Economic Reform and Democracy: Can The Middle East Compete?

Reforming stagnant, inefficient, and backward economies like those found throughout most of the Middle East with the aim of integrating them into a dynamic and expanding international market is a difficult endeavor. Adding political liberalization to the agenda results in a truly Herculean task. Yet economic reform and political liberalization are intimately linked. The countries of the Middle East are finding themselves under increasing domestic and international pressure to achieve progress along both of these dimensions.

Although authoritarian regimes may initiate economic reform programs, their ultimate success depends not only on reductions in the size and role of the state but also—and to an even greater extent—on the development of pluralist politics. In most of the countries of the Middle East, particularly in the Arab world, it is the incumbent political regime that constitutes the greatest obstacle to both political and economic reform. The much discussed question of sequencing—that is, whether economic reform brings about democracy or vice versa—is not addressed here. Rather, this essay argues that even when authoritarian regimes such as those in power in the Middle East manage to initiate economic reform, its extent and duration are determined more by political considerations than by economic rationality.

As a rule, political leaders are moved to implement economic reforms by one or more of the following conditions: 1) balance-of-payments crises, often accompanied by severe indebtedness; 2) runaway inflation and consequent dislocations in domestic production; 3) pressure exerted by international financial institutions and powerful capitalist states, typically in the form of a refusal to extend any new loans; and 4) a decline in the state’s capacity to extract revenues from its citizens through taxation.

In most developing societies beset by such difficulties, the first stage of reform consists of measures designed to redress macroeconomic imbalances. Devaluing the national currency, cutting budget deficits, freeing some prices, and generally opening up the economy are all examples of stabilization measures that have been successfully implemented by authoritarian as well as democratic regimes. The case of Chile under the dictatorship of General Augusto Pinochet (1973–90) is often cited as evidence that authoritarian regimes may be better equipped than democratically elected governments to handle the initial stage of economic reform. Yet the record here is mixed. The patronage networks, rent-seeking behavior, and tendency to fall captive to narrow interests that are characteristic of many authoritarian regimes may all serve to derail reform efforts.

What an authoritarian regime clearly cannot manage without fundamentally changing its character is the second stage of reform. This stage consists of institutional changes such as the development of stock markets; the liberalization of labor markets; the revamping of social security, social services, and retirement systems; large-scale privatizations, especially of state banks; the restructuring of state enterprises; the encouragement of competition within the domestic private sector; and the establishment of a coherent regulatory framework. Such second-stage tasks entail a major transfer of power from the state to civil society—a civil society that is weak or nonexistent in authoritarian states. The efficient functioning of capital and labor markets requires free flows of accurate information and the decentralization of financial resources. Democratic regimes are clearly more effective than authoritarian ones at generating and distributing unbiased information. Most important, every step that an authoritarian regime takes along the path of the second stage of reform limits its direct control over individuals and groups and is thus a nail in its own coffin. This means that whether or not an economic reform program progresses beyond the initial stage is a political decision.

If real competition is allowed—as opposed to a rent-seeking simulacrum of capitalism featuring a tame, state-dependent bourgeoisie and a government that seeks to forestall political opposition through the strategic distribution of goods—then both an efficiently functioning market and a vigorous democracy are a good bet to emerge. In postcommunist Eastern Europe, a consensus in favor of real reform has sprung from the association of command-style economic practices with a repressive political system. In Latin America, the zeal for reform is rooted in...