Economic and Social Impact of Arab Political Transitions Mustapha K. Nabli Harvard Kennedy School of Government October 20, 2015

Three main questions 1.What was the immediate economic and social impact of the political transition? 2.Which economic policies characterized the transition? 3.Are the changes taking place leading towards the emergence of a new social contract?  Will illustrate focusing on the cases of Tunisia and Egypt

I. Economic and social outcomes during the transition (1): Overview,

Economic and social outcomes during the transition (2) : Total GDP growth and GDP growth per capita drop by about 3 percentage points

Economic and social outcomes during the transition (3): drops in investment rate by 2-3 points of GDP, domestic savings rate by 7 points. Current account balance increases by 4-5 points of GDP

Economic and social outcomes during the transition (4): Worsening social indicators Social indicators worsened: Unemployment increases by 2-3 points: – Egypt: from 10% before the uprisings to more than 12% afterwards (up to 13,4% in 2014) – Tunisia: from 13,5% before the uprisings to 16,5% afterwards (up to 19% in 2011). Unemployment of university graduates: – Tunisia: increased from 23% in 2010 to reach 33% in 21012/2013, but decline slightly to 29% in Poverty: in view of the stagnation or decline in GDP per capita poverty must have increased somewhat in both countries, affecting most significantly the most vulnerable, even though some of the impact must have been mitigated by the active wage policies of the poorest (minimum wages, and cash transfers) Indicators for public services deteriorated: health, education, urban services, transportation, etc.

II. Policies pursued (1) Three main areas of policy were the most significant: Two active: fiscal, public employment and wages One passive: food and energy subsidies Other areas were much less active: monetary, trade, and so on.

Policies pursued (2): very expansionary fiscal policies A few indicators:

Policies pursued (3): Expansion in public sector employment and wage increases Governments used public employment and wage policies as a main instrument to respond to the social pressures which emerged after the revolution and demands for social justice. Tunisia: Public sector employment increased from 475 K in 2010 to 632K in 2015, or a 1/3 increase. Government wage bill as % of GDP increased from 10,7% in 2010 to 13% in Private sector wages increased by an average of 6,3% per year over the period Egypt: Govt wage bill increases from 7% of GDP before revolution to 8,7% in 2014/15

Policies pursued (4): large increases in commodities subsidies and late reforms Cost of subsidy system skyrocketed during first years ( ) with limited or no reforms or adjustments in food and energy prices: Tunisia: cost of subsidies increased dramatically between 2010 and 2013 (From TND 1,5 billion TND 5,5 Billion), from 2,3% to 7,2% of GDP. Egypt: Subsidies cost increases from 7,3% of GDP in 2010/11 to 8,7% in 2012/13. But recent reforms in 2014 Egypt: Adjustments in prices (2% of GDP) Introduction of two new cash transfer schemes: one unconditional for the disabled and elderly, one conditional for poor to support children in education and health Tunisia: Major cuts in energy subsidies, with adjustment in electricity prices and other products.

Main Message from previous discussion  It is widely accepted that it was the economic and social limitations and failures of the old social contract which were the main cause of the uprisings end 2010/early  Whatever the grievances which have driven the uprisings the economic and social situation has gotten much worse since then.  What does this imply for the prospects of a new social contract given the limits and failures of the old one?

III. Are we moving towards a new social contract? (1) Major building blocks of changes in a social contract: 1.From a closed (Authoritarianism) to a more open political system (Democracy) 2.From active state dominance of economy (with patronage and rents) to a more open, competitive economy and regulatory role of the sate 3.From limited access to broad based access private sector 4.From a large/broad welfare system (public employment, direct subsidies and large scale provision of public goods and services) to a more targeted redistribution system.  Large literature on point 1, will focus on points 2,3 and 4.

Are we moving towards a new social contract? (2) What needs to happen? 1.Major changes in fundamental conditions are required to underpin a new social contract:  change in the political balance of power?  changes in attitudes and preferences with respect to role of the state and freedoms? 2.For such changes to result in an actual movement towards a new social contract would require:  the undertaking of significant structural reforms  political and social action to promote and undertake such reforms

Are we moving towards a new social contract? (3): No or limited changes in the political balance of power The same socio-economic groups which supported previous regimes are still the most influential: Middle class (which defected the previous order during the uprisings): public sector employees, those of formal private sector In Tunisia: labor union whose members are to a large extent part of the middle class Security apparatus Insider business elites

Are we moving towards a new social contract? (4): Some changes in attitudes and preferences, but mixed as regards implications? Attitudes and preferences do not change fast. But there should be changes in people’s attitudes, political preferences, and views which would inform us about the extent to which they expect and demand a new social contract. Results from analysis of opinion polls show: 1. There have been longer term trends towards: more self-expression, more civic engagement, more support for gender equality, less religiosity, more support for democratic governance. But levels remain low in comparison with rest of the world. 2. Since the uprisings there is limited empirical evidence that since 2011 some important changes have taken place which are mixed (Diwan and others):  Less support for authority and less obedience especially among the youth  A rise in grievances and more support for redistribution among the poor, in many countries.  Strong preference for desirability of democracy did not change after uprisings, but major decline in people’s assessment of the suitability of democracy to their country in Tunisia and Egypt (Arab Barometer)  Rise in support for strong rule, especially among the better off There is no evidence of much change on expectations about the role of the sate and the private sector.

Are we moving towards a new social contract? (5): No significant structural reforms Not much achieved in the relevant and central areas of reform related to the social contract: 1.The reform of the state and its dominance of the economy  Realigning the role of the state  Less corrupt and a more transparent systems for better delivery of public services 2. The development of a dynamic private sector which is not based on cronyism, rents and connections; 3. A more equitable and broad based tax system, 4. Reform of the redistribution system  Subsidy system  Reactivation of a the dynamic process for social mobility through more equality of opportunity in terms of access to quality education and health

To sum up: Where do we go from here? No indication of change towards a new social contract:  same interest groups and political economy environment, no reforms  weak political parties to drive significant changes and reforms (role of the state, redistribution system, governance, etc.),  absence of credible social dialogue around economic and institutional reforms  weak state capability and leadership to spearhead strong reform agenda and implement it effectively, But: people aspirations for changing the old social model (freedom, social justice, more redistribution, better opportunities, etc.) are still alive and may have increased (deterioration of the social conditions); and presence of quite a strong civil society. Two possible scenarios (mostly for Tunisia): S1: Poor quality democracy, possibly unstable, with the old social contract broadly in place (less the autocracy).  This seems most likely as of now!  The weak economic performance undermines social stability, which itself might undermine the consolidation of democracy S2: Better quality democracy with a new social contract  This would require new institutional processes in order to design and implement the necessary changes and reforms The question we may debate today is: what type of political forces and institutional processes are required and how to bring them about in order to achieve this scenario?