Rethinking the Arab Spring - A Road Map for G20-UN Support - Geopolicity - October 2011

RE-THINKING THE ARAB SPRING: A ROADMAP FOR G20/UN SUPPORT?

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Contents:

RE-THINKING THE ARAB SPRING

& ROADMAP FOR G20/UN SUPPORT?

Supporting Political, Security and Socio-economic Transition Across the Arab Realm

October 2011

geopol ic i ty

Experts in Managing Complex Transition


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CONTENTS: CONTENTS: ................................................................................................................................. ii TABLES: ................................................................................................................................. iii

CHARTS: ................................................................................................................................. iii

EXECUTIVE SUMMARY................................................................................................................... v

-‐ About This Report ................................................................................................................ vi -‐ Report Headlines:................................................................................................................. vi

1: THE UPRISING IN CONTEXT...................................................................................................... 1

2: LEADING DRIVERS OF CHANGE ................................................................................................. 3

3: COUNTRIES IN TURMOIL ......................................................................................................... 8 -‐ Egypt.................................................................................................................................... 11 -‐ Algeria ................................................................................................................................. 12 -‐ Libya .................................................................................................................................... 14 -‐ Morocco .............................................................................................................................. 17 -‐ Tunisia ................................................................................................................................. 19 -‐ Jordan.................................................................................................................................. 20 -‐ Syria..................................................................................................................................... 22 -‐ Bahrain ................................................................................................................................ 24 -‐ Oman................................................................................................................................... 26 -‐ Saudi Arabia ........................................................................................................................ 28 -‐ Yemen.................................................................................................................................. 30

-‐ Impact on Other Regional Hotspots.................................................................................... 32 Iraq ....................................................................................................................... 32 Lebanon................................................................................................................ 33 Sudan.................................................................................................................... 34 Israel/Occupied Palestinian Territories ................................................................ 35

4: COSTING THE ARAB SPRING – WINNERS & LOSERS..................................................................... 38 -‐ Methodology....................................................................................................................... 38 -‐ The Accrual of Costs and Benefits of the Arab Spring......................................................... 39 -‐ Countries Losing Most with Few Winners........................................................................... 39 -‐ Countries Losing on Aggregate with Many Winners ........................................................... 39 -‐ Countries Winning on Aggregate with Many Winners........................................................ 40

5: LONG-‐TERM OPPORTUNITIES................................................................................................. 42

6: COUNTRY TRANSITION PRIORITIES .......................................................................................... 45

7: STRATEGIC ROADMAP AND G20/UN SUPPORT OPTIONS ............................................................ 50 -‐ Securing the Medium-‐Term Picture:................................................................................... 50 -‐ Strategic Entry Points: ......................................................................................................... 50 -‐ Institutional Partnerships.................................................................................................... 53 -‐ Financing Options: .............................................................................................................. 54

8: CONCLUSION -‐ THE VIEW FROM HERE ..................................................................................... 55


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TABLES: Table 1 Corruption Perceptions Index Ranking .......................................................................... 9 Table 2 Egypt – National Statistics at a Glance.......................................................................... 12 Table 3 Algeria – National Statistics at a Glance........................................................................ 13 Table 4 Libya – National Statistics at a Glance .......................................................................... 15 Table 5 Morocco – National Statistics at a Glance .................................................................... 17 Table 6 Tunisia – National Statistics at a Glance ....................................................................... 19 Table 7 Jordan – National Statistics at a Glance ........................................................................ 21 Table 8 Syria – National Statistics at a Glance ........................................................................... 23 Table 9 Bahrain – National Statistics at a Glance ...................................................................... 25 Table 10 Oman – National Statistics at a Glance......................................................................... 26 Table 11 Saudi Arabia – National Statistics at a Glance .............................................................. 29 Table 12 Yemen – National Statistics at a Glance ....................................................................... 31 Table 13 Economic Impact (% GDP) ............................................................................................ 40 Table 14 Impact on GDP (Billion US$, 2011) ............................................................................... 41 Table 15 Impact on Fiscal Balance (billion US$, 2011) ................................................................ 41 Table 16 Framework of Possible Country-‐Based Corrective Measures....................................... 46

CHARTS: Chart 1 Voice & Accountability.................................................................................................. 10 Chart 2 Government Effectiveness ........................................................................................... 10

ABBREVIATIONS & ACRONYMS: bn Billion CPI Corruptions Perceptions Index EU European Union G20 Group of 20 G7 Group of 7 GCC Gulf Cooperation Council GDP Gross Domestic Product HDI Human Development Index IMF International Monetary Fund MoF Ministry of Finance n/a Not Available NATO North Atlantic Treaty Organization UN United Nations UNSC United Nations Security Council WB World Bank Front Cover Credits: Courtesy of Gigi Ibrahim (http://theangryegyptian.wordpress.com), famous Egyptian blogger and Wikipedia Commons. Media Coverage: http://www.bbc.co.uk/news/world-‐middle-‐east-‐15303413 http://globalpublicsquare.blogs.cnn.com/2011/10/14/the-‐economic-‐winners-‐and-‐losers-‐of-‐the-‐arab-‐spring/ http://af.reuters.com/article/worldNews/idAFTRE79D2D420111014 http://twitter.com/#!/fareedzakaria


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EXECUTIVE SUMMARY

This is an independent report prepared by:

Peter Middlebrook (Co-Lead) - Claire Hajaj (Co-Lead) - Sharon Miller - Diana Stellman - Hannah Stewart - Omar Bennamour - Fouzia Ahmed - James Lloyd

Geopolicity Offices:

UAE - BVI - USA – IRELAND

[email protected]


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EXECUTIVE SUMMARY Over the course of the past ten months, the Arab world has been thrown into the greatest pan-‐regional turbulence than at any other time since the 1950s. At stake in this regional gamble is the fate of millions of people from North Africa to the Levant, as well as the fortunes of several key ruling dynasties and massive international interests—public as well as private. We are witnessing a critical and profound reshaping of the Arab world psyche, potentially including in its relations with Israel. Only one outcome is clear: the Arab realm has a narrow window of opportunity to transform old un-‐representative political structures and clique-‐dominated distribution of oil wealth. It is an enormous challenge. This report argues that nothing less than major, meaningful change across government systems, economies and society will provide the tools to chart a viable course. By early 2011, most observers would have been forgiven for thinking that the misleadingly named ‘Arab Spring’ had the legs to precipitate profound structural change to political, security and socio-‐economic relations across the Arab realm. However, these four distinct Arab contexts (Levant, Gulf, North Africa and Egypt) cannot be compared to Eastern Europe either culturally or contextually -‐ and will not follow the same history of democratic transition. Where overthrow has occurred, new interest groups have captured what remains a partial reform process with uncertain ends (except for Libya whose fate still hangs in the balance). In countries not directly affected by the uprising, it has nonetheless catalyzed modest reforms as leaders bid to forestall discontent and open their governments to greater broad-‐based representation. In addition, the Palestinian bid for full state membership at the United Nations has become a serious complicating factor for new leaders and their international supporters. Whatever the outcome, it is likely to prove pivotal in shaping the Arab world’s internal and external relationships at this fragile moment.

Given the scale of the challenge at hand, international support has fallen way short of expectations. The support promised by G8 at the May 2011 Deauville summit has to a large extent not materialized; and the impact of the now US$100 billion in support through the Breton Woods organization will, from a grassroots perspective, be ‘trickle down’ at best. Assistance is loan-‐based, focused on macroeconomic stabilization and limited to Libya, Egypt, Morocco and Jordan – a carrot-‐and-‐stick approach to regional stabilization.1 The slow pace of broad European financial support for the range of Arab countries in turmoil is largely explained by the following three factors: 1) the ‘entente cordial’ between France and the UK over Libya⎯which has tied up resources and strained strategic focus; 2) an unprecedented fiscal

1 The G7 meeting reported that the World Bank is putting up US$10.7bn, the African Development Bank US$7.6bn, the Islamic Development Bank US$5.0bn with the rest coming from the European Bank for Reconstruction and Development and other lenders.

This report identifies the major drivers of change and costs incurred so

far, alongside a framework for

strengthening regional and international support towards a strategic shift in

approach; which we call ‘changing-‐the-‐channel’. Moreover, moving away from oil dependency demands a strong

private sector and civil society, and often a

substantial foreign work force, all drivers, which

demand a new institutional framework.


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crisis sweeping Europe on the back of a decade of expensive military campaigns in Afghanistan and Iraq; and, 3) the absence of a clear road map to facilitate EU and U.S. engagement. Given the widespread and ongoing loss of life (3,000 in Syria alone according to the UN Human Rights Commission), it should be deeply concerning to all stakeholders that the benefits of the uprising remain as intangible as the indicative support provided by the international community so far -‐ contributing to regional destabilization

This report by Geopolicity⎯an independent economic intelligence consultancy advising institutions and governments worldwide and specializing in post-‐conflict transitions⎯identifies the major drivers of change in the ‘Arab Spring’ and the economic impact so far. It aims to provide a viable framework for strengthening international support towards a strategic shift in approach—a view towards ‘changing-‐the-‐channel’.

The risks are clear. Unless the drivers of change in each country are strategically engaged, and a region-‐wide support program conceived and led by Arab states, the outcome of the uprisings will remain unknown and could potentially be regressive. Moreover, the international community currently needs smarter and more regionally tailored instruments to expedite support or sufficient on-‐the-‐ground influence to leverage sustainable reforms. Is this the opening of a new chapter of Arab history, or will these events diminish into a footnote of an old story? Revolutions may easily default to recidivism in the Arab governing psyche -‐ as great Arab historian Ibn Khaldoun describes. Yet, the opportunity for a more positive outcome has never been greater. The Arab world—which has in recent years stood up and embraced Western economic ideology⎯has now reached a crossroads: adopt a regressive stance which sacrifices reform for special interests, or embrace greater transparency, social equity and global integration. The former route is a clear dead-‐end street. The latter may be long and arduous towards, as yet, unknown ends; but millions of Arabs have already set off and deserve appropriate help along the way.

ABOUT THIS REPORT This report outlines the rationale for rethinking national, regional and international ‘Arab Spring’ support and suggests alternatives to be implemented over the short, medium and longer term by Arab states and their partners.

REPORT HEADLINES: 1. Arab Spring Costs to GDP are projected to be US$15.873 Billion for 2011: The costing

exercise undertaken by Geopolicity, based on data from the International Monetary Fund, shows that GDP losses in Libya, Egypt, Tunisia, Syria, Yemen and Bahrain will total some US$15.873 billion in 2011 alone. The costs to Public Finance for the same countries totals some US$18.89 billion over the same period:

The risks are clear. Unless the drivers of

change in each country are strategically

engaged and a region-‐wide support program conceived, the outcome of the uprisings will be unknown and could

potentially be regressive.


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Country Costs to GDP Cost to Public Finances:

Libya US$ 7.67 billion US$ 6.49 billion Syria US$ 1.39 billion US$ 4.85 billion Egypt US$ 4.27 billion US$ 5.52 billion Tunisia US$ 2.03 billion US$ 0.49 billion Bahrain US$ 0.39 billion US$ 0.69 billion Yemen US$ 0.12 billion US$ 0.86 billion Sub-‐Totals2 US$ 15.87 billion US$ 18.89 billion

2. Emerging Winners Among Wealthy Oil Producers. The overall economic Impact of the

Arab Spring is mixed with wealthy oil exporters such as the UAE, Saudi Arabia, Qatar and Kuwait seeing significant increases in GDP over the same period. These countries have forestalled major internal protest and their economies are more progressive and growth oriented;

3. Impact on Public Revenues Worst in Poorest Countries. Libya, Egypt and Syria have so far paid the highest price—both human and economic. Public revenues have fallen too, – by 77 percent in Yemen and 84 percent in Libya, damaging ability to deliver basic and essential services. Wealthy countries able to avoid protest and afford large public handouts have seen a positive impact on public coffers. Revenues in Saudi Arabia and the UAE have increased with, outside of Yemen and Libya, oil exporters being winners and oil importers losers;

4. Arab Leadership Essential for an Arab Renaissance: Any Arab Renaissance must be led

by the leaders of the Arab realm directly, including through the League of Arab States, and supported by the international community, with a focus on strengthening political freedoms and transparency over the utilization of natural resources. Leadership by the Arab League and Gulf Cooperation Council (GCC), as well as countries spearheading regional change such as the UAE and Qatar, are key to developing a carefully-‐sequenced political, security and economic road map for the region as a whole. Qatar, the UAE and Kuwait are already playing central roles, with the strategic military alliance between Saudi Arabia and the U.S. made complicated by the need for stability first and reforms second;

5. A Regional Road Map for a Realistic Transition: Analysis in this report suggests three essential outcomes are most likely to assure mutual benefits: (i) stable, inclusive and sustainable economies based on solid regional integration; (ii) resilient and accountable governance systems balancing rights and responsibilities; and (iii) homegrown and open socio-‐political frameworks creating an organic democratic process. Unless a regional road map is established around which G20/G7 can provide financial support towards these goals, country-‐based loans through the World Bank and IMF will have little impact on the reform process. Further, international loans will do no more than support macroeconomic stabilization objectives. It will also be essential to create mechanisms for policy-‐based lending in support of social transformation goals;

2 Summing may not occur due to rounding.


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6. Minimizing the Risk of Regressive Political and Security Shifts: Increasing political freedoms in the Arab world will necessarily increase freedom to criticize Western and Israeli policy. Should this lead to a dramatic deterioration of political relationships once stable, regional security would suffer. The challenges are particularly high in Egypt, where Mubarak’s tight lid on expression of ill feeling towards Israel has now been lifted. It will be critical for both Israel and its international supporters to take a measured approach and differentiate between a perhaps necessary outpouring of repressed public sentiment with a real increase in risk to regional security. Reactions to the outcome of the Palestinian application for UN membership currently being discussed at the United Nations Security Council (UNSC) and full state recognition will be key in this regard. While nations have a responsibility to prevent violence towards international property and persons, a return to repressive policies would be ill conceived from a longer-‐term security perspective. Any road map towards regional stabilization and peace must, therefore, also involve a process of reconciliation;

7. Changing the Way the UN Does Business in the Arab Realm: The United Nations, which is organized on a country-‐by-‐country basis without synchronized regional hubs across agencies (the Secretariat and World Bank), lacks the institutional framework for a regional approach and this shortfall needs to be addressed urgently. Aligning strategic UN investments and interests with the Arab League, in coordination with G7 would appear a logical starting point;

8. “Top-‐to-‐Bottom” Indicators of Success: Political freedoms, improved political representation, greater transparency over the utilization of revenues from the extractive industries, improving basic indicators (particularly for child health and education), gender and press freedoms are going to be critical proxies of long term structural-‐change; and,

9. Building on Regional Design for Greater Economic Diversification: Arab countries striving to move away from oil dependency must open themselves up for business, to foreign direct investment and often foreign workers. Strengthening the private sector also affects capital rights and voice in relation to national policy.


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1: THE UPRISING IN CONTEXT 1. On 17 December 2010, 26 year-‐old Mohamed Bouazizi set himself alight outside a government building in Sidi Bouzid, to protest the confiscation of his vegetable cart. In doing so, he inadvertently lit the dry tinder of populist anger directed against repressive and unresponsive ancient Arab regimes. Ten months later, the conflagration has spread almost two thousand miles, across the deserts of North Africa to the oil-‐soaked Gulf Kingdoms and shores of the Levant. Three deeply ingrained autocracies have been summarily decapitated, several proud royal dynasties have been forced into new and humiliating postures of conciliation and three violent internal conflicts are still playing out—one with NATO intervention and another with a UN Resolution ramping up the stakes.

2. The Arab uprisings were not foreseen by any intelligence agency, and the scale and speed of the chain reaction caught world leaders entirely off guard. Arab-‐Western relations since 2001 had been locked into a fear-‐based retreat that no diplomacy seemed able to reverse. Exactly one decade later, the Arab world image/view is unexpectedly being transformed from within, by a well-‐televised, populist demand for liberty, dignity and social justice.

3. The Arab Spring, as it has been coined, seems perfectly designed for the Internet age. It appears to be propagated by a young and modernized demographic group, using global social networks like Facebook, Twitter and YouTube to spread the message. It also resonates deeply with a Western psyche raised on narratives of foundational struggle for freedom -‐ both in America and more recently in Europe (thus the erroneous Prague Spring parallel appearing so swiftly in popular usage). Politicians and people alike are transfixed

by what appears to be a domino effect of emerging democratic consciousness in a formerly mysterious and conservative society. While this narrative is compelling, it is also misleading for 3 significant reasons:

• First, it presumes a culturally homogenous protest movement within the Arab world, as was the case for the fall of communism. Even the term “Arab world” is a reductive misnomer in this setting. At least four separate regions are at play here, each with their own distinct regional and internal politics: North Africa, the Levant, the Gulf and Egypt (a special case due to its size, history, cultural mix and geography). We are witnessing not one, but several uprisings, driven by different political and economic factors within each country. The aspirations of the young Google executive in Cairo, the enemies of the Alawi tribe in Hama and the subsistence farmer outside Sanaa are not comparable. Each shares perhaps only a daring sense of possibility.

• Second, the “personal liberty” narrative suggests that the root causes of these revolts are clear—but they are not. Despite much analysis, it has not been possible to characterize these uprisings—except to say that they are highly fluid with uncertain outcomes. They are not, for example, the inter-‐tribal battles of the 1920s and 30s or the hegemonistic Middle Eastern proxy-‐conflicts of post-‐World War II. They are very far from a Nasser-‐esque pan-‐Arab movement, spurred by one man’s vision and political maneuvering. They are not a faith-‐based crusade and they are not rooted in a single political agenda (anti-‐Zionist sentiment hitherto being the one defining common cause of the Arab world). In their political intelligence, pan-‐regional infectiousness and raw-‐staying power, such uprisings in the Arab world have never been



seen. Therein lies their greatest potential and risks.

• Third, we lack a common language to define what protesters seem to want. Democracy, human rights, secular social justice, civic engagement are modern republican concepts that translate one way among secular liberals and another in highly religious and tribal societies. Arab society can boast some of the world’s greatest and most progressive thinkers, but has not produced any indigenous institutional template for secular republicanism and no example of democracy that has not been transplanted (Iraq) or mired in conflict (Israel, Lebanon). In Egypt, for example, the young and sophisticated lead actors of the revolution, who have a Western-‐influenced belief in the power of civil society, may be using terminology that has little practical meaning to the large supporting cast of the culturally-‐conservative poor.

