Download lecture 16: the middle east in war and depression

LECTURE 16: THE MIDDLE EAST IN WAR AND DEPRESSION
Practically everyone who has written about the Middle East has recognised that the First World War was a major
turning point in the region. Maurice Yapp, for example, who has written the most authoritative account of the
political history of the region, has argued that the decision of the Ottoman Empire to enter the First World War was
the single most important event in the region’s history. The decision to support Germany, perhaps not surprising
given the threats that Istanbul perceived from the British and Russians, and maybe even from the French certainly
threw the Middle East into turmoil.
Power Politics and the Middle East in the First World War
The Empire tried to forge a pan-Islamic alliance by declaring a jihad but the British quickly stepped in to support
local rulers opposed to Istanbul. The British had become clear about the potential advantages of oil to the Royal
Navy and saw the Middle East as its main potential source of supply. The British also saw the Russians as the key
to eventual victory and knew that they needed a prize for Russia for continuing to fight. The prize would be the
extension of Russian power into the Ottoman territory. The British and the French also had their very strong
designs on the territory of the Ottoman Empire. They concluded in 1916 what is known as the Sykes-Picot
Agreement to divide up much of the Empire, but the British were also doing deals with friendly Arab leaders.
Moreover, the withdrawal of Russia from the combat in 1917 left some of these plans in a mess and induced the
British to believe that they could fill the vacuum left by Russia. If this were not enough, there were also some
powerful negotiations concerning the wartime status of Iran, and again the fading of Russia in 1917 led the British
to believe that strategic, political and diplomatic gains were possible. But perhaps the most significant of these
manoeuvrings for the long-run development of the region was the Balfour declaration. Lord Balfour was Britain’s
foreign secretary and declared in a letter of 2 November 1917 to a leading British Zionist, Lord Rothschild, that
Britain would use its best endeavours for the establishment of Palestine as the national home for the Jewish people.
There were important provisos, that nothing should be done to compromise the civil and religious rights of nonJews in the area, and that nothing would compromise the rights of Jews in any other country. No-one really knows
what Balfour understood by a deliberately vague form of words or what the ultimate purpose of his declaration
might be, not least because the British continued to work with Arab nationalists against Ottoman rule.
The region did not experience the dour, slogging warfare of Flanders, but notable campaigns in the
Middle East included the escapades of T.E. Lawrence in what is now Jordan and Syria and the botched landings at
Gallipoli. The real significance of the First World War, however, was that the Ottoman Empire, being on the losing
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side, was effectively made subject to the justice of the victors and the victors had already planned to carve up the
area. Moreover, the collapse of Germany on the Western Front was sudden. The Ottoman Empire passed up the
opportunity of a separate peace deal in early 1918 because it thought that it could do better with Germany.
The collapse of the Ottoman Empire and the chaos in Iran gave the Western Powers the opportunity to
impose on the Middle East their own terms. Peace making in 1918-19 was driven by a multitude of often
conflicting principles, but two had particular importance for the Middle East. They were the alleged rights of selfdetermination of groups that could be defined as ‘nations’ and the great desire to punish the Ottoman rulers for
rising up against the dominant European economic powers and trying to incite an Islamic revolution. As a result of
the deals done during wartime, the Arab provinces of the Ottoman Empire were carved up into separate successor
states, but each was under the control of either Britain or France. This control was underwritten by the new League
of Nations, which in 1922 issued Mandates to Britain and France to govern the area, subject to certain
internationally agreed guidelines, especially to establish constitutional governments in these states to prepare them
for eventual independence. These plans were certainly not accepted meekly. There were revolts against the British
in Egypt, Iraq and Palestine, where there were also anti-Jewish demonstrations. French control of Syria was
challenged almost continually to the later 1920s. In other areas, however, local indigenous control became more
firmly rooted.
Britain, France and Nationalism in the Middle East after 1918
We looked at the Turkish case in the first semester. Despite the attempts of the Great Powers to establish spheres
of influence in what was left of the Turkish state left after the Versailles Peace Conference, the local population
rebelled. The Turkish forces rallied under General Mustafa Kemal, later Ataturk (father of the Turks), and
consolidated a Turkish Republic in 1922. In Iran, the post-1918 stand-off, with Russian forces in the north, British
in the south and the buffer zone occupied by smaller-scale war lords, was broken when another local military
leader managed to regain control. General Reza Khan managed to impose his army over virtually the length and
breadth of the country and to build the institutions of a more modern state.
