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Upheaval in Middle East a warning for developed economies

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The revolutions in the Middle East are not just about corrupt and overregulated autocratic regimes crushing freedom and democracy. They also reflect dysfunctional economies, products of crony capitalism creating massive unemployment, substantial sections of the population living below poverty levels, gross income inequality, bloated public-sector payrolls and suppression of business formation. As with Europe, the US, Britain and Australia, economics has shaped the politics.

It’s not insignificant that the revolutions in the Arab world started in Tunisia. Mohamed Bouazizi, 26, and with a computer science degree, was forced to sell fruit and vegetables from a cart. He had no licence but it was his sole source of income. On December 17, authorities confiscated his produce. Bouazizi drenched himself in petrol and set himself on fire outside the governor’s office.

This triggered an explosion throughout the Arab world. The upheaval is also a warning for developed economies. In his book, Fault Lines, former International Monetary Fund chief economist, Raghuram Rajan, says the roots of the financial crisis lay in income inequality, political mismanagement, where politicians pushed easy credit instead of tackling structural problems and perceptions of crony capitalism, where governments pandered to corporate interests and vice versa. The Middle East continues that theme of tightly interconnected politics and economics.

The parallels with the Middle East are there with the post-financial crisis electoral volatility witnessed in Australia, Britain and the US, including the rise of the Tea Party following the bank bailout, a US model of crony capitalism. Europeans from Britain to Bavaria are rebelling against austerity programs. People are not paying road fees in the Greek town of Aphidal, bus and metro passengers in Athens now refuse to pay for tickets. In Europe, critics say the austerity measures show government and corporate interests have merged.

Libya is an exemplar of crony capitalism. Gaddafi and his family have reportedly accumulated an estimated $US97 billion in accounts and investments around the globe. Compare that with the rest of the population in Libya. According to the CIA World Fact Book, one in three Libyans lives at or below the poverty line.

Hosni Mubarak who, according to various media reports, is worth anywhere up to $US70 billion, started out by cracking down on profiteering by politically connected businessmen linked to his predecessor, Anwar Sadat. A 1990 New York Times profile described his “rigid personal probity”.

But as with Gaddafi, power corrupts. Over the years, there were reports describing how he enriched himself and his family through partnerships in Egypt’s powerful companies. His family reportedly owns properties all over the world. Compare the wealth of the Mubarak clan with the low-wage labourers in Egypt, with most available jobs in poorly paid informal work, a 9.5 per cent inflation rate and where at least 50% of men and 90%   of women remain jobless two years after leaving school.

And then there is the royal welfare system in Saudi Arabia which, according to WikiLeaks, in cables reviewed by Reuters, works in legal and illegal ways. Legally, there are monthly allowances for thousands of princes and princesses, ranging from $US800 a month lower down the food chain, to $US270,000 a month for sons of Abdul-Aziz Ibn Saud. Illegal ways include skimming $US10 billion yearly from off-budget projects related to defence and infrastructure, sponsoring expatriate workers who have to pay a small monthly fee to their royal patron.

In the wake of a violent crackdown on protesters that left at least 37 dead, Syrian President Bashar al-Assad announced changes, including pay rises for public workers. The question remains whether Syria is next. Fixing the problems will not be easy. Even after the regimes are gone, the infrastructure and systems for corruption will still be there.

Economist, Nouriel Roubini, has proposed an assistance program designed for the Middle East, modelled on the Marshall Plan in western Europe after World War II, or on the model offered to eastern Europe after the Berlin Wall’s collapse, with finance coming from the IMF, the World Bank, the European Bank for Reconstruction and Development, as well as the US, the European Union, China, and the Gulf states. Such a program should tackle the systemic problem of income inequality and crony capitalism.
Rajan argues that every financial and economic crisis has political roots. But events in the Middle East and around the world suggest it is also vice versa.

Economics rooted in income inequality and the blending of government and corporate interests can frame the political environment. The public’s faith in private enterprise is corroded and people feel there are two sets of rules: one for those in influence and another for the rest. It’s something the Gillard government should keep in mind when it picks winners and losers for its carbon tax compensation package. The growing convergence of politics and corporations is meat for conspiracy theorists and has political consequences.

Leon Gettler
This article first appeared in BusinessDay magazine

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