4. There is only one, self-‐evident certainty: global interests are hugely invested in the end result of these uprisings. Not just in the crude sense of material concerns, but rather in the potential contribution that a revitalized Arab world could make to global commerce, security and political maturity of other nations. Enormous financial gambles are already being made on outcomes—over US$1.4 billion spent on Operation Unified Protector in Libya, as well as a further US$1.3 billion pledged in support to the Transitional Council and over US$20 billion to support Tunisia and Egypt’s transitional process.

5. But as events reach a turning point, these gambles look ever more uncertain. Tunisia and Egypt’s roll of the democracy dice has left many players dissatisfied, and Egypt’s elections look set to take place in an unprepared political climate following only minor constitutional tweaks. Endgames in Libya, Yemen and Syria are unclear beyond the bloody stalemate now setting in. It

remains to be seen whether Bahrain and Saudi’s royal dynasties can cooperate to fund their way out of trouble. Without renewed energy and direction, the Arab spring could yet fizzle out as the summer heat cools across the Arab world, struggling to deliver genuine political change expressed in government accountability and public participation in decision-‐making.

6. Today, the dilemmas posed across these radically different contexts look remarkably similar. The old regimes still clinging onto power must decide whether to entrench, bend or find a dignified and financially acceptable exit. The successful revolutionaries must decide how quickly to push newly won but fragile institutions towards democracy, while ensuring economic growth and pre-‐revolution security. In turn, the international community must seek to carefully calibrate support; implying a detailed understanding of the binding constraints to endogenous transformation; which has been lacking.

7. Just as the Arab world has no ready template for democracy, the international community has no useful Arab world framework within which to answer such complex questions. A historic engagement model that de-‐prioritizes true democratic expression in favor of pro-‐Western stability is shortsighted at best.

8. The analysis in this report suggests a more nuanced engagement model is possible and, indeed, essential to transform these events from mere regime changes into genuine social revolutions. It explores the key change agents within the various contexts, as well as the socio-‐economic and political factors defining their operating trajectory. It also proposes the best entry points for regional, UN and G20 support in the challenging but promising months and years ahead. While there are no utopias on the horizon, this uncertain growing season may yet bear fruit.



2: LEADING DRIVERS OF CHANGE 9. THE CONTEXT OF CHANGE: There is a long road between riot and revolution, as Arab history has repeatedly proven. Many Hama residents will be experiencing a worrying sense of déjà vû as tanks stalk through their city, recalling the bloody sequel to the Sunni Islamist uprising of 1981 delivered by Hafez and Rifat Assad, the current President’s father and uncle. Likewise, the Kefaya movement in Egypt tried and failed to capitalize on national outrage when President Mubarak claimed 86 percent of the vote in the country’s first multi-‐party elections in 2005. The crackdowns succeeded, the rallies simply petered out, and the promised mass campaign of civil disobedience never materialized. So what is different today?

10. It is impossible to spotlight the exact tipping point for events in each “Arab Spring” country. And yet, it is arguable that a confluence of certain factors has made them possible—and also made healthy outcomes more likely for some than others.

11. The actors in today’s protests are not new, but their context has changed profoundly since the turn of the century. Staggering internal socio-‐economic disparities, widespread under-‐education (particularly for minorities), corruption, special-‐interest hold on trade commodities, repression of freedom of speech and an all-‐pervasive and anti-‐populist security apparatus—these injustices have been simmering with millions of Arabs for decades past.

12. However, surprising elements have appeared within the last five years, giving localized rage a much broader channel and

adding both momentum and direction. An internet-‐fuelled jump in social connectivity has accelerated information networks, creating and propagating communities of ideas. Extreme fluctuations in oil prices post 2006—from stratospherically high to rock

bottom low—acted to inflate and then stifle local economies, increasing middle class and lower

quintile restlessness. Cross-‐fertilization of social values has been increasing between young Arabs and liberal democracies (largely within the arts and IT sectors, but, arguably, also boosted by President Barak Obama’s Cairo agenda, as part of the post-‐Iraq outreach process). Finally—and controversially—a modernized template for middle-‐class political protest in an Islamic society was provided by the 2009 Green Revolution.

13. These factors may have been instrumental for Egypt and even Tunisia (where the state had become the equivalent of loathed colonialist masters); however, the spillover of protest into Bahrain, Libya, Syria and Yemen has unlocked less encouraging sectarian and tribal rivalries. These now threaten to submerge genuine governance and economic grievances.

14. Unfortunately, the local templates for change available to Arab would-‐be revolutionaries are largely recidivist. The fall of communism parallel, emphasized by the “Prague Spring” association, is false. This is not Eastern Europe, which (for better or worse) had a culturally similar, stable, successful and welcoming example of free-‐market capitalism on its doorstep in 1989. Turkey is the nearest equivalent to the Arab

“What I want is for the kids on the street to win and the Google guy to become President” President Barack Obama



world, but there are long-‐standing historical tensions complicating that relationship.

15. In short, there is no combination of events or influence that could see the “kids on the street... win” and an energetic young democracy quickly emerge. Still, some agents of change are actively looking for inspiration in new models—while some would be content to simply see power shift, or else ensure no movement at all. It follows that the struggle between these various elements, and the sensitivity of international support mechanisms engaging them, will be the primary factor determining outcomes.

16. KEY AGENTS OF CHANGE: The range of actors in the Arab uprising is most usefully divided into three types—modernist, recidivist and blocking: • MODERNIZING AGENTS: The initial spark for the Arab uprisings emerged from within the nearly 90 million of young Arabs under the age of 30, who account for well over half the region’s population (this figure rises to two-‐thirds in Egypt and three quarters in Yemen). This group is also among the region’s most economically stressed. Youth unemployment averages 18 percent in the Gulf, 23 percent in the Levant (excluding Israel), 31 percent in North Africa and 25 percent in Egypt. Arab youth has reaped the greatest social and economic benefits from the rise in IT-‐led forms of networking. It also has the most to gain from open, diversified economies and a dynamic cross-‐cultural discourse; and the most to lose from corruption and arrogant state controls. Young people, particularly from the educated middle classes, have articulated the political soul of the Arab

protests. They have shown a new kind of anti-‐tribal social alliance in the call for political rights above even economic

change—a modern interpretation of the ancient Arab concept of asabiyya, or social

consciousness—which asks a major restructuring of arthritic state mechanics, along more accountable, liberal and participatory lines.

In Tunisia, Egypt,

Libya and Yemen the initial groundswell of youth protest was buoyed by key defectors from within the government and the armed forces. Whatever interplay of realpolitik and ethnic loyalties factored in each decision, the engagement of such key pillars of state in transition to a less authoritarian form of government is encouraging. The relationship between security forces, government and population in the Arab world has always been extremely fraught. Indeed, armies and police have been largely viewed as instruments of state control, ready to defend state apparatus with lethal force. Determined resistance from Egypt’s patrician army, for example, could easily have turned Tarhir Square into Tiananmen. By siding with a protest movement, security personnel not only enable it to grow but offer a preview of a more just population-‐state-‐security equation post facto. Largely cooperative opposition movements in Tunisia, Egypt, Libya and even Syria have strengthened the potential for this equation, opening the door for eventual transition to a workable democracy. Viewed realistically, these alliances are marriages of convenience—a sine qua non of vital international funds and political recognition. Opposition groups do not

The initial spark for the Arab uprisings emerged from within the nearly 90

million of young Arabs under the age of 30, who account for well over half the region’s population and this figure rises to two-‐thirds in Egypt and three quarters in Yemen. Young Arabs are among the region’s most economically stressed. Youth unemployment averages 18 percent in the Gulf, 23 percent in the Levant (excluding Israel), 31 percent in North Africa and 25 percent in Egypt.



naturally default to viable political parties once revolutions are over, and a certain amount of jockeying for position is inevitable—perhaps even healthy. However, support by Turkey, the Libya Contact Group and other international players to create space for a discussion of common goals, cooperative structures and timing among these fragile coalitions is—at the very least—a necessary and positive start. Helping those coalitions deliver political change, while keeping the lights on and engine of state running, is a critical next step. A key driver of all these different factions is the potential for greater economic integration and diversification, starting with a fairer transfer of public revenues. Many Arab countries—including those relatively untouched by the recent uprisings—are characterized by high unemployment rates and weak, unequal delivery of public services. Economies are generally highly centralized and commodity-‐based, and where they are diversified (as with Syria), special interest groups hold the revenue purse strings. The dominant theories of governance, whether Islamic monarchial or Islamized socialism, have led to a public sector squeeze-‐out of all but informal family-‐sized enterprise. The poorest members of society joining the middle classes on the street are expressing their exhaustion with this modus operandi and demanding the chance to express more of their socio-‐economic potential. • RECIDIVIST AGENTS: In the flux of political and social protest, regimes are also facing the re-‐emergence of tribal and sectarian rivals seeing opportunities to shift long-‐held power balances. The difference between “haves” and “have-‐nots” in the

Arab world can all too easily be described in ethnic, tribal and sectarian terms—explaining in part the weary cycle of

repression and regime change. The royal Khalifa Sunni’s face-‐off against disenfranchised Shia in Bahrain has been painted as a sectarian stability issue justifying the intervention of the Gulf

Cooperation Council. Shifting tribal loyalties have massively complicated the Libyan opposition movement and its military campaign, leaving the rebels stuck in three non-‐contiguous strongholds and threatening to split the country along lines determined by family loyalties. The use of Alawite-‐only militias in Syria is playing into an old dynamic of tribal caste-‐systems and rivalries, while the billionaire Al-‐Ahmars are suddenly leading the fight against the billionaire Salehs in Yemen’s water-‐stressed and economically collapsed capital. Should the struggles of these nations be re-‐framed under such narrow terms, it would gravely undermine their long-‐term prognosis.

Market constriction among a disaffected lower quintile also presents a risk of recidivism, fuelling anger, blame and unrealistic change expectations among the poorest. Income gaps in the Arab world are substantial. Of all the countries affected by protests only Bahrain makes the top 50 of the Human Development Index 2010, which compares the level of equitable development in states. When compared to the degree of wealth corralled by the leadership of these states and their family interests, the scale of social injustice becomes very clear. Already there is evidence in Egypt that Salafists and other social conservatives are working within these disenchanted communities to build support bases outside the formal political system.

Market constriction among a disaffected lower quintile also presents a risk of recidivism, fuelling anger, blame and unrealistic change expectations among the poorest. Income gaps in the Arab

world are substantial.



• BLOCKING AGENTS: While individual Arab nations have been hit by unparalleled turbulence, Arab cooperative structures—notably the Gulf Cooperation Council (led in essence by Saudi Arabia) and the Arab League—have been either silent or leveraging in favor of the status quo. Criticism of blatant violations of human rights and humanitarian law in Syria and Libya has been late in coming and, when eventually delivered, weak in tone. Saudi Arabia has proved itself a harbor for beleaguered dictators, while pouring nearly US$5,000 per capita into its own social programs in an effort to stall internal dissent. It also lent the support of the GCC to Bahrain in quelling its own unrest. Some trepidation on the part of these weighty establishment bulwarks is understandable; however, their position represents a grave opportunity cost, not just for Arab protesters but also for still stable governments wishing to introduce reasonable reforms, and for the long-‐term economic dynamism of the region. The Arab world suffers without a credible forum in which to project new thinking, as opposed to simply protecting patrician interests. Would-‐be Arab world interlocutors, such as the G20, are equally blocked in developing sensible regional approaches. It is time to rethink the purpose and function of these forums if they are to remain relevant and useful to a future Arab agenda.

• Economic Agency: The harsh reality for

much of the Arab world, particularly countries that are heavily oil dependent, is that economic diversification demands strong foreign direct investment, a more integrated global economic approach, often-‐

significant non-‐national residents and therefore a softer foreign policy.

17. OLD WALLS -‐ NEW PAINT: What would a viable “future Arab agenda” look like, considering the different forces struggling to shape it? The past may hold some interesting lessons. Since Ottoman times, Arab governance structures have moved in ever-‐decreasing circles—resembling the

“dynastic cycle” described by historian Ibn Khaldoun of social uprising, demand-‐based

governance, complacency and corruption and, finally, regime overthrow again.

18. It is certainly possible to see this cycle at work in the current uprisings. The Assads themselves are members of a once-‐oppressed minority tribe that successfully toppled a military dictatorship on a platform of socialist reforms. Arab monarchies in the Gulf and in Jordan have worked hard to project a feudal “right to rule” equating with stability and prosperity for their peoples, but are feeling the sands of public opinion begin to shift beneath them.

19. Can these countries now shift to a different path—one where change does not depend on upheaval but is built within governance systems? The answer is yes, but only if the transition process is allowed to be indigenous in structure, temporarily unstable in its infancy and de-‐linked from pro-‐Western agendas.

20. International interests in Arab governance have been slow to acknowledge that most G20 legislative, jurisprudence, civic and financial systems do not bear comparison to the equivalent Arab systems. The latter have been developed over millennia and are rooted in Islamic law, as

It is also critical to accept that opening greater freedoms, including freedoms of expression, means that, occasionally,

new governments and Western interlocutors will hear things they do not like. Democracy does not automatically mean liberalism, or pro-‐Westernism.



well as Islamic norms and values (while at least 2 million Arabs are not Muslim, Islam has had predominant influence on Arab-‐world governance traditions). Free market capitalism, as interpreted in the West, does not translate neatly into Islamic economic systems, with their prohibition against riba (traditional debt structures). And while human rights, freedom of speech and the dignity of men and women are enshrined in Islamist thinking, they are not based on secular civil allegiances but on perception of religious, family and tribal duties within the broader framework of the Umma (a community of believers).

21. It follows that an effective transition process cannot simply cobble new governance thinking onto old structures or, at worst, dismantle them in addition to expelling the current caretakers. To do so—usually in the interest of speed, security and former regime “cleansing”—risks an Iraq-‐style collapse of credibility, as well as an explosion in capacity-‐substitution and stabilization costs. The new or reformed

leadership of old nations should be looking instead to root more open systems in traditions with which societies already have some level of comfort and experience.

22. It is also critical to accept that opening greater freedoms, including freedoms of expression, means that, occasionally, new governments and Western interlocutors will hear things they do not like. Democracy does not automatically mean liberalism, or pro-‐Western. While Western sympathies resonate so much more naturally with the rebels than rulers, many of these old regimes have greater investment in realpolitik and pro-‐Western dialogue than the movements seeking to unseat them. 23. New leaders may wish to benefit from economic integration without having to agree with every Western dictate on regional affairs. Managing change expectations on all sides will need to be done “the Arab way”— “schwaye schwaye” (slowly slowly).



24. The social uprising across the Arab realm has left few countries untouched, with progress towards real structural transformation either yet to begin or left very much in the balance. Currently, direct costs significantly outweigh short-‐term benefits, with losses due to a production downturn reaching billions of U.S. dollars. Moreover, government failure to entertain the demands of civil society has diverted public revenues away from capital investment—which is growth, revenue and employment inducing-‐ towards recurrent spending-‐ which is not. When the direct costs of production losses and additional security and law and order spending are calculated, the price tag of political turmoil will have in many cases long-‐term structural effects on growth and employment. 25. On the other side, if newly elected Governments and transitional authorities rise to meet the challenges of increased accountability and transparency, then the long term impacts of the uprising will likely be replaced by the positive impact of more representative societies and stronger social equity and accountability ideals; particularly vis-‐à-‐vis the demands of the youth. Egypt, Tunisia and Libya have seen largely national level uprisings to displace entrenched autocratic leaders and it would appear to be impossible for Assad in Syria to survive, given the contingent risks of international trade embargos and loss of legitimacy in the eyes of the general populace. That Iraq has not been seriously affected is also of note.

26. The logical choice of an accountable and transparent government would be to understand the causes of public descent and open up dialogue, and this is a key lesson for Egypt, Libya, Tunisia and Syria in particular—because people matter.

Examples of more open dialogue and wider public participation can already be seen in some parts of the region. In the United Arab Emirates for example, steps have been taken towards greater representation with an historic parliamentary election resulting in the election of 20 new members to the Federal National Council on 24th September 2011 and an encouraging voter turnout from an electoral college of 130,000, including a high ratio of women voters. This move in the UAE is set in the context of a country whose government has in many ways already become an economic model for the surrounding states, whilst accommodating massive social change during the course of economic diversification. 27. The same can be said of Qatar. In Syria, however, government crack-‐down against the uprising is regressive in all regards, either securing the eventual collapse of Government as a result of lost legitimacy or greater state controls, which undermine liberalist ideals and equality. So what are the headlines:

• Tunisia, Egypt and Libya have overthrown autocratic leaders amounting to the most significant transformation of the Arab realm since the 1950s. Mubarak is standing trial and could face the death penalty, and Qadhafi’s regime has just fallen;

• The Government of Syria, whilst still strong in many ways, has undermined its legitimacy in the eyes of its citizens and the international community. Progressive hardening against groups opposed to Assad’s rule will plant the seeds of eventual overthrow. This will have a profound effect on Lebanon and Israel;

3: COUNTRIES IN TURMOIL



• Saudi Arabia provided a hand out to the civilian population amounting to [US$30 billion] although real structural reforms remain to be put in place;

• Israel, Palestine, Jordan and Iraq have all been affected by the ensuing regional political transformation. In the case of Israel and Palestine the implications of shifting regional political alliances are likely to be profound and the result of the Palestinian campaign for full state membership of the UN will significantly affect the regional and wider international balance.

28. This section provides a country-‐by-‐country summary of the key characteristics of change in the countries affected by the uprising, around which a framework of supportive measures can be considered by the newly-‐established authorities and international community. To provide a

governance context for the analysis, various governance indicators are provided below, alongside useful cross-‐national comparators. These indicators, many of which are not widely accepted by the sovereign states in question, do, however, indicate the need for major voice and accountability, and government effectiveness reforms to be undertaken. 29. Corruption, both state capture and petty corruption, substantially shape public opinion and as such—given the low ranking of many Arab states based on the results of Transparency International’s perceptions index—improving voice and accountability, government effectiveness and corruption must be central to any long term reform program. Table 1 below ranks Yemen, Libya, Syria, Algeria and Egypt as the most corrupt countries in the region, in marked contrast to the UAE and Qatar for example.

Table 1 Corruption Perceptions Index Ranking 3

Country 2008 2009 2010 Corruption Trend Yemen 141 154 146 ⇑ Libya 126 130 146 ⇑ Syria 147 126 127 ⇓ Algeria 92 111 105 ⇑ Egypt 115 111 98 ⇓ Morocco 80 89 85 Tunisia 62 65 59 ⇓ Jordan 47 49 50 ⇑ Saudi 80 63 50 ⇓ Bahrain 43 46 48 ⇑ Oman 41 39 41 Israel 33 32 30 ⇓ UAE 35 30 28 ⇓ France 23 24 25 ⇑ UK 16 17 20 ⇑ Qatar 28 22 19 ⇓

Source: Transparency International (2010)

3 The Corruption Perceptions Index (CPI) ranks more than 150 countries in terms of perceived levels of corruption, as determined by expert assessments and opinion surveys. Countries are ranked from 1 to 176 with 1 being the least corrupt and 176 being the most corrupt.



