Economic Research Forum (ERF)

Transformation under radical uncertainty: the challenge for MENA

Shifting from a centralised rent-seeking society to a decentralised productive society is such a major transformation that it cannot be fully planned in advance. As Paul Collier explained in his keynote address at ERF’s 25th annual conference, it is subject to ‘radical uncertainty’ and as such depends on igniting rapid social learning so that society ‘error-corrects’ as it attempts change. His analysis draws lessons for MENA countries.

In a nutshell

The scale of the change from a rent-seeking economy to a skill-based economy is massive: it requires both cultural and institutional change – it is a transformation.

By its nature, a transformation cannot be planned in detail; any set of proposals will need to be responsive to unanticipated future events and resilient to shocks and ‘radical uncertainty’.

The way to navigate radical uncertainty is to build a process of rapid social learning based on experimentation, not by insisting on implementing a highly specified plan; as society adapts and experiments, new opportunities will open and next steps will become clearer.

The essence of the strategy that Deng Xiaoping adopted in transforming China was that the process involved ‘radical uncertainty’ (Kay and King, forthcoming) and needed to recognise the importance of experiments and social learning. It was summarised in two images that he used: ‘feeling your way across a river, stone by stone’; and ‘it doesn’t matter whether a cat is black or white as long as it catches mice’.

Embarking on a radically uncertain process inevitably arouses fears. But apprehension is compounded because MENA countries are starting from a situation very different from that which characterised East Asian countries at the onset of their successful transformations. East Asia started from low incomes and strong states, whereas MENA countries start from incomes that are quite high because of oil rents, and states that have become somewhat fragile.

The East Asian economic transformation was a simple one of pulling people out of low wage, low productivity occupations (such as primitive agriculture) towards more productive, higher wage manufacturing. In MENA, wages are too high to ignite such a process.

The East Asian transformation was implemented by states that were effective and purposive. MENA states are characterised by some of the classic features of fragility: a weak private sector, a low level of political legitimacy and limited state capacities (International Growth Centre, 2018). The state is built on a top-down basis, rather than on a set of reciprocal obligations between rulers and citizens that implicitly form a social contract in which citizens pay broad-based taxes in return for public services.

Given the starting point, it is natural to be fearful of an uncertain transition. But the fears have to be faced because there is no viable alternative: the present structure is unsustainable. Oil revenues will wither rapidly, and the working-age population will rise rapidly. Continuing along a path that is unsustainable is far more dangerous than embarking on uncertain change since it can only end in crisis.

Transformation, albeit uncertain, will succeed as long as strong mechanisms for rapid social learning and ‘error correction’ are put in place. As my accompanying column explains, the overarching objective is for the growing inflow of young jobseekers to find productive employment in knowledge clusters, instead of working in low productivity bureaucracy, low productivity crony capitalism and low productivity informality.

Transformation and the importance of effective communication

Underpinning the change from centralised bureaucracy and crony capitalism to decentralised government, purposive tertiary education and market-disciplined firms are two profound transformations, one in institutions and the other in norms and cultural practices.

The first of these has been discussed extensively in contemporary research (for example, Acemoglu and Robinson, 2012), but the latter has received much less attention. The two are deeply complementary: many institutional innovations work only when the people who work in the institutions bring cultural practices that are well suited to their operation. Changing these requires a change in mindset and ideas across the society.

Political leaders rarely have enough power to implement the huge task of transforming their society simply by issuing commands. If people are reluctant to comply they can usually find a myriad of ways to inhibit change. Hence, leaders need to gain a degree of willing compliance from their citizens and for this, they need to go beyond issuing orders: they need to change minds.

People’s minds are filled with the ideas they get from their social networks, such as families, from organisations, such as their places of work and prayer, and from the media. The few people who are at the hub of these networks and organisations are vitally important as communicators. Political leaders are not just the commanders-in-chief, they are the ‘communicators-in-chief’: by communicating effectively and consistently, they can gradually reset the ideas that people hold.

They have two means of communicating: what they say; and what they are seen to do. By far the most effective form of speech is narrative: most people find stories easy to understand and to remember. The use of visible actions to reinforce credibility is analysed rigorously in the theory of signalling.

Well-used, narratives and signalling actions fit together, complementing each other. By using appropriate narratives leaders can convey the meaning of an idea to people clearly and memorably. By matching this with visible behaviour that is consistent with the idea, leaders’ messages become more credible: they ‘walk the talk’.

While the narrative needs to be aspirational, it is also important to stress the necessity of change by allusion to potential outcomes without transformation. One of the hardest steps is to convince a population to embrace change. Indeed, this is hard in any society, as the recent experience of France shows.

A key principle of charting a path is not to overload the reform the agenda. When an economy has many distortions, it is tempting to deal with all of them (and reform strategies are spoilt for choice). But a long wish list is unwise. A step-by-step process involves focusing on tangible short-term wins. By acknowledging uncertainty, the leader gradually builds a culture of experimentation, in which a range of options are tried and carefully monitored to see what works.

A national communication strategy that builds willing compliance with change conveys three distinct ideas (Collier, 2018a, 2018b):

  • One is of shared identity: in effect, the proposition that we all belong together.
  • The second is a causal proposition of the form ‘if we all take part in this endeavour, then we, or our children, will all be better off.
  • The final idea is a normative proposition: it tells people to esteem those of their fellow citizens who take part in the common endeavour, and to disapprove of those who fail to do so.

Once these ideas are accepted, they reinforce each other. The shared identity describes the domain over which these reciprocal obligations apply; the causal proposition explains the purpose of the endeavour and thereby gives a rationale for the obligation. People comply willingly because they value the esteem of their neighbours, and fear disapproval.

While once these beliefs are widespread they are self-reinforcing, they can seldom be spread widely all at once. In practice, it is useful for a leader to target a group of people who become the vanguard for changed behaviour.

Sources of esteem and the vanguard of youth

In MENA, the obvious vanguard is youth. It is easier to change the culture of the youth than that of older people, and youth are the people who most need to change and who stand to benefit most from change. Indeed, youth naturally see themselves as a cultural vanguard.

The communication strategy therefore needs to be tailored specifically for them. Young people need to see themselves as the generation that will create a new self-sufficient society. They can be given a sense of purpose: ‘only if youth acquire vocational skills can the country attain self-sufficiency’. This can be matched by an underlying normative proposition: ‘vocational training is an activity to be rewarded with esteem’.

In the process, there is a shift in the source of self-esteem from being to doing. Prestige becomes attached to doing something that is productive for society, not merely being in a position. Given that currently, esteem comes from being in the public sector, it might sometimes be necessary, especially in the Gulf, to make this transformation in two stages.

First, shift the source of esteem to working productively in the public sector and only later take the second step of shifting esteem to working productively in the private sector. Hence, the first step might involve creating more productive opportunities within state-owned enterprises.

But any state-owned enterprises need to be subject to genuine market tests: only then will they create sustainable change. Infant industry arguments along these lines would require careful management along a transition path towards self-sufficiency. It is unlikely that these enterprises can compete in world markets and consideration should therefore be given to entering sectors with less exposure to foreign competition.

Experimentation and the lessons from other countries’ process of transformation

Narratives are most effective when they are culturally specific and credible. The pace of change is not going to be rapid: no MENA country is going to become Singapore. Each country is unique and so it cannot adopt a narrative that amounts to becoming a replica of somewhere else. Such a narrative could be more dangerous than helpful. It amounts to looking at someone else’s finished building rather than erecting the scaffolding to build your own house.

