Debt, Growth, Austerity and the Rest of the Confusion in the USA and Europe.

      Debt, Growth and Confusion; the Crisis in the US and Europe

               (the outline of a lecture given by Dr. Michael Sakbani at an Interbational Conference on     debt on 12/11/2011 at Webster University, Geneva, Switzerland)
 
Ladies and Gentlemen
   I am going today to talk about the Confusion called the debt crisis. In fact, it is the crisis of the political class in Europe and the USA. Debt is normal for individuals and countries. what is not normal is to make it a way of living and ignore what will happen next or refuse to deal with the crisis when it explodes. Let us give the picture first:

-          US Public debt at end 2010 at $ 14.96 tri, US GDP was $ 15.02 trillion. Public debt to GDP was 99.6%. Excluding due payments to Social Security and Public Pensions, the privately held public debt is 68% of the GDP. Among the developed industrial countries, only 9 countries have a debt GDP ratio higher than 100 % (Rogoff/Reinhardt).

-           The net interest service of the debt is 9.5% of the US. budget.

-         Potential crowding out(qualify)

-          Burden of the stock of the debt on future generations, The Sargent- Barrow equivalence hypothesis.(qualify)

-          The structural problem for the budget, impact on discretionary policies (investments in tech.,edu, and infrastructure); only 19% of US expenditures are discretionary.

-          TRisk to the US dollar and US borrowing ability.

-          Dependence on foreign funding. As the political developments in Greece and Italy have shown, in a globalized setting, the financial markets can rob a heavily indebted country of its economic sovereignty.

-          The Pattern of use of global international savings.

Why did the US get into a debt Problem?

-          Reagan and bush each added $ 4 trillion to the deficit.

-          The weakness of the BOP (Manufactures, Chemicals, Energy, demand for foreign goods)

-          The structure of the US budget.

-          Inability to deal with the problems at the political level.

-          Deterioration of the US financial position since 2001.

The structure of the Budget expenditures:

-          US Federal Budget in 2010 stood at $ 3.’5 trillion  of which 25 % is spent on the military and on wars,  9 % on servicing the net interest of the public debt, 52% on various mandatory entitlements, 19 % discretionary.

-          The total tax collection of the three levels of Government is about 18.3 % of the GDP, much lower than any other industrial developed country.

     Reasons for the recent US financial deterioration since 2001:

-          Revenue decline (28%)

-          Increased defense expenditure(15%)

-          Bush tax cut (13%)

-          Increase in net interest payments (11%)

-          Other tax cuts (8%)

-          Obama’s stimulus (6%)

-           War on terror (2%)

-          Increases in medicare (2%)

-          Other reasons (8%).

The breakdown shows that the US recession is responsible for 42 % of the deficit, while the structural elements account for the 58%

The US public is in virtual revolt against paying more taxes as taxpayers do not see direct benefits to public Federal expenditures. Yet, it wants social programs and military spending.

US press has no views to publish.

48% of Americans do not pay Federal income tax. Since the Reagan era, US politician have fed this aversion to paying taxes without ever pointing out the implications.

The US economy has not recovered fully from the recession, running 8.6 % unemployment on official statistics but   more than 12% if one factor in part timers, and people who dropped out of the active labor force.

- Consumers demand, which has historically been 67% of aggregate demand, is now only 60% of AD. -Today the corporate sector in the US has profits twice their size of 2007, but it produces 10% less in value added to the GDP.

Conclusions:

-1.The US public indebtedness is for the foreseeable future out of control unless major changes in the tax and expenditure structures are made.

2.       The US has hardly any room to use discretionary spending to steer its economy or undertake investments in infrastructure in new technologies and in any social educational domains. This threatens future growth.

3. The US economy is in recession for reasons that have yet to be dealt with effectively.

4.       The debate on dealing with the large deficits has had no strategic design; there is a     wide consensus on cutting the budget without factoring in the adverse impacts on economic growth. Indeed, growth is more effective in reducing the growth of debt than mere austerity.

5.       Split on what to cut and what to increase (rep. debate).

6.       There is a massive need for investments in new technology, human resources, R &D and infrastructure if the US wants to safeguard its leading economic position.

7.       Large segments of the public harbor a deep sense of social injustice, as the top 1 percent of income earners in the US have doubled their share in the GDP to 20 % in the last decade.

8.       US global firms have moved away many jobs to garner global profits and these jobs have not been replaced by more intensive skills jobs.

9.       The US cannot afford its entitlement programs and it's military spending.

Europe: EU and Eurozone.

The EU 27 members had in 2010 a collective indebtedness of $ 12.9 trillion. Their Combined GDP        stood at $16.3 trillion resulting in a debt ratio of 80%.

The Euro monetary zone total GDP stood in 2010 at $12,458 trillion, while their debt stood at little more than $ 9.1 trillion, thereby resulting in a debt GDP ratio of 76 %.

Seven members are indebted at more than this average ratio. If one eliminates France (81%) and Austria (72.3%), Greece, Italy, Belgium, Ireland and Portugal had in 2010 debt-GDP ratios between 142% and 93.0 %. For Greece and Italy, the ratio is certainly higher in 2011.

Except for Germany, Sweden, the Netherlands, Slovakia, Poland and Finland, other members are either in recessionary conditions or anemic growth. The eurozone combined growth over the three quarters of 2011 was only .2 %.

Europe’s social compact involves a great measure of social solidarity. However, without significant increases in productivity or human and other resources, Europe cannot afford such a social compact.

Europe has a severe demographic problem, which is non-amendable to immigration solution in as much as its societies loath multiculturalism and its various states have no immigration policies. As a result, its pension systems are in stress and need significant reforms.

Almost all European countries are now adopting restrictive macroeconomic policies. In view of their very large intra- trade and connections, this stance leaves no room for trade-led growth.

The Euro was launched as a political project without thinking carefully about its economic design. It is a monetary union whose Central Bank does not have a bank of last resort function and is barred from lending to its member states. The fiscal policies of the member states are independent and in recent years non convergent. Although there are common criteria, there are no mechanisms of enforcement. There is no Union authority over sovereign fiscal decisions by member states. The Union has no sovereign governmental authority to decide resource transfers when needed.

The Eurozone incorporated, knowingly and purely on political grounds, states whose economies are inefficient and uncompetitive (Portugal, Greece, Spain, Italy and Ireland) The internal balance of payments deficit of the weak countries shows up in significant debt positions of their respective national central banks vis a vis the ECB. In effect, the Eurozone is not an optimal currency area, in as much as labor, capital, and public transfers are, for a variety of sociological and other reasons, not completely mobile. And, if resources and labor were perfectly mobile, members' public opinions would not accept the national consequences of such mobility.  If these deficits remain, there should be income-employment and price-wage adjustments and deep structural reforms that affect wages and the standards of living. Otherwise, the EMU risks becoming a transfer union.

Greece and Italy:

Both countries have recently been in the financial limelight. I will take up the problems of these countries bellow.   

The Greek economy is uncompetitive; export labor unit costs 44% more to import from Greece than from next-door Turkey.

The export sector is dominated by tourism, thus, domestic prices rule most services.

Greece does not have outside maritime transport, world-class big export firms.

The budget has been bloated for decades; it pays very high salaries and pensions. Greek banks have weak capital positions and deteriorating assets. The state must drastically cut its expenditure and increase its taxes engendering in the process of severe deterioration in the standards of living.

Eurozone recent package to help Greece is neither sufficient nor well designed. The agreement has four pillars. It established a European Financial Safety Facility ( Euro 440 billion with unexplained gearing potential), approved a package of lending to Greece by the IMF, the European Bank and Governments (Eur. 140 billion), forced specific austerity measure on Greece’s budget instituted performance and monitoring clauses and restructured Greek private debts, down to 50% of their book value.

After this hair cut, the Greek debt ratio will go down from 160% to 120% of the GDP, the same as Italy. Interest yield on 10-year Greek bonds has passed 7 %, some 511 basis point higher than the German comparable yield. At 2.1 % inflation, the real interest rate is 4.9 %.

To pay this interest on the stock of the debt without deterioration in living standards, Greece should grow at about 5.88 % in real terms. Greece has averaged only 1.5 over 2001-2007 and is now expected to shrink in 2012 by 6.0 %. Under the Euro, system cannot adjust its exchange rate. Therefore, Greece cannot on objective grounds continue being in the Eurozone without other buying its debts.

Italy,

the third largest member in the Eurozone, has a debt GDP ratio of 120%. Italy must grow at 5.96 % per year to keep its debt burden steady.

Italy has grown by 1.3 % in 2010 and is expected to shrink by 2.2 % in 2012. It has shrunk by 1.3 in 2008 and 5.2 in 2009. The Italian economy is not competitive and its exports cannot be helped, as in the past, by currency devaluations. It needs substantial income and price adjustment and deep structural reforms.

The good thing is that the Italian state owns significant and viable assets, which can be sold. Italy also does not run a significant budget deficit; its 4% deficit is modest by European current standards. Moreover, the majority of its public debt is domestically owned. Sr. Berlusconi’s resignation will be helpful in the financial markets once the new Government is installed.

Italy’s main problem, besides economic mismanagement, has been the deterioration of its productivity. While Italy has some world-class export firms, its small and medium-size firms dominate. This is not helpful to increasing productivity and is a source of its large underground economy.

Italy, Spain, Greece, Portugal, Ireland and Austria are all in need of structural economic reforms. These include labor market liberalization, privatization of some state assets, pension reforms, tax and expenditure adjustments and a variety of other measures to improve competitiveness within and without the Euro Zone. In some respects, even France is in need of such reforms.

The Eurozone sovereign debt problems will feed into a global banking crisis. Within the Eurozone, banks from France, Germany, Italy and Spain have large Greek and Italian assets. This crisis will have two main dimensions, deterioration of bank balance sheet assets, and capital inadequacy. It will also result in erosion of the value of collaterals and mutual default insurance contracts, as the value of these instruments fluctuates with the cycle. Globalization of financial markets synchronizes this fluctuation globally and renders banks everywhere simultaneously vulnerable.

