From Arab Spring to a Winter of Discontent?
A few weeks ago, this report would have focused entirely on the improvement in economic conditions in North Africa. Riots across the region, attacks on embassies, and the deaths of U.S. diplomats have clearly altered the narrative and threaten to derail efforts to increase investment and financial stability in the three “Arab Spring” countries of Egypt, Libya, and Tunisia. The revolutions that overthrew autocratic rulers across North Africa exacted a toll on the region’s economies. In 2010, Egypt’s inflation-adjusted GDP rose more than 5 percent and industrial production increased 10 percent as the economy recovered from the effects of the global recession. Paralyzing strikes and the collapse of the Mubarak regime cut economic growth to 1.8 percent in 2011. The OECD’s forecast for 2012 shows Egypt’s GDP rising by less than 1 percent.
As Table 1 shows, a similar but more extreme pattern holds for Libya and Tunisia. In both cases, GDP growth declined in 2011. The situation was most severe in Libya, where civil war raged for several months. Sanctions on Libya’s oil industry and a blockade of export terminals caused GDP to contract and reduced industrial production by 74 percent.
While far from rosy, the economic outlook for the three countries improved as the summer progressed. And despite the recent regional turmoil, the trend will probably continue unabated. Although the slowdown in Egypt’s large tourism sector has depressed GDP growth, industrial production is expected to rise 7 percent this year, buoyed by major investments of $11 billion from BP and $18 billion from Qatar’s Sovereign Wealth Fund. Recovery in oil and gas production will boost economic output in Libya. The financial crisis in Europe—Tunisia’s principal trading partner—will crimp growth somewhat.
Planned Aid Packages
In the months leading up to the September 11 violence in Cairo and Benghazi and later in Tunis, the International Monetary Fund, the United States, and a number of Gulf states were taking steps to shore up weak economies in all three of the Arab Spring countries.
In April, a delegation of 30 companies organized by the U.S.-Libya Business Association explored investment opportunities in energy and infrastructure.
The U.S. and Egypt negotiated most of the terms of an agreement to relieve $1 billion in Egyptian debt. The money would come from unspent foreign aid funds.
The IMF agreed to consider Egypt’s request for a $4.8 billion loan at 1.1 percent interest to be used to reduce budget and balance of payment deficits and restart growth.
Rep. David Dreier (R-CA), Chairman of the House Rules Committee, introduced a bipartisan resolution calling for a free trade agreement with Egypt and indicated his support for a free trade agreement with Tunisia.
The U.S. Trade Representative resumed talks on a Trade and Investment Framework Agreement with Tunisia.
In the week preceding the attack on the embassy in Cairo, the U.S. Chamber of Commerce led a trade mission consisting of more than 100 executives from 50 companies (several of them MAPI members), and the Chamber declared that “Egypt is open for business, and the U.S. business community is ready to invest.”
Two Final Questions
Have the riots materially changed the conditions that prompted efforts to assist the fledgling democracies of North Africa?
No. Economic stabilization and increased investment are essential to the success of these new governments. Past experience with “political transitions” leads the IMF to estimate that it will take two to three years at least for economic recovery to take hold. There is little nostalgia for the old regimes, but the new governments in all three countries remain weak and dysfunctional. They contend with unemployment rates unthinkable in developed countries and public sector payrolls so bloated they account for 30-50 percent of total employment. Their ability to rein in radical factions and ethnic or tribal conflict is limited until they can demonstrate that economic growth and opportunity is on the horizon. At the same time, the limited progress made in recovering from the economic setbacks incurred during the Arab Spring has not been imperiled. Except in Benghazi, the demonstrations have not caused major destruction or economic dislocation.
Will political considerations in the United States delay or compromise efforts to assist the fledgling democracies of North Africa?
Quite probably. Handing money to countries where the United States embassy and consulates have been attacked is a non-starter in an election year, especially one as closely contested as this one—even if leaders in the Arab world say all the right things. Ultimately, the need to influence developments in a volatile region will bring the U.S. government and business back to the table to negotiate public loans and private investments. But those who hope for a sudden infusion of aid to revive struggling economies will have to wait for another season.
 According to the New York Times, “[Egyptian President] Mr. Morsi and his Islamic movement, the Muslim Brotherhood, have since made it clear that the struggling economy is their most urgent priority, brushing aside reservations about American and international assistance and outright opposition to it from other Islamic factions. American officials say they have been surprised by how open Mr. Morsi and his advisers have been to economic changes, with a sharp focus on creating jobs. ‘They sound like Republicans half the time,’ one administration official said, referring to leaders of the Muslim Brotherhood . . .’”