The Modern Middle East (68 page)

Political considerations, however, are by far more important in explaining the timid—and at times nonexistent—course of economic liberalization in the Middle East over the past two decades or so. Statism, it must be remembered, has been more than just a pattern of economic development. It was, and remains, one of the central means through which successive Middle Eastern regimes have sought to consolidate themselves in relation to their societies. Giant bureaucracies and state-owned enterprises have been seen as the means through which the state ties itself to the various social classes. By ensuring the continued dependence of social actors on its largesse, the state seeks to guarantee society’s continued political compliance. With the possible
exception of revolutionary Iran, by the late 1970s most Middle Eastern states had exhausted the ideological and symbolic sources of legitimacy on which they could rely. As a result, they were reluctant to relinquish the institutional mechanisms that made the urban classes beholden to them. Meaningful economic liberalization meant energizing society and enhancing its potential for (economic) autonomy, and this was a risk the state could ill afford. The widespread collapse of authoritarian states in South America and eastern Europe in the mid-to late 1980s did little to allay the fears of Middle Eastern state actors.

Even in instances in which states have sought to foster genuine economic liberalization programs, the institutional infrastructure needed for the promotion of the private sector have tended to be highly underdeveloped. Across the Middle East and North Africa, privatization efforts have been hampered by the lack of political will on the part of state actors, the unavailability or underdevelopment of institutions meant to encourage investor confidence, and the inability or unwillingness of the state to promote the efforts of private domestic exporters abroad (in comparison, for example, to similar efforts by the South Korean and Brazilian states).
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“Investor perception is that while change is occurring, it is at times reluctant. Since there are powerful social groups that still resist change, investors are concerned about the chance of backsliding.”
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The political economy of the Middle East has in many ways always been more political than economic
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In reforming it, therefore, political factors have taken great precedence over economic ones. In fact, the limited measures of economic liberalization that have taken place so far—and the even more circumscribed measures of political liberalization in the region—are essentially elaborate survival strategies, designed to enhance incumbent states’ resilience and institutional capabilities in light of emerging difficulties. Appearances to the contrary, Middle Eastern states have done little to alter their basic economic relationship with society, a cornerstone of which is the substitution of rent revenues for various forms of direct taxation. Rent-seeking activities remain one of the primary economic concerns of the state, in turn buffeting the state from extensive domestic pressures to disinvest from the economy. It is little surprise that today, some three decades into the era of structural adjustment, Middle Eastern economies remain largely statist.

Excessive state intervention in the economy, coupled with the imperative of pursuing economic policies that boost fragile political legitimacy, has
resulted in the large-scale adoption of rent-seeking economic practices throughout the Middle East. The resulting rentierism has had two broad consequences for the region’s political economy. First, it has curtailed the degree to which society has been able to obtain autonomy from the state, thus undermining the possibilities of democratization “from below.” Second, rentierism has kept the potential for greater economic and industrial development in check, instead perpetuating the very unproductive practices that keep rentierism alive.

Rentierism is the result of earning high profits from economic activities that do not require proportionately high levels of productivity.
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For example, the costs of extracting and exporting oil are far less than the profits accrued from its sale abroad. In the Middle East, in fact, petroleum products have become a primary source of rent for most of the region’s governments, and the oil monarchies in particular have become rentier states par excellence.
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But rent seeking is not limited to the export of primary products at highly profitable rates. “Rationing foreign exchange, restricting entry through licensing procedures, and instituting tariffs or quantitative restrictions on imports are all ways of creating rents.”
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In sharp contrast to “extractive” economies, rentier economies can provide for the population by demanding little or nothing in return. Access to rents reduces the state’s need to extract taxes or other sources of revenue from society.
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Naturally, not all states have equal access to various sources of rents, and for some states rent income constitutes a lower percentage of the gross national product (GNP) than for others. A useful distinction can be made here between rentier states and rentier economies. In a rentier state rent incomes are “quite substantial and accrue directly to the state,” whereas in a rentier economy “the absolute and relative percentage of rent is lower” and “rent does not accrue directly to the central government.”
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In the Middle East, the oil monarchies plus Libya may be considered rentier states, whereas the region’s other countries, including foreign aid–dependent Israel, may be said to have rentier economies.
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The emergence of rentierism in the Middle East can be traced back to the early 1950s, some two decades before the start of the so-called petroleum era. Since then, there have been steady increases in the royalties that the region’s ruling elites receive from the oil companies that extract and export their oil. Initially, almost all these oil companies were foreign owned, although in later decades most were either nationalized or otherwise replaced by domestic, state-owned enterprises. The earliest and most direct beneficiaries of oil-based rentierism were the oil producers along the Persian Gulf, including Iran and Iraq, in addition to Libya and Algeria. But
the oil boom helped foster “rentier economies” in the non–oil producers as well. In the oil monarchies, the oil boom led to the creation of vast employment opportunities in each country and opened the door to hundreds of thousands of expatriate workers from Jordan, Egypt, Syria, Lebanon, the Palestinian territories, and Yemen. The remittances these workers sent back became a major source of rent: “The salaries of the expatriates abroad are higher than they would be had they remained at home and the differential constitutes a form of quasi-rent.”
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Since these non–oil producers simply could not afford the political costs of becoming extractive states, they resorted to three additional means to enhance their rentier features: they ran chronic trade deficits, importing more and more consumer goods for the consumption of the urban middle classes; they ran large budget deficits; and they permitted consumption and investment levels well above what the country’s gross domestic product could sustain.
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By the 1960s and especially the early 1970s, virtually all Middle Eastern states were embarking on aggressive rent-seeking initiatives of one form or another to strengthen their clientelistic ties with the various social classes.
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To ensure the active participation of the urban middle classes in maintaining the political status quo, or at least their passive compliance, the state engaged in rent-seeking activities and pumped the proceeds into the urban economy.
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With varying degrees of success, depending on the larger context in which rent seeking occurred and corporatist and patron-client relations were forged, a self-perpetuating, implicit understanding emerged between a politically and economically omnipresent state and a deepening, increasingly dependent pool of societal clients.
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These clients of the state were primarily urban-based labor groups and unions, industrialists, and civil servants and other public employees (bureaucrats, teachers, physicians working in state-run hospitals, etc.). The essence of the ruling bargain was that the state provided social goods and services by renting out access to natural resources—often hydrocarbons or, for those not endowed with oil, migrant labor—in return for general societal acquiescence to a nonaccountable, undemocratic government.
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In the early to mid-1980s, however, drastic shortfalls in oil revenues, compounded with mismanagement and rampant corruption, threw established methods of rent seeking and the supporting corporatist system of patron-client bonds into serious crisis.
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Oil output fell from a high of thirty-one million barrels per day in 1979 to eighteen million in 1982, while the price of oil fell by 50 percent. Reluctant to revise the political bargains that had served them so well in the 1960s and early 1970s, Middle Eastern leaders initially borrowed heavily from international lenders.
According to one estimate, by 1985 the Arab countries had a cumulative debt of some $80 billion, a figure that rose to $144 billion by the end of 1986.
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This represented an increase of 21 percent in only two years. Before long, the need for new survival strategies could no longer be masked by massive borrowing, and entrenched corporatist arrangements had to be altered accordingly.