Despite these signs of Middle Eastern independence, it was the British and the French who were dominant
in the region. They decided the national boundaries of the new states, who should rule, under what constitutional
forms and, together with the Americans, how the region’s newly discovered natural resources should be exploited
(Owen 1992, 11). This control lasted, in the British case, roughly until independence in the mid-1950s. In
examining the development of the Middle Eastern economy, it is more or less essential to begin with the mandated
territories. Britain was the mandated power over Iraq, Palestine and Transjordan, with the French in control of
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Syria and Lebanon. All of these states had to be created and it was one of the great objectives of the British and the
French that these new states should pay for themselves. This meant that attention was given first to the creation of
a central bureaucratic authority and a police force, with the added these states could spend only what they raised in
taxes. A priority was the creation of a tax base, and a tax on land was the obvious candidate. But Britain and
France had also decided that political control was cheapest if it was undertaken in alliance with rather than in
opposition to the local power structure. Land ownership was both the source of political power and agriculture the
overwhelmingly predominant economic activity, and so second-best solutions had to be found to the question of
raising revenue, commonly in the form of a tax on trade. Of these mandated territories, the richest was undoubtedly
Iraq. It had water, a substantial agricultural acreage – at least by the standards of the region – and, from the later
1920s oil revenues from royalties paid on each ton of oil extracted by the British-controlled Iraq Petroleum
Company. The country that had the hardest time between the wars was Transjordan, since it had few natural
resources, its borders were threatened by powerful tribes over the borders in Saudi Arabia and Iraq. Its population
was tiny and dependent on uncertain winter rains for agriculture and herding.
Britain and Palestine
The most interesting is undoubtedly Palestine, because the Balfour Declaration committed the British to facilitate
the establishment of a Jewish national home, and this was written into the Mandate from the League of Nations. In
effect, the British had to pay special attention to Jewish immigration and to Jewish land purchase and the earliest
British officials concluded that this part of the mandate would be carried out most easily if the regional economy
was expanding. Accordingly they did more to assist the industrial development of Palestine, especially in the
1920s by manipulating tariffs, than elsewhere in the Middle East. However, Palestinian Arab objections to
increased Jewish immigration were powerful, and the British began to make the condition of the local Arab rural
population a higher priority, but without real success.
Any assessment of the performance of the Palestinian economy between the wars is necessarily intensely
political but it would be a reasonably fair summary to suggest that the Palestinian economy grew solidly,
especially up to the mid-1930s. However, the kernel of that growth lay in the Jewish community, which was much
less agricultural than that of the Palestinian Arabs. The growing income differential and the increasing
displacement of Arabs from land bought by Jewish immigrants only fuelled ethnic conflict, which intensified as
German Jews fled Hitler from the mid-1930s. the Jewish part of the Palestinian economy was more oriented to
manufacturing than was the Arab and this resulted in higher incomes, better educational provision and more secure
employment for Palestinian Jews than Arabs.
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Egypt
Egypt, by contrast, was nominally independent between the wars, though the British remained powerful through
the supply of capital and expertise. Britain had formally established a Protectorate in Egypt in 1914, to preserve its
position during the First World War, but British wartime policy hit ordinary Egyptians relatively hard. Inflation
during wartime and the immediate post-war period eroded living standards and the cotton growers were badly hit
by the wartime loss of markets. The Egyptians rose up in 1919 and forced the British to agree to independence and
to hand the administration of the country back to the Egyptians, while retaining control over key strategic points
like the Suez canal. The loosening of British control in Egypt is clearly in stark contrast with the assumption of
formal control in the Mandated territories, but in most economic respects Egypt suffered a similar plight to other
primary producers.
The Egyptian economy was dominated by agriculture and by cotton, which in a normal year absorbed
about one-third of the cultivated ground, but the cotton economy had a major problem in the interwar years. The
first problem intensive cultivation and irrigation before the First World War resulted in some exhaustion of soil
fertility and salination and this loss of vigour resulted in greater vulnerability to pests and diseases. It took some
time in the early 1920s to resolve these problems, and the economy was shaken again by the international slump of
1929-32. Manufacturing showed some signs of increasing vigour, especially after 1930 when tariffs were raised.
But manufacturing remained small in scale and its fundamental difficulties arose from the small size of the
Egyptian market, inducing much inefficient and high-cost production. In fact any assessment of Egyptian
economic development before 1939 would have to be disappointing. The economy did indeed grow, but at
approximately the same pace as its population. The figures in the basic statistical material (drawn largely from the
work of Angus Maddison) indicate that income per head in Egypt was at roughly similar levels in 1900, 1913 and
1950 (the three dates in the first half of the century for which estimates are available). These are perfectly
consistent with those from other authorities such as Issawi who have argued that the average standard of living in
Egypt stagnated for the first half of the 20th century.
