Is Governance a Prerequisite for Democracy? Insights from the Middle East

Democracy in the Middle East has been in the spotlight of the world media for a number of years now. Along with the ever-growing international debate on the importance of democratizing political systems around the globe, questions such as how seriously the Arab countries take the calls to adopt real democratic practices and how far they have gone in implementing political reforms continue to arise. While some signs of change have apparently emerged, these questions remain difficult to answer, even for practitioners in the field.

In a broad sense, democratic societies are defined by the adoption of political practices such as public debate, freedom of speech, elections, representation, transparency and accountability, as well as consensus building and active decision making. However, a broader defi nition of democracy also encompasses attributes of economic democracy such as economic justice, property rights, freedom of contract, broad access to information and education, and poverty reduction.¹ This view is strengthened by the correlation among political democracy, economic freedom, governance and the private sphere. In fact, it is said that the institutionalization of economic reform and corporate governance around the world is one of the fundamental challenges of promoting democracy and economic stability. A link has also been identified between democracy and economic growth, especially when proper governance mechanisms are prevalent.²

Focusing on the economic, financialmarket-development and governance aspects of these issues, this paper further explores some of the reforms being introduced in the region that are expected to pave the way to real democracy. In particular, we attempt to answer the following questions: (1) What types of reforms are being undertaken? (2) How do these reforms relate to democratization? and (3) How would they eventually trigger the need for reforms at the political level?

Transition to democracy is not easy or fast, and the road chosen to introduce and implement democratic and political reform varies across countries. However, certain prerequisites, such as a strong will at the authority level and awareness of the importance of such reforms at both the ruling and public levels, remain the common ground for any move in this direction anywhere in the world. The commitment of politicians and policy makers, the motivation of government employees, the introduction of entrepreneurship and dynamism by profit-seeking risk takers, and the implementation of a democratic process for citizens are crucial for reform implementation.³

In fact, a closer look at the Arab countries suggests that many of their ruling elite show a will to forego some of their power over economic interests and to encourage the participation of the private sector and ordinary citizens in the process of wealth creation to alleviate poverty. This is being achieved through the privatization programs that are currently in progress in a number of the Arab countries and the continuous development of the region’s fi nancial markets.

The countries of the region also seem eager to liberalize and expand their economies and markets and attract international capital flows. As much as these markets appeal to international investors, the achievement of these ends and the ability to sustain them place regulators under pressure to establish well-governed financial markets. Consequently, a culture of sound corporate governance, where shareholders ensure that they are treated equally, their rights are respected, their best interests are pursued by directors and managers, and transparency and disclosure rules are imposed, will gradually emerge among all market participants. Citizens will come to realize that their rights as shareholders in companies are to a large extent equivalent to their rights as nationals in their countries. This is in line with Gompers, Ishii, and Metrick’s⁴ description of companies as republics in which the rights of shareholders mirror those of citizens in their nations, and the fiduciary duties of boards of directors and managers, respectively, resemble to a great extent those of parliamentary members and ministers. Thus, citizens will learn to adopt an active, rather than a passive, role in their countries. Consequently, an awareness of democratic practices will become prevalent among the communities of the Arab countries. These include the right to elect representatives who are accountable for acting according to the will of the people and responsible for delegating decisions to ministers and examining the performance of the government. An environment in which citizens have the power to hold ministers and governmental authorities accountable and to replace them when necessary is regarded as a democracy. In such a setting, citizens would also press to be allowed to express their opinions freely, have access to transparent information on the activities of governmental and public institutions, and impose disciplinary actions on corrupt behavior. In the Gulf Cooperation Council (GCC) countries, improvements at the public level have already started to take effect. According to the World Bank, regulatory quality and control of corruption are two aspects of public governance that have particularly improved. Over the past decade (19962006), the two measures respectively increased from averages of 0.44 and 0.11 to averages of 0.54 and 0.69 for the GCC countries.⁵