30. Chart 1 provides voice and accountability rankings for all Arab Spring Countries, with Israel, France and the UK as useful comparators. Chart 2 provides a similar ranking for Government

Effectiveness, which must be seen as a core measure of reform given the unemployment and service delivery requirements of many of the countries highlighted by this study.

CHART 1 VOICE & ACCOUNTABILITY

CHART 2 GOVERNMENT EFFECTIVENESS



EGYPT

31. STATE OF PLAY: The attack on the Israeli Embassy in Cairo by Egyptian protesters, leading to the evacuation of embassy staff, raised tensions and may exacerbate divided opinion over Israel within Egypt. Over the past eight months, the Supreme Council of the Armed Forces has focused on—in order of priority: (i) maintaining rule of law and the basic functions of state; (ii) overseeing a limited constitutional revision process in preparation for general elections; and (iii) holding previous regime members accountable for crimes alleged during and prior to the February uprising. However, recurring episodes of popular unrest indicate impatience with the pace and direction of reforms. Former President Mubarak’s National Democratic Party has been dissolved by court order, in parallel with a reshuffle of ministerial posts. The state of emergency introduced in 1967 and extended every 3 years since 1981 is to be lifted prior to parliamentary and presidential elections controversially scheduled for later this year. In August, trials of senior government officials, including former President Mubarak, commenced—further aggravating socio-‐political divisions. With the interim government and Army maintaining control, further economic reform and liberalization will be sacrificed in the short term, in favor of economic and political stabilization.

32. TRIGGERS & DRIVERS OF UNREST: Rising unemployment, particularly among youth, widespread social inequality and a growing resentment of all-‐pervasive and heavy-‐handed internal security have left Egypt with a pyramid of socio-‐economic grievances; the former President projected a quasi “pharonic” status during his four-‐term, thirty year rule, but his political and

economic achievements for Egypt were finally eclipsed by middle-‐class anger at

crony capitalism, blocking equal opportunity, lack of political accountability and often vicious repression of dissent. 33. COSTS SO FAR: The Spring storm

resulted in severe disruption of economic activities, closure of bank and stock exchanges, currency depreciation, collapse of the vital tourism sector and a standstill in foreign direct investment. As a result, Egypt’s growth in 2011 is forecast at just 1.22 percent. An official reserve loss of US$9 billion and social spending increase of 25 percent has widened the fiscal deficit. After months of revolts and regime change, the cost of the revolution to the Egyptian economy is high—around US$4.27 billion in total—equating to approximately 4.2 percent of GDP. The cost to the fiscal balance is also significant, at approximately US$5.521bn. Increased wage and salaries of civil servants and tax breaks have cost between US$710-‐914 million (until April 2011) in a total increase of US$5.446bn of public expenditures, compared to a decrease of public revenues by US$75 million for 2011. 34. MAJOR RISKS & OPPORTUNITIES: Risks: short-‐term attempts to alleviate cost-‐of-‐living woes for the poorest may affect the supply/demand chain for basic needs. In particular, diesel shortages (affecting agricultural production and foodstuff prices) are likely as increased subsidies on petroleum products stimulate consumption. Within the political realm, sectarian conflict in Cairo and in rural areas is likely to polarize public opinion, undermining the outcome of the elections and progress on transition. Opportunities: effective



democratization in Egypt will allow for market liberalization, which will offer a model for transition elsewhere and allow

for reversal of political rhetoric in states where autocratic regimes still hold on to power.

Table 2 Egypt – National Statistics at a Glance

2008 2009 2010 2011 GDP (US$ Billion) 162.435 188.608 218,466 231,111 GDP Per Capita (US$) 2,160 2,455 22,788 2,892 General Debt (% GDP) 74.7 75.6 73.8 74.9 Population (million) 75.2 76.8 78.33 79.90 Urban Population (%) 42.72 42.76 -‐ -‐ Unemployment Rate (%) 8.9 9.4 9.2 9.7 CPI Inflation (%) 18.3 11.7 11.6 11.8 HDI Rank 0.608 0.614 0.620 -‐ Gini Coefficient 32.1 32.1 32.1 -‐

35. FUTURE CHANGE AGENTS: (i) the Coalition of the Youth of the Revolution; (ii) the Supreme Council of the Armed Forces; (iii) established and emerging secular and Islamist factions and (iv) external interests. 36. CRITICAL FACTORS & LIKELY SCENARIOS: Premature elections will disadvantage emerging opposition movements from establishing electoral bases, favoring old unpopular structures and resulting in de-‐legitimized leadership. Legalization of formerly outlawed religious factions (the Muslim Brotherhood) and the emergence of new radical Islamist parties (Salafis) signal

revival of political Islam as a challenge to Egypt’s new and untested management structures.

37. ENTRY POINTS FOR G20/UN SUPPORT: Financing the deficit is a priority for international support. Egypt’s financing gap is projected to reach up to US$12 billion in Fiscal-‐Year 2011/12. Efforts should be made towards supporting a grass-‐roots maturation of social democratic thinking, increasing intra-‐regional trade and refocusing towards wider and emerging international markets.

ALGERIA 38. STATE OF PLAY: Events and developments across the border in neighboring Libya have been a source of concern for the Algerian leadership, but the threat of uprising in Algeria remains relatively low, despite public discontent and political disaffection. President Bouteflika successfully discouraged the waves of violence, self-‐immolations and industrial action through a large-‐scale, assertive but largely peaceful deployment of the police force in urban centres. Public opinion has been placated

by the promise of a democratic reform process kicked off by a Presidential decision on 15 April, to include constitutional revision. This process is moving slowly but steadily. In July, President Bouteflika was presented with

findings from a cross-‐party consultation process on democratization. Following this, the regime has pledged to develop an online forum to promote public debate (named the Nabni, “to build”) that⎯along with civil society and a series of regional



and local conferences for development⎯should inform a full-‐scale reform roadmap. A number of reports suggest that Colonel Muammar Gaddafi has sought refuge in Algeria but an official offer of sanctuary from the Algerian leadership is highly unlikely given Algeria’s strategic political and economic ties to Europe, USA and GCC. Nevertheless, Algeria has not yet recognized Libya’s National Transitional Council. 39. TRIGGERS & DRIVERS OF UNREST: Unrest echoed the plight of a distressed population faced with unemployment, a housing crisis and soaring food prices. Algeria’s economic profile is still blighted by decisions taken in

the wake of independence in 1962, which introduced an oil-‐funded socialism, including planned economic development, collectivized agriculture and naturalization of oil production. Collapse of oil prices in the 1980’s resulted in severe economic austerity, and a failed democratization process under Chadli Benjedid led to a brutal civil war and a state of emergency that remains in place today. President Abdelaziz Bouteflika’s rule since 1999 capitalized on soaring oil prices and FDI to project stabilization and growth in Algeria—but his administration has not mitigated the impact of the global economic turndown and rising cost of living on an increasingly poor population.

Table 3 Algeria – National Statistics at a Glance

2008 2009 2010 2011 GDP (US$ Billion) 170.228 139.763 160.270 192.384 GDP Per Capita (US$) 4,939 3,924 4,435 5,245 General Debt (% GDP) 8.2 10.4 10.2 10.1 Population (million) 34.46 35.6 36.134 76.676 Urban Population (%) 65.2 65.9 -‐ -‐ Unemployment Rate (%) 11.295 10.21 10.034 10.0 CPI Inflation (%) 4.9 5.7 4.3 5 HDI Rank 0.667 0.671 0.677 -‐ Gini Coefficient 35.3 35.3 35.3 -‐

40. COSTS SO FAR: The total cost of the ‘Arab Spring’ to the Algerian economy is estimated at around US$1.4 bn for 2011, constituting approximately 1.7 percent of the initial GDP forecast for that year (estimated in October 2010). As one of the major OPEC members (around 1 300 tb/d for oil), Algeria has benefited from the growth of world oil prices and has increased its revenues by US$9.6 bn. However, a relative decrease in investments in non-‐oil sectors, and inflation of imported production has led to increased strain on the ‘public purse’ including a temporary tax exemption on basic food stuffs such as sugar and oil, at a cost of around US$257

million (up to April 2011). Total expenditures are, however, expected to decrease by US$802 million, explained by spending cuts and policy reform. Where human costs are concerned, Algeria’s Arab Spring has resulted in a total of 3 fatalities and 1,900 injuries. 41. MAJOR RISKS & OPPORTUNITIES: Risks: The reform agenda has not yet played out, and a weak or delayed process could easily spark further public protest against President Bouteflika. Internal insecurity could be a key factor in derailing a reform process, particularly should further attacks by Al Qaeda in the Maghreb (AQM) provide



justification for a more authoritarian system dominated by security forces, rather than by constituencies’ interests. Opportunities: The new consultation process offers an opportunity for higher public participation in decision-‐making. The need to tackle youth unemployment could also encourage economic diversification beyond oil dependency and towards enlargement of higher employment generating sectors. 42. FUTURE CHANGE AGENTS: (i) President Abdelaziz Bouteflika; (ii) Key opposition groups, particularly the Socialist Forces Front and National Coordination for Change and Democracy; (iii) Civil society. 43. CRITICAL FACTORS & LIKELY SCENARIOS: Fragmentation of Algeria’s population,

explaining the sporadic and disorganized nature of the unrest, is likely to be exploited by the current leadership in defining the scope of constitutional, economic and social reforms. Increasing AQM threat could also be used to preserve the old status quo and secure military strongholds. 44. ENTRY POINTS FOR G20/UN SUPPORT: Political and institutional support for the promised constitutional reform, decentralization and electoral processes. A cohesive civil society base must be built to ensure political changes are sustainable. A cross-‐sectoral employment generation strategy is critical, encompassing reforms linking education and the private sector.

LIBYA 45. STATE OF PLAY: The combined military and political efforts of Colonel Qadhafi’s internal and international foes struggled for months to dislodge him; however, regime decapitation swiftly followed once NATO-‐backed rebel forces made the long-‐awaited breakthrough into Tripoli. Qadhafi is no longer in power and on October 3rd Libya’s Transitional Council announced a new cabinet. Libyan Rebel forces have now taken control of much of the country, with small pockets of resistance in Sirte—Qadhafi’s birthplace. Colonel Qadhafi’s whereabouts remains unclear, amidst conflicting reports that he remains in southern Libya, or that he has fled to Algeria, Niger, or headed for Burkina Faso. UK-‐led recognition, resourcing and grooming of the National Transitional Council (NTC), plus the most aggressive NATO operation since the Balkan wars, was instrumental in swinging the balance in favor of the Libyan opposition movement despite its uncertain capabilities. However,

with Qadhafi still at large and capable of prolonging a chaotic power-‐struggle,

stabilization and rule of law will remain profound challenges. Whatever the outcome in Sirte and other regime strongholds, the NTC faces a long-‐term struggle to convince tribal

leaders (particularly in western Libya) and ethnic separatists of its right to rule. Capacity to mount an authoritative governance process will depend on strengthening tribal allegiances and brokering politically palatable support deals with its international backers, as well as oil companies. The NTC Chairman, Mustafa Abdel Jalil, has dismissed the entire cabinet over the July assassination of army commander General Abdel-‐Fatah Younes. Arrest warrants from the International Criminal Court for Colonel Qadhafi, his son and the head of military intelligence, are still outstanding.



46. TRIGGERS & DRIVERS OF UNREST: Initially sparked by a delay in a public housing scheme, the Libyan civil war has become dominated by the figure of Colonel Qadhafi and his role as either a cruel dictator or maligned defender of tribal traditions, depending on one’s position within a widening internal schism. While Qadhafi’s death or departure would be a game-‐changing event, it would do little or nothing to heal the deep rift in Libya’s unique social structure. Colonel Qadhafi had held power since the 1969 military coup, and has—in over 40 years—transformed Libya into a bizarre mirror of his personal ideology (as envisaged in the Green Book of 1977). The Libyan jamahiriya, or republic of the people,

is a combination a fully-‐centralized power supported by decentralized tribal structures. Public protests in Benghazi, starting in February 2011, were driven by youth-‐ brought up entirely in Qadhafi’s world yet denied opportunity-‐ led by long-‐standing enemies of the regime. Qadhafi’s response with disproportionate lethal force catalyzed dormant protest elsewhere, providing grounds for international intervention (UN Security Council (UNSC)l Resolution 1973 establishing a no-‐fly zone, as well as embargos, travel bans and asset freezing), as well as hope from political opposition groups that their ambitions would at last receive appropriate support.

Table 4 Libya – National Statistics at a Glance

2008 2009 2010 2011 GDP (US$ Billion) 88.888 60.239 74.232 n/a GDP Per Capita (US$) 14,114 9,371 11,314 n/a General Debt (% GDP) -‐73.104 -‐108.412 -‐94.908 -‐ Population (million) 6.298 6.428 6.561 -‐ Urban Population (%) 77.54 77.72 -‐ -‐ Unemployment Rate (%) -‐ -‐ -‐ -‐ CPI Inflation (%) 10.4 5 4.5 3.5 HDI Rank 0.744 0.749 0.755 -‐ Gini Coefficient n/a n/a n/a n/a

47. COSTS SO FAR: The conflict in Libya has halted economic activity in the country, with an estimated cost to GDP of US$7.67 billion, equalling approximately 28.17 percent of GDP. More than 740,000 people have fled Libya since the start of the conflict, losses of mismanaged assets have allegedly reached up to US$2 billion, and severe disruption in the hydrocarbon sector (accounting for over 70 percent of GDP and over 90 percent of exports and government revenue) has devastated the economy. Domestic production has fallen as a result of the oil sector crisis; and a lack of foreign workers, low local consumption, and decreased purchasing power have all produced significant negative impacts on Libya’s economy. Furthermore, the fiscal

balance has deteriorated as a consequence of military, social and election expenditures as well as decreasing oil revenues and declining investment in the country. As a result of the ongoing conflict, it is not possible to cost all the material losses including the damage done to Libya’s infrastructure. However, costs to public revenues in the region of US$21.54 billion have been offset by a decrease in public expenditures due to absence of governance. The total cost to the fiscal balance stands at US$6.485 billion, approximately 28.84 percent of GDP. According to Spokesman Mahmoud Shammam, the National Transition Council needs US$3 billion, to recover the budget.



48. MAJOR RISKS & OPPORTUNITIES: Risks: Downward oil production and export trajectory will further contract Libya’s economy, resorting to higher oil export prices to offset the price tag of a widening fiscal deficit. It will take an estimated 3 to 6 months to repair oil infrastructure and restore supply lines, with a further 3 months required before production can resume.4 Food and commodity prices will surge, accelerating poverty levels. Prolonged civil war or an uncertain opposition victory poses a significant threat of territorial disintegration of the state, splitting into an anti-‐regime East and pro-‐Qadhafi West. Among the many challenges to disentangling Libya’s unique de facto and de jure governance structures, Imazighen (Berber) separatism is a key threat to an emerging democratic process. Opportunities: The momentum of change presents an opportunity to eliminate a decades-‐long legacy of dictatorship and poor governance and to introduce radical changes to economic policy, achieving diversification from oil overdependence, enhancing liberalization and trimming the public sector. The independence of the Central Bank of Benghazi, in the aftermath of protest, offers opportunities for stabilizing the fiscal environment and stimulating the investment climate. 49. FUTURE CHANGE AGENTS: (i) Mustafa Abdul Jalil, Mahmoud Jibril and the Transitional National Council; (ii) Defecting Qadhafi personnel; (iii) young men 18-‐35 (born under Qadhafi) in key hubs of Benghazi, Tripoli, Mistrata and Sirte (Qadhafi’s tribal seat); (iv) Pro-‐Qadhafi tribes, particularly the Warfalla tribe and others in Zawarah, as well as the discontented Obeidi tribe affiliated to NTC; (v) AU; (vi) International Contact Group on Libya.

4 Wood Mackenzie Energy Consultancy referenced by Economist Intelligence Unit, August 22, 2011

50. CRITICAL FACTORS & LIKELY SCENARIOS: A negotiated deal between pro-‐ and anti-‐regime camps has proved elusive despite the reality of NTC domination in Tripoli and nationwide. This makes Colonel Qadhafi’s elimination or decease central to de-‐escalating violence over the long-‐term. Pro-‐Qadhafi factions will provide all possible support to him, even as an agitator of an NTC-‐led government—prolonging the “engagement” dilemma of Western backers looking to secure stabilization with the lightest possible footprint. Alternative forms of peacekeeping support, including from Arab League members, may become necessary. 51. ENTRY POINTS FOR G20/UN SUPPORT: A pragmatic nation-‐building strategy will be critical—including outreach to Qadhafi loyalists and a slow restructuring of Libya’s complex, ideology-‐driven and labyrinthine institutional structures. The planed elections, now being overseen by the transitional cabinet, and rapid establishment of political architecture will be vital to meeting medium term stabilization objectives. Priority is to develop a politically sensitive engagement between emerging governance structures to create financing for public welfare projects, generate employment and create a “trust” to buffer state finances. Diversification is critical to a more equitable future for Libya’s population.



MOROCCO 52. STATE OF PLAY: Morocco’s political situation is likely to remain comparatively stable over the course of the next few years, however, wider regional events—particularly in Tunisia and Egypt—may fuel continued unrest and popular discontent. 53. Minor public unrest has precipitated a moderate reform process, led by Morocco’s politically astute monarch Mohammed VI. A revised text of the constitution drafted through a multi-‐party process and presented by the King was approved by popular referendum on 1 July 2011. The revisions received a 98 percent “yes” vote, with a turnout of 73 percent. The reformed constitutional model vests broader powers in the Prime Minister and the elected government, improves civil liberties and establishes equality of the sexes. Swift action to address public concerns has strengthened the legitimacy of the current structure but Morocco is not out of the woods; further demands were raised at a mass protest on 10 July, lead by the so-‐called February 20 Movement, which has yet to demonstrate any significant capacity to convene sustained protest at a

national level. Moreover, a weak parliament, and the continued grip on power maintained by King Mohammed VI and his advisers are likely to cause

Moroccans to turn increasingly towards Islamic organizations and charities. 54. TRIGGERS & DRIVERS OF UNREST: The wave of regional unrest has

fuelled a dormant resentment over a restrictive political and economic system, joblessness and perceived inequality, and denial of freedoms. Unlike some regional neighbors, Morocco’s current regime made pre-‐uprising attempts to forestall an unhappy populace. Upon inheriting the throne from his father in July 1999, Mohammed VI made changes to the institutional, political and socio-‐economic fabric of the kingdom. Broader freedoms have been granted to women and the press. The economy has marked an average annual GDP growth of around 5 percent between 2000 and 2009, paralleled with surge in FDI and infrastructure development. However, even at a decreased poverty level, education and youth unemployment remain problematic.

