A Memo From Tunisia

Rachel Ziemba of Roubini Global Economics writes:

...the events in Tunisia are reverberating throughout the Arab world. Despite Arab leaders’ insistence on the exceptional nature of the developments in Tunisia, the underlying triggers—weak employment prospects, stagnant incomes, rising prices and a lack of representation—are common in much of the region...

It is difficult to predict if other regimes will go the way of Tunisia, but the volatile mixture of economic grievances will add pressure to fragile political institutions in the MENA region and could temper investment. Arab leaders’ immediate response of boosting subsidies on food and fuel as well as other social transfers and their hyper-vigilance about protests suggest that these regimes may muddle through. Also, we continue to see strong oil prices in 2011 supporting growth in the MENA region, one of the few in the world where growth will accelerate from the 2010 pace.

However, with commodity prices, especially food product prices, set to rise, we see several linked economic risks across the region. These include the deterioration of fiscal and external balances, financing issues and a clampdown on economic and social liberties, including access by foreign investors. Maintaining expensive subsidy regimes (and adding more government spending) will be particularly detrimental to the fiscal and external positions of oil importers. Some, like Jordan, may turn to bilateral aid. Others, including Tunisia, could face significantly higher financing costs and may be forced to delay international bond issuance and turn instead to local markets, possibly crowding out private investment.

These policies are unsustainable in the medium to long term. Subsidy measures will do little to dampen inflationary pressure, especially if governments pair them with higher public-sector wages and other types of fiscal support to soothe troubled populations.

More here.