The Modern Middle East (66 page)

10
The Challenge of Economic Development

In one form or another, and to one extent or another, all developing countries have faced formidable obstacles in their efforts to foster economic development. For a variety of reasons, the twists and turns of history have left developing countries in an inferior global position in relation to increasingly more powerful and advanced economies. Domestic political institutions and procedures have remained equally underdeveloped and have been subject to violent oscillations and even revolutions, so that making rational economic policy has been even more difficult. Economic and industrial infrastructure could not or have not been allowed to develop, and when they have developed they often have fallen victim to foreign economic domination, the greed or incompetence of domestic tyrants, or, as is often the case, a combination of both. It did not take long for the developing world to lag significantly behind in basic indices of development such as the availability of transportation and storage facilities (roads, ports, and warehouses), hydroelectric dams and power-generating plants, steel mills, and various other industrial complexes that manufacture consumer goods and provide employment opportunities.

By the 1950s and 1960s, the glaring underdevelopment of what by now had emerged as the “Third World” made the large-scale importation of Western industry an attractive and indeed necessary option. Import-substitution industrialization (ISI) policies were adopted in one developing country after another from East Asia to South America, including the countries of the Middle East. The hope was to eventually indigenize the imported industry and, once the industry had become “developed,” to engage in the profitable export of manufactured goods such as appliances, automobiles, spare parts, and other technologically advanced products. For some time, the countries of East Asia—most notably South Korea and
Taiwan—were the only developing countries that made the successful transition from the import phase of ISI to its more mature export phase. But the self-perpetuating dependence on imports did not dissuade most other developing countries, including those in the Middle East, from zealously following ISI as a viable path to industrial development.

This was the general economic predicament in which the countries of the Middle East found themselves by the mid-twentieth century. In many ways, the economic conditions of most Middle Eastern countries in the 1950s and 1960s were not that different from those in many other parts of the developing world at around the same time. The cumulative effects of the Great Depression of the 1930s and the Second World War had been ruinous for almost all countries of the Middle East. Before the 1950s, Middle Eastern economies had relied heavily on agriculture as their primary source of production and capital. The 1920s and 1930s had brought about a period of “deglobalization,” in which previously significant levels of capital flows to and from Europe, derived from the export of primary goods—such as cotton, silk, pearls, and fruits—were greatly reduced.
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Shrinking exports brought about deteriorating terms of trade and balance-of-payment difficulties, to which were added shortages and disruptions of various kinds during World War II. Although the consequences of World War II were not as devastating for the Middle East as had been the case with the First World War, the region’s economies did suffer as a result of the conflict. Iran, for example, was occupied by British and Soviet troops during the war and experienced severe shortages of basic foodstuffs and disruptions to its economy. Turkey, while neutral, was forced to keep a standing army some five hundred thousand strong, which affected its agricultural output.
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Egypt also experienced shortages and hardship during the war. Though it had a brief spurt of economic growth while it served as a base for British troops and was cut off from the rest of Europe, this limited economic progress was offset by its rapid population growth rate, so that per capita income showed no real signs of overall improvement from 1913 to the late 1940s. This appears to have been the case in Syria and Lebanon as well.
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Beginning in the 1950s, a new crop of state actors assumed power in various Middle Eastern countries. These nationalist leaders were painfully aware that their countries’ low-income, agrarian economies needed fundamental structural changes if they were to develop. At the same time, as we saw in chapters 7 and 8, they established “patron” states through which they sought to enhance their domestic legitimacy by providing employment and various means of political and economic patronage. This chapter
examines the challenges these state actors faced in their quest to bring about economic development. Development, of course, is a process shaped by past limitations and present possibilities, and as such it cannot be adequately studied in a historic vacuum. Therefore, the chapter begins with a brief historical account of what the states of the Middle East have done since the 1950s to foster economic development. In the 1950s and 1960s, “statism” became the order of the day; it became even more extensive because of the economic upturn of the 1970s and then was haltingly and gradually modified beginning in the 1980s. Economic policies are shaped not only by the agendas and capabilities of state actors but also by the availability and mobilization of different resources. The emerging political economy of the region became one based primarily on “rent seeking,” with the intent of lessening the potential for economic grievances on the part of the populace. At the same time, few Middle Eastern states have been able to effectively manage or regulate the various sectors of the economy. Specifically, much economic activity remains either completely “informal” or, at best, “semiformal.” Increasing interaction with the global economy over the past few decades has not changed the dynamics underlying the region’s political economy in any fundamental ways. Naturally, intentions and outcomes are not always the same, especially in the emerging economies of the developing world, and for much of the Middle East development has been highly uneven at best and elusive at worst.

By the mid-to late 1950s, the state was almost universally assumed in the Middle East—and elsewhere in the developing world—to be the actor most capable of fostering the structural transformations deemed necessary to bring about economic development. The state was therefore assumed to have a national duty to play a “major role . . . in the direction of the economy both directly through the operation of state-owned enterprises and indirectly through the management of the overall economy.”
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Statism—also referred to by its French variant,
etatism
—thus became the dominant norm in the political economy of the Middle East. As Alan Richards and John Waterbury argue, “The Middle Eastern state took upon itself the challenge of moving the economy onto an industrial footing, shifting population to urban areas, educating and training its youth wherever they lived, raising agricultural productivity to feed the nonagricultural population, redistributing wealth, building a credible military force, and doing battle with international trade and financial regimes that held it in thrall. These
were goals widely held by state elites but poorly understood by citizens at large. There were no impediments, then, to the expansion and affirmation of the interventionist state.”
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These interventionist states ushered in what could best be described as state capitalism: a process of accumulation that gave rise to a state bourgeoisie, who in turn controlled but did not own the major means of production.
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The state accepted the general premises and practices of capitalist competition as effective means of generating economic growth. But it still saw a need for regulating the economy and did so extensively.
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“The economy, from the view point of state capitalists, is simply too important to be left to the ‘invisible hand’ of the marketplace. Individual capitalists, in their view, are too concerned with immediate profits to recognize either their own long-term interests or those of society as a whole.”
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Statism in the Middle East is generally dated from the 1950s to the late 1980s, although in at least two countries of the region, Turkey and Iran, it dates back to the 1930s. By the late 1980s, the developmental policies of the state had generally proven to be failures, thus compelling most states in the Middle East to embark on ambitious-sounding liberalization programs. Nevertheless, today, more than three decades after the start of liberalization programs, the extent to which statism has been dismantled is not at all clear. In many ways, as we will see later, statism remains the norm in the Middle East. Lately, however, many Middle Eastern states have been pretending to have more liberal, open economies.

In the Middle East and elsewhere, state actors opted for statist policies for three general, reinforcing reasons. First, in the absence of a preexisting industrial base and given the pervasiveness of economic and political underdevelopment, they saw the state as the primary agent capable of and responsible for effecting meaningful change, not only socially and politically but economically and industrially as well. Second, most nationalist leaders, especially the generation that came to power in the 1950s and 1960s, viewed the private sector with suspicion and skepticism, seeing it either as an agent of foreign capital or as economically parasitic, or both. This conviction was reinforced by a painful awareness of the state’s disadvantaged position in relation to many multinational corporations and thus the need for greater centralization and policy coordination in dealing with them. Related to this was a third and final factor, namely, the widespread adoption of ISI policies, with the state retaining for itself the role of a central actor. The hope was to satisfy the needs of the expanding domestic market for consumer goods and, at the same time, to eventually replace the export of raw materials with industrial and technological exports. As it
turned out, it was in relation to this last goal that statism suffered perhaps its biggest setbacks.

Statism in the Middle East reached its peak in Algeria (1962–89), Egypt (1957–74), Iran (1962–present), Iraq (1963–2003), Libya (1969–2011), Sudan (1969–72), Syria (1963–present), Tunisia (1962–69), and Turkey (1931–83). Compared to that in the rest of the developing world, Middle Eastern statism has tended to be more extensive and deeper. According to World Bank estimates, for example, worldwide, state-owned manufacturing enterprises accounted for 25 to 50 percent of value added in manufacturing around the year 1980. The comparable percentage for Egypt was 60 percent and for Syria was 55 percent.
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In Egypt in 1953, a year after Colonel Nasser’s coup, the total output from the public sector was £E128.0 million and from the private sector was £E736.6 million. By 1973, the year before President Sadat officially announced the open-door (
infitah
) policy and the start of his liberalization program, public sector output had grown by 11 times, to £E1409.8 million, while private sector output had grown by only 2.5 times, to £E1807.1 million.
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By the 1980s, the Egyptian public sector included 391 companies, employed 1.2 million workers, and had assets with a market value of £E38 billion.
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The state’s economic reach has been equally pervasive elsewhere in the Middle East. In Syria, between 1970 and the 1990s, there was a fivefold increase in the number of civilians employed by the state. By the early 1990s, the state employed some 700,000 civilians, of whom more than 420,000 were part of the state bureaucracy, and another 530,000 men and women served in the armed forces and the security apparatus, bringing the total number of individuals on the state’s payroll to 1,230,000.
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According to the state’s own figures, by 2007, despite the repeated promises of economic liberalization, of a total labor force of 4,950,000, more than one million individuals were still in one way or another employed by the state.
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In Algeria, similarly, the state became the biggest employer and the primary agent of industrial development, setting up a network of forty-five national industrial corporations (the biggest one being the gas and petroleum giant SONATRACH), eight banks and financial organizations, and nineteen national offices, all designed to ensure the state’s monopoly over virtually every facet of the economy.
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By the late 1980s, the state employed 80 percent of the industrial workforce and accounted for 77 percent of total industrial production. A total of 45 percent of Algeria’s nonagricultural labor force was on the state’s payroll.
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Equally high percentages of public employment were found in Iraq prior to the U.S. invasion in 2003: government employment in the late 1970s (410,000 people) amounted to nearly half of the organized workforce. The state also owned some four hundred industrial enterprises, employing nearly one in every four Iraqi citizens.
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Next door in Iran, the 1978–79 revolution ushered in a new wave of nationalization of banks and industry, and by the early 1980s the state owned some six hundred enterprises.
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In the 1980s, some four-fifths of all new jobs created were in the public sector, and by 1986 public sector employment accounted for 31 percent of total employment.
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Similarly high levels of government involvement are found in the economies of ostensibly “liberal” monarchies. In Jordan in the late 1990s, it was estimated that as many as 40 percent of all gainfully employed Jordanians worked for the state, ensuring an elaborate welfare and job protection system meant to sustain the Hashemite monarchy in power.
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In the oil monarchies of the Arabian peninsula, where the state owns and then distributes the revenues accrued from oil, the oil sector accounts for consistently high portions of the gross domestic products. According to 2009 estimates, revenues derived from oil constitute roughly 80 percent of total government income in both Saudi Arabia and Kuwait.
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Similarly, export revenues accrued from oil sales account for some 90 percent of Saudi Arabia’s total exports and 85 percent of Kuwait’s.
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