Conclusions:

-1.  The Euro package for Greece arrived at in October needs to be revisited: There are five ways in which the Eurozone may deal with its debt-deficits dual problems.

- First, allow the European Central Bank to purchase bonds of member states, thereby printing money and in effect distributing the burden of the severely indebted countries to the strong economies.

- Second, keep lending to Greece and potentially to Italy, Portugal and Spain on an unlimited basis, a recipe of symptom suppression under the current Eurozone arrangement. Besides, the funds required are beyond any feasible size of the projected EFSF at any workable gearing ratio. This alternative renders the Union a transfer union, which surely would be voted down by the Public.

Thirdly, force adjustment in the form of structural reforms and austerity measures upon the weak economies and stimulate the strong ones to act as locomotives. That creates a two-tier Eurozone at two speeds.

Fourthly, force adjustment and austerity only on the weak deficit countries. In view of the rather restrictive policies of the core countries, the price and income adjustments therein would take a very long time; it took France close to ten years to adjust to 1981 payments problem through automatic price and real income adjustment.

Fifthly, allow controlled default and possible exit from the Eurozone. This can be done cooperatively and is perhaps easier than carrying on with the Euro Zone faulty design.

The current crisis points to the imperative of revising the Euro Treaty. Mrs. Merkel and President Sarkozy both brought up this issue by the end of November. In the summit of late January, the Council of Europe approved a draft treaty, in which 25 members indicated that they will sign. The revision included: stronger fiscal integration and a modified common monetary mandate for the ECB. It also created enforcement mechanisms for the Euro three criteria (debt ratio, deficit ratio, BOP ratio). There is furthermore a veto power in the hands of the Commission on budgetary decisions by member states.

These all are long term measures.

For the short term: the ESF and its gearing; the ECB (2 changes); the banks’ capital.

 The taboo of countries dropping out of the Euro is now broken. It is better in the long run to have fewer but more cohesive and stronger Eurozone than the present limping spectacle.

A possible process of devolution:

Greece can revert to a new Drahma for all contracts signed forthwith and for all government taxes and payments under Greek law, thereby regaining its full monetary independence. Old accounts denominated in Euros would continue on bank books. The exchange rate of the new Drahma to the Euro would find its market rate at perhaps very low levels. Europe can help in mitigating the impact on Greek debtors in Euro and the deterioration of banks’ asset values. Greece would also be helped in coping with its payments balance. There would be undoubtedly significant inflation during the adjustment. But this will be easier than staying within the Euro trying to service the escalating cost of the debt.

A strong and healthy Euro is a common international good for the International Monetary System; a viable Euro is needed as an alternative to the US dollar in the IMS.

Is the West Still on Top of the Hill

    Is the West still on the top of the hill?

An essay by

     Dr. Michael Sakbani

Ten years ago, America had Steve Jobs, Bob Hope and Johnny Cash. Now it has no Jobs, no Hope and no Cash. Or so the parable goes.

Only, it’s not a joke. The line is pretty close to reality in the US and we need not mention old and aging Europe. Let us first recall that the economic dominance of the West has been there only for last 300 years. According to Angus Maddison’s OECD study, India and China had nearly 50 percent of global GDP as late as the end of the eighteenth century. Hence India and China are not emerging or rising powers. They are retrieving to an extent their past positions.

Western decline can be monitored from various indicators. The US dollar is having a rollercoaster ride at present and if it were not for the flimsiness of the Euro and lack of alternatives, it would have been long discarded as the world key currency. In 1990, the share of the G-7 in world GDP (on a purchasing power parity basis) was 51 percent and that of emerging markets 36 percent. But in 2011, the G7 share is less than 40 percent. Both Europe and the US are growing in real terms at less than one-fourth of China and India and less than half of the average of middle income developing countries. The crisis today is an American crisis exported to Europe, in which the US is incapable of dealing effectively with it and Europe has neither the vigor nor the willingness to devise the measures necessary for the task.

The US economy is essentially dependent on borrowing in dollars foreign savings to finance its public expenditure. The US economy is dependent on imported talents and on the rent from its rich natural resources to generate growth. It still has great universities and innovative entrepreneurs and some world-class institutions. But the US has taken leave of its senses. Its society is becoming divided between those who think in rural terms and want no government in their lives and those who depend on government in everything. According to a recent report in The Wall Street Journal (10 October 2011), nearly half of US households receive government benefits like food stamps, subsidized housing, cash welfare or  Medicare or Medicaid and social security (which is not fully funded).

 As a result, Washington has no decision- making ability these days. Instead of investing in new technologies, it continues to spend 27 percent of its budget on the military and wars and their consequences. By the time the debt is serviced, only 61 percent of the budget is left. Expenditure on infrastructure in real terms is back to the levels of the per Eisenhower's administration and expenditure on research, education in urban places, is relatively at the bottom of the industrial countries. Half the roads and one-third of the bridges need infrastructure investments. The US now produces half of the engineers it needs and its great universities accord one-quarter of their graduate degrees to foreign-born graduates.

