The League of Arab Societies

It’s high time for a new Arab League -- one that reflects and supports the rising (and struggling) wave of liberals across the Middle East and North Africa.

Amid disheartening news from across the Arab world, one of the few pleasant surprises has been the reinvigorated Arab League. Since the outbreak of revolution last year, the league has conferred legitimacy on the NATO-led campaign to oust Muammar al-Qaddafi, helped coax Yemeni President Ali Abdullah Saleh out of power, and assisted Europe and the United States in applying pressure on Syrian President Bashar al-Assad to resign. At a time when Egypt, mired in domestic strife, no longer plays a leadership role in the neighborhood, the Arab League has demonstrated that a pan-Arab coalition can serve a useful function.

But the region's defining challenge for years to come -- how to build the foundation for democracy over the fault lines of tribe, sect, ethnicity, and ideology -- requires a different form of transnational leadership. The Arab League remains largely an assembly of autocrats who exploit the divisions within their societies to cling to power. Even the fledgling democracies among its member states have begun to use the same old cynical tactics with their populations. Egypt's post-Mubarak junta is prosecuting foreign and local NGO workers on bogus conspiracy charges, and Arab heads of state have been silent. Despite having assisted the international community in Libya, Syria, and Yemen, the League has not discussed the future of these states' political development. Nor will it: Arab leaders won't press for democratic reforms in other countries that they are unwilling to take on themselves.

While the league should continue to serve as a policy platform for Arab heads of state, the region also needs a transnational body that speaks for the aspirations of civil society activists and reformists -- and the tens of millions of people who stand to benefit from efforts to fight corruption, stem extremism, provide electoral transparency, and build institutions to serve women and the working class. Call it a "League of Arab Societies." This organization should draw inspiration from the region's most successful transnational institution in recent memory: The Muslim World League (MWL), an umbrella organization headquartered in Saudi Arabia that drew together the Muslim Brotherhood, Salafi clerics, and jihadists to fight secular dictatorships.

Founded in 1962 and still active today, the MWL advanced the pan-Islamist ideal of a region organized by a framework of Islamic law. The venture represents an impressive marriage of pragmatism and idealism. The MWL's constituent groups used friendly Saudi terrain to plan and coordinate their activism, endowing mosques with funding and ideological literature and pumping resources into a network of charitable organizations. They fostered an agile political strategy: Where Arab leaders sought an ally in the struggle against communists and socialists, the MWL was there to help. When the United States sought an ally in its struggle against the Soviets, the MWL brought together the infamous team of Islamist groups that fought and flourished in Afghanistan.

It may seem strange to recommend that a liberally oriented "League of Arab Societies" model itself after an organization that nurtured Islamist groups -- including jihadists who violently turned on their backers and the West. But Islamist parties committed to nonviolent activism are now poised to shape the future of Tunisia, Libya, Egypt, and perhaps Syria and Yemen. These parties, which often share an agenda consonant with the MWL's founding principles, also owe a debt of gratitude to that group. This may not be good news from a liberal point of view -- but it is a validation of the Islamists' transnational model.

We should appropriate this model to serve a new, liberal agenda -- one that would stand in stark contrast to the situation region-wide only a few years ago. In 2003, many of the region's reformists and civil society activists hoped that a post-Saddam Iraq could serve as a home base for Arab liberalism, just like Saudi Arabia had long served the cause of Islamism. They did not look to the Arab League for support in this endeavor -- member states were sharply divided over how to engage postwar Iraq diplomatically and economically, let alone get involved in civil-society promotion. Instead of facilitating regional initiatives by Arab liberals on Iraqi soil, the United States adopted a laissez-faire attitude toward Iraq's domestic politics, enabling Arab liberalism's greatest foes to mold the country.

But Arab liberals then were more timid than they are today: Islamism had become the virtually undisputed language by which Arab masses expressed their frustration, and many liberals had made the crucial mistake of seeking common ground with dictators like Tunisia's Zine el-Abidine Ben Ali and Egypt's Hosni Mubarak. Islamists, having achieved control of mosques from the Red Sea to Morocco's Atlantic shores, had consecrated a space for themselves to transmit their ideas and connect with followers. But in a dramatically changed Middle East, Islamism may come to represent authority and imposition rather than disaffection and aspiration. If this happens, the region's disaffected majorities will seek a new set of ideas by which to express their aspirations. Witness Tehran, a city of Islamist domination, where young people dream of liberalism and Islamic reform. As the pendulum swings in many Arab capitals, liberals will have the opportunity to inform this new agenda. A transnational umbrella could equip them with needed resources and create a network to protect them -- providing practical and logistical support and, where necessary, security.

