This article constitutes edited text from the Economic Freedom of the Arab World: 2015 Annual Report.
Arab and Islamic societies have a rich trading tradition, one that celebrates markets open even to the humblest members of society. Yet in recent decades, elites in many Arab nations have controlled economic activity for their own benefit. They have used onerous regulation and a corrupt rule of law to deny opportunity for others.
A new economic vision is thus needed for the Arab world to move forward – one of economic freedom and open markets that create hope and opportunity equally for all. Economic freedom is the extent to which one can pursue economic activity without interference from government. It is built upon personal choice, voluntary exchange, the right to keep what you earn, and the security of one’s property rights.
The Legacy of Crony Capitalism
Many in the Arab world believe their nations have already gone through a period of free market reform and that it has not worked. This misconception deprives many of an economic alternative and vision for the future.
Economic reform before the Arab Spring was frequently phony; all too often it was crony capitalism dressed up in the language of free markets.
In fact, economic reform before the Arab Spring was frequently phony; all too often it was crony capitalism dressed up in the language of free markets. In many nations, it simply replaced government control of the economy through government to elite control via the handing off of state assets, monopolies, and other rent-seeking opportunities to friends, supporters, and relatives of the regime.
The “progress” in some nations in divesting state enterprises and opening up the market through privatization was therefore often illusionary. The old elites simply took the “privatized” assets and continued their control of the economy under crony capitalism. This is the very opposite of economic freedom, with the rich and powerful suppressing the opportunity of others.
Rather than releasing entrepreneurial drive, such a system protected privilege. Yet governments in the region and international institutions like the International Monetary Fund promoted it as “free market” reform.[1]
Benefits of Economic Freedom
Since the publication of the first edition of the Economic Freedom of the World in 1996 and, more recently, national and regional indexes, there have been hundreds of scholarly and policy articles that have used the economic freedom indexes to explore the relationship between economic freedom and other socioeconomic outcomes. Studies have shown that economic freedom promotes growth, job creation, prosperity, and other positive outcomes.
The relationship of economic freedom to prosperity is unsurprising. Individuals and families are best able to look after themselves when free to do so, without external constraints. Economic freedom is simply the ability of these individuals and families to make their own economic decisions – to sell or buy in the marketplace without discrimination, to open or close a business, to work for whom they wish or hire whom they wish, to receive investment or invest in others. Their drive and ingenuity have proved to be more productive than government planning or restricted markets and monopolies under crony capitalism.
The importance of economic freedom goes beyond economics. When governments or crony capitalists control the ability of individuals to get a job, start a business, gain a promotion, feed, house, and clothe their families, and so on, the government and its supporters have tools to suppress freedom and democracy, until the anger grows too great, as it did in many parts of the Arab world. However, when individuals and families have the right to make their own economic decisions, economic freedom liberates them from government dependence and opens the door to other freedoms. Over time, economic freedom supports democracy and stability by changing the way societies function.
Indeed, economic freedom transforms the dynamics of society. When people make their own economic choices, they gain only when they produce products or services desired in free exchange – in other words, by making people better off.
When people make their own economic choices, they gain only when they produce products or services desired in free exchange – in other words, by making people better off.
Those in other groups become customers, suppliers, and clients. Over time, this builds tolerance and a common sense of citizenship. With economic freedom, people who increase the size of the economic pie for everyone achieve the biggest gains.
In contrast, when governments – or government friends under crony capitalism – control the economy, those who cut a bigger slice of the pie for themselves to the disadvantage of others achieve the biggest gains. The economy grows slowly or not at all. Individuals and groups battle each other for wealth and
privilege. People gain by cultivating connections, suppressing the opportunities of others, and making them worse off. All too often, the individual gains not as an individual but as a member of a rent-seeking group, whether economic, ethnic, or religious. Groups stand against groups.
True economic freedom also combats corruption. Although some regulation is necessary, government permission is not needed for the majority of transactions, so there is no one capable of demanding a bribe. Also, as a government’s size decreases, it has fewer favors to hand out, so no one can demand a payment for a favor that the government cannot grant in the first place.
Economic freedom would also have a particular benefit for the Arab world. A key driver of dissatisfaction in the region is the high unemployment rate among young people, which averages nearly 30 percent.[2] Economic freedom has been shown to create jobs and reduce unemployment, particularly among young people,[3] and hence could play an important role in increasing stability and thus the region’s attractiveness to investors, leading to even more job creation.
Policy Changes: Where to Begin
It is vital to increase economic freedom in the less economically free Arab countries. Economic policy implemented to foster this freedom must create new prosperity, entrepreneurship, and jobs, rather than re-set the stage for the phony reform of crony capitalism. A vigorous state role in improving public administration is therefore essential to establishing the conditions that will permit economies to grow.
There are a number of areas in which Arab countries are lagging in terms of economic freedom. One example is the amount of time it takes to start a business. The average in the Arab world is over 21 days, in contrast to the world’s best case, New Zealand, where it takes just a day to complete the process.
The Arab countries can begin by improving their policies regarding business establishment and international trade.
Another example is the Arab world’s capacity for international trade, which is a strong driver of economic growth. In comparison to France, where just two documents are needed to process imports and exports, the number of documents required in the Arab world ranges from four at the least to eleven at the most. And while some Arab countries perform well in terms of the time required to complete exports procedures (the UAE needs seven days, compared to the best performing country in the world, Denmark, which needs five days), the overall regional average stands at 22.2 days, with Iraq needing as many as 80 days.
The Arab countries can thus begin by improving their policies regarding business establishment and international trade. Changes would include the number of documents required as well as the costs and time taken for various procedures.
Hope for the Future
The good news is that many Arab nations have instituted real reform and have gained in economic freedom, albeit by small margins, since the Arab Spring. A number of role models have emerged. The UAE and Jordan have advanced into the top 10 of the world index and, not surprisingly, they are first and second in the Arab world. Oman has also been working to streamline its regulations and it is now one of the leaders in this area.
[1] See, for example, International Monetary Fund, “The GCC Monetary Union – Choice of Exchange Rate Regime,” The Middle East and Central Asia Department, August 28, 2008, https://www.imf.org/external/np/pp/eng/2008/082808a.pdf.
[2] World Bank and International Bank for Reconstruction and Development, “World Development Indicators” (editions 2005–2015).
[3] Horst Feldmann, “Economic Freedom and Unemployment,” in James Gwartney, Joshua C. Hall, and Robert Lawson, Economic Freedom of the World: 2010 Annual Report, Fraser Institute, 187–201.
