The way recent economic reform programs have been implemented in the Arab world reflects similarities in countries’ approaches to such policies, forming a unique model for pushing through economic change.
The foundation principle of this model is the adoption of top-down reforms, rather than introducing them gradually. Reforms are imposed in a manner that creates vast economic and social shocks, in a shock doctrine similar to that followed by eastern European countries as they transformed from communist to free market economies.
The psychological aspect is a key part of this model. Most governments in the region send double messages, promising both the proverbial carrot and stick, to win endorsement for economic reforms, perceived by the government as essential -- particularly austerity measures. Governments argue that these policies create solid future opportunities for economic growth and improvement of long-term living conditions, and that failing to implement them will damage the economy.
Some states in the region have already succeeded in pushing through economic transitions based on the psychological and political makeup of the previous model. Other have failed to pass such measures in some countries such as Tunisia, where the political opposition has the leverage to oppose the government and block these policies.
Reform measures
In recent years, several states in the region including Egypt, Tunisia, Algeria, Iraq, Jordan and Morocco, have embarked on economic reform programs. They hope to boost economic growth, which has been stagnant since the Arab uprisings of 2011, as well as tackle local economic distortions, in particularly budget deficits that have grown markedly because of shrinking public revenues and growing spending.
These packages have aimed to promote the private sector, improve the investment environment and unpeg currencies. Most controversially, many of the packages have including stringent austerity measures, including the following:
1. Rationing fuel subsidies. Governments in the region have been raising fuel prices for several years running, including the prices of petrol, diesel and kerosene, affecting most sectors of the economy. One of the first governments to do so was Jordan, which raised the price of petrol and diesel in 2012 by 16 to 32 per cent.
In July 2014, the Egyptian government raised the prices of oil by-products and natural gas by as much as 11 to 122 per cent. Tunisia hiked the price of a liter of petrol by 6.3 per cent in the same month, and in November 2016, Sudan raised the price of oil by-products by 32 to 34 per cent, after already hiking them up by 37 per cent in 2013. The Egyptian government raised the price of oil by-products again in the aforementioned month by approximately 30 to 47 per cent.
2. Tax hikes. Arab governments have resorted to topping up their budgets either by raising taxes, especially consumer taxes, or broadening their tax bases. Egypt’s value added tax (VAT) rose from 10 to 14 per cent in September 2016. From the start of 2017, Algeria raised VAT from 17 to 19 per cent, in addition to higher fees’ rates on real estate, fuel and tobacco. Rates on electronic goods that consume a significant amount of energy have also been raised. In its 2017 budget, Tunisia increased taxes on cars and broadened its tax base by subjecting certain categories of professionals to the tax system, including doctors, lawyers and others.
3. Cutting basic commodity subsidies. The prices of basic goods including food and medicine in Arab markets have risen to unprecedented rates as Arab states adopted flexible exchange rates. In Egypt for example, the decision to unpeg the currency from the dollar in November 2016 almost doubled food prices in the markets. In the same month, the Sudanese central bank stopped providing foreign currency for the import of medicine -- a decision later rescinded after drug prices skyrocketed and that would have almost doubled the price of medicine.
4. Public sector wage freezes. On top of these measures, the region’s governments have put in place plans to ration the public wage budget, which makes up the largest share of government spending. Algeria’s 2017 budget included a plan to freeze public wages for the coming years, while Tunisia approved raises in salaries, yet the wage budget was set for two years rather than one.
Despite the argument that such reforms would enhance the region’s financial and currency stability in the future, they offer little comfort in the short term. Many see austerity measures as part of an unfair local economic system that puts extra economic burdens on the public’s shoulders. Some economists oppose such measures as they see them as not fulfilling of long-term economic needs, but rather as hitting the living standards for most of the population without offering real guarantees of enhanced economic growth or social justice.
Certainly, public fears regarding austerity measures breed worry among governments fearing that they could trigger unrest, hindering the path towards more comprehensive economic reform. That has happened in several countries including Algeria and Tunisia, which in 2016 witnessed labor protests against the effects of the measures mentioned above.
Various tactics
Arab governments have responded to public fears towards austerity measures by adopting political and psychological tactics to pave the way for economic reforms. A similar model has been adopted across the Middle East, consisting of the following:
1. Top-down policies. Some Arab governments have had limited dialogues with segments of society before implementing economic reforms, to show that reforms are indeed centrally-managed and imposed from the highest levels of the government downwards. This reveals that there is little real need for public support, but rather the measures are accompanied by political and economic warnings about the possible consequences of failing to implement such measures, as well as encouraging evidence of the various positive results.
