Anne Brocard and Stéphanie Vallet

The historical context of the emergence of the rentier state in the Middle East

National economies throughout the Middle East struggled in the 19th and 20th centuries to develop their natural and human ressources, to modernize their societies, and to raise their standards of living. They have made significant, hard-won progress on many fronts (like broad-based education), and some countries are blessed with abundant natural resources (oil, natural gas, phosphates, and other minerals, for example). In general, however, Middle Eastern economies have faced significant obstacles to successful development.
One major obstacle has been Western efforts to control the region's resources. Other challenges include rapidly increasing populations, uneven distribution of resources like water and oil, protracted armed conflicts and the resulting high military spending, rapid urbanization, and incorporation into a global economy. How has the Middle East tried to deal with these challenges?

In 1526, Sultan Suleyman the Magnificent (known as the "Lawgiver" to the Ottomans) granted the first of what came to be called the “capitulations” to the French. The agreements gave France, and later other European powers, the right to trade within the Ottoman Empire without paying taxes and other economic concessions as a sort of pre-modern free-trade agreement. The Ottomans granted the capitulations from a position of strength. They were eager to encourage imports to supply their population with goods and could afford to do so without heavy import duties. The Europeans wanted markets on which to sell their exports. In the beginning, it was a win-win situation. Three hundred years later, however, the capitulations gave Europeans an enormous advantage over local merchants on the Ottoman market. Not only were Europeans (and any local protégés they hired, especially local Christians) still exempt from taxation, but they were also now mass-producing cheap manufactured goods that were displacing local products. The Ottomans no longer had the political power to rescind the capitulations which had helped the European powers gain control over the economy of the Empire, and thus control over its political and economic decisions.

As Egypt and the Ottoman Empire watched themselves fall behind Europe's military power, they tried to copy Europe's sources of strength. They began to borrow heavily from European banks, on bad terms, in order to finance the modernization of their armies, social institutions, infrastructure, and industry. As time went on, expensive efforts at reform continued, and the Ottomans were unable to repay the loans on schedule. When they declared bankruptcy in 1875, the Western powers took direct control over parts of the economy.

A similar situation had developed in Egypt. Enormous efforts had been made to modernize the military and infrastructure and to begin industrialization throughout the 19th century.
Egypt had two advantages: First, the American Civil War meant that cotton from the South was no longer available on the world market. Cotton prices rose, and Egyptian cotton became an extremely valuable export. Second, the Suez Canal opened in 1869. Despite the potential represented by these developments, Egypt's expensive reform program, lavish royal spending, and European pressure led to bankruptcy. Partly to ensure economic stability and repayment of debt, and partly to squelch a nationalist uprising, Britain colonized the country in 1882.

The process of achieving independence was uneven: Egypt, for example, achieved nominal independence from Britain in 1922, but Britain retained enormous influence until the Free Officers' Coup under Gamal Abd al-Nasser deposed King Faruq in 1952. Syria achieved independence from France in 1946, while Britain unilaterally left Palestine in 1948, leading to the creation of a political division between Israel and the Palestinians on the West Bank and Gaza.

The nationalist regimes which came to power on independence from the Western mandates tended to maintain significant control over their economies. Using a socialist economic model, countries like Egypt, Iraq, Algeria, and Syria wished to pool national resources and spend them centrally to spur economic development.

One common strategy in the 1960s was import-substituting industrialization (ISI). This was an attempt to build local industries that would create jobs, use local resources, and allow countries to stop importing Western goods. Governments raised trade barriers and heavily subsidized infant industries (often owning them outright) to stimulate rapid economic development. ISI failed when these industries became bloated, inefficient enterprises riddled with bureaucracy and corruption. They couldn't meet local demands and were a drain on national resources.

By the late 1970s, Egypt, under President Anwar Sadat, abandoned the strategy of ISI in favor of infitah, opening up the economy to foreign investment. More and more countries decided to encourage foreign investment in order to stimulate their economies in this way. The strategy of Infitah , however, has also been a disappointment. Much of the sought-for foreign investment has been in Western consumer goods and luxuries, like McDonald's and name-brand clothing, rather than in local industry. This importation of Western culture does little to raise the general standard of living in the region. Instead, it tends to increase the cultural and economic gap between a wealthy class that has benefited from Western investment and adopted a more Western lifestyle, and a much larger population of the poor. Many feel that the importation of Western goods and cultural values challenges important social traditions. This is one factor in the rise of resentment against the West and the increasing popularity of Islamic opposition groups that promise to restore cultural and economic sovereignty.

The economy of oil

The discovery of enormous oil deposits in the Middle East coincided with increasing dependence upon oil in the West in the early 20th century. Money from oil has created enormous opportunities for development in the countries where it is concentrated, such as Saudi Arabia, Kuwait, Bahrain, the United Arab Emirates, Qatar, Iraq, Iran, and Algeria.

We can provide a first definition of this concept: a rentier state is one that gets most of its income from selling its natural resources to outside buyers. Different theories have been developped around the concept of rentier state. The theory of the “rentier state” says that countries that received substantial amounts of oil revenues from the outside world on a regular basis tend to become autonomous from their societies, unaccountable to their citizens, and autocratic.

