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Rethinking the Rentier Curse

Adeel Malik

Abstract

The Middle Eastern political economy has long been studied through the prism of the resource curse—that is, how resource riches undermine the region’s economic and political development. While many of the region’s pathologies are rooted in an economic structure heavily reliant on external windfalls, the existing literature tends to overstate the role of oil. This research note develops the case for a broader conceptualisation of rents that includes not just windfalls from hydrocarbons, but also rents derived from aid, remittances and government manipulation of the economy. Reliance on these rent streams is the 'original sin’ that perpetuates underdevelopment. Discussions of Arab political economy should therefore be framed as part of a broader enquiry into the relationship between rents and development. This requires, in turn, a deeper understanding of business-state relationships and the role of regional linkages in development.

Introduction

This chapter highlights the centrality of 'unearned’ income streams, typically described as rents, for understanding the political economy of the Middle East. Many of the region’s pathologies—including unemployment, a bloated state, a weak private sector or limited political evolution—are ultimately rooted in an economic structure heavily reliant on external windfalls, whether derived from oil, aid or remittances. Questioning the exclusive focus of the prevailing literature on oil, I develop the case for a broader conceptualisation of rent streams that includes, besides oil, rents derived from foreign aid, remittances and government regulation. These non-oil rent streams can also be both sizeable and significant in their impact.[1] Regulatory rents that result from market subversion are particularly important in understanding the business-state relationship and its bearing on political economy. Reliance on these windfalls is the ‘original sin’ of development in the Middle East and North Africa (mena). The story of Arab development is therefore a story of how these rent streams shape paths of political and economic development. I argue that the Middle East’s resource curse can simply be viewed as part of a broader rent curse.

The basic analytical frame used in the literature is the celebrated—but increasingly contentious—paradigm of the Rentier State Theory (rst), which argues that unearned revenue streams, external to a country and accruing mainly to the government, shape that country’s political and economic character.[2] [3] The upshot: resource-rich societies are systematically condemned to having underdeveloped political structures. A key mechanism behind this adverse connection between natural resources and democracy is the fiscal independence of the state from taxation, which relieves it from intense pressure for accountability (the famous dictum, ‘no representation without taxation’). Direct access to resource revenues also allows state elites to buy political consent through repression and patronage. The principal function of a rentier state is the allocation or distribution of rents, which tilts incentives away from production to predation, stifling competitive structural change that could otherwise have produced a social structure more favourable to democratisation— independent classes and horizontal alignments in society (Beblawi and Luciani, 1987; Ross, 2001).

As a general typology of resource-rich states, the rst captures many salient features of rentier states. For a long time it has served as a leading explanation for weak political institutions in oil-rich countries. Its deep influence on public debate is best illustrated by New York Times journalist Thomas Friedman’s famous observation that in resource-rich countries ‘the price of oil and the pace of freedom always move in opposite directions’ (Friedman, 2009). The broad claims of the theory resonate with the actual mena experience. Resource rents have enabled ruling elites to expand instruments of both patronage and control. Without oil rents, it is difficult to sustain the region’s repressive military structures, its bloated public sector, pervasive subsidies, and the ‘cradle to grave’ welfare systems. Whether through co-option or coercion, oil wealth has allowed states to subdue possible challengers, create new economic elites and bind old merchants in a relationship of dependence. In short, rarely can any facet of mena political economy be studied without a deep understanding of how oil shapes the state-society relationship.

There is growing realisation that, while RST paints a good broad-brush caricature of resource-rich societies, it falls short of fully capturing the nuances, contexts and dynamics. Scholars have therefore called for refining and qualifying the claims and predictions of RST by studying the role of initial historical conditions, dynastic family politics, the micro-politics of development, and emergent forms of capitalism in the Gulf (Dunning, 2008; Hertog, 2010; Herb, 2009; Gray, 2011). Much of this literature can be read as simply an exercise in refinement, rather than an outright rejection of the theory. While agreeing with the broad thrust of this literature, this research note insists on developing a wider political economy of rents and development, which takes into account the nature, composition and deployment of rents. I argue that there is a need to transcend the continuing predilection for tracing the impact of oil on development. Oil revenues in mena are complemented with other unearned income streams from aid, remittances and government regulation, which together constitute a broader challenge of ‘rentierism’.

While oil rents clearly dominate the external revenue flows in mena countries, the impact of other rents derived from foreign aid and remittances is insufficiently explored. Furthermore, far more emphasis has been placed on the role of external rents, whereas domestically generated rents from government manipulation of the economy are largely neglected by dominant approaches to studying mena political economy. Such rents are critical, however, in the region’s labour-abundant economies, where—given the relative scarcity of oil rents—domestic rents from economic protection play a prominent role in generating elites’ commitment to regime continuity. Perhaps the best example of the importance of such rents is the pervasive use of non-tariff barriers in North African economies. Restrictive trade policy is used to privilege businesses connected to the regime or other insiders who are given control of the protected enclaves of the economy. In turn, the regime is able to secure a binding commitment to the maintenance of authoritarian order.

Another important dimension—largely omitted from dominant narra- tives—is the importance of the external anchor in sustaining authoritarianism in the Middle East. Existing theoretical accounts have been largely focused on how domestic recycling of resource rents buys the political acquiescence of key constituencies at home. While this is admittedly the core political economy dimension pertaining to the political economy of oil, another crucial dimension, at least in the Middle Eastern context, is the manner in which resource rents are externally recycled to build a support base abroad. As this research note will show, such recycling can take many forms and is often geared as much towards securing geopolitical returns as towards economic returns for overseas investments. As exporters of hydrocarbons, many mena countries are highly integrated into global commodity and finance circuits. The external and domestic structures of power are therefore co-constituted in such domains.

All of this underscores the need to unpack the complex architecture of authoritarianism in resource-rich societies. The rentier experience in the Middle East is broader and deeper than uni-linear and deterministic oil-based accounts would have us believe.

The remainder of this article is structured as follows: Part 2 furnishes a brief background of the relationship between natural resources and development. Part 3 proposes a broader conceptualisation of rent streams and emphasises the role of the external recycling of rents. Part 4 provides a brief conclusion.

  • [1] Empirical studies suggest that natural resource rent is typically 10-20% of the GDP of developing countries although it can be significantly higher, especially in hydrocarbon-richeconomies (Auty, 2001). Aid streams tend to be relatively stable and can have somewhat disappointing impacts, but there is disagreement whether this reflects Dutch Disease effects(Rajan and Subramanian, 2011), rent seeking (Boone, 1996) or political instability (Islam, © ADEEL MALIK, 2017 | DOI 10.1163/9789004336452_004 This is an open access chapter distributed under the terms of the cc -by-nc License.
  • [2] 2005). In the period 1995-2004, remittances averaged 3.6% of gdp (Barajas et al., 2009), typically ranging between 2% and 10% but rising above 15% in seven countries, including Jordan.Although remittance flows tend to be stable and diffusely distributed, their net impact isdisputed (Rajan and Subramanyan, 2011).
  • [3] Rents are defined as ‘supernormal profits, or the excess over the return on capital, land, andlabour, when these factors of production are put to their next best use’ (Dunning, 2008, 6).Beblawi and Luciani (1987) describe four conditions of a rentier state: (a) size and scale ofthe rent streams relative to the economy, (b) external source, (c) limited involvement of thepopulation in the state’s production activities, and (d) accrual to the government of a rentierstate.
 
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