Category Archives: Tunisia

Why Offshore Matters

Guest post by Bradley Hope, The National newspaper’s Cairo bureau chief.

Phrases like “nominee shareholders” and “chains of offshore companies” are enough to make most people’s eyes glaze over. But that is on purpose.

Much like the financial wizards who created complicated financial instruments to conceal the risky bets they were making before the financial crisis, the lawyers and accountants behind offshore banking want their world to become low-profile and unimportant when the truth is quite the opposite. 

Half of all global trade passes through offshore tax havens, as this video below explains in what is a good primer for those unfamiliar with the topic:

But why do these tax havens matter?

A telling glimpse into why businessmen and women are so keen on keeping their secrecy came in April with “Offshore Leaks”, a huge investigative journalism project involving dozens of reporters around the world that showed how the high and mighty use offshore banking to conceal assets, evade taxes and pay bribes.

The leaks have shaken the foundations of a financial edifice that is believed to hold as much as $32 trillion.

So far, the elites of the Middle East have been saved of any exposure.

But that may soon change because journalists are still digging through the 2.5 million secret records obtained by the International Consortium of Investigative Journalists from a whistleblower.

The authoritarian regimes of the Middle East have long understood the power of offshore banking. Without the mechanisms provided by offshore banking, the countries of the Arab Spring would have been sitting ducks and vulnerable to exposure, long before they were hit by political change.

That’s why post-Arab Spring countries are struggling to recover assets they believe to have been the product of corruption: bribes, kickbacks and outright thefts.

For example, when Egypt’s Illicit Gains Authority – one of the main groups investigating corruption cases against the Mubarak regime and cronies – checked the bank accounts of Hussein Salem, a major tycoon, they found 45,379 Egyptian pounds, US$4,091, 18,730 Euros, 4,170 Saudi Riyals, 370 Swiss Francs and 30 British pounds.

In all that amounted to about $37,444.36 in cash. They also found properties, jewels and other valuables, but nothing close to his real estimated wealth of more than a billion dollars.

Salem, like many of Egypt’s political and business elite, did not keep his money in Egypt because it wouldn’t be safe from scrutiny.

Instead, he held bank accounts in Switzerland, Paris, Abu Dhabi and Hong Kong. He owns companies in the British Virgin Islands, Guernsey and Panama.

Likewise, Ahmed Ezz, the steel tycoon and former National Democratic Party bigwig, held accounts in Liechtenstein. Authorities there told Egyptian investigators that money funnelled into the country from Cairo promptly disappeared into a web of other companies, many of them believed to be used by Ezz to buy property in London.

Gamal and Alaa Mubarak, sons of the former president, hold more than $300 million in a joint bank account in Switzerland. They also owned a Cypriot company that they used for investments.

But in all of these cases, it is physically impossible for the average person to trace the assets and beyond the capabilities of many countries.

Remember when the protesters in Tahrir were chanting about Mubarak’s $70 billion? Egyptian investigators have only found two assets in Mubarak’s name: a villa in Sharm el Sheikh and another on the North Coast. In total, Egypt has not found more than $1 billion of assets belonging to members of the old regime around the world.

Even if it did find assets, it would have the challenge of proving they originated from corruption. That may be impossible without years of exhaustive inquiries, following each transaction from each offshore company to the next.

The Phillipines is still trying to figure out where the Marcos family stashed all their money (on cases that began in the late 1980s).

This explains why the government of Mohammed Morsi is trying reconciliation negotiations, allowing those accused of corruption to turn over some assets in exchange for cases against them to be dropped. But that is a bad idea for another reason: it only perpetuates a system where those accused of corruption can buy their way out of legal cases.

None of this even begins to touch on an even bigger problem: tax evasion. Offshore banking has helped created a situation where economic growth does not filter down to people in developing countries. Even as countries get richer, the elite use offshore accounts and companies to avoid paying taxes.

[caption id="attachment_1687" align="aligncenter" width="640"]Locations of Offshore Tax Jurisdictions, Grant Thornton Locations of Offshore Tax Jurisdictions, Grant Thornton[/caption]

Egypt estimates it is missing about 66 billion Egyptian pounds from tax revenues – enough to fund gas cylinder subsidies for a year and $1 billion worth of wheat. 

Libya and Tunisia are also grappling with similar problems. And should the government of Bashar Al Assad fall in Syria, the next government, too, will struggle to find the family’s assets.

Here’s hoping that the crack forming in offshore banking rips all the way across. The world needs to fast put an end to an era where bankers and multi-national companies, mafia dons and kleptocrats can build up secret fortunes with no accountability.



Guest Post: “Tunisia is more than just Secular VS Islamist”

Rebel Economy spoke to Monica Marks, a Tunisia-based Rhodes Scholar and doctoral candidate at St Antony’s College, Oxford, who debunks the myth that Tunisia was a bastion of liberalism in North Africa. She explains that too many bought into former president Zine El Abidine Ben Ali’s idea of a “Tunisian Miracle”. 

  • 1) – Before the country’s revolution, Tunisia was often described as having a large, well-educated middle class and a liberal social system. Will this still be the case under an Islamist-led government?

Two parts of this question are problematic: the supposition that Tunisia had a ‘liberal social system’ before the revolution, and the implication that Ennahda’s Islamism poses the largest threat to Tunisia’s economic future.

Tunisians of all ideological stripes (save for a few Salafis) tend to praise their society for being more tolerant and open than elsewhere in the region, particularly Arab countries to the east such as Egypt and Saudi Arabia. Tunisian society is notably less conservative on a number of fronts—women enjoy more legal protections, public schools are co-ed, alcohol can be procured easily in many parts of the country, and some restaurants stay open during Ramadan.

It is important to note that when observers (particularly foreign observers) characterize pre-revolutionary Tunisia as socially ‘liberal,’ they are often basing this on two simple factors: (1) Tunisia’s post-independence leaders (Bourguiba and Ben Ali) are almost always described as ‘secularists’, and (2) Tunisia’s 1956 Personal Status Code, which is still in effect, granted women more rights than elsewhere in the MENA region and included the Arab world’s only prohibition on polygamy. Taken together, these factors—the secularism of state leaders and women’s advanced legal status—are often enough to prompt commentators to call Tunisia’s society and pre-revolutionary government ‘liberal.

But Tunisian society before the revolution was, in many ways, anything but liberal—at least in terms of its relationship to the state.

[caption id="attachment_1535" align="alignright" width="239"]Monica Marks Monica Marks[/caption]

Journalists who spoke out against the government would face salary suspension, firings, and harassment at the very least. Critical bloggers were threatened with imprisonment, and some chose to self-deport out of fear of long sentences and/or torture. Real or suspected members of Tunisia’s Islamist movement, Ennahda, faced years of incommunicado detentions, torture, and post-carceral oppression (being blacklisted from employment, being forced to register their names up to five times per day at local police stations, etc.). Leftist activists, though a much smaller group, faced similar brutality. Judges who spoke out against the regime had their salaries suspended without notice, and human rights leaders—such as the prominent lawyer and anti-torture activist Radhia Nasraoui—dealt with near-constant harassment from the regime’s goons in their homes and offices.

Despite Tunisia’s much-vaunted claim to progressivism on the matter of women’s rights, more religiously conservative women, particularly those expected of involvement in Ennahda, underwent myriad forms of abuse, including having their hijabs ripped off by police officers, undergoing long periods of arrest and unofficial detention, and being sexually harassed and abused by security forces. Religious expression was seriously curbed—young men who wore beards were often arrested on suspicion of being Ennahda members, women who worked in state facilities such as schools were generally not allowed to wear the hijab, and police officers were routinely stationed in mosques to monitor Friday sermons.

All of this is to say that we must think critically about this dichotomous picture that is often presented to us in local and international (particularly French and English) media, of Tunisia being a dramatic ‘before and after story’—i.e. a liberal, progressive society before the revolution that has quickly regressed into a sort of Islamist-led backwater.

This is far from the case. What we are seeing after the revolution is a great deal more contestation in the public sphere. Ben Ali held the lid of oppression very tightly. Now the lid has flown off the pot, and long-percolating differences in Tunisian society are finally bubbling to the surface. In some cases, those differences have bubbled over into acts of violence and criminality (such as the June, 2012 protest against the Abdeliyya art exhibit in La Marsa, repeated Salafi attacks on Sufi shrines, etc).

  • 2) So Ennahda’s Islamist influence is not the real impediment to the country’s economy?

Islamism is nowhere close to being the chief threat to Tunisia’s economic future.

Rest assured, Tunisia faces major challenges on the economic front: for starters, the public contestation which I mentioned above often manifests itself in the form of strikes and socio-economically motivated protests.

Though major strikes happened under Ben Ali (most notably in Gafsa in 2008), such acts of protest were generally met with swift oppression. The regime used a mixture of police brutality and economic mollification to keep protesters at bay (eg: giving 200 dinars a month to citizens in restive southern areas through bogus public programs—not enough for a decent quality of life, but just enough to keep hungry mouths from protesting in the streets).

After the revolution, a kind of laissez-faire democratic atmosphere started to pervade the country. The state’s monopoly on all forms of authority receded, and people began to express their preferences and grievances about all topics—political, religious, socio-economic, etc.

So strikes have been a major problem for Tunisia’s interim governments, and the transitional government led now by Ennahda. Naturally, foreign direct investors aren’t keen to pour money in a country where strikes are so frequently closing factories. There are other major problems plaguing Tunisia’s economy: poor educational quality, underdevelopment in the interior, the presence of bloated public companies and the huge informal economy.

In my conversations with leading economists speclialising on Tunisia at the World Bank, International Finance Corporation and African Development Bank, I have heard across the board that Ennahda “could not have done much better” on the economy over the past two years, that the challenges are huge and often of a structural nature. So there are a number of major obstacles for Tunisia’s economy here, but Islamism doesn’t seem to be one of them.

  • 3) In Egypt youth unemployment stands at 77% and is one of the most pressing problems. How does this compare in Tunisia?

Along with underdevelopment in the interior, youth unemployment is one of the leading economic challenges for Tunisia. These are also important political challenges, since the 2011 revolution – which started with a young vegetable seller’s protest in an impoverished interior town, Sidi Bouzid – which are prompted primarily by socio-economic grievances. The nexus of youth unemployment and regional marginalization in the interior was critical to the revolution, and many ministers and leading economic advisers in Tunisia’s government fear persistent challenges on these fronts might spark a second revolution.

Youth unemployment hovers between 10 and 30%, depending on what region of the country you’re looking at. But current, reliable statistics on things like youth unemployment and literacy rates are difficult to find. That’s because Tunisia’s National Institute for Statistics (INS), along with the leading international development banks here (including the World Bank and the African Development Bank, which is actually headquartered here), have been scrambling to re-diagnose the country’s basic indicators in the wake of the revolution.

[caption id="attachment_1537" align="aligncenter" width="580"]Brookings Brookings[/caption]

Ben Ali very much manipulated the INS, and the international banks will frankly tell you that they bought into Ben Ali’s idea of the “Tunisian miracle” too much—i.e. that they didn’t do enough work to really go beyond the manufactured stats and get a good handle on the socio-economic indicators in the country before the revolution. As this research gets done, it’s becoming clear that literacy rates are lower than previously thought, and that youth unemployment is higher.

What we do know is that the economic situation in Tunisia—despite all its problems—isn’t nearly as dire as the situation in Egypt. While statistics on indicators like literacy may turn out to be about 10 percentage points lower than previously thought (in the low 80s as opposed to the high 90s), this still places Tunisia head and shoulders above Egypt, where literacy rates are around 50 percent. Tunisia desperately needs to reform its educational system to match graduates’ skills with the needs of the market, but there is a good basic educational infrastructure intact here, and the country has immense potential to build. I believe Tunisia could become a real educational hub in the region if the proper reforms and investments are made.

And what are the major factors responsible for youth unemployment in Tunisia?

There are about seven:

(1) the low value-added nature of the economy, which is geared toward benefitting offshore exporters more than developing skills at home;

(2) poor infrastructure in the interior, including roads, water supply, electricity, and internet access;

(3) an outsized informal economy;

(4) a partially closed economic structure benefitting large public companies, such as Tunis Air and Tunisie Telecom;

(5) the relatively low skills of many labourers;

(6) the poor quality of vocational training and the local perception that such training is only for poorly achieving students; and

(7) the significant mismatch between university graduates’ skills and the needs of the job market.

Again, referring back to the last answer, we must try and look at these things in a technical way—not getting too tied up in the secular vs. Islamist debates, which are so frequently dominating local and international headlines.

  • 4) How is Tunisia relying on international donors and assistance?

This is a critical question, and it’s one that’s not getting enough attention in my opinion.

From my work with the Institute for Integrated Transitions (IFIT), a newly founded Barcelona-based non-governmental organisation (my report, called “Inside the Transition Bubble: International Expert Assistance in Tunisia”, can be accessed in English or Arabic here) we looked at international expert assistance in four key areas of Tunisia’s transition: media, judicial, and security reform and youth employment.

In the youth employment sector, one of the most intriguing things to come out the research was that key policy makers in the troika coalition (most often from Ennahda and the secular CPR party) often feel deeply confused by and frustrated with the international advice they are receiving.

Many lamented Tunisia’s lack of in-house ability to diagnose domestic economic problems.

“We are forced to rely on internationals who take our data, then go and formulate plans and projects for us without ever explaining how they got from the data to the plans and projects,” one ministerial adviser who asked not to be named said.

One quote that I cited in the IFIT report was from Jameleddine Gharbi, Minister of Regional Development and Planning. “They come with an already determined vision and only want to focus on a specific subject,” he said, referring to international experts. And:

“The needs in the interior are critical, but they don’t look there… We point, we say ‘Look—this is our problem.’ But then they point and say ‘no—your problem it is here.’ It’s as if I have a red folder and they try to convince you that no, it’s blue.”

The most disturbing quote I heard on this theme during the course of interviews was that certain international advisors, whom my interlocutor wouldn’t name, advised the government to [completely] cancel [rather than reform] key subsidies on basic goods like cooking oil and bread. I have not verified this information, but fortunately the subsidies—which are absolutely critical for Tunisia’s poorest citizens—are still in place.



GUEST POST: Interview With A ‘Rebel Economist’

“Boom times have arrived in Libya,” declares this analysis of the country’s economy in Revenue Watch.

The tangible and intangible proof is there. Cafes and restaurants are heaving and US franchises are choosing to open along Tripoli’s beautifully historic, and untouched streets.

There are high hopes for the future, Revenue Watch says:

In 2012, Libya’s economy grew by 122 percent, by far the fastest growth rate in the world. One reason for such high growth is the economy’s collapse during the revolution; however, GDP is expected to grow another 17 percent this year, faster than all but a handful of countries.

But much more needs to be done, say economists and bankers on the ground.

Rebel Economy spoke to Alaa El Huni, a Libyan investment banker who was part of the opposition’s economic team during the revolution. Their work was often described as constituting the “Rebel Economy”.  He explains that Libya has a long way to go before boom times. 

  • 1) We are already seeing signs of major reconstruction along the coast and a boom in consumerism. As Libya rebuilds after its revolution, do you see the country transforming into a tourist haven with foreign companies taking a dominant role? 
Alaa El Huni: There are numerous elements that Libya must consider and work on to properly promote tourism in Libya. This is not currently being considered one of the key priorities for Libya. There is large scale investment in infrastructure in Libya, but this is more targeted at ‘redeveloping’ Libya due to the current state of the country. There has been very little investment in infrastructure in Libya, and the bulk of investments are targeted at improving the standard of living (housing, roads, ports, power, telecommunication, etc).
There is, and will continue to be, government-driven investment in hospitality and tourism but this is merely enough to bring Libya to basic touristic needs, both domestic and international. I firmly believe that for a proper industry to flourish in tourism, the following elements must be in existence:
A) Security: Due to the current post revolutionary security situation in Libya, the situation is not conducive to promotion of tourism.
B) Investment from the private sector: Coupled with investment from the government sector, private sector investment is a clear requirement. Complementary services from the hospitality industry are needed (restaurants, entertainment etc)
C) Travel and Logistics: Currently, Libya is seen as one of the toughest countries to secure a tourist visa for. The costs are very high, the procedure is very bureaucratic and opaque, and it applies to a very large amount to foreign countries.
  • 2) Is the government spending money in the right places?
AH: I think the issue of government spending is better defined as the governments ability to spend.

[caption id="attachment_1466" align="alignright" width="255"]Alaa El Huni Alaa El Huni[/caption]
There is a strict limit to the government’s abilities to truly spend the budgets that are being approved. The current systems are ones that have developed from the same systems in existence over the past 40 years in Libya. Current government budgets are nearly double those prior to the revolution, and unfortunately there is a limit to the ability of the government to spend these amounts properly.
These are bottlenecks, from the government’s perspective.  For example, there is a ceiling on the number of qualified, skilled and experienced people on the ground but there is a much larger demand than available.
There are also limits to how much our sea ports can receive and process, hence curbs how much can be imported, and how much work can be performed. This ultimately restricts our ability to work on additional infrastructure works, like building more ports.
I believe the key issue is that governmental infrastructure that had been previously put in place was based on an antiquated “old” regime that had been in power. This system still needs to be upgraded and expanded (technology, processes, systems, human capital etc), and as it currently stands it will be very difficult for the government to efficiently and effectively spend as per the recently approved budget.
  • 3) Libya will provide Egypt with the equivalent of one million barrels of crude per month at world prices to support the economy. It has also provided $2 billion to support Egypt’s central bank. How have Libyans reacted to this financial support at a time when their own country needs massive reconstruction and investment? 

AH: There was a clear public backlash, but I truly believe the real mistake was the PR and Communication initiative behind this decision. There was no clear message sent to the Libyan or Egyptian people regarding this matter.

Much of the Libyan public sentiment was that a deal was brokered between the Libyan and Egyptian governments. They believe that there is a direct correlation between the extradition of key members of the old Gaddafi regime that are residing in Egypt and the financial pledge from Libya to Egypt. In essence, it is like Egypt sold these people back to Libya. The key individual that Egypt was meant to hand over was Ahmed Qadhaf Al Dam. This belief is similar to the one voiced by the Libyan public over the hand over of Baghdadi (Tunisia) and Abdullah El Senussi (Mauritania).



SPECIAL REPORT: After Arab Spring, Islamists Test Religion In Economics

With the rise of political Islam across North Africa in the wake of the Arab Spring uprisings of 2011, Islamic finance is being touted as the solution to decades of unemployment and economic inequality.

“We’ve tried socialism, we’ve tried capitalism, now we’re trying Islam,” cried supporters of Mohammed Morsi, when he was elected as Egypt’s first Islamist president last June. In Libya and Tunisia, new political movements have pledged to use Islamic principles to right their wayward economies.

But some critics – including advocates for the greater use of Islamic finance – believe that a sudden and rigid adherence to Islamic law, known as Sharia, could dramatically slow down economic recoveries across the region at a time when governments are already struggling to establish stability.

With rising unemployment, growing deficits and continued protests, anything less than a quick-turnaround for post-Arab Spring economies could be disastrous, economists warn.

“Governments have to prioritise getting economies back in shape before introducing Islamic finance,” said Douglas Johnson, chief executive of Codexa, a New York-based investment bank that creates Sharia-compliant financial products.

Egypt, where the Muslim Brotherhood is positioning itself as the most powerful political group in the post-Mubarak era, has become an important test for whether the marriage of Sharia with a 21st-century country can ameliorate financial and social hardship.

[caption id="attachment_1455" align="aligncenter" width="580"]Economist, Global Sukuk Economist: Global Sukuk, and by country[/caption]

The Islamist government has focused on passing new laws to allow the issuance of sukuk, or Islamic bonds, and pledged to centralise zakat, a mandatory charitable giving from Muslims, to better target poverty.

While a shift to Islamic finance could bring an economic boost by giving countries access to a huge pool of Islamic investment funds from the oil-producing countries of the Persian Gulf, such as Saudi Arabia, Qatar and the United Arab Emirates, some say Sharia is out of sync with modern economics and cannot work in today’s world without extensive updating.

“What passes as Islamic finance is anything but interest-free,” said Timur Kuran, a professor of economics and political science at Duke University. Mr Kuran is the author of “The Long Divergence,” a book that argues that Arab countries have failed to keep up with the economies of the West because of the rigidity of Islamic law around business and finance.

Sharia, which is “out of date” and has not played an important role for almost two centuries, only serves to add an “Islamic veneer [which] will not improve an economy in any measurable way,” Mr Kuran said.

Egypt’s long-winded negotiations with the International Monetary Fund for a $4.8 billion loan have shown how an uncompromising adherence to Sharia can slow down much-needed injections of funds. Clerics and Islamists have dithered over the loan, in part, because the loan comes with a 1.1 per cent interest rate. Sharia prohibits usury.

After an initial reluctance, the Muslim Brotherhood’s Freedom and Justice Party recently endorsed the IMF loan and called it Sharia-friendly. They describe the interest rate as “an administrative fee”.  But the IMF has distanced itself from any claim that the loan is Sharia-compliant, saying instead that the terms of the loan are “favourable”.

Without the funds, Egypt has had to allow the currency to gradually devalue and risk higher inflation, especially for food, provoking a backlash from protesters who believe the government has relegated demands for social justice.

The careful deliberations of the Brotherhood and its political arm reflect the group’s more pragmatic views of religious doctrine, but also what they see as a tremendous opportunity.  About 65 per cent of Egypt’s mostly Muslim population do not have bank accounts. By increasing access to Islamic finance, they believe Egypt could gain billions of dollars in new deposits.

“Islamic Finance is a realistic option especially with demand coming from those who by nature prefer ‘Islamic’ solutions regardless of the sector and domain,” said Ashraf Serry, one of the Muslim Brotherhood’s top economists.

North Africa 

Governments across North Africa are also shifting to Islamic finance as a way of reducing deficits.

[caption id="attachment_1456" align="aligncenter" width="580"]African Development Bank: North African Shariah compliancy African Development Bank[/caption]

The Tunisian government is trying to diversify and increase its sources of revenues by tapping into Islamic finance and issuing sukuk.

Tunisia’s newly elected Islamist movement Ennahda, which has led the government after the overthrow of president Zine al-Abidine Ben Ali last year, said the government would ensure that Islamic banks were able to compete on a level playing field with conventional banks and wants Tunisia to become a regional center for Islamic finance.

Critics in Tunisia believe the strategy is more about playing to Ennahda’s fervent constituency than wise economic policy. Tunisia’s economy has long been a hotspot for foreign investors, especially from Europe, because of its Western-influenced political, economic and legal system.

Since protests broke out in 2011, Tunisia’s unemployment rate has risen to 18 per cent from 13 percent, with about 750,000 people out of work. The worsening situation has fuelled arguments that what the country needs is stability, not Sharia-compliant financial products.

[caption id="attachment_1457" align="aligncenter" width="580"]African Development Bank: African Development Bank[/caption]

For many Arabs living in the Middle East, however, Islamic finance is a welcome relief.

“Libya is 100% Muslim so there is a willingness to adopt islamic banking solutions and this will definitely have a significant impact on retail and personal banking in Libya,” said Alaa El Huni, an investment banker based in Tripoli, Libya.

Libya’s government has indicated it will further enshrine Sharia in laws and approved an Islamic banking law in May to stimulate its private sector following a civil war that ousted Muammar Gaddafi.

Here, in a country devastated by lengthy battles between rebels and Gaddafi’s supporters, the opportunity for restructuring the Libyan economy is larger.

But Mr El Huni’s warned that moving from one extreme to another will negate any efforts.

“A country run wholly on islamic finance would to some extent alienate itself or at least create barriers to an effective relationship with the rest of the world.”



Original Sin: Where Did Arab Economies Go Wrong?

Arab economies have become addicted to “unearned income streams” including fuel exports, foreign aid, and remittances. This fragile social contract has led countries across the Middle East and North Africa to increase subsidies on fuel and food at times of social unrest.

This is their “original sin” and is fast becoming a liability, say economists Adeel Malik and Bassem Awadallah in this important paper for the World Development journal recently made available to the public.

“External revenues—whether derived from oil, aid, or remittances—profoundly shape the region’s political economy” which only serves to “stifle economic and political incentives, turning economies away from production to patronage”.  

So as a result, on a per capita basis, the Middle East and North Africa received the highest overseas development assistance in 2008 ($73 compared to $49 in sub-Saharan Africa), the paper says. North Africa has consistently been the largest recipient of net aid per capita since 1960s (see table). These aid flows are largely driven by geo-political considerations.

graph11

The authors point out that despite the differences in cultures, economies and geographies across the Middle East and North Africa (Algeria to Syria for example), there are “at least five common denominators that cut across commonly recognized conceptual boundaries—for example, whether an Arab state is a monarchy or a republic, labor-scarce or labor abundant, resource-rich or resource-poor”.  One of these is the dependance on exports and aid. They spell out the other connecting factors:

First, all across the Arab world both economic and political power is concentrated in the hands of a few.

Second, the typical Arab state can be characterized as a security state; its coercive apparatus is both fierce and extensive.

Third, the broad contours of demographic change and the resulting youth bulges are fairly common across the region.

Fourth, Arab countries are mostly centralized states with a dominant public sector and, with few exceptions, weak private enterprise.

So what went wrong?

Malik and Awadallah go back to the Ottoman empire where centralized bureaucratic rule worked hard to prevent the emergence of autonomous social groups, and therefore valuable and profitable connections across the region and a strong private sector:

The Arab world has inherited an unfavorable and divisive legacy. The roots of a weak private sector run deep in history. Merchants were politically weak under the Ottomans.

A robust private sector was more feared than favored. When business thrived, it remained effectively in the hands of foreign merchants and local minorities. This was politically expedient: foreign merchants benefited from the economic privileges granted by rulers, but
seldom challenged their authority.

The break-up of the Ottoman Empire into a multitude of independent states created new political boundaries, but, over time, these became permanent economic boundaries.

The consequence of this divide meant that when globalisation was unavoidable, Arab economies did not integrate with one another but only with global structures of trade and finance.  It’s no surprise then that trade agreements in the Mena region are well below the global average.

graph22

The key concluding questions is: can the region harness its natural geographic strengths to build a future based on trade and production, or does it fall back on the geography of rents and patronage?  Access to the coast, Europe and a large labour force are attractive opportunities that emerging markets would jump at. So why has the Arab world failed to integrate?

Revolutions across the region are an “apt reminder that the prevailing model has reach its expiry date”, they say.

“This model built on oil and aid fortunes—and a leviathan state—is fast becoming a liability.”



Breakfast Wrap: Is Egypt on the Cusp of Privatising Electricity? Taxes Take Two

Egypt’s first private-sector electricity station began operations in Alexandria yesterday in a move that appears to rattle, if not, break the mould of the seven state-run energy companies operating the nation’s power stations.

TAQA Arabia, a subsidiary of Citadel Capital, the Egyptian private equity firm, is running the $400 million station, which will have a production capacity of 11 megavolts and will be fuelled by natural gas.

Up until the early 1960s, electricity generation and distribution was practiced by private companies.  But in 1978, after a transition to nationalisation, seven regional electricity distribution companies were established under the supervision of Egyptian Electricity Authority, according to the Ministry of Electricity.

Some of these companies have now been split into two, but fundamentally Egypt’s electricity power supply is state-owned.

The station was acquired by TAQA as part of a Build, Own, Operate, and Transfer (BOOT) financing scheme.

I.e:

BOOT projects are used to fund large-scale public infrastructure without affecting the country’s debt profile. Private developers are allowed to recover their costs of construction through ownership and operation of the plant for a fixed period before handing it over to the state.

Citadel’s project will provide power to a particular company (the state-owned Egyptian Styrenics Production Company, according to Ahram Online), but it could signal a move toward expanding this scheme elsewhere.

Egypt’s gas shortages have caused some of the worst electricity black-outs in recent years.  But with electricity demand growing, could Egypt consider limited privatisation of the electric power sector? 

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Three big announcements were made yesterday by the ministry of finance:

1)  Egypt expects to reach a loan agreement with the IMF by mid-December after talks this month focusing on limiting the budget deficit and a minimum level for its foreign reserves.  Ahram Online reported that the loan amount, initially set at $4.8 billion has been reduced slightly to $4.5 billion.

2)  The cabinet also approved a new 10% tax on major transactions on the Egyptian stock exchange, including initial public offerings (IPOs). The president said in August there would be no new taxes.

3) Finally, the cabinet approved two new tax brackets for high-income individuals. A 22% tax will be levied on individuals with annual incomes between 1 million Egyptian pounds and 10 million pounds, while annual incomes higher than 10 million pounds will be taxed at a rate of 25%.  The new structure looks something like this, according to Ahram Online:

First segment (LE5,000 – LE20,000): 10 per cent

Second segment (LE20,000 – LE40,000): 15 per cent

Third segment (LE40,000 – LE1 million): 20 per cent

Fourth segment (LE1 million – LE10 million): 22 per cent

Fifth segment (LE10 million and up): 25 per cent

The move to implement taxes on corporations and individuals after previous cabinets had failed to do so signals how the current government is forced to impose hard austerity measures that were initially played down.

The decision to levy a capital gains tax comes despite repeated assertions by bourse officials that such a tax would not be “suitable” for the Egyptian market.

Last year, the finance minister at the time, Samir Radwan, proposed a 10% tax on stock dividends in the hopes of offsetting Egypt’s rising budget deficit. But the proposal was quickly rejected by investors and bourse officials and Radwan was removed in a cabinet reshuffle.  How policies change.

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In my latest FT report, I write how escalating disputes between labour unions and employers in north Africa are threatening to derail economic recovery after the uprisings that ousted long-ruling dictators in the region.

Emboldened by the spirit of political change, thousands of workers in Egypt and Tunisia have staged a series of protests and are now in deadlocked talks with companies over demands for a minimum wage.

The piece puts together a series of examples of how the quest for a minimum wage can also be detrimental to a country’s economic fortunes.  But it also shines a light on the lack of conversation between labourers and their employers.

Some of the companies quoted in the report include Kraft Foods, which has commenced legal action against strikers and DP World, which shut down its Ain Sokhna port twice this year.

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As UAE-based Dana Gas restructures its $1 billion sukuk payment, averting a potential seizure of its Egyptian assets, the “region’s debt market barely blinked,” according to this Reuters feature on sukuk, or Islamic bonds.

Not long ago, a billion-dollar payment miss would have triggered a crisis of confidence in the market; now, it is almost ignored.



Bloggers Beware

Governments are prepared to spend billions of dollars to protect the state.   Dictatorships will spend even more to maintain the status quo.

One day in July, a blogger from the United Arab Emirates discovered the extent his government would go to make sure his voice was silenced.

Ahmed Mansoor, an outspoken blogger from the UAE and a member of the “UAE Five” — a group of Emirati activists jailed last year for criticizing government leaders — opened a suspicious e-mail with a Microsoft Word attachment that, when opened, “deployed spyware that could monitor his every keystroke, record his passwords, social networking and instant messenger chats and even his voice conversations through his computer’s microphone,” Nicole Perlroth writes in this great New York Times article.

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Breakfast Wrap: The Workers’ Revolution, Egypt Needs $22 Billion In Financing, Qatar Slows

There are two recurring economic problems in Egypt: the demands of the massive labour force and the energy subsidy issue.  Both are old problems but have been propelled into the limelight post-revolution because budgetary constraints have intensified the situation.  These are discussed below.

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Labour 

In just the latest bout of labour unrest, industrial action has significantly disrupted operations at an Egyptian port run by DP Worldthe world’s third largest port operator.

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Breakfast Wrap: Morsi & Mubarak Aren’t So Different, Labour disputes

Egypt’s president Mohammed Morsi may propose a way of life so different than the former regime’s that it is no longer comparable, but ultimately, the grand plans and the mega-projects are just progressions of the past few decades under a regime that sought to clamp down on today’s president.

Mr Morsi has spoken on encouraging Islamic finance and banking, once neglected by the regime of former president Hosni Mubarak, but do not let this detract from the similarities between the men.  That is not a criticism, but an indication that the current government lacks innovation.

Mr Morsi’s administration is spending time reviving and building on projects and schemes first developed in the 1990s under former President Mubarak.  For instance, nuclear power projects have been revived from the 1990s and early 2000s.  Mr Morsi is also mimicking many of the diplomatic business routes Mubarak took, with a strong push toward China as a country than can use Egypt for its resources in exchange for connecting Egypt to Asia.

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Breakfast Wrap: Ugly Financial Decisions, Morsi In Turkey For 12 Hours

The bad, the worse and the ugly 

Nothing is pretty about revolution and nothing is tidy about the consequences.  For those countries that are battling with a post-revolutionary economic crisis, difficult decisions must be made that will not be accepted universally.

Tunisia’s budget deficit should narrow to 6% next year from 6.6% of gross domestic product (GDP) expected in 2012, the central bank governor said on Friday, indicating economic recovery in the cradle of Arab Spring revolts may take longer than anticipated.

“2014 will not be the year of recovery for the Tunisian economy. It is still a year of transition that may see the premise of recovery,” said Central bank governor Chadli Ayari indicating the country may not fully recover by 2014.

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