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Babylon & Beyond

Observations from Iraq, Iran,
Israel, the Arab world and beyond

Category: Carnegie Middle East Center

ARAB WORLD: The absent debate on progressive taxation

With the revolts in many Arab countries, the subject of taxation in the Arab world should be urgently tackled. Taxation is not a financial issue in advanced democracies but rather a socio-political matter with various implications. Those same implications apply to the future economies and societies of Arab countries undergoing political revolutions.

6a00d8341c630a53ef0147e2190b46970b-800wi In developed countries, taxation shapes the contours of the social contract that governs the relationship between the state on the one hand and all components of society on the other, whether individual citizens, businesses or social interest groups. As a result, it is a fundamental pillar of democracy and accountability. Taxation determines the size of state revenue, and thus its ability to spend on vital matters—that is, the basis of states’ competency, legitimacy and its ability to achieve.

In the Arab world, there are two groups of states. The first group, the Gulf states—which take in oil revenues—redistribute part of these revenues to citizens and do not impose taxes. The second group, the non-oil Arab states—which have much lower per-capita incomes, depend on foreign markets or some foreign sources of income such as aid and workers’ remittances (Tunisia, Lebanon and Jordan, for example) or a mixture of aid and rent sources, such as in Egypt, which contains natural sources and the Suez Canal.

The common denominator among the second group states is that they have not resorted to complex regimes for progressive taxation on individual incomes and corporate profits. Rather, they have primarily used indirect taxation. This approach does not greatly distinguish between the rich and poor but instead uses taxes—such as the value-added tax (VAT), which is a fixed percentage imposed on goods and services consumed inside a country irrespective of who the consumer is, custom fees on imported commodities, and additional fees sometimes imposed in a haphazard way, such as land fees, education fees, etc.—to generate state revenue.

Such indirect taxes are easy to collect and assess and do not require specialized tax staff. Furthermore, this kind of taxation, due to its wide base, normally does not worry or vex the traditional power centers in these states. In fact, the burden of such taxation on consumption favors the rich when one considers the difference between their income and consumption levels.

Indirect taxes also reduce political tensions. With direct taxes, the income tax goes right from the citizen’s pocket to the state’s treasury. The citizen therefore feels the loss of money and begins to question the legitimacy of these taxes and how they are spent.

Indirect taxes, however, do not normally generate such a response, perhaps because they are not paid at once but are linked to sporadic consumption throughout the month or year. These factors have motivated pre-revolution autocratic Arab states to implement indirect taxation while claiming their intentions of transitioning to direct taxation in the future.

More importantly, as long as sources of rent and other additional sources of income accrued directly to the state were available, they did not want to create any political opening that welcomed this taxation.

With winds of change blowing throughout the region, accompanied by talk of comprehensive political and economic reform, the lack of dialogue about how progressive taxation can open the door to political change and social justice is shocking. It is, rather, currently focused on the subjects of corruption, the privatization of public-sector enterprises, and social subsidies. Taxes—which could form the first step of the new social contract—are almost entirely absent from this discussion.

In conversations at the elite level, taxation does not receive sufficient attention. Perhaps it is because of its technical aspect or a collusion of some sort between elites and the official sectors collecting taxes. They neutralize the subject and keep it out of public dialogue. They do so because imposing direct taxes could increase accountability regarding justice in taxation and expenditure as well as the need for progressive taxation: redistributing income and improving the chances of those with limited income to benefit from taxes imposed on the rich.

One expert offered one of the best expressions on taxation in the Arab region explaining that non-oil Arab states are trying to achieve the “welfare of the Scandinavian states with African tax levels.”

Egypt took an important step in its 2011-12 budget by suggesting a capital gains tax on profits from capital operations, such as stock and real estate profits, raising taxes on the highest income bracket by 5%. This marks the founding of a new stage, perhaps one in which the government prioritizes the middle class rather than the rich.