The learning from other countries should focus on the scaffolding – the process of how transformation was achieved. The scaffolding used by China had four components:

  • The first was an overarching narrative spread around the population, namely to rebuild a prestigious, proud China.
  • The second was a political leadership that encouraged intensive, rapid social learning to understand what would work within the local context.
  • The third was to evaluate the performance of those who held positions of authority and hold them to account for success and failure.
  • The fourth was decentralisation used to foster yardstick competition across jurisdictions, further encouraging experimentation on a local scale.

Rapid social learning can only happen if policy-makers and decision-makers acknowledge that there are many aspects of the reform programme that they cannot yet understand: they know that they do not know. Success lies in a step-by-step approach and learning from the steps.

In China, the political leaders enforced the need to experiment and changed the perception of failure so that it became seen as a positive learning experience. Local leaders were forced to experiment: if companies, institutions and bureaucracy did not innovate, they were judged to be failures. Bureaucracy changed as leaders encouraged experimentation.

Hence, running a series of social experiments should be a core element of the actions to be taken in support of the narrative. The experiments should be done on a small scale –large experiments are too risky.

Institutional change is not sufficient but it is important. The development of institutions can create convincing signals making cultural change credible. Articulating new rules can also facilitate shared understanding of the steps that need to be taken and can create incentives to do so. Institutional reform can also provide a context for bringing in new people to the policy process with different mentalities, goals and ambitions.

Institutions and culture co-evolve. Just as institutional rules signal the formal norms, so culture embodies the informal norms. The culture of an institution becomes established where its staff become willing and competent in what the institution is tasked to do. This requires the appropriate level of staffing and analytical resources.

Institutional design, implementation and social learning

There are many examples of institutional reforms in the real world that have been able to change norms and practices as well as creating new rules. A good example is having an independent Office for Budget Responsibility, as established in the UK in 2010. It has the potential to instil discipline, particularly around spending based on realistic long-term projections for the price of oil. This would avoid the current situation of public expenditure following oil prices in a pro-cyclical fashion.

Improving the framework for budgetary forecasting can be used to change narratives around public management, forcing policy-makers to pay attention to longer-term goals. And it injects an element of independent thinking and analysis into policy.

But the details of institutional design matter. It is important that the institutional goals are carefully specified, that the system of accountability is specified, and that there are sufficient human and financial resources for the body to do its job to a high level. Institutions can be set up to fail.

Giving an institution the wrong mandate amounts to giving it a death sentence. For example, no institution to improve fiscal management should be judged on whether its forecasts are accurate, as these are invariably wrong even when they are performed by the most competent analysts. Similarly, attempting to implant Western-style cultures and institutions into MENA will not work.

The importance of not overloading the narrative carries over into implementation. Failure is most commonly due to trying to do too many things at once. The fear of failure and the reality of failure are demoralising. Visions are grand leaps. But actions and initiatives in support of the narrative should not take the form of leaps. Rather they should be considered more akin to scaffolding.

Scaffolding supports the construction of a building, but when it is taken away on completion, the building stands on its own. The scaffolding of actions and narratives for transformation are the gradual changes in institutions and ideas that pave the path along which the local knowledge clusters that enable a workforce to be productive get built.

China discovered the scaffolding that it needed for transformation from experiments within its regions. Since these experiments were conducted within an area bounded by a common culture and institutions, the lessons from one place were likely to be pertinent for others.

MENA is even better placed to undertake experiments within its own region of cultural and institutional similarities, because it consists of many sovereign states. In China, the central government had to convince regional leaders that they would not be punished for branching out from what had been nationally imposed policies. MENA is fortunate that it does not have a MENA-wide central government: experiments are much easier.

But in China, once experiments got underway, it was easy to spread because the institutions of the central state could evaluate the learning from them and disseminate ideas around other regions. MENA’s strength in being able to experiment is its weakness in spreading the learning from them.

What have been missing in MENA are the institutional structures designed to learn from experiments in other countries within the region. What MENA needs is not regional power structures but regional knowledge networks capable of evaluating experiments and spreading the lessons from them. All new experience is valuable: societies can learn not only from successes but also from failures.

