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Chapter 4: Political Economy
Pete W. Moore
Introduction
One of the most popular socio-cultural stereotypes of Arabs is their predisposition to
business and trade. After all, the Prophet Muhammad was a successful businessman and the
region has long been geographically defined by its great urban trading centers. This is a
stereotype that many Arabs embrace and even joke about. To whit: “The math teacher asks a
Lebanese student “what is two plus two?” The student responds, „it depends, are you buying or
selling?‟” Few however, see business or making money as divorced from politics. Indeed,
following the money or exploring the political rationale for particular investment decisions is the
stuff of everyday discussion, whether among the urbanites of the oil rich Gulf states or among
rural populations in North Africa. And it is this critical disposition which binds the sub-field of
Political Economy. Where does the money go? Who decides? What are the effects of the
intersection between politics and the economy? The study of political economy can be basically
defined as investigating the effect of political variables on economic outcomes (how does
authoritarian rule affect economic development?) or analyzing the effect of economic change on
political outcomes (do oil profits impede the development of democracy?).
While many approaches in political economy borrow from both directions, scholarly
biases favoring political or economic arguments are common. This chapter will stress the
political foundations of economies and their effects, but the economic arguments will not be
ignored. Specifically, we will cover four themes that bind the Middle East region:
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1. Since the end of World War Two, political leaders in the Middle East have crafted and
implemented economic policies with clear political imperatives to maintain their
political power and the socio-economic privileges of their supporters.
2. The discovery and exploitation of oil in the region have interacted with the domestic
politics of countries as well as the relations between states in the region.
3. There has been a tension between state-dominated economies, which has been the
norm for most of the post-World War Two period, versus the regional and
international drive in the last twenty years to reform and liberalize those same
economies.
4. The manifestations of global market forces (“globalization”) are having varied effects
on the region‟s people and states.
All the countries of the region have gone through similar periods of growth and
stagnation. In the aftermath of World War Two, optimism and enthusiasm for political
independence influenced political leaderships to embark on grand plans to catch up to the rest of
the world in economic terms and with regard to infrastructure development. From about the
mid-1960s until the early 1980s, the region witnessed what can be termed the boom period, in
which increasingly high oil prices and growing public investment flooded domestic economies
with significant capital and finance. Urban growth was massive as was migration to cities;
highway systems, ports, and communications networks were put in place; public education
expanded; and government bureaucracies swelled. Given that all of this investment was guided
by regimes of unelected monarchs and presidents, there was a clear political subtext. Money and
the ruler‟s economic privileges could be used to buy loyalty or weaken one‟s political
adversaries.
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But this bubble was destined to burst (see Table 4.1). Starting in the early 1980s, oil
prices dropped quickly, public budgets went into debt, and in parts of the region with persistent
violent conflicts, instability combined with these dislocations led to what has been termed the
bust period. This meant growth rates stagnated and unemployment increased. Promises of
socio-economic equality gave way to increasing inequality, both economically and politically.
Some states attempted austerity measures -- like increases in prices and reductions in welfare
subsidies -- but often this led to public disturbances and riots. For much of the 1980s and 1990s,
states muddled through.
Not all countries, however, have failed to achieve productive economic development.
Turkey, Israel, and Tunisia have upgraded workforce skills and capitalized on exports in niche
industries. And among the Gulf oil states, Dubai in the United Arab Emirates has launched
unprecedented efforts at diversification away from oil reliance. Still, for most of the region,
boom and bust have gone hand in hand and periodic economic growth has not led to productive
or sustainable development. Since the turn of the century, the pendulum has again swung wildly.
While a new oil boom was well underway in the early 2000s, the 2008 financial crisis sent prices
plunging and regional financial fears have followed. The next sections will examine the legacies
of colonial rule that shaped independent states‟ policies, the years of economic growth or boom,
oil politics, the bust period that followed, and the current situation of the region‟s political
economies.
The Colonial State and Political Economy Legacies
For most of the region‟s states, formal political independence from the European powers
came after World War Two. Prior to European domination, the Ottoman Empire had controlled
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Table 4.1 GDP Growth (percent per year average)
1960-70
1970-80
1980-90
1990-00
2000-06
Algeria
4.3
7.0
2.7
1.9
5.0
Bahrain
--
--
1.2
Egypt
4.3
7.4
6
4.4
4.0
Iran
11.3
2.5
-0.2
3.1
5.6
Iraq
6.1
12.1
--
--
-11.4
Israel
8.1
4.1
3.4
1.5
2.6
Jordan
--
--
4
5.0
6.1
Kuwait
5.7
2.5
-0.8
4.9
7.3
Lebanon
--
--
--
6.1
3.7
Libya
24.4
2.2
-6.4
--
3.2
Morocco
4.4
5.6
3.7
2.4
5.1
Oman
19.5
6.5
10
4.5
4.2
Qatar
---
--
--
Saudi Arabia --
10.6
-0.5
2.1
4.4
Syria
4.6
10.0
2.8
5.1
4.2
Tunisia
4.7
7.5
3.8
4.7
4.6
Turkey
6.0
5.9
4.1
3.8
5.6
UAE
--
1.3
4.8
8.2
WB & Gaza
--
--
7.3
0.2
Yemen
--
--
6.0
3.9
--
Sources: World Bank, World Development Report, 1982 p. 196, 1987 p. 223 and World
Development Indicators 2008, pp. 198-200, and World Development Indicators Online
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the region‟s people and economies. None of these external powers were interested in
establishing responsible governance or developing productive economies. Instead, policies
directed at the people and societies within a foreign power‟s control were designed to serve
external strategic and commercial aims, often in competition with other outside powers. These
legacies meant that newly independent rulers were hardly working from a blank slate when it
came to their political economies. Hundreds of years of foreign rule, punctuated by two world
wars in the 20th century, left their impact in three ways.
