To the G8: Don’t Let Aid Perpetuate Barriers to Growth in Tunisia and Egypt

In this Bloomberg Echoes post, I argue that the United States should do whatever it can to promote economic freedom in the post-Jasmine Revolution Middle East and North Africa, and strongly support economic leaders who are committed to creating a private market economy. This is the lesson learned from the transitions from government control to market economies two decades ago in Eastern Europe, especially Poland and the Czech Republic. The U.S. government strongly supported those economic reforms—the removal of price controls, of barriers to new businesses, and of subsidies of old state enterprises, along with a restoration of the rule of law and property rights. And the United States also supported the reformers, including Leszek Balcerowicz in Poland, who carried out the reforms against much oppostion.

In this regard it is alarming to hear that the G8 support package for Tunisia and Egypt--being developed at the meeting in Deauville France today and tomorrow--may do just the opposite: encourage more government subsidies and controls. Indeed, a recommend list of actions in a recent letter to the G8 from top economists—mostly from France but including Joe Stiglitz and Nouriel Roubini from the United States—starts with the case for government subsidies. But as argued persuasively by Ned Phelps yesterday in an article in Le Monde (in English here), Tunisia needs an immediate and dramatic reduction in the barriers to entrepreneurship and job creation. It needs to open the economy, domestically and internationally, and the G8 can help in both as it implements a support package.

Are there new leaders in the Middle East and North Africa (MENA) who will support such economic changes? Of course there are. For example, it is very encouraging that the new Tunisian central bank Governor Mustapha Nabli, who obtained his Ph.D. in economics from UCLA in 1974, is a reformer. His recently published book Breaking the Barriers to Higher Economic Growth in MENA argues that “at its core, [economic growth] requires the region's public sector-dominated economies to move to private sector-driven economies, from closed economies to more open economies, and from oil-dominated and volatile economies to more stable and diversified economies.” His case is based on hard facts including a careful empirical comparison of Eastern European transitions with MENA, and an analysis of reform in practice, which strongly suggest a serious, relatively fast-paced reform worthy of strong support from the United States and the whole G8.