Makio Yamada, Princeton University

This chapter is part of POMEPS Studies 33: The Politics of Rentier States in the Gulf. Download the full PDF here.

Can rentier states reform themselves? The governance capabilities of rentier states in the Gulf increasingly loom as a concern as their reform initiatives gradually shift from centrally setting general directions of wanted changes to implementing specific policies and programs. While the policy-implementation stage of reforms is influenced by the institutional quality of state apparatuses, the literature implies that such governance capabilities are systematically lacking in rentier states. The institutionalist scholarship has long viewed developing states outside the West and East Asia—not only rentier ones—as suffering from clientelistic institutions that are responsible for economic stagnation.[1] Even Malaysia, one of the major post-Asian Tigers emerging economies, is seen as struggling to move out of the middle income trap due to institutional problems such as corruption.[2] In these states, institutions tend to remain inefficient and under-meritocratic as inherited and reproduced patronage networks keep inviting rent-seeking behaviors and prohibiting necessary prioritization of productive players.[3]

These states still can leverage productive enclaves – sometimes referred to as “islands of efficiency,” which are shielded from the rest of national institutions by the strong political mandate (as shown by Steffen’s Hertog’s analysis of efficient state-owned enterprises in Gulf economies, for instance)[4] – and achieve growth “on spot”. Such enclaves are often created in an “additive” manner, without dismantling the existing institutions—a logic similar to the creation of Special Economic Zones in China, which are largely populated by migrants from other parts of the country that have been more successful in developing governance capabilities than other older industrial cities that continue to suffer from inherited and reproduced clientelistic forces.[5] Nevertheless, for economies to grow sustainably and inclusively, a wider institutional upgrading is required.  

Then when do governance capabilities develop? Although this is a frequently asked question, the dynamics of institutional upgrading has remained a puzzle since Peter B. Evans said in the late 1980s that solving it will demand “intellectual imagination.”[6] The observation of the emergence of governance capabilities itself is not new: it is, indeed, a classical agenda in social science, most prominently advanced by Max Weber’s theory of bureaucracy in the early days of the discipline. However, as Francis Fukuyama points out, social scientists since then have studied this topic much less than the process of policy-making.[7] Recently, scholars, nevertheless, have gradually been disentangling this complex puzzle through closely examining the historical experience of states in the West and East Asia as well as those in other regions.

Subscribing to the discourse of contemporary liberalism, many scholars associate participation with governance via accountability. However, in recent years, more comparativists and historians have paid attention to the record of institutional upgrading in the pre-participation era. They have been increasingly forming an understanding that the initial transformation of authoritarian states from those captured by clientelism to those hosting meritocratic bureaucracy results in economic growth creating a broader, productive middle class, which is more self-reliant and, thus, possesses greater bargaining power vis-à-vis the state than the previous patronized generations; and here begins the participation–governance linkage.[8]

This trend, often found in the scholarly agenda of “state formation,”[9] has been directly and indirectly met by the long-standing puzzle that early modern growth took place in a time of political authoritarianism in a range of countries, from England and Prussia to Japan and South Korea, and by an increasing view that, without due governance capabilities, participatory political systems would be fragile and distortive, rather than stable and developmental.[10]

The dynamics of (the beginning of) institutional upgrading

When do the reduction of rent-seeking behaviors and the unraveling of the existing clientelistic order occur? Pierre Bourdieu once described the emergence of formal institutions in historical patrimonial dynastic states as a gradual process, in which homines novi—disinterested technocrats—constructