Storm clouds gather after the Arab Spring

The Middle East and North Africa (MENA) region has entered, but has not yet emerged from, a deep and rocky transformation in the wake of the Arab Spring. Arabs are facing a restructuring of their political, economic, social and cultural landscape.

As constitutions are currently being redrafted, the role and the relationship between state and religion are coming under question. Crony capitalists that were associated with fallen regimes have tainted the perception of the market system. There is no clarity on the transformation’s final destination or on its path for this part of the world. Adding to this confusion is that Arab countries in the region are not uniformly impacted by their “Spring”. Each country is experiencing its own blend of the wrath of the disenfranchised. As the final outcome of this shuffle remains elusive, three by-products are clearly emerging: distrust, uncertainty and fear.

For decades, the soft fabric of trust in Arab societies has been coming undone. The old social contract between people and the state has been revoked due to the state’s inability to maintain equilibrium between rapid population growth and stifling economic stagnation. The Arab security apparatus has shifted its role from ostensibly protecting citizens to becoming their chief tormentor as the decaying regimes stubbornly held to their authoritarian rule.

In addition, unchecked privatization gave rise to corruption. Financial institutions, dominated by public banks, based their lending on patronage and political calculations, not profitability. Finance catered to the government and the well-connected elite while keeping the rest at bay. As a result, Arab citizens lost trust in their figureheads, institutions and each other.

As Arab states are imploding, uncertainty looms. Unlike risk – where outcomes and their probabilities are more or less known – in an environment of uncertainty, anything is possible and probabilities are unknown. Uncertainty is paralyzing. While insurance and future markets absorb risk, markets cannot price uncertainty, and thus cannot insure against it. It is detrimental to the economy and investments without viable interventions.

Furthermore, Arab economies are in trauma. FDI has slowed down to a trickle at best. Faced with the impatient demands of the angry public and fear of being ousted, the focus of Arab governments has shifted to the short term, at any expense. Budget deficits are growing to meet a regime’s overpromising (e.g. Saudi Arabia’s US$ 36 billion benefits package to counter the Arab Spring). Governments are borrowing at unsustainable interests rates (16% in Egypt) to finance their overspending. In Egypt, tourism is down and foreign reserves have dwindled to US$ 15 billion in October 2012 from US$ 36 billion in December 2010. Economic stabilization is desperately needed but elusive.

Therefore, it is not surprising that economic stabilization, political entrenchments and distrust in financial institutions top MENA’s risk trends.

Excluding oil, the Arab world’s integration within the global economy is weak. In fact, an argument can be made that it has in fact been disintegrating. The Arab world’s share of “world trade and investment have fallen by half in the past 25 years… [and] its slice of global manufacturing exports, never high, has dropped to less than 1%”. In fact, “the total manufacturing exports of the entire Arab world have recently been below those of the Philippines (with less than one-third the population)”.In the inward looking Arab countries, facing uncertainty, distrust and economic Armageddon, trouble in the Eurozone is not headline news!

Author: Mohamad Al Ississ is Professor of Economics at School of Business, American University in Cairo, Egypt and is a Member of the Global Agenda Council on the Arab World