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A transition for Arab economies

By David Ignatius
Thursday, March 10, 2011;

After the radiant sunrise of the Arab spring, here's a somber shadow: Egypt and other Middle Eastern countries making the transition to democracy are likely to face severe economic problems over the next several years - ones that could bring chaos if the Arabs and their friends in the West aren't wise.

For the dimensions of this economic transition, think of the Marshall Plan after World War II, but add several complicating factors: The United States and many of the European governments that would fund such a program can't afford it; the new democracies don't have governments yet to manage the assistance and probably won't for months; and the Arab people are likely to be prickly about accepting help, especially if it has U.S. strings attached.

And here's one more post-revolutionary worry: Many of the initiatives that will be popular with the people, such as across-the-board wage increases and subsidies, will be good politics but bad economics. The public sector is already too big in countries such as Egypt and Tunisia, and there will be pressure to expand it even more as the economic crisis worsens.

"The challenge that faces Egypt and other Arab countries is how to go on with economic reform without bringing back a big role for the state in managing the economy," says Marwan Muasher, a former Jordanian foreign minister who is vice president of the Carnegie Endowment for International Peace.

The weeks of protest in Tahrir Square were a heady school for democracy, but they brought economic activity almost to a standstill. Factories were idle; banks were shuttered; financial markets were closed; tourists canceled their trips. The World Bank says it doesn't have reliable forecasts for Egypt yet because officials there haven't been able to finish their assessments.

The economic impact of turmoil is estimated by George Abed of the Institute of International Finance. He forecasts growth of just 1.5 percent this year in Egypt, and a decline of 1.5 percent in Tunisia and 31 percent in Libya. Egypt's budget deficit will grow to 9.8 percent of gross domestic product this year, compared to 7.9 percent in 2010, and deficits will total 4.5 percent of GDP in Tunisia and 35 percent in Libya, both of which recorded surpluses last year.

How to avoid a post-democratic crackup? What's needed is a multilateral version of the Marshall Plan - that is, a framework of loans and other assistance that can steady the Arab countries as they make their transition to democracy and prosperity. America isn't really an option; we don't have the money, and our politicians wouldn't want to give it to foreigners, anyway.

But I'm happy to report that there's an answer to this Middle East puzzle. The institution that was created 20 years ago to oversee Eastern Europe's transition, known as the European Bank for Reconstruction and Development (EBRD), is ready to take on this new mission. I talked Tuesday with Thomas Mirow, its president, who said his organization is ready to act as a "bank for economic and political transition" in Egypt and neighboring countries.

The Europeans have the expertise. As Mirow notes, the new Arab democracies have the same problems that Eastern European countries did: weak private sectors; feeble small andmedium-sized business; and poor infrastructure. The EBRD has the money, too, with about $17 billion in capital and the ability to raise far more from lenders. Mirow foresees providing about $1.4 billion to Egypt over the next several years, and up to twice that amount to neighboring countries. He's already thinking about opening an office in Cairo, so that Arabs will see this "bank for transition" as their own.

White House officials like Mirow's idea for assisting the new democracies of the Middle East. This approach avoids the stigma of assistance from the International Monetary Fund or the basket-case aura of aid from the World Bank. It puts Egypt and its neighbors in the same category as Poland or Bulgaria - countries whose economic and political systems were shattered by authoritarian rulers. Perhaps the European bank could partner with the Inter-American Development Bank, which has expertise in transition from "Peronist," military-led systems.

The young people who gathered in Tahrir Square say they want to be part of the Mediterranean world - civilized countries with prosperous economies and free political systems. This transition will be rocky because the foundations are so weak, but there are creative new ways - that aren't marked "Made in America" - to provide stability along the road to progress.

davidignatius@washpost.com

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