03/09/2014 08:36 pm ET Updated May 09, 2014

Time for an Arab Economic Revolution: How Keynes Can Save the Arab Spring

"It is better to be roughly right than precisely wrong," argued the legendary British economist John Maynard Keynes, one of history's greatest thinkers. His ideas on the fragile balance between capitalism and democracy enlightened a whole generation of leaders and policy-makers, who managed to overcome the tumultuous aftermath of the Great Depression with cold minds and warm hearts. Keynes' works served as an effective antidote to classical economics' dangerous assumptions vis-à-vis capitalism, particularly the (mistaken) notion that markets have an endogenous ability to self-correct during deep economic recessions.

Keynes' constant emphasis on the state's indispensable role in taming the passions of markets, and his direct role in establishing the post-war architecture of global governance under the Bretton Woods system, paved the way for a "Golden Age" of capitalism. Largely thanks to Keynes' ideas, the world witnessed rapid recovery among war-ravaged nations of Europe and Japan, concomitant with an explosive rate of economic expansion across much of the Global South. It was an era of great economic convergence among nations, until a toxic combination of imperial misadventures, profligate spending and regulatory overreach exhausted the traction of Keynesian capitalism.

By the 1980s, state-led capitalism was in retreat. The Middle East was no exception to this rule. Once the Anglo-American world succumbed to Milton Friedman's self-assured, highly mathematical economic assumptions, it was just a matter of time before the rest of the world would follow. And so was born a neo-liberal version of capitalism among the center-economies, with peripheral states imitating its features with varying degrees of imperfection.

Suddenly, the prevailing belief was that markets are rational and dynamic, subject to predictable and precise calculations, while state regulation is inherently populist, irrational and economically destructive. It was precisely this period that marked the beginning of the end for the post-Colonial Arab states, found upon a unique cocktail of pan-Arabist ideology, quasi-socialist economics, and absolutist autocracy.

The collapse of oil prices in the 1980s dealt a huge blow to feckless regimes across the Arab world. In the absence of democratic accountability, Arab autocrats squandered a mountain of petro-dollars and strategic rents in the vain pursuit of military glory, untold luxury, and domestic consolidation of power. Contrary to the rapidly industrializing states in East Asia, there was no systematic, targeted investment in the manufacturing capacity and human capital of the Arab economies. Suffering military stalemate and/or defeat at the hands of non-Arab powers of Israel and Iran, and no longer benefiting from booming oil prices, much of the Arab world was bereft of national pride and economic resilience.

A new era was born, and the product was a vicious form of governance, anchored by a repressive state apparatus, personalized leadership, and concentrated economic growth. As I argue in my book How Capitalism Failed the Arab World: The Economic Roots and Precarious Future of the Arab Uprisings, the roots of the 2010-2011 Arab uprisings can be traced to the emergence of this new political economy in the Arab world. The so-called "Arab spring" was not merely about more political freedoms and democratic representation, as naively portrayed by the mainstream media, but instead primarily about overturning crony capitalism in its worst manifestation.

The reason why Arab Transition Countries (ATCs) have dramatically failed to alter the political landscape in the region is largely because the post-revolutionary regimes have collectively failed to appreciate the economic roots of the Arab uprisings. While Tunisia stands out as the most hopeful ATC, mainly because of its increasingly mature parliamentary politics and progressive-liberal constitution, the future of the Arab spring mainly lies in a genuine economic revolution, which revives the manufacturing sector, enhances human capital, and resuscitates the rural-agricultural sectors. And this is where Keynes' ideas on the necessity of direct state participation in shaping the operations of capitalism and ensuring an equitable economic system is of utmost importance.

Arab Predatory Capitalism

While the economic crises of the 1980s facilitated the downfall of many autocratic regimes across Asia and Latin America, the Arab world took a different direction. Arab autocrats were in no mood to relinquish power. Witnessing the spectacular downfall (1979) of Iran's once-mighty monarch, Mohammad Reza Shah Pahlavi, they feared confrontation with post-revolutionary Iran as well as violent uprisings at home.

