FROM THE ECONOMIST INTELLIGENCE UNIT
The revolutions in Tunisia and Egypt, and now the unfolding crisis in Libya, are giving Western governments and companies alike pause to reconsider their interactions with authoritarian regimes. The need to deal with corrupt and repressive governments, or for companies to operate in countries controlled by such regimes, will not go away. But the extraordinary developments in the Middle East and North Africa (MENA) seem to have changed the mood. Governments and companies will, at least for the time being, be more wary about being seen to cultivate ties with unpleasant regimes. Moreover, such pragmatic calculations should not obscure the possibility that the revolts in the Arab world will have a more fundamental effect. Recognition of the importance of political legitimacy to political stability implies changes in foreign policy and foreign investment strategies—or at the very least, in the assumptions behind them.
Recent events in North Africa have made prominent the question of ethics in the West’s dealings with the developing world. France has been embarrassed by the perception of cosy links with the now-defunct Tunisian regime, as evidenced by the sacking of the French foreign minister, Michele Alliot-Marie. Uncomfortable questions are also being asked about the US’s support for the former Mubarak-led regime in Egypt, and—particularly awkward for the UK—about the West’s diplomatic rehabilitation of Colonel Muammar Qadhafi of Libya. The argument for supporting dictators and undemocratic governments has traditionally been of the pragmatism-trumps-idealism variety: that propping up unsavoury leaders and corrupt governments is a fact of diplomatic life. This thinking drew support from the cold war, and more recently from the US-led “war on terror” that emerged after 9/11. In MENA authoritarian leaders have long appealed to Western fears of the rise of Islamist groups to justify repression in the pursuit of so-called “stability”. For their part Western governments have played along, whether out of a misreading of local political dynamics or as part of a calculated appeal to domestic anxieties about terrorism and immigration.
The collapse of the Tunisian and Egyptian regimes and the death throes of the Qadhafi regime in Libya have weakened the (already questionable) argument that authoritarianism can ensure political stability. The fact that these regimes endured for several decades could be interpreted as a sign of resilience. However, the sudden collapse of entrenched regimes as a result of popular demand for political reform is also testament to their inherent structural vulnerability. It is worth noting that the Economist Intelligence Unit’s political risk ratings tend to assign higher levels of risk to authoritarian countries; for all its apparent chaos, for example, democratic India gets a much higher political stability rating than one-party China.
Perhaps the crucial factor that will inform Western governments’ immediate response to the political crises in MENA, as well as any longer-term rethinking of foreign policy, is the importance of political legitimacy. To some extent, these are not regimes in which one faction within the elite has overthrown another (although one can argue that Egypt and Tunisia have been cases of army factions overthrowing incumbents). Nonetheless, change has stemmed to a significant degree from large-scale popular demands for democracy. This mitigates Western governments’ fears that a political vacuum would allow Islamist extremists to gain the ascendancy; Islamist groups are likely to thrive only to the extent that they enjoy popular support, and the legitimacy of any new political order will depend on its success in giving voice to a diversity of political views, including secular ones. This is evident in Egypt, for instance, where it would be unfeasible for the Muslim Brotherhood to impose Islamist principles when many segments of a diverse population were behind the demands for reform that ousted Hosni Mubarak. It is also already clear that the Muslim Brotherhood itself has diverse tendencies and is unlikely to act in a monolithic fashion.
If the new rulers in post-revolution MENA countries will now be forced to seek democratic legitimacy, the foreign governments and multinationals that deal with these countries will have to bear this in mind. To the eyes of many in Egypt, for example, the West is tainted by its long-running support of the Mubarak regime and will be under pressure to avoid picking political winners or siding with any political forces that lack democratic legitimacy.
Good deeds in a bad neighbourhood
The West’s response to political turmoil in the region is further complicated by the violence in Libya, which is raising questions about the need for foreign (potentially even military) intervention. The dilemma is that even as the violence in Libya has increased calls for intervention, any military action by Western governments runs the risk of delegitimising the uprisings that have already occurred and of undermining possible popular revolts elsewhere. The success of home-grown pro-democracy revolutions in Tunisia and Egypt has strengthened greatly the argument for Western powers to let MENA populations determine their own affairs. However, at the same time, the possibility that pro-Qadhafi forces could commit further atrocities on a large scale has revived the question of the international community’s “responsibility to protect”, on which an international consensus (thus far achieved in the UN and international responses to the crisis in Libya) would be almost impossible to attain. Pressure for intervention may increase if the refugee crisis develops and spills over into neighbouring states and Europe.
However, it is widely acknowledged that even limited measures, such as the imposition of a no-fly zone, would be fraught with military and political difficulty. Libya’s size is a complicating factor, as is the reluctance of Western countries to intervene after the debacle of Iraq. In light of the US’s misadventures in Iraq, formal UN endorsement of military operations would seem to be a minimum requirement, but there would likely be opposition from many countries unless the situation in Libya got far, far worse. Even then, China and Russia would be almost certain to oppose intervention despite both countries’ endorsement of the UN Security Council’s sanctions against Libya, and of the referral of Libya to the International Criminal Court.
The dilemma for businesses
The fallout from Tunisia, Egypt and Libya also creates ethical and practical dilemmas for businesses, particularly those in the resource-extraction sectors for which operating in politically and physically inhospitable environments is often a fact of life. With regime change, the security of contracts and assets in the affected country is a paramount concern, as is the safety of workers. The risk of reprisals against workers representing a company that may be perceived to have been close to a previous, authoritarian regime will be a concern in some cases. There is also the broader issue of reputational damage as a result of a company’s engagement with a corrupt or authoritarian regime.
That said, in a post-revolution setting any incoming government will need to keep the economy running. Pragmatism may therefore prevail, for example, when it comes to the need to keep oil facilities operating. In addition, the risk of a backlash is mitigated where foreign oil contractors work for either 100% state-owned oil companies or for joint ventures in which the state owns a majority stake.
Traditionally, there has been an assumption that foreign investors tend to be indifferent to the form of government in host countries, or may even favour the now-discredited “stability” of autocracies. An Economist Intelligence Unit survey in 2007 found mixed views among businesses about the relevance of democracy (or the lack thereof) to their foreign direct investment decisions in emerging markets. Around half of all respondents said that democracy mattered, but almost 30% thought authoritarian states could make for a more predictable and stable environment.
Whether the latest upheaval in North Africa is likely to change businesses’ views on these issues is uncertain. Resource companies tend to take political trouble in their stride; indeed, to a large extent they must, not only because of the geographical location of many mines and oilfields but also because such projects are often planned and financed with a decades-long operating life in mind. Oil and mining companies are accustomed to the risk of dictators’ whims—a recent MENA instance was Algeria’s windfall oil profit tax—and will have to be prepared for the eventuality that newly installed democratic regimes will also want to revise the terms of contracts or concessions. Of more concern will be the risk that the overthrow of these long-established regimes will lead to a prolonged period of political uncertainty, with frequent changes of policy direction. Yet one thing is clear. With the MENA crises making the longevity of other regimes look ever more suspect, companies would be well advised to reassess their assumptions on political risk as well as their policies towards autocratic countries. Just as governments, too, should now be thinking twice before cuddling up to dictators.