The last thematic issue of International Development Policy, “Combining Economic and Political Development”, deals with democratic transitions in the Middle East and North Africa, which seem to have mostly failed to consolidate and have been hindered by the difficult economic heritage of previous authoritarian governments. Giacomo Luciani, Editor of the volume and Adjunct Professor of Interdisciplinary Studies at the Graduate Institute, reviews in his introductory chapter existing literature on this crucially important question: Can democracy succeed? Interview.
You write in your introduction that the outcome of economic policies in Arabic countries “was partially, yet not entirely disappointing”. Can you describe the economic heritage of authoritarianism?
The economic heritage of authoritarianism may be described as partial macroeconomic equilibrium and liberalisation, coupled with insufficient growth and labour mobilisation. State budgets were brought closer to equilibrium, exchange rates unified, and inflation much reduced: all of which earned the praise of international financial institutions. However, subsidies remained a very important component of expenditure, a huge unresolved problem. Furthermore, liberalisation was more apparent than real, with privatised companies transferred to political cronies, the banking sector still mostly under direct state control and again used to support political cronies, and multiple obstacles to competition and entrepreneurship. The outcome was some GDP growth, indeed at a satisfactory level, but no improvement in employment conditions, no inclusiveness. The share of the marginalised increased and social services available to them deteriorated sharply. The Arab countries have historically been rather egalitarian in international comparison, and this egalitarianism was eroded. Hence new democratic governments were left with the task of containing subsidies expenditure while increasing investment, growth and inclusiveness: not an impossible task if they could have access to international finance, but the latter shies away from “political instability”, and official sources were not forthcoming.
Why do you write that “well-established recipes do not support democratic transitions”?
Authoritarian regimes collapse when popular discontent becomes overwhelming, to the point that the forces of repression abandon the incumbent regime. Governments that are called to manage a democratic transition may enjoy an initial honeymoon thanks to increased freedom and hope for the future, but expectations of material benefits must also be addressed. Ideally this requires redirecting expenditure towards investment and social services, and attracting international investment. A revolutionary phase, however, frequently entails a deterioration of the balance of payments, because insecurity will cause a collapse of certain sectors that are an important source of revenue, notably tourism; and capital will tend to flee. Achieving a national constitutional pact while at the same time cutting expenditure on subsidies and making at least some improvement in the conditions of the marginalised is extremely difficult. Subsidies – especially on the consumption of petroleum products – are well known to be regressive: in theory one could obtain an improvement in equity and inclusiveness by abolishing these subsidies and offering compensatory measures, such as universal cash payments. But subsidies have powerful lobbies supporting them, especially among the salaried middle classes, i.e. government employees. Similarly, opting for a large enough devaluation will damage the purchasing power of the middle classes, which can buy imported products, while potentially benefitting higher incomes that frequently own assets abroad. Further privatisations or a reform of the banking sector are difficult to achieve in the short term, and almost invariably lead to losses of jobs.
In other words, a democratic transition government will inevitably hurt the interests of some important constituency. It is a question of balance: a democratic transition government would need to be able to tap an international “political transition credit facility” but unfortunately this is not available.
I would also like to mention migration policies: Europe could support democratic transitions by allowing more immigrants to come from countries that initiate a transition, but we are so overwhelmed by refugees from countries where repression and resistance to transition precipitate civil wars and human rights violations that the tendency is rather to make it more difficult for citizens of countries in transition to obtain visas. It is understandable that it should be so, but the outcome is perverse in the eyes of the citizens of transition countries, especially the young.
So, what economic policies and development priorities should be pursued by governments in the early phases of democratic transition processes?
Inclusiveness is the key objective: the marginalised masses must see at least some improvement in their lot, the youth some improvement in their opportunities. In the short run, a combination of cuts in regressive subsidies, compensated by universal cash transfers, and bold currency devaluation may succeed in injecting dynamism and signalling the will to change course in economic policy. Maintaining security is crucial to revive tourism and encourage foreign direct investment, especially investment from nationals that reside abroad and may be keen to reinforce their ties and interests in the motherland.
Then structural policies must be tackled, beginning with reform of the banking sector to open access to credit for small and medium-sized enterprises (SMEs). We know very well that employment growth depends primarily from nurturing a dynamic SME sector, and everybody pays lip service to this goal, but actual initiatives in support of these enterprises are few and frequently ineffective. Excessive regulation frequently suffocates diffuse entrepreneurship and only creates opportunities for corruption. The state must control less of the economy and offer more and better social services. Education and health are top priorities, together with housing for the poor.
Does democratisation have a chance?
Absolutely, and a better one if it takes place in the right international context. We have not been very good at supporting democratisation processes, I believe. At the institutional level, democratisation has frequently floundered because the wrong constitution and/or electoral laws have been adopted. In a democratic transition, institutions should be open to inclusion and flexible change: concentration of powers or majoritarian electoral systems encourage exclusion rather than inclusiveness. And with respect to the management of the economy, a degree of populism must be recognised as necessary. Pressuring transition governments to quickly enforce unpopular policies does not help: reforms are necessary but should be accompanied by measures aimed at allowing some rapid if limited improvements at least for the poorer strata of the population.
Europe has been very rigid in enforcing fiscal discipline among its member countries, but should not show the same stern face to its democratising neighbours. In fact, in some cases the European Union (EU) has been quite generous, but not especially so towards its southern neighbours. I do not believe that the failure of democratisation processes is the EU’s responsibility, certainly not. But we could have been more generous in the one successful case so far, which is Tunisia. We should have aimed at turning Tunisia into a great economic success, which at the moment it is not.
Full reference: Luciani, Giacomo. “Introduction: In Search of Economic Policies to Stabilise Democratic Transitions.” In Combining Economic and Political Development: The Experience of MENA, edited by Giacomo Luciani, 1–21. International Development Policy series 7. Geneva: Graduate Institute Publications, Boston: Brill-Nijhoff, 2017.
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