By Pete W. Moore, Case Western Reserve University

* This memo was prepared for “The Arab Thermidor: The Resurgence of the Security State” workshop held at the London School of Economics and Political Science Middle East Centre, October 10, 2014.

“In many areas of the Middle East and Latin America, revolutionary pressure continues to build up…The problem which has to be solved, and to which no one has yet found a satisfactory answer, is how to bring about change in the balance of power which is needed to avert revolutions without having a revolution.”

-Nicholas Kaldor, “Will Underdeveloped Countries Learn to Tax?” 1963

Fiscal politics is the study of how states and societies extract and distribute resources, and the effect of these policies. This is an interdisciplinary literature in which social scientists and historians from different analytical backgrounds have long recognized the importance of taxation and fiscal regimes for state building, democracy, and rebellion.[1] In the study of the Arab world, a truncated form of the study of fiscal politics, rentier state theory, has dominated. I will outline a different fiscal politics approach, one that focuses on the long-term fiscal crisis of the less resource rich Arab states and how those regimes have responded. My simple claim is that political authoritarianism in the Arab world has come to accommodate strategies of fiscal weakness. I cannot quite argue one caused the other, and at this point I am more interested in tracing the effects. My understanding of fiscal crisis draws on an older literature, such as James O’Connor’s The Fiscal Crisis of the State, as well as the late Samer Soliman’s 2011 work on fiscal crisis and political change in Egypt.

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Despite decades of economic growth and expansion since the 1970s, Arab states have witnessed steady declines in levels of total public revenue. At the same time, the socio-economic expectations of coalition supporters compelled regimes (to attempt) to continue meeting those demands. This fiscal dilemma and vulnerability to periodic economic crises provides one way to understand regional bouts of rebellion starting in the late 1970s and culminating in 2011. This perspective also reveals political economy structures of authoritarianism, which are likely to deepen after 2011. In the rest of this essay and relying primarily on evidence from Jordan and Egypt, I focus on the dilemmas fiscal weakness has spawned: greater labor market insecurity, privatization of urban infrastructure, and more regressive taxation.

Accommodating fiscal weakness: Labor, infrastructure, taxes

As levels of public revenue began their decline in the 1970s, profound changes in Arab labor markets surfaced. Until the late 1970s, expansion of public employment contributed to gains in equality and income as well as increasing female work force participation. By the early 1980s however, public employment peaked for most of the non-resource exporters and began declining along with public revenue. From the mid-1980s to the 2000s, the share of educated entrants to the work force taking public sector employment in Jordan dropped from 60 percent to 30 percent. In Egypt, the same trend began a few years earlier and went from 70 percent to 20 percent by the 2000s.[2] The few studies on the importance of public employment in the region suggest that the poorest households rely to the greatest extent on public employment to decrease inequality.[3]

To make up for declining access to secure public sector jobs, political leaderships in both countries embraced domestic and international employment strategies that were less secure and more volatile. In Egypt, much of the shift away from public employment in the 1970s went into the informal sector, where insecurity and volatility are likely the norm. In contrast, Jordan reacted by increasing formal employment in the private sector, so that the 10-12 percent of new workers who started in the private sector in the 1980s had risen to 36-38 percent in 2010.[4] However, because many of these new Jordanian private sector jobs required temporary contracts or no contracts at all, the insecurity and volatility of Jordanian labor resembled the Egyptian flight into informality.

In addition to these domestic labor shifts, governments embraced strategies to export labor, which was also a contributor to overall labor insecurity. From the mid-1970s to the mid-1980s, on average one-third of Egypt’s labor force was employed outside the country, and by the new century nearly 20 percent of Jordanian and Lebanese GDPs were comprised of worker remittance income, some of the highest ratios in the world.[5] Moreover, the Arab region ranks the lowest in terms of labor protections and the highest in unemployment and particularly youth unemployment.[6] As disruptive and unsustainable as these labor policies have been, they served as timely adaptations to fiscal decline. Weak labor protection fit with strategies to export labor. Remittance income acts like other forms of exogenous revenue to compensate for declining public goods and revenue. In the short run at least, labor remittances have helped Arab families make up for public investment shortfalls in education and social welfare and allowed political leaders to avoid greater revenue extraction.

Similar to the expansion then contraction of public employment, by the 1970s states across the region had invested significant public revenue into developing urban transportation, communication, and housing to accommodate rapid urbanization. What changed in the decades of fiscal decline has been the evolution of new geographies of urban corruption and inequality. It appears that many of these development projects enriched regime cronies and selected public-private enterprises in the construction business. As annual declines in public revenue normalized in the 1980s, investment and infrastructure upgrading in the region’s largest cities began to lag. Jordan and Egypt were paragons in this respect as officials in each country pursued similar fiscal recouping measures: privatization of urban space and decentralization to local authority.[7] Officials crafted parastatal organizations to plan, build, and govern new urban developments. The projects of the 1990s and 2000s aggressively courted private sector alliances with significant tax subventions and opaque property rights transformations. Juridical changes in the capital ostensibly decentralized fiscal decision making to the local level. In the last two decades, leaders put in place elements of these urban privatization policies in Amman, Alexandria, Aqaba, and Qina.