Factors Hindering Democracy

An overwhelming majority of Arab countries have been lagging behind in the practice of democracy for many reasons. Countries within the region were believed to be reform resistant and to have little hope of moving toward democracy because they lacked the required democratic experience. Kedourie states that constitutional rule in the region is hindered by the fact that the people are accustomed to “autocracy and passive obedience.”⁶ To Cantori, the region is characterized by narrow political and economic power interests and lacks means of political transition.⁷ Deegan considers that the countries of the Middle East are “weak institutionally; divided ethnically; tethered to authoritarian structures of government; and lacking in unity, political legitimacy and tolerance of opposition.” ⁸ Furthermore, Richards claims that the low dependence of these countries on their communities and the sufficient resources available to the authoritarian governments have undermined incentives for reform and hindered the transition to democracy.⁹

In addition to serious social problems such as unemployment and poverty, Richards cites the lack of accountable governance structures and corruption as key detriments to democracy in the region.¹⁰ These factors reflect the close ties among democracy, governance and anti-corruption. Marquette notes that good governance, or good government, is equivalent to democratic government.¹¹ The relationship between governance and democracy is also revealed in Leftwich’s defi nition of good governance as including “some or all of the following features: an effi cient public service; an independent judicial system and legal framework to enforce contracts; the accountable administration of public funds; an independent public auditor, responsible to a representative legislature; respect for the law and human rights at all levels of government; a pluralistic institutional structure and a free press.” ¹² Corruption, on the other hand, is defined as the abuse of power resulting in the reaping of benefits at the expense of the rights of an individual, a group or the whole society; the making of public institutions controlled by private interests; and the hindering of the transparency of governmental operations.¹³ The high levels of corruption in Morocco, for example, have also long been caused by the concentration of wealth and economic power, the meager scrutiny of public affairs and dealings, and the favoring of officials and entrepreneurs who hold close ties with the monarchy in terms of unfair advantages and non-transparent business transactions.¹⁴

Signs of Political Change

In 1998, Kamrava argued that democratic governance in the Middle East is hard to attain because the necessary social and cultural dynamics do not exist.¹⁵ Yet since then, several events have occurred and many circumstances have been transformed, gradually shaping a picture of the region as open to reform and democratic change. While Richards agrees that a “democracy deficit” is a prevailing fact in the region, he does not agree that the Arab countries are “not ready” for democratic reform, and he identifies grounds for a potential shift towards more accountable and democratic governance.¹⁶ These include the current level of development, literacy, education and urbanization. For instance, the World Bank indicators of 2007 reveal that enrollment at secondary schools in the Middle East and North Africa (MENA) region increased from 67.7 percent in 2000 to 73.5 percent in 2005. In Morocco, the rate increased from 38.1 percent in 2000 to 52.4 percent in 2006. Qatar recorded a 100 percent enrollment in secondary schools in 2006, up from 87.6 percent in 2000. In 2003, 97.5 percent of males and 94.5 percent of females were enrolled in primary schools in Saudi Arabia, as compared to 61 percent and 57 percent, respectively, in the period 1994-2000. Richards concludes that democracy is attainable if some political obstacles are overcome.

For political reform to be introduced and instituted, a strong will at the authority level must exist. In addition, in countries where the level of corruption seems to be advanced, building awareness in the public and in all institutions and corporations seems to be an essential step in the democratization process. Arab countries have already started to reveal some desire to introduce reforms, and some steps undertaken are expected to contribute to raising public awareness. While several countries in the region have embarked on anti-corruption and democratic reforms, the speed and level of their achievements vary.

We have begun to notice the gradual shift of the region’s governments towards boosting the participation of their populations in freer elections, and we now hear the voices of some forces opposed to the regimes in place. Algeria held its fi rst elections in 1999; and, in 2002, Qatar, for the first time, allowed its citizenry, including women, to participate in direct and secret voting.¹⁷ Kuwait is considered the GCC country that has witnessed the greatest political change towards a civil society and away from the ruling elite, as demonstrated by the elections of summer 2006.¹⁸

In 2000, a political-reform strategy was formulated in Bahrain specifying a framework for establishing a constitutionally grounded political system. Morocco has also made some progress in its attempts to fi ght corruption. Transparency has been improved, and the upgrading of the country’s legal and regulatory framework is now underway. Some nongovernmental organizations (NGOs) have been working on building awareness among the public and lobbying the authorities. Still, Denoeux states that much remains to be done in terms of enforcing the laws and imposing accountability.¹⁹

Economic and Financial Reform

Nevertheless, Doucouliagos and Ulubasoglu²⁰ assert that political democracy is more than free elections; it is correlated with economic freedom, governance and the private sphere in the economy. These aspects, among others, are particularly emphasized by the Arab countries. In fact, the majority of Arab countries, notably the GCC countries, seem to have chosen to approach reform from another angle: the economy.