First, when foreign governors and military forces departed, they left behind institutions
that governed the collection of revenue, import and export practices, the distribution of
investment, and the adjudication of private property rights. Colonial rulers generally did not
invest in developing states‟ administrative capacities to tax residents and businesses – thus
generating a legacy wherein, after independence, indigenous elites had important political
leverage over merchants and citizens since rulers did not rely on them to generate public funds.
Colonial powers determined import and export monopolies whereby selected business elites
were given special access to import goods -- often from the colonial homeland (Vitalis and
Heydemann 2000). This had the effect of weakening domestic producers of the same good
(often agricultural products) as well as weakening other domestic private sector elements, which
were left out of the special deals. Where large settler or foreign merchant communities existed
(Algeria, Palestine, Egypt, and Turkey), colonial rule supported and extended those
communities‟ economic privileges, thereby setting the stage for political backlash after
independence. Colonial officials also favored the creation or continued existence of large
landowning elites in the rural areas of countries like Egypt, Syria, and Iraq. The existence of
these, often absent, landlords dampened development in rural agriculture, increased rural
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inequities, and provided resistance to industrialization in urban areas. But because these rural
elites supported colonial rulers, their interests were protected (Gerber 1987). Finally, where
external powers did establish profitable businesses within the indigenous economies (particularly
in the oil sector and Egypt‟s Suez Canal for example), continued foreign control even after
political independence would ensure future political conflict.
Second, the creation of new states and borders limited the choices available to build
economies or imparted heavy incentives to build one‟s economy in a specific direction. In the
most basic sense, the creation of new borders recognized by the United Nations meant some new
states had natural resources while others did not -- oil reserves being the most obvious. Where
whole new political entities were created, as in Lebanon and Jordan, labor markets, private sector
alignments, and domestic markets were completely remade. In the pre-independence years, for
example, merchants (especially in the Gulf) could migrate to other areas if relations with local
political rulers soured. Once new borders were established, this form of exit was cut off (Crystal
1995). In short, the regional state system determined by departing colonial powers meant local
leaders inherited a geographic and political economy terrain which could not be changed.
Third, how political independence from colonial rule unfolded often left important
political economy legacies. Turkey‟s achievement of independence under the leadership of
Kemal Ataturk proved an early model for the economic development of other states later in the
century. Ataturk‟s 1930s policies crafting significant state control over the economy and
financial sectors would be replicated by Gamal Abdul Nasser in Egypt twenty years later
(Richards and Waterbury 1990, pp. 187-193). The violent Algerian war of independence from
France also led to a subsequent political arrangement in which a strong Algerian state dominated
by the victorious National Liberation Front (FLN) would guide economic decisions. Another
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violent conflict which resulted in the creation of the State of Israel in 1948 had profound effects
on regional political economies as neighboring states Jordan, Syria, and Egypt directed precious
resources away from social development and toward military spending.
All Middle East states inherited political economic institutions and factors shaping their
future development. This did not mean trajectories could not be changed or that destinies were
set; however, decisions in the new environment of political independence were circumscribed.
Moving sharply against these legacies would not be easy or politically profitable in most cases.
The Boom Years: 1950s-1970s
For many in the Middle East, the end of World War Two marked an optimistic change.
The instability of the end of Ottoman rule and the dislocations from European dominance under
the Mandate system were in the past. Formal political independence seemed to promise control
over the future. The challenges of building new states and economies, however, were daunting.
Political leaders had to build new state bureaucracies from the remnants of previous colonial
rule; craft national identities and attachments for populations that were sometimes very socially
diverse; and, finally, construct national economies with a promise of higher living standards for
all. Rulers pursued all of these tasks simultaneously within a highly unequal global economy
dominated by Western countries. Moreover, attempts to address one of these tasks would surely
affect the prospects of solving the others. To add further complication, countries faced these
challenges from different starting points or levels of preparation.
Some of the resource-poor countries like Syria, Jordan, and Lebanon (as well as resourcerich Iraq) had complex societal divisions, which meant economic decisions that favored one part
of society over the other were bound to have adverse political effects. A number of the smaller
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Gulf countries did not face such divisions, but having wholly new political borders and limited
urban populations brought other challenges. Where they enjoyed an advantage was close
European and American support for building their oil-based economies right from the start. By
contrast, a state like Egypt had a more developed bureaucracy and civil service inherited from
British rule, yet that same colonial legacy meant Egypt‟s finance and trade sectors were
dominated by foreign interests (the British-French-owned Suez Canal for example). Perhaps the
best prepared states could be found in Turkey and Israel after 1948. In both cases, but owing to
different reasons (Turkey because foreign rule was expelled and Israel because foreign support
undergirded Jewish rule), states enjoyed comparatively more autonomy from external economic
influences than their neighbors. Domestically, political leaders in each state also faced less
entrenched socio-economic interests (particularly the absence of large landowning elites) which
could thwart efforts at economic development and industrialization, as often occurred in other
parts of the region. Despite different levels of preparation, all of the countries built their
economies with significant state leadership. All would realize decades of economic expansion
and growth, but uneven productive development.