Following on from the problems in agriculture, Egypt found it difficult to generate resources for
investment. Incomes were low, which made it difficult to generate a surplus from investment from within. Foreign
capital was put off Egypt by the 1919 Egyptian uprising, so it was unrealistic to hold any expectations of foreign
investment. The Bank Misr was formed in 1920 to raise Egyptian capital to finance exclusively Egyptian projects,
but these too were relatively small-scale operations with limited long-run economic impact. There was a similar
story in the development of human capital. When the bureaucracy and policy machine was handed back to
Egyptians in 1922, there was a conscious effort to increase spending on education, which the British had neglected.
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But the expansion of state spending was small, in part because of the familiar Middle Eastern problem of fiscal
constraints. To increase public expenditure implied higher taxes on land. But the larger landowners were politically
well-organised and succeeded in blocking higher taxes on more than one occasion. Thus, the economy was
vulnerable to changes of world market conditions for its major export sector, raw cotton, and the big fall in cotton
prices during the slump dealt a body blow to hopes for economic progress. At one level, this is a significantly
disappointing result. Egypt was the Middle Eastern country with relatively generous supplies of water, fertile land
and signs of structural change towards industry. But countries outside the Middle East with similar heavy
commitments to cotton and other forms of tropical agricultural exports suffered a similar fate. Perhaps Egypt’s
economic performance should be described as perfectly understandable rather than disappointing.
Turkey and Iran
In the first semester, I gave an outline of Turkish development, emphasising the efforts to create a single, unified
nation state, especially through the expansion of public expenditure, and to try to develop the economy away from
dependence on agriculture towards industrialisation. Many of the basic outlines and structures are very similar to
those of Iran between the wars, so I will concentrate on Iran and then draw a brief comparison with Turkey.
Iran tried to remain neutral during the First World War but without much success, as Russian, British and
Turkish troops invaded the country and German agents stirred up tribal unrest. Popular sympathies in Iran lay with
the Central Powers, not least because the Ottoman empire, the only Islamic group in the conflict, was part of the
Central Powers against the British and Russians. A breakaway group within Iran did declare war against the Allies,
prompting the invasions already mentioned and the virtual collapse of Iranian economy and society after 1916. As
in Turkey, the disturbances continued into the early 1920s and only ended when the British encouraged a coup by a
strong military commander, Reza Khan, who made himself Reza Shah Pahlavi in 1925. He set about creating the
first centralised state in modern Iran. He was much influenced by Mustafa Kemal, the founder of modern Turkey,
another a strong nationalist who first modernised the army to make it a centralised and unified national force to end
the widespread banditry and impose peace and control. By 1925, the army was the most powerful and centralised
institution in the whole country (Karshenas 1990: 65). Again following the Turkish precedent, he moved to
secularise society and restrict the decisive role of religion in society, particularly its role in defining status and its
role in the legal system. Gradually a civil and penal code came to transform judicial practices from the personal
interpretation of religious law by individual mullahs, to a more bureaucratic, system in which judges were
appointed to administer the law on the basis of their formal knowledge of the penal code (Karshenas 1990: 65-6).
The administration of government was reformed by the creation of a unified civil service, with competitive entry
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based on educational attainment and a definite career path, separate ministries and a central bank under Iranian
ownership. A key part of creating a new centralised and unified bureaucratic machine was to sort out the state’s
own finances.
Like the reformers of 1908-11, Pahlavi called on a US financial adviser, A.C. Millspaugh, to set the
country’s internal and external finances on a sound footing. He centralised fiscal authority from the various
ministries to the Ministry of Finance. Obsolete taxes were withdrawn and the collection of other taxes was
streamlined and improved. From 1924 an annual budget was published and by 1927, servicing the public debt had
been cut to only 3 per cent of the total budget. Reform of the tax structure however upset the landowners, who had
for years been adept at avoiding taxes. Millspaugh wanted to shift the burden of taxation from the shoulders of the
peasantry to other sources of revenue. The landlords objected and caused the Shah to get rid of Millspaugh in
1927, but he had by then completed the essence of his task; the public accounts were now on a sound footing. The
major source of expenditure was on defence, which accounted for something in the region of 30-40 per cent of all
budgetary expenditure during the period of Reza Shah (and indeed of his successor, his son). Reza Shah’s regime,
like its predecessors and its successors, became increasingly autocratic, and increasingly dependent upon force
rather than consent as a means of gaining legitimacy.