Table 5 Morocco – National Statistics at a Glance

2008 2009 2010 2011 GDP (US$ Billion) 88.879 91.374 103.482 100.323 GDP Per Capita (US$) 2,850 2,899 3,248 3,116 General Debt (% GDP) 48.2 47.7 49.9 52.8 Population (million) 31,177 31,514 31,851 32,187 Urban Population (%) 56.02 56.36 Unemployment Rate (%) 9.6 9.1 9.o 9.1 CPI Inflation (%) 4.2 1.8 2.2 2.6 HDI Rank 0.556 0.562 0.567 -‐ Gini Coefficient 40.9 40.9 40.9 -‐



55. COSTS SO FAR: The Moroccan uprising has been a comparative “bargain” in view of the ongoing calamity at other corners of the Arab Realm. With political stability relatively unchallenged, Morocco’s FDI-‐ and export-‐based economy (the phosphate, textile and agricultural sectors, in particular) has remained largely intact. The cost of the protests to the Moroccan economy is nil, with weak positive impact on GDP estimated at US$18 million, equal to around 0.02 percent of GDP. However, the Moroccan government has increased its expenditures (US$3,482 billion) despite a lower rise of public revenues (US$282 million), inferring a total cost of approximately US$3.2 billion to the fiscal balance. Political and social uncertainties inside Morocco have marginally affected investments (through FDI inflows) and tourism sector activity, and the impact of higher oil prices on imported products, which, unlike the cases of Jordan and Lebanon, are not compensated for by remittances from the Gulf, have been felt across the country. A number of these impacts have, however, been offset by relatively high growth in the agriculture sector, and while Morocco has experienced a sharp increase in public expenditures (US$1.588 billion) this spending has assisted in maintaining social stability with the introduction of subsidies on food and petroleum products as well as social transfers. Public and government restraint have limited the human cost: excepting four self-‐immolations and a few injuries, no casualties have been reported. 56. MAJOR RISKS & OPPORTUNITIES: Risks: The reform process has yet to yield tangible, street-‐level results—potentially testing public patience. Extremist groups, operating underground, can make use of uncertainty for high-‐profile attacks or low-‐profile support-‐building. Opportunities: The Arab

Spring has opened a window of opportunity for transition towards a parliamentary monarchy and economic development, based on the principles of transparency, accountability, social justice and wealth repartition. Major development indicators have been on the rise and are expected to improve with GCC’s recent decision to consider Morocco for membership. 57. FUTURE CHANGE AGENTS: (i) King Mohammed VI; (ii) Politically empowered population, including women, under the new constitution; (iii) the GCC. 58. CRITICAL FACTORS & LIKELY SCENARIOS: King Mohammed VI has not been a target for the unrest; hence, he is likely to retain high level of popularity, especially in view of recent constitutional amendments. However, future unrest cannot be excluded as royal power over governance appointments –security, religious and cabinet-‐ has not been compromised. 59. ENTRY POINTS FOR G20/UN SUPPORT: GOVERNANCE: Long-‐term political support en route to democratization of the monarchical system. Employability could be boosted through improvement of the education system. Support for more accessible and adequate basic and essential services.



TUNISIA 60. STATE OF PLAY: The first “domino” in the chain of Arab uprisings has seen a mixed result: successful ousting (dubbed the Jasmine Revolution) of a hated leader, former President Zine El Abidine Ben Ali, but little relaxation of tight regime controls. As of July, the Interim President and Speaker of Parliament, Foued Mebazaa, has indefinitely extended the state of emergency introduced upon former President Ben Ali’s flight from power in January 2011. Elections for the National Constituent Assembly (to assume oversight of political transition and rewrite the constitution in view of fairer electoral law) have been deferred to 23 October and parliamentary and presidential elections are expected in 2012. Much uncertainty still persists, indicated by ongoing—although small scale—public protest events, and economic growth could suffer further in the

unpredictable climate which is set to increase in the lead up to elections. 61. TRIGGERS & DRIVERS OF UNREST: Tunisia seemed, on the surface, to be a healthy example of

secular, modernist, free-‐market statehood; however, repeated demonstrations of authoritarian contempt for the needs of ordinary people fused—if briefly—a divided society into genuine rage. Mohamed Bouazizi’s desperate act of self-‐immolation in Sidi Bouzid on 17 December 2010, resonated with a public deeply humiliated by repeated human rights violations and corruption. Ben Ali’s rule since 1987, taking up the reins and goals of the post-‐colonialist Bourguiba presidency (1956-‐1987) was seen as a betrayal of the dream of independence. Self-‐rule and a diverse, open economy had not protected Tunisians from rising youth unemployment, high costs of living for the poor and the indignity of abuse by authority figures.

Table 6 Tunisia – National Statistics at a Glance

2008 2009 2010 2011 GDP (US$ Billion) 44.878 43.523 44.290 46.623 GDP Per Capita (US$) 4,345 4,170 4,200 4,375 General Debt (% GDP) 43.3 42.9 40.4 42.8 Population (million) 10.327 10.327 10.544 10.655 Urban Population (%) 66.5 66.9 -‐ -‐ Unemployment Rate (%) 12.6 13.3 13.0 13.0 CPI Inflation (%) 5 3.7 4.8 5 HDI Rank 0.671 0.677 0.683 -‐ Gini Coefficient 40.8 40.8 40.8 -‐

62. COSTS SO FAR: The cost of ‘Arab Spring’ uprisings to Tunisia is estimated at US$2.03 billion, amounting to roughly 5.22 percent of GDP. ‘Revolution’ in Tunisia, and the Libyan conflict have produced serious negative impacts on a number of sectors including tourism, mining, and phosphate and fishing production, as well as levels of

investment and inflow of remittances. In response to the protests, the Tunisian government increased its expenditures (US$746 million), throwing the fiscal balance of track by an estimated US$489 million. In terms of human cost, Tunisia’s uprising led to approximately 100 deaths and many more injuries.



63. MAJOR RISKS & OPPORTUNITIES: Risks: Internal political fragmentation could crystallize in lack of consensus over a new constitution, potential boycott of elections and collision between the armed forces and former administration. Expansion of Islamist factions (with Ennahda generating an electoral constituency base of 20 percent) is likely to compromise recent political gains, civil and political rights. Opportunities: Successful democratization and liberalization (political and economic), will offer the critical leverage for transitions elsewhere. 64. FUTURE CHANGE AGENTS: (i) Transitional Authority and armed forces; (ii) UGTT and PDP (iii) Trade Unions; (iv) Islamist movements and the Congress for the Republic (CPR) amongst other opposition factions.

65. CRITICAL FACTORS & LIKELY SCENARIOS: A representative democracy could evolve. Yet deferral of elections has triggered a level of political uncertainty, along with a significant degree of insecurity. A tenuous, weak government or a potential collapse of confidence in the transition is a distinct possibility. The worst-‐case scenario is a military coup—eroding the objectives of the revolution. 66. ENTRY POINTS FOR G20/UN SUPPORT: Significant international support is necessary to offset Tunisia’s fiscal and balance-‐of-‐payments losses and cushion the impact on the employment-‐fertile tourism sector. Investment in education is critical to boost employment amongst the youth.

JORDAN STATE OF PLAY: Violent public protest against corruption in Amman’s poorest quarters has catalyzed some regime compromises—namely (i) an investigation by the Anti-‐Corruption Commission into several headline-‐making cases; (ii) a reshuffle of senior government officials; and (iii) a National Dialogue Committee to seek compromise between the ruling elite and the opposition on revising the political system and reforming a highly unpopular and discriminatory electoral law. Tensions remain palpable, but any major change to the status quo is extremely unlikely. Presenting the possibility of new tensions, however, is the evacuation of almost all staff from the Israeli embassy in Amman on 15 September amidst planned protests and growing anti-‐Israel sentiment, catalyzed by recent events in Cairo. This comes at an

unpredictable diplomatic period for Israel and its allies. These new developments and the King’s approach to relations with Israel moving forward may exacerbate divides and tensions in Jordan.

67. TRIGGERS & DRIVERS OF UNREST: Surging oil and food prices, high taxation, tension between displaced foreigners (Iraqis and Palestinians) and Jordanian nationals and unsustainable levels

of unemployment are putting Jordanians under extreme pressure. Corruption is perceived to be endemic, bureaucracy all-‐consuming and government largely unaccountable. Jordan’s progressive youth are also frustrated by a schizophrenic government ideology that seeks to present a modern front while placating conservative tribal ideologies. King Abdullah remains, ironically, very popular particularly among



the middle classes—having continued his father’s push towards trade liberalization through inter alia WTO membership and associate status at the European Union. However, conservative forces are finding

Jordan an increasingly fertile field as government subsidies fail to keep pace with a rising cost of living for the poor, and as Jordan remains diplomatically wedded to a pro-‐Western agenda.

Table 7 Jordan – National Statistics at a Glance

2008 2009 2010 2011 GDP (US$ Billion) 22706 25.113 27.527 29.964 GDP Per Capita (US$) 3,881 4,199 4,449 4,788 General Debt (% GDP) 58.4 61.8 61.4 62.8 Population (million) 5.85 5.98 6.117 6.258 Urban Population (%) 78.42 78.46 -‐ -‐ Unemployment Rate (%) 12.6 12.9 12.5 12.5 CPI Inflation (%) 9.6 2.7 5.8 5.2 HDI Rank 0.673 0.677 0.683 -‐ Gini Coefficient 37.7 37.7 37.7 -‐

68. COSTS SO FAR: The unrest has translated into consumer price inflation and a blow on government fiscal and account balances. At the bloom of the Arab Spring (10 January-‐ 14 April), the Kingdom’s equity markers registered a fall of 11 percent. Foreign direct investment and tourism—the latter accounting for nearly 14 percent of GDP—have declined significantly. Nevertheless, the cost of the Arab Spring on the Jordanian economy is low relative to that of other Arab countries, with an approximate cost totaling US$28 million, which equates to 0.20 percent of GPD. However, in addition to the negative impacts on tourism, trade and direct investment, rising costs of energy sparked by temporary interruption of gas deliveries from Egypt and increasing oil prices have exacerbated the economic strain. Countering these costs, however, are the high prices of phosphate and iron ore, which have continued to benefit Jordan, and the increase in remittances from Gulf countries. In addition, public expenditures (US$1.178 million) decided by the government to boost consumption and keep social peace have added to Jordan’s relative stability. Such measures include social protection policies, tax cuts on fuel and foodstuffs, additional subsidies and

increased civil service salaries and pensions. When compared to a small rise in public revenues of US$972 million, this public expenditure does not present significant economic implications for the Jordanian economy. 69. MAJOR RISKS & OPPORTUNITIES: Risks: If regional unrest continues, Jordan will find itself bearing an impossible burden of chronically high oil prices and rising fiscal deficits. Paralleled with eventual FDI capital outflows, the Arab Spring could leave Jordan short of cash for financing higher public expectations. Recent boost in food and oil subsides risks pushing the overall budget deficit to 6.8 percent of GDP (increasing the cost of preexisting subsidies by 2.1 percent of GDP). Opportunities: A private-‐sector economic council has been established to identify strategies and policies for encouraging private investment.

70. FUTURE CHANGE AGENTS: (i) large Palestinian Diaspora (ii) low to middle-‐class poor youth; (iii) the Islamic Action Front (IAF); (iv) King Abdullah II and Queen Rania’s role in leading meaningful policy and institutional changes.



71. CRITICAL FACTORS & LIKELY SCENARIOS: King Abdullah must at all costs retain the country’s cherished status as a peaceful haven for business and diplomacy within the Levant. However, implementing and financing reforms will be a major challenge to public coffers. Solutions will be preferred that combine graduated political compromise for poor and middle-‐class Jordanians with monitoring of foreign elements seeking to capitalize on

disaffection. King Abdullah’s management of relations with Israel will also be key. 72. ENTRY POINTS FOR G20/UN SUPPORT: Substantial foreign support will be needed to finance the widening deficit, to liberate more national funds for basic services. Long-‐term public expenditure shocks could be cushioned through better-‐targeted social protection mechanisms.

SYRIA 73. STATE OF PLAY: Operations led by the Syrian armed forces intensified during the month of Ramadan resulting in significant civilian casualties. Continuing its crackdown on dissent, Syrian tanks attacked the town of al-‐Rastan in the central province of Homs overnight on 25th September. The Syrian government remains defiant and unyielding in confronting the protracted civil unrest, portrayed by the State as acts of terrorism. Mounting international condemnation and diplomatic efforts by allies such as Turkey and Russia, amongst others, have failed to contain ongoing arrests and armed offensives against civilians. Major GCC states have withdrawn their ambassadors from the country. The U.S. and Europe imposed sanctions on Assad’s top officials; however, international consensus has not coalesced into a Security Council Resolution (as with Libya), with a draft UNSC resolution rejected by both Russia and China. Countering Lebanon’s statement disassociating itself from UNSC criticisms of Syria, Saudi Arabia provided a strong ‘Arab’ voice in condemning Assad and calling for him to step aside. 74. Assad’s moves to implement a reform process have been repeatedly dismissed by opposition leaders as gamesmanship—a façade to quell dissent. A two-‐day meeting

between the Baath party and the opposition initiated by the Syrian government on 10-‐11 July was boycotted by

major opposition leaders. A Parties Law was passed in August, allowing for political parties to be set up alongside the leading Baath faction. Military action in Hama and elsewhere is ongoing, and the international dilemma as

to how best support the opposition movement remains as deep as ever.

75. TRIGGERS & DRIVERS OF UNREST: Syria represents one of the bloodiest consequences of the Arab Spring. Unrest has been propelled by: (i) popular discontent over falling living standards; (ii) economic constriction due to oil shortages in a largely rent-‐based economy; (iii) and systemically breached freedoms and repression by an authoritarian regime and its feared security apparatus. Violence precipitated by the alleged torture and murder of an adolescent boy by Syria’s mukhabarat (mlitary intelligence) has reopened old sectarian and tribal rivalries in a country known for its peaceful inter-‐religious coexistence. Initially demanding the end of a State of Emergency in place since 1963, the revolt now seeks to overthrow the Assad Alawite dynasty, established by President Hafez El Assad’s



who—upon his death in 2000—amended the Constitution to allow his son Bashar Al Assad to take office by referendum. Under both Hafez and Bashar’s rule, Syria has become increasingly ostracized in the

international community due to rapprochement with Iran and Hizb’allah, as well as allegations over the assassination of Lebanese Prime Minister, Rafik Hariri.

Table 8 Syria – National Statistics at a Glance

2008 2009 2010 2011 GDP (US$ Billion) 52.573 53.908 59.330 68.336 GDP Per Capita (US$) 2,676 2,678 2,877 3,234 General Debt (% GDP) 38.2 31.2 27.5 24.3 Population (million) 19.645 20.127 20.62 21.125 Urban Population (%) 54.22 54.56 -‐ -‐ Unemployment Rate (%) 10.9 8.1 8.4 8.3 CPI Inflation (%) 15.2 2.5 5 5 HDI Rank 0.584 0.586 0.589 -‐ Gini Coefficient n/a n/a n/a n/a

76. COSTS SO FAR: As of October 2011, the civilian death toll since the beginning of the upheavals is estimated at nearly 2,900, according to UN Human Rights Office. Continuing offensives by Assad’s armed forces increase this number by the day. Thousands of injured, unlawfully arrested and displaced persons add to the human cost. The outcome of the Syrian protests remains highly uncertain, though early estimations indicate a total cost to the Syrian economy of approximately US$6.074 billion (equal to 4.52 percent of GDP). The drop in tourism, the decrease in public investment and FDI inflows, and the introduction of international economic sanctions (oil exports in particular) have severely affected Syria’s economy, resulting in a forecasted GDP growth of -‐2 percent. However, the economic costs to Syria are limited by a sustained high level of exports to and remittances from the Gulf, self-‐sufficiency where oil is concerned allowing Syria to partially avoid the increase of oil prices, and growth in the agriculture sector. 77. In response to the protests, the Syrian regime has introduced a number of social measures designed to appease Syria’s increasingly frustrated and disaffected

society. Such measures include cash transfers, civil service wage increases, improving health services and tax breaks on some food products, leading to an increase of public expenditures by US$18.907 billion in 2011. This expenditure situation has been worsened by a decrease in public revenues in the region of US$2.317 billion (1.72 percent of GDP). In the short term, increasing military costs and falling public revenues will have an important impact on the political stability of Syria implying a US$21.22 billion cost to the fiscal balance. 78. MAJOR RISKS & OPPORTUNITIES: Risks: Assad’s determination to remain in power and a potential failure to integrate the opposition into the reform consultation process (as signaled by July developments) risks escalating the unrest into an all-‐out civil or inter-‐ethnic war with further economic and social costs, and pressure on Syria’s peripheral allies. The potential for bitter and protracted sectarian strife, even in the event of regime change, is very real if Syria’s internal and external influencers succeed in reframing the conflict in these terms. Opportunities: The current stalemate and sudden Saudi Arabian and GCC condemnation could leave the Syrian



leadership with no opportunity but to realign its interests and political platform, in view of adequate decentralization, repartition of wealth and economic growth. Recent consultation initiatives signal an opportunity to introduce more inclusive and transparent decision-‐making. 79. MAIN CHANGE AGENTS: (i) President Bashar Al Assad; (ii) Baath party; (iii) Opposition crystallized in new political factions as authorized by the new Party Law; (iv) Iran, Saudi Arabia, Turkey and Russia. 80. CRITICAL FACTORS & LIKELY SCENARIOS: President Al Assad looks unlikely to be shifted in the short term unless key Alawite military commanders defect, further stalling an overdue conciliation and transformation process. Rejection of Assad’s initial offer to open national dialogue on reforms suggests that reaching consensus with the opposition would be difficult and opportunities for reform could be missed.

Iran’s underground channel of hardware and intelligence to Assad will prolong his rule without strengthening his position, and further destabilize the country. Saudi Arabia’s recent condemnation of Syrian leadership will reshuffle the regional balance, including allegiances vis-‐à-‐vis Iran. 81. ENTRY POINTS FOR G20/UN SUPPORT: The priority must be to leave the door open for influence on both government and opposition forces, to allow a viable exit strategy for Assad or at least a platform for compromise. Apart from containing disproportionate force against civilians, support could focus on improving the socio-‐economic balance sheet in Syria, most urgently through employment generation and economic growth. Specific focus areas should include: (i) development of the agricultural sector (high olive oil potential) and (ii) the tourism sector (mostly infrastructural); as well as (iii) enabling the growth of private economic activity.

