Severe social unrest similar to that experienced in the Arab Countries in Transition (ACTs) tends to be “accompanied by a sharp deterioration in macroeconomic outcomes,” argue Padamja Khandelwal and Agustin Roitman in an IMF working paper published in March 2013 entitled ‘The Economics of Political Transitions: Implications for the Arab Spring’. The paper, which reflects the views of its authors and not those of the IMF, examines comparable historical episodes of political instability with a view to determining the implications of transition for the near and medium-term economic outlook. The ACTs covered in the paper include Egypt, Jordan, Libya, Morocco, Tunisia and Yemen, and their performance is compared to a group of 11 other countries that have experienced episodes of political instability.
The paper concludes that countries experiencing political instability undergo sizeable output losses, and that recovery is often sluggish and output gaps persist for about five years, leading to an increase in unemployment. It adds that “the deterioration in fundamentals and heightened macroeconomic uncertainty lead to lower investment. Fiscal positions deteriorate and debt levels rise.” During political instability foreign exchange reserves decline but then improve slowly, and external current account balances improve over the medium-term in many, but not all, cases. The paper notes high external vulnerabilities can lead to currency depreciation and in turn to higher inflation. The authors note that economic activity in the ACTs has remained at a low level in 2012 and that unemployment has increased, as it has during past episodes of political instability. (CONTINUED - 247 WORDS)