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As citizens across the Arab world call for better living conditions and greater personal freedoms, many countries have witnessed protests and revolutions. The year 2012 offered a clear example of how political transformations have impacted regional economies.

Five Arab countries – Tunisia, Egypt, Syria, Jordan, and Lebanon – are experiencing transitions. However, their current economic performance will not allow them to meet the Arab Spring’s demands for better living standards.

insight carnegie mec INSIGHT: Arab Economies in Transition   Limited Room for OptimismExpected growth rates for these economies have all fallen significantly, now standing at three percent at best. Egypt’s projected growth is estimated at two percent, while estimates for Jordan and Lebanon stand at 2.5 percent. Syria’s growth rate is predicted to decline by 5.5 percent, while Tunisia’s growth will shrink by two percent.

If population growth is taken into account, the net economic growth will be negligible across the board. This will only further contribute to the deterioration in standards of living, making it difficult for new regimes to claim that the demands of the revolutions have been achieved.

These declining growth rates are accompanied by mounting concerns about the future, feeding into the conflicts plaguing the political process, particularly in Egypt and Tunisia. Political instability in turn exacerbates economic problems, making it exceedingly difficult to boost growth rates and attract investment. The first priority, then, is to achieve a political settlement that sends the right signals to parties across the political spectrum and gives private sector investors the confidence to resume business activities.

“Even assuming that the situation will improve in some Arab countries as stability is regained and political solutions are achieved, the behavior of political parties, the private sector, and foreign investors during the best periods of 2012 does not suggest a strong forecast for 2013.” – Ibrahim Saif, Carnegie Middle East Center

The five countries undergoing economic transitions share some common challenges. Chief among these is the problem of large budget deficits, which prevents governments from spending on stimulus packages. Public spending in these economies remains focused on covering public salaries and benefits, with very little allocated for investment in infrastructure and utilities, such as water and electricity – a situation that reflects the politicized nature of public spending policies in these countries.

reu arab econ2 04jan13 INSIGHT: Arab Economies in Transition   Limited Room for Optimism

A street vendor sells Egyptian flags in Tahrir Square in Cairo November 30, 2012. (Reuters)

Another challenge shared by the five countries is the lack of a clear economic program that sets out priorities and policy frameworks. This lack of a coherent economic vision deters local and international private investors, which explains the decline in the level of direct investment in these economies.

Egypt saw more than $8 billion in capital flight last year, while inflows fell to about $3 billion. Apart from some investment from Gulf countries, Egypt is unable to attract foreign direct investment. Tunisia is in a similar situation and suffers from an unemployment rate of 19 percent – its highest level in five years.

Instability and the lack of a clear economic vision have also affected critical sectors in these five countries. The tourism industry, for example, which is viewed as the most important contributor to foreign currency inflows and job opportunities in the five countries, has been hit particularly hard. For example, the Lebanese tourism sector declined at least 30 percent last year, negatively affecting related economic activities. Jordan faced a similar situation, forcing the government to make difficult decisions to compensate for the resulting shortfall in foreign currency earnings. Egypt, where tourism is estimated to account for 30 percent of overall employment, is experiencing comparable challenges. The fact that European countries, which are the primary source of tourists in the region, are experiencing an economic crisis of their own has also negatively affected spending in this sector. Morocco is the only exception; growth in Morocco’s tourism sector is up 4.5 percent despite difficult conditions.

reu arab econ3 04jan13 INSIGHT: Arab Economies in Transition   Limited Room for Optimism

A woman carries bread in Aleppo, Syria, December 25, 2012. (Reuters)

Syria remains in critical condition. The country has not only experienced a deep economic decline, much of its infrastructure and key institutions have been destroyed as well. According to IMF estimates, Syria’s GDP is expected to see a 5.5 percent decline in 2012. This figure does not take into account the destruction of institutions or the time that will be needed to rebuild many sectors of the economy once the present crisis has come to an end. In light of these considerations, Syria’s prospects for the next two years are anything but optimistic.

The outlook for economic growth in Tunisia, Egypt, Jordan, and Lebanon will depend primarily on the countries’ abilities to recover stability and achieve political settlements. In Egypt, for example, the conflict between the Muslim Brotherhood and its opponents will remain the central political issue for the immediate future and will have a significant impact on the country’s economy. Lebanon’s tourism and financial services sectors will continue to be negatively affected by the ongoing conflict in Syria, given the close links between the two countries. If a resolution is reached in Syria, Lebanon’s economic outlook would improve. The situation in Jordan will be determined by the outcome of upcoming parliamentary elections, but it remains to be seen whether the vote will contribute to a solution or only serve to deepen Jordan’s internal conflicts.

The trajectory of economic conditions in the region remains uncertain. Even assuming that the situation will improve in some Arab countries as stability is regained and political solutions are achieved, the behavior of political parties, the private sector, and foreign investors during the best periods of 2012 does not suggest a strong forecast for 2013. Ongoing challenges are likely to include a slowdown in economic growth and a deepening of instability, given that economic reforms have failed to achieve an acceptable degree of social justice.

The English version of this post was authored exclusively for MEV by Carnegie Middle East Center. Click here, for an Arabic version of the post provided by the Center. On Twitter, the Center can be followed at @CarnegieMEC.

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 INSIGHT: Arab Economies in Transition   Limited Room for Optimism

Ibrahim Saif

Ibrahim Saif is a senior associate at the Carnegie Middle East Center. On Twitter, he can be followed at @IbraSaif.