In Europe, the twenty-seven members of the EU have fourteen trillion Euros in public debt, which is close to their combined GDP. Some of them, Greece, has debt GDP ratio in excess of 165 %. The Eurozone has members like Greece and Portugal that should not have been admitted and aspirants like Bulgaria and Rumania, which are essentially underdeveloped. Its third and fourth-largest economies, Italy and Spain, are mismanaged, have low productivity growth, double-digit unemployment, a debt they cannot pay and have recently been running negative growth.

If one considers the so-called “emerging economies”, one finds that at no point of time in the last 20 years has a foreign investment – direct and portfolio – exceeded 10 percent of domestic investment in India, Japan and S. Korea. China has had higher figures, but a large part of investments are financed by savings from overseas Chinese. Moreover, its undemocratic government has proven clever in its economic and policy choices and extremely able in implementation.

The crisis faced by the West is primarily because it does not save enough to finance its investments. In the US on the one extreme, national savings average less than 6 percent of the GDP and in the household sector, they have been negative several times in the last 15 years. In Europe, nonself dependent social traditions have become the political norm. Europe has nationalized families over the last 60 years: old age, ill health, single motherhood – everything is the responsibility of the state. The benefits disbursed under this social contract exceed the European ability to pay. To pay for living high on the hog, the west borrows to spend. This is its way to not allow a real transfer of resources to the Asian and other developing nations which must result in a decline in the standards of living. However, the West resists allowing that to take place and borrows to pay. Before the onset of the Arab Spring, the West could have counted on Arab and Chinese savings to pay the bill. But, after the seminal changes in the Arab World, this source might soon dry up.  

Demography has also been adverse. Social security goes for a toss since people are living longer and not many from below contribute to their pensions through taxes. So the nationalization of families becomes   burden on the state. And European societies do not accept immigrants to solve this problem and loath cultural differences.

The Western model of Big Government and Big Business has twin dangers for average citizens. This model is unjust and inefficient. It is capitalist in distributing the benefits and socialist in bearing the burdens. The Wall Street demonstrators are bringing starkly this fact before our eyes.

The Transition from the Arab Spring to Democrac; Issues and Questions

The Transition from the Arab Spring to Democracy
By
Dr. Michael Sakbani*
As 2011 draws to end, the time has come to evaluate the transition from the Arab Spring to Democracy. It is time to ask whether the revolutions that sprang up in the Arab streets have opened the road to real changes in the way the Arab world has been governed? Or, have the Arabs changed a set of dysfunctional regimes with a new constellation of equally dysfunctional ones. Another equally important question is to examine the nature of any transitions from a totalitarian system with view to draw up some general conclusions about regime changes and revolutionary expectations. It would perhaps be in order to review the transition underway in the various countries which witnessed revolutions in order to lay empirical basis for our observational principles .
Tunisia:
The state that lit the spark has had the most matured transition. Tunisia managed to steer its political affairs under three governments, the last of which conducted a transparent free and well organized elections for a Constitutional Assembly. The massive turnout of 90% of eligible voters was an exemplary display of people empowerment. And in the wake of the elections, all the participants accepted the judgment of the ballot box. A coalition government formed by the three biggest blocs is now underway and a President and Assembly President have been put forth by the majority coalition. The transition has been so far smooth and promising. In this transition, the biggest challenge is to restart the economy, which depends on tourism and foreign investment (Sakbani, “a”) .
The Tunisian election results produced an Islamist plurality for al Nahda party. Under the wise and moderate leadership of Mr. Rasheed al Ghannoushi, the Nahda party put out an assuring message that the Islamists will play by the Democratic rules and will cooperate with the secular and liberal parties. The remarkable score of the Nahda was widely based. It demonstrated a depth and spread of organization that was not matched by the other parties. In particular, al Nahda had full organization in the country side, where the others were often not present. The triumph of al Nahda is a testimony to the fact that the Islamists were able to maintain their presence and organization under dictatorship.