In the 1950s, a consensus emerged that economic development required strong state
guidance. The argument followed that private capital in the Middle East was weak and that
public finance would have to be injected to kick start growth. Strong national leadership was
required to guide the process and generate a national commitment to large-scale public
enterprises. Again, Ataturk‟s Turkey provided the model which Egypt and a number of other
Arab states would follow. Coupled with the rising tide of anti-colonial movements in the region,
these statist policies became wrapped in a collectivist ideology. State-led development and
socialist means of production -- meaning significant public ownership of leading economic
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sectors -- had the declared goal of guaranteeing that all classes of Arabs would benefit from
growth. Rural peasants would be liberated from serf-like conditions and urban workers would
join with students in moving toward greater social equality. That an Egyptian, Syrian, or
Algerian state would control the key economic assets of the country would free countries from
foreign economic control. These world views dominated economic policy discourse well into
the 1970s and produced widely shared economic policies across the region, including:
1. growth of the public sector
2. state-directed finance and creation of state-owned enterprises (SOEs)
3. nationalization of leading economic enterprises
4. rural land reform and agricultural expansion
Building the capacity of the public sector entailed wholesale expansion of government
agencies and related institutions that were ostensibly meant to regulate and manage the domestic
economy. In the 1950s and especially 1960s, the size and scope of government ministries
expanded significantly. The logic was that since the economies of the region were
“underdeveloped,” modern civil servants and state capacities were needed to guide and
encourage economic growth. Expanded government offices were tasked with implementing a
slate of economic laws that newly independent political rulers had designed. An important
complement to public sector expansion was the treatment of labor unions and professional
associations. With few exceptions, unions and professional associations of doctors, lawyers, and
engineers were brought under state control. In countries with mass-based political parties -- like
the FLN in Algeria, the Ba‟ath parties in Syria and Iraq, and the Arab Socialist Union in Egypt -unions and associations came under party control. To get a business license or practice in one‟s
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field, membership in such associations or the party was required. In addition, state officials
controlled the leadership and funding of these organizations and monitored their activities.
States also moved aggressively to nationalize leading industries and financial
enterprises. Among the countries without oil reserves, industrial, agricultural, and transportation
sectors were the first to be nationalized. This typically entailed state purchase of company assets
from foreign and domestic shareholders. The most famous of these nationalizations was
Nasser‟s nationalization of the British-French-owned Suez Canal in 1956. Such sequestrations
were replicated across the region. While some countries like Jordan professed a “free market”
commitment even in these early years, all countries, including Israel and Turkey, allowed for
significant state involvement in the economy. The oil exporting nations followed similar
patterns, however, national oil companies which had been controlled by European and American
firms were the primary targets of nationalization. By the 1970s, all major oil exporting countries
had completely taken over their oil industries. In addition to the takeover of resident firms, states
also created wholly new public industries and utilities, such as national airlines,
telecommunications, and transportation companies. These SOEs enjoyed subsidized inputs and
protection from external competition. Located in urban areas, these industries were also
designed to provide employment to growing cities. Once protected industries developed their
own capacities and efficiencies, the idea went, protections could be removed and these domestic
firms would then compete in regional and international markets.
Not all economic policies were directed at cities. A number of policies, referred to as
land reform, targeted rural areas. While the small Gulf oil countries generally lacked populated
rural areas and therefore focused on urban growth, it will be recalled that Egypt, Syria, and Iraq
had inherited significantly unequal and impoverished rural areas from colonial rule. Peasants
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(fellahin) often worked land -- owned by large, mostly absent landlords -- for increasingly
marginal returns. In many countries, these landed elites supported previous colonial rule and
therefore once revolutionary regimes took power, these elites became popular political targets.
Land reform took many forms but the aim was to break up large rural land holdings and
redistribute the parcels to peasants. States were then to help small farmers prosper through the
provision of irrigation, fertilizer, and road networks; agricultural production would then increase
and rural inequity would be alleviated.
Behind these ambitious policies and rapid changes, political constraints and opportunities
were at work. As the great social historian Ibn Khaldun once remarked, no king is powerful
alone; he requires people to support his rule. Economic policies, then, were a principle means of
securing that support. Three basic political imperatives were at work:
1. fashion a political coalition to support the ruling regime
2. weaken domestic rivals to that regime
3. compete for ideological and socio-cultural authenticity at home and abroad
Expanding government agencies and the civil service directly employed large portions of
the labor market. This gave people, especially in urban areas, a tangible stake in a regime‟s
political rule. In countries with new revolutionary regimes, mass-based political parties evolved
into venues of employment and economic gain. Party membership and public service overlapped
so that the most likely path to social and economic advancement came through party allegiance.
In the monarchial states and smaller Gulf countries, political parties were effectively outlawed or
handicapped, so ruling families directly expanded public sector employment. By the 1980s,
public sector employment, including the military, was among the largest component of the work
force in most countries. Since labor unions and professional associations offer perfect
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institutions around which popular mobilization can occur, rulers strictly supervised and managed
them to keep potential rivals close at hand and restricted. While labor laws often professed
various rights, in practice strikes were not allowed and union leaders had little autonomy.
State control over leading economic firms, trade protection, and subsidies gave political
leaders the tools to reward political allies. In other words, economic control translated into
political patronage. Rulers could assign their allies, or clients, to sit on corporate boards and
award public works contracts to favored businesses. By the 1970s public-private shareholding
companies formed in which the state would maintain a controlling ownership with smaller -- but
very profitable -- shares allowed for private sector allies. The sale or transfer of public land,
particularly in booming urban areas, provided another way to route patronage to political allies.
Finally, by controlling credit allocation and strictly licensing who was allowed to import and
export, rulers could select allies to receive incredibly lucrative monopolies over luxury goods as
well as basic staples. Imagine the money that can be made if one has the exclusive right to
import, say, BWM motorcars or Apple computers to Saudi Arabia or Egypt? By signing one‟s
name to the import bill, millions are made with little effort. Scholars refer to these mechanisms
as “side payments,” a nice word for payoff or sweetheart deal (Waterbury 1993).
Lastly, in tone and proclaimed intent these policies corresponded to broad ideological as
well as local socio-cultural sentiments of the day. Arab nationalism, equality, and collective
advancement resonated with Arab and Muslim society across the region. And though divorced
from Arab nationalism, Turks, Israelis, and Iranians identified with this collectivist spirit as well.
Consequently, state efforts to limit foreign capital and guide the domestic private sector
comported with conceptions of fairness and justice. Early efforts at land reform and
redistribution in rural areas particularly expressed these attributes. Since the situation of
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peasants and rural inequality had been aggravated under colonial rule, it was no surprise that
revolutionary movements in Syria, Iraq, Egypt, and Algeria drew much of their early support
from these areas.
