Will countries like Egypt, Tunisia and Libya be able to change decades of mismanagement? It is possible, but exceptionally difficult. The entrenched interests are not giving up without a fight

Most people have an opinion about their government. Whether they feel it is either good or bad is a matter of perception. From a perspective of sustainable economic growth and long-term investing, it is less important to judge a government by what it does and more important to know what it can’t do.  
 
The Middle East and North Africa (MENA) region have some governments that most people would judge to have real problems. Economic growth for all of these countries is generally lethargic. With the notable exception of Turkey, their stock markets never recovered from their pre-crash highs. The Saudi Tadawul index has not recovered from its crash in 2006.
 
The reason for the lacklustre growth is that all of these markets display the four elements or hallmarks of emerging markets. All of these markets are dominated by well connected family-run firms. The countries are very corrupt and crony capitalism is dominant. According to Transparency International’s Corruption Perception Index, over half rank well below the average. All of these countries have large segments of the economy in state hands. Finally, since many smaller companies have been excluded from the regular economy by either discriminatory regulations, lack of connections or inability to get capital, these countries all have large underground economies that may exceed 50% of the gross domestic product (GDP).
 
The four hallmarks of emerging markets slow economies for the simple reason that they distort information and choices. Efficient markets need both. Buyers, sellers, investors and lenders need to find the best deal, not the deal with the best connections. It is hardly surprising that most of these countries score well below the average in the World Bank’s Doing Business report for ease of doing business.
 
The governments of the MENA have created systems that perpetuated favouritism and inefficient markets. These systems were created because they helped powerful people in government and elites. They were able to create these systems, because there were no limits on the government’s power to discriminate, not independent courts, not elections, not autonomous regulators. Without legal limits to help free up these economies the problems simply became worse as the renters demanded an every larger piece of the pie, at least until this year.
 
The Arab Spring has brought some important changes. Regimes have fallen in Tunisia, Libya, and Egypt. There is ongoing civil strife in Syria and Yemen and protests in other countries. But will these new found freedoms result in renewed economic growth?
 
It is an arduous process. Some of the best examples come from Eastern Europe. For example compare Poland and the Ukraine. Both countries became democratic about twenty years ago. At that time, both countries were economic basket cases. Since then their economic growth could not be more different. Poland hardly noticed the recession. It was the only country in the EU (European Union) not to contract. Ukraine’s economy contracted by 15%. Poland ranks at 62 on the Doing Business list and 41 on the corruption index. Ukraine ranks 152 and 134 respectively.
 
Both countries had popular uprisings or demonstrations that attempted to put the government at the service of the majority and not for the benefit of the few. Poland succeeded and the Ukraine failed. Poland had the benefit of only a generation of state control, while in the Ukraine there were no institutional memories. There were other differences, but perhaps the largest was membership in the European Union. This forced Polish politicians to adhere to laws and regulations instead of using their offices as profit centres.
 
Will countries like Egypt, Tunisia and Libya be able to change decades of mismanagement? It is possible, but exceptionally difficult. The entrenched interests are not giving up without a fight. Specifically the military in Egypt is doing everything possible to protect its sweeping privileges. There are no limits on the hated emergency legislation and the government is free to crackdown on critics. The new government is supposed to protect the military by exempting it from civilian oversight and allowing it to interfere in politics.
 
The other problem with these new governments is not with the old haves, but with the have nots. Many of these groups, and certainly the groups who will gain power, will be eager to use the government to reward their followers. Since limiting government subsidies and reforming regulations takes time, it is often easier to keep bloated bureaucracies and unfair redistributions in place.
 
The good news is that unlike autocracies, democracies can change, change laws and change policies. The more citizens become empowered, the better off they will be. A freedom of information act has become a powerful tool to fight corruption in India and an anti-corruption commission in Indonesia is beginning to make difference.
 
But the work of the protestors in Tahrir Square and elsewhere will never be finished. Corruption and special interests are always waiting.