By Steffen Hertog, London School of Economics
*This memo was prepared for the workshop, “From Mobilization to Counter-Revolution: The Arab Spring in Comparative Perspective,” held on May 3-4, 2016.
The Arab world’s wealth distribution regimes are central for understanding both the Arab uprisings and the region’s subsequent failures to reform their economies and find a new social contract. This note will briefly outline the notion of an Arab “variety of capitalism” characterized by the central role of a distributive state whose interventions lead to a deep, and at least in parts unintended, segmentation of business and labour markets into insiders and outsiders. It will explain how this model has led to economic stagnation and contributed to the uprisings of 2011 as well as how it has hobbled economic adjustment after the uprisings, both under anciens and new regimes. Its pessimistic conclusion is that distributional institutions in most Arab countries remain very sticky, having created powerful vested interests not only in business but also in society at large that undermine the negotiation of a new “social contract” – a concept that many are talking about but no one seems to be able to map out in any detail.
The note draws on the author’s ongoing work on defining an Arab variety of capitalism as well as joint work on Arab welfare state legacies with Ferdinand Eibl.
Background: distributional regimes in Arab world
It might be hard to believe, but in a number of critical areas Arab countries stand out as development successes compared to their developing world peers: since independence, most Arab countries have increased school enrolment and improved basic health provision at a rate that is the envy of most countries in sub-Saharan Africa, Asia and Latin America. Figure 1 below shows that both resource-poor and resource-abundant MENA countries have witnessed much more significant drops in infant mortality than their sub-Saharan Africa peers, reaching a compound annual reduction rate of about 4 percent, compared to SSA’s 2 percent (note: the World Bank’s definition of MENA is used here; figures would be very similar of only Arab countries were included.) MENA’s comparative improvement on the human development index, which includes life expectancy, school enrolment and GDP per capita, is similarly impressive (figure 2)
Authoritarian-populist republics like Algeria, Egypt, (pre-war) Syria and Tunisia have achieved particularly good human development scores considering their modest levels of wealth (figure 3).
The rapid improvements have been enabled by the fast post-independence growth of Arab states and their infrastructural power. Arab states have become deeply involved in economy and society also in other ways, many of them reflecting an ambition to build and materially protect an indigenous middle class.
While Arab governments’ ambition to provide might have led to solid coverage of basic services, most Arab states have pledged much wider material guarantees to their citizens – typically beyond their fiscal and administrative capacity, especially once economic growth started stalling in the 1970s. The result has been a rigid insider-outsider division in which some benefit from Arab governments’ relative generosity while others remain excluded.
The most important field of intervention has been the labor market, where Arab states have retained a stronger role both as regulator and, crucially, as direct employer (see figure 4). The shares of public in total employment across core Arab countries in Maghreb and Mashreq mostly lie between 20 and 40 percent, far above those in richer Latin America, where they range from 4 to 15 percent (OECD 2014, 61), sub-Saharan Africa, where they range from 2 to 9 percent (Monga and Lin 2015, 138), or East Asia and Pacific, where they mostly lie below 5 percent (Packard and Van Nguyen 2014, 16).
International polls show a continuing strong preference for public sector employment among Arab citizens. On average, only about a fifth of respondents in a 2010 Gallup poll had a preference for private employment, with figures ranging from 8 percent in Yemen to 35 percent in Morocco.
A majority of citizens, however, remains excluded from state employment, which is often seen to be allocated in intransparent ways. As formal employment in the private sector remains miniscule, the default option for most remains the badly paid, precarious informal sector. The growth of this sector has again been driven by state intervention that is intended to protect the middle class, but which deters formal hiring. Formal labor market regulations in the Arab world are perceived as particularly heavy by local firms and the World Bank classifies the “difficulty of redundancy” in the Arab world as the highest worldwide.
A large informal sector also exists in other developing countries. But different from most other developing economies, the “insider” group on the labor market mostly consists of public employees (figure 5). This setup makes for a relatively large and protected insider group, but also crowds out state resources for more inclusive and growth-oriented policies.
Figure 4: Public employment shares in international comparison
Figure 5: Distribution of formal employment, percent
Insider-outsider dynamics are also at play in Arab business, the top tiers of which are typically state-dependent cronies, protected through layers of heavy regulation as well as discretionary subsidies and credit allocation – themselves often distorted legacies of earlier periods of statist development (Chekir and Diwan 2015; Diwan, Keefer, and Schiffbauer 2015; Nucifora, Rijkers and Freund 2014). Most other businesses, particularly smaller firms, remain outsiders whose property rights are uncertain and whose interests are not represented in the policy-making process.