The significant question now is how this concept of taxation as a political means can be introduced within debates in the Arab countries. What role can the international community play and how will local economic and political elites of each country address a topic that so far has been unwisely and critically ignored.

--Ibrahim Saif in Beirut

Saif is a resident scholar at the Carnegie Middle East Center in Beirut, specializing in the political economy of the Middle East.

Editor’s Note: This post was from an analyst with the Carnegie Middle East Center. Neither the Los Angeles Times nor Babylon & Beyond endorses the positions of the analysts, nor does Carnegie endorse the political positions of The Times or its blog.

Photo: Carnegie Middle East Center logo. Credit: Carnegie Middle East Center website


SYRIA: The economic consequences of social unrest [Video]

Editor’s note: This post is from analyst Lahcen Achy, below left, with the Carnegie Middle East Center. Neither the Los Angeles Times nor Babylon & Beyond endorses the positions of Carnegie analysts, nor does Carnegie endorse the positions of The Times or its blog.

Achy_color_medium Popular protests in Syria over the last five months have caused a notable decline in the country’s economic indicators. Gross domestic product is expected to contract by 5% for the current year, after International Monetary Fund estimates had originally predicted 3% growth before the protests erupted.

The budget deficit has increased due to expanded social expenditure and shrinking tax revenues. The economic and security situation is expected to deteriorate further as the unrest continues to grow. The international community may resort to additional sanctions affecting the private companies and government institutions that form the backbone of the Syrian economy. This could throw the country into an unprecedented economic and fiscal crisis.

Carnegie logo Tourism, which accounts for about 12% of Syria’s GDP and directly contributes more than 10% of total employment, is one of the economic sectors most damaged since the protests began. Over the last three years, Syria has spent huge sums to increase its ability to receive Arab and foreign tourists and improve the quality of services provided to them. Tourist numbers rose from 6 million visitors in 2008 to 8.5 million in 2010, an increase of more than 40%. This activity supplied Syria with about $8 billion of hard currency over the same period.

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IRAQ: Nouri Maliki's uneasy alliance with Muqtada Sadr's movement

Editor’s note
: This post is from analyst 
Maria Fantappie, below left, with the Carnegie Middle East Center. Neither the Los Angeles Times nor Babylon & Beyond endorses the positions of the analysts, nor does Carnegie endorse the positions of The Times or its blog.

Fantappe_color-medium1 (2) Since recent developments have rocked the region, leaders are realizing that popular support is now necessary to remain in power. Prime Minister Nouri Maliki is among those who seem to be aware of this change as he consolidates his rule over Iraq.
The Sadrists -- the Shiite militia-turned-political movement nominally led by cleric Muqtada Sadr --  have the appropriate tools to reach people on the ground and mobilize them in the streets. They are paradoxically becoming Maliki’s most dangerous political adversary as well as his most necessary ally. 

In 2007, Maliki’s forces drove the Sadrists’ Mehdi army out of Basra. Although allied in the central government, Maliki and the Sadrists are once again competing, but this time through political rather than military means.

Carnegie logo Presiding over the federal administration and in control of the security ministries, Maliki is able to withhold funding, maneuver provincial alliances, and even deploy armed forces. But the Sadrists are positioned to fight back: in control of key ministries­­­ -- water, housing and construction, municipalities, and planning -- they are organized locally and best able to mobilize Iraqis in the streets. 

Southern Iraq remains the primary battleground. On the verge of establishing a stronghold in the provinces of Maysan, the Sadrists are slowly but surely making strides in the neighboring provinces and threatening Maliki’s State of Law coalition in the provincial councils of Basra and Baghdad.

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SYRIA: Crisis may hurt economies of Turkey, Lebanon, Jordan, Iraq


Editor’s note: This post is from analyst Ibrahim Saif, below left, with the Carnegie Middle East Center. Neither the Los Angeles Times nor Babylon & Beyond endorses the positions of the analysts, nor does Carnegie endorse the positions of The Times or its blog.