The regime’s biggest problems in gaining legitimacy lay with the large-scale landowners. Before Reza
Shah’s centralisation of power, the large landowners had been virtual princes in their own lands. The Shah’s law
reforms turned the landlords into private subjects of the state but the government decided not to interfere with in
the relationship between landlords and peasants. In other words, the regime struck a compromise; it extended its
formal power over the major landowners, and some major landowners joined the bureaucracy or the military elite.
But the regime decided against major modernising policies, like land reform, which might have created great
popularity for the regime amongst peasants but would have seriously antagonised the landowners. As a result,
agriculture was left largely untouched by Reza Shah’s increasingly centralised, increasingly powerful state
machine. If agriculture could not be the focal point for modernisation, the regime had to look to industry to
strengthen the economy and overcome the problems created by Iran’s peripheral role in the world economy.
The state’s economic policy under Reza Shah fell into two parts, with the world slump as the dividing
line. In the 1920s, the government attempted relatively little. Its main efforts were concentrated on the financial
and bureaucratic reforms we have already discussed and improving the means of transportation. One of the first
problems to be tackled was the lack of economic integration in the Iranian economy. The regime bought 200
lorries in the mid-1920s to distribute agricultural crops from surplus to famine areas. It did not prevent local
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famines but it did cut significantly illnesses and deaths due to malnutrition. Of course, road transport is only as
good as the roads on which it operates, and in 1927 the government established a nine-year road building
programme and the results were fairly impressive. In addition, there was large scale importing of new vehicles and
a rapid fall in freight rates for internal transport. Otherwise, economic policy was very limited. The regime retained
the commitment to free trade but the export sector lagged because of shortage of capital, except in the Britishowned oil industry, and the decline of world trade during the world slump of 1929-31 only made matters
considerably worse.
By the mid-1930s the need for economic restructuring became obvious, and the example of importsubstitution industrialisation in Turkey provided an example to follow. The centralised state apparatus was now
used for the first time as an instrument for economic policy formation. The government first tried to control foreign
trade with very high tariffs, import controls and exchange controls. It then turned to an industrialisation policy,
based on consumer products such as sugar, cotton, silk and wool and the intermediate product cement. By the end
of the 1930s the government owned and operated some 100 factories. At the same time, the state was allocating
about 20 per cent of its general budget to industry and the phase of fastest growth was in the period 1934-38. But,
the Shah’s industrialisation drive seems to have been a bit of a mess. The new economic enterprises suffered from
over-centralisation and bureaucratic inefficiency, as is typical with development ‘from above’. Government needed
to protect these industries by huge tariffs to get them established, but the unwillingness to reduce tariffs simply
allowed the factories to remain highly inefficient. The development strategy was accompanied by high inflation.
Reza Shah wanted to modernise but was short of capital. In this respect, it was in a similar position to Stalin’s
Soviet Union and adopted a similar solution. The state bought basic foodstuffs very cheaply and sold them more
expensively and used the difference to fund the industrialisation programme. Reza Shah could not follow Stalin
and institute a major land reform, because he needed to avoid antagonising the landlords, as we have seen. The
government could not raise sufficient funds from these methods and had to deficit finance, which was the
underlying inflationary mechanism in the Iranian economy in the later 1930s.
Part of this problem could have been resolved if the regime could have had bigger returns from the oil
industry, the unequivocally modern part of the Iranian economy. However, the oil sector was an enclave, owned
and controlled from Britain and directed without any thought for the needs of the Iranian economy. The Iranian
government had an agreement with APOC over the payment of revenues based on the company’s annual net
profits but APOC did what MNCs always do and minimised its tax liability by creative accounting. Not
surprisingly the friction between the government and the company mounted. Even after re-negotiating the
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agreement on Iran’s share of the oil wealth and seeing rising oil sales during the years after 1932, oil revenue
amounted to only something like 16-17 per cent of total government income. This has to be compared with the
figure of 50 per cent which was reached in the mid-1960s and 75 per cent reached after the OPEC price rises of
1973, which we will look at next time.
