Blog Post

The Jasmine Revolution

What’s at stake With the spread of the anti-government protests – the “jasmine revolution” – across North Africa and the Middle East, the world has stopped to contemplate the potential ramifications of regime changes for the political stability of the region and the world economy. Concerns are numerous and legitimate and change is likely to […]

By: Date: February 4, 2011 Topic: Global economy and trade

What’s at stake

With the spread of the anti-government protests – the “jasmine revolution” – across North Africa and the Middle East, the world has stopped to contemplate the potential ramifications of regime changes for the political stability of the region and the world economy. Concerns are numerous and legitimate and change is likely to bring more uncertainty but the prospects of a new beginning for the region brings new hopes of change.

Geopolitical turmoil and the global recovery

Michael Schuman writes in the Curious Capitalist that at first glance, the upheaval on the Nile might seem far removed from the world of Wall Street and Main Street. Egypt is not a major participant in global manufacturing networks, nor is Cairo a significant financial hub. But Egypt’s political crisis could have implications for the global economy nevertheless. That’s because the economic and political role Egypt plays in the Middle East gives it economic power beyond the easy-to-measure statistics. The turmoil in Egypt is putting a glaring spotlight on the fragility of political stability in the entire Arab world.

Mohamed El Erian
, speaking with the authority of his Egyptian descent, argues that Egypt matters a great deal to the world economy. Not because of its weight in global demand but because it is a critical enabler. It is the gatekeeper of global trade through its control over the Suez Canal and a corner stone of political stability in the region. What is important, however, is that those protest are channelled into forward-looking agenda to avoid this unquestionably secular movement to be hijacked by theocrats.

Nouriel Roubini
argues that such turmoil and the ensuing risk of further sharp increases in energy prices is a serious risk to a global economy that was only tentatively recovering from its worst financial crisis and recession in decades. We may hope that the events in Tunisia and Egypt will lead to a smooth transition to stable and democratic new regimes. But the risk of more unstable and radical outcomes cannot be ruled out. The recent experience of “free elections” and “democracy” in the Middle East has indeed been disappointing: the Iranian revolution has led to an authoritarian and oppressive regime controlled by Islamic fundamentalists; Gaza’s election led to the rise of the radical Hamas; Lebanon has seen the rise of Hizbollah, a radical and well-armed state within a state; and the US invasion of Iraq has brought civil war and an unstable pseudo-democracy now increasingly at risk of being controlled by radical and Shia groups. 

Paul Krugman
refuses to comment on Egypt directly but he compares this uprising to the people power revolution that toppled the Philippine’s government in 1986 and which subsequently led to important changes to the economic structures. He concludes by saying that Egypt won’t turn into Sweden, but maybe, just maybe, something good is about to happen.

Gavyn Davies
writes that there are plenty of reasons for real concern when the world’s largest oil producing region shows signs of mounting political instability. But there are also grounds for hoping that the Egyptian crisis might be resolved without causing disruption in the neighbouring Gulf States, which contain the vast majority of the region’s oil supplies. The enormous gap in wealth between Egypt and its oil-producing neighbours is one reason for optimism. Measured in US dollars at purchasing power parity, Egypt’s GDP per capita last year was $6,367. The equivalent figure in Saudi Arabia was $23,742, and in the UAE it was $36,973. This means that the likelihood of severe economic hardship stemming from food shortages and youth unemployment is a good deal more probable in Egypt than it is in the neighbouring oil producers. Although income distribution is of course extremely skewed in all parts of the region, the scope to “buy off” trouble is much greater in rich countries which are currently enjoying renewed growth in oil revenues.

Geopolitical unrest and world oil markets

James Hamilton
looks at the potential effects of Egypt’s crisis on oil. A closure of the Suez Canal at the present time would not be as economically damaging as the original. For one thing, there is less oil going through the canal today (1 mb/d in 2009 compared with 1.5 mb/d in 1956), and that flow is a significantly smaller fraction of the world total (1.1% today versus 8.8% then). The bigger worry for oil markets would be that the process may yet spill over into other key oil-producing countries. Iraq will be a huge factor in determining medium-term growth in world oil production, and Iran is twice as important as Iraq in terms of current production. And should we see the temporary cessation of Saudi production, it would be an event without historical parallel.

Fabius Maximus
writes in RGE that rumours are circulating that the Saudi Princes might respond to rising geopolitical tensions by pumping more oil. This would help Egypt’s government as well as the global economy.  Especially if the Brent spot price rise over $100, which is only 2% from here.  With the ability to boost production by at least 4 million barrels/day (a 5% increase to global supply) — and even more as a temporary surge — they can stabilize or bash down prices.

Behind the revolt

Michael Schuman
writes in the Curious Capitalist that the failings of Mubarak are symbolic of those throughout the Arab world. While East Asia and increasingly Latin America leap from strength to strength, becoming more and more important to the world economy, the Middle East has tended to remain on the outside of the globalization story, with its impact on the world economy generally limited to the oil sector. The result is a region that has in certain respects been frozen in time.