While Richards²¹ contends that the surge in oil prices would strengthen authoritarian rule in the region because the ample resources would hinder incentives for reforms, Hertog²² claims that the boom is “generating a new regional political economy” in which businesses and foreign direct investment (FDI) are playing a ground-breaking role, and the Gulf is a “pivotal player.” In fact, the GCC countries seem to recognize the benefits that could be extracted from the oil boom and are taking advantage of the increased liquidity in their markets to institute economic and market reforms. To Hertog, the boom observed in the region during the last couple of years was better managed than the one that occurred in the 1970s. Less money was wasted, and more was being invested in projects and utilized in sophisticated and diversified ways. The transformations and developments in the Gulf fi nancial markets were indeed unprecedented.

Dubai, Qatar, Bahrain and even Saudi Arabia have put substantial effort into creating special zones, administrations and “economic cities” to attract and retain capital. In a move towards liberalizing its markets, markets, Saudi Arabia has fi nally entered the World Trade Organization (WTO). Its accession will facilitate its shift towards a more open and balanced economy because it requires the introduction of structural changes to its economic and legal regimes, the institutionalization of reforms in public entities, and a commitment to economic diversification and privatization. Saudi Arabia has already created ine regulatory bodies and announced a complete overhaul of its judicial system.²³ Additional benefits also include reducing bureaucracy, addressing issues relating to the opacity of decision making, safeguarding access to Saudi markets, and greatly enhancing protection of intellectual property rights, along with the adoption of enforcement procedures and the imposition of penalties for violations. Saudi industries are also expected to benefit from increased transparency and access to important information relating to governmental and legal procedures. The law fi rm Loeffl er Tuggey Pauerstein Rosenthal LLP concludes that, together, these initiatives “will increase transparency and predictability, which serve as a basis of the global economy.” ²⁴ Such initiatives would no doubt serve as preliminary anti-corruption procedures.

Privatization programs of public institutions — telecommunications, water and energy supplies, and banking and insurance — are also gaining increased momentum across the countries of the region. For instance, in an attempt to diversify its economy, Bahrain is implementing a privatization scheme through the Supreme -Privatization Council. Abu Dhabi has also taken steps towards privatizing utilities. Furthermore, the Capital Market Authority of the Muscat Securities Exchange has recently presented a “golden share” method whereby state-owned, strategically important companies are encouraged to divest stakes for public investing, while giving the government veto power even in cases where it is a minority shareholder.²⁵

These privatization efforts aim to encourage wider participation of the private sector in the economy. Hertog states that the private sector is, in fact, becoming more and more independent from state contracts and is playing a greater role, with private wealth in the Middle East being estimated at $1.5 trillion. The heightened participation of national citizens in the economy and in the financial markets, in particular, is notable. Gulf investors have begun to move from being rentiers to entrepreneurs who take an active interest in projects and establish start-ups.²⁶ These initiatives were encouraged as the bureaucratic procedures to start a business were alleviated in several Arab countries. Egypt, for instance, was identified as the top reformer of 2007 in the World Bank’s Doing Business 2008 report. Saudi Arabia was among the top 10 reformers in 2007 and was ranked twenty-third out of 178 countries in the ease of doing business.²⁷

Entrepreneurs in the region were motivated to offer their companies for public subscription through the liberalization of listing rules related either to the pricing of the offer or the reduction of the minimum-percentage stake of the offerings. This process has resulted in euphoria over initial public offerings (IPOs) in the past few years. The total amount raised from IPOs in the GCC increased by 40 percent between 2006 and 2007, and a great potential for more is still expected.²⁸

By expanding privatization programs for inefficient public companies and enabling a large number of companies to raise capital through the fi nancial markets, the countries of the region have provided further support for their stock markets. Also fueled by the excess liquidity, the region’s stock markets have witnessed a long-lasting upward trend. With more than $700 billion in market capitalization, the Saudi stock market was expected to exceed that of South Korea and approach that of India.²⁹