2. Shock vs. gradual change. Some Arab governments have adopted models of gradual reform, but the dominant feature in these policies, including austerity measures, is that they are imposed over two or three years at most. That places severe economic burdens on the public within a short time frame.
3. Perfect timing. Currently is the ideal time for governments across the region to impose economic reforms. In most Arab states, the political opposition is exhausted and at a turning point after the failure of the Arab Spring uprisings. That has undermined their capacity to resist such policies. Regionally, the unstable political and security environment in places such as Syria, Libya and Yemen has encouraged the public to accept government measures without major resistance, fearing that opposition could spark renewed chaos.
4. Cohesive political systems. The tenacity of political systems is also key. The implicit deal between the executive and legislative branches in various states in the region to push through economic reforms is seen as a clear message to the opposition that there is no escape from such reforms. This is confirmed, for example, in the Algerian parliament’s overwhelming approval in November 2016 of the 2017 austerity budget. Furthermore, these governments enjoy the backing of international institutions such as the IMF and the World Bank.
5. Bartering over reform. Some Arab governments have enjoyed political flexibility in passing their economic reforms, negotiating with opposition forces to reach a compromise deal for implementing economic reforms. Whenever the two sides have been able to reach agreements acceptable to both sides, it has appeared that the opposition has won major victories. But in fact this reflects opening negotiations between the two sides to open the possibility for enforcing further reform measures.
For example, the Tunisian government reached an agreement with the powerful Tunisian General Labor Union in December, cancelling plans to freeze public wage rises for a year in exchange for measures including imposing the tax system on professionals such as doctors, engineers and lawyers.
Against a backdrop of widespread outcry against a decision to raise the price of drugs in Sudan in November, Khartoum was forced to postpone the decision, announcing that it was extending the scope of health insurance instead, standardizing the prices of drugs across the country and raising its budget for free healthcare. These were seen as unexpected gains for the public, but the Sudanese, in fact, are waiting for a decision from a committee formed to set the prices of drugs. The prices could still be raised, albeit by a smaller amount.
6. Intense media campaigns. Before and during economic reform programs, local media outlets gave a space to voices in favor of the new measures, intensifying the messaging around their importance in enhancing economic growth and stability. Meanwhile, many outlets marginalized voices opposing the government measures.
Psychological narratives
Another aspect of the strategy governments in the region adopted was that of psychological messaging, using a mix of fear and temptation:
1. Discourses of blame and warning. Some Arab governments have responded to illegal anti-reform demonstrations -- limited in scope and effect in most cases -- by shutting them down with brute force.
At the same time, they have sent subliminal psychological messages to the political forces taking part in such demonstrations, either by stating the protests will harm the whole of society or threatening to prosecute those taking part. Algeria faced protests against its 2017 austerity budget in several cities, especially in the province of Béjaïa in January 2017. That was accompanied by government discourse in the media warning of the results of such protests and their impact on the country’s stability.
2. Limited alternatives. Governments have constantly emphasized that not adhering to such programs will not serve the economy, but will rather create further difficulties for local economies. They have promoted the line that there is no alternative to such measures in tackling economic hurdles including dwindling resources, rising budget deficits and public debt.
3. Incentivization. Governments have also claimed that these programs will guarantee a better economy for future generations by raising growth, lowering unemployment, clamping down on corruption, reforming tax systems and creating fairer economies.
Officials have repeatedly promoted the idea that such programs are being implemented according to national agendas rather than the agendas of international institutions, which have notorious reputations among the population.
4. Sharing the sacrifice. Governments have emphasized that the responsibility for shouldering the burden of reform packages is shared both among members of the government and the broader public. Some governments, notably Tunisia and Algeria, cut ministers’ wages by up to 10 to 30 per cent in September and November 2016, in symbolic moves designed to curb public spending but also to encourage the public to accept their reform packages.
Will they work?
Elements of the model described above, based on curbing socialist ideas which oppose these reform packages, are adopted by states including Egypt, Algeria and Tunisia to push through planned measures such as wage freezes, raising fuel prices and taxes, etc.
Psychological messaging to the public has played a role in limiting potential opposition to the measures. A large part of the population in the region today fears a recurrence of the chaos that has hit their neighbors.
Despite all this, there is no guarantee that these tactics will remain effective forever. As long as governments are implementing reform programs, which they see as essential for stabilizing their economies, the public will be waiting to reap the economic rewards they have been promised.
