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The right tool for the developing economies of the Arab world

The right tool for the developing economies of the Arab world

By Ghanie Ghaussy / Saturday, November 17, 2007

Freedom and order for more justice: Social market economy - a model for the Arab world?

This is the second in a series of commentaries The Daily Star is publishing in association with the Konrad Adenauer Stiftung, a German research foundation.

The theory of economic order is hardly developed in Arab economic literature. At best, it is addressed in politics to compare the various economic systems and to derive there from the implications for economic policy. This situation may be ascribed mainly to the fact that Arab states - despite the unifying element constituted by Islam as a religion encompassing all aspects of life - did not have, historically speaking, a homogeneous development, except for the classical era of the Muslim empire which, even itself, was not free from regional and geographical differences. During that era, there developed almost everywhere an economic system based on the free choice of economic actors, though directed, in almost all Arab territorial states, toward trade (bazaar capitalism).

The right tool for the developing economies of the Arab worldThe economic and social development which followed upon the Industrial Revolution contributed, in European countries, to the advent of a fairly homogeneous economy based on freedom and the division of labor. It also, on the other hand, required the introduction of a regulatory policy (managed policy), since any freedom that does not have limits turns into a destructive freedom. At that time, the economic dependence of the Arab world vis-a-vis Europe was determined by the European colonial powers which had continued to exercise their influence until the end of the colonial period. Colonization had also contributed in distorting the ancient structures in Arab countries.

The new concepts of the economic order introduced by the colonial powers marked all those in the Arab countries who, for political or economic reasons, were in contact with them. It was not until the late 1950s and during the 1960s that the Arab states, which had just obtained their independence, started to conceive of the orders according to their own political and economic visions. Discussions about "Arab socialism" and the "socialism of the Baath Party" are but a few instances. As mentioned above, this debate was more focused on the political system, and less determined by criteria belonging in a regulatory policy (managed policy) in matter of economy.

Yet, in the conception of economic orders, the issue is to know how and based on what criteria the various economic actors - enterprises, households, etc. - establish their plans and how they coordinate them among themselves. The issue is also to know if and under what form the state intervenes in this process. In a market economy, the various enterprises design their production plans, and the households design their consumption plans according to the individual and free decisions. The state creates the legal and economic framework conditions and does not intervene in the individual decisions of the economic actors. Coordination of the plans is governed by the market, i.e. by the price mechanisms on the various markets. An economic order which governs the economy via the market and in which the process of adaptation is also affected by the market is that of "free economy." The sine qua non condition for such an economic order is the existence of private property and freedom of action of the economic actors as regards their individual economic activities.

By contrast, a "centrally managed economy" admits neither a private property of the means of production nor of consumption goods. State planning bodies take decisions on behalf of businessmen and consumers. The coordination process is not affected by the formation of prices on the market but by state planning bodies (socialism).

Neither in Western states, nor in Arab states, do these various types of economic order exist in pure versions. The needs of the economic actors (individual needs) and those of the community (collective needs) require state intervention. Absolute freedom granted to businessmen and the possibility of their merging, if not the creation of monopolies or oligopolies which determine prices on the market, may jeopardize the meeting of individual needs. Combines between producers and the formation of cartels or groups, as well as "gentlemen's agreements," are the consequences of a free market economy without state intervention. Enterprises which focus on maximizing profit are hardly interested in investments in areas that relate to collective needs and do not promise substantial profits. Several areas of national economy - be it European or Arab - which are vital for proper operating of a given society, such as investments in infrastructure, security, education, law and social security, make it necessary for the state to intervene directly or indirectly.

For this reason, the German Federal Republic has combined, since the conception of its economic order of 1948, the principle of free competition with that of "social harmony." That was how the notion of "social market economy" came into being. As one of the founders of this system, Alfred Muller-Armack put it, social market economy is, therefore, "advisedly conceived for market economy;" it rests on a deep-seated conviction that "the social exigencies of a modern society" must be mainstreamed "in a system of free competition."

As regards developing economies - such as those we find today in almost all Arab countries - state intervention is crucial, and not only in favor of collective needs, but also in all economic sectors that are essential for economic development but which do not attract private investors.

In order to create an optimal economic order, it is necessary - particularly in emerging Arab economies - to target an optimal balance between a free conception of private interests and private enterprises, on the one hand, and ensuring collective interests via state investments, on the other hand. There should be a "mixed economy" or, as we call it today, a "managed capitalism," a system in which the state - by adopting proper legislation - creates the necessary framework conditions for private economic activities and allows at the same time - via direct interventions - the meeting of collective needs.

This optimal balance varies from one country to another, from one case to another. On the whole, it may be said that an economic order is optimal when, within a framework established by the legislation, private activities may be conducted freely and "as much as possible" and state interventions and activities are limited "as much as need be." The managed framework for such a "mixed economy" with an overriding social dimension must be guaranteed in the long term. A managed policy in the field of economy which changes from day to day according to political interests is a political economy that is prejudicial to development and to the growth of any national economy.

Ghanie Ghaussy is professor emeritus in political economy. He has taught since 1979 at Helmut Schmidt University - University of the German Armed Forces in Hamburg. A former governor of the Afghan Central bank, he is an eminent expert on Islam and an authority on social market economy.

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