Middle Eastern countries between political restructuring and macroeconomic flaws

Over the last two decades, most of Middle Eastern countries have embarked upon what is called “neo-authoritarian restructuring”, namely limited and reversible processes of liberalization aimed to shore up their authoritarian rule: from the overbearing role of the state in the economy to cronyism and neo-patrimonialism, state-society relations have shifted from populist mobilization of the middle and lower strata and inclusive socio-economic agenda to depoliticization of political discourse and the consequent diffusion of pro-reform and “technocratic” agenda. In this sense, elites and middle-classes, instead of being the key actors of political change in favor of more inclusiveness and participation, seem to constitute the pillar upon which regimes have restructured themselves. Cooptation of elites aside, to make things worse is that the only structured and organized opposition is political Islam, a force of conservation dressed up as progressive.

Why is it so? 

One of the biggest flaw is that the Middle East falls short in terms of macroeconomic integration and thus suffers from several shortcomings with regard not only to economic performances but also the process of democratization: the main rationale behind this assumption is that economic integration would in fact foster democracy and favour institutional change. Macroeconomic integration is conducive to democracy through several channels: the action of ruling classes, modernization, human capital accumulation, trade-induced changes in inequality and, ultimately, the so-called “learning/cultural transmission channel”.

Though, here I would like to stress few figures about MENA economy stressing how over-reliance on oil has contributed to create several distortions both in patterns of trade and wealth redistribution amongst states. 

Oil revenues have created a regional cleavage between oil producers and non-oil producers. With regard to this, the former has a stake outside the region and a rentier mentality, while the latter is short of capital but over-populated and underdeveloped. This has ultimately resulted in low degrees of competitiveness of local economies if compared to other regions and high level of capital flight outside of the region. As a result, oil-rich countries' patterns of trade are characterized by an eastward vision (China, Japan, India) where the main export goods are petroleum, gas and petroleum/gas derivative products. Plus, these countries, such as Saudi Arabia and Qatar, having a downstream-oriented labor force and low levels of human capital, tend to import capital-intensive and knowledge-intensive goods, such as machinery, equipments and services: oil has thus ended up deepening technological dependency without a real absorption/transmission of technology itself. The massive amount of surplus due to revenues stream is then mostly reinvested in Western financial markets- in terms of share of fixed-income assets, equities, real estate and other asset classes, turning oil-rich countries into the biggest providers of venture capital for high-tech industries in the US. Simultaneously, trend for non-oil producers is to increasingly trade with EU partners, where the main export goods are represented by labor-intensive and low-value added products and imports are made up of capital-intensive goods. It is worth mentioning how these countries also rely on a steady stream of remittances from citizens living abroad, especially in the Gulf.  

Intra-regional trade and an across-the-board regional integration with regard to several variables have been worsened by the over-reliance on oil. By way of example, over the period 1980-2000, MENA non-oil exports rose by only 5%, while Latam rate was well above 350% and South Asia even more than 400%.

To make matters worse,  macroeconomic fundamentals such as the ratio of external debt to GDP has been growing and is among the highest in several countries of the region- Lebanon, Egypt, Jordan and Yemen: as a consequence, resources have been diverted from value-added investments to servicing the debt. This has led governments to cut public spending and impose austerity measures across the region. As a consequence, food riots erupted in Egypt in 2008, when government decided to stop subsidizing food and bread prices soared. Jordan has experienced the same more than once, when it defaulted on IMF loan in 1996, and in 2018 again. 

Net international investment position of several MENA countries has remarkably improved over the last few years. However, unfavourable regional conditions and domestic political risks deter foreign direct investments, thus worsening both domestic and external equilibrium of such countries. 

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Foreign direct investments by foreign investors are very low for Arab countries if compared to other regions. Saudi Arabia continues to reinvest massive amount of oil rents' surplus in Western financial markets and/or abroad, while Israel enjoys high degrees of foreign investments. As stressed earlier, financial account positions of several MENA countries do not weather well due to political risk and financial conditions volatility: rampant inflation, shortage of foreign reserves or massive capital outflows could bring about social unrest and political turmoil.

In light of a likely tightening of global financial conditions, GCC countries followed suit FED decision to cut rates, in order to boost sluggish economic growth and improve credit conditions for private sector. However, shortcomings aforementioned need to be addressed for a sound and inclusive economic growth. 

To sum up, over-reliance on oil has worsened intra-regional trade and global integration into the supply chain. A real regional integration would imply lowering trade costs, enhancing factor mobility&product diversification more prices flexibility in terms of factors of production and macroeconomic policies convergence (mon&fiscal).
Last but not least, low increase in income and human capital accumulation due to the aforementioned shortcomings have been short in enabling citizens to better coordinate their actions and push for institutional change. Simultaneously, trade-induced changes in inequality-i.e. the widening of the income gap between skilled and unskilled workers- and consequent more demand for democratic change, have had little effect in MENA region, due to the particular features of the oil-industry and the massive use of skilled-labor force from abroad. Paradoxically, the labelled “learning channel” have had more impact in better living conditions and institutional change- i.e. the widespread penetration of social platforms in the region that have exposed many illiberal countries to the benefits of their democratic peers and have contributed to the Arab Uprising.  
Potential for cooperation is quite high: macroeconomic integration could favour institutional change and trade agreements could help in this sense.

(This article is part of a more detailed report. If interested, contact the author)