Lack of economic vision threatens stability in Tunisia

Tunisia’s National Dialogue Quartet, a coalition of four civil society groups, richly deserves the Nobel Peace Prize for shepherding Tunisia through turbulent times. However, the Norwegian Nobel committee, in awarding the prize, side-stepped the deep causes of the Arab Spring and missed the gravest threat to Tunisia’s future, greater than the danger of Islamic extremism.

To understand the danger, go back to the Arab Spring. The western media, like the Nobel committee, interpreted it as a “struggle for democracy and fundamental rights.” There was some of that, but it was primarily provoked by low levels of economic freedom, high levels of government regulation, and phony reform saturated by corruption.

Crucially, the usual “security” compact in dictatorships, where citizens give up freedom in exchange for security, was supplemented in Arab nations by a perverse economic deal. The poor got subsidies and benefits from extended patronage networks; the middle class got guaranteed government jobs in exchange for often worthless “university” degrees; and the rich got to loot the state. This created incentives for all segments of society to milk the state rather than engage in productive activity.

The deal was disrupted by skyrocketing Arab birth rates, sending costs through the roof. Arab states could no longer afford the subsidies or government jobs for a bulging youth population. Western donors, a hugely important source of funds for poorer Arab nations, balked at sending more billions down the rabbit hole of destructive economic policy.

To keep money flowing, Arab nations started to “reform,” de-tangling regulation and privatizing state enterprises. Some of this helped. Economic growth and investment ticked up in places like Tunisia and Egypt. But it was mostly a fraud. The bureaucracy liked tangled regulations, a source of bribes from those who needed to cut the red tape. Privatization was a cover for shifting resources from elite control through the government to elite control through crony transactions. The Mubarak family in Egypt and the Ben Ali family in Tunisia ransacked the state.

Public anger was compounded by youth at drift. Official Arab youth unemployment is and was around 30 per cent, but perhaps three-quarters of young people lack full-time jobs. Polling evidence shows that economic issues were forefront for Arab Spring demonstrators who typically came from the middle and lower-middle class. They expected no-longer-available government jobs.

And here’s the rub for the future of Tunisia. “[W]hen political change is not accompanied by widespread economic change, there is a risk of reversion… When old economic structures are preserved or only modestly adapted, it cannot be expected that different outcomes on growth and equality will result,” an influential study on the Arab Spring argued.

Tunisia lacks a viable economic reform vision. During the period of phony reform, international institutions fell over themselves praising Tunisia and Egypt for their “neoliberal” free-market restructuring, fooling the public and even members of the elite into believing Tunisia had tried free markets and they had failed.

Today, in key indexes, Tunisia ranks little better and in some cases much worse than its pre-Arab Spring performance. Tunisia is 60th in the World Bank’s Ease of Doing Business index, 79th in Transparency International’s corruption index, and 116th in the Fraser Institute’s economic freedom index, which Nobel laureate Douglas North has called the “best available” measure of efficient markets.

Worse, reform is a dangerous process after profound political change. The economy inevitably dips and unemployment rises as subsidies and unproductive jobs are cut. New activity requires time to bloom. Post-Soviet nations and even the United States suffered economic reversals after their revolutions. Such a setback in Tunisia will discredit the government and refresh memories of false reform, all with Islamic extremists ready to exploit the discontent.

Despite the courageous and tireless efforts of many members of Tunisia’s civil society, real democratic stability will fail in Tunisia unless economic policy shifts from milking an impoverished state and stifling economic freedom to creating conditions for meaningful productive employment for all and, most importantly, stability for throngs of impressionable young men with little to lose if opportunity is unavailable.