BAHRAIN 82. STATE OF PLAY: Having been caught off-‐guard by the rapid progression of mostly Shia’a public protests, the ruling Al-‐Khalifa family has succeeded in smothering most public dissent (with the assistance of the Peninsular Shield Force). Further sporadic rallies have taken place since the lifting of the emergency law on 1 June 2011, but have not gained national momentum. The government introduced a ‘National Dialogue’ but the withdrawal of the main opposition group al-‐Wefaq National Islamic Society—in early July has seriously undermined the Dialogue’s credibility. In addition, trials of those arrested since February continue behind closed doors. The government crackdown has led to calls for

removal of the King and Prime Minister and sparked public criticism of Bahrain’s human rights record from the U.S.

83. TRIGGERS & DRIVERS OF UNREST: Bahrain’s majority Shi’a population is politically, economically and socially marginalized, resulting in

grievances that are sources of constant tension. Political representation is unequal between sects; most ministerial posts are appropriated by the Sunni ruling family. Bahrain is also struggling to combat rising unemployment, adding to frustrations and unrest. The current trials of protestors and perceived non-‐combatants (particularly doctors) arrested during the recent uprising have provoked outrage. The uprisings can



also be viewed as part of a longer sequence of political and social unrest, following the ‘1990s Intifada’ between the emirate government and opposition movements that resulted in approximately 40 deaths. A referendum in February 2001 reinstated

constitutional rule and opened politics to minority parties including Islamist groups and human rights campaigners. However, progress could not mask widespread social inequity, and current crackdowns will sow the seeds for future conflict.

Table 9 Bahrain – National Statistics at a Glance

2008 2009 2010 2011 GDP (US$ Billion) 28.416 19.314 22.656 26.484 GDP Per Capita (US$) 6,074 4,698 4,591 4640.535 General Debt (% GDP) 14.6 25.4 32.0 24.8 Population (million) 0.779 1.039 1.107 1.129 Urban Population (%) 88.52 88.56 CPI Inflation (%) 5.1 2.8 2 2.7 HDI Rank 0.809 0.798 0.801 -‐ Gini Coefficient n/a n/a n/a n/a

84. COSTS SO FAR: Bahrain’s economy has suffered significantly. The Economist Intelligence Unit (EIU) forecasts growth of just 2.4 percent (compared to nearly 4 percent in 2010), largely due to the impacts of the uprising on the financial sector. Esam Fakhro, (Head of the Bahrain Chamber of Commerce and Industry) estimates that the cost of unrest in early 2011 to Bahrain stands at US$1.5bn-‐2bn in lost GDP.5 85. However, once oil prices and production increases are included, the overall cost of Bahrain’s uprisings to the national economy in 2011 thus far is comparatively low, totaling approximately US$391 million (around 2.77 percent of GDP in 2011). This is explained in part by Bahrain’s significant and stable oil sector production, contributing around 30 percent of GDP. Given the dominance of the oil sector in the national economy, Bahrain has been able to limit impact on the fiscal balance, with public revenues in fact increasing by US$1.378 billion, (around 9.77 percent of GDP). However, public expenditure has also increased in recent months by approximately US$2.077 billion. 5 Economic Intelligence Unit (Aug 12, 2011) referring to remarks quoted in London-‐based Asharq al-‐Awsat.

This increase is due in part to government cash transfers of US$2,660 to each family in an attempt to compensate for declines in the banking, retail and toursim sectors, as well as failed government efforts to diversify the economy. These measures were intended, at a societal level, to increase employment opportunities, prosperity and living standards for Bahrian’s inhabitants. 86. MAJOR RISKS & OPPORTUNITIES: Risks: Unrest will damage Bahrain’s reputation as a financial hub. The outcome of the trials of arrested protestors could exacerbate unrest. Association of the uprising with Bahrain’s Shias could increase sectarianism. Opportunities: While expectations are low, the National Dialogue could mark the beginnings of reform and greater political participation. Relocation of the headquarters of the European Islamic Investment Bank from London to Bahrain is a positive step towards financial stabilization. 87. FUTURE CHANGE AGENTS: (i) The Khalifa family hold the key to reform; (ii) Regional actors including Iran and Saudi Arabia; (iii)



Regional economic developments are also pivotal. 88. CRITICAL FACTORS & LIKELY SCENARIOS: Political unrest in Bahrain will continue, with little hope of meaningful reform in the near future. Failure to address grievances of Bahrain’s society will exacerbate existing tensions, and the National Dialogue introduced in July is unlikely to lead to any significant change. Political unrest will impact negatively on foreign investment, leading investors to shift operations elsewhere. Bahrain will focus on economic diversification away from oil in order to address social and economic grievances.

89. ENTRY POINTS FOR G20/UN SUPPORT: Encouraging foreign investors to return to or set up in Bahrain is critical—as is reform to the current subsidy system. Given Bahrain’s growing debt burden, G20 support is pivotal for development projects, infrastructure and debt re-‐financing. This will complement Bahrain’s receipt of half of a US$20 billion GCC fund for housing and infrastructure. Political reform is key to address discrimination against Bahrain’s Shi’a population, improving employment and services. International efforts to stabilize wider regional tensions will also be an important factor, particularly vis-‐à-‐vis Iran.

OMAN 90. STATE OF PLAY: The Omani administration has mitigated social unrest that peaked in February 2011 through a stick and carrot approach—deployment of armed forces matched with a rise in minimum wage. There has been little overt criticism of the Oman’s Sultan Qaboos; rather, protests have been directed against ministers and powerful businessmen. Ministers implicated in corruption have been dismissed, which has lead to restructuring of certain organs of the state. The Council of Oman is expected to absorb legislative and audit powers, amendments yet to be entered into the Basic Law. The Financial Affairs and Energy Resources Councils have been restructured. 91. TRIGGERS & DRIVERS OF UNREST: Participants in February’s Green March

were largely members of a fast-‐growing young population frustrated by excessive state control over the media and restricted freedom of expression. Unemployment and

growing inequality have fed demand for a more open system of governance in one of the Gulf’s most hidebound pillars. Oman was one of the founding states of the GCC in 1981, after pursuing

an ambitious economic liberalization and modernization strategy that did not extend to the political system. A non-‐participatory political structure, ruled by decree in the absence of a legislature and political parties, remains in place to date.

Table 10 Oman – National Statistics at a Glance

2008 2009 2010 2011 GDP (US$) 60.568 46.861 55.62 66.048 GDP Per Capita (US$) 21,747 16,255 18,656 21,421 General Debt (% GDP) 5.1 8.0 5.9 4.1 Population (million) 2.785 2.883 2.981 3.083 Urban Population (%) 71.62 71.66 -‐ -‐



Table 10 Oman – National Statistics at a Glance

CPI Inflation (%) 7.8 3.4 3.4 3.3 HDI Rank n/a n/a n/a n/a Gini Coefficient n/a n/a n/a n/a

92. COSTS SO FAR: Oman’s economy has been partly safeguarded by a strong hydrocarbon sector and higher oil prices. However, the economic cost of the ‘Arab Spring’ to Oman is relatively high (US$1.087 billion) amounting to approximately 1.25 percent of GDP, with protests and moderate unrest detrimentally affecting investment, tourism and economic diversification. In response to protests, the Omani government adopted important social measures including the creation of jobs, increasing the minimum wage, and the introduction of a monthly unemployment benefit of US$390, amongst others. These measures resulted in costs of approximately US$1.157 billion (about 3.54 percent of GDP), which, in turn, have placed long-‐term fiscal pressure on the state. Volatile oil and gas export prices and the recent downturn in domestic oil production may not support such expenditures for long, and gas shortages have resulted in delay and cancelation of major industrial projects. However, Oman has been able to take advantage of high public revenue increases in the region of US$5.397 billion. In terms of human costs, at least two fatalities have been reported, amidst forceful removal and incarceration (without charge) of hundreds of demonstrators. 93. MAJOR RISKS & OPPORTUNITIES: Risks: Sultan Qaboos bin Said al-‐Said’s exclusive rule is at the core of future instability. Growing uncertainty over the upcoming succession of the throne could trigger a second wave of unrest with substantial

impact on FDI, the private sector and tourism. Recent gains towards diversification and employment generation could be lost. The security crisis in Yemen could inflict a refugee influx and increase the threat of penetration of al-‐Qaida in the Arabian Peninsula (AQAP). Opportunities: Should political reforms manifest, the tourism sector has the potential to contribute towards diversification of revenue. Recent rapprochement with India will allow for increase in non-‐oil exports. Expanding non-‐oil industries will create more stable sources of employment and allow for more inclusive economic growth. 94. FUTURE CHANGE AGENTS: (i) Sultan Qaboos bin Said al-‐Said, enjoying popular support; (ii) New generation of politically active youth. 95. CRITICAL FACTORS & LIKELY SCENARIOS: The reform process underway is unlikely to meet public expectations—particularly towards employment generation—leading to a gradual but sporadic escalation in social unrest focused around key moments in Oman’s political calendar, stressing the economy. Regime change, however, is very unlikely. 96. ENTRY POINTS FOR G20/UN SUPPORT: The G20 could most usefully focus on encouraging economic diversification for employment, through creating an enabling environment for expansion of businesses and more open competition. Gas shortages should be addressed as a major constraint to growth.



97. STATE OF PLAY: The Arab Spring reached Saudi Arabia in March 2011, but an initial flurry of demonstrations were banned on the pretext that threats to national security and stability will not be tolerated. The present political and security situation is relatively stable but the regime is, at root, extremely vulnerable due to high levels of unemployment, unease at pro-‐Western economic links and widespread infiltration by extremist groups provoking disproportionate security expenditures to maintain the status quo. This unease will likely be exacerbated during a fragile process of succession. King Abdullah bin Abdel-‐Aziz al-‐Saud acted fast to forestall unrest by pledging an estimated US$100 billion to increase public wages and welfare benefits, as well as for the introduction of a house-‐building program. Minor government reshuffles have taken place, though the Cabinet remains in its pre-‐Spring format. Party politics remain illegal. The second municipal elections are scheduled to take place on 22 September 2011.6

98. Renewed Saudi-‐Iranian cooperation is also a new possibility following positive dialogue emanating from Iranian and Saudi foreign ministers. In addition to Bahrain, a number of other regional challenges—largely sectarian in nature– confront both regimes, which may deem co-‐operation mutually beneficial. 99. TRIGGERS & DRIVERS OF UNREST: Saudi Arabia is perhaps the most polarized society in the Middle East—a hugely influential bastion of conservatism in the heartland of Islam, run by absolute monarchs who

6 In 2010, Saudi Arabia was awarded the largest arms deal in US history, totaling US$60 billion.

project themselves as caretakers of tradition, whilst pursuing a pro-‐Western

economic agenda and exuberant lifestyles. A founding member of GCC and OPEC, Saudi Arabia, as an economic powerhouse, defines the direction of economic growth throughout the Middle East.

However, lack of economic diversification and human rights repression at home has opened the door to grassroots rather than extremist disaffection. 100. COSTS SO FAR: The Arab uprising—and events in Libya in particular—have boosted Saudi GDP by US$5.019 billion. In addition, public revenues have been boosted by US$60.93 billion through the increase of oil prices and increased Saudi oil production. As a result of internal troubles, the Saudi authorities have also embarked on a huge social spending program, which will cover construction of accommodation, increasing civil servant wages and wider public investments. This cost equals US$37.83 billion—approximately 15.6 percent of GDP. 101. In response to social demands, the government has indefinitely extended the 15 percent inflation allowance for state employees (phased over the past three years). The cost of this and other measures is expected to reach 25 percent of GDP over several years. The current trend of increasing fiscal surplus on the back of booming crude production (raised by 0.40 barrels a day December-‐February) hinders the expansion of the non-‐oil sector, trimming stable job sources. Furthermore, unpopular intervention in Bahrain has cost Saudi some regional credibility.

SAUDI ARABIA



102. MAJOR RISKS & OPPORTUNITIES: Risks: Given the financial commitments made by the Saudi regime to placate public opinion, oil price volatility presents major risks to stability. Current fiscal surplus projections are highly fallible, based on a surge in oil price and decline in output amongst other oil exporters. Any surplus could be momentary and gains may fail to offset

increased long-‐term government spending (US$130 billion), risking budget deficit. The private sector will be set back under the “Saudization" program, envisaging preferential employment for Saudi nationals. Saudi militants currently operating in deteriorating Yemen could return to ferment unrest.

103. Opportunities Current fiscal surplus could be injected into high employment generating industries such as tourism and manufacturing. Increased employment opportunities can contribute to expanding the non-‐oil sector, offering opportunities for further diversification. 104. FUTURE CHANGE AGENTS: (i) King Abdullah bin Abdel-‐Aziz al-‐Saud and his Cabinet; (ii) Politically active, economically deprived and socially discriminated women and youth; (iii) Islamic factions. 105. CRITICAL FACTORS & LIKELY SCENARIOS: Comprehensive political and social reforms will be resisted by conservative senior officials and the Saudi clerical

establishment. Remobilization of protests is less likely than further underground fracturing of state security. Intervention in Yemen might be considered to offset potential spillover threat from that conflict. The process and outcome succession may prove critical. 106. ENTRY POINTS FOR G20/UN SUPPORT: Unemployment could be offset through encouraging growth in non-‐oil industries. Further efforts could focus on generating political consensus on women’s enfranchisement, as well as achieving broader political and economic equality.

Table 11 Saudi Arabia – National Statistics at a Glance

2008 2009 2010 2011 GDP (US$ Billion) 476.941 376.268 443.691 578.566 GDP Per Capita (US$) 19,156 14,744 16,995 21,685 General Debt (% GDP) 13.2 16.0 10.8 8.3 Population (Million) 24.897 25.519 26.106 26.680 Urban Population (%) 82.42 82.26 -‐ -‐ Unemployment Rate (%) 9.8 10.464 10.476 10.8 CPI Inflation (%) 9 4.9 5.4 6.6 HDI Rank 0.746 0.748 0.752 -‐ Gini Coefficient n/a n/a n/a n/a



YEMEN 107. STATE OF PLAY: Three months after surviving an assassination attempt, Yemen’s President Ali Abdullah Saleh returned to Sana’a at dawn on 23rd September 2011. Despite calling for a truce and ceasefire, Saleh’s return raises real fears of full-‐blown civil war. Following Saleh's return, protests in Change Square, Sanaa were marred by violence as protesters were caught in clashes between the army and dissident soldiers. While the death toll remain unconfirmed, some reports indicate upwards of 40 casualties across the city. 108. Yemen’s brutal conflict has teetered on the edge of regime decapitation since President Saleh fled the country to Saudi Arabia in June. His decision to back out of a GCC brokered peace plan intensified confrontation between security forces and Hashid anti-‐regime tribesmen. However, Saleh has now agreed to return to the table, with a recent announcement that he has authorized Abdrahbuh Mansur Hadi—Yemen’s vice-‐president—to sign a Gulf Arab initiative paving the way for transfer of power. This announcement came soon after thousands of protestors stormed Sanaa’s main university on 17th September, calling for an end to the current regime. However, it may be too late to prevent a de facto fracturing of Yemen. The death of the Chairman of the Shoura Council and Saleh ally, Abdulazziz Abdulghani, has sparked a fresh wave of protests and clashes with loyalists to Sadiq Al-‐Ahmar. Islamist militants have taken control of the towns of Zinjibar, Ja’ar and Shuqrah in the Abyan governorate, accelerating displacement levels and constraining a humanitarian response.

109. TRIGGERS & DRIVERS OF UNREST: The region’s most extreme examples of poverty, weak service delivery and inequity can be found in Yemen, stressing an already

fragmented national identity fused from two formerly conflicting entities. With heat applied by regional unrest, frustration finally boiled over into demands for political pluralism and an overdue leadership

change. Ali Abdullah Saleh’s presidency from 1990 has been propped up through consecutive elections by quid pro quo tribal support. The collapse of this deal has added internal power struggles to a mix of socio-‐economic malaise, local insurgencies and externally aided extremist movements. Militants have taken advantage of Yemen’s weak central authority since anti-‐government protests began in January, with militant bases dominant in Yemen’s southern provinces and some eastern areas. Of particular concern to the U.S. and other Western governments is the presence and potential role of Al Qaeda in Yemen if regime collapse results in a power vacuum. 110. COSTS SO FAR: The ongoing conflict has negatively affected the economy, devaluing the Yemeni Riyal and leading to substantial surge of commodity prices. A significant portion of the population has been pushed below the poverty line (estimated to reach 15 percent in the near-‐term if the Riyal continues to weaken). A parallel fuel crisis is hurting the private sector. Distribution of water and food, as well as access to medical aid has been disrupted. Fuel shortages have also led to security incidents. Amidst conflicting reports, some sources indicate that the cost of transporting goods to market has risen by up to 60 percent,



resulting in a significant rise in the price of staples such as flour and sugar.

Table 12 Yemen – National Statistics at a Glance

2008 2009 2010 2011 GDP (US$ Billion) 26,909 25,131 31,273 38,255 GDP Per Capita (US$) 1,171 1,060 1,281 1,522 General Debt (% GDP) 36.4 49.9 40.6 42.0 Population (million) 22.978 23.687 24.398 25.13 Urban Population (%) 30.64 31.22 -‐ -‐ Unemployment Rate (%) 15 -‐ -‐ -‐ CPI Inflation (%) 19 3.7 9.8 8.9 HDI Rank 0.424 0.431 0.439 -‐ Gini Coefficient 37.7 37.7 37.7 n/a

111. Yemen has suffered significantly as a result of internal troubles, with a total cost to the economy estimated at US$121 million, equal to 6.33 percent GDP. This comes despite high remittances from the Gulf. Serious ongoing conflict has affected public and private investment in Yemen, halting the process of economic diversification, and production in the services and hydrocarbon sectors has fallen. Social measures were introduced by the Government, such as bonuses and allowances to civil servants, and exemption from tuition fees for students, but public expenditure is forecasted to reduce by US$630 million, (equal to 32.89 percent GDP) due to current weak governance. Furthermore, the cost to public revenues will be extremely high (estimated at US$1.488 billion) producing a significant negative impact on the fiscal balance translating to approximately US$858 million (44.87 percent of GDP). 112. MAJOR RISKS & OPPORTUNITIES: Risks: Soaring inflation is a threat due to sharp increase in food and gas prices, as supply has been severely disrupted. Further decrease in oil output, offset by higher import of refined oil, could shrink government revenue, widen the fiscal deficit and contract real GDP. A rule-‐of-‐law vacuum upon any regime change could produce a destructive environment

amongst the military echelons, offering opportunities for terrorist infiltration into the political realm. Opportunities: Current political momentum allows for overcoming an underdeveloped and largely cash-‐based economy. Further public revenue could be generated through Yemen’s first liquefied natural gas project. 113. FUTURE CHANGE AGENTS: (i) Heavily armed tribes; (ii) Hamid al-‐Ahmar, allegedly financing the opposition and aspiring to leadership; (iii) Republican Guard; (iv) Islamic factions; (v) increased Al-‐Qaeda involvement; (vi) GCC and Saudi Arabia in particular, given its significant influence over Yemen’s key actors. 114. CRITICAL FACTORS & LIKELY SCENARIOS: President Saleh’s decision to reconsider a peace deal is unlikely to quell unrest, with elements of the revolt now outside his or the Hashed tribe’s control. Attempted secessions are possible. Next steps may be shaped by a compromise administration including elements of the armed forces and Hashed tribe elements. However, President Saleh’s insistence that his son should remain in the next government provides little optimism for a smooth transition. 115. ENTRY POINTS FOR G20/UN SUPPORT: Defusing the political, security and humanitarian crisis is the most urgent priority for international support.