Segmented labor markets and private sectors are not unusual, but state intervention is particularly deep and the segmentation is particularly rigid and hard to overcome. Firms in MENA on average are older; there are fewer firm entries and exits than in other world regions (World Bank 2009; Gatti, Morgandi, and Grun 2013). The dispersion of value-added within sectors is particularly high, which reflects lack of competition (World Bank 2009, 103). On labor markets, informality typically lasts longer, labor turnover is lower, and exits from public employment are almost unheard of (Gatti, Morgandi, and Grun 2013, 52, 153; Gatti et al. 2014, 187). In other words, when you are in, you are in, and when you are out, you are truly out: deep formal and informal state intervention and protection result in low mobility between segments.
Arab capitalism has provided more widespread distribution of state resources than most other developing country governments, benefiting a relatively broad middle class, a phenomenon described as “precocious Keynesianism” by David Waldner (Waldner 1999). Yet the system remains deeply exclusive for those outside of this coalition. Non-contributory and universal social safety programs such as cash benefits, micro-credit, workfare and training programs are weak in the Arab world, even in comparison with other developing countries (Loewe 1998). Expenditure on them only amounts to an average of 0.7 percent of GDP across the region and they are deeply fragmented and badly targeted (Levin, Silva, and Morgandi 2012). Given that such universal social safety mechanisms can increase educational and labor market mobility, this weakness critically contributes to the stasis of Arab economies. The only universal benefit on which most Arab states spend large amounts are energy subsidies, which are regressive as they disproportionately benefit richer households.
Rigid insider groups in business and labor market create vested political interests that make economic reforms to reduce segmentation difficult. Encompassing interests or marginalized groups that could push for inclusive reforms have particularly little space to organize in Arab world’s authoritarian context.
Why did mass distribution not prevent the 2011 uprisings?
Most Arab states have been repressive, but in developing world comparison also relatively generous to their population. Why didn’t this generosity prevent the uprisings of 2011? While much work remains to be done on this question, it is clear that there was a disconnect between expectations and performance, and frustration with the (often unintended) inequalities created by the region’s insider-outsider systems.
While Arab states have gone to great lengths to provide, popular expectations of provision in the region have also been particularly high (figure 6) – arguably a legacy of populist policies that have promised universal public services and employment to the masses since the age of Nasser.
Figure 6: Preferences for government provision
Given these high expectations, material exclusion and inequality and the highly visible “winner takes all” business cronyism in the 2000s has been grating for many ordinary citizens – even if average levels of inequality in the region remain on a middling level in global comparison.
As we would expect, levels of trust in government and large business across the region have been low across the region, particularly so in the “post-populist” republics that have witnessed revolutions (figures 7 and 8).
Figure 7: Respondents with “no trust at all” in government
Figure 8: Respondents with “no trust at all” in large companies (WVS)
Given Arab states’ over-stretch, broken promises, meddling and favouritism, and the deep insider-outsider divisions in business and labor, it is unsurprising that citizens have felt betrayed by political and business leaders. While the elites leading the revolutions cared deeply about questions of political freedom, it is clear that material issues played an important role in the mass mobilization that tipped the balance in cases like Egypt or Tunisia.
What happened to distribution?
The first reaction of Arab rulers to the popular challenges of 2010 and 2011 was not to reform, but to step up distribution along the established model, despite the fiscal strains that Arab states already were under. Rulers pledged additional public employment and reversed partial subsidy reforms. And in cases where rulers were replaced, new ruling elites did exactly the same. Since 2011, some energy subsidies have been cut in a piecemeal fashion, but only under enormous fiscal pressure and without building a comprehensive social safety system to compensate. In the absence of such systems, public resistance to subsidy reforms has been strong. No ruler has yet dared to substantially change public employment policies.
As trust is in short supply and state capacities are stretched, negotiating a new social contract has been very hard. Instead, vested interests in business and the public sector stick to any tangible entitlement they have. The tiny size of formal private employment means that organic linkages between citizens and business are weak, providing little scope for a class compromise in which both business and workers would benefit from growth of the private economy.
But without reducing in subsidies and public employment, there will be no resources to improve public services, provide universal social safety or invest in economic development. Without lowering barriers of entry to the private sector, there will be no growth and job creation. Lowering barriers to entry however itself requires better regulation of business, which in turn calls for a stronger and more agile state – not the slow-moving and opaque Arab bureaucracies that have resulted from decades of over-employment.
This anti-development equilibrium of low capacity and vested interests has led Arab states even further down the route of unequal and exclusive distribution after 2011. In Tunisia, the most powerful interest group is the national union UGTT, which represents mostly middle aged, middle class government employees – not the informal sector whose rage fuelled the revolution. The UGGT has contributed to elite-level political pacts that have prevented Tunisia from backsliding into autocracy. In the economic field, however, it has mostly focused on defending insider privileges, investing much of its energy in fighting successfully for fiscally unsustainable civil service salary raises. In the meantime, little has been done for improving the lot of informal workers. They themselves remain fixated on the public sector: protesters from marginalized communities have been asking for the provision of one government job per family, and unrest has been triggered by the removal of individuals from an official list promising government employment.
