Friday, February 10, 2006

Middle East Reform: Growth Before Democracy?

What if democratic reform in the Middle East is really contingent upon the same factors that have driven the OECD-ification of the former communist states in Eastern Europe? What if economic growth is a lever for political reform in the long term? This would imply that the Western hope for ME democratic reform would be better suited by focusing less on "cultural factor" civil society projects and security sector reform (as is the case now) -- and more on traditional, "boring" politics areas of functional cooperation such as trade facilitation and lobbying for bureaucratic reform of the legalese underpinning economic growth in the ME.

Last week's edition of the Economist carried an interesting article about trade in Eastern Europe, based on this recent study from the World Bank: "From Disintegration to Reintegration: Eastern Europe and the Former Soviet Union in International Trade." The study distinguishes between three spheres of countries, depending on their level of economic integration through trade and general development:
COMMUNISM divided the world into two camps, with a grey zone in between. Now capitalism has similarly divided the former captive nations. On one side are countries now tightly integrated into the world economy: chiefly, eight new members of the European Union, such as Poland and Estonia. On the other are the 12 countries of the Russian-dominated Commonwealth of Independent States (CIS), where foreign trade is backward in both quality and quantity: commodity-based exports, few services and big bureaucratic barriers. In between are the seven countries of south-eastern Europe, ranging from prosperous Croatia to dirt-poor Albania.
Note the story starter: the distinction between those who are more and those who are less integrated into the global economy seems even more valid today than during the Cold War, when the Communists at least had a run at creating an alternative system. Nowadays there is only the OECD and the rest. "OECD" is here a shorthand for well-functioning market economies with membership of the WTO, low levels of corruption, good levels of growth, etc. ... and democracy. The distinction is applicable to the Middle East by extension. The WB argues that internal reform matters more than bilateral and multilateral trade policies: that the domestic arena is more important than the international:

It is tempting to think that formal trade policy matters a lot. Certainly, rich-country protectionism has hurt exports, particularly food and metals. (...) But self-imposed, low-level barriers to trade have a much worse effect. The study describes the “extraordinarily pernicious” effect of corrupt customs services in Central Asia and the Caucasus. (...) The gains from what the study calls “trade facilitation” are huge. It gives the countries scores for their regulations, customs services and the efficiency of ports. Raising these scores to merely half EU levels would bring $178 billion in extra trade, a gain of around 50%.

The underlying message is that clean, competition-friendly countries do well. Foreign investment, good scores in corruption indices, and low barriers to the entry of new firms and the exit of failing ones (such as crunchy bankruptcy laws) are strongly correlated with high shares of imports and exports in GDP. The extent of reform counts for much more than each country's starting point. Getting ready to join the EU forced the pace for the eight countries now in the union. Now they “overtrade”: imports and exports are around one-third higher, as a share of their national income, than in other countries with similar geography and incomes per head. The south-eastern Europeans “undertrade” by 25%. In short, it is reforms “behind the border” that count. Foreign trade is highly beneficial—but ultimately it is a symptom of success, not a cause. [emphasis added].

Of course, the WB study's conclusions explicitly state that trade policies count for less than internal reform. So in terms of the strategic approach to the larger ME policies of the West, merely opening the gates for trade will not do the trick, even if it will be a start. Akin to the Middle East, the CIS countries' economies are dominated by "commodity-based exports, few services and big bureaucratic barriers". Both groups have members that are struck by the "curse of oil" -- who might just be even worse off than the rest because of the usual disincentives for reform associated with that situation. These of course represent a different challenge: but one where the solution of differentiating the economy is at least clear to the local elites -- such as in Dubai.

It is thus likely that our policies that are aimed at democratization of the ME should e
mphasize internal policies conducive to trade and general economic development in broader terms. The advantages of this approach are evident: these are not suspicion provoking demands associated with direct democratization attempts but rather mutually beneficial initiatives -- and elegantly neutral-looking.

It would be interesting if the WB, or somebody else, would repete the scoring analysis of this study with the economies of the greater Middle East -- to gauge how comparable these economies are, and to plot them into the three groups. This would enable an identification of more and less promising candidates: obvious upfront ones include Egypt, Tunesia, Iraq and Lebanon. Such a study would then also identify target policy areas. But are the bureaucrats behind European Union's Barcelona Process and the strategic policy units of the State Department and the CIA thinking in this vein?


NYkrinDC said...

This is Barnett's theory in a nutshell. Political reform matters less in the short run than economic reform and integration into the global economy.

Draconian Observations said...

Hi nykrindc,

Thanks for the response! Actually, I think Barnett's emphasis on connectivity can be going in both directions: as a policy it basically becomes engagement -- not necessarily political and consciously teleologcial, but not necessarily "economy first" either.