Current events in Syria are expected to impact other states economically, especially neighboring Turkey, Lebanon, Iraq, and Jordan. The first potential effect is on bilateral trade between Syria and its neighbors. Turkey comes to the fore here, since its trade to and from Syria was valued at $2.27 billion last year.

The situation in Syria affects Turkey in two ways. The first is the potentially large drop in trade volume, especially since demand for imports and Turkish commodities –- which used to be high –- has dropped sharply since the beginning of the events. Some sources estimate that trade volume has dropped between 30% and 40%, and that these percentages could drop even lower with the expiration of prior arrangements and the continued state of chaos.

Carnegie logoMeanwhile there is an absence of desire on both sides, Syrian and Turkish, to renew these contracts before matters become clearer. During 2010, Syrian exports to Turkey were valued at $1.6 billion, while Syrian imports from Turkey were around $630 million.

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ALGERIA: Postponing economic therapy is playing with fire


Editor’s note: This post is from analyst Lahcen Achy, below left, with the Carnegie Middle East Center. Neither the Los Angeles Times nor Babylon & Beyond endorses the positions of the analysts, nor does Carnegie endorse the positions of The Times or its blog.

Achy_color_medium In recent weeks, Algeria’s government has taken a series of steps to improve the economy and reduce public anger over its poor political and economic performance. The government amended the 2011 budget law, approving a 25% increase in public spending.

The country also launched a new round of negotiations with the European Union aimed at postponing Algeria’s obligation to lift customs barriers on European imports. Policymakers also took various measures to improve the country’s business environment and stimulate private investment.

Although these moves may suppress the potential risk of short-term popular unrest, they fail to address the structural flaws in Algeria’s economy. Its excessive dependence on global oil and gas prices, along with the absence of any credible strategy for economic diversification, present clear mid- to long-term challenges.

Carnegie logoThis failure to use available resources today to develop competitive economic activities outside the fuel sector is exposing Algeria to serious dangers in the future. If the price of oil suddenly drops below $100 — which is plausible — it will be impossible to maintain the current pace of government spending without tapping the country’s sovereign wealth fund, known as the Revenue Regulation Fund, and then resorting to foreign loans.

On the other hand, sharply reducing government spending to limit the budget deficit could fuel popular anger and throw the country into a cycle of social unrest. Even if fuel prices stay high, however, Algeria’s oil and gas reserves could be depleted within 20 years. Algeria’s leaders must therefore start now to seriously plan for a post-fuel economy. 

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IRAQ: Nouri Maliki attempts to bolster his power by looking to the provinces


Editor’s note: This post is from an analyst with the Carnegie Middle East Center. Neither the Los Angeles Times nor Babylon & Beyond endorses the positions of the analysts, nor does Carnegie endorse the positions of The Times or its blog.

As a stalemate between the State of Law and Iraqiya coalitions continues to paralyze Iraq’s central government, Prime Minister Nouri Maliki is looking to the governorates to tilt the political balance in his favor.

Fantappe_color-medium1 (2) In the country’s south, Maliki is attempting to defend his base from the growing popularity of the Sadrist Trend. Meanwhile, in Iraqiya’s northern strongholds of Anbar, Ninewa, Salaheddine, and Diyala, the prime minister is mounting an ambitious campaign to consolidate his hold over Iraq. By attempting to break the link between provincial leaders and the Iraqiya coalition — his main parliamentary rival — Maliki is seeking to bind the governorates to Baghdad.

Already, public demonstrations and a deteriorating security situation in these governorates have challenged the credibility of local political leaders, who came to power following the 2009 provincial election. Governors, deputy governors and heads of provincial councils in all four northern governorates have been repeatedly confronted by protesters calling for service improvements. Recent attacks targeting provincial offices in Salaheddine and Diyala have called into question the competence of police and local security officials.