Substantial foreign assistance is crucial to avoid a catastrophic economic crisis, which risks delegitimizing all engines of state and

potentially extending extremist political and territorial influence.

IMPACT ON OTHER REGIONAL HOTSPOTS

IRAQ

116. Iraq is at a pivotal time in what still is a post-‐war phase of development, despite it approaching the ninth anniversary of Saddam Hussein’s downfall. Iraq continues to be plagued by violence perpetrated by a range of groups including Al-‐Qaeda in Iraq. August proved to be the bloodiest month in a year, with an estimated 395 civilian deaths according to Iraq Body Count (IBC). 7

117. The balance of power within Nouri El Maliki’s coalition government, unable to take shape for eight months because of wrangling, is extremely delicate; its relations with neighbors Syria, Iran, Turkey, Jordan and Kuwait even more so. Iraq does not have an investment in the preservation of regimes currently under pressure. In particular, relationships with the Syrian Baathist government have been deteriorating for the past two years, and the burden of externally displaced Iraqis has been a factor aggravating tensions in Jordan and Syria. But instability in its neighborhood is already having a profound effect on Iraq’s public-‐political dialogue. There are major question marks over the entire state apparatus and its ability to deliver accountability, adequate public services, economic and physical security. While the issues at play here stretch far beyond revolt against autocracy, the regional turmoil is adding fuel to the fire and increasing the

7 IBC referenced in Economic Intelligence Unit country page, September 12, 2011

political stakes for Iraq as it struggles to build a functioning state.

118. To date, popular unrest has induced a number of high-‐level political resignations, widespread arrests and dozens of fatalities. The absence of a government for eight months

has significantly decreased capital spending. Mounting public demands for employment generation have refocused public investment in labor-‐intensive but low-‐productivity sectors, such as agriculture. Deeply wedded to an oil-‐only revenue model, Iraq’s current surge of oil profits is decreasing momentum to seek more inclusive sources of economic growth, to generate sustainable employment for the rapidly growing labor force and develop the financial system. Without reliable water and electricity, living standards and enterprise both suffer dramatically. Insecurity is still a consistent factor in Iraq’s inability to express its potential; frequent attacks on strategic targets in Baghdad and assassination attempts targeting key political figures have tested the capacity of Iraqi security forces to sustain stability post U.S. withdrawal. 119. The outcome of Prime Minister Nouri al-‐Maliki’s 100-‐day reform, aimed at the dismissal of nonperforming ministers, is overdue. The current uprisings also offer some surprising opportunities for Iraq. A significant reform agenda in Syria, Jordan and the Gulf may open both political



dialogue and possibilities for economic integration. Models for translating oil revenue into non-‐oil economic growth-‐ improving education, stimulating businesses and employment-‐resourceful industries—could also be shared. 120. COSTS SO FAR: Given the environment of political, economic and social instability that has gripped Iraq since 2003, separating the economic cost implications of the recent Arab Spring from pre-‐existing ‘costs’ is a difficult task. However, it is possible to identify and partially explain a number of recent developments in the Iraqi economy in the context of regional consequences of the Arab Spring, particularly relating to oil prices, investments, remittances and trade. The contribution of Iraq’s oil sector to national GDP has increased sharply during the uprisings across the region, caused primarily by an increase in oil production

and price (estimated at US$11.1 billion total increase of public revenues) in light of the Libyan crisis. Government expenditure on public investments, social reforms and the security sector, totalling around US$12.99 bn, have been offset by these benefits. However, rising political instability, both in Iraq and across the MENA region, has prevented the development of Iraq’s non-‐oil sectors, with investment and remittances disrupted and in some cases halted, and deterioration in terms of trade with neighboring countries, sparked by high prices of imports. Nevertheless, Iraq’s forecast GDP growth remains at around 9.6 percent , despite an Arab Spring cost to Iraq’s GDP estimated at US$, 1.329 bn, (approximately 3.37 percent of GDP).

LEBANON 121. Lebanon has a high stake in Arab Spring outcomes, particularly in Syria. In June 2011, a new government was formed under Prime Minister Najib Mikati, however cabinet deadlock in August over the passing of an energy investment plan has already highlighted government fragility. The balance of power between the March 8th and March 14th blocs has shifted, with significant increases in the representation of the latter dominated by pro-‐Syrian and Shi’a representatives. Hizb’allah currently risks losing its crucial Syrian ally, which would perhaps compel Iran to fill the gap and heighten tensions with Israel. The aftermath of the Special Tribunal for Lebanon (STL) into the killing of former prime minister, Rafiq al-‐Hariri, could polarize political and sectarian divides, with the possibility of violence.

122. Increasing Lebanese interests over the last decade in the Gulf has been shaken by the Bahrain and Oman uprisings. Confidence in the economy is low, exports are low, and the construction, services and

tourism industries upon which the Lebanese economy relies—as well as remittances—are at the mercy of regional developments. 123. While the Arab Spring has

expressed itself in Lebanon through elite reshuffling rather than popular unrest, the political scene is likely to remain tense and divided. This will, in turn, inhibit economic growth. Political unrest and lack of confidence in the economy mean that GDP growth in Lebanon will be slow. The EIU forecasts real GDP to grow by an average of 2.5 percent for the year 2011-‐2012 compared with an average of 8 percent for the previous year.



124. Lebanon desperately needs a stable source of economic support– particularly if intervention from Iran or Saudi Arabia is to be avoided. Efforts to redress the socio-‐economic inequities that mirror sectarian divides could play a key role in cooling sectarian tensions. Addressing these tensions at the regional level, particularly in the Gulf, is also important given the emergence of new international alliances defined—directly or indirectly—by religious sect. Lebanon’s neighbors remain, as ever, vital to Lebanon’s stability. 125. COSTS SO FAR: While avoiding major protests, Lebanon has been negatively impacted by the ‘Arab Spring’ sweeping the region. The reason for this stems predominantly from Lebanon’s open economy, which is highly dependent on the

regional political and economic climate, and particularly that of neighboring Syria. The overall cost of the Arab Spring to Lebanon has not been estimated but the cost to public revenues is around US$932 million, including around US$146 million for tax breaks, with the remainder caused by a decrease in construction activity. Main contributing factors that have impacted upon Lebanon’s economy as a result of the Arab Spring include: (i) deterioration of regional trade caused in part by the Syrian conflict, (ii) high energy prices due to temporary interruption of gas deliveries from Egypt, (iii) increase of the cost of imported products caused by the high oil prices (though partially offset by the increase of inflow remittances from Gulf countries), (iv) low tourism sector activity, mainly from other Arab countries, and (v) a drop in FDI inflow.

SUDAN 126. Sudan has been relatively cushioned from events in the Middle East and North Africa due to its own major internal struggles; however, dormant anti-‐government sentiment in the North has been awakened and President Omar Bashir has been obliged to announce he would not stand for a new term. South Sudan’s independence on 9 June 2011, following a 98.8 percent referendum vote in favor of separation, has left key border, oil and debt issues unaddressed and reignited clashes. The UN Interim Security Force has deployed in disputed Abyei to prevent a military takeover by either side. Fighting increased in South Kordofan and Blue Nile state (although a ceasefire in Kordofan is now in effect). Border disputes, oil and debt will remain ongoing tension between the North and South for the foreseeable future.

127. The Government of South Sudan (GOSS) and the National Congress Party

(NCP) are faced with opposition, internal disunity and tribal conflict. Internal fragmentation within South Sudan is also at risk with Sudan People's Liberation Movement (SPLM) struggling to manage tribal conflict and militias. The NCP and SPLM have made little progress towards post-‐secession arrangements, though China’s Foreign Minister has offered China to mediate. Such mediation could become necessary should relations between North and South deteriorate.

128. Despite its own larger issues at stake, Sudan remains vulnerable to an uprising —particularly in the North. Economically, investment is low and real GDP growth is expected to drop from an estimated 5.2 percent in 2010 to an average of 4.2 percent in the coming months. Should discontent with al-‐Bashir’s regime in the North fuel a major opposition drive, results for regional stability could go either way. A



new way of thinking in Khartoum could ease tensions in Darfur, as well as the South, or spark increased nationalism and a hardening of attitudes. Both North and South Sudan need support to prevent an Arab Spring spillover—through bolstering the accountability and credibility of their governance structures, promoting transparency, and addressing tribal, ethnic and economic grievances. International actors have a key role to play to address tensions over economic interdependencies,

the disputed province of Abyei, and border demarcation. Support may also be required in economic diversification away from oil. 129. COSTS SO FAR: It could be argued that Sudan’s economy has been significantly affected by the Arab Spring if the partition of the North and the South is viewed through the ‘Arab Spring’ lens. The costs to Sudan’s GDP are estimated at US$1,047 billion, with a total cost to revenues standing at US$374 million.

ISRAEL/OCCUPIED PALESTINIAN TERRITORIES 130. A view of recent events from Jerusalem, the West Bank or Gaza has likely been both perplexing and alarming. Leaders in all three areas are triply exposed to potential fallout—(i), from unpredictable shifts in regional and international allegiances; (ii) from the diversion of G8 resources previously channeled to their political causes, (iii) from protest spillover into their own constituencies, and most recently (iv) the Palestinian campaign for membership and UN state recognition. 131. ISRAEL: Israel is in a particular quandary. Well aware that a democratic model in former Arab autocracies does not necessarily augur well for neighborhood relations, Israel has been stumped on how and whether to welcome emerging events in Egypt, Syria and the Gulf. Regime change in Egypt and developments on Israel’s periphery have already required reconfiguration of national security priorities. Egypt’s embargo on Gaza has been lifted and the blockage of the Rafah border crossing—the sole border bypassing Israel—has been reopened in the aftermath of the crackdown on Mubarak’s regime, unleashing potential arms smuggling into the Hamas-‐administered Palestinian territory.

132. Protests on Israel’s northern borders with Syria and Lebanon are also offshoots of the Arab uprising—as Assad attempts a diversion from the bleeding streets of Syria. Of all the possible outcomes in Syria, none look very promising for Israel's current leadership. Regime change in Damascus is unlikely to improve relationships across the Golan Heights. And while the Knesset would be delighted with any scenario hurting Iran, it is far from clear that a Sunni-‐dominated or chaotic Syria would be a true body blow to Ahmedinejad and the Supreme Council. Iran would lose a key ally in Assad, but it would also gain space to assume some of Syria’s influence elsewhere; moreover, an unstable Syria might provide greater scope for agitation on Israel’s border. Balancing these threats against the known devil of Assad, it is easy to understand why Netanyahu took so long to join the international clamor for Assad’s departure. Israel has also experienced a weakening in relationship with two key allies. Israeli relations with Turkey reached a new low, as Turkey expelled the Israeli ambassador in response to Israeli refusal to apologize for the Gaza flotilla incident. Additionally, relations with Egypt look uncertain as the Egyptian population expressed their anger at Israel through the storming of the Israeli



embassy in Cairo, following the shooting of three Egyptian soldiers by Israeli troops. 133. Aside from these regional woes, Netanyahu’s Likud coalition is also extremely vulnerable at home. It has failed to deliver victory, peace or prosperity in any politically palatable form. High cost of housing and food prices have sent thousands of middle-‐class Israelis onto the streets in an echo of regional events. 134. Protests on government policy are different from revolutions across the border; however, they are influenced by the aura of populist success (notably in Egypt), and play on deepening fault lines in Israeli society. Zionism, security and social equality ⎯three foundational concepts of the State of Israel⎯are under pressure. Israel’s polarized society is being hammered apart by demographic shifts, financial constriction and a war of attrition apparently immune to either compromise or hard line approaches. Left wing opposition groups are doing all they can to ride the wave of frustration towards greater political influence. Likud has pledged economic compromise to placate political foes—but in doing so risks alienating coalition allies, particularly Yisrael Beiteinu. This limits scope for compromises on the Palestinian front. 135. PALESTINIAN TERRITORIES: Though slow off the mark, the Palestinian Arab Spring caught up on May 14th-‐15th, with mass demonstrations across the Palestinian territories and refugee camps in Lebanon to commemorate the “Naqba” (catastrophe) marking the creation of the Israeli state in 1948. In addition, as a welcome diversion from its own troubles, Syria assisted hundreds of Palestinian protestors defy Israeli border fences and enter the Golan Heights—something which no Arab Army had managed to do in 38 years.8 When

8 The Economist, ‘Spring for Arabs, winter for Jews’, 19th May 2011

combined, Palestinian protests along with Hizb’allah—Israel confrontations led to more than 15 deaths and many more injuries. Despite this, the Palestinian ‘Spring’ has been somewhat muted, with threats of a third ‘intifada’ failing to materialize.

136. Where Israel’s policy towards the Palestinians is concerned, Fatah has most to lose from an inflexible Israeli posture, including in its jockeying with Hamas. The Cairo Agreement stipulates that elections for the Parliament, the Presidency of the Palestinian Authority (PA) and the Palestine National Council (PNC) are to take place in October 2011. By then, Hamas’ position in Gaza will be even stronger than before. Mubarak had pursued a strategy of containment and isolation vis-‐à-‐vis Hamas, keeping them out of the peace process for its own security and as part of its U.S. engagement policy. With Egypt’s policy now in flux and Syria in ongoing turmoil, Hamas is likely to benefit. A Hamas closer to Egypt and distanced from Syria is, ironically, an ideal outcome for both the Palestinians and Israel⎯removing Hamas’ least helpful promoters, adding some legitimacy and perhaps catalyzing a greater maturity as a governance force with an agenda beyond Israel-‐baiting. However, as long as Israel’s blockade of Gaza continues, the blame for catastrophic governance and economic failures will continue to fall outside, reducing whatever pressure Hamas might feel to move beyond its political adolescence. Currently, Fatah is far more exposed than Hamas to the deep economic frustrations of its voters.

137. However, the Cairo Accords are a genuine opportunity—and a concrete outcome of Arab Spring politics manifesting in the would-‐be Palestinian State. The uneven state of play in Cairo and Damascus



has made both Fatah and Hamas more keenly aware of how tenuous their regional support mechanisms are and, therefore, how much they need each other. Peaceful and fair elections in the Palestinian territories would further Palestine's capacity to leverage a two-‐state solution.

138. To capitalize on this opportunity, Fatah and Hamas need to move beyond key sticking points—recognition of Israel and adoption of non-‐violent approaches. Their willingness to do so may depend on long-‐term transitions elsewhere in the Arab world. With nearly 2 million registered Palestinian refugees in Jordan, and another million split between Lebanon and Syria, Palestinian leaders are steered by regional

winds almost more than any others. If new administrations in key capitals, particularly Cairo, can give Hamas as much incentive to come to the table as it has had thus far to stay away, then new possibilities may open. However, to bring suffering populations along in Gaza and the West Bank will take more than regional influence; it will require a concerted effort to alleviate economic and human rights woes, and to convince a weary populace that a more accountable system of governance has their best interests at heart. The implications of the Palestinian bid for UN Membership is briefly discussed below.

IN FOCUS: PALESTINIAN BID FOR UN MEMBERSHIP On 28th September 2011, the United Nations Security Council (UNSC) discussed Palestine’s application to become a UN Member State before forwarding the application to the UNSC Committee on the Admission of New Members. Earlier that same week, the 15-‐member body held closed-‐door discussions regarding the application officially submitted by Mahmoud Abbas to Secretary-‐General Ban Ki-‐moon on 23rd September. If the Palestinian application succeeds at the UNSC, a recommendation will then be presented to the 193-‐member UN General Assembly, where a two-‐thirds majority of voting members is required for admission of a new State. Pending a final decision, the world waits anxiously, though many are resigned to (or hopeful of) what they perceive as a pre-‐defined outcome, resulting ultimately in a rejection of Palestine’s application—not least given confirmation from the United States’ of its intention to veto any Palestinian statehood recognition. However, Should the Palestinians succeed in gaining full state recognition and membership to the UN, the implications will be significant for relations both with and between Israel, the Middle East region and the international system as a whole. That said, a majority of UN member states (120) already recognize a Palestinian state. In this sense, the positive impact of a ‘yes’ vote on UN membership for the Palestinian Authority will be limited and will imply few changes in terms of foreign relations. Negative impacts on the other hand could be significant with financial penalties and restrictions imposed by the US and further drastic measures imposed by Israel. In the context of the Arab Spring, outside of Palestine’s UN bid, recent developments concerning Israel and Palestine have been whipping up sentiment and exacerbating pre-‐existing internal and international divides across the Middle East for months now. Angry reactions to the killing of Egyptian soldiers during an Israeli operation along Egypt’s borders expressed through attacks on the Israeli Embassy in Cairo, and threats of similar action in Jordan raised tensions, while deterioration in Turkish-‐Israeli relations threatens the balance of power and allegiances across the region. Notably, however, the Arab realm’s reaction to all things ‘Israel-‐Palestine’ is expressed more often than not through angry reactions against Israel rather than solid support for the Palestinians when it is needed most. This has remained the case throughout the ‘Arab Spring’ to date, and the Arab response to Palestine’s application for UN membership—regardless of the result—is difficult to predict.



139. Using data from the International Monetary Fund (IMF) for selected economies, we forecast that the costs of the Arab Spring to GDP on Libya, Egypt, Tunisia, Yemen, Bahrain and Syria currently stands at US$15.87 billion. Our analysis indicates that, while the region is benefitting economically from the Arab Spring, there will be both winners and losers between countries and within countries. How will these costs and benefits accrue between nations and what impact may these have on the political and economic future of the region? Largely, this is a story of oil, the health of public balance sheets and domestic trouble.