Thus, we have two perspectives on the Iranian economy in the interwar years. The first is of a
modernising regime that alone had the capacity to mobilise the capital required for industrialisation but lacked
expertise and ability in other critical areas. The other is of an administration that was basically inept. The question
of internal transport illustrates the range of possibilities. As we have already seen, road building was one of the
successes of the regime’s development policies, but its most grandiose follies was the railway. There were only
about 250 miles of track before the Trans-Iranian Railway Act in 1925 and much of it was in complete disuse apart
from a spur to the Russian system in north-west Iran and a short stretch of line around Tehran. However, the entire
political class saw railway building as an essential part of modernisation, and in 1927 work began on the TransIranian railway. Finance came entirely from local sources - largely from indirect taxes falling squarely on the
peasantry. When completed in 1939 the line ran for 862 miles, joining Bandar Shah on the Caspian Sea to Bandar
Shapour on the Gulf. It cost £30 million, of which roughly 40 per cent consisted of foreign currency
commitments. Apart from Tehran and Ahvaz, the route touched no major city. It was isolated at first from all
international rail systems, while the two ports that it connected were unimportant in foreign trade. Estimated
passenger and freight traffic was clearly insufficient to warrant the massive expenditure, and the severe gradients
made it impossible to transport heavy machinery. It was equivalent to building the first major railway in Britain
from Tiverton to Hebden Bridge via Glossop. It would have been more rational in economic terms to build roads,
but the aims of the railway were both military/strategic and nationalistic. The Shah wanted to link his estates
around Bandar Shah with Tehran and wanted to get his army to the south where tribal dissidents were most
troublesome. The railway was moreover a symbol of modernism for the entire urban society.
Thus, the Iranian economy between the wars suffered from a combination of domestic inexperience and
incompetence and the difficulties of LDC governments in negotiating with MNCs from the centre. But there were
also more fundamental fissures. The upper and new middle classes were becoming increasingly westernised and
alienated from traditional religious and cultural values. Reza Shah tried to secularise Iran; traditional religion was
viewed as backward-looking. A split developed between metropolitan Iran and the village, which was seen by the
regime as a haven of traditionalism. The peasantry did not understand what the elite was trying to do and certainly
did not trust what was happening. This looks like classic dependency analysis, but there are riders. The Shah was
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able to play rich country interests off against one another. Because of his dealings with APOC and the warm
overtures that Nazi Germany put out to southern Europe and the Middle East, the Iranian regime was very antiBritish. The Shah attempted to interest the two European powers in bidding up their interests in the region.
However, his successes were limited, as were those of Turkey, which followed a similar strategy.
The Middle East and the Second World War
The final point to consider is the impact of the Second World War on the region. We can examine this at two
levels. First, the Second World War, like the First, had an important positive impact on the politics of nationalism
and independence. Just as the First World War had resulted in the creation of new states out of the Ottoman
Empire and grant of formal independence to Egypt, so the Second hastened the end of the formal control of
European powers. The two French mandated territories in the region, Syria and Lebanon, received formal
independence in 1943, but the British and French troops finally withdrew only in 1946. Transjordan, renamed
Jordan, received its independence from the British in 1946. The growing influence of the USA and the USSR in
the region from the middle of the war also had profound consequences not only for the short-run role of the old
mandatory powers but in the longer run. The Middle East became the cockpit of postwar international politics.
Finally, the Second World War effectively decided the Palestinian question. The growth of Jewish economic
activity in Palestine during wartime and the revelations about the Nazi extermination camps made it more or less
inevitable that there would be a new postwar Jewish state. This was not, however, one of Britain’s more effective
episodes in foreign policy in the 1940s. By one means or another, the Second World War brought political
independence (of a sort) to the Middle East.
In economic terms, the war caused reductions in income but probably also accelerated the pace of
economic development, if we take structural change as a major element in that process. Living standards
undoubtedly fell during wartime. GNP per head in Egypt fell by approximately 10 per cent during the war and in
Turkey by approximately double that. For other countries, precise information is not available, but there is little
doubt that living standards fell generally. The main problem, especially in the western Middle East, was the
closure of the Mediterranean by the German navy, which hurt all countries dependent upon its use. The region was
militarised, which meant a huge increase in the number of mouths to feed and a massive increase in the local
money supply as military requisitions were added to local demands. The result was massive inflation and severe
dislocation. Agriculture was the real loser, especially the Egyptian cotton growers with their huge dependence on
world trade, and the major beneficiaries were those who could supply the military with the unsophisticated
manufactures that they needed – from beer, cigarettes, textiles and basic metal goods like petrol cans and barbed
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wire. This laid the basis for future growth as did the extension of commercial agriculture and wage labour. It would
not be too unrealistic to see negative growth but positive development in the Middle East economy during the
Second World War.
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