The Economics of Political Transitions: Implications for the Arab Spring

It has been two years since Arab Spring began. So how are the various Arab economies performing since the Spring?

Padamja Khandelwal and Agustín Roitman of IMF review the economies in this paper. They also compare the performance with economies under similar political instability (PI) cases. The Arab economies indicators are broadly similar to other PI countries:

Our empirical work indicates that episodes of severe social unrest similar to those experienced in the ACTs are accompanied by a sharp deterioration in macroeconomic outcomes. Countries experiencing political instability (PI) undergo sizeable output losses. The recovery is often sluggish, and output gaps persist for about 5 years, leading to an increase in unemployment. The deterioration in fundamentals and heightened macroeconomic uncertainty lead to lower investment. Fiscal positions deteriorate and debt levels rise. Reserves decline during PI, and thereafter improve slowly. External current account balances improve over the medium-term in many cases, but not all. High external vulnerabilities can lead to added pressures and large currency depreciation, which in turn, can lead to higher inflation.

Many of the economic trends that have characterized other episodes of political instability are becoming evident in the ACT. Output declined in 2011 in Egypt, Tunisia, and Yemen, but remained more stable in Jordan and Morocco. Economic activity has remained at low levels in 2012, and similar to past episodes of PI, unemployment has increased. Macroeconomic stability has come under pressure as fiscal deficits have widened from already high levels, and external current account deficits have deteriorated. International reserves have declined. Inflation has remained muted in most countries due to weak aggregate demand.

In terms of prospects over the medium-term, the recovery in the ACT is complicated by weak external demand (especially from European trading partners), high food and fuel prices, and the need for sizable fiscal consolidation due to weak initial fiscal positions in the ACTs. Thus, economic recovery in the ACTs could be delayed even more than in past episodes of PI. Pressures on fiscal and external stability are also likely to be more intense. Although policy actions can help mitigate some of these adverse factors, weak transitional governments may  find it politically difficult to implement measures to maintain macroeconomic stability and  avoid a prolonged growth slump.

Continue with the reforms. Pain is likely to remain over medium term..

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