SUMMARY FINDINGS 140. Those countries that have taken significant economic, social and political risks through engaging in social struggle will lose economically in the short term, with GDP contracting significantly. Egypt, Libya Syria, Tunisia and Yemen are projected to lose the most. It remains to be seen whether the short-‐term costs and risks of social upheaval will be repaid with interest by longer-‐term economic, social and political dividends. The longer these dividends take to accrue, the less incentive there will be for other societies to take the inherent risks associated with social struggle. 141. Those countries that we project to benefit in the short term from the Arab Spring share two characteristics; they are oil exporters and successfully suppressed social movements in their early stage, partly through increased Government

expenditure. Economic and political benefits in these countries have channeled to those with power, thereby strengthening their position and the incentives to keep a grip on power. Until the pay-‐offs accrue, to those countries where social upheaval have taken place, the risk of social struggle further spreading in the region is low.

METHODOLOGY 142. Costing the Arab Spring in 2011 cannot be done precisely because many critical economic indicators are unavailable and the situation is highly fluid. For example, the costs of social reforms, military operations or future elections cannot be estimated precisely. 143. For these reasons, we assume that the difference between the projected GDP value for 2011 published in October 2010 and then again in September 2011 is the best methodology to calculate the economic impact of the Arab Spring. This is because the projections come from a single reputable source and are made before the uprisings broke out. These are compared with the most recent projections available. We used the same methodology to cost the impact on the fiscal balance. We then subjected the figures to judgment to arrive at finalized numbers. We employ real GDP values as forecasted for 2011 by the IMF’s World Economic Outlook to account for inflation. We assume that no other factors than the Arab Spring, and its secondary and tertiary effects, have any impact on GDP.

4: COSTING THE ARAB SPRING –

WINNERS & LOSERS



THE ACCRUAL OF COSTS AND BENEFITS OF THE ARAB SPRING

144. We project the net impact of the Arab Spring in Libya, Egypt, Tunisia, Yemen, Bahrain and Syria to be US$15.87 billion. The region as a whole is projected to benefit economically from the Arab Spring in 2011. Some economies are projected to be net economic losers while others net economic winners. How these net costs and benefits are projected to accrue across countries depends on country-‐specific factors relating to the nature of their individual uprisings, the response, and their context prior to the uprisings. We split the countries we study into three groups: • Countries who will lose the most with

few winners; • Countries who will lose but where

there are some winners; and, • Countries who will win where there are

many winners.

COUNTRIES LOSING MOST WITH FEW WINNERS 145. The countries projected to lose the most in the short term from the Arab Spring in terms of GDP—Egypt, Libya, Syria. Tunisia and Yemen—have experienced either prolonged and/or intensive civil disturbances and have not managed to suppress the uprisings. In these countries there are likely to be few net winners as GDP is contracting significantly. However, wins from increased public expenditures will be experiences by some in Syria, Tunisia and Egypt. In Yemen and Libya public expenditures have fallen considerably alongside public revenues as Government collapsed. It is in these countries that there will be the fewest winners over the short term. 146. The length and intensity of uprisings in Egypt, Libya, Syria, Tunisia and Yemen indicates the extent to which citizens are willing to risk economic losses over the

short term in the hope of accruing pay-‐offs in the future. How the economic and political benefits accrue in these countries and, especially, who they accrue to will be key in determining how successful belligerents and observers view the Arab uprisings. It is too early to make predictions of the economic and political benefits of the Arab Spring and where these will be channeled in Egypt, Libya, Syria, Tunisia and Yemen, but the longer it takes for these benefits to accrue, the more harm aggrieved belligerents will feel.

COUNTRIES LOSING ON AGGREGATE WITH MANY

WINNERS 147. Many other countries, such as Bahrain and Jordan, are projected to lose in terms of GDP but will experience significant economic benefits to some sectors and actors. In these countries GDP projections for 2011 have fallen slightly while public expenditure is projected to rise significantly. This is a result of disturbances to production, expenditure and investment, as components of GDP, but also large public expenditures in the form of increased salaries in the public sector, food subsidies and reduced taxes on fuel, among others. 148. In these countries many are projected to win from the increases in public expenditure. Those who will win are also those with the most to lose from social and political upheaval. Soldiers, civil servants, car owners, urban-‐based upper-‐ and middle-‐income classes with the most to lose from the Arab Spring will see fresh incentives not to challenge the status quo. As a result, economic and political benefits in these states will channel to those with influence, thereby strengthening their position and their incentives to keep a grip on power.



COUNTRIES WINNING ON AGGREGATE WITH

MANY WINNERS The oil rich countries in the region that have suppressed or avoided uprisings are projected to gain the most from the Arab Spring. Saudi Arabia’s projected GDP for 2011 increased by around US$5 billion (or 2% of GDP) as a result of the Arab Spring, while UAE’s increased substantially over the same period. Uprisings in other oil exporting countries, such as Yemen and

Libya, have been partly responsible for the large increases in the price of oil and production levels. As GDP is projected to benefit from the uprisings of the Arab Spring, so are the winners within the country due to increased projected social expenditures. Winners from these expenditures include the construction sector and civil servants, as well as broader winners as a result of broader public investments.

Table 13 Economic Impact (% GDP)

Countries Impact on GDP Impact on Public

Spending Impact on Public

Revenues

Algeria -‐1.70% -‐0.94% 11.28% Bahrain -‐2.77% 14.73% 9.77% Egypt -‐4.20% 5.36% -‐0.07% Iraq -‐3.37% 32.93% 28.14% Kuwait 1.41% 2.95% 27.70% Jordan -‐0.20% 8.15% 6.72% Lebanon n/a -‐5.76% -‐19.09% Libya -‐28.17% -‐55.26% -‐84.10% Mauritania 0.15% 13.12% 17.89% Morocco 0.02% 4.23% 0.34% Oman -‐3.33% 3.54% 16.52% Qatar -‐3.52% 6.76% 8.89% Saudi Arabia 2.07% 15.60% 25.13% Sudan -‐9.68% -‐14.47% -‐3.46% Syria -‐4.52% 14.05% -‐1.72% Tunisia -‐5.22% 1.92% 0.66% Yemen -‐6.33% -‐32.89% -‐77.76%

Sources: Geopolicity staff calculations based on October 2010 and September 2011 World Economic Outlooks and AfDB projections (Libya).



Table 14 Impact on GDP (Billion US$, 2011)

Countries Impact on GDP Libya -‐7.674 Egypt -‐4.27 Qatar -‐3.38 Tunisia -‐2.03 Algeria -‐1.44 Syria -‐1.388 Iraq -‐1.32 Oman -‐1.087 Lebanon n/a Sudan -‐1.047 Bahrain -‐0.39 Yemen -‐0.121 Jordan -‐0.028 Mauritania 0.002 Morocco 0.018 Kuwait 1.000 Saudi Arabia 5.019 Sources: IMF (WEO), AfDB

Table 15 Impact on Fiscal Balance (billion US$, 2011)

Countries Impact on public expenditures Impact on public revenues Total Impact on fiscal balance

Libya -‐15.05 -‐21.54 -‐6.48 Egypt 5.44 -‐0.075 -‐5.521 Syria 4.319 -‐0.529 -‐4.85 Morocco 3.48 0.28 -‐3.2 Iraq 12.99 11.10 -‐1.89 Yemen -‐0.63 -‐1.48 -‐0.85 Bahrain 2.0 1.3 -‐0.69 Tunisia 0.74 0.25 -‐0.48 Jordan 1.17 0.97 -‐0.20 Mauritania 0.17 0.24 0.06 Sudan -‐1.56 -‐0.37 1.19 Qatar 6.49 8.53 2.04 Oman 1.15 5.39 4.24 Algeria -‐0.8 9.6 10.41 Saudi Arabia 37.83 60.93 23.09 Kuwait 2.09 19.63 17.54 Lebanon -‐1.83 -‐0.93 0.89 Sources: IMF (WEO), AfDB



149. By October 2011, the overall benefits of the uprising remain largely intangible—and in many cases, the costs appear to significantly outweigh any immediate gains. Future benefits are equally ephemeral. Arabs participating in demonstrations from Morocco to Oman are demanding quick, visible and transparent reforms—the very commodities that governments struggle to deliver well. Only countries such as Qatar and the UAE, both with established long-‐term national reform agendas, have not been directly affected by the uprisings. However, should the Arab League and Gulf Cooperation Council pursue strong leadership in coordination with the wider international community, at this most critical junction in history—then, there remains significant room for pragmatic optimism. Vision and leadership for change in the Arab realm already exists to realize this great opportunity—but an inclusive roadmap for the region must be found—one that includes peace between Israel and Palestine. Potential benefits of such a roadmap include: 150. A Strategic Re-‐think on Peace Consolidation: The impetus of the Arab Spring could provide fresh incentives towards policy change on longstanding regional bugbears. The benefits (for US and Israel particularly) of supporting autocratic regimes and monarchies in the interest of stability are no longer clear. Secondly, if greater political voice is to be allowed across the Arab realm, Israel’s policy towards Palestine will need to soften considerably. The key question remains,

therefore, over how best to reform the Arab realm (from within) whilst minimizing the risk that a rise in nationalism undermines the complex relationship between Israel, Egypt, Syria, Lebanon, Jordan and of course Palestine. This is particularly crucial given that regional peace must remain the long-‐term agenda. On the

other side, if autocratic voices fail to listen to the voices of reform, there remains a considerable risk (as highlighted by the attack on the Israeli

Embassy in Cairo) that a larger uprising destroys any possibility of peace.

151. The Rise of Global-‐Facing Youth Culture in Regional Politics: Arab youth has comprehensively rejected the overall control framework that has kept politics, oil and corruption in the hands of a few. They represent the true potential of the Arab Spring. International support for macroeconomic stabilization alone will not address the fundamental structural problems that stifled them for so long. New leaders and their international supporters have a clear mandate for a reform framework that addresses the core drivers of discontent, at a minimum encouraging:

• Improved freedom of expression; • Greater state justice and separation

of powers: • Political rights/expression and the

right to formal, legal, political opposition;

• Greater capital equity and utilization over national oil revenues;

5: LONG-TERM OPPORTUNITIES

The vision and leadership for change in the Arab realm already exists to realize this great opportunity. However, an

inclusive road map for the region must be found -‐ one that includes peace

between Israel and Palestine.



• Human rights for minority groups and gender mainstreaming; and,

• Peace between Israel and Palestine

152. How Can Long Term Benefits Be Realized Without Undermining the Future of Peace? Formal adoption of a medium-‐ to long-‐term road map is required and should be premised on the observations that benefits will only accrue once fundamental changes are made to political freedoms, economic equality, transparency and media spheres across the Arab realm. This process has already started, and the leadership of the Arab realm has adopted viable change models to this end, as illustrated below. Another key driver of reform, particularly in oil dependent countries, is the drive for economic diversification and foreign direct investment as oil supplies slowly begin to dry up. The regional focus on removing the binding constraints to growth and improving the enabling and business environments are essential to meet diversification objectives, though such an approach naturally has social and capital equity implications. Further, with countries such as the UAE and Qatar depending heavily on a foreign work force, a soft foreign policy is required. • The United Arab Emirates, a Federal Presidential System, member of the GCC and Arab League, and elective Constitutional Monarchy, is pursuing a relatively progressive reform agenda in the context of the Middle East whilst also spearheaded economic and social diversification leaving it as one of the wealthiest countries on earth. His Highness Shaikh Mohammad Bin Rashid Al-‐Maktoum, Vice President and Prime Minister of the UAE, in a message to the nation stated that

taking part in the Federal National Council (FNC) elections is ‘a test for the people of the UAE to exercise their rights’. UAE now plays an increasingly central role in regional and international relations. The UAE is now committed towards a path to establishing more democratic institutional structures, with women representing 46 percent of the Electoral College, a path that regional leaders need to look at very carefully;

• Qatar, an absolute monarchy, established a Consultative Assembly and has shown commitment to holding legislative elections, whilst also charting a course for economic diversification away

from oil and gas. Qatar has been awarded the 2020 FIFA World Cup, has one of the highest per capita incomes in the world, and is home to Aljazeera, which plays a central role in regional and wider international media. Like the UAE and

Lebanon, Qatar has played a significant role in supporting the Transitional Council in Libya and is a member of the GCC, which, having established a common market, is also considering the establishment of a GCC Central Bank and currency. 153. So, How Can the International Community Support an Arab Renaissance? A key issue discussed here is the likelihood that loan based support provided through G8 will do little more than stabilize the macro-‐economic situation in a small number of target states. It will not deal with the social crisis being faced. The UN too, which is organized around country programs, has no means to engage, as an implementer, without being seen to be partisan. So far, the little support provided has been for government rather than non-‐governmental and civil society institutions. As such, given (i) the fiscal crisis faced by

The regional focus on removing the binding constraints to growth and

improving the enabling and business environments are essential to meet

diversification objectives, and such an approach naturally has social and capital

equity implications.



the west, (ii) the fact that the Arab League and GCC have become significant donors in their own right, (iii) that the EU and UN lack the procedures and instruments for expedited engagement, (iv) that oil-‐based states need increased foreign direct investment to diversify their economies, and (v) the need for strong Arab leadership, the international community must focus its

efforts on support for socio-‐political transformation and security reform first, coordinating any support through the reform oriented members of the Arab League and GCC. Furthermore, dealing with Syria, through non-‐covert means will be critical to the outcome of regional peace prospects.



6: COUNTRY TRANSITION PRIORITIES 154. Should the Arab League/GCC take the necessary step of adopting a regional reform road map that can be supported by the members of the regional and international communities, it must consider political, security and socio-‐economic priorities on a country-‐by-‐country basis. In Libya for example, investments in political infrastructure are vital for successful transition, but macroeconomic support and financing to kick-‐start the oil economy re-‐build infrastructure is also required. In Syria, an entirely different reform road map is required to move beyond the current impasse and chart a course to greater stability. 155. With the UAE, Qatar, Kuwait and France for example, now heavily involved in financing significant property and telecoms investments from Egypt to Tunisia and Libya, any road map will need to be meet both domestic and foreign direct investor requirement. Reforms will therefore need to focus on strengthening property and commercial laws whilst clamping down on corruption. In the most corrupt countries the weak enabling environment and often-‐archaic regulatory controls undermine a stronger private sector, and an economy that is more globally integrated. For oil-‐based economies, economic diversification requires a more liberal economic ideology to be accelerated, and an economy that is open to business. Economic realities—the need to spur growth and combat high unemployment levels—will lead to a stronger civil society, albeit predominantly shaped by the private sector.9

9 The problems being faced by France Telecom in its launch of ‘Orange Tunisie’ and Qatar Telecom’s 75 percent stake in Tunisiana are evidence of risks of poorly regulated FDI deals. UAE based DAMAC

156. Whilst Arab realm countries need to chart their own reform programs, leadership and vision can best be leveraged from the experiences of other countries such as the UAE and Qatar, who are successfully navigating complex socio-‐economic transitions that covers political, security and socio-‐economic spheres. This section therefore, provides an indicative framework of measures that could form the foundation for such a road map. 157. The following matrix provides a brief summary of the main structural challenges for each country and the implications for national and international support, with strong focus on maintaining economic stability, strengthening legislative and constitutional reforms to foster broad based growth, gender and human rights and encouraging long term economic diversification which has become vital to transitional success. The list is illustrative, not exhaustive.

Properties have filed an international arbitration case against Egypt—over the development of the Festival City—at the International Centre for Settlement of Investment Disputes.



Table 16 Framework of Possible Country-‐Based Corrective Measures

Country Core Structural Challenges Implications for Engagement Egypt • Absence of a clear roadmap for transition.

• Security and political vacuum stalling recovery.

• Identifying strong growth and employment futures;

• Political freedoms requiring constitutional, law and order and judicial reforms;

• Strengthening the regulatory environment to encourage private sector investment and FDI;

• Stable relations with Israel.

• Economic adjustment and political liberalization. • Counter-‐cyclical macroeconomic policy and fiscal consolidation is key to reducing

inflation inertia and the costs of disinflation. • Creating a vibrant economy to absorb the 700,000 people entering the labor market

annually, likely mean a strong focus on property rights, commercial law, commercial credit and skills training and development.

• Enhance competition so that markets become more contestable for domestic and foreign investors, meaning a predictable and open business and trade regime.

• Creating a business environment that attracts and retains private investment and supports small businesses.

• Reforming labor markets and labor laws. • Reducing the fiscal deficit through removing subsidies. • Ensure greater investment in infrastructure, human capital, and social protection).

Algeria • High unemployment rates (especially among youth) and low standard of living;

• FDI regulations deter foreign investors and hamper growth;

• Decline in Non-‐Performing Loans; • Volatile natural gas prices and exports linked

to oil price influx and industrial activity; • Lack of diversification of the tradable sector.

• Constitutional and enabling regulation reforms. • Encourage sustainable, diversified and private investment-‐led growth. • Achieve macroeconomic stability and restore fiscal prudence. • Modernize and strengthen the financial sector and improve business climate to

enhance private investment and employment generation. • Increase non-‐hydrocarbon revenues. • Contain public spending thought greater control of the public sector wage bill, better

targeting of transfers and subsidies, and prioritization of public investment projects. • Achieve wider integration in the regional and global economy (encourage FDI). • Enhance governance and modernization of public banks.

Libya • Absence of a clear roadmap and agents (institutions and public administration capacity) for transition;

• Constitutional, electoral and reconciliation processes;

• Democratization and human rights; • Migration (return of refugees /displaced

persons);

• Establish political institutions and non-‐state growth enabling regimes; • Lift sanctions (delisting) from previous regime and provide access to frozen state

assets. • Economic adjustment and political liberalization. • Provide employment opportunities for a young and growing labor force. • Advance structural reforms to support private sector development. • Implement reforms to diversify the economy and reduce the high dependence on oil

revenue.




• SSR/DDR; • Large excess liquidity in the banking system. • Investment funds outside the budget

complicate public expenditure management.

• Cast fiscal policy in a medium-‐term framework to minimize the impact of oil price volatility.

• Contain the increase in current spending and ensure the quality of spending. • Improve the governance of LCB and encourage fiscal prudence.

Morocco • High levels of Illiteracy; • Address unemployment, poverty and

inequality; • Sustain macroeconomic stability; • Inflated commodity prices; • Declining growth in the Euro zone (primary

trading partner); • High public expenditure (wider budget

deficit).

• Reform and strengthen the education sector to enhance workforce capacity and productivity.

• Reorient, manage and rationalize expenditure to allow for improvement of education and health services.

• Introduce further structural reforms, to promote inclusive economic growth, strengthen the business environment and accelerate employment generation and living standards.

• Achieve macro-‐economic sustainability though the introduction of sound fiscal measures.

• Further improve the enabling environment for private sector growth. • Civil service reform to increase output and lower expenditure levels. • Expansion and diversification of exports (beyond phosphates).