In summary, while some changes started to occur due to political pressures from the United States, others were motivated by and came into existence after observation of the Dubai model, which succeeded in opening that economy and establishing it as a dynamic and fast-growing regional hub. The aim of this paper is not to build hopes for major democratic transformations that are not likely to be achievable or may be constrained by the inherent factors of the Arab countries. However, on a smaller scale of expectations, some political reforms driven by the observed economic reforms can be hoped for. We are thus arguing that fi nancial-markets reforms will reinforce the transition towards more democratic governance. The link between these reforms and democracy stems from two important factors and reveals a certain level of tolerance among the ruling elites for change. First, the drive to privatization implies that the ruling authorities are willing to give away some of their power or control over economic interests. Second, a reduction of poverty and a more equitable distribution of wealth are being achieved. The emphasis on the private sector and the fast development of the capital markets are leading to wider participation by citizens in wealth creation. According to the UN Development Programme (UNDP), Bahrain has undertaken serious efforts to alleviate poverty and foster democratic governance. Based on the indicator that measures the number of people living on less than $1 per day, Bahrain does not suffer from extreme poverty.³⁰ In the same way, Kuwait has achieved tremendous progress in eradicating extreme poverty and hunger. In 2005, the average expenditure of the Kuwaiti poor was 10 times higher than the international poverty line of $1.08 per day.³¹

In Saudi Arabia, the stock market boom has been shared by a large proportion of the population and has helped generate wealth for millions of Saudi investors, creating a middle class in the country.³² The kingdom has already succeeded in cutting poverty levels by half, a major step towards achieving the goal set with the UNDP of eliminating poverty by 2015.³³ The Saudi IPO oversubscription rates of 10 or 12 times, noticed in the last couple of years, are illustrations of the high participation of the population in wealth creation. The IPO of the petrochemical company Yansab attracted more than a third of Saudi Arabia’s population of 17 million, according to the country’s finance minister. Because they have reduced poverty levels, these developments are considered a key component of democracy, in line with Bhagwati’s and Krueger’s view that democratic governments have to remain alert for redistribution to lower-income groups.³⁴

Financial Markets and Corporate Governance

Many of the region’s countries share a vision of establishing leading international financial markets and attracting local and international capital. The modernization of regulatory systems by Saudi Arabia and the establishment of the Dubai International Financial Centre (DIFC) are steps in that direction. Further market liberalizations have been undertaken. Some Arab countries have already started to take steps in favor of opening their markets to foreigners in areas such as investment and stockmarket participation, in which national privileges have been extended to other GCC nationals or to foreign residents and, in some countries, to international investors.³⁵

In addition, dealing in sophisticated products has also risen, and the asset allocation of Gulf investors is considered much more sophisticated than during the 1970s boom. According to the International Monetary Fund (IMF), Dubai has emerged as the world’s largest project-finance market, with developments estimated around $700 billion. The rapid growth of sukuk (Islamic finance and Shariacompliant products) is another aspect of the trend towards sophistication. With a yearly growth rate of 45 percent, sukuk has become an increasingly popular source of financing for companies and a very attractive asset for local and foreign investors. In the first half of 2007, the United Arab Emirates accounted for 52.7 percent of the total global capital raised through sukuk, and now the country’s companies hold $22 billion worth of sukuk.³⁶

These factors have triggered the influx of further Gulf funds into the Arab financial markets, accounting, for instance, for more than 20 percent of the traded volume on the Jordanian stock market.³⁷ Even international investors were being attracted to markets where investment restrictions have been curtailed. This has translated into international confi dence in Arab economies that has been reflected in rising international capital fl ows. The Middle East’s share of global foreign direct investment grew from 0.4 percent in 2000 to 4.1 percent in 2005.³⁸ In the Foreign Direct Investment Confidence Index (FDICI), the UAE has risen from twenty-second position in 2005 to eighth in 2007, and 29 percent of investors placed it fourth behind India, China and Brazil in terms of increased investment optimism globally.