The natural constituent groups for a League of Arab Societies are the liberal organizations, parties, and intellectual circles that have been struggling, in isolation, to gain ground in their home countries. Politicians like Egyptian dissident Ayman Nour, together with the "Tomorrow" party he founded, have already been featured in the West. Arab NGOs devoted to women's issues, labor rights, human rights, rule of law promotion, and civics education have long been on the radar screens of American and European foundations. There are also dozens of liberal voices that deserve institutional backing and a regional network. In Tunisia, Ulfa Yusuf, a charismatic female scholar of Islamic studies, has developed a liberal interpretation of Islamic history that radically diverges from the views of the ruling Islamist Ennahda party. Lebanese scholar and activist Chibli Mallat has built a following around a new political philosophy, dubbed "White Arabism," that marries liberal democracy to Arab nationalism. And even in Saudi Arabia, "Saudi Liberals" -- a virtual, online consortium of thousands of college students, young professionals, and journalists -- envision a cultural and political alternative to Wahhabism. Most of these figures and groups did not rise to prominence during last year's revolutions because they concern themselves with long-term, and not immediate, transformation.

A League of Arab Societies could nurture these groups in valuable ways -- allying with foreign and local powers as needed to win advantages for them and confronting such powers when necessary to protect their interests. Moreover, Saudi-backed precedent demonstrates that a provisional partnership with the United States need not be the kiss of death for such an organization.

Who would back and host such an organization? Some oil-rich states, such as Qatar, have begun to support liberal causes that diverge politically from ideas about governance that have long held sway in the Gulf. Wealthy financial institutions such as Jordan's Arab Bank and billionaire investors such as Saudi Arabia's Waleed bin Talal have become more active in backing Arab political figures. American and European foundations have poured billions into Arab reform initiatives in cooperation with regimes that no longer exist -- and now seek a more effective strategy, less reliant on Arab governments, to advance their values in the region. In all likelihood, the best financial base for a League of Arab Societies is no one party, power, or petro-endowment, but an investor coalition that includes all of the above. As for a suitable location, a country such as Morocco could offer stability and continuity, as well as a social environment in which civil society groups have been steadily growing in strength.

For all its faults, the Muslim World League taught us that meaningful change is both transnational and multigenerational. The Arab League has taught us that transnational cooperation can provide vital support to Arab populations struggling internally against oppression. But it's time for a new, liberal regional grouping that can embrace and foster the dynamic changes across the Middle East and North Africa. Yes, progress will be gradual, but we must take whatever steps we can to accelerate that progress.


Democracy Lab

Why Capital Flows Uphill

You wouldn't necessarily expect capital to move from poor countries to rich ones. But that's exactly what seems to be happening in some cases. Here's why.

Trillions of dollars in capital now cross borders each year in search of profit. And since more is flowing out of developing countries than coming in, the return must be higher in the rich industrialized economies.

Wait; that can't be right. The low-hanging fruit in the United States, Western Europe, and Japan was presumably picked long ago. Shouldn't capital now be sucked into places where labor's cheap and opportunities abound? Indeed, isn't that what global economic integration is about?

It's more complicated than that. (Bet that caught you by surprise.) But there's an important truth underlying this paradox: In a world in which financial market integration lags far behind the integration of trade and technology, flows of financial capital are playing a surprisingly limited role in driving growth in developing economies. In fact, there seems to be a negative correlation between growth and imports of financial capital: The fastest growing emerging-market economies typically save more than they invest at home, with the difference spilling into foreign securities.

To understand what's been happening, look closely at capital flows between the U.S. and China -- the iconic example of the aforementioned paradox. Each year, hundreds of billions of dollars more flow from China (where the productivity of capital is very high) to the United States (where the potential return is lower) than vice-versa. One reason is that Beijing is eager to support job-creating, politically wired exporters, and is thus willing to accept foreigners' IOUs in order to induce them to buy all those laptops and dining sets and designer jeans. To put it another way, if the China's central bank didn't buy humongous quantities of dollars (mostly in the form of U.S. Treasury securities) as a means for holding down the value of China's currency, Walmart and friends might well find it cheaper to buy goods in, say, Thailand or Mexico.

That's not the only reason, though, that Beijing pushes international capital "uphill." It fears currency exchange volatility if it lets private interests determine financial flows in and out of China. This fear, moreover, hardly springs from thin air. Back in 1997-98, surges of "hot" money (short-term liquid investments) from abroad shattered the stability of currencies from Thailand to Indonesia to Korea -- and then went on to wreak havoc in Russia and Brazil. Even Hong Kong, arguably the best-run economy on the planet, was badly shaken in the tumult.

China, by contrast, escaped relatively unscathed because capital controls kept its currency, the renminbi, out of global play. That is, for the most part, Beijing limited foreigners' holdings of renminbi to the amounts needed to do business in China.

Oh, you say: We've learned from the mistakes of the Asian currency crisis; now it's safe to go back in the water of global financial capitalism. Dream on. After all, it was the integration of international capital markets that meant that the American mortgage-backed securities collapse quickly spread to Europe and beyond. Why should China risk infection from global financial viruses?

Actually, China has yet another reason to brush aside the reality that it is investing hundreds of billions annually in U.S. Treasury bills while hundreds of millions of Chinese still lack the capital needed to earn a decent living. The Chinese, who save a higher proportion of their income than any other people in the world, already have more capital than they can make good use of. The real constraint on (even faster) economic development is that China lacks the efficient, well-developed banking and securities markets needed to allocate even more capital into investments that would eventually make the Chinese as productive as their North American or European counterparts.

Indeed, by this reckoning, opening the door to more financial capital would only lead to an asset bubble. The whole point of allowing capital to flow downhill would be to generate more investment in technical education, health care, more efficient transportation, and pollution control (not to mention more factories). But the result might just be more empty apartments and office buildings in the already overbuilt real estate markets of China's booming coastal cities.

Note an important distinction here. In contrast to purely financial investments --say, the purchase of bonds issued by Chinese companies -- the government welcomes foreign direct investment in businesses, especially those that come with new technology and highly skilled management. Foreigners have invested close to $800 billion in Chinese production facilities; the stock of foreign direct investment in China now far exceeds that in Australia, Switzerland or Canada. But it isn't the capital that China wants or thinks it needs, but the productivity spillovers from foreign technology and training.

It's pretty easy, then, to see why China is reluctant to conform to what is often called the "Washington Consensus," which includes the diktat that developing countries should open their economies to global market forces as fast as it is practical. China has done very well by doing things its own way. And (with reason), Chinese leaders suspect that the pressure to conform is in part motivated by ideology, along with rich countries' perceived interest in seeing Chinese exports become less competitive in world markets.

But before buying entirely into the Chinese view, consider this. The reality that China can't make good use of savings from rich countries -- that it chooses to invest in U.S. Treasury securities rather than education or infrastructure or whatever at home -- is not solely a consequence of the Chinese people's extraordinary thrift. It also is a symptom of institutional weakness, of China's well-founded fear that it lacks the management and regulation to operate stable, efficient private capital markets that could funnel more resources into building a modern economy.

It's not clear, moreover, that what is working now will work indefinitely. For one thing, the bigger the Chinese economy becomes, the more difficult it will be to sustain high growth without sophisticated domestic capital markets. And once that becomes painfully clear, China will have to play a dangerous game of catch-up.

For another, the success of China's strategy of export-led growth facilitated by recycling huge quantities of dollars ironically depends on Americans' inclination to save very little. Eventually, this delicate dance of co-dependence must end. More to the point, unless it ends in a coordinated fashion, with America becoming thriftier as the Chinese find satisfactory ways to invest and consume more, there will be hell to pay. And that smooth transition will be next to impossible if China does not speed the development of efficient private capital markets.

China isn't the only relatively poor country that is saving more than it invests at home -- that, in effect, is exporting capital to rich countries and adding to the stresses on an unbalanced global economy. While the particulars vary, these countries generally share the problem of being unable to absorb more capital because they lack efficient capital markets.

But as Eswar Prasad of Cornell (and, not coincidentally, the former head of the IMF's China Division) argues, change is slowed by an inherent tension. International financial integration will eventually serve developing countries' interests, helping to manage the complexity of associated with greater productivity. But the process of getting from here to there will be perilous, giving high-saving countries ample reason to think thrice before opening their doors to financial integration. Pretending otherwise won't make it any easier.