The link to urban revolt and protest grievance was not immediate but the importance of these political geographies to social movements and perceptions of inequality mounted. First, decentralization to the local level failed to generate more public revenue for the localities thereby deepening dependence on dwindling central funding.[8] Second, the opening to the private sector, often involving alliances with public sector officials, came to define these urban renovation projects. In and around Amman and Cairo for example, high-end shopping malls, privately financed parks, luxury enclaves, and “free zones” carved out new urban geographies.[9] According to Jillian Schwedler, “Cosmopolitan neighborhoods near or in proximity to the centers of foreign capital have received a disproportionate share of the new services and infrastructures. These inequalities are highly visible to an already economically fragmented population.” These geographies “create sites of inclusion and exclusion, effectively creating different sets of rights and opportunities for different segments of the population.”[10] Outside the privileged enclaves lie large tracts of decaying 1970s urban landscape. Thus while privatizing infrastructure helped alleviate fiscal pressure, new divisions and inequalities rendered in brick and mortar emerged. Indeed, many of the grievances focused on corruption in 2011 were animated by these privatized urban transformations.

Perhaps the most prominent, yet less analyzed, reaction to fiscal decline has been the effort to reform tax regimes. Though study of the effects of taxation on inequality and socio- economic grievance are limited, there are good reasons to believe these reforms aggravated inequality and contributed to popular perceptions of fiscal unfairness, all the while failing to reverse fiscal decline.[11] There are two tax measures of interest in this sense: total domestic taxation as a percentage of GDP and direct taxation as a percentage of GDP.[12] The total tax take is often used as a proxy measure for state capacity. The general consensus among developmental economists is for a developing state to take 20 percent of GDP in taxes.[13] As a state falls below this threshold or as the economy expands and taxation lags, “a strong momentum sets in…entailing the substitution of private for formerly public services.”[14] But even if a state’s total tax take is high, important structural inequities can be obscured; therefore, the measure of direct tax over GDP gets at the important political question of who pays and who does not. Direct taxation – usually income collected at the source as opposed to value added taxes, customs duties, or other forms of indirect collection – requires the kind of deep roots in society Michael Mann termed “infrastructural power.” Income tax, in particular, requires a high degree of supervision and information collection, which, in addition to the institutional challenge, also entails a clear political challenge, since in theory direct taxation falls more heavily on the rich than the poor. So how do states in the Arab world match up?

Source: Henry and Springborg, Globalization and the Politics of Development in the Middle East, 2nd edition, pp. 77-78.
Source: Henry and Springborg, Globalization and the Politics of Development in the Middle East, 2nd edition, pp. 77-78.

At first glance, the comparison shows that Arab states, similar to other developing regions, fail to capture much public revenue through taxation. But revenue statistics from Arab governments should be taken with a grain of salt as they are likely over estimated. What is actually reported as total tax collection by Arab governments is one problem. For example, Algeria, the United Arab Emirates, Qatar, and Morocco have at times reported as part of taxation revenue proceeds from state-owned monopolies, like airlines, communications, pension funds, mining, and so on. In the case of Lebanon, most observers agree much of the country’s tax collection figures are periodic voluntary contributions not constitutive of a national tax regime. In lieu of a comprehensive review, it is reasonable to conclude that a more accurate measure of overall taxation in the Arab world is well below 15 percent of GDP. Turning to reported levels of direct taxation, there are more problems. For example, it is widely believed that Oman and Qatar’s reported levels of direct taxation are high because they include profits from state-owned mineral companies and levies on foreign corporations.[15] In fact, direct income extraction in the region is rare with only Jordan and Egypt attempting new income tax legislation in the last decade. Therefore, in the context of fiscal decline Arab states reacted by only lightly taxing their citizens and visitors. And where there are the most extensive efforts at tax reform in Jordan and Egypt, the results have been regressive and unequal. Research by Samer Soliman to access Egypt’s disaggregated tax statistics (what actually comprises the levels in figure 2) revealed that over 60 percent of Egypt’s reported taxes came from indirect fees and sales taxes. For Jordan, I found a similar pattern approaching 70 percent. Therefore, as revenue declined and public goods provision withered, authorities shifted more of the fiscal burden onto lower income groups and vulnerable consumers.

