This issue of Middle East Report presents critical — and timely — analysis of the impact of neoliberal economic policies in the Middle East and North Africa. Authors representing a variety of disciplines and viewpoints explore the dilemmas confronting progressive forces searching for alternative programs to restore growth and promote equity.

The region missed the decade of rapid growth that raised living standards in many developing countries. As a result, Middle Eastern populations that just a generation ago enjoyed per capita incomes twice that of East Asian countries are now frustrated and anxious about their economic future. With few signs of recovery in sight, economic reform is imperative. International lending institutions and aid donors have strongly urged Middle Eastern policy makers to follow the neoliberal, or “Washington consensus,” path and undertake structural adjustment programs to reduce the scope of state control and allow markets to operate freely.

Structural adjustment encourages the globalization of investment, finance and trade, eroding national sovereignty over economic policy and favoring transnational corporations and foreign private capital. The early, stabilization phase of restructuring invariably induces recessions, with a sharp fall in investment and a rise in unemployment and poverty. Then follows legal liberalization of land tenure, investment and labor laws, and finally privatization — the divestiture of public assets and enterprises. These policies frequently favor the owners of land and capital over urban workers and rural peasants. Furthermore, structural adjustment rarely makes good on its “trickle-down” promise of enhanced growth and efficiency in the long run.

Progressive forces face a profound dilemma. While they do not believe that globalization and the market miracle promised by neoliberal economics will solve the problems of growth and poverty, they must offer a viable alternative. The “socialist model” as practiced in the Soviet Union and Eastern Europe has evaporated, and the Middle East’s own brand of state-directed development has lost credibility due to its poor performance.

What kinds of alternative visions might there be for the region’s economies? Some political groups call for an approach that promotes democracy, equity and sustainability in conjunction with economic growth and reorders the international institutional structure. The Syrian leftist “economic studies group” believes that the management of human and capital resources is more important than ownership of the means of production. While vehemently rejecting the “Washington consensus” formulas promoting markets for Western goods rather than democracy, they view the state — its laws and personnel, often intertwined with the private bourgeoisie — as the prime culprit in perpetuating economic inequality, inefficiency and political oligarchy. They aim to define a reform strategy to revitalize the economy but avoid social polarization and the erosion of national sovereignty. To curb corruption on the micro level, for example, they suggest that state-owned enterprises be administered as businesses responsive to market signals and collective demand. [1]

On the macro level, analysts such as Dani Rodrik and Robert Wade argue for the “heterodox” approach followed by the East Asian high achievers. Let each country set its own agenda for stability and high investment (prerequisites for growth) and integrate with the international economy selectively.

These proposed programs still pose difficult choices for progressives, however. The first dilemma concerns reliance on competitively determined prices. Free market prices on daily necessities such as bread and fuel are usually too high for poor people to afford. However, general subsidies on such commodities can be a waste of public funds since a large share of the benefits goes to those who do not need them. On the other hand, targeting subsidies to the poor alone runs the risk of missing many deserving people.

A second dilemma concerns privatization of public sector assets. Supporting privatization alienates public sector workers who stand to lose, writes off the possibility of reforming public enterprises and underplays the fact that some form of planning remains an important need of all developing countries. On the other hand, opposing privatization ignores the generally unsatisfactory economic performance of state-managed production and the need for dynamic investment and growth. Furthermore, privatization can broaden ownership of productive companies and create space for more small, labor-intensive operations. This is important in countries with high unemployment where small-scale and informal enterprises are the biggest source of new job growth.

If some form of privatization is on the agenda, there is broad debate over what form it should take. What is the appropriate role for foreign capital? How widespread should ownership be? Is worker ownership viable and equitable? Can the job security of public sector workers be preserved while the lot of private sector workers and the unemployed is improved? Is severance pay adequate compensation to downsized workers?

Yet another dilemma concerns deregulation of labor markets. Due to legislation or unionization, workers in the region, particularly those in public sector firms, have enjoyed job security with good compensation. They will lose these advantages with liberalization. Yet, workers should be able to move to newer, more dynamic industries when old industries become outmoded or prices for their output fall sharply (as happened with oil prices, for instance).

Furthermore, government intervention in the labor market is not always effective in raising the living standards of workers and may even keep new labor force entrants from finding employment. Striking a balance between protecting the interests of the securely employed and job seekers is at the heart of this dilemma. In a developing economy, perhaps labor and the left can accept privatization and flexible labor markets in exchange for rigorous occupational health and safety laws, social security, a “social safety net” for the poor, unemployment insurance and, above all, a recognition of workers’ rights to organize and bargain collectively.

The overarching dilemma concerns the role of existing Middle Eastern states in revitalizing their economies — are they more accountable to global economic interests, local elites or the citizenry as a whole? The following articles indicate that local governments are not strictly subservient to foreign lenders, nor do neoliberal policies necessarily help indigenous upper classes. Tunisia’s authoritarian government defied World Bank recommendations for diversifying land ownership and catered instead to the landed elite. Iran’s democratically elected government appears fully sovereign in its policymaking, yet the prevailing opinion among supporters of President Mohammad Khatami, a former leftist who still considers himself a progressive, is to allow privatization and liberalization as a means to resume economic growth. Accountable government appears to be a prerequisite for the successful implementation of socially conscious economic changes, and a politically open system is a necessity if Middle Eastern societies are to struggle successfully with the dilemmas of economic reform.


[1] Communication from Bassam Haddad, Ph.D. candidate at Georgetown University, February 15, 1999.

How to cite this article:

Karen Pfeifer, Djavad Salehi-Isfahani, Steve Niva, Marsha Pripstein Posusney "Reform or Reaction?," Middle East Report 210 (Spring 1999).

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