However, foreign investors insist more and more on transparent corporate governance that reflects international standards encompassing the combination of laws, regulations and listing rules that enable a corporation to meet legal obligations and general societal expectations as well as serve the interests of its shareholders.³⁹ Research findings suggest, for instance, that the poor governance practices of companies deterred half of U.S. and European investors from investing in them. The acknowledgment of the need to meet the higher expectations of foreign investors in terms of both corporate and public governance, and to persuade them that they can confidently invest in their countries or companies, has led to the initiation of additional reforms.

The regulators of several of the region’s financial markets have already initiated actions that reflect their recognition that sound corporate-governance practices should not be left only in the hands of the corporations, but should be supported and guided by market authorities. In 2007, Emirates Securities and Commodities Authority (ESCA), a regulatory body that supervises all aspects of financial-market activities, issued, corporate-governance code with which all companies listed on the Abu Dhabi Stock Market are required to comply. The standards are aligned with international best practices of corporate governance related to the role of boards of directors and their committees, audit and control mechanisms, transparency, and the rights of shareholders. The Bahrain Stock Exchange (BSE) focused on introducing disclosure requirements relating to share prices, performance of listed companies and investors’ activity in an attempt to attract and encourage the participation of a large number of small and international investors. Other regulations included measures to control insider trading and ownership activities subject to holding-percentage limits,⁴⁰ and were later amended in 2007 by the Central Bank of Bahrain. Also aimed at stimulating investment in the market, the easing of mutual-fund regulations and the tightening of insider-trading laws have been undertaken by the Oman market authority.

In Saudi Arabia, the Capital Market Authority (CMA) was established in 2003 to develop and regulate the country’s capital markets. In 2007, the CMA started not only drafting corporate-governance guidelines, but also acting as a “watchdog” in the marketplace by imposing regulatory actions, initiating investigations and taking disciplinary procedures against more than 80 companies for cheating. Some poorly performing Saudi agricultural companies were also delisted, as noted in a 2008 report by the Kuwait Financial Center.⁴¹ The regulators also released guidelines governing mergers and acquisitions for listed companies. The listing rules for the Saudi market require a three-year track record of operation, past profitability, sound balance sheets and a minimum paid-up capital of 75 million Saudi riyals.

Since the principles of corporate governance encompass transparency, improving accountability and responsibility, allocating responsibilities and clearly defined roles, reducing corruption, decentralizing decision making, recognizing ownership needs, and managing resources better,⁴² these principles are believed to lay the ground work for improvements at the public-governance and democracy levels. The critical driving factor here is building awareness of practices of governance that promote fair treatment among the participating public. This is in line with the view that, in order to introduce a change in the thinking and behavior of citizens, reform initiatives must begin from the “inside or from the grass-roots level.”⁴³ As Gandhi once pointed out, “The spirit of democracy cannot be imposed from without. It has to come from within.” In support for this argument, he added that “to safeguard democracy, the people must have a keen sense of independence, self-respect, and their oneness.”

In practice, once the customs of sound governance emerge at the corporate level, they are progressively disseminated among communities and the employees of governmental institutions. Citizens will gradually move from accepting the status quo to acknowledging their right to be fairly and equally treated, to receive transparent and accurate information, to express concerns to authorities in relation to their practices in serving the public interest, and to impose penalties for violation of laws and abusive behavior. They will eventually learn to stand up for these rights. As they become accustomed, as controlling or minority shareholders in corporations, to having the right to elect board members who represent and protect their interests, citizens will acknowledge that politicians also need to be elected to represent the will of the people. In Franklin Roosevelt’s words: “If the average citizen is guaranteed equal opportunity in the polling place, he must have equal opportunity in the marketplace.” These ideas are aligned with the view expressed by Gompers, Ishii and Metrick⁴⁴ that “corporations are republics.”

The same reasoning applies to the right to express opinions and impose corrective actions. From an awareness of governance at the corporate level arises the community’s awareness of its right to public debate and deliberation. Citizens, NGOs, journalists and other social actors will be encouraged to use different forms of public expression and bring to public attention political or social issues such as corruption. The effectiveness of such empowerment at the public level was highlighted by John F. Kennedy himself, as he noted that “labor unions are not narrow, self-seeking groups. They have raised wages, shortened hours and provided supplemental benefits. Through collective bargaining and grievance procedures, they have brought justice and democracy to the shop fl oor.” Such movements constitute the preliminary phase of political and social change, as they trigger a debate on the search for optimal solutions and encourage reform.

