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From Resource Curse to Rent Curse

While the Middle East’s resource riches are often held culpable for the region’s perverse political economy, the role of oil can easily be overstated. It is also difficult to explain the adverse performance of relatively resource-scarce Arab countries (the likes of Syria, Jordan and Egypt). Despite the absence of vast quantities of oil, many of these nations share the resource-curse symptoms of their oil-rich neighbours. This is partly explained by the significance of nonoil rent streams that mimic the effect of oil, and help to shape a similarly adverse political economy. At least three such revenue streams are noteworthy in mena economies that are relatively labour abundant and resource scarce: aid, remittances, and rents from government regulations. The first of these— foreign aid—is a geopolitical rent that can replicate resource-curse symptoms. By virtue of its strategic location, the average mena state derives greater aid rents than the average low-income country or sub-Saharan African state. Over the last fifty years the mena region has received roughly three times more net aid per capita than Latin America. Despite being home to a significantly greater proportion of poor people, South Asia received only usd 6 per capita in net foreign assistance during the last decade, compared to usd 43 per capita in mena.

mena economies engulfed in the Palestinian-Israeli conflict are particularly large aid recipients (Jordan and Lebanon receive the highest level of net aid per capita—usd 128). The figure for Egypt, while significant by international standards, does not take into account the additional stable rent stream in the form of us military aid (usd 1.5 billion annually). An average North African state receives more net aid (in per capita terms) than an average low-income country. Since 2011 aid flows have skyrocketed in Arab Spring countries, rising to usd 158 in Egypt and usd 86 in Tunisia (once more in per capita terms). In the wake of its political crisis, in 2013 Egypt secured aid pledges worth usd 12 billion. Interestingly, these aid windfalls are shared even by countries with precarious oil exports (e.g. Iraq, Bahrain and Oman).

A second potentially important source of rents is remittances from expatriate workers. The salience of these rents is again evident from the fact that the mena region has the highest ratio of remittances to gdp of all the developing regions (4 per cent compared to 1-1.5 per cent in Latin America and subSaharan Africa). Jordan and Lebanon derive roughly 20 per cent of their respective gdps from expatriate worker remittances. The ratio is similarly high, by international standards, in Yemen, Egypt and Morocco. Unlike oil and aid, remittances are well dispersed among recipients, leading to more ambiguous political effects. Although remittance flows, together with foreign aid, are statistically correlated with authoritarian stability, they can also weaken patron- client linkages and create an independent political space (Ahmed, 2012). The mechanisms behind these statistical correlations are unclear, however. It is surmised that remittances can influence government spending decisions, tilting them away from essential public goods, and that they can also relieve the political pressure emanating from excessive unemployment.

The economic effects are similarly ambiguous. While remittances can improve financial intermediation, they can also trigger Dutch Disease effects, depressing growth in the long term (Rajan and Subramanian, 2011). By providing the necessary foreign exchange cushion, remittances can shield countries from economic crises, thereby weakening incentives for economic reform. In mena, a key feature of both aid and remittances is their high correlation with oil prices. This is easy to understand: oil rents are recycled in the region through financial support for poorer neighbours and the creation of jobs for

Inter-linked capitalflows

figure 3.1 Inter-linked capitalflows: Oil, aid and remittances (1972-2008) source: ahmed (2012).

Note: Oil price (left scale)—usd per barrel

unskilled migrants from labour-surplus countries. The oil price is, therefore, a fundamental driver of these cross-border financial flows. As Figure 3.1 shows, aid to Muslim non-oil producers (in percentage of gdp) tracked quite closely with oil prices until 2002. A similar trend is observable for remittances.

The third rent stream, with particularly pernicious effects on political economy, is generated through government manipulation of the economy.[1] Arab markets are among the most protected in the world. In Arab countries domestic economic activity is routinely governed by monopoly concessions, price controls, procedural regulations and a raft of arbitrary trade barriers. Effectively, these barriers assign elites control of vital access points to the economy, generating rent streams that support ‘networks of privilege’ deemed essential for regime survival. Arguably, the need for such rent streams is most acutely felt in labour-abundant countries with more extended distributional commitments. This provides an important explanation for why non-tariff barriers remain both more pervasive and persistent in labour-abundant mena economies. In fact, in terms of trade restrictiveness, mena’s labour-surplus economies leave all other regions, including sub-Saharan Africa, behind.[2]

Such policy-induced rents can be significant even in resource-rich countries. In most Arab rres little is known about the number and strength of those with veto rights with regards to major fiscal policy decisions. The activities of many public sector enterprises also remain off the fiscal radar screen, with such quasi-public spending believed to be particularly important in Algeria, where public sector banks are repeatedly recapitalised through outright cancellations of their debts, purchase of non-performing loans (npls), and liquidity injections. Such transfers are often sophisticated ways of transferring rents to elite groups in society, groups without whose support the authoritarian order is difficult to sustain. In the Gcc countries many popular instruments of patronage, such as land sales and tax benefits, are not accounted for in fiscal terms but are crucial forms of rent transfers to elite constituents. In fact, the literature on the business-state relationship in the Gulf has long recognised the ways in which a private sector that is structurally dependent on the state bolsters authoritarian stability (see Hertog, Luciani and Valeri, 2013).

Selective economic reform itself provides an important mechanism through which rents are generated to reconfigure elite alliances. Most North African countries have suffered from the familiar ‘partial reform syndrome’ that has remained a persistent feature of African economies (Van de Walle, 2001). Selective liberalisation of trade, finance and services has helped to generate new rent streams. The growth of the financial sector provides an important illustration of this point and deserves a separate mention.

  • [1] These rents are often generated through government intervention that changes relativeprices.
  • [2] See Figure 7 in Malik and Awadallah (2013, 16).
 
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