Business, Not as Usual
For more than a generation, most of the Arab world
has suffered from economic stagnation.
is no accident that the Arab Spring commenced in Tunisia instead of, say,
Syria or Yemen.
started there because of the promise of prosperity and growth. It started
there because of the country's large, literate middle class. It started
there because of that middle class's relatively liberal political outlook
and thirst for the political freedoms that accompany economic prosperity.
an environment of political stability and open economic activity, private
enterprises flourish and economies grow, supporting the emergence of a
middle class. It is that middle class, in turn, that pushes for further
political change and bolsters democracy.
the Middle East is to realize the democratic promise of the Arab Spring -
and if the rest of the world is to enjoy the global benefits it would garner
- countries in the region and abroad must foster private enterprise and the
emergence of a strong and vocal middle class.
The Arab population today numbers 400
which will double to
800 million by 2050.
When protests erupted across Tunisia in January 2011, the economy was open
and vibrant. The population was educated and technologically adept - 20
percent of the population used Facebook to communicate with family and
friends at home and abroad.
During the decade leading up to the Arab Spring, Tunisia was enviously
referred to as the "China of the Arab world." Although it was authoritarian
and beset with corruption, it was also integrated into the global economy
through manufacturing exports and tourism and was growing at a rate
comparable to those of large emerging economies. This growth produced the
middle class that ultimately pushed for political change.
For more than a generation, most of the Arab world has suffered from
economic stagnation. State control of economies has produced bloated
red-ink-generating public sectors that have crushed innovation and
entrepreneurship while shielding inefficiencies behind government protection
and high tariff barriers.
a result, the Arab world has fallen behind other developing regions. It
suffers from a sclerosis that has deepened poverty and frustration. And this
is only aggravated by the demographic "youth bulge" in the region.
this picture does not change - if the Arab world fails to follow in the
footsteps of successful transition economies in eastern Europe, Latin
America, and southeast Asia - the region will not only fail at democracy,
but will also grow poorer and more unstable. And that will lead to myriad
social and political problems that could threaten global security and
economic prosperity around the world.
The most obvious risk is the familiar specter of extremism and terrorism,
but fratricidal regional conflict, humanitarian crises, and large-scale
labor migration to Europe are also worrisome threats.
Private sector–led growth:
The Arab population today numbers 400 million, which will double to 800
million by 2050. Population growth makes aggressive economic growth an
urgent imperative. Even to tread water and maintain current living
standards, the Arab economies would need to grow at "tiger-economy" rates of
9 to 10 percent for a decade or more. That is a daunting task, one the
public sector cannot accomplish alone. Growth must come from the private
sector, and that requires reform of the economy: removing regulations,
relaxing government control, promoting trade, and bolstering the rule of
The region clearly has the potential for private sector growth. In the past
decade, the opening up of economies - most prominently in Tunisia, Egypt,
and the United Arab Emirates, as well as in Jordan and Morocco - and the
influx of new technologies and capital born of high oil prices nurtured the
growth of small and medium-sized enterprises. These new enterprises both
embraced traditional manufacturing and services and created new industries
such as technology start-up ventures. Witness the purchase by Yahoo! of the
Jordanian Internet start-up Maktoob for more than $120 million in August
Thanks to some of this small and medium-sized enterprise activity, we can
look past today's gloomy picture and imagine real economic change in the
region. Economic reform in Dubai, Malaysia, and Turkey and even the modest
loosening of government control in places such as Egypt, Pakistan, and the
West Bank have made room - if rarely enough - for local commerce and global
trade. Local entrepreneurs and businesspeople have begun to take advantage
of these changes.
A growing middle:
The result of the escalation in private sector activity has been the birth
of a small but growing middle class. In the 1960s, on average less than a
third of the populations of large Muslim countries such as Iran, Pakistan,
and Turkey lived in cities, and by most estimates, only about 5 percent were
middle class. Today, about two-thirds of these countries' populations live
in urban areas, with about 10 percent qualifying as middle class.
the middle class is defined more broadly to include people with formal
employment and a steady salary and benefits who can afford to devote a third
of their income to discretionary spending, it now includes about 15 percent
of Pakistan's population and 30 percent of Turkey's. The numbers are even
higher if the definition is extended to include those who have adopted
modern family values, such as the desire to have fewer children and to
invest in their advancement. One estimate puts as many as 60 percent of
Iranians in - or ready to enter - that group.
