Memo to Syria

Readers of this blog may be surprised to learn that in 2005 I coauthored?an article with Jonathan Macey which made explicit predictions about the future of democratization in Egypt. In 2005, Jonathan and I wrote:

We also posit that economic reform will bring increased pressure for democratization in countries such as Egypt and Syria. For this reason, economic reform of the kind we discuss in this Article (simplifying and reducing the costs of business formation) will be a good “leading indicator” of political leaders’ real interest in implementing meaningful democratic reforms that go beyond mere public relations gimmicks.

Even more surprising, our prognostications (at least for now) are holding up remarkably well. (Warning: this post is filled with inordinate back patting — even by blogging standards.? But in this case, any credit for prescience really goes to my coauthor, who conceived and executed the vast majority of our 2005 publication.) Hosni Mubarak‘s regime did institute meaningful economic reforms — soon after our article was published.? And as the world has seen, the Mubarak’s regime did experience increased pressure for democratization.

Of course,?post hoc does not mean?propter hoc.? But, as Jon and I argue in?this Politico article, the economic reforms implemented after our article likely played a role in empowering a new entrepreneurial middle class which supported the democracy movement.? A key piece of evidence supporting our theory is Egypt’s recent economic?success. Contrary to most news reporting, the Egyptian economy has been growing at a high rate — with an average real GDP growth rate of more than six percent.

Here’s the back story to our 2005 analysis of Egypt.? Back then, Egypt made it difficult to start a new business.? The World Bank estimated that it would take 43 days and more than a dozen legal steps before an entrepreneur could incorporate and Egypt was on “the list of the 10 countries in the world with the highest minimum capital requirement for starting a business” — requiring a buy in of more than $11,000.

We attributed Egypt’s inhospitable business climate in part to the regime’s insulation from external threats.

In contrast, the ruling coalitions in Syria and Egypt, with few external threats, have weak incentives to pursue reforms likely to generate growth, and even weaker incentives to tolerate the political dissent and the democratically inclined social class that such growth is likely to generate. Consistent with this our analysis, while it is relatively cheap and simple to start a new business in Lebanon and Israel, it is costly and complex to do so in Egypt and Syria.

But we held out the possibility for change from a mixture of external and internal pressure.? We said:

Of course, we do not mean to imply that Egypt and Syria are free from pressure for political reform, despite the lack of democratic government. As a result of the recent U.S.-sponsored elections in Iraq, the entire Middle East is “bubbling with expectations for political reform.” The pressure comes both from domestic opposition groups as well as from foreign governments. The pressure on Egypt is particularly strong, since the country receives roughly $2 billion in U.S. aid annually, and has been criticized for moving slowly to enact democratic reforms. In particular, during his State of the Union address on February 2, 2005, George W. Bush suggested that “[t]he great and proud nation of Egypt, which showed the way toward peace in the Middle East, can now show the way toward democracy in the Middle East.” Shortly thereafter, on February 26, Egyptian President Hosni Mubarak unexpectedly called on that country’s Parliament to amend the Constitution to allow for direct, multiparty presidential elections for the first time in the nation’s history. President Mubarak predicted that the next president of Egypt “will be elected through direct, secret balloting, opening the opportunity for political parties to run in the presidential elections and providing guarantees that allow more than one candidate for the people to choose from with their own will.” The proposal was heralded in the press as responding both to “vocal domestic demands for increased democracy as well as stepped-up pressure from the Bush administration.”

In a footnote, we even discussed some additional evidence for why we were agnostic about whether President Mubarak at the time was serious about make meaningful reform:

During his [February 26, 2005] speech, President Mubarak did not discuss amending Article 77 of the Egyptian Constitution, which provides for an unlimited term of office for the Egyptian President. His comments were restricted to amending Article 76 of the Constitution, which deals with how presidents are selected.? Not all observers were convinced that the proposed changes are meaningful.?Id. Columnist and political analyst Ibrahim Eissa observed, “[t]his is a way [for Mubarak] to improve his image with the Americans and to please them with some formal changes . . . [w]hile at the same time he is keeping everything else unchanged, like the emergency laws, imprisoning the opposition, the state controlling the media and political parties existing just on paper. This is deception.” Ayman Nour, head of Al Ghad, a newly approved political party, was imprisoned on January 29, 2005, on allegations that he forged signatures to gain government recognition of his political party. Critics of Mubarak such as Hisham Qassim, Vice President of Al Ghad, observe that “the only credible candidate against Mubarak is lying in prison on trumped up charges.” (citations omitted).

In 2005, we suggested that Mubarak’s choice about economic reform — especially about simplifying and reducing the costs of business formation — would be a credible signal — “a good “leading indicator” — of whether he was serious about implementing meaningful democratic reforms.? Our leading indicator prediction has borne fruit.? As we wrote in?Politico:

[T]he Egyptian minimum paid-in capital requirement had dropped to about $250, and the time to incorporation is just seven days. The World Bank now ranks Egypt as the 18th easiest nation in which to start a business. The past five years were characterized by meaningful economic liberalization and economic growth – in Egypt.

No account of the Egyptian revolution should overlook this crucial point. In 2004, in the wake of the controversial presidential election, Mubarak installed a new, Cabinet-level economic team. Cairo reduced tariffs and taxes, improved transparency of the national budget, restarted stalled privatizations of public enterprises and passed economic legislation designed to reduce bureaucratic obstacles to business and foster private-sector-driven economic growth.

Economic reform has been a leading indicator of democratization.? What this means for places like Syria:

If Syria’s President Bashar al-Assad cares more about retaining power than the welfare of his people, he would be advised not to follow Mubarak’s lead in opening the door to entrepreneurial democracy.

Syria hasn’t even started down the path to economic reform. The minimum capital requirement for incorporating a new business there remains a staggering $8,500. The World Bank now ranks Syria as one of the most difficult places in the world to start a new business.

If you are a despot, unleashing entrepreneurship can be bad for your job security.

Calvin Graham

One counterexample: China


Your 2005 piece was nothing new or unique, neither is your analysis of today.

Students of history have always known that "reform" in the form of economics, religion, etc., always has the chance to develop into political changes that challenge those currently in power.

After all, economics provides a common denominator for a group of people -- and, once these people become a "group" with a unique identification, they subsequently become politically active if they are a large enough of a group. They inherently become politically active because they want to defend their economic interests, e.g., farmers, tradesmen, bankers, etc.

Same thing with religion. Why do you think the Chinese government dislikes the Falun Gong? It's certainly not because they think some other religion is "better," but because they do not want to open the Pandora's Box of something developing into an organized movement -- people organized around a common theme -- that could potentially challenge the status quo.

Your horse arrived before the cart. You're merely describing in reverse the existing internal politics of Egypt, and then taking credit for it!

Once again, Politics trumps Economics again. Stop patting yourself on the back.


Mike B

Whatever happened to the successful despot that could get things done and encourage economic growth that benefited a strong plurality of the population?

Eric M. Jones

I am underwhelmed. This is not much of a prediction.

The real cause was communication and education...the same thing that brought down the Soviet state.

Here's my prediction: Blue Jeans, cell phones and Microsoft (or similar) will revolutionize the world.


You're too modest; you deserve all credit for predicting that your coauthor would make such accurate predictions.

John Ellis

Correlation does not equal causation at the best of times, let alone when we have a sample size N=1.

Oh, and not just China, there is Vietnam, still communist.

Does this correlation hold up with other countries that went from dictatorship to democracy, such as the various south and central americas, South Korea and Taiwan, Indonesia (the latter seems a better comparison to Egypt to me anyway)?

How about another N=1, say the Iraq war promoting ideas of democracy in the muslim world?


Ian, during the Reagan era, I wrote a paper in college that "predicted" that some of the Eastern Bloc countries had perhaps a decade.

I was right!

Of course, you and I both know that "predicting" is just another word for "guessing," but let's not tell anyone! In fact, I join with you in patting you on the back! I always enjoy your articles.


You think small business entrepreneurs in Syria actually hold off on opening their doors because they can't incorporate? No, they just open the doors and start selling goods and services. You obviously have no grasp on Middle Eastern culture or the way business is really done there.


I suppose we can also conclude that economic reforms in communist Poland inspired Solidarity, caused the Soviet withdrawal, and restored a democratic government. Similarly, we should predict that Deng's free market reforms will produce a new Chinese democracy by, um, 1999.

Or maybe you, your co-author, and Casey Mulligan over in the Economix blog have an extraordinarily self-serving interpretation of correlation and causation.


Yes, as Hz is alluding to, walk down the street in Damascus and ask yourself if even 50% of local merchants or small businesses have paid the 58k USD the World Bank report cited in Ayres' article states as a starting capital requirement.

While I do not dispute their findings, the primary barrier to a lack of GDP growth is certainly not the fact that your average Syrian is preoccupied about incorporation or tax codes.

Furthermore, a major contention of protesters in Egypt was/is not of the procedural complications or costs related to entrepreneurial activity but the fact that vast sectors of the economy remain controlled by Mubarak, Mubarak relatives or sycophants. When a trading subsidiary of ours opened in Egypt to represent the firm's trading interests locally, it was made clear not ever too discreetly that certain contracts and commissions would have to be routed through a London based clearinghouse which was known to be controlled by Gamal Mubarak. This, in itself, stood as a major dysfunction for local businesses as well as multinationals.

Without even scratching the surface of the myriad of social/political drivers, the maxim "correlation does not necessarily imply causation" could not be more true even looking merely at economics.

If you are a despot - hoarding vast sums of national wealth, clamping down on free expression with an iron fist, institutionalizing torture, etc - in short, being a despot, is bad for your job security.


seth edenbaum

Memo to Ian Ayres

"The fact is: every Middle East regime that has been seriously challenged by sustained popular unrest so far is either a close U.S. ally (Bahrain, Egypt, Tunis, Yemen) or a former rogue that made a surrender-type deal with America (Libya). That's the pattern. Rather than acknowledge this fact, this pattern, and deal with the deficiencies in America's Middle East policies, Washington has focused on the possibility that the wave of popular unrest that's taking down one U.S. ally in the Middle East after another will now bring down the Islamic Republic-and, perhaps, Assad's government in Syria, too.
In my view that is wishful thinking....
So, from the perspective of many in Iran-and, I would argue, in reality-the relative distribution of power in the Middle East is shifting away from America and our allies and toward the Islamic Republic and its partners in the resistance camp. In this context, Iranian policymakers are confident-with good reason-that any government in the Arab world which becomes at all more representative of its people's values, beliefs, concerns, preferences, and interests will become, first of all, less enthusiastic about strategic cooperation with the United States and Israel,... Iranian policymakers are also confident-again, with good reason-that any Arab government which becomes more representative of its own pop will become more receptive to the Islamic Republic's message of resistance to U.S. and Israeli hegemony in the Middle East. This message appeals not just to Shi'a. Public opionion polls and just the experience of spending time in these societies indicate that the message of resistance resonates throughout the region, and has tremendous appeal not just to Shia but on the Sunni Arab street. ..."

"Syrian youth certainly share the economic grievances of young people in Tunisia and Egypt, but widespread poverty and unemployment are unlikely to catalyze sudden regime change now. Despite the policy of cautious economic liberalization that Assad initiated after taking office in 2000, Syrian society continues to be defined by its high degree of egalitarianism. True, Western luxury goods are increasingly available to elites, and some members of Assad's extended family have been accused of nepotism and profiteering. However, the accumulation of excessive wealth in the hands of an oligarchic political elite has been more an exception than a rule. Political isolation and domestic authoritarianism have severely restricted the development of a politically conscious and economically empowered middle class. As such, the situation in Damascus differs significantly from pre-revolutionary Tunisia, Egypt, and Libya. In all three countries, public fury was fueled by a highly visible and ever-increasing status gap between a large elite class and a marginalized majority. Unlike Syrians, protesters in Tunisia, Egypt, and now Libya perceived their poverty to be relative rather than absolute -- and thus as an injustice caused by the regime.

...It is true that Assad has even fewer enthusiastic supporters beyond his small group of co-opted elites than did former Tunisian President Zine el-Abidine Ben Ali and former Egyptian President Hosni Mubarak, but the regime's opposition has even less popular support. Unlike other dictators in the region, Assad is seen by many as a counterweight to sectarian disintegration rather than as a champion of sectarian interests. Moreover, Syrians have had frequent and direct exposure to the devastating outcomes of sectarian conflicts in Iraq and Lebanon. In 2005 and 2006, hundreds of thousands of Lebanese and Iraqi refugees flowed into Damascus, reminding Syrians of the dire consequences of religiously fueled carnage. "

"If you are a despot, unleashing entrepreneurship can be bad for your job security."
But if you are a well ordered non-democracy that's not necessarily a problem.

Context-free punditry is sells books.