Astute in the politics of survival, the Arab autocrats reinvented themselves. Aware of Western animosity towards Iran and the resurgence of political Islam, Arab republics such as Egypt re-aligned their strategic outlook, while Arab monarchies ensured Washington's patronage in exchange for strategic subservience. Presenting themselves as the sole guarantors of regional stability -- and the predictable supply and transport of hydrocarbon commodities -- Arab autocrats were able to receive crucial strategic rents from the West. International Financial Institutions (IFIs) eagerly came to their assistance, demanding varying forms of economic liberalization in exchange for monetary and technical aid. Soon, many Arab economies managed to achieve a semblance of stability in terms of inflation, foreign exchange, and balance of payments. But democratic opening was not part of the deal, and the long-term economic cost was incalculable.

Arab autocrats such as Ben Ali and Hosni Mubarak skillfully co-opted the process of economic liberalization by favoring their clients, including high-ranking security officials, and relatives during large-scale privatization schemes. Evoking economic crisis and the necessity for belt-tightening, the autocratic regimes used economic liberalization as an excuse to outsource welfare responsibilities to the private sector, while strengthening the internal security apparatus to quell all forms of political opposition. The increasingly privatized banking sector was transformed into a cheap source of credit for regime insiders, who were quick to invest in speculative, profitable businesses such as tourism and real estate.

The retrenchment of trade barriers and the privatization of state-owned industries led to the hollowing of nascent manufacturing industries as well as traditional agricultural sectors. Despite achieving relatively stable rates of economic growth, there was no inclusive development, with relentless population growth exacerbating youth unemployment and widespread poverty among many Arab economies.

The 2007-08 Great Recession, followed by multiple spikes in global food prices, led to massive food insecurity and macroeconomic downturn among many Arab economies, especially the non-oil-rich economies such as Egypt, Morocco, Tunisia, and Yemen. With many non-oil-rich Arab economies struggling to counter the impact of the global economic crisis, and Arab autocrats refusing to introduce democratic reforms, the Arab spring became almost inevitable.

The Return of the Master

Three years into the Arab spring, we are yet to achieve a semblance of stability across ATCs, with Libya, Yemen, and Egypt descending into inter-factional warfare and outright mayhem. No wonder, many democrats in other Arab states are having second thoughts about launching their own revolutions, welcoming varying forms of dole-outs by oil-rich monarchies.

Much of the criticism has been focused on the inability or unwillingness of post-revolutionary governments, mostly Islamist parties, to share power with the opposition forces and respect the liberal-secular aspirations of the middle and upper classes. But what has been generally overlooked is how the new power brokers hardly presented any viable alternative economic agenda to end crony capitalism in the Arab world.

The new leaders vacillated between pursuing the neo-liberal policies of the previous regimes, on one hand, and promising full-employment, higher wages, and strict banking regulations, on the other. As a result, there was hardly any coherent policy on the economic front, while the stubborn recession in Europe -- a key economic partner of most ATCs -- meant declining exports, tourists, and investment inflows. The deteriorating economic climate created a vicious cycle, constantly eroding the legitimacy of newly-elected governments, which, in turn, responded to growing opposition with more draconian measures to purportedly defend themselves against counter-revolutionary forces. Egypt was a poignant example of this dangerous dynamic, with the downfall of the Morsi government sending shockwaves across the Arab world.

What the ATCs, and the broader Arab world, needs above all is an economic revolution that matches the democratic aspiration of the masses. And it is here that Keynesian ideas on pro-active state participation in economic planning and welfare-provision make sense. There may be no escape from global capitalism, and a return to the quasi-socialist past is out of question. But what the post-revolutionary Arab states could do is to abandon the narrow, technocratic assumptions -- which gave birth to Arab crony capitalism -- in favor of a bold alternative economic agenda.

There should be a serious debate on how to reinvent the Arab state, establishing a developmental regime that fosters a reorientation of the national economy towards industrial productivity, agricultural dynamism, and inclusive growth. And the experience of developing countries such as China and Thailand strongly demonstrates the viability of such project even in an era of economic globalization. Otherwise, the Arab spring would at best only achieve a semblance of discursive freedom for the chattering classes, without significantly altering the living conditions of the masses. The Arab revolutions should strike twice. The next stage of protests should focus on economic equity and national development.