Egypt:
The Egyptian transition is marked by uncertainty. The Army, which had protected the revolutionaries and eased Mubark out, has proven incapable of running well the transition and of developing a strategic vision for change. The Generals slowed everything down and put in power governments which have failed to run effectively the ship of the state. Neither the economy, nor public security, nor administrative reforms have fared well. Part of the reason is the difficulty of transiting from totalitarian practices, with victims, accounts to settle and ingrained but untested notions of political dangers of a free and open arena. This is why the military tried to impose on the process supra constitutional principles to safeguard, in their view, the transition. Unfortunately, the army who has been in power for 59 years seems to believe that ousting Mubark and stopping his son from succeeding him was all that is needed. Changing the regime with all its fixtures is rather alient to the military establishment which has over the years accumulated privileges and spread its economic control to a wide swath of the economy. In the eleventh hour, the Supreme Military Council tried ineptly to put its affairs outside civilian and parliamentary controls. But that galvanized opposition from all parties who are frustrated with the military continuation of the repressive practices of the Mubarak regime.
The transition locks Egypt into a tripartite struggle among the Army, the Islamists and all the other groups. The Islamists, led by the Muslim Brothers and their putative party of Justice and Liberty, want to take advantage of their good organization, their implantation in the country- side and their prosperous financial state, thanks to foreign contributions, to push for early elections and rather fast constitutional drafting. They have also played opportunistic games with the military to position themselves on the inside track for power. These political games have not succeeded, but have nevertheless forced early elections on the political agenda (Sakbani “b”) .
The others are dozens of parties and groups. They have small popular bases and often rudimentary organizations. This is true in particular for the youth who made the revolution. The old Wafd party, the Egyptian Bloc and Mr. Mubark’s National Party might have popular basis. However, their foot- prints and the degree of their effectiveness in free elections remain unknown.
The renewed popular demonstrations seen in late November 2011, just a dozen days before the scheduled elections on 28 November, point to a state of confusion and political disputation. It now appears that the elections are the only acceptable way to exit from the current impasse and from popular dissatisfaction and chaos. Egypt went on the twenty eighth of November to elections, and that, in our judgment, is a hasty affair; it should have been elections of a chief executive rather than a legislature. The parliamentary elections will be in three stages and the election of a President who sets up a legitimate government is at least six months away. Meanwhile, the administrative vacuum will be around until then.
The first round of the elections went, on the whole, well and registered impressive turn out, 62%, reaching in some districts 80 % of the eligible voters; something not seen in Egypt in sixty years. There was no violence and no large scale fraud as Mubark’s time. The long lines were eloquent testimony to the power of mobilization of political empowerment (The Economist, 3 December,2011) . The Supreme Military Council substituted its armed forces for the discredited forces of the Ministry of Interior, and along with the Judiciary, did a credible job. But the nagging problem is that a legislature cannot exercise power and its legitimacy has no bearing on the executive prerogatives of the SMC. Hence, there will be a conflict of legitimacy in play. We still do not know the results, but it looks that the Muslim Brothers will be big winners, amassing more than 40 % of the votes. The latter, scattered and unorganized, scored poorly. The liberals, progressives and seculars came in third place after the ultras, known as Salafis. That in effect means that the Islamists rode successfully to power on the revolutionary wave unleashed by the youth. These results must be respected, but they do not auger well for the future of Egypt’s transition. The drive for building a modern and liberal society was the driving motive for the revolutionaries. The Islamists, especially the Salafis, are not modernizers; they have a non critical reception of the received heritage; their concept of authenticity is the application of laws, rules, opinions and institutions of the era of the four Khalifs, which lasted for less than forty years and took place 1350 years ago (Sakbani,”d”2011) . At any rate, no matter who is in charge, the revival of growth and investment in the Egyptian economy along with the reestablishment of security will determine the transition’s failure or success (The Economist, November26) . The Egyptian scene is open to a good deal chaos.
Egypt’s is the critical revolution of the Arab Spring. Its success or failure is paramount for the prospects of the other Arab revolutions. Except for the state of the economy and of public administration, Egypt has all the assets for success.

Libya:
After nine months of civil war, with widespread devastation and tens of thousands of casualties, the Libyan revolution emerged from its struggle with Kaddafi and his henchmen, triumphant. The human and physical reconstruction is immense and costly. However, Libya has the resources and the expertise to effect a successful transition. Its new Government, under the exiled and respected Dr. A.al kibee is now in power but is a government of transition with a limited time period. The country, despite the tribal fissures, is reasonably unified, and the public services are on the whole recovering well. There remain however, three major problems: the collection of the arms still in the hands of the revolutionaries, who on more than one occasion have used them against each other and as an instrument of political struggle. The other problem is the building, virtually from scratch, of the institutions of the state and the civil society. And last but not least, the restarting of the economy. In Libya, just as in the other Arab countries in North Africa, the Islamists have the best chance of coming on top given the disorganization of the others. This paper has some commentary on this eventuality in the second section.

Yemen
President Saleh ran out of tricks by late November; his tactical skills ran up against his empty strategies. After four tries and three theatrical trapeze - artist performances from Mr. Saleh, he signed on 23 of November the Gulf Council initiative as elaborated by the UN special envoy Mr. Omar Khalid. The deal gives President Saleh and all his lieutenants, immunity from persecution. It provides for a transition period with coalition government under Mr. Seleh’s vice president and a prime minister from the opposition. There are provisions on restructuring the armed forces and presidential elections in 90 days together with eventual new Constitution. The Yemeni established opposition parties signed the counterparty, but the youth, who manned and led the street protests, find many details unacceptable. Moreover, President Saleh and his family will still be a part of the new order through their party and associates in the administration and the military. Will they really fulfill what they promised? Another open question is how and who will control and reorganize the army? Finally, will the youth abide by the deal? Mr. Saleh has a long record of wiggling out of agreements.
Yemen is a tribal society with North –South divide and an unsettled system. It is a miracle that the popular revolution has been peaceful and bore no divides. Mr. Saleh is out after 33 years, but his supporters have to be accommodated and cannot be excluded. A grand compromise is needed for attaining peace. Yemen is in a desperate economic state and in fundamental need of modernization (Sakbani “b”) . Among others, the Saudis and the US, the two backstage players, should extend to Yemen every help they can. The Gulf Initiative, blessed by both, is a start for a long march for a complex and difficult country. Despite all his snake charming political skills, Saleh is the fourth dictator in the box.