Consequently, as corporate governance allows shareholders to monitor the performance of directors and managers and grants them the right to take corrective and disciplinary actions in case of inefficiency or misconduct, citizens will gradually expand this awareness of their rights to the broader environment, namely the political system. They will learn to vote corrupt politicians out, thus giving them an incentive to work in the public’s best interest. According to the World Bank,⁴⁵ the latter practice has been observed in democratic countries.

Furthermore, when transparency and accountability spread to public dealings and governmental activities, citizens will be able to increase participation and delegate power and control to local organizations.⁴⁶ Additionally, decentralized mechanisms are more effective and democratic and help in dispersing control horizontally, thus distributing influence more widely and creating equal exercise of political freedom and effective social freedom.⁴⁷ As Richards⁴⁸ points out, such an environment will prevent corrupt elites from wasting public resources and enriching themselves at the expense of human-capital formation. This environment could also lead to less economic power being concentrated in political figures and to more equitable distribution of income. This would be a step towards Marquette’s proposal that, in a democracy, social, political and economic priorities should be agreed upon, and citizens should express their opinions on the allocation of resources and on matters affecting their well-being.⁴⁹ Thus, corporate governance is regarded as a weapon for fighting corruption and promoting democratic acts and practices within a country,⁵⁰ and raising awareness is a significant democratic exercise in itself. Indeed, the effect of sound governance has already started to spread to the public level in the GCC countries. The control-of-corruption indicator published by the World Bank has improved, on average, from 0.11 to 0.69 in the 10-year period 1996-2006.⁵¹

Thus, the move towards more liberal and open financial markets and economies and more equitable distribution of wealth, as well as the loosening of governmental control on the economy, will no doubt facilitate the adoption of more democratic mechanisms. In summary, the argument that the economic reform currently underway in the Arab countries may be considered a step towards political reform stems from a number of factors: (1) the emergence of the will among the ruling elites to give away some power over interests (economic ones at least); (2) the encouragement of increased participation by the public and more equitable distribution of wealth; and (3) the gradual building of public awareness of sound governance and consequently democratic practices, the creation of a strong civil culture, and a middle class that is aware of its rights and the ways to claim them.

Although Ehteshami and Wright view these changes as an attempt to liberalize rather than implement substantive reforms in political regimes, they argue that even liberalization can be seen as a stage in the enfranchisement process, where power is transferred to civil society and reforms are driven from below.⁵² In fact, the European Bank for Reconstruction and Development Transition Report finds a positive correlation between economic reform and democratization after 10 years of transition, and it suggests that the relationship between these factors is bidirectional.⁵³ It appears from several examples, such as Rwanda, Russia, Chile and China, that democracy can be instituted at almost any stage in the developmental process, regardless of factors such as social structure, economic conditions, political traditions or external relations, and that democracy eventually stimulates development.⁵⁴

Need for Political Reforms

In the same vein, Laurila and Singh consider that democratic institutions prosper following economic growth that is achieved by a well-governed corporate sector. Their arguments support a gradual transition, rather than an abrupt one. They argue in support of the Washington Consensus, that is, of starting the transition with macroeconomic reforms and opening the economy to foreign competition (liberalization, stabilization and fi scal austerity) and some microeconomic reforms (privatization, promoting FDI, property rights).⁵⁵ However, growth at the economic level could not be sustained if reforms were not carried out at the next level, the political one. Richards⁵⁶ contends that nations cannot rely solely on markets to allocate resources and increase their wealth. Economic reforms would be insufficient to raising income and employment and attracting foreign investments. It is unlikely that an arbitrary, authoritarian regime would be successful in attracting private local and foreign investors, who give special consideration to the degree of predictability and accountability in the marketplace. When a business operates in an environment where corruption and lack of democracy reign, it is very likely to get caught up in the corrupt practices of its external environment, harming its achievements at the economic level, even if its culture preaches good corporate governance. Corruption in the private sector resulting from corruption in the public sector undermines the value of businesses as well as the value and image of the country itself, hampering its growth and prosperity. In the same way, corruption and poor public governance would lead to adverse consequences in public administration areas such as revenue collection, revenue allocation, resource mobilization and public regulation.⁵⁷

Laurila and Singh⁵⁸ thus contend that the focus has to shift to reforming public-sector governance in order to support the undertaking of macroeconomic reforms and the establishment of a strong corporate sector. The sequence they observe starts with macroeconomic reforms, followed by reforms of public governance and the development of the corporate sector, which serves to finance the improvement and maintenance of public governance and democratic institutions. The last step is the establishment of democratic institutions. The authors state that developing countries start by developing their commercial markets, followed by a democratic restructuring.

