The Missing Conversation: How to Build a Moral Capitalism in the Arab Region

The Arab transition countries, Tunisia, Egypt, Yemen, and Libya, are grappling with complex issues relating to personal values, the extent of freedom of speech, individual rights,  family matters, that all orbit around deep issues of identity and the respective roles of the individual, the state and society. These social conversations are constructive in that they reflect a rich pluralism of views in societies where conformity was the rule under dictatorship. But unfortunately, these dialogues are polarizing society, leading to violence and threatening chaos and a possible return to authoritarianism. In fact, the current social polarization to a large extent reflects attempts by political entrepreneurs to use existing social fault lines, and even exacerbate them, in ways that mobilize passions among possible supporters, driven to over-reach by the political vacuum created by the departure of the historical autocrats. The dynamics in Morocco, Jordan, Algeria, and Lebanon are slightly different, but here too, the intense and exclusive focus on identity is crowding out more important and immediate social and economic challenges.

Indeed, and as these countries will rediscover in time, the main issue confronting their societies is how to lay the ground for a form of capitalism that will be more effective in reaching the social goals of more and better jobs, better standards of living and better public services, and be at the same time, socially acceptable. In societies with high levels of religiosity, and where social justice has become a central social demand, the question is how to lay the ground for a “moral” or “just” capitalism.

In their slow transition from autocratic and import substitution state-led industrialization, Arab states had started to open-up to the private sector and liberalize their economies starting in the 1970s and 80s, but they did not open up their polity (until 2011). To stay in control, autocratic rulers relied on loyal private entrepreneurs who would do their bidding - what we now call crony capitalists.

Cronies grew fast and took over the liberalized markets all over the region, especially in the late 1990s and 2000s. But they were not particularly efficient. And they stifled competition and innovation, allowing unfettered competition to flourish only in informal markets where authority could not penetrate.

To stay on top, until the end of the decade, rulers had to co-opt the middle classes with subsidies, while the poor were violently repressed (but they managed to organize in the mosques, where again power could not penetrate easily). States grew poorer and the quality of public services suffered, hurting social mobility. The fight against Political Islam served to strengthen the elite bargain, by scaring secularists into the autocratic coalition.

This regime did not deliver the jobs needed by the increasingly educated and larger waves of entrants in the labor market. Moreover, it generated rising inequalities, increased the grievances of the poor that could not advance socially, and exacerbated frustration among the educated youth with high expectations for a better future.

This system collapsed with the Arab Spring. Like a dam exploding, the uprisings have revealed the existence of a deep crisis of Arab capitalism. The graph below depicts popular opinions in the Arab world before and after the uprisings. It plots the share of the population in each of the countries with favourable opinion about entrepreneurs, against perceptions about corruption in the business world. Several conclusions emerge. First, in many countries, opinions about entrepreneurs are quite negative. Second, when this is the case, it is associated with perception that the business world is corrupt. Finally, it is apparent that after the uprising, the whole line shifts down for countries with high levels of corruption, which indicates that people have become less accepting of corruption – for any level of perceived corruption, their opinions about entrepreneurs become less positive.

It is not going to be possible, given a more competitive political arena, to develop the reforms needed for the private sector to grow and thrive unless these opinions are reversed.

Arab societies have started to outgrow the state in a process of modernization. Political liberalization is in full swing – it is this new space of liberty that has allowed the very noisy conversation between secularists and Islamists to take place. But the transitions have so far avoided tackling the crucial conversation on how to create a capitalism that works – more competitive and dynamic, fairer, with more possibilities for small firms to innovate and grow, and more democratic capital markets. When this conversation starts, Arabs will go back to reading the economic classics and they will rediscover the virtues of: market regulation; social dialogue between business, labour, and the state; the role of activism and open information in making markets and institutions work better; and the role of social policies in smoothing the sharp edges of markets. Until this conversation starts in earnest however, citizens will remain suspicious of entrepreneurs, large businesses will remain suspect of cronyism and corruption, and growth will remain elusive.