ERF is just such a network. As the region’s premier social science knowledge network, ERF’s role in speeding the transformation of the region is exceptionally important. The first 25 years of the ERF have gradually built an organisation that can be truly valuable in the decisive period of the next 25 years.

Further reading

Acemoglu, Daron, and James Robinson (2012) Why Nations Fail, Crown Publishing/Penguin.

Collier, Paul (2018a) The Future of Capitalism: Facing the New Anxieties, Allen Lane/ HarperCollins

Collier, Paul (2018b) ‘Rational Social Man, Speech Acts, and the Compliance Problem’, Blavatnik School of Government Working Paper No. 25, Oxford University.

International Growth Centre (2018) Escaping the Fragility Trap, Report of the Commission on State Fragility, Growth and Development.

Kay, John, and Mervyn King (forthcoming) Radical Uncertainty, Little, Brown

Most read

Lebanon’s 2019 austerity measures: enough to restore confidence?

Lebanon has entered the danger zone of high public indebtedness. As this column explains, this could seriously compromise the credibility and sustainability of the fixed exchange rate regime and may spark renewed inflationary pressures. Proposed austerity measures are unlikely to be enough to restore confidence in the country’s economy.

How to liberate Algeria’s economy

Algeria’s economy is growing far too slowly to provide enough jobs for a young, expanding and increasingly restless population. As this Project Syndicate column explains, the country's authorities need to boost competition, spur the creation of a digital economy and revamp state-owned enterprises.

The impact of hosting refugees on the labour market

What are the labour market effects of a massive influx of people on members of the host community? This column examines the experience of Jordan resulting from the conflict in neighbouring Syria. Evidence shows that Jordanians living in areas with high concentrations of Syrian refugees had no worse labour market outcomes than Jordanians with less exposure to the influx.

Economies of agglomeration and firm productivity in Egypt

There is a strong body of international evidence that firms are more productive when they cluster near one another geographically. This column reports new findings on the substantial productivity benefits of such agglomeration in Egypt. The results have important implications for policy, including the value of establishing specialised industrial zones for promising business clusters with high growth potential.

Unemployment in Tunisia: why it’s so high among women and youth

Why is unemployment among women, youth and educated people so high in Tunisia? Drawing on a new ERF book – The Tunisian Labor Market in an Era of Transition – this column explores three key factors - labour supply pressures; weak demand for skilled labour; and rigidities in the core institutions of the labour market – as well as potential policy responses

Lebanon’s austerity budget of 2019: a last resort to avoid crisis?

Lebanon’s high and rising public debt has become unsustainable. This column explains why it is essential that the austerity measures in the draft budget of 2019 are approved in order to avert imminent debt and exchange rate crises.

Return migration and income mobility in MENA

The emigration and return migration of working-age men in the Middle East and North Africa have significant effects on national economies. This column summarises new evidence on the contribution of moving to another country for work and later returning home to the lifetime earnings and intergenerational socio-economic mobility of workers in Egypt, Jordan and Tunisia.

Falling rents should make way for institutional reforms in Arab states

Can the development prospects of the Arab countries be separated from the natural resource endowments that have been shaping their economies for so long? This column outlines the likely downward trajectories of per capita natural resource rents to 2030 – and the sense of urgency that those numbers should bring to discussions of the need for institutional reform.

Why reforms in the Middle East are unavoidable

One striking feature of the recent economic history of the Middle East is high-income Gulf economies financing the persistent external imbalances of its geo-strategically important neighbours. This column asks what happens when, as a consequence of the technological disruptions of the global fossil fuel market, the current account deficits of key countries in the region are no longer sustainable.

Unemployment in Tunisia: why it’s so high among women and youth

Why is unemployment among women, youth and educated people so high in Tunisia? Drawing on a new ERF book – The Tunisian Labor Market in an Era of Transition – this column explores three key factors - labour supply pressures; weak demand for skilled labour; and rigidities in the core institutions of the labour market – as well as potential policy responses.