ministry jobs is exactly what they shouldn’t be doing. The same goes for raising public sector pay, while leaving private sector pay untouched. These directly contradict the visions to reduce the role of the state in the economy and expand the role of the non-oil sector.”

Middle East political reform

Where financial inducements do not look enough, political reforms have been offered up as well, although with the exception of Morocco, none will fundamentally alter the power structures. Parliaments have been promised greater power in Algeria, Egypt, Jordan and Oman. In the UAE, the size of the electorate for the Federal National Council was widened. In Saudi Arabia, King Abdullah bin Abdulaziz al-Saud has promised women the vote by 2015.

Such reforms are not always greeted warmly by voters. Bahrain’s by-elections on 24 September were boycotted by Shia opposition parties, turnout was low for the UAE’s election on the same day and Saudi Arabia’s municipal elections five days later were largely ignored by the half of the population that could vote.

Despite the shortcomings, some observers say it is better than nothing. “It’s very important that you start to get people used to this political process,” says one Kuwait based political analyst. “It is something that people in the West take for granted, but it’s really not something that is part of the social structure in this part of the world.”

Alongside the limited political reforms has often come old-fashioned repression. That was most obvious in Bahrain in March, but authorities elsewhere have proved very sensitive to any suggestion of dissent too. In the UAE, for example, five people were arrested in April and are facing charges of, among other things, “opposing the government system and insulting the president, vice president and the crown prince of Abu Dhabi”, according to a statement from the Attorney General Salim Saeed Kubaish.

Among the region’s monarchies, there has also been some effort to defend their positions. Again, Bahrain is perhaps the most notable case with the entry of the GCC’s Peninsula Shield force into the country in March. But the GCC has also offered membership talks to Jordan and, more surprisingly, Morocco. It appears doubtful whether full membership will actually happen, but in any case it is not an entirely selfless act. Jordan has what is generally viewed as the most professional army in the region outside Israel.

“They probably want to benefit from the human resources and the advanced security personnel that exist in Jordan, in order to solidify the security aspect within the GCC,” says Ibrahim Saif, resident scholar at the Carnegie Middle East Centre in Beirut.

The effectiveness of all these responses remains open to question. On one basic level they have worked, in that no other regimes have been toppled outside the North African trio of Tunisia, Libya and Egypt. When MEED went to press, President Bashar al-Assad of Syria and President Ali Abdullah Saleh in Yemen were both still clinging on to power, but protests elsewhere have largely died away.

Even in those countries where the leader has been ousted, however, it is not always clear whether the regime has changed or just the figurehead. The continued delays in the political process in Egypt in particular has led some to fear the military there are intent on retaining a great deal of influence.

In countries where the balance of power has not changed, the risk of upheaval has not gone away entirely, as the grievances that lay behind the protests remain in place. Most countries have large, young populations with limited hopes of finding rewarding employment and they have unrepresentative and autocratic governments.

In that sense, the mix of higher spending and limited political reforms that most governments have offered would seem, at least, to partly address the issues at hand. However, many of the governments’ expenditure plans are not sustainable. Perhaps only Qatar can truly afford the extra spending commitments in the longer term; even other oil rich countries such as Saudi Arabia may not.

In July, Saudi bank Jadwa Investments issued a research note saying that, even with a projected slowdown in the growth of state spending, Riyadh will need an oil price of more than $320 a barrel in 2030 to balance its budget.

In addition, the government will have to run budget deficits from 2014, which will become substantial by the 2020s. “Preventing this outcome requires tough policy reforms in areas such as domestic pricing of energy and taxation,” the bank said.

Underlying issues

It is also far from clear that the political reforms will be meaningful enough to meet people’s expectations.

“The problems that generated the protests – people’s feeling of economic helplessness, frustration at corruption, and governments they felt were completely unresponsive to everyday needs – they’re present throughout the region,” says Coates Ulrichsen. “The reforms do nothing to change the balance of political power.

“They can probably get away with [higher spending] for a few more years, particularly if oil prices remain high, but in the longer term its going to be fiscally unsustainable. It’s going to be extremely hard to roll back these measures, especially in times of unrest, so it’s just going to lock in government spending at incrementally higher levels. That just increases the eventual cost of coming to a reckoning.”

While Arab governments appear to have hit on a short-term formula to deal with the pressures of the unrest, they may yet find they have merely bought more time. In the longer term, most will have to find real alternatives.