THE POLITICAL ECONOMY OF INCLUSION
The Arab Spring may contribute to altering this trajectory by opening up political systems, which would enable social and economic systems to become more open and inclusive and experience more economic growth, poverty reduction, and creative destruction. Historically, the political-economy equilibrium in MENA yielded policies that have led to several unproductive outcomes: • Highly uneven regulatory playing fields for fi rms, including discretionary access to credit • Significant labor market rigidities • Access to jobs based on personal networks rather than on objective signals of ability • Generally limited access to information and civil liberties All of these outcomes were—and have the potential to remain—significant barriers to employment growth in MENA. Their secondary legacy is an unorganized citizenry that may at first struggle to use new liberties, such as those acquired in post–Arab Spring nations. This chapter reviews the consequences of these policies from a political-economy perspective and examines the alternatives for change.
Revisiting the political economy of private sector dynamics This section revisits key features about the interactions between the state and the private sector—the experience of privatization, enforcement of regulation, and limited access to credit—and explicitly links them to some of the political-economy incentives that prevail in rentier states as well as to the types of exclusion and social divides that this model perpetuates.
Elite capture of public benefits Following decolonization and independence, most of the countries in MENA adopted the (then common) development model of stateled industrialization. As rents from natural resources were depleted in the region’s relatively resource-poor countries (for instance,
the Syrian Arab Republic, Tunisia, and the Republic of Yemen), several governments embraced policies to increase the role of the private sector and reduce the fi scal losses. In North Africa, the fi rst wave of marketoriented intervention in the 1990s was intended to attract foreign direct investment in the energy sector to increase revenue generation and forestall the taxation of citizens in a period of fiscal constraint. The second wave corresponded to internationally backed structural adjustment programs aimed at reducing government losses from state-owned enterprises, mainly through privatizations. According to the (still-emerging) literature on this period, economic liberalization was part of a long-term strategy of power preservation. Rulers used economic reforms to consolidate power, reconfigure ruling elites, and get buy-in from the upper-middle classes by allowing access to greater consumption (Dillman 2001; Heydemann 2007; and Kienle 2001). Among others, Kaufmann (2011) claims that the gains from privatization were captured by elites, as observed in Eastern Europe following the collapse of the Soviet Union. At the same time, MENA governments proved unable to break away from their traditional sources of political support in the public sector. Unlike their Asian counterparts, MENA economies enjoyed only a limited political space for imposing the reforms that could effectively increase private sector– led development and reduce rent seeking (see Esfahani 1994, for an example from the Arab Republic of Egypt). Privatization in all countries occurred at a very slow pace and in a piecemeal fashion owing to its unpopularity among workers and among those concerned about political stability (Posusney 2003). Many retrospective analyses have argued that one consequence of these reforms and of the way in which they were implemented was to reinforce inequities in labor and product markets. The earlier regime of industrialization allowed governments to provide rents to a broader base of citizens, for instance, by subsidizing loss-making enterprises and granting monopolies. Instead, the new phase
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