Corporatism, Capitalism and the Arab Spring

Corporatism, Capitalism and the Arab Spring is the title of a Working Paper I completed for the Columbia University’s Center for Capitalism and Society. It is freely accessible on the Center’s website. All feedback is appreciated.

This is the abstract of the paper:

This paper examines the economics of the popular revolutions that removed the ruling regimes of Tunisia and Egypt in early 2011, and presents the concept of a corporatist economy as a better framework for understanding the economic systems of these countries. The deposed regimes had instituted a deep corporatist governance system that placed control of most economic activity in the hands of the regime and its closest loyalists. This corporatist system was very beneficial for the regime and its cronies, but was very destructive of economic freedom of the majority of people, leading to economic stagnation, youth alienation and the eventual mass protests that deposed the regimes. Moving forward, what these economies need is not a return to socialism, nor a retrenchment of corporatism, but a move towards dynamic free market capitalist economies that allow individuals the freedom to make their own living and determine their own future.

On Mubarak’s odious debts

On October 6th I had a piece published with Project Syndicate on the debt legacy with which Mubarak has saddled the Egyptian people. I argue that the Egyptian government should announce it is not liable for Mubarak’s foreign debts, and that the person who should be made liable for them is Mubarak himself. The piece is freely accessible on Project Syndicate’s website.

The piece is also available in Arabic, Spanish, Russian, French, German, Italian, Czech, and Mandarin Chinese.

On Aid to Egypt and Tunisia

In June, I wrote an article for the Financial Times on the question of foreign aid and loans to post-revolutionary Tunisia and Egypt. The crux of my argument is that this aid would be a bad idea for three main reasons:

1- foreign aid’s track record is less than stellar, and it is unlikely to spur the economic growth and development its advocates promise. Foreign aid money goes to governments and development agencies which essentially engage in central planning, a discredited idea that has has a woeful track record whenever it has been tried. Prosperity doesn’t come from the planning of the few, but the freedom of the many.

2- Foreign loans will, on top of failing to spur economic growth, turn into a heavy debt burden on the recipient country, leading to increasing debt repayment burden, requiring higher taxes and potential fiscal and monetary crises.

3- The political impact of handing large sums of money to the transitional governments of Egypt and Tunisia will be to give them inordinate power, and make them accountable to their foreign funders, rather than to their people. It is worth remembering, after all, that the deposed regimes of Ben-Ali and Mubarak were themselves the recipients of large amounts of foreign funding, and we all saw how that worked out.

The article is available on the Financial Times’ website (requires free registration). Excerpts:

Perhaps most important, aid has a political impact too. Those calling for new support seem to forget that the deposed regimes already received plenty of international aid finance. Under the aegis of the International Monetary Fund and the World Bank, they presided over elaborate privatisation and reform programmes, which benefited those close to power but did little to help the wider population. In truth the regimes tended to use this support to strengthen their rule, building state security apparatuses and creating kleptocratic governments accountable only to their foreign bankrollers.

Today, with both Tunisia and Egypt led by provisional caretaker governments, the risk is that the power granted by control of this spending will subvert their precarious democratic transitions. Generous aid programmes mean leaders do not need to please their citizens, or gain their trust to secure power; they can instead use donor money to build a security state and buy off their opposition. Without aid, however, governments find it harder to build corrupt client networks, and must instead be responsive to the demands of their people.

A better approach would be for assistance to wait until elections are completed, and elected governments are formed. Even better, donors should be willing to put the question of funding to the public in a referendum, allowing the people to choose whether they really want projects today and then debt tomorrow. Indeed, given the strong relationship between donors and the deposed regimes, it is not impossible to imagine free elections producing new leaderships that reject new funding, aiming instead to reduce or eliminate foreign aid and debt.

Without this, a dysfunctional body politic and a large debt burden may be all that Tunisia and Egypt are left with following the distribution of donors’ money. Yet the people of Tunisia and Egypt rose up against unaccountable dictators aided by just this largesse. Now they deserve the chance to decide for themselves whether they want the same foisted on their ruling classes again.

On Arab Economies

Back in April, I wrote a piece with Project Syndicate on what the economic challenges facing Arab countries in light of the revolutions taking place across the Arab World. The article views two different approaches that economic reforms might take: More government provision of goods and services, or less government supervision of economic activity. I am in favor of the second. The article is freely accessible on Project Syndicate website.

It has also been translated to Arabic, Spanish, Russian, French, Italian, and Mandarin Chinese.

A piece I co-wrote on the Tunisian revolution in January in the FT

Back in January, I co-wrote a piece with Professor Edmund Phelps in the Financial Times on the Tunisian and Arab economies. The argument of the piece, which is a theme I will revert to frequently, concerns the role of corporatism in the economic systems of Arab countries. People generally think of two opposed economic systems: capitalism and socialism. A third system, which is more prevalent but less discussed, is corporatism. My favorite way of explaining corporatism is that it is an ‘unfree market system’. Unlike socialism, and like capitalism, corporatist systems do have private ownership of capital, as well as markets. But these markets are not free. Transactions are controlled and supervised by the government, which exercises a heavy-hand in planning economic activities, and treats the interest of various stake-holders as being of more importance than the freedom of individuals to transact and produce freely.

The piece is accessible with free registration on the Financial Times’ website, and I excerpt it here briefly:

Bouazizi was selling vegetables in the streets of Sidi Bouzid when police confiscated his stand on the grounds that he lacked the required permits. Unable to afford the permits and a new stand, Bouazizi’s livelihood was destroyed. He had no other way to support himself.

In Mr Ben Ali’s Tunisia, nearly all business activities, not just selling vegetables on city streets, were placed under the supervision of the regime. Permits were sold to poor people to raise the revenue that increases in income and sales taxes might not. Among the middle class, those awarded privileged positions were selected for loyalty to the regime more than for business acumen. Worse, under this system, rulers played a direct part in the control of many big enterprises.

Thus state agencies and state-run corporations had a stranglehold on virtually all the economy.

The losses of inclusion into the market economy suffered by poor people were a grave injustice. Millions of Bouazizis, unable to find a job in a state-controlled labour market and powerless to start a business without the proper connections, found it impossible to be productive members of society. “It was peaceful,” a young woman told a reporter, “but poor people didn’t have any chance to live.”

The protection of sclerotic state-backed enterprises from the entry of new ideas and new people has closed off many better ways to operate. The dearth of innovation, in turn, has had a chilling effect on job creation and the growth of incomes.

Last week, Hillary Clinton, US secretary of state, remarked to a group of Arab leaders that many Arabs had “grown tired of corrupt institutions and a stagnant political order”. She seemed to miss, though, an important lesson of the events in Tunisia when she said: “If leaders don’t offer a positive vision and give young people meaningful ways to contribute, others will fill this vacuum.” Tunisia was failing not because it neglected to “offer” its people opportunities; it was failing because it denied them opportunities, as in the case of Bouazizi. This is the simmering volcano with which many Arab regimes must contend. Regimes that stifle their people’s chances for prosperity and personal development do not deserve to survive, nor should they expect to.