Pricey revolution

The recent convulsions in the Arab world — starting with Tunisia and Egypt, and seemingly at risk of spreading to Yemen and Algeria, though both have iron-willed military establishments which may be more effective at dealing with them — have raised questions about the economic implications for the region, especially at a time of recession. And those, in turn, may have further political consequences.

Egypt, whose political troubles clearly owed a great deal to the country’s economic woes as well as to other factors, is an instructive case. It does export modest amounts of oil (but much more of gas) but it has seen its revenues fall significantly during the global economic crisis of the last couple of years. Egypt is also dependent on the outside world for two major sources of revenue — from the Suez Canal, which has seen less use as a recessionary economic climate reduced global shipping, and tourism, which is the sort of discretionary spending that is usually the first thing to be cut when political unrest erupts onto the street. Whatever the new government in Cairo may do politically, it is going to confront serious economic challenges which may yet generate fresh waves of protest.
The Arab world is, of course, divided between those countries which do not have oil resources, and whose challenges of poverty and under-development will therefore be accentuated in the short term by the present crisis, and those whose oil resources give them a significant protective buffer even though prices have been volatile in recent months. Saudi Arabia, for instance, says confidently that any shocks produced by the current global economic crisis will be offset by the country’s substantial reserves and continuing oil revenues. You can expect the Saudi government to continue spending lavishly, which will keep liquidity flowing within their economy like a good lubricant. Saudi banks announced excellent third-quarter results this fiscal year; they have no sub-prime exposure and there is no reason why their stocks should go down, except for the irrationality that makes downward pressure in one country translate into downward pressure on all countries in our globalised world.
Nonetheless project financing is bound to go down in Saudi Arabia as well as in the other countries of the region, because projects everywhere are still largely financed by the same international financial institutions whose capacity to extend credit has been severely hit by the crisis. When mega-projects go down, ordinary individual consumers could also have less spending money in their pockets. The Saudi government, conscious of this, took an interesting step when it made a 10 billion riyal ($2.7 billion) deposit into the Saudi credit bank, to be loaned interest-free to lower-income Saudis.
The Arab Gulf countries had largely been expected to emerge unscathed from the global financial crisis, but the reality has been sobering. Many Gulf banks, notably Kuwait’s, were revealed to have much more exposure to derivatives than had been imagined, and their losses had a negative effect on confidence in the banking systems of the region. How can the Gulf countries sustain their massive spending and high economic growth rates at a time of falling oil prices and wobbly banking systems? They all have a bit of an oil cushion built up in the good years, but that may not be enough. Kuwait, for instance, has a less diversified economy than Saudi Arabia or the United Arab Emirates (UAE), and it guarantees its citizens a cradle-to-grave social security net; no wonder Kuwaiti stockbrokers marched en masse to the Prime Minister’s palace asking for more government intervention!
Many UAE watchers who saw property prices shoot up year after year (and even month after month) are not surprised that the balloon has clearly been pricked. There is a noticeable drop in the prices of properties yet to be built in Abu Dhabi and Dubai, which also suggests that foreign investors are pulling a lot of their money from the region. But the UAE government has been aggressively injecting liquidity into the economy and cutting interest rates. There is now modest talk of a recovery even in Dubai, though real estate is, as always, likely to be the last to recover. There is no sign of political unrest in any of the Arab monarchies, since — with the possible exception of Jordan — they appear much more stable than the civilian authoritarians who have come under siege recently.
But there’s no room for complacency. The Arab region’s economic growth in recent years has largely been driven by oil revenue, real estate investments (some of which have been really speculative), a housing boom, tourism and, in some countries, foreign aid and foreign direct investment. Very little of this has gone towards building a significant industrial infrastructure, through of course Saudi Arabia and the Gulf countries have been an exception. Further, surplus oil revenues will be difficult to rely upon, and that means less money available to everyone — to governments, to the sovereign wealth funds, and to the middle class consumers who drive economic growth in every society.
In short, there is a genuine risk of greater instability and conflict throughout the Arab world, not just because of the political factors that propelled protestors in Tunisia and Egypt, but because of the difficulties that have come in the wake of the global economic crisis. If the amount of money coming into the region from abroad — whether from trade, foreign direct investment or even remittances, which may go down as economic growth slows everywhere — decreases, unemployment is bound to increase. When people do not have regular employment and a steady income, social and political unrest is likely to follow; and in turn, this serves as a further disincentive to foreign investors, which creates a vicious cycle. With a demographic boom that gives the Arab world a huge army of unemployed young men, the spread of information across borders in the Internet era and the economic consequences of the global recession, the prospects for more political unrest in the months to come appear very high indeed.

Shashi Tharoor is a member of Parliament from Kerala’s Thiruvananthapuram constituency