Carnegie logoThe Maliki-run central government now has an opening to play a greater role in provincial affairs.

In Ninewa, central government emissaries have ridden the wave of popular discontent to call for the resignation of local authorities. The army-run Ninewa Operations Command (NOC) has openly supported protests against the incumbent governor, Atheel Nujaifi.

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ARAB WORLD: Why social expenditure in the Arab states isn’t working

6a00d8341c630a53ef0133f5be761c970b-320wi-1The major challenge facing Arab states transitioning from totalitarian regimes to democracy is how to manage social expenditure: that is, state spending on health, education, direct subsidies to poor citizens, cash support for poor families, pensions and social security for those working in the private sector. Even though these states face different situations, such spending shares a number of traits.

The amounts spent on social expenditures -- about 40% to 50% of GDP -- are high in the Arab states, including Morocco, Tunisia, Egypt, Jordan, Lebanon, and Syria. This means that the chances of allocating additional resources for social expenses are slim.

In addition, social spending is distinguished by low levels of competency, especially in healthcare and education -- the two sectors that capture the greatest share of social expenditure. These sectors are usually not subject to oversight and lack indicators to measure their operational efficiency. Most of the expenditures go to wages and salaries, rather than to areas such as research and development, which could help improve competency and reduce waste.

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ARAB WORLD: Democracy uprisings should herald a new dawn of education reform


Editor’s note: The post is from an analyst with the Carnegie Middle East Center. Neither the Los Angeles Times nor Babylon & Beyond endorses the positions of the analysts, nor does Carnegie endorse the positions of The Times or its blog.

As the popular uprisings in Egypt, Tunisia, and other Arab countries achieve their primary goal of changing the political regime, they will soon face the urgent need to reform the education system as well as the economy.

Carnegie logo Consolidation of political democracy and economic liberalization requires citizens who have appropriate knowledge, skills and values. As states democratize, good governance will promote quality education, an objective that most Arab education systems have failed to achieve.

Despite the rapid expansion in primary and secondary education, Arab schools continue to have high dropout and repetition rates, with graduates lacking the required skills and knowledge to compete successfully in the global job market or to pursue quality higher education.

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MOROCCO: Reform as a path to a genuine constitutional monarchy


Editor’s note: The post is from an analyst with the Carnegie Middle East Center. Neither the Los Angeles Times nor Babylon & Beyond endorses the positions of the analysts, nor does Carnegie endorse the positions of The Times or its blog.

When King Mohammed VI announced broad changes to Morocco’s constitution in March, he signaled a shift from an absolute to a constitutional monarchy. The new, elected government that results from these changes will be accountable to parliament, have an independent judiciary, offer a more decentralized governance system, provide broader individual liberties and offer women the same chance of winning elected office as men.

Carnegie logo The changes came suddenly. Before massive protests erupted in Morocco on Feb. 20 — part of the upheaval that has swept across North Africa and elsewhere in the Middle East — the political scene seemed stagnant; no political party was pressing for constitutional changes.

On that day, however, protesters in more than 50 Moroccan cities called to set boundaries on the king’s powers and hand over the executive prerogatives to an elected government that voters can hold accountable. The king apparently received the message, although he did not make any explicit reference to the protests in his speech.

The announced constitutional reforms open new opportunities for political life in Morocco. Seven significant suggested changes included in the reforms would do the following:

Shift executive power from the king to the prime minister. The prime minister will serve as the head of the executive branch and is fully responsible for the government, the civil service and the implementation of the government’s agenda.

In the current constitution, the prime minister is responsible only for coordinating activities among the ministers of government. With the prime minister selected from the political party that enjoys a majority in parliament, parties will need to develop their economic and social platforms.

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EGYPT: Foreign debt constrains economic choices


The first six months of this year have not been easy for the Egyptian economy. The political unrest that ousted the president and uncertainty over the country’s direction triggered a drop in tourism revenues, low levels of domestic and foreign investments and scarce employment opportunities in the formal private sector.