Through these various forms of patronage, regimes built coalitions of support and
sidelined rivals. In Algeria, Iraq, Egypt, and Syria private sector elites that had been aligned
with the previous colonial regimes were pushed out or co-opted through state-mediated side
payments. In the Gulf states, ruling families were able to build massive bureaucracies that left
marginal room for the private sector. However, a caveat is necessary. Highlighting the political
and social sources of economic policy is not to argue that such considerations automatically
impair economic development or interfere with the market. On the contrary, state provision of
regulation, infrastructure, and investment is a requirement of efficient market operation, not an
impediment. After all, Middle Eastern countries were emulating the policies and strategies that
had led to Europe‟s successful economic development a century earlier (Gerschenkron 1962) and
having economic policies which reflect social conceptions of justice can be found in all national
economies. The question of the political underpinning of economic policies is not about political
direction per se but about who is to benefit from such policies. Are investments designed to
broaden economic participation? Increase opportunities and capacities to advance? Distribute
resources so as to include more and more sectors of society? Or are policies designed to enrich
only a narrow strata of society? When the case turns out to be the latter, all too often productive
economic development is weak (Waldner 1999).
Despite these problems, some of the optimism of these decades was rewarded. In terms
of real GDP growth per capita, the Middle East outperformed all other parts of the developing
world excluding East Asia, until 1979 (IMF 2003). State policies in these decades led to the
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construction of urban infrastructure, expanded road networks, new power grids, and port facility
modernization. Expansion of public education succeeded in boosting literacy and increased
public employment allowed women into the workforce in large numbers for the first time.
Unfortunately, these were gains that could stagnate or be reversed.
Oil Politics
Saudi Arabia‟s first oil minister was reported to have once remarked, “All in all, I wish
we had discovered water.” Reference to the perils of oil may clash with the perceived wealth of
many oil-producing countries today; however, the interaction between oil and politics is anything
but a clear success story. During the decades of growth and expansion, the region‟s oil exporters
experienced massive increases in the price of their primary commodity. The Organization of
Petroleum Exporting Countries (OPEC) was founded in 1960 in Baghdad. From 1970 to 1973
the last three major exporters, Algeria, Libya, and Iraq, nationalized their oil industries. These
changes paved the way for regional states to have much greater control over the supply and price
of their primary export. In the wake of the 1973 War and American support for Israel, the OPEC
states embargoed oil shipments, sparking the 1970s oil crisis. The rapid spike in the price of a
barrel of oil transferred historically high profits directly to rulers and the nationalized oil
companies they controlled. This has meant that oil profits comprise the largest part of gross
domestic product as well as the majority of government revenue in these countries. However,
not all oil exporters in the region are similar.
One of the basic distinctions is size. The larger oil states, Algeria, Saudi Arabia, Iraq,
and Iran, all have populations over 20 million. By contrast, the smaller Gulf oil states average 1
million or less (see Table 4.2). Distributing oil profits over a larger society versus distribution
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Table 4.2 Oil Production and Population
Production
Population (2008)
(mbd*)
(total residents/non-nationals in millions)
Saudi Arabia
7.6
28/5.5
Iraq
2.0
28/negligible
U.A.E.
2.0
4.3/3.0
Kuwait
1.9
2.6/1.3
Iran
3.5
65.9/negligible
Libya
1.3
6.2/0.17
Qatar
0.6
0.9/0.55
Algeria
0.9
33.8/ negligible
* millions of barrels per day
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over a smaller one leads to important differences. Consequently, the smaller Gulf states are
among the world‟s wealthiest in terms of per capita income and GDP, whereas Saudi Arabia, the
world‟s largest oil exporter, has seen its per capita GDP decline since the 1980s as its population
has grown. It is easy to appreciate, then, that with such wealth, politics is close by. The
interaction of oil and politics can be assessed from two vantage points: domestic and regional.
How oil has affected the internal politics of countries has long been a focus of scholarly
debate. Until the 1970s, it was common for Western academics to argue that authoritarianism in
the Arab Middle East was due to Islam or an unchanging “Arab character.” Such perspectives
persist until today, but they have undergone withering criticism in the last several decades. A
focus on the role of oil, instead of culture, was one of the primary critiques. The most prominent
set of these arguments, known as the “resource curse” or “rentier state” theories,1 holds that the
way a state earns its money (in this case through oil export) determines its basic politics.
Rulers with exclusive access to oil profits enjoy what is termed “soft budget constraints,” that is,
far more money than normal public revenue was available year in and year out due to high oil
prices. In turn, rulers were free to distribute this wealth through a myriad of means to co-opt
political allies and sideline rivals. In the logic of the rentier framework, since rulers did not have
to exploit domestic resources to fund their states (that is, tax citizens), they were not compelled
to grant political representation either; hence the twist on a well known maxim, “no taxation, no
representation.” The expectation is that such polities should experience declining political
opposition and subdued civic association, since gaining individual favor with the ruler becomes
the name of the game. In this way, rentier theory argued lack of democracy was not caused by
religion or culture, but by economic factors, that is, easy oil profits. Lavish lifestyles for rulers,
public budgets that dwarfed private interests, well funded internal security apparatuses, and
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militarily powerful foreign patrons, all gave the rentier state an appearance of fierce political
strength. However, here is where the “curse” part comes in, for there are costs to this type of
political economy.
States built on distribution and not extraction (i.e. an income or corporate tax) tend to
have underdeveloped administrative capacities. For example, consider all of the information the
government needs to tax your pay check. All of those deductions and accounting procedures
require lots of information that is constantly updated; that in turn requires state agencies with
vast administrative skills to generate, monitor, and authenticate that information. Distribution
does not require such information-gathering skills. So while typical oil state agencies appear
numerous, expansive, and well staffed, they are flabby in terms of actual capacities and
capabilities. They can‟t do much. Hence when the price of oil drops, the oil-dependent state
does not have much to fall back on and political crisis is expected to follow. What happens
when it is forced to turn to domestic taxes? No taxation without representation?
