Why does the Rentier Curse represent such a Challenge to Development and Political Progress in the Middle East?
It would be easy to assume that those that live in a resource rich country are blessed with individual wealth and abundance. Particularly so for those in countries in the Middle East. There is no shortage of information coming from the region showing new mega cities, global airlines, luxury cars and reports of purchases of global brands and icons. However, this wealthy facade can distract from the fundamentals of the society that lie beneath. The very resources that create the wealth for these nation states is also seen as a curse in many ways. In this essay, I will look at what challenges exist for these resource rich countries in relation to economic and political progress. I have linked development from the title to that of economic development for this essay. Is it even possible for resource rich nations to achieve greater democracy and economic diversity? Although there are nations that also derive large percentages of their income from natural resources, this essay will only be exploring those in the Middle East. It will also only focus on those states that are direct recipients of the rents received from resource extraction and not on those that may derive significant remittances from their nationals working in states deemed as rentier.
To begin understanding the challenges that may be faced by nation states that are rich in natural resources, there is a need to unpack what a rentier curse is and look at a suitable definition. The term rentier curse can also be used in other forms such as Dutch disease, resource curse and rentier state theory. All allude to the effect a natural resource can or may have on the nation that owns the resource in relation economic growth and stability of the nation. What is a rent? A simple definition is that a rent is a reward for ownership of all-natural resources. Hazem Beblawi (1990) further defines a rentier state as one who’s income is derived from these rents and meets the following criteria. Firstly, there should be a substantial percentage of a nation’s economy derived from the revenue from their resources via external rents, this should be in the range 60–80 per cent of gross domestic product (GDP). It is important to note that the definition of rentier only applies to external rents and not from internal rents. Secondly, very few are involved in the generation of the rent, somewhere in the order of 2 -3 percent of the labor force, whilst the majority are involved in the distribution of the wealth. Lastly, rent revenues are collected directly by the government or the state. This last point is of interest and will be explored further in this essay as it highlights where economic power resides in these countries and how it is used. Middle East states that meet the above criteria are; Saudi Arabia, Bahrain, Iran, Qatar, Kuwait and United Arab Emirates. The natural resources include oil and gas. The central argument for rentier states and the effect that the natural resources have on their economy and stability is based on the notion that as a nation’s income rises, democratic governments follow, where as if natural resources are at the center of the increase in wealth, democracy shrinks or disappears. I will not explore whether a Western bias exacerbates the notion of a curse in this essay.
Economic Development
It is important to highlight the differences between economic development and economic growth. GDP is commonly used to measure growth. If GDP increases at the same time as income per capita and exceeds population growth, an economy is considered to be a healthy one. This growth tends to occur in diversified economies where labor skills increase, and manufacturing technology improves. For rentier economies, GDP can increase simply through the price of the commodity increasing and no changes to labor, technology or any diversification. This can create an economy that becomes linked to the pricing cycles of the natural resource rents. If prices fall, economies can become conservative and limit spending and more restrained in diversification, or alternatively, if prices rise, there is a reduction in the sense of urgency to look at economic changes. Although there is evidence that some Middle East states are attempting to diversify their economies through the building of global airline hubs as they attempt to capture more revenue from tourism, banking, education and travel. The flipside to some of these attempts though has resulted in white elephant projects that have failed to diversify economies. This may be due to large public and weak private sectors that exist in trying to run these projects. These two factors are symptomatic of rentier economies and form part of the ‘curse’ as they do not promote a competitive economic environment. The large public sectors that pervade rentier states are a result of the dispersal of rent revenues to the citizens as the governments in these states are the primary recipient of the rent revenues. As per capita income increases, the result is a growing middle class that require more spending on infrastructure and schools, this in turn creates even more bureaucracy and increases the size of the public sector. There also exists an underlying mentality in the economy that causes citizens of these states to seek a greater proportion of the rent that is available as opposed to the usual risk-reward work undertaken in other economies. Economic benefit for citizens is obtained through citizenship rather than through creating new opportunities within the economy. This also applies to the military in these states as they seek to modernize their armed forces. There are some exceptions to the above however. There has been an increase in state owned enterprises (SOEs) that are proving to be able to operate in a profitable and efficient manner without interference from the state. Saudi Arabia, Qatar and the UAE have all managed to establish SOEs that have consistently produced profits. Two examples of these are SABIC, a diversified petrochemical company and the gas and oil giant Saudi Aramco. What differentiates these organizations from others that exist in the region is that they are not run by CEO’s that are not from the ruling elite or their associated families. These organizations do though enjoy the protection of the elites as they are examples of the states to compete at a global level. The economic development challenge for rentier states is evident in the large bureaucracies that exist in delivering the rent revenues to the population at large through various means. It is also burdened by a system that doesn’t look to generate new sources of wealth but instead encourages participants to seek a greater slice of the wealth.
Political Progress
The rentier curse has been described as not an economic one but mainly that of a political phenomenon and that an under-performing economy can be attributed to a failure of state level policies. Most governments in the Middle East have been highly authoritarian since their independence. However, as mentioned earlier, do we measure political progress against that of Western definitions of democracy? If these states have maintained authoritarian regimes and grown their wealth through the exploitation of their natural resources, is it possible that any political progress is required? Another factor is the role of Islam in the region and the distinct cultures that exist there. If we link democracy and the rights of individuals, then the case can be made that progress is required in some of these states where gender is still an issue. For individuals to be able to demand certain rights from their governments, there is a need for a fiscal association between them to exist. In essence, this is the concept of no representation without taxation]. As most rentier states require their citizens to pay very little or no tax, a dependence separation exists that results in less accountability and a social contract exists that results in citizens having very few political demands. This type of social contract remains stable if there are enough resources and rents available to maintain the equilibrium between the demands of the population for rents and services but is at risk of becoming unstable if a prolonged period of fiscal crisis was to exist. Waldner and Smith highlight the effect that oil has on the democracy index and posit that oil prolongs pre-existing dictatorships. This being the case, the ruling elites in these states have the ability through resource rents to expand their control and patronage through the dispersal of rents and the control of the public service. There also exists in the Middle East the notion of Wasta as a social mechanism and part of the patronage system. Wasta means that proximity to those in power is advantageous in securing favors as opposed to being earnt through other means This can be interpreted as regimes buying legitimacy through rents. Ross goes further and links rent revenues as a means by which state governments repress their populations through spending on internal security measures to politically demobilize the public. The lack of accountability, patronage and use of rents to repress a population are all likely to stop a political progress to that of a more democratic system of government, if that is in fact what the population want. Unless the governments are willing to impose a taxation on their citizens that then makes them accountable, it would seem major progress is doomed. Malik expresses this paradigm as one that means rentier states are ‘systematically condemned’ to having political structures that remain underdeveloped.
Economic and political development are both intrinsically linked in rentier states in the Middle East. Authoritarian regimes have seen the exploitation of their natural resources through the rents they receive increase their GDP’s and per capita incomes to some of the highest in the world. However, this dependence on a limited resource also comes with challenges that are the rentier curse. The wealth generated allows the ruling elites to remain in power and distribute monies to the population without the need to raise revenues via taxation. This means that a separation exists between the governments and the population regarding accountability. Economic development is difficult also as large public sectors and weak private sectors limit the opportunity for the growth of new industries to emerge that enable states to be uncoupled from resource rents. GDP is linked to the variances in global prices for commodities and can therefore be subject to the normal cycles of supply and demand. There are some green shoots emerging through SOE’s and their competitiveness at a global level and the attempts to increase revenues from tourism in some states, although this is prone to the global economy and whether people travel. Overall, I see the challenges outlined in this essay as continuing for the foreseeable future unless there is a major disruptive event.
