Middle East Crisis Can Impede ‘Economic Liberalization’: US Economist

“Iraq has actually regressed in the last few years in the inclusiveness of governance, enabling rebellion by a Sunni minority. In that context, economic liberalization can hardly proceed at potential for two reasons: first a significant portion of the population will not invest in capital or in themselves without knowing that their families and property are safe; second, foreign firms will be reluctant to invest as long as the conflict persists,” Eli Berman, a professor at Department of Economics at University of California, San Diego, told the Tasnim News Agency.

Following is the full text of the interview.

Q: How can one explain the relationship between economic modernization and political stagnation in the Middle East, taking into account the region’s ongoing crises?

A: That's a great question. I should say at the outset that Economists like myself know a lot about how development, urbanization and modernization best serve the public when certain institutions are in place already and well-functioning. By that I mean a platform of inclusive, representative governance that respects human rights, due legal process, a free press and the other aspects of civil society. When that platform is lacking or absent, which we would call the "political stagnation" you speak of, it is very hard to know if "modernization" will benefit the general public or simply redistribute resources and output to a privileged few.

The same is true of conflict. While protecting national security is important to the general public, conflict also has the effect of advantaging some groups over others within countries, so a challenge to societies in conflict is to balance security with the economic and social needs of the public.

Q: How do you see impacts of economic liberalization policy in crisis-hit countries like Iraq?

A: Iraq is a great example of the principle I laid out above. Iraq has actually regressed in the last few years in the inclusiveness of governance, enabling rebellion by a Sunni minority. In that context, economic liberalization can hardly proceed at potential for two reasons: first a significant portion of the population will not invest in capital or in themselves without knowing that their families and property are safe; second, foreign firms will be reluctant to invest as long as the conflict persists.

Q: What’s your take on the crises plaguing the Middle East and the economic prospect of the region?

A: One clear lesson of development in the 20th century throughout the world is that markets unlock tremendous development potential when people and property are safe from danger, including safety from expropriation. Subnational conflicts are the greatest threat to people (and to markets) in the Middle East, and so a concerted effort to cooperate in resolving those conflicts is a common interest of ordinary people throughout the Middle East.

Q: Do you believe that raising tax revenues would help increase economic prosperity?

A: Yes, as economies get richer the income tax becomes an increasingly effective alternative to a sales tax. Though it is more expensive than a sales tax to administer it allows redistribution from higher income to lower income families by imposing a higher tax rate on families with higher income. Again, since all taxation provides the potential for abuse, economists are generally reluctant to advise increasing taxation in the absence of the platform of inclusive, representative governance and civil society that I mentioned above.

Q: Many countries are suffering from rising unemployment. What measures can be taken in order to resolve this issue?

A: A growing economy will tend to create jobs quite quickly. Modern economics typically advises to leave that process to a market economy rather than to recommend direct job creation by government, except in very extreme circumstances such as a deep recession. The role of government is best confined to providing the "public goods" that only it can provide: security of people and property, rule of law, education, health, infrastructure, regulation, and the like. Most developed economies today provide income to the poor through tax credits, unemployment insurance and other transfers, rather than by directly providing jobs