In Egypt, official unions are similarly rooted in the public sector, but much more toothless than the UGTT. New, informal unions have emerged before and after the 2011 uprising – but they too have only weak links to the huge informal sector, which remains marginalized and disorganized. Public expectations and demands again remain in the old populist mould: The first public protest after the July 3, 2013, coup that brought General Sisi to power was not about politics, but consisted of a group of masters and doctoral degrees holders demanding government jobs (it was violently dispersed). More recently, Sisi has been trying to tackle the thorny issue of public sector reform with a new civil service law issued by decree during his parliament-less interim reign. Reflecting how deeply anchored Egypt’s distributional system is, this law was the only measure challenged post hoc by the supine new parliament elected in 2015.
Even “fierce” states embroiled in civil wars have deepened their old-style distributional commitments: Post-Saddam patronage policies under rival prime ministers have resulted in a state that now reportedly employs 7 million individuals, about half the total adult population (More than 55 percent of the population of about 36 million is under 20). Including in ISIS-occupied areas, 8 million individuals rely on a government salary or pension. Iraq competes with much richer GCC countries for the highest share of government employees anywhere in the world. Current Prime Minister Haider al-Abadi’s recently attempted public sector salary reform has failed, despite a severe budget crisis.
In Syria, state employment has reportedly risen by 61 percent from 2010 to 2014.  Out of a total workforce of 5.5 million, 2.1 million are state-employed, and the government has continued to pay salaries in occupied areas, to the very same people it bombs. Syria has become a brutal caricature of the populist-authoritarian systems of old.
On the business front, old patterns of segmentation similarly continue, even in the cases where hatred for ruling families’ crony networks was a core driver of revolutionary rage. Tunisian and Egyptian attempts to prosecute old regime cronies have been half-hearted at best and many cronies remain well connected to the new ruling elites. In the absence of an independent business class, both governments have made attempts to lure temporarily marginalized old-school business tycoons back into their countries to invest.
The post-2011 trajectory of distributional policies challenges Steven Heydemann’s argument that the basis of authoritarianism in the region is fundamentally changing as “market-oriented models of authoritarian governance” are introduced and support coalitions narrow along ethnic or sectarian lines. While the latter might be true politically, the record of economic policy tells a different story. It is true that no Arab state can quite live up to its populist promises, but they all continue trying, even if the social and economic results grow ever worse.
Chekir, Hamouda, and Ishac Diwan. 2015. “Crony Capitalism in Egypt.” Journal of Globalization and Development.
Diwan, Ishac, Philip Keefer, and Marc Schiffbauer. 2015. “Pyramid Capitalism: Political Connections, Regulation, and Firm Productivity in Egypt.”
Gatti, Roberta, Diego Angel-Urdinola, Joana Silva, and Andras Bodor. 2014. Striving for Better Jobs: The Challenge of Informality in the Middle East and North Africa. Directions in Development: Human Development. Washington, D.C: World Bank.
Gatti, Roberta, Matteo Morgandi, and Rebekka Grun. 2013. “Jobs for Shared Prosperity: Time for Action in the Middle East and North Africa.” Washington, D.C: World Bank.
Levin, Victoria, Joana Silva, and Matteo Morgandi. 2012. “Inclusion and Resilience : The Way Forward for Social Safety Nets in the Middle East and North Africa – Overview.” 72975. The World Bank. http://documents.worldbank.org/curated/en/2012/09/16965002/inclusion-resilience-way-forward-social-safety-nets-middle-east-north-africa-overview.
Loewe, Markus. 1998. “Sozialpolitik Im Dienste Des Machterhalts: Soziale Sicherung Und Staat Im Arabischen Vorderen Orient (Social Policies as a Legitimation Strategy: Social Protection and the State in the Arab World).” SSRN Scholarly Paper ID 2192560. Rochester, NY: Social Science Research Network. http://papers.ssrn.com/abstract=2192560.
Monga, Celestin, and Justin Yifu Lin. 2015. The Oxford Handbook of Africa and Economics: Context and Concepts. Oxford University Press.
Nucifora, Antonio, Bob Rijkers, and Caroline Freund. 2014. “All in the Family : State Capture in Tunisia.” WPS6810. The World Bank. http://documents.worldbank.org/curated/en/2014/03/19291754/all-family-state-capture-tunisia.
OECD. 2014. “Government at a Glance: Latin American and the Caribbean.” Paris: OECD.
Packard, Truman, and Trang Van Nguyen. 2014. “East Asia Pacific At Work: Employment, Enterprise and Well-Being.” East Asia and Pacific Regional Reports. Washington, D.C: World Bank.
Waldner, David. 1999. State Building and Late Development. Ithaca, NY; London: Cornell University Press.
World Bank. 2009. From Privilege to Competition: Unlocking Private-Led Growth in the Middle East and North Africa. World Bank Publications.