As far as these arguments go, there is a degree of logic and plausibility. However, of late
scholars have come to question the simplistic formula: oil causes political outcomes. To begin,
oil does not spend itself; political rulers choose how to control and deploy these assets. As
discussed previously, state-led development in the region has had clear political rationales. Gulf
rulers deployed their oil wealth not just to generate economic growth, but also to secure political
rule. Certainly having exclusive control over massive oil monies makes it easier to thwart
political opposition and reward allies, but something more than just oil revenue generated
society‟s support for or acquiescence to nondemocratic rule in the Gulf and beyond. For one
thing, though oil prices declined precipitously in the 1980s and 1990s, no oil exporters embarked
on democratization and, where some political liberalization took place, it was marginal.
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Moreover, though oil exports put countries like Libya and Iran in the same analytical category,
oil exporters are hardly uniform. For instance, Kuwait, a small oil-rich state with a ruling family,
has had a freely elected parliament with a well organized opposition since 1961. Though
parliament‟s legislative powers are circumscribed, its latitude of political action is far greater
than its neighbors. And in 2006 Kuwait extended suffrage to its female citizens, the first among
the Gulf Arab monarchies to do so. Indeed, Libya, Algeria, Saudi Arabia, Qatar, Oman, Bahrain,
and the U.A.E. all have nondemocratic regimes which enjoy monopoly access to oil and gas
revenues, yet their politics and societies are hardly similar. Something more than oil is at work.
The oil boom of the 1970s also had profound effects on the region as a whole and the
relations among its states. Since many of the smaller oil states experienced inflows of finance
which they could not hope to fully invest domestically, there was much capital to invest
elsewhere. From the 1970s onwards, Gulf states provided billions of dollars in bilateral aid,
loans, grants, and development assistance to other Arab states without oil resources. This
financial power has positioned donor states, like Saudi Arabia and its royal family, as important
regional players and decision makers for a number of regional diplomatic issues. The funds and
aid also became important sources of external financing for Egypt, Syria, Lebanon, Palestine,
Morocco, and Yemen. In return, as the oil boom fed growth and expansion, large numbers of
citizens of these countries migrated to the Gulf states to staff professional and middle
management positions in the government and private sectors. The money they earned was often
sent back to their families at home. Like development aid, these worker remittances became
important sources of finance for the resource-poor countries of the Middle East.
In short, oil and politics have historically shaped one another and since oil is a finite
resource in continual demand, this relationship is sure to endure for many more decades.
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The Bust Years: 1980-2000
From the early 1980s, most countries of the Middle East experienced stagnant or unstable
economic growth and mounting public debt. While expansion and economic growth took place
until the late 1970s, more tangible development, through investments yielding productive returns
and labor upgrading, failed to take root. After decades of mounting expectations, the economic
crunch contributed to public discontent across the region. Sharp increases in the price of basic
staples in Egypt, Jordan, and Morocco led to public protests in the 1980s, often ending in violent
clashes with security forces. The increasing gap between rich and poor and overt displays of
elite consumption laid bare the previous rhetoric of equality and social justice. Where state
programs and public investment were proclaimed as means to fight inequality, they instead
became exclusive venues for those few with political access to realize significant benefit.
Investment in education and upgrading labor skills quickly atrophied because while such
expenditures pay benefits for many in the long term, they pay few short-term political benefits.
State-owned industries failed to become competitive and instead siphoned off declining public
assets to continue operation. The private sector, though surviving the nationalizations and
restrictions of the 1960s and 1970s, reacted by investing little in domestic enterprises and instead
sending its capital overseas. Cities that had grown rapidly became overburdened with new
arrivals; social services weakened; and urban planning ceased in many areas. Rural areas fared
no better.
Promised land redistribution either never materialized or was piecemeal. Where peasants
actually took control of land, state supports infrequently materialized, forcing them to turn for
loans to the very landed elites whose land was sequestered in the first place. Instead of
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development of a productive agricultural sector, rural debt increased and countries were forced to
import many food products. Rural discontent was reflected in growing political opposition as
well as cultural critique. For example, Yusuf al-Qa'id‟s popular novel, War in the Land of Egypt,
depicted the failure of Nasser‟s land reform and the peasant oppression that followed. Among
the Gulf oil exporters, the financial cushions were greater, but for the first time since political
independence public debt became a reality in the 1980s. The conspicuous wealth of the ruling
families led to critical questioning about the destination of oil profits. Here too, discontent
expressed itself through popular novels like Abdul Rahman Munif‟s trilogy Cities of Salt, which
depicted the social dislocations caused by oil exploitation.
All of these socio-economic strains took place at the same time population growth
remained high across the region. Since growth was not keeping up with the need to produce
jobs, unemployment increased. Previous decades of growth and expansion without genuine
economic development and investment succeeded in producing low quality jobs and
uncompetitive industries. While sectors of the Turkish and Israeli populations achieved higher
standards of living and previously underdeveloped South Korea and Taiwan began producing
cars and electronics in the 1980s, Arab countries remained wedded to industries with low worker
skills or sectors of economic activity that required little fixed investment (like transportation,
trade, and services) and little upgrading or educational investment. Thousands of university
graduates were coming onto the labor market with few prospects beyond a mundane career in the
public sector. Only for the few politically connected or for the sons and daughters of private
sector elites were there more opportunities for the future.
What explains such a big turn around? The spark is commonly attributed to the long
decline of oil and commodity prices from their highs in the 1970s to their lows in the 1990s. As
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oil producers witnessed reductions in their public revenue, bilateral aid and worker remittances to
the resource-poor states declined accordingly. Egyptian, Palestinian, Jordanian, and Yemeni
workers in the Gulf sent less money back home. The reduction in regional finances put serious
strains on state abilities to continue their expansive economic policies. However, while oil prices
certainly played a role, the problems of the bust decades went deeper.
A major reason for the economic downturn was the political rationales for the boom
policies in the first place. Economic policies corresponded to the demands of state and coalition
building, thus the webs of political patronage that met those demands were not easily changed.