Signs of this emerging middle class and the capitalist surge it has been
driving are found throughout the Middle East, even in revolution-struck
Cairo, war-weary Beirut, and sanctions-worn Tehran. While the overall
picture in the Middle East looks grim, signs of promising economic activity
in pockets across the region started to emerge in the past decade. That
activity did not change the overall economic picture but produced a certain
momentum and pointed to the possibility of change. Between 2002 and 2008,
real GDP in the Middle East and North Africa grew by 3.7 percent, up from 3
percent in the previous decade.
Middle-class entrepreneurs represent the best hope for betterment of their
countries - and the most potent weapon against extremism and for democracy.
Until now the Arab world's tiny middle class has relied on state salaries
and entitlements, with few ties to free markets. The growth of local
entrepreneurship on the back of burgeoning capitalism - and integration with
the world economy - could help change that.
These forces are already having an impact. The 2009 Iranian election
controversy was a struggle by its rising middle class to protect its
economic interests against President Mahmoud Ahmadinejad, who has sought to
increase state domination of the economy. And as mentioned, the Arab Spring
began as a push by the middle class for political change to match that
group's cultural and economic aspirations. Just as Turkey relied on its
middle class to transform itself into a successful Muslim democracy fully
integrated into the global economy, so too can the Arab world grow with a
newly created middle class combined with entrepreneurial zeal.
The promise of the new Arab middle class is compelling: by bringing
stability to the Middle East it can boost the global economy too. The Middle
East sits at the heart of a larger Muslim world also poised for change. As
one and a half billion consumers move up the economic ladder, they will
demand the material benefits of liberal capitalism. Some will seek
distinctly Islamic goods: not just halal food and head scarves, but also
Islamic banking services, education, entertainment, media, and consumer
Boom in Islamic finance:
Such consumer demand has already made waves in global markets, as
illustrated by the boom in Islamic finance (financial services that abide by
Islamic rules forbidding the collection and payment of interest). The growth
of such services is integrating the Middle East more closely into the global
economy. Although Islamic finance remains a niche market - the Islamic bond
market, worth close to $100 billion, represents a mere 0.10 percent of the
global bond market, and about 300 Islamic banks and investment firms in more
than 75 countries oversee banking services in the hundreds of billions of
dollars - some estimate the assets of this sector will grow to as much as $4
trillion by 2015.
Some members of this new middle class are the children of the old
bureaucracy, but a far larger percentage come from the provinces and from
lower social classes. These sons and daughters of the rural poor have made
the jump to the middle class by embracing the regimen of modern economics.
Many are devout, but their wealth and aspirations can put them squarely at
odds with extremism. After all, with wealth can come conspicuous
consumption, liberal social and political values, and a vested interest in
engaging the world.
This does not mean there will be no middle-class Muslim terrorists. But much
as in Latin America in the 1990s, terrorism will stop resonating with a
truly integrated Muslim middle class. Those with a stake in commerce and
trade will not subscribe to destructive ideas that endanger their future.
The alienation and rage many Muslims now feel toward the West is a product
of historical grievances but has been greatly aggravated by their isolation
from the global economy. Were that to change, many Muslims would begin
looking forward rather than backward. The rise of this "critical middle" is
a trend every bit as powerful and important as extremism. And it holds the
key to changing the hearts and minds of the Muslim world.
is too soon to say whether businesspeople in Tunis or Cairo will lead a
full-fledged revolution that anchors Arab politics in democracy - a
historical transformation akin to the one spearheaded by Protestant burghers
in Holland four centuries ago. But history does suggest that a robust
embrace of capitalism by entrepreneurs is the way to truly modernize the
The world has a vested interest in the success of the Arab Spring. If the
change does not put the Middle East on the path to prosperity and democracy,
increased instability and extremism will wash onto Western shores.
Those who vanquish the Islamic extremism now on the rise across the Arab
world will not be enlightened clerics or liberal reformers but entrepreneurs
and business leaders. This has obvious implications for Western governments.
Values gain currency when they serve the economic and social interests of
the people, and when those who hold them gain power, those values shape
The triumph of democracy in Europe followed in the footsteps of capitalist
development. Moderate capitalist values have not yet been fully embraced in
the Middle East, not because of the fundamental nature of Islam, but because
the commercial class leading the process is still too small. Helping that
bourgeoisie to grow and dominate its societies is the best way to ensure
that democratic values take root.
What can the United States and its allies do? The first solution is to step
up trade with the region. The West has committed much in blood and treasure
to protecting its interests in the greater Middle East, yet it does very
little real business with the region (except with Turkey). Excluding oil and
weapons sales, U.S. trade with the whole Arab world amounts to barely a
fraction of its trade with Latin America, eastern Europe, or India. The
United States now has free-trade deals with Jordan and Morocco, and Europe
is considering an economic partnership with the Arab countries of the
Mediterranean rim. These are positive steps, but there are still far too few
Arab-made goods on Western shelves.
Western governments seem to understand the importance of entrepreneurship,
commerce, and open markets to the future of the Arab world, but mechanisms
to promote economic change are absent. Bureaucratic rules have prevented
financial investments in small and medium-sized enterprises - American
dollars have gone only to non-profit-generating ventures - and no concerted
effort has pushed governments to embrace reform. Talk of economic change
lags behind discussions of politics.
Small and medium-sized businesses remain the region's beacon of hope and the
anchor of the international community's economic vision for the region,
thanks in part to their success over the past decade. But this vision is
also based on the belief that there is still ample capital in the region -
from local investors who are far more comfortable with political risk than
Western investors - that could keep that dynamism alive. There is also hope
that the new breed of leaders taking over will be business friendly. Egypt's
President Mohamed Morsi fashioned himself "Egypt's Erdogan" (referring to
the popular pro-business Turkish prime minister) during the country's recent
presidential elections. And it is accepted wisdom that the Muslim
Brotherhood's merchant base will encourage the party throughout the Arab
world to favor business-led growth.
Stability and reform:
There are things that small and medium-sized businesses can do to fulfill
their promise - practices that worked in newly democratic countries in Asia
and Latin America. But these are contingent on two fundamental factors:
political stability and thoroughgoing economic reform.
is difficult to envisage investors returning to Egypt until the country
returns to the rule of law, street agitation ends, and government stability
is palpable. But businesses also need assurance that labor strikes will end,
that the government will impose and defend labor market rules, and that
relations between the government and business will be stable and
Although there may be plenty of capital in the Arab world, it is less likely
to go to businesses in countries where labor strikes disrupt operations,
wage hikes cut into profits, and the continuous threat of instability clouds
the prospects for business growth. Some political instability is to be
expected after the monumental changes that have swept across the region. It
will take time for the dust to settle and stability and rule of law return.
But some of the political chaos is due to the miserable state of the
Take Egypt. In the first year after President Hosni Mubarak stepped down,
Egypt's economy contracted by 0.8 percent (on a calendar basis in 2011),
with manufacturing falling by 5.3 percent. Unemployment rose to 12 percent
(25 percent for young people). Private domestic investment fell by 10.5
percent, with foreign investment dropping off the table - from $6.4 billion
in 2010 to $500 million in 2011. The plunge in domestic and foreign
investment presented the government with a gaping hole of $11 billion in its
financing in the second half of 2011. International arrivals have decreased
about 35 percent - a grave problem for a country whose tourism accounted for
11 percent of GDP. Not surprisingly, the government's budget shortfall
ballooned, to $11 billion (10 percent of GDP, the largest in the Arab
world). Combined with capital flight, which continues unabated thanks to
persistent political instability, foreign reserves fell sharply, from a high
of $43 billion to $15 billion. Two out of every five Egyptians live on less
than $2 a day, so the human impact of such jolts has been profound.
doubt, economic stabilization is needed to address this challenge. That was
what Western powers promised at the 2011 meeting of the Group of Eight
industrial countries (G8) at Deauville. But stabilization would provide only
a short-run gain - not enough to reverse the trends that have dogged the
region and precipitated the crisis of governance and economy in the first
Clear path ahead:
Economic transformation and democratization need private sector growth and
business dynamism. Small and medium-sized enterprises have to lead the way
with enough growth to turn Arab countries into breakout emerging nations;
only then will democracy stand a chance in the region. And that demands
Every recent case of successful democratization has gone hand in hand with
economic restructuring. International financial institutions have joined
hands with Western governments and private donors to pair thoroughgoing
reform with the capital needed to fuel growth.
This partnership reached its apogee in the so-called Washington Consensus.
The much-maligned strategy to foster growth and democracy did not always
work - or work perfectly - but without it, most democratization efforts
would have failed.
The Arab world needs a new Washington Consensus: a clear strategy for
implementing reforms and providing needed funds to make them possible. That
is the best way to create the right environment and sufficient capital for