The World Bank also considers that political reform remains a vital component at the heart of any initiative towards democracy and away from corruption.⁵⁹ Thus, a simultaneous strengthening of incentives for environmental protection needs to be undertaken.⁶⁰ In order to achieve long-term stability and sustain economic achievements, greater governmental accountability and more transparent rules of the economic game are certainly needed. In fact, a study of the MENA region by the World Bank reveals that these countries would be able to achieve annual growth rates more than one percent higher, if they had administration in the public sector comparable to that of a group of well-performing Southeast Asian countries.⁶¹ Thus, inasmuch as the government expects the private sector to adhere to the highest standards of corporate governance, the government itself and its agencies must be subject to the same kind of scrutiny. A good governance system should exist at the public level to manage public affairs in a transparent, accountable, participatory and equitable manner.⁶² There is, hence, a close relationship between appropriate corporate governance and the political, institutional and social conditions in a country.

Views concerning the need for democratic practices to maintain reforms at the economic and corporate levels are supported by several arguments and seem to be viable in light of the real experiences of some countries and the empirical evidence relating to the link between democracy, governance and economic growth. Richards provides the opposing examples of South Korea and Indonesia. With institutional reforms enhancing accountability and predictability, South Korea was able to recover from the Asian financial crisis of 1997, while Indonesia, which did not undertake such reforms, suffered heavily from it.⁶³

Although the prior evidence of the impact of democracy on economic growth is inconsistent, Doucouliagos and Ulubasoglu find evidence, by aggregating the previous results, that democracy does not have a direct impact on economic growth, but an indirect one, through greater human-capital formation, lower inflation, less political instability and greater economic freedom.⁶⁴ Richards contends that improved accountability at the public level would alleviate poverty, have a positive effect on economic governance, and stimulate investment and the sustainable growth of the “wealth of nations.”⁶⁵ The findings of Rivera-Batiz support this view. More democratic countries are found to have a higher quality of governance. In turn, governments in improving democracies seem to make an effort to fi ght corruption by granting freedom of the ballot and press, thus making information on corrupt officials available and raising levels of accountability.⁶⁶ Consequently, democracy is found to affect long-term economic growth positively by infl uencing governance. Introducing democratic processes would also provide support for long-term economic reform by placing constraints on the powers of elite groups, safeguarding property rights and adopting transparent procedures.⁶⁷ According to Brinkerhoff, democratic governance creates motivation, allows the private sector and societal groups to participate in formulating policies and increases the management quality of such policies, all of which help increase the efficiency and effectiveness of reform.⁶⁸ Additionally, several researchers note that instituting democracy would limit state intervention in the economy; respond to the public’s demands in areas such as education, justice and health; and encourage stable and long-term growth.⁶⁹

Public governance and the existence of democratic institutions identifi ed by the absence of corruption and other risk factors are also positively associated with the ability of emerging capital markets to attract foreign-equity flows, since such sovereign characteristics would provide assurance for investors as to the safety of their funds.⁷⁰ From a similar perspective, Marquette reports that bilateral donors think democracy reduces opportunities for corruption and thus focus on strengthening democracy as a priority.⁷¹ The World Bank also considers corruption endemic in countries that are institutionally weak and have low levels of accountability, rule of law and participation, yet it does not insist on democratization as a prerequisite for support. Donors’ focus on democracy might be driven by concerns that in nondemocratic environments, populations would be deprived of the right to express their opinions and would have no access to transparent institutions and a free press. Consequently, they would have no control over corrupt behaviors by government officials or authorities that would lead to default on sovereign debt. Such defaults would drive up the poverty level astronomically.⁷²