Clients of political patrons were expected to deliver political loyalty, not more valuable goods,
more skilled workers, or more efficient factories. SOEs and shareholding companies that had
been fostered through state patronage and protection had no incentive to wean themselves.
Layers of regional trade barriers meant that even if an SOE were efficient, it could not export to
its neighbors. Instead the state-owned factories became employment vehicles of last resort and
sources of easy profit for the politically connected. Private sector elites cushioned by trade
protection and easy profits from public contracts had little incentive to switch to more risky
investments in domestic production.
Another reason for the bust was that competition in the international market place
became more fierce and uncertain. Where the immediate post-WWII global market was heavily
weighted in favor of North America and Western Europe, the global economy of the 1980s saw
the East Asian economies arrive as serious competitors. Exposing SOEs and shareholding
companies to such competition would have had dire social ramifications. Domestic currencies
that had been overvalued as a means to aid industry and support urban consumer purchases of
imports came to be an obstacle to economic adaptation. Lowering the value of one‟s currency
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(thus lowering the costs of exports but increasing import costs) is one way to compete
internationally, but that would carry political costs rulers were not willing to undertake.
Stuck between the rock of political survival and the hard place of economic crunch, how
did rulers and states respond?
1. by implementing selective and limited economic reform
2. by reaching out to international lending agencies for support
3. by allowing elements of limited political liberalization
At first, nearly all states in the early part of the 1980s avoided any reductions in public
spending or price supports. They simply kept going in hopes conditions would improve. Such
avoidance is common to most governments in the world because what politician wants to be the
first to call for policies that will bring economic hardship? However, as the downturn in world
oil and commodity process continued, public debt mounted, particularly among the resourcepoor countries, and has continued up to today (see Table 4.3).
Countries like Yemen, Egypt, Jordan, and Morocco had problems financing their debts
while maintaining high public budgets. Controlled experiments to lower public subsidies and let
prices rise resulted in public unrest, limiting those options. A number of countries announced
economic reform policies, or what generally became known as infitah (economic opening).
Egypt, Tunisia, and Turkey led the way by announcing policies to increase the role of the private
sector, increase foreign investment, and boost exports. Eventually most countries in the region
announced similar directions and intents but their experiences varied. Whereas Turkey and
Tunisia would achieve some success in boosting manufactured exports and attracting investment,
Egypt‟s efforts generally failed. Openings to the private sector were selective and geared toward
retaining political clients. Removing or endangering the modest welfare provisions many states
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Table 4.3 Debt of Selected Countries: Value of Debt as a Percentage of Total Exports, 2006
Egypt
69%
Iran
27%
Jordan
77%
Lebanon
128%
Morocco
72%
Syria
51%
Turkey
200%
Yemen
46%
Source: World Bank 2008, pp. 348-350
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established in the 1970s risked pushing more people toward the political opposition, groups
dominated by the increasingly popular Islamist parties in the 1980s and 1990s. For rulers, the
political costs to decentralizing economic control and resources were just too great.
By the late 1980s, some of the non-oil exporters were compelled to turn to international
lending agencies like the World Bank and International Monetary Fund for assistance. In what
was known as the Washington Consensus, these international agencies offered funds to debtburdened Middle Eastern states but required specific policy reforms in return. These reforms
went beyond earlier infitah policies and included privatization of state assets, trade liberalization,
currency liberalization, elimination of foreign investment restrictions, and public sector reform.
In short, to get financing the Washington Consensus called for a wholesale reversal of decades of
state involvement in the economy. This would mean cutting supports to clients, increasing
unemployment, and endangering private profits, all of which threatened the political loyalty and
social stability that these policies were intended to generate in the first place. Rulers were wary
of going down this road, and as critics of the Washington Consensus argued, it was far from
clear that such policies would restore growth and lead to meaningful development (Rodrik 1997).
Nevertheless, a number of Arab states (Jordan, Egypt, Morocco, and Yemen) were forced
to act and signed structural adjustment agreements with the IMF. Interestingly however, these
states were able to delay or stave off serious reforms to the state‟s powers. Since the Middle
East is viewed as strategically crucial for the U.S. and Europe and these countries comprise the
IMF‟s largest contributors, there was a geostrategic interest in advancing loans to lessen political
pressure. As well, when push came to shove, there was little interest on the part of those same
donor countries to compel reforms or withdraw funding in ways that might endanger the stability
of friendly regimes, especially in Jordan and Egypt. Often reforms were either purely
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declaratory or, where taxation and public sector reforms were implemented, compensation
subsidies or new types of patronage elsewhere made up for the change. Just as regimes in the
region relied on different forms of state involvement as one means to ensure political survival,
political leaders in the West needed those same regimes to stay in place to ensure their own
interests, like guaranteeing access to oil and negotiating peace with Israel.
The resource-exporting countries faced similar financial pressures but they did not need
to turn to international lenders. In the 1990s, Algeria‟s civil war put further pressure on a regime
weakened by the economic downturn. One of its survival mechanisms entailed opening up to
foreign investments in Algerian oil fields, thus giving the FLN much needed funding and support
to defeat Islamist insurgents (Martinez 2000). Iraq survived its war with Iran but then faced
decaying economic conditions at a time of declining oil revenues. Saddam Hussein was able to
survive until 2003 in part because of oil smuggling and circumvention of import restrictions
through neighboring countries. Saudi Arabia witnessed a dramatic reduction in per capita
income as its population continued to grow while its oil money decreased. Along with Saudi
Arabia, the smaller oil producers met hard times as well but the Gulf enjoyed a larger tool box of
responses to avoid turning to the IMF. These states could endure longer periods of debt
financing and avoid serious austerity since oil is a finite resource whose price will rise as it gets
scarcer. Private lenders were all too happy to extend loans (without reform conditions) to these
countries because oil in the ground is excellent collateral for future repayment. Thus, none of the
oil states were forced to turn to international lending agencies and their policy strings.
Finally, under taxing social dislocations and as a last resort, some states entertained
limited moves toward political liberalization so as to release the pressure and hopefully divide
the political opposition. Jordan reinstituted its elected parliament in 1989; Kuwait did the same
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after being liberated from Iraq in 1991; and Yemen followed suit after its brief civil war in the
mid-1990s. Albeit well short of elected bodies, the more conservative Gulf states promised
various forms of appointed consultative councils. And while not exactly a form of political
liberalization, Saddam Hussein‟s Baath party in Iraq devolved economic and political power to
provinces in the south and west in order to cope with international sanctions in the 1990s.
Finally, press freedoms were relaxed in a number of countries as new forms of media made their
appearance in the 1990s. All of these shifts influenced some outside observers to expect that
liberalization would deepen as the economic downturn continued (Anderson 1995). Perhaps
economic liberalization could lead to democratization. But this was not to be.
Liberalizations remained limited and genuine political decentralization rarely occurred.
In Egypt, Jordan, Morocco, Kuwait, and Tunisia, press and associative freedoms were reversed
in the mid-1990s. State security agencies increased their surveillance of opposition groups,
while periodic arrests of opposition figures and general intimidation silenced those who might
voice more opposition. Consequently, the regimes of the region survived the bust decades
politically intact. Economically and socially, however, there were great costs. Infrastructure
decayed in many cities, living standards declined, and inequality increased. Though opposition
movements had been blocked, the socio-economic reasons for discontent remained unaddressed.
A New Century and a Different Boom and Bust
The turn of the century has seen a region seemingly used to shocks and sudden shifts
witness even more. In this period a new oil boom took place, surpassing the highs of the 1970s.
The survival of the United States as the sole superpower directly affected the region‟s political
economies through the “war on terrorism,” the invasion of Iraq, and closer economic relations
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with a number of Arab regimes. The 2008 global financial crisis has not spared the region with
even the small oil-rich countries feeling the effects. Consequently, there are a number of trends
which appear underway and consequential for the near future:
1. increased international and bilateral pressures to liberalize economies
2. deepening socio-economic decay and inequality in a number of countries
3. tremendous capital inflows from rising oil prices followed by a new price collapse.
Taken together these factors are remaking the region in profound ways. No longer can we speak
of a single regional economy, one developmental path, or shared strategies. Instead, parts of the
region are moving in different directions and differences in wealth between as well as within
countries are growing more pronounced.
Among the Gulf oil exporters, staggeringly high oil prices until 2008 buoyed public
budgets and allowed new forms of investment such as Sovereign Wealth Funds (SWFs). These
funds consist of percentages of oil revenues put aside each year. The resulting fund is controlled
by the state and invested, usually overseas and without transparency, to earn returns so that in a
future without oil reserves national wealth can be preserved. These SWFs have grown in value
into the hundreds of billions so that Kuwait, the United Arab Emirates, and Saudi Arabia have
become important players in global financial investment. Domestically, most of the Gulf
exporters have spent this second boom of oil wealth more cautiously by avoiding 1970s- style
large SOEs while still ensuring extensive welfare provisions for their citizens. Hundreds of
thousands of Arab, South Asian, and European expatriates have moved to the Gulf to take part in
the boom, and as a consequence, citizens of the smaller Gulf states are a minority in their own
countries. Efforts to increase the participation of nationals in the private sector work force have
failed as nearly 90 percent of nationals in the smaller states remains employed in the public
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sector. At the same time, ruling families have ascended the ranks of the world‟s wealthiest, and
rampant consumption has brought comparisons with some of the excesses of the 1970s boom.
Perhaps the most interesting case of these trends has been the United Arab Emirates.
This federation of seven emirates has its capital in Abu Dhabi, where the most significant oil
reserves are located. While most of the emirates have pursued conservative economic
investment plans, the emirate of Dubai has splashed on to the world scene with massive
investments in real estate, retail, and tourism. Coming to resemble Hong Kong with its high-rise
buildings and urban sprawl, Dubai has become a new global trade and financial center. This is a
political-economy experiment without peer, in the region or the world. At least 90 percent of
Dubai‟s residents are not Emirati citizens, and whereas commercial property and investment
laws are considered transparent by international standards, labor and juridical rights for noncitizens noticeably lag. It remains to be seen whether Dubai‟s achievements amount to
productive development that can survive the financial crisis of 2008.
In addition to Dubai, one could also add to the list of quasi-successful developers,
Tunisia, Turkey, and Israel, where niche industries in garments, construction, and software
respectively have evolved into profitable exporters. Turkey‟s favorable disengagement from
colonial rule, democratic opening, and close relations with Europe undoubtedly contributed to a
foundation for economic development. Israel, though democratic for part of its population, has
also benefitted by escaping colonial legacies and crafting profitable relations with the US and
Europe. Tunisia, while not opening politically, nevertheless successfully developed garment
manufacturing exports to Europe through investment in labor skills and industrial upgrading
(Cammett 2007). The lesson is that while some political factors can hinder productive
development, others can spur it forward.
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For much of the rest of the region however, the new century has brought less optimism
and more questions. Countries with already young and impoverished populations, such as
Yemen, Egypt, and Morocco, remain so into the 2000s. Smaller Syria and Jordan face many of
the same problems whereby income levels, infrastructure, and overall development have not
advanced much past their levels in the mid-1980s. As a region, though the Middle East exports
more fuel than any other region, it also exports fewer manufactured goods than any other region
including Sub-Saharan Africa. Pressures to expand job opportunities, improve antiquated public
education, and upgrade urban infrastructure remain major issues for all countries. Finding
investment funds for these sectors remains difficult. Still if one travels to Cairo, Amman, or
Tangiers today, it is easy to see pockets of wealth replete with conspicuous consumption,
prestige vehicles, and Western retail chains. For the vast majority of citizens these luxuries are
far out of reach, leading to the conclusion that while new wealth is apparent in the region, it
remains poorly invested and unevenly distributed. Those with political connections profit, and
those profits tend to be spent on consumption and overseas bank accounts, not on productive
domestic investments. Those without such connections struggle to keep up, desperately hoping
to give their children a better life. It‟s no surprise therefore that Arab countries consistently rank
high on indexes measuring corruption and the perception of corruption among developing
regions (United Nations Development Programme 2004, pp. 136-141).
External actors, international lending agencies, multi-national corporations, and world
trade organizations have added to these difficulties. Rulers in the strategically important Middle
Eastern countries have been able to bide their financial time through increased bilateral and
military aid from the West, particularly the United States. In pursuing “the war on terror,” US
financial assistance to Jordan, Egypt, Yemen, and Morocco has increased significantly from the
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Table 4.4 2006, Manufactured versus Fuel Export by Region (% of total exports)
Fuel
Manufactures
East Asia
8
80
Europe & Central Asia
32
46
Latin America
21
53
Middle East
76
15
South Asia
9
72
Sub-Saharan Africa
n/a
28
Source: World Bank 2008, p. 212.
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1990s. Just like oil monies that flow to the Gulf‟s ruling families, budgetary and security
assistance from the West flows directly to the control of allied regimes (Baylouny 2008).
Indeed, among developing regions, the Middle East has the highest level of foreign aid as a
percentage of GDP, making it the most aid dependent region in the world (World Bank 2008, p.
366). Political opposition and general discontent with stagnant economies have intersected with
public opinion which runs strongly against Western, especially American, policy in the region.
Given that same policy involves Washington directly aiding unpopular rulers, the perception
which connects the poor economy to alliance with Washington is shared by many in the region.
Aside from direct regime funding, external assistance has been directed toward
rebuilding. Libya and Lebanon coming out of decades of isolation and civil war respectively
have begun to realize significant foreign direct investment (FDI). Multi-national investment in
Libya‟s oil sector and Gulf Arab investment in Lebanon‟s infrastructure and tourism sectors
suggest a hopeful turn. Dubai and other parts of the Gulf have also attracted international
investment, however these are exceptions. Compared to other parts of the developing world, the
Middle East lags behind all when it comes to external investment. The persistent problem seems
to be that if the Arab private sector does not invest money domestically, then why would foreign
investors? Still aside from foreign investment, multilateral institutions have offered potential
benefits like membership in the World Trade Organization and bilateral trade agreements with
the European Union and the United States. For example, since the 1980s, the US has signed Free
Trade Agreements with Israel, Jordan, Bahrain, Morocco, and Oman. These agreements require
varying levels of openness to external investment, adherence to intellectual property rights, and
even minimal labor regulations. In theory, Arab countries that sign will gain privileged access to
Western consumer markets, but in return Western exporters and investors should realize
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unfettered access to the signee‟s domestic markets. It is still too early to see what will become of
these trade agreements in a political economy sense. Yet it is already evident for example that
Jordan‟s special trade agreements with the US and Israel have, by 2005, made the US market
Jordan‟s most important export destination in terms of total dollars.
So while we can see that some countries have achieved pockets of productive economic
development amid general stagnation, others have sadly regressed or reversed development.
After war with Iran, a decade of international sanctions, and then invasion by the US in 2003,
Iraq is the starkest example of reversed development. Once the economic and social powerhouse
of the region in the 1970s, the political and economic hardships of Iraq‟s people have taken their
toll. As of 2008, large parts of Baghdad have been ethnically cleansed, hundreds of thousands of
civilians have been wounded or killed, and over 4 million have been displaced. Iraqis now
comprise the region‟s largest refugee population since the displacement of Palestinians during
the creation of the state of Israel in 1948. Many of these Iraqis find themselves in Jordan and
Syria, putting serious strains on those countries‟ economies and societies. Resolution of this
situation and the future of Iraq are crucial variables in how the region will ultimately move
forward into the new century. The occupied Palestinian territories have also experienced
regression. Enduring Israeli blockades and frequent violent conflict have scared away foreign
investment, leaving Palestinians worse off than before the Oslo peace process began in 1993. If
a two-state solution to the Palestinian-Israeli conflict is to be, it requires an economically viable
Palestine, and that is more remote today than at any point since 1948. Finally, though Beirut has
recovered from civil war, much of the rest of Lebanon has not moved forward. The 2006 Israeli
attack on Lebanese cities and villages as well as the country‟s persistent socio-political divisions
underscore the fragility of post-war recovery.
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Conclusion
Recalling the chapter‟s opening observation, Arabs and Muslim society in general have
historically been closely associated with business pursuits and trade. Yet, as the post-World War
Two patterns demonstrate, the Middle East‟s economic and developmental potentials have not
been realized. While much of the region has experienced periods of economic growth, there has
been little productive development. We have seen that growth can be equated with expansion of
money in the system and increasing national incomes. This came and went with boom and bust.
Development on the other hand requires higher value added, more complex manufacturing,
competitive exporting, and increasing the skills, education, and security of domestic labor. Once
begun, development is harder to reverse and tends to build upon itself. With few exceptions,
these developmental benchmarks have not been achieved. At the same time, political rulers,
whether republican or monarchical, have demonstrated remarkable longevity and tenacity despite
repeated political and economic crises. This link between regime endurance and economic
stagnation is no coincidence. After independence, leaders adapted to the limits and opportunities
inherited from decades of foreign rule to bend economic policies toward their own political ends.
Despite rhetoric to the counter, all too often policies serve narrow interests instead of national
goals. Short-term political survival seems to trump long-term development and a better future
for the region‟s people.
1
Rentier theory refers to rents. The classic definition of rents refers to income as a form of
reward rather than earned. Rent often derives from monopoly control of an asset.
Consequently, some forms of commodity extraction, especially oil, require very little labor and
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capital investment after initial drilling and hence the price of a barrel of oil far exceeds the actual
cost of production. Given that oil is state owned in most countries (a monopoly), the difference
between low production costs and high world price is the rent income.