Apart from unleashing force, many MENA governments have also opened their coffers to keep trouble at bay. But what are the long-term implications of social spending on regional economies?
The regional governments' response to the social unrest in most states has been mixed. Some of have used force, others their capital reserves, and many have used a combination of these to retain the status quo.
The high levels of unemployment and lack of job and business opportunities were the key reasons for Arab citizens to take their grievances on to the streets.
Anger had grown against those governments that are seen as plutocratic and corrupt, promoting the economic interests of the privileged few at the expense of the rest of society.
Citibank argues that countries such as Egypt, Tunisia and Jordan had over the past decade gravitated increasingly towards market-oriented economic models, reducing subsidies and driving forward private sector growth while diminishing the public sector through rationalization and privatization.
"While this had made them the darlings of the international investor community, the net effect has been a growing sense of social injustice on their streets over the years," notes Citibank.
Not surprisingly, Arab authorities have focused their attention on job creation and subsidies and policies that are people-friendly. And while that has, in many cases, calmed public sentiment, it has put greater economic pressure on governments as they navigated through an uncertain global economic environment.
Citibank analyst Farouk Soussa says that the new wave of social spending will help oil exporters and oil importers differently.
Bahrain, Oman, Saudi Arabia have announced various measures, with Saudi Arabia leading the way with its spend of $130-billion.
"The weighted average ratio of expenditures to non-oil GDP in these three countries is expect to rise by 5% in the coming two years, relative to the past two years."
For these countries, the rise in expenditure will be offset by the rise in the prices of oil, ironically because of the unrest in the region. Citibank expects government savings to actually rise if oil prices remain at their current levels for two years.
The three countries have also initiated job creation programmes which will further improve long-term consumption patterns.
Furthermore, nationalisation of the workforce will also reduce unemployment, although it may result in productivity losses in the medium-term.
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Finally, while the rise in investment programmes among oil-exporters will lead to more capacity and greater diversification, "replication and competition in investment strategies, may mitigate somewhat the positive effect of this expenditure on long-term economic growth."
Oil-Importers
For oil importers, the rise in social spending comes at a time when revenues are shrinking. For example, tourism sector - one of Egypt's greatest strengths - has seen revenues fall at a time when the country needs it the most. Other areas of business and economic activity including real estate, foreign direct investment are falling even as Egypt plans more expenditure in its new budget.
The rise in commodity prices does not help their cause either. High food prices and rising inflation was one of the key triggers of the Arab Spring, and the oil-importers in the region will continue to face that pressure during this time.
Citibank also notes that government efforts to raises taxes could also backfire as they could be a negative for investment in the countries. Meanwhile, rising debt levels could hurt these countries in the long term.
"In Egypt, we have estimated that, if local banks are forced to absorb the rising government financing needs, in a stress scenario government debt could rise from 40% of domestic banking assets to 70% within five years, crowding out private finance and reducing long-term growth," says Citibank's Soussa.
Citibank's 6 Key Points:
1 The blow-out in government expenditures in response to social unrest in the Middle East is likely to have a positive impact on long-term economic growth for oil exporters, but presents challenges to oil importers given the likely ensuing drop in national saving and investment.
2. The questionable long-term productivity of some of the capital expenditure being carried out by GCC countries, given replication and competition in investment strategies, is likely to mitigate somewhat the positive effect of this expenditure on long-term economic growth.
3. Even if long-term growth prospects are diminished by a fall in national saving and investment in oil importers, consumer demand is likely to grow in the medium term as social spending boosts household income.
4. As growth becomes increasingly consumption-led and investment diminishes, the output gap in oil importers is likely to narrow in the medium term, resulting in inflationary pressures rising.
5. Better targeting of the needy would boost the efficiency and growth-enhancing qualities of social safety nets across the Middle East.
6. Oil importers may be tempted to claw back some of the fiscal loss from greater expenditure by raising taxes, but this carries significant risks to long-term growth if tax policies negatively impact incentives to invest, or erode international competitiveness.© alifarabia.com 2011