Conclusion

Clearly, Kaldor’s revolution and tax dilemma remains as fiscal decline has matured over decades in the Arab world. Regressive taxation, labor insecurity, and urban privatization emerged as short-term solutions to long-term problems. With the outbreak of mobilized protests in 2011 and enduring social unrest, the long term may be at hand. For understanding political economies of authoritarianism and its endurance, I believe there are two important implications. Basic rentier state theory holds that regime stability prevails as long as external rents remain in place.[16] When those rents decline, states are expected to turn to greater domestic taxation entailing all the potential political effects. Building from Soliman’s work, this cursory look at fiscal politics suggests those linkages have not panned out; fiscal decline and periodic revolt have proven more tenacious than fiscal strengthening. The popular focus on the effects of external revenue at the expense of a broader fiscal analysis proves misleading. At least in the leadership change cases of Egypt, Tunisia, and Yemen, there were no sudden or precipitous declines in external revenue. Rather, it was long run total financial decline and failed recouping measures that laid the groundwork.

Second, investigation into domestic tax regimes and public finance offer an alternative to theories emphasizing the strains of uneven modernization as explanation for the kind of rebellious opposition voiced against authoritarianism in 2011.[17] It puts the focus back on the politics and policies of authoritarian leaderships struggling to maintain political coalitions under deteriorating fiscal conditions. It suggests the evolution of a kind of “fiscal social pact” in which avoidance of direct or deeper forms of domestic extraction are replaced with policies clustering at the margins. From this perspective, there is every reason to conclude that the resurgence of the mukhabarat state promises continued fiscal decline.

Pete W. Moore is the Marcus A. Hanna Associate Professor of Political Science and director of graduate studies at Case Western Reserve University.

 

[1] See Block, F. (1981) “The fiscal crisis of the capitalist state,” Annual Review of Sociology 7; Tilly, C. (1990). Coercion, Capital, and European States, A.D. 990-1990. Blackwell; Centeno, M.A. (1997) “Blood and Debt: War and Taxation in Nineteenth-Century Latin America,” American Journal of Sociology 102:6; Levi, M. (1989) Of Rule and Revenue University of California Press; and Kurtz, M. (2009) “The Social Foundations of Institutional Order: Reconsidering War and the ‘Resource Curse’ in Third World State Building,” Politics and Society 37:4.

[2] Assaad, R (2012) “The Structure and Evolution of Employment in Jordan,” Economic Research Forum, Working Paper 674, 8.

[3] Adams, R.H. (2001) “Nonfarm income, inequality, and poverty in rural Egypt and Jordan,” World Bank, Policy Research Working Paper No 2572

[4] Assaad, R (2012), 3.

[5] On Egypt’s labor force see Benin, J (2001) Workers and Peasants in the Modern Middle East, Cambridge University Press, 149-150;

and on remittance income World Bank (2006) World Development Indicators, May.

[6] Cammett, M and Posusney M. (2010) Labor Standards and Labor Market Flexibility in the Middle East: Free Trade and Freer Unions?” Studies in Comparative International Development 45.

[7] Decentralization as a form of delegation can be associated with a strengthening of state capacities but if conducted under conditions of fiscal weakness, delegation may also be a form of retreat.

[8] Soliman, S. (2011) The Autumn of Dictatorship: Fiscal Crisis and Political Change in Egypt under Mubarak Stanford University Press: 76-96.

[9] Parker, C. (2009), “Tunnel-bypasses and minarets of capitalism: Amman as neoliberal assemblage,” Political Geography, 28:2, 127; and Soliman 2011;125).

[10] Schwedler, J (2010) “Amman Cosmopolitan: Spaces and Practices of Aspiration and Consumption,” Comparative Studies of South Asia, Africa, and the Middle East 30;3, 269.

[11] Bibi, S. and Nabli, M.K. (2010) “Equity and Inequality in the Arab Region,” Economic Research Forum Policy Research Report, February.

[12] For a discussion of different taxation measures in comparative studies see Lieberman, E.S. (2002) “Taxation Data as Indicators or State-Society Relations: Possibilities and Pitfalls in Cross-National Research,” Studies in Comparative International Development 36;4.

[13] Lewis, W.A. (1966) Development planning: The essentials of economic policy Harper & Row.

[14] Goldstone, J.A. (1991) Revolution and Rebellion in the Early Modern World, University of California Press, 491.

[15] Henry, C. and Springborg, R (2012), Globalization and the Politics of Development in the Middle East Cambridge University Press, 76-79.

[16] Morrison, K.M. (2009) “Oil, Nontax Revenue, and the Redistributional Foundations of Regime Stability,” International Organization 63 (Winter).

[17] Campante, F.R. and Chor, D. (2012) “Why was the Arab World Poised for Revolution? Schooling, Economic Opportunities, and the Arab Spring,” Journal of Economic Perspectives 26;12.

Fiscal politics of enduring authoritarianism

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