Raj M. Desai
of Brookings argues that the classic Arab authoritarian bargain has collapsed. For several decades now, Arab rulers have remained in power by giving citizens a generous set of social benefits (free education, government jobs, subsidies, and other entitlements), and in return, the public accepted severe restrictions on political life. But since the mid-1980s two “shocks” undid that bargain: the economic recession and the large-scale entrance of youth into the workplace.

Marcus Noland and Howard Pack
argues that although Egypt is not a poor country by world standards and the income growth was comparable to other countries, the inability for an educated workforce to secure employment planted the see of revolt. He concludes that manufacturing and technology usage could be a key catalyst to improve employment prospects for the youth. The widespread use of social media and Internet in the Tunisian and Egyptian protests demonstrates that these societies are adapting imported technology. But more could be done, particularly in industrial applications.
Stanford Professor Lisa Blaydes argues that it was the regime’s reliance on corruption as a strategy to bind the rent-seeking elite to the ruling regime that ultimately undermined Egypt’s status quo. Economists have described corruption as a stable equilibrium, but one for which the associated cumulative social costs can drive the system to a catastrophic point at which this equilibrium becomes suddenly unsustainable. Of course, no one knew that Police Day, January 25 2011, would be the day that Egypt’s autocratic ruler, Hosni Mubarak, would lose his grip on power. But it was on this day that the endogenous by-products of the power equilibrium Mubarak had so deftly maintained for almost thirty years finally caught up with his regime.

Half-backed measures won’t work

Joshua Tucker
writes in The Monkey Cage that the success of the Jordan King’s move on Wednesday may actually be determined more on the streets of Cairo than Amman. The 1989 collapse analogy is helpful in that during the collapse of communism, the momentum of protest spread from one country to another became so strong that these kind of half-baked measures – which only months earlier would have been a huge step forward – came to be seen as unacceptable precisely because other countries (Poland originally being a notable exception) were going all the way to open elections.

Comparing Tunisia and Egypt

Jean-Noel Ferrie
argues that the conditions for a successful social movement do not lie simply in hatred for the regime displayed by demonstrators. They arise, rather, as the aggregation of discontent, the credibility of the action taken and, most importantly, the weakness of the rulers. The regimes that fall do not fall because they are attacked, but because they fall apart, because their own members fail them. In this sense, things are different between Egypt than in Tunisia. The links between Mubarak and the military are strong. He comes from there and he knows the leaders. In addition, the army thinks that Hosni Mubarak is the legitimate head of state. It has nothing to do with a Tunisian army relatively marginalized in the organization of the Ben Ali regime.

The Islamist threat

Political Scientists Drew Linzer and Lisa Blaydes
have an article at The Huffington Post where they attempt to estimate how large is Egypt’s potential "religious right" based on research they did for a 2008 World Politics article. e examined the attitudes and political preferences of the Egyptian public, using public opinion data collected as part of the World Values Survey. Our study identified the absolute most religiously and politically conservative segment of the Egyptian public; a bloc characterized by deep personal piety, support for the confluence of politics and religion, and, quite frequently, a worldview that systematically favors men over women. Based on this definition of the “religious right”, the authors estimate that the likely support for a Muslim Brotherhood type party in a fair election as falling somewhere between 20% and 60% of votes.

US foreign aid in Egypt

FT Alphaville
notes that since the Israel-Egypt peace accord in 1979, these two countries have been the number one and two recipients of US foreign aid. (Excluding money spent on the wars in Iraq and Afghanistan.) This amounts to around one-third of total US foreign aid.

John Quiggi
writes at the Crooked Timber that the Mubarak regime is finished in its role as the key US ally in the Arab world. If the regime survives at all, it will be through brutal repression which makes it clear once and for all that the dictatorship is held in place solely by military force. That in turn will make the provision of substantial economic or military aid politically untenable (the Republicans were already keen to cut aid to Egypt). But without continuing aid, there is little reason for any Egyptian government to support US foreign policy in the region.

A challenged EU diplomacy

argues that the spread of the anti-government protests across North Africa and the Middle East represents a big test of the ability of the External Action Service, the EU’s “foreign ministry” headed by Catherine Ashton, to respond to unexpected events. Even as the Americans had shifted their position at the weekend to call for an orderly transition to democracy in Egypt, and even after the leaders of Britain, France and Germany issued a joint letter calling for elections, Mrs Ashton was reluctant to call for a free ballot. Diplomats say this is because she feared she did not yet have consensus among the 27 states. Is this admirable respect for smaller member states, who had not yet expressed themselves, or is it a worrying timidity?
Gavin Hewitt notes that some had hoped that under the Lisbon Treaty – which set up a foreign affairs chief with a diplomatic service – it would all be different: Europe would speak with a stronger, clearer voice. The reality is different. Cameron and Merkel got to speak directly with President Mubarak. Catherine Ashton didn’t.

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