Syria
The terribly disappointing Mr. Assad seems heading to the dust bin of history. He has unfathomably tied himself to the security apparatus of his father and the shackles of the Assad clan. All of his troubles could have been avoided if he had acknowledged the obvious problems of Syria and took advantage of his then popularity (Sakbani”b”) . From the start, the Assad regime sank into denial and opted unequivocally for a security solution. The regime and its beneficiaries do not want to abandon power and lose their privileges. Thus, they have no use for popular legitimacy and participation. Instead, they unleashed the Army, their thugs, known as Shabbiha, and the dreadful security apparatus on the people. In the past eight months, they have killed, according to the UN Human Rights Commissioner, more than 4000 people including 317 children. The investigative Commission sent by the HRC reported that 14000 are under arrest. The Syrian NIC says that 130,000 have been arrested since March 2011. The UN HR commission reports instances of abuse, torture and mutilation. There is also a couple of thousand people unaccounted for.
This blood bath is licensed by the regime under the narrative of outside conspiracy and Western-Zionist plot employing armed bands. This narrative sets aside the sensible observation that no conspiracy can move the masses of millions involved in the Arab Spring; Syria is not different from the others. It is a known fact that the Arab revolutions surprised everybody and every state; nobody had time to conspire. One observes that there were no casualties in the demonstrations supporting the regime, but scores of casualties in the anti regime demonstrations. And videos show people in Syrian military uniforms, tanks and sharp shooters firing on people. Is not it right to wonder why the armed bands did not attack the regime supporters? To be sure, there are several hundred casualties among the regime forces, but these can be due to other than armed bands of conspirators. The narrative of the regime cannot be tested by objective independent observers, be it the press, nongovernmental organizations or the Arab League’s proposed observers, because the authorities refuse free entry and unhampered operation to all.
Syria is now under severe economic sanctions which will, in the medium run, cripple its week and inefficient economy (Sakbani “a”) . It is politically isolated and fatally weekend in the region. After eight months of silence, the Arab League perhaps fearing, in part, the Arab public opinion, revived by the Arab Spring, and following, in part, outside influence hostile to the regime, tried to throw an Arab safety rope for the regime by proposing in the second half of November, an Arab Initiative. The Initiative calls for stopping the bloodshed, withdrawing the Army to its barracks, releasing political prisoners, allowing peaceful demonstrations and free entry for the press and non- governmental observers. In return, the opposition would open a dialogue with the regime. The Syrian Government and Opposition accepted the Arab Initiative. On the ground however, the regime flouted the agreement and inflicted several hundred casualties since launching this Arab initiative.
After exhausting the Arab league repeated deadlines, Syria was given an ultimatum on 24 November to sign and accept as is the Arab league compromise. But the new deadline passed without response. Hence, the Arab Social and Economic Council met on November 26 at the level of Finance Ministers and decided a bundle of economic and financial sanctions against Syria. That was followed on 29 November by a meeting of the Foreign Ministers which confirmed these sanctions and added political ones as well. It is doubtful that these sanctions will alter the regime’s response in the short run. However, by ignoring the Arab League compromise, Syria has in effect, allowed its file to be internationalized. Nobody at this juncture can predict what will happen under the UN or under the NATO. Nonetheless, despite the regime brutality, an outside military intervention will be ruinous to Syria in the military, economic, infrastructural and socio political- domains.
The situation has perhaps reached the point of a difficult return. Left on its course, the regime is heading towards civil war pitting its minority supporters against the majority of the Syrian people. Neither the Army nor the Russian Veto will forever support the failed security solution. President Assad can in no way continue to rule a people he has killed, maimed, imprisoned and tortured. He has manifestly failed his role. A grand compromise is the only way out of the potential strife, destruction and chaos. Syria’s friends, in and outside the region, should press the opposition and the Government to sit with them at a round table to negotiate a democratic exit out of this dangerous impasse.
Where are we going with Syria?
The regime has trapped itself in a terrible dilemma of its own making: it refuses to quit and to alternate power because it is frightened of the majority and does not want to give up its privileges. Despite Syria’s excellent record of tolerance, communal harmony and national oneness, the regime is seized by its hubris. It has shrouded itself with a sectarian wrap with the devastating potential of a civil war. In the process, it has discredited the Army and the state apparatus and lost most of its friends. On the other hand, the Syrian opposition has been divided and without a common program for post Assad Syria. Its external luminaries have been long in exile and have insignificant popular bases. However, the opposition has recently established the Syrian Interim National Council (SINC), which is open to all the exterior and interior players. Part of the interior opposition however, organized itself under the National Coordination Committees. Both now agree that removing the regime is a common goal. Towards the middle of November, some general principles for a future Syria were proclaimed by the SINC. The door thus has opened for the opposition to be a partner in the outside dialogue about Syria. Indeed, both the Arab League, the French government, Turkey and even Russia have opened dialogue with the opposition (Economist, November 12) . From where we stand, it looks that Syria’s transition to democracy, while inevitable, will be costly, bloody and perhaps in some time. One still hopes, against the odds, that wise and cool heads in the regime can stop this wrecking train. But Bashar Assad will be the fifth dictator to fall.

What are the problems of the transition from totalitarianism to democracy?
There is no general political theory for transition to Democracy from totalitarian regimes. One can however, discern some pragmatic examples of successful transitions from East Europe and South Africa in formulating guiding principles.
The first is the turning of the page. Transition cannot be done without admitting the crimes and misdeeds of the past regime and meting out fair punishments for the criminals before courts of law. However, the non indicted followers and supporters of the totalitarian regimes should be given a chance to confess and ask for pardon without punishment. This purges the motives of guilt and revenge without excluding a part of the population on account of their political views. South Africa’s success in this should be contrasted with Iraq’s failure (Sakbani, “c “) . The second principle is the need to transform perceptions regarding the role of the state and that of citizens in an open society. The all knowing paternal state induces apathy and dependence in the citizenry. The public passivity and unfamiliarity with democratic practices can be interpreted as lack of readiness for democracy. This is an argument used by dictators and is denuded of any historical relevance. Rather, democracy is learned through doing, as has demonstrated the history of England, the US, Germany, East Europe; Japan and India.
The third principle concerns the performance of the economy during the transition to a functioning market system. The Arab countries have either market economies with loose and failed regulations invested with rampant corruption or inefficient command economies. The experience of Eastern Europe shows that many strata of the society suffer from marginalization and poverty after the down fall of the providential totalitarian state. In the passage to a workable market economy, there is high inflation, a substantial drop of the national output and deterioration of the balance of payments. There are also legal and institutional problems, which take time to resolve. Market systems are generally efficient but not inclusive. Those who are capable of using them will prosper, but those who cannot need measures of social justice and solidarity. Democracy cannot survive and is not worth much without taking care of the basic needs of the population. It follows from that the market system should be safeguarded against market failures and social injustice. This is done through competition laws and laws that place limits to economic concentration and monopolies. It is also important to have a modicum of social safety net.
The fourth principle concerns the application of the concept of equal citizenry in the context of social and political plurality. This means protection of minority rights, equality of everybody in all rights and prerogatives and permissibility of political and intellectual differences. It is said that Democracy is an institutional package comprising independence of judiciary, separation of powers, rule of law, protection of human rights, and freedom of expression, assembly and association. However, all of that will not take roots without the vigil of a liberal society which accepts and respects dissenting views and examines critically its received values. In simple words: Democracy needs the neutrality of the state and society with respect to all citizens and all points of view.
The fifth principle is to accept that political fragmentation and disorganization are natural short-run consequence of the fall of totalitarianism. In all Eastern Europe, the one party state was replaced by dozens of parties, some of which had not even a platform. In some countries, the Communist parties made a return to power in slightly modified formations. But in a few years, the political process was shaken out and many parties fell by the way side. Stability and peaceful alternation of power emerged among the newly shuffled parties as the modal norm.
The sixth principle is degree of preparedness of the alternative management. In the Arab scene, the alternatives seem to be so far the Islamists and the liberal-revolutionary youth. Both of them lack experience to manage the affairs of government. The Islamists have no program of social development. Their economic program is a mixed bag which does not stand analytic scrutiny. Their political program is not suitable for mixed faith societies; it violates the principle of equality among all citizenry (Sakbani”e”, 2011) . As long as they believe in the verity of the received traditions from another era; it will be hard for them to break out to the pragmatism required for state management. Besides, their claims to democratic alternation are yet to be tested. The youth and others are disorganized and have yet to develop popular bases. Their showings in the elections testify to that. Hence, the transition is fraught with potential strife, mal functioning and slippage.
Finally, in the Arab World, where separation of religion and state does not have a historical record, it is essential for liberal democracy to disentangle the respect and acceptance of religious and ethical values from politicking in the name of religion (Sakbani, “d”) . The concept of a civil state implies equal treatment of all faiths and non permissibility of all barriers based on faith. Half of the Arab societies have religious minorities and many are ethnic mosaics.
New compacts and political contours in the transition.
The Arab Spring is a Tsunami which has swept away the old order. Despite all the difficulties and slips inherent in the transition, no dictators and absolute Monarchs will survive the change. If successful, new structure of Governess and modalities of political participation must be wrenched out of the prevailing petrifaction. People will have to be given their due role in running their Governments and conducting public affairs. The success of such a new order is conditioned upon putting in effect political and social compacts based on participation, popular consent and social solidarity. The political compact of the new order should embrace liberal political pluralism based on free association of the sovereign citizenry in a modern state, and not on family, tribe, ethnicity or historical privilege. In this compact, political legitimacy is based on the consent of the public. That consent is expressed through the ballot box which allows for the peaceful alternation of power. But the political compact cannot survive without a consonant social compact. This must be based on equality, social solidarity and economic viability. The basic function of the modern state is to give effect these two compacts.
After the 1967 defeat, there came a new paradigm purporting that Arab Nationalism has no basis in history (al Jabri, 2011) . The failed record of the autocratic nationalist leaders was cited as the incontrovertible evidence of the political unreality of the Arab nationalist system (Ajami, 1981) . Indeed, the failed nationalist autocrats have richly earned their disrepute. That however, is a separate issue than the validity of the Arab Nationalist project. In the revolutionary event, the masses of the Arab Spring displayed on their posts, in their blogs, songs and chants Arab solidarity. The Moroccans felt the pain of the Syrians and Egyptians. And the Jordanians and the Yemenis demonstrated for Syria and for Libya. The accomplishments of Tunisia were song in Egypt, and Egypt’s revolution was celebrated in Bahrain and Iraq. These are the expressions of peoples that feel a common destiny and share a common pulse. One does not need to extol the economic and political benefits of an Arab commonwealth in our globalized world to advocate a renewed and self interested Arab cooperation. It is enough to witness the nationalist current which ran this time without advocacy or leadership. Perhaps, it may explain the cascading of the revolutions of the Arab Spring.
A major legacy of the Arab Spring is a new found Arab public opinion. This public opinion will force on the new democratically elected leaders, independent foreign policy making and a rejection of outside intervention. Such leaders will know, perhaps for the first time in modern Arab history, that their policies with respect to national problems and issues must reflect the Arab Street at the risk of losing their jobs. There will be no more phone calls to and from Washington and other capitals as a part of the daily agenda and no double talk with outsiders. This will undoubtedly transform the hapless and dysfunctional Arab League. We have just seen under the pressure of public opinion, glimmers of revived nerves in the much delayed position of the Arab League on Syria. To be sure, there might be some foreign interests hostile to the Syrian regime behind that, but there is, nonetheless, the beginning of the people’s League to replace the regimes’ League. Foreign policy independence will affect many issues, the first of which is Palestine, and the investments of Arab capital in foreign lands. Another influence will play out in checking and influencing the regional agendas of both neighbors and foreign powers long used to an Arab vacuum.
Many commentators express fears about the chaos of the transition, the electoral ascendance of the Islamists, the poor performance of the economies and the continuation of the dysfunctional bureaucracies. Others believe that a grand conspiracy is behind all that has happened. The fears have basis in facts; and the conspiracy proponents weave scenarios of the designs of Israel and the West which are in intentions but not facts. The massive popular uprisings were just too big for any conspirators to plan; they surprised everybody everywhere. Those anxious about what will unfold should ask a series of questions: were the dictators successful?; were people better off under repressive totalitarianism?; was there a rosy future in the works? May be one of the casualties of the revolutions will be the theory of conspiracy, an expression of powerlessness, escapism and self nonreliance, which has distorted so many Arab minds steeped in opaqueness and factual disregard.


*Professor of Finance and Economics, the Herbert Walker School of Business, Webster university; former Director of the divisions of Economic Cooperation, Poverty alleviation and UNCTAD Special Programs, UNCTAD-Geneva; Senior consultant to the UN system, the EU and Suisse banks

(Geneva, 29/11/11.)

1. Morocco, which has seen constitutional changes and legislative elections, is left out due to the limitation of the scope of this paper.
2. For a detailed and documented analysis see: Michael Sakbani (a), “ The Revolutions of the Arab Spring; are democracy, development and modernization at the gate”, Journal of Contemporary Arab Affairs, Volume 4, Issue 2, 2011.
3. Michael Sakbani (b), The Revolutions of the Arab Spring Four Months After: an Update in www.michaelsakbani.blogspot.com, July, 2011
4. The Economist, December 3, 2011.
5. For a detailed and documented discussion of the Islamist political current see: Michael Sakbani, Fundamental Islamic Militancy; a Phenomenon of Religious Schism and Regimes Failure”e” in www.michaelsakbani.blogspot.com. 2011.
6. The Economist, November26, 2011.
7.Sakbani (b), op. cit.
8. Michael Sakbani Sakbani,(a), op.cit.
9. Michael Sakbani, (b), op. cit.
10. The Economist, Decmber 3, 2011.
11. Michael Sakbani, (c), the Genesis of the US Problems in Iraq in www.michaelsakbani.blogspot.com., 2006.
12. Michael Sakbani, Fundamental Islamic Militancy, Op. Cit.
13. Michael Sakbani (d), Islamic Militancy and the the Failure of Modernization and Development in the Arab World. in www.michaelsakbani. blogspot.com, 2007.
14. The late Moroccan philosopher Mohammad Abed al Jabri argued, with great erudition, that there is no Arab nation but an Arab program. A propos the advocates of authenticity such as the Islamists, he drew a sharp distinction between authentic inherited values and the Heritage, a socio-cultural whole at any given epoch. He goes on to argue that the Arabs have no choice if they want to moderenize other than the contemporary global civilization, dominated by the West. See M.Abed Jabri, Critique de la Raisonment Arab, This work was translated into English by I. B. Tauris, Formation of Arab Reason: text, traditions and the construction of Modernity in the Arab World, Contemporary Arab scholarship in the Social Sciences, London,2011.
15. Fouad Ajami, The Arab Prediciment, John Hopkins University Press, 1981. Ajami is one of many who hold the political view that the Arab Nationalist system was effectively replaced by the state system after the 1967 defeat. This view point negates the