Carnegie logo Economic growth is expected to drop from an early forecast of 5.5% to a maximum of 2% for the 2010-11 fiscal year, the country’s lowest growth rate during the past decade.

Meanwhile, government expenditures are steadily rising, following a 15% hike in civil servants’ wages and a budget increase in food subsidies to soften the burden of high prices in global markets. The government’s budget deficit for the 2010-11 fiscal year could exceed 10% of GDP, up from 7.6% projected before the unrest began.

Timeline: Revolution in Egypt

Lkd5nonc As a result, the Egyptian government is struggling to fund a gap of around $20 billion and to budget confidently for the coming fiscal year, which begins next month. There are ongoing negotiations with international institutions — primarily the International Monetary Fund (IMF) and the World Bank — as well as talks with Egypt’s traditional partners: the United States, the European Union and the Persian Gulf states.

In his recent speech on the Middle East, President Obama announced several measures to support the Egyptian economy, including the conversion of $1 billion of Egyptian debt into investments, and loan guarantees up to $1 billion to assist Egypt in entering global financial markets. Egyptian debt to the United States now amounts to $3 billion of a total of $32 billion in foreign debt. Saudi Arabia has also announced a program of loans, grants and support for investment programs in Egypt with a total value of $4 billion.

Other negotiations are underway with the IMF to obtain loans that could be worth an additional $4 billion. The G-8 has also announced a forthcoming support package of loans and investment partnership projects, which could pump nearly $10 billion directly into Egypt’s economy within one year.

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MOROCCO: What a GCC membership would mean for the economy

The Gulf Cooperation Council’s unprecedented decision to invite Morocco and approve Jordan’s request to join its ranks came as a surprise to political observers in the region and outside. Since its inception, the council has been reluctant to grant membership to other states in the region.

Carnegie logo Even though Yemen represents a natural geographic extension and strategic depth for the Gulf states, the council has always refused its membership request. It has also dealt cautiously for a decade with Jordan’s application for a free-trade zone agreement.

Political uprisings and new security concerns that surfaced in the Middle East and North Africa over the past few months explain the unexpected move by the GCC. Gulf countries are in the process of building new strategic alliances to face the Arab Spring’s ramifications on both domestic and regional politics. Yet, Morocco’s membership in the GCC does not seem to be the right option. The cost of its membership may be incommensurate with the expected benefits for both parties.

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MIDDLE EAST: 'Arab Spring' has yet to alter region's strategic balance


Editor’s note: This post is by Paul Salem, director of the Carnegie Middle East Center. Neither the Los Angeles Times nor Babylon & Beyond endorses the positions of Carnegie's analysts, nor does Carnegie endorse the positions of The Times or its blog.

Salem_color_medium3 (1) Despite their sweeping repercussions for both domestic and international players, the Arab uprisings have not led to a dramatically new regional order or a new balance of power. This could change, particularly if developments in Syria continue to escalate.

While Iran has welcomed uprisings against Western-backed regimes in Egypt and Tunisia, it dealt harshly with its own protesters and has been worried about recent events in Syria. Moreover, countries that threw out pro-Western dictators are not moving closer to Iran.

Egypt's and Tunisia’s future foreign policies are more likely to resemble Turkey's in becoming more independent while remaining allied with the West. And Iran's soft power has decreased as its regime looks increasingly repressive and new models of revolutionary success have emerged in Tunisia, Egypt, and other parts of the Arab world.   

Carnegie logo Turkey, for its part, bungled the opportunity to take advantage of this historic shift to bolster its influence in the Arab world. The Arab uprisings are effectively calling for the Arab world to be more like Turkey: democratic, with a vibrant civil society, political pluralism, secularism alongside Islam, and a productive and fairly balanced economy. However, after expressing clear support for Egyptian protesters, Turkey has hedged its bets in Libya and Syria.

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