Tunisia • Adopting and inclusive electoral process and clarify the role of the Constituent Assembly;

• Resolve disagreements between the state, Islam and Islamic practice.

• Political uncertainty and spill-‐over from Libya; • Higher and more inclusive growth and

employment generation; • A regulatory environment discouraging

private sector investment and FDI; • Economic governance and transparency; • Financial sustainability.

• Navigate complex political and security transition. • Develop economic and social recovery plans. • Improve governance and transparency including recovery of state assets. • Offset increase in current spending, whilst reorienting, managing and rationalizing

allocation of resources. • Advance structural reforms to support private investment, and encourage higher and

more inclusive growth. • Stimulate the economy to accommodate the demand of over 1 million jobs in the next

decade. • Reform the labor market and education sector to address unemployment. • Substantial investment in infrastructure as a prerequisite for sustainable development.

Jordan • Political uncertainty; • High unemployment amongst educated

youth; • Scarce natural resources, harming the

development of the agriculture and industrial

• Greater public sector efficiencies necessitates a civil service reform and moderation of the public sector wage bill.

• Prioritization of capital spending, including replacement of generalized subsidies with targeted social protection tools.

• Achieve fast and more inclusive growth, inclding through stimulating tourims




sectors and creating dependency on commodity imports and external grants.

• Broad based growth investments; • Private sector productivity and external

competitiveness.

(inversment in ifnrustructure) and the private sectors (SMEs support) as an engine for empoyment generation.

• Accelerate growth through wider regional trade integration (enery and rail sectors) and removal of remaining tax exemptions on commodities.

• Further liberalization (energy and water sectors) to improve business environment, boosting productivity and external competitiveness.

• Debt management. Syria • Rigid labor market regulations impede job

creation in the formal sector; • Social and political freedoms; • Large numbers of refugees and internally

displaced persons; • Prolonged stalemate between regime forces

and the opposition; • Political stabilization, reconciliation and

public sector reform.

• Restore security and political stability, complimented by a public administration reform.

• Facilitate political transition towards reforms and a broader democratization effort. • Promote inclusive and sustainable economic growth. • Introduce targeted social protection measures, avoiding unaffordable/excessive public

spending. • Tackle unemployment through relaxation and reform of labor laws and introduction of

structural reforms, creating a better enabling environment for the formal private sector.

Bahrain • High debt levels, resulting from Increased government borrowing (past years);

• Downturn in construction and financial services, amidst low non-‐oil revenues;

• Growth is anticipated below historical averages;

• Enhancement of human capital and tackling unemployment;

• Improving the provision of basic services (health, education, housing, etc.).

• Rebalance the fiscal accounts in order to accommodate reforms in the education, health and housing sectors and generate employment opportunities (given lower growth).

• Achieve higher public savings though better targeted public investment (ex. compensatory transfers to vulnerable households).

• Seek diversification of the oil revenue base. • Further strengthen debt management capacity. • Address uncertainty in the legal and regulatory framework to improve the business

environment. • Introduce public administration reforms in view of strengthening public sector

productivity. • Foster growth and investment through higher integration with regional (GCC) markets.

Oman • Private sector, non-‐oil economic growth; • Sustainable and accelerated employment

generation to accommodate employment needs of a young and growing population (~43% under 15 years old);

• Strong and sustainable non-‐hydrocarbon growth to generate employment for the rapidly growing population.

• Enhance productivity through reforms in the education sector. • Address anticipated decline of hydrocarbon reserves through a multi-‐year budgeting

framework, fiscal prudence and higher savings.




• A monetary policy environment constrained by a currency peg;

• Rapid social and cultural change.

• Increase target subsidies to the most vulnerable. • Strengthen the banking system and monetary policy through macro-‐prudential tools. • Stimulate the private sector through higher access to finance (relaxation of interest

rates and quantitative ceilings). Saudi Arabia

• Provide jobs and housing for growing population;

• Improve the enabling environment for private sector growth;

• Oil revenue overreliance; • A conservative clergy stalling meaningful

political and social change; • Human rights and equality; • Peaceful succession of power.

• Constitutional reform and electoral reform. • Further diversify public revenue and expand the non-‐oil sector. • Enable the private sector (small and medium enterprises) by accelerating access to

finance. • Stimulate employment generation through public investments that compliment private

sector growth. • Enhance the education sector in view of higher employability and productivity. • Further mainstream meaningful reforms towards gender equality. • Carefully balance social reform with the expectations of the clergy.

Yemen • Weak structures of political representation; • Economic collapse and soaring

unemployment; • Scarce recourses (land and water) underlining

unrest; • Excessive fuel subsidies (about 8–10% of

GDP); • Risk of penetration of terrorism into the

political realm; • Unrest stalling reforms.

• Constitutional and electoral reform. • Strengthen rule of law and national counterterrorism capacity. • Public sector reform and strengthening the provision of basic services. • Inclusive and sustainable, private sector driven growth. • Strengthen tax policy and administration reforms to reduce reliance on the

hydrocarbon sector. • Reduce fuel subsidies and introduce better-‐targeted social protection mechanism. • Introduce reforms and regulate land/resource ownership.



7: STRATEGIC ROADMAP AND G20/UN SUPPORT OPTIONS

SECURING THE MEDIUM-‐TERM PICTURE: 158. The potential for transformation across the Arab world is now higher than at any time since the 1950’s. No matter which regimes fall and which cling to the helm, populations have shown a far broader vision of their future than a mere crucible for religious ideologies, or a safe harbor for G20 economic interests. G20 economies have a particular responsibility to help secure this vision: the G20 contains regional representatives and will, by necessity, shoulder most of the burden of international financing for transitions. A recent G7 meeting reiterated financial support for the transition to democracy in Egypt, Tunisia and for the first time, Morocco and Jordan. A total of US$38 billion in loans has been promised to these four countries.

159. What would be the most promising medium-‐term picture for Arab world transition? And where could G20 and UN interests best align in support, given that Western and Middle Eastern political priorities will not always (and should not always) converge? Further, how should the G20 and UN best work with the Arab League and GCC countries, given the leadership role being played by the UAE and Qatar, for example? Analysis in this report suggests that four essential strategies to achieve the following targets are most likely to assure mutual benefits:

• Stable, inclusive and sustainable

economies based on solid regional and progressively global integration;

• Resilient and accountable governance systems balancing rights and responsibilities;

• Charting a course towards long-‐term economic diversification away from oil dependency, which requires a strong private sector and civil society and enabling legislation to business and capital investment rights. Arab spring countries need to be ‘open-‐for-‐business’; and10

• Homegrown and open socio-‐political frameworks adapting the democratic process to Arab world patterns.

STRATEGIC ENTRY POINTS: 160. Any road map would need to take immediate, short and long-‐term priorities into consideration, be driven internally by the Arab realm/countries themselves and be supported by the international community (G7/G20/UN). Should Arab world leaders and G20 focus on these as primary targets for a new partnership, then expertise and financing can channel towards the following key entry points for international assistance:

• Economic Support: Critical shifts in

macro-‐economic balance across the Arab world should be implemented based on diversification, re-‐distribution, integration and youth development. a. Macroeconomic Stabilization is

vital to allow transitional

10 Foreign direct investment has been badly hit for all countries embroiled in conflict, as have country credit ratings, increasing the costs of borrowing considerably.



governments off set production losses which have significant revenues and employment implications; now and over the medium term. Where broad-‐scale infrastructure damage and disruption of oil production has occurred investments to not only ‘bounce-‐back’ but rather to ‘bounce-‐forward’ should be secured. G20 ‘fiscal stimulus’ support should however be set within a programmatic framework to foster long term transition objectives, with achievable benchmarks that allow early structural adjustment to take place;

b. Economic Diversification is the primary challenge in the most sensitive economies⎯to encourage greater private sector ownership, reduce oil dependence in some cases and promote job creation to make space for a necessary streamlining of bloated public sectors. Managing the economic transition requires various socio-‐economic measures to be carefully sequenced. The risks that significant investments by the regional and global communities are stymied by weak investment and capital protection laws also needs attention, as evidenced by telecom and land deals in Tunisia and Egypt alike;

c. Re-‐distribution of wealth is a parallel priority, where support is needed to redress perceptions of social injustice and do more to relieve absolute poverty while reducing strain on welfare budgets. Redistribution of wealth will also be required to spur economic diversification, given that an economy of corporate giants will

fail unless small to medium enterprises are central to side-‐stream and downstream investments;11

d. G20 and UN Support for regional

integration is key to longer-‐term political health in the Middle East; it is simply not viable that an “oil-‐only” club and private hydrocarbon interests should dominate regional economic cooperation. Opportunities also exist in IT, banking, telecoms, commodities and other areas—requiring a more thoughtful approach to strengthen cooperation and mutual investment mechanisms (through the banking sector and more dynamic relationships with international institutions including the IMF and the WTO). The UN is particularly weak in the Arab realm, underscoring the urgent need for a review of how to move away from traditional country-‐based support programs to a more strategic transboundary approach with closer ties to the Arab League and GCC.

e. Youth Development must also

remain a cornerstone policy over and above more traditional considerations; youth opportunity (or lack thereof) has been a significant driver of recent events. High fertility rates and poor education systems mean that every year more young people will enter job markets, ill prepared and with poor prospects. A comprehensive reform program must forge better links between education and

11 Greater transparency over the management of national oil and gas reserves, and wealth redistribution mechanisms are also required, and the Extractive Industry Transparency Initiative (EITI) provides a framework towards such objectives.



employment sectors, and look even more fundamentally at basic mother and child support, nutrition and healthcare.

• Governance: Stability is best guaranteed by slowly re-‐orienting public sector governance and accountability structures, security sector reform (SSR) and in many cases decentralized service delivery. a. Political, Constitutional and

Legislative Reforms—forwarded within a ‘rights-‐based’ framework—are urgently required in many countries studies here. Other measures include adopting country-‐based political reform road-‐maps, strengthening the separation of legislative, executive and judicial powers, where necessary constitutional reforms and laws that protect domestic and foreign investment to strengthen the enabling environment. Moreover, if the private sector is to emerge as the long term driver of growth and employment—which is vital for Arab states to navigate the long term transition away from oil dependency—political, security and legislative reforms will need to be carefully reviewed; covering land, capital rights and labor laws;

b. Public Wage Bills need to be brought down—an over-‐large public sector that accounts for a disproportionate amount of full-‐time formal employment is indelibly linked to corruption and economic mismanagement. Rightsizing core state economic functions by delimiting mandates to encourage contracting out will be key. Archaic and often convoluted civil service administrative systems need

modernization to re-‐orient towards service, openness and performance, and to improved regulatory oversight of the emerging private sector. National fiscal and expenditure priorities—with the national budget set as the central tool of policy—will mean that any road map of corrective measures needs to be reflected in national policy and spending;

c. Security Sector Reform is essential in Egypt, Libya and Tunisia in particular, as part of reconciliation and reform effort, linking “demobilization” of police and military personnel with job creation initiatives;

d. Basic and Essential Services: Above

all, UN agencies, funds and programs can provide a comprehensive support to promote better service delivery. Services are a bellwether for public perception of and investment in stability. Governments that promise freedoms and reform constitutions, but cannot keep the water and electricity running, will not last long. Service efficiency can mean decentralization—but not in every case. Countries can all benefit from a two-‐phase model of public sector modernization (scoping then implementation, based on a sector-‐by-‐sector approach) adapted from examples in transitioning countries.12

• Socio-‐political: Different approaches apply for countries experiencing regime change and those where old power structures remain but have shown a will to adapt.

12 Water stress will emerge as one of the biggest challenges of the wider Arab realm, and alongside the long term transition from oil dependency, sustainable and collaborative regional solutions will need to be found.



a. Avoid Short-‐Term Promises: Where regimes have changed, international supporters should avoid the temptation for overnight fixes, over-‐support and “one-‐size-‐fits-‐all models” to promote a new body politic. Political parties will necessarily take a long time to mature and rushed elections should be avoided. The UAE and Qatar have embarked on long-‐term reform agendas, with citizens who now boast per capita earnings and services not seen in the rest of the Arab world. However, a sustainable process depends on the widest possible participation, including of radical groups who risk de-‐railing a successful transition; Egypt and Tunisia being good examples. International support will be necessary to build an open, dynamic and multi-‐representational media, causing national social networks and local cooperative structures to thrice as the basis for future civil society. Financing to new civil society groups should be carefully balanced to allow “survival of the fittest”, i.e., those genuinely valued by local people.

b. Leading-‐Change Management: Where regimes continue in a climate of change, G20 and UN bodies have a key role to encourage a dialogue between long-‐standing and new leaders on strategies to revitalize social frameworks and political dialogue.

INSTITUTIONAL PARTNERSHIPS 161. The key to success is good structural management; however, the unique architecture of many Arab Spring nations—notably Libya, Egypt and Yemen—makes it particularly challenging to pitch the right balance of international engagement, local

institutional leadership and regional capacity transfer. In each country, a central leadership body to drive change is a sine qua non of any institutional partnership. In-‐country inter-‐ministerial leadership and change advisory groups should be encouraged, linking finance, security, planning, major national financial institutions and high-‐level leadership, in addition to other appropriate government offices. The change-‐management effort would most usefully be led by this group; with the UN/WB representing international support, and must maintain a clear focus on charting a progressive triple-‐transition; covering political, security and socio-‐economic spheres; 162. The UN has struggled in the past to support complex regional transition issues—unless there is a close alignment between the interests of the transitional government and UN Security Council, (as with Libya). To become a viable player, it would need significant new resources and a structural rethink for a successful pan-‐Arab approach, given its loose and uncoordinated Arab world structures between the Secretariat and various agencies, funds and programs. Learning lessons from other contexts, the UN should be empowered by G20 members, particularly where there is also a substantial European Union or G8 presence. The role of the Arab League and GCC remain an open question, although strong leadership from parts of the GCC have already helped shape reforms in Egypt, Tunisia and Libya. Its theoretical relevance to support new regimes and assist the intra-‐regional transfer of capacities and ideas is unquestionable. However, its institutional ability to move up a gear into substantive support is untested in these new waters. Potential strengthening of Arab League and GCC institutions in the wake of the Arab uprisings—to foster a region-‐wide approach—is an important international



agenda item, one best pushed from within emerging Arab democracies.

FINANCING OPTIONS: 163. A financing model for transitioning Arab states should ideally seek to avoid: (i) increased debt burdens on the one hand, and (ii) over-‐commitment of public finances on the other—particularly in the temptation to increase spending to quell dissent. Further, given that most G20 support is focused on achieving macro-‐economic stabilization objectives, there remains a considerable risk that an ‘uprising-‐dividend’ does not accrue to those who took to the streets; increasing the likelihood of more structural turbulence down-‐stream. 164. The G7/G20 will be stretched to provide much support beyond loans to shore-‐up public finances. As the World Bank, IMF and African Development Bank do not directly support political and security transitions, G7 support could have limited immediate impact on restructuring. Rather, given the capital wealth of the Middle East, countries are more likely to receive support from regional funds, by stepping loans that may be positioned to support structural re-‐adjustment. Countries such as Egypt and Tunisia have already complained about external support being slow and insufficient. Clearly, if the international community is to buy favor with newly incumbent transitional authorities, visible support with quick wins will be necessary. 165. Ultimately, any financing package must be closely tied to strengthened Medium Term Economic Frameworks and—even better—to support national development strategies. These should include significant public co-‐financing, perhaps leveraging private sector support through emerging public private partnership models. International donors should carefully monitor the transaction and management burdens that inevitably follow large and un-‐

harmonized aid inflows. The best way to coordinate a multi-‐national financial stake in a democratization and reform process is through funds co-‐managed by national governments and the UN/WB, dedicated to human rights and economic development. Again, there are valuable lessons to be learned from other post-‐conflict models (for example, the International Reconstruction Fund Facility for Iraq and the new fund established to support the Transitional Council in Libya). The establishment of National Solidarity Funds and instruments in support of transitional justice would prove logical investments but are perhaps complex to implement in the absence of strong grassroots and community structures. 166. Various co-‐financing options could be considered. Countries with large oil revenues could co-‐finance nationally managed trusts dedicated to stimulation of non-‐oil enterprise. In addition, strengthening SME development and FDI in sectors with a strong growth upside, and within a framework of economic diversification, will have medium and long-‐term impact. This is also an opportunity for GCC investors to show greater foresight and accountability for conditions in their region. The moment has come for its members to re-‐examine their international development investment models—to date largely unilateral, focused on poorer OIC member states and closely linked with faith-‐based causes. The GCC should also consider reorientation towards the neighborhood, increase participatory approaches and become a nexus for dialogue on financing long-‐term modernization in the Middle East.



8: CONCLUSION

THE VIEW FROM HERE: 167. The international community has a vested interest in supporting the aspirations of millions of Arabs as they seek to shape their future. We have already witnessed the power of organized, cooperative, humanist protest across two continents in less than one year. The emergence of progressive, open and dynamic systems could have an even more dramatic impact on Arab world politics over the next decade. To a large extent, the need for economic diversification away from oil will have an opening and diversifying effect anyhow.

168. Such predictions are, by their nature, fallible. These regions do not lend themselves well to utopian imaginings. Impatience, poor management, misapplied interference and economic fragility remain real risks to the process. The adrenalin of victory and the flood of global interest will necessarily diminish, leaving hard governance, economic and political choices in their wake. These choices will determine how Arab realm shapes its future within an increasingly global economic and social setting. The reforms underway in the UAE and Qatar—albeit driven by economic imperative—provide a luminous example for other Arab states to follow. They show that need-‐driven economic diversification can lead to a burgeoning private sector capable of shaping the way government enables growth. 169. The view from here may be uncertain, but the possibilities are undeniable, and worth striving to realize. The first challenge will be to establish common ground for change, both within countries at the heart of the turbulence and with the watching world. The greater challenge will be to set a

clear direction for the long work ahead, and then to stay the course.



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Notes on Statistical Data: 1. All actual, projected and forecast GDP figures are sourced from the International Monetary Fund. 2. All figures for corruption are sourced from relevant annual reports from Transparency International’s

Corruption Perceptions Index (CPI). 3. All figures for public spending are from national authorities, but are reported in US$. 4. All human development figures come from the United Nations Development Program (UNDP) Human

Development Index (HDI), which provide country-‐by-‐country ranking. 5. Governance Indicators are sourced from World Wide Governance Indicators, an annual report of the

Word Bank. 6. Adjusted growth futures come from the IMF World Economic Outlook (WEO). 7. Inflation rates come from national Consumer Price Indexes.



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Rethinking the Arab Spring - A Road Map for G20-UN Support - Geopolicity - October 2011

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