The Arab Uprisings One Year On: What’s Next?

An Oxford Analytica Open Conference Call, Thursday February 16, 2012

Call summary

A year has passed since the ouster of Hosni Mubarak, but the next chapters of the Arab Awakening are still being written. In Egypt, the young democracy activists and Tahrir Square protesters who spearheaded the uprising were the main losers in this year’s parliamentary elections -- but they still have the power to shape the agenda, and will continue their campaign for an immediate end to military rule.

The fate of a country that has exercised a leading role in the Arab world -- politically, economically and culturally -- hangs in the balance. The outcome of Egypt’s transformation has been felt far beyond its borders, and the region may not yet have seen the last of popular demands for change. The strategic balance in the Middle East has already been profoundly affected, with an insecure Iran relying on rhetorical brinksmanship to demonstrate its continued clout.

Identity politics

The initial uprisings were driven by ‘individualist’ movements – but these have been replaced in a number of countries by identity-driven politics. Embattled regimes are exploiting sectarian divisions to remain in power, notably in Bahrain, Syria and Iraq. This, coupled with the increasing role of geopolitical rivalries is set to make their political and economic evolution much more fraught.

By contrast, in North African states where uprisings have succeeded in overthrowing governments, societies are mostly homogenous in terms of ethnic and religious background. This is part of the reason why the elections in Egypt and Tunisia have brought Islamists to power after decades of secular rule.

Spending pressures

Popular pressure for increased public spending has grown across the region, and most governments have responded by significantly reallocating resources. This has drastically constrained the fiscal policy space in the poorer states, increasing the risk of a solvency crisis. In transition countries such as Egypt and Tunisia, the business environment has deteriorated further due to increasing regulatory difficulties, insecurity and corruption -- though the longer-term outlook may brighten.

EGYPT EVOLVES

Constitution deadline

Post-Mubarak Egypt will be heavily influenced by the kind of coalition the Muslim Brotherhood can cobble together, and the policies they adopt on subsidy reform. The youth activists in Tahrir Square will be a continuing source of instability.

Egypt’s next major political challenge is writing the new constitution to a very compressed deadline. A constitutional committee will be formed after elections to parliament’s upper house are completed at the beginning of March. The constitution must be written by the time of the presidential election which should take place by the end of June.

Investor outlook

The Muslim Brotherhood has not yet articulated a clear economic agenda. Sometimes described as an ‘Islamic bourgeois’ movement, it is broadly capitalist and favours small- and medium-sized enterprises. Its policies are liberal and in economic terms, broadly in line with those of the Mubarak regime. No fundamental shifts are therefore expected. The movement is unlikely to impose Islamic strictures on the tourism sector, which is too important to jeopardise.

The primary challenges facing investors are political uncertainty, bureaucratic obstacles, corruption and the decline in security -- these factors mean that investment will take a long time to recover to pre-uprising levels.

As for fiscal and monetary policy, the most immediate challenge is the state of Egypt’s foreign reserves. These have declined sharply since the uprising and a ‘crunch point’ is likely next month -- before any IMF deal would be in place. Egypt may ultimately be bailed out by the Gulf states and the United States -- but no money will be left for modernisation and fixed investment.

SYRIA – APPROACHING REVOLUTION?

The embattled regime of Bashar al-Assad regime will exhaust itself and could fall later this year. The Muslim Brotherhood and Salafis are at the core of the uprising, and external calls for jihad are increasing the risk of a sectarian conflict. Local opposition groupings will determine the outcome -- not the foreign-based Syrian National Council, which has no power on the ground.

Economic factors will play a key role in how long the regime survives. Factories are shuttered, power cuts and fuel shortages are biting, and sanctions are in place on the oil and gas sector, a key source of Syria’s foreign currency. Iranian financial support is helping keep the economy afloat, but this may not be sustainable given Tehran’s own economic problems.

The ‘tipping point’ is likely to be when the Sunni middle classes of Damascus and Aleppo decide their interests will be better protected by the opposition than by the regime. A number of elites are already hedging their bets. For the time being, minority communities are standing by Assad.

GULF STATES’ CHALLENGES

While the region’s poorer countries are facing immediate fiscal crises, the challenges faced by Saudi Arabia and other Gulf Cooperation Council (GCC) states are longer term. Issues such as rising domestic energy consumption, youth unemployment, labour reform and housing shortages have been made more complex because of the uprisings.

Increased public spending in the wake of the Arab uprisings is pushing up the break-even price for oil (the market price at which state budgets will balance); this has edged closer to 90-100 dollars. The uprisings have also made necessary reforms in the labour market, energy subsidies and resource allocation much more politically sensitive.

In Saudi Arabia, the government has attempted to pre-empt any domestic uprising by increasing public sector employment and spending on housing. However, there has been insufficient long-term thinking on how to address key structural issues. The country could therefore face a fiscal crisis by the end of decade, depending on the direction of oil prices.

IRAN’S DECLINING INFLUENCE

Iran has attempted to frame the uprisings as an ‘Islamic awakening’ akin to its own 1979 revolution. However, this narrative has been exposed as facile, and Iran is in fact attempting to catch up with developments. A number of factors are making it harder for Iran to project its influence in the Arab world:

Opposition to the Syrian uprising. Tehran’s denunciation of the protesters as ‘agents of Zionism’ and its crackdown on its own opposition movement in 2009 stand in stark contrast to its support for anti-government movements elsewhere in the region. This has exposed it to accusations of hypocrisy and caused a significant decline in its popularity in the Arab world.
New Islamist governments. The emergence of new Islamist governments in the region does not necessarily work in Tehran’s favour due to Sunni-Shia sectarian differences.
Western-led sanctions. The latest round of sanctions on the Central Bank is making it increasingly difficult to do business with Iran. Importers of Iranian oil are set to reduce their orders to qualify for a waiver from US sanctions, while Dubai has become less amenable to acting as an intermediary for Iranian trade.
GCC defence spending. Iran’s relative military prowess is declining because of significant high-tech arms purchases made by GCC states.

ISRAELI STRIKE?

The Obama administration is placing enormous pressure on Israel not to strike Iran. A strike is extremely unlikely before the US presidential election in November. Instead, a covert war between Iran and Israel will continue, perpetuating a cycle of violence and regional volatility.

WESTERN ENGAGEMENT

Western engagement with the North African states where uprisings have taken place has been relatively modest due to preoccupation with the euro-area crises. Initial promises of help have not yet materialised into financial support. The West is now focused on winning contracts rather than supporting the political transition.

The US State Department is focusing more on relations with the Muslim Brotherhood, as governments will be heavily influenced by them. However, the Muslim Brothers’ rise will prompt some concern in Washington because of their ties with Hamas.