Middle Eastern states responded by introducing austerity measures and liberalizing their economies—again, of course, to vastly differing degrees.
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In confronting the crisis of rentierism, a vast majority of states in the Middle East changed their modus operandi only slightly and silenced their opponents with heightened repression and reinvigorated authoritarianism. Only a handful—notably Iran, Lebanon, and Morocco, and to a much lesser extent Jordan and Kuwait—instituted certain political reforms aimed at placating potential opponents (see chapter 7). For the state, maintaining the status quo meant finding new sources of rent (especially in the form of World Bank loans and grants); tightening the corporatist links between the state and its societal allies; and resorting to tactical or blanket repression to remind its opponents of the consequences of nonconformity.
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To satisfy international creditors, several states also embarked on a highly selective privatization campaign, conspicuously absent from which were those institutions that generate rent incomes, such as heavy industries, banks, insurance companies, the oil and phosphate sectors, airlines, and railways.

Rentierism, in short, remains highly vibrant in today’s Middle East, having modulated itself to respond to periodic crises from the 1980s onward. In fundamental ways, this pervasive rentierism has undermined the possibilities for further economic growth and development. In itself, rentierism is not necessarily a hindrance to economic development. Through-----out the developing world, many states engage in rent seeking through subsidies, the logic being that price distortions will stimulate the economy. A select number of states, however, have been able to enforce tight discipline over the recipients of the subsidies, especially firms, demanding from them performance standards in return for favorable prices and terms of trade. This is what has occurred in East Asia’s newly industrialized countries, such as Japan, Taiwan, and South Korea.
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Most Middle Eastern states, however, have been unable to impose discipline on the recipients of rent benefits. As a result, they have inadvertently fostered the emergence of what may best be described as “unruly rentierism.” The underlying causes of unruly rentierism are the precarious nature of the state’s political and ideological legitimacy and the way state building and political consolidation were achieved. In Middle Eastern countries, unlike
in many East Asian countries, political consolidation was attained simultaneously with and through the incorporation of certain social and economic classes into the state-building project. The state, therefore, became beholden to such groups for its continued hold on power and was forced to embark on what one scholar has called “precocious Keynesianism” to keep its societal allies acquiescent.
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But in most East Asian countries, especially Japan, Taiwan, and South Korea, attempts to bring the popular classes into the orbit of the state occurred only
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state actors had secured and consolidated political power. These states were much better positioned, therefore, to place demands on various social groups.

The institutional context and historical evolution of rentierism in the Middle East have had several negative consequences for the developmental potentials of the region. To begin with, extensive state intervention in the economy has brought with it highly bloated and inefficient bureaucracies. Additionally, these bureaucracies are highly susceptible to corruption. At the same time, unruly rentierism has resulted in the development of highly inefficient and uncompetitive industries. Ironically, although one of the original intentions of statism was to curtail the growth of a parasitic private sector, this is exactly what the state’s rentier policies and selective privatization campaign have helped foster. At the same time, particularly in the more oil-dependent rentier economies of Saudi Arabia, Iran, and Algeria, those segments of the private sector that happen to be productive tend to fall victim to the effects of the so-called Dutch disease, whereby steady attention to the profitable oil sector often occurs at the expense of non–oil sectors, not only making them less productive and less competitive but in fact increasing their vulnerability to fluctuations in the foreign exchange rate, inflation, and, ultimately, less expensive imports. Equally detrimental, especially for the manufacturing sector, tend to be the effects of rising exchange rates, making it more expensive for domestic manufacturers to export their goods abroad.
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