The rentier state theory originally developed in relation to Iran’s mid-20th century economy. The West became involved with Iran’s oil in the following way. In 1941, Germany invaded its former ally, the Soviet Union, which quickly re-allied with Great Britain. The British and the Soviets then occupied Iran, fearful that its leader, Reza Shah, would align its oil-rich country with Germany. The Shah’s son, Mohammed Reza, came to the throne and Iran became the major conduit for British and later American aid to the USSR in what came to be known as the “Persian Corridor.”

In 1953, the Shah was forced to flee Iran by Mohammed Mossadegh, the nation’s prime minister and “godfather of populist petroleum politics.” (Yates) After negotiations for higher oil royalties failed in 1951, the Iranian parliament, led by Mossadegh, voted to nationalize Iran's oil industry and replace the British-owned and operated Anglo-Iranian Oil Company (infuriating Winston Churchill and, subsequently, President Eisenhower) by the National Iranian Oil Company.

(Mossadegh’s nationalization of Iran’s oil subsequently served as a model for the nationalization of the Suez Canal by Nasser (1956), which in turn set a precedent for Northern and sub-Saharan African nationalizations such as Algeria (1967), Libya (1970), Nigerian (1970), and Gabon (1974).) Mohammad Reza Shah allocated oil revenues over the next 25 years, to build up a huge military, among other things. Hussein Mahdavy, the economist who first popularized rentier state theory, believed that the 1951-1956 period represents a landmark in the economic history of the Middle East: a historical era when radical nationalizations transformed ex-colonial models of petroleum exploitation into what he termed “fortuitous statism”. Statism is state socialism whose goal is the unconditional subordination of the individual to the state, in a situation where the government alone holds all initiative. Massive amounts of foreign currency and credit generated by petroleum development flooded into the state coffers and, Mahdavy argues, turned at least some oil-producing countries into rentier states. Kuwait and Qatar are extreme examples of the phenomenon, with limited capabilities for industrialization and few alternatives to rentierism. The case of Iran was very important to Mahdavy because, given its size and potential, it had alternatives that the extreme cases lacked. Indeed, Mossadegh had fought for diversifying Iran’s economy, while it nationalized its oil industry in the 1979 Iranian revolution that swept Ayatollah Khomeini into power.

Two economists, Hazim Beblawi and Giacomo Luciani became interested in Mahdavy’s theory of rentierism and the effect of a windfall of wealth on oil-producing countries. Beblawi and Luciani preferred the term “rentier economy” to rentier state, suggesting that the rentier state is really a subset of a rentier economy, and that the nature of the state is best examined primarily through its size relative to that economy and the sources and structures of its income. A rentier economy is an economy in which “rent plays a major role, and in which that rent is external to the economy.” (Yates)

 Beblawi delineates four characteristics of a rentier economy :

1. First, rent situations must predominate in that there really is no such thing as a pure rentier economy.
2. Second the rent must come from outside the country.
3. Third, in a rentier state only the few are engaged in the generation of rent, while the majority is involved in its distribution and consumption. Translated, this means that government leaders make the deals and take in the revenue and then allocate to the public, which is not involved in the creation of wealth.
4. Fourth, the government must be the principal recipient of the external rent in the economy.

The point here is that external rent liberates the state from the need to extract income from the domestic economy. (Yates) The government can embark on large public expenditure programs without resorting to taxation. The government becomes an allocation state, which is very different from a production state. A production state relies on taxation of the domestic economy for its income; taxpayers remain involved with government decisions because they are supporting them with onerous taxes. An allocation state, by contrast, does not depend on domestic sources of revenue, but rather is the primary source of revenue itself in the domestic economy. Mahdavy said: “Perhaps one of the more crucial problems that need to be studied is to explain why the oil-exporting countries, in spite of the extraordinary resources that are available to them, have not been among the fastest growing countries in the world.”. The answer to the enigma, according to Yates and classical economists, is that the rentier is a parasite who violates the most sacred doctrine of the liberal ethos: hard work.

Because the government gets its income directly from selling this resource, there is no need to tax its citizens. Nor is there any need to give them a voice in running the country. Rentier states in the Middle East usually have strong, autocratic governments which buy off political dissent by distributing the wealth derived from oil through extensive subsidies and allocations. In some ways, money comes in too easily in rentier economies. There is little incentive to increase efficiency in resource production or to diversify the sources of wealth. The state bureaucracy and public industries become bloated. The population may develop unrealistic social expectations, but at the same time has no way to express opposition to those in power. Connections to the source of wealth come to count for more than individual ability.

First, we may posit a lack of democracy linked to the lack of representation due to the system of taxation in these countries. The state organizes society and builds an inclusion/exclusion system, raising the sole question of who is going to take advantage of the rente ? This kind of organization entails some social effects, like, for instance, “crony capitalism”, which is building a clientelist relation between the non-productive rentier class (considered as citizens) and all the rest of society, which doesn’t benefit from the rent (this part of the population is not considered as citizens). This is a way for the government to prevent any kind of economic or political opposition.

The Kafala system in the Gulf States is a good example of this organization : society is divided between citizens and non-citizens (rentiers and non-rentiers). The foreign workers must have a Kafil (a guarantor) on the labour market who takes a percentage of their salary. This system is legally organized and all the wealth is owned by a small part of the society.

If there are only a few direct taxes, there are a lot of indirect taxes like VAT, so the expression “no representation without taxation” can be criticized in the case of the rentier state. The proposition that postulates that the rentier economy is reinforcing authoritarism is certainly verifiable, but that is not the most important reason : coalitions between groups are certainly more important.