In light of these links between sustained economic growth and democracy, Arab countries aiming to expand their economies further should proceed with their reform plans and take them to the political level. The Saudi government, for instance, would be motivated to institute further reforms in order to promote sustainable growth in the IPO market, which is exploited in financing its infrastructure projects and in implementing its privatization program.⁷³ Despite the improvements made, regional and international investors face considerable obstacles to investment, such as bureaucratic opacity, complex and outdated regulations and non-transparent licensing policies.⁷⁴ Further, a large proportion of the population is still young (33 percent in Saudi Arabia and 43 percent in Oman are under age 14); the unemployment problem is turning into a political issue, presenting the countries of the region with the need to sustain economic growth and create work opportunities. Population growth is also expected to increase the strain on public services such as education facilities.⁷⁵ Further reform would contribute to resolving these issues and would also enable countries in MENA to achieve their ambitious visions of expanding their economies, attracting capital and creating investment opportunities for locals and foreigners.

The relationship between economic reform, governance and democracy is double-sided: economic reform is a means to achieving democratization; reaching economic goals and sustaining them in the long run requires democratic procedures.

Conclusion

The Arab countries appear to be following in the footsteps of China, initiating economic reform as a step towards political reform. China has been a successful in making huge market reforms, improving living standards, introducing liberalization and implementing a gradual process of overall reform, allowing the country to move to a modern market economy that has expanded ninefold in 25 years. Zhang argues that this has permitted China to institute political reforms. These political reforms are not necessarily associated with abandoning the political system and do not necessarily mean democratization as the West understands it. The reforms aim for improving the efficiency of the existing political system in order to facilitate rapid economic development. Thus, according to the author, China has achieved major democratic transformations relative to the country’s scale, and the economic reforms have set the pattern for future political reforms.⁷⁶

In the case of the Arab countries, economic initiatives reflect a certain level of willingness among the ruling authorities to move in the direction of political reform, as they promote heightened participation in the private sector and a more equitable distribution of wealth. These initiatives also have a positive effect on building awareness of sound democratic governance among citizens and authorities. By being exposed to sound governance practices at the corporate level, citizens can begin to acknowledge and claim their right to express their opinions and to have access to transparent information, not only in the corporations in which they invest, but also in their governments. Consequently, the very basic components of democracy — enlightened understanding, control of the agenda, effective participation, voting opportunity, inclusion, and improved prosperity⁷⁷ — would be instituted.

While the task of liberalizing the markets and the economy and bringing them up to international standards is now underway, the positive consequences of such initiatives cannot be sustained in the long run unless steps towards more democracy and less corruption are taken. Thus, economic reforms are considered not only steps towards democracy, but also forces that create incentives to pave the way for further democratic and political reforms. The potential heightened awareness of, and spread of demands for, good public governance by communities; the pressures to sustain long-term economic growth, reduce poverty, and create a middle class; the openness to competitive markets; and the attraction of foreign investors are factors that the countries of the region are eager to develop and sustain. Such factors in turn drive the need to support them with a gradual reform of the political system. Central to achieving this objective is success in gaining a reputation for equity, fairness, transparency, accountability, responsibility, and crafting effective governance practices. Thus, much as a corporation faces the need to institute corporate governance to serve its shareholders effi ciently, maxiize their wealth and treat them equally, a nation faces the need to adopt democratic practices that ensure that the will of their citizens is being served, their resources efficiently employed, their economic wealth maximized and fairly distributed, and their participation encouraged. As Santiso asserts, the challenge of countries would be to bridge the economic and political gap by integrating them into a single strategy.⁷⁸

Thomas Jefferson knew what democracy requires: “I know of no safe repository of the ultimate power of society but people. And if we think them not enlightened enough, the remedy is not to take the power from them, but to inform them by education.” Despite the promising nature of recent developments and reforms in the Middle East, whether they will lead to -notable improvements in democratic practices and whether the obstacles between countries in the region can be overcome are questions that remain open to debate. While authorities in the Arab countries seem to have started to give up some of their control over economic interests, it is not clear whether they would tolerate giving up some of their political power. All depends on the true will of political leaders and the awareness among communities and -authorities of the rights of citizens.