Role of middle class as the main drivers of new Arab development model

Engaging the middle class in reshaping a future is the only sustainable way forward for the Arab region, highlighted the Arab Middle Class Report titled “Arab Middle Class: Measurement and Role in Driving Change”.

For decades, the Arab development model has thrust upon generous public services and subsidies in exchange for little or no public policy accountability.  However, this “authoritarian bargain” came with an expiration date. It began in the 1990s with the onset of economic structural adjustment programmes. Across the region, particularly in oil-poor economies, governments adopted economic reforms in the face of mounting financial pressures. Middle-class people, constituting nearly half of the Arab population, bore the brunt of the pain—with few compensating benefits—as subsidies and public expenditures were slashed. The number of jobs guaranteed to young graduates diminished and the quality of the public services deteriorated. Flourishing patronage networks favoured some groups over others, undercutting social cohesion and encouraging significant disparities. The educated middle class people realized that their political and social systems were lacking. Frustrations finally boiled over in 2011.

The “Arab Spring” began with great hopes for the middle class. However, the consequences have been far from aspirations. In some countries, conflict has wiped out decades of development gains. For example, the economic cost of the unrest in the Syrian Arab Republic alone was estimated to have reached $140 billion by the end of 2013. Including losses incurred by Egypt, Libya and Yemen could bring the regional cost to double that amount. Factoring in the human cost and long-term implications, the situation is even more dire. Not only do they destabilize the middle class in the short-term, but they also undercut its innate capacity to steer transition in more productive directions and to moderate destructive social elements. The region’s longstanding governance gap complicates the situation; there is a legacy of institutions badly equipped for easing tensions, fostering social consensus and driving development.

Given the backdrop of the geo-political and socio-economic challenges of the Arab region, this report highlights the essential moderating role of middle class citizens as the main drivers of successful development experiences, the backbone of democracy and the market economy, and a force for social cohesion and political stability. The report introduces distinct and novel technical approaches in understanding the dynamics of the size of middle class, and then sets outs methods for sustaining, empowering and enlarging the middle class.

This report argues that a new model should unite the middle class with the poor and vulnerable in a grand democratic alliance, with a clear and pragmatic agenda. The slogan “subsidies for the poor and decent jobs for the middle class” provides a starting point for this transformation. An overriding aim should be to prevent members of the middle class from slipping into poverty, while expanding the middle class by upwardly mobilizing the poor and vulnerable.

No single set of policies can be applied across all Arab countries, but none of the changes proposed in this report can succeed without political reform. A brighter future for the Arab region depends on a governance revolution to undo the old authoritarian bargain.

The Arab Middle Class Report: a force for change? (by Abdallah Al Dardari and Naren Prasad)

The geopolitical and socioeconomic map of the Arab region is currently facing the most serious existential threat since the creation of independent Arab nation States in the mid-twentieth century. Disillusionment with the prospect of a serious peace process in Palestine; the seizure of vast areas of land in the Arab Mashreq by the Islamic State; high youth unemployment; governance fragmentation; and global marginalization all paint a bleak picture of a region that, only three years ago, looked set to provide a commendable example of non-violent democratic transition. Underlying political economy factors driving the rise and fall of the Arab middle class might best explain why a region, abundant in human and natural resources and unsurpassed in its heritage, cultural endowments and diversity, is seemingly unable to confront ethno-religious threats. The fate of the Arab middle class, inferred from rigorous socioeconomic analyses, sheds lights on this question. The empowerment of the Arab middle class could carve a way out of the current development and governance debacle. 

Contrary to popular belief, the middle class in the Arab region has not been eliminated. Prior to the Arab uprisings, it remained constant as a percentage of the population, increasing in size in some countries. Since then, however, the middle class has been shrinking, especially in countries that have witnessed popular revolts, notably the Syrian Arab Republic and Yemen. A strong positive correlation exists between social unrest and the size of the middle class in the Arab region. Increases in middle class size, owing to decades of successful public policy implementation, have been reversed by social upheaval. 

Evidently, young people with high school and higher education qualifications are the driving force behind the growth of the affluent and middle classes in the region. Education remains the most influential policy option in explaining the resilience of the Arab middle class until 2010, and it remains the strongest policy tool for its enhancement. Understanding poverty in the region is paramount to understanding the middle class and therefore to answering this fundamental question: what policies and measures prevent the current middle class from falling into poverty; can push the poor into the middle class; and guarantee unrestricted social mobility?

The fading social contract highlighted by a lack of structural transformation and decent jobs; falling wages as a share of gross domestic product (GDP); inefficient public finances; unfair subsidies; and the breakdown of public health and education, combined with non-transparent repressive political systems, are all powerful examples of a rapidly changing political economy that has directly affected the welfare of the middle class in most countries. The contrast between the increased capacities of Arab youth, as evidenced by improvements in health and education, and their inability to translate these human development gains into higher incomes and political participation explains the middle class’s shift in allegiance and its explosion onto the streets three years ago. Since then, the erosion of the Arab middle class can only be explained by the political failure to empower them, thus benefiting violent non-State actors who fill the vacuum.

A set of policy recommendations for the development of a short and medium-term policy framework to protect the middle class from falling into poverty and enhance the poorer classes’ ability to join the middle class, must be offered to underscore the importance of a socially conscious developmental State. The middle class is not demanding more hand-outs; it is requesting equitable development and decent employment opportunities. This requires a shift from a rentier State based on authoritarian bargaining, to a developmental State where productivity enhancements drive economic growth and inclusive social and economic policies underpin economic and social justice. These initiatives will not be effective if governance reforms are not undertaken seriously to meet the growing demands and aspirations of an increasingly capable Arab middle class.

These policy recommendation should not be viewed in isolation. It is an integral component of an immense effort by ESCWA to develop an intellectual foundation for a new Arab development paradigm built on sound macroeconomic policies, good governance and sustainable social policies within a regional integration and cooperation framework. This is also reflected in the recently launched Arab Integration report and the soon to be launched Arab Development Outlook: Vision 2025 Report, the Arab Economic Integration Report, the Arab Poverty Report and the Arab Governance Report. Nonetheless, as these reports bring together hundreds of Arab intellectuals and policymakers to develop a new and daring vision for the region, the forces of disintegration, extremism and occupation are forging ahead with their enterprise. Only an empowered middle class, the backbone of progress, democracy and prosperity, can challenge these destructive forces and broaden the horizons of Arab aspirations.

The Arab Middle Class Report: a force for change? will be launched in late October 2014. More details will be available from the ESCWA website and this blog.

Abdallah Al-Dardari

Report task leader

Chief Economist and Director of the Economic Development and Globalization Division

ESCWA

Situation brief: The Libyan conflict and its impact on Egypt and Tunisia

          Since the 2011 uprisings, the Libyan Government has been struggling to build State institutions, draft a new constitution and provide essential services to the population in the midst of protracted financial, political and security crises, notably the integration of numerous armed militias into the armed forces.

          Parliamentary elections were held on 20 June 2014, but the Government was unable to extend its authority beyond Tripoli. Local councils are currently managing civilian and administrative affairs, and local military councils and militias are overseeing security, in view of the absence or weakness of public institutions. Significantly, local militias, in particular those that formed the rebel army, continue to retain power on the ground and have been the most influential players on the Libyan scene.

          It is therefore vital that the central Government include the various tribes, local councils and militias in the State-building exercise to guarantee viability. The challenge is to negotiate the restoration of core Government functions and mandates to the central authority. The Government, which has adopted a decentralized system of governance, needs to develop an integrated programme to convince the numerous councils and militias to give up the prerogatives they acquired during the uprisings. However, towns and cities have been running themselves since the collapse of the former regime and retain an inherited mistrust of the central Government, which has been unable to guarantee citizen security and offer financial and social incentives, such as integrated development programmes. Instead, security remains in the hands of various militias that vie for control of national assets and resources, especially oil. These factors, along with external considerations, have led to the outbreak of the most recent armed conflict between rival factions in Libya.

          Since July 2014, political instability and armed violence have intensified around the capital city of Tripoli and the second largest city of Bengazi. The evacuation of foreign nationals, including United Nations staff and diplomatic corps, is under way.  Since 30 July 2014, there has been no political thrust to resolve the conflict, despite a recent agreement between the Government and opposition militias to resume crude oil production and export.

          The present brief provides a snapshot of the economic situation in Libya and reviews the main challenges the Libyan economy is facing. It also highlights the impact of the Libyan conflict on two neighbouring countries, namely Egypt and Tunisia.

الإسكوا تتناول الأزمة في العراق وتأثيرها على اقتصادات الأردن ولبنان وسوريا والكويت (بقلم عبدالله الدردري)

أعلن اليوم الدكتور عبدالله الدردري، كبير الاقتصاديين ومدير إدارة التنمية الاقتصادية والعولمة في اللجنة الاقتصادية والاجتماعية لغربي آسيا (الإسكوا)، أنّ اللجنة على استعداد للدعوة إلى اجتماع خبراء يهدف إلى دراسة معمّقة للتداعيات الاقتصادية الناتجة عن الأزمة المستجدة في العراق. وحذّر من انّ هذه الأزمة ستُحدث تأثيراً مباشراً على كلِّ من سوريا والأردن ولبنان، وعلى الكويت أيضاً ولكن بنسبةٍ أقل.

كلام الدردري جاء عقب إصدار الإسكوا مذكّرة حملت عنوان "الأزمة في العراق وتأثيرها على اقتصادات الأردن والجمهورية العربية السورية ولبنان والكويت" (بالعربية والانكليزية). وتقول المذكّرة إن الترابط القوي بين اقتصاد العراق واقتصادات هذه الدول يظهر في العلاقة بين الناتج المحلي الاجمالي في العراق وتلك الدول. ومع أنّ مستوى المعيشة في الكويت ما زال محمياً إلى حدٍ ما من تداعيات الأزمة، ليس هذا هو الحال بالنسبة لسوريا والأردن ولبنان.

وفي هذا الإطار، ترفق وحدة الاتصال والإعلام في الإسكوا طياً النص الكامل للمذكرة باللغتين العربية والإنكليزية بهدف النشر والمتابعة.

An Analysis of Access to Finance by MSMEs in Egypt (By J.A. Pedrosa Garcia, S. Agbollah and D. Kharbotlı)

Micro, Small and Medium Enterprises (MSMEs) represent more than 99% of all non-agricultural private enterprises in Egypt, and access to finance is a requisite for their survival and their ability to invest in the future. Finance can take the form of debt (e.g. from banks or microfinance institutions) or equity (e.g. venture capital, angel investors). This paper does a comprehensive review of the several types of finance that MSMEs can access (including new channels such as crowdfunding), as well as of the demand (MSMEs) and the country’s institutional and regulatory framework.
The results are very interesting. For instance, the line between banks and microfinance institutions (MFIs) has become blurry, which has happened because first, the weight of banks’ credit has decreased relative to the economy (private commercial banks have had relatively high liquidity levels and been conservative when working with MSMEs); and second, because MFIs have grown in importance, e.g. Egypt is now one of the largest microfinance markets in the Arab region.
The study highlights policy measures that could improve access to credit by SMEs. To stimulate the supply, for instance, banks could adopt lending systems better suited to the nature and characteristics of MSMEs (e.g. assess growth prospects rather than past financial statements); the appropriate infrastructure to allow NGOs involved in microfinance (NGO-MFIs) to become commercially autonomous could be provided; the demand for credit could be stimulated with measures promoting entrepreneurship, such as streamlining the procedures to start a business. Furthermore, the institutional system is rather burdensome, resulting in lenders not fully empowered to lend. Hence, measures to increase its efficiency (e.g. via express courts dealing with business affairs only) could be established.

اجتماع وفد الإسكوا بكبار المسؤولين بوزارة التخطيط والاقتصاد السعودية حول " مشروع دعم الاسكوا الفني للخطة الخمسية العاشرة في المملكة العربية السعودية"

الرياض، 20 مايو  2014- اجتمع اليوم بمقر وزارة الاقتصاد والتخطيط بالمملكة العربية السعودية في الرياض فريق "مشروع دعم الإسكوا الفني للخطة الخمسية العاشرة في المملكة العربية السعودية" يترأسهم الدكتور عبد الله الدردري، مدير إدارة التنمية الاقتصادية والعولمة وكبير الاقتصاديين في الإسكوا، بمجموعة من كبار المسؤولين بالوزارة.

وخصص اللقاء للوقوف على مستوى الإنجاز إلى مايو 2014، وتبادل اللآراء بين الجانبين حول المنهجيات المعتمدة وخطط التنفيذ. وأكد الدردري في مستهل مداخلته على أن المشروع هو جهد وعمل وطني سعودي تتشرف الإسكوا بالمساهمة فيه كشريك تقني. وأبرز  التقدم الملحوظ حيث بلغت نسبة إنجاز المرحلة الأولى من المشروع حدود 75 % من المتفق عليه علما أن المرحلة لم تتجاوز بعد نصف المدة الزمنية المحددة لها. وبين أن المنهجية المعتمدة  ترتكز على مؤشرات الآداء الرئيسة والتوزين بحيث يتم الربط بين كل أهداف الخطة وسياساتها والجهات المكلفة بتنفيذها للحصول على شبكة كاملة تستعمل كإطار جديد في وضع الخطة ومتابعة تنفيذها، وهو ما يمثل سابقة في العالم العربي. وشكر وفد الإسكوا المسؤولين في الوزارة على حفاوة الاستقبال وتجاوبهم مع الخبراء المكلفين بالمشروع.

ومن جهته، أبدى الجانب السعودي ارتياحه عن مستوى التعاون الفني والتقدم في الإنجاز. ويهدف المشروع إلى تطوير قدرات الوزارة في إعداد خطط التنمية ومتابعتها من خلال إعداد مؤشرات لقياس مدى تحقيق أهداف وسياسات خطة التنمية العاشرة، وترابط الأهداف التشغيلية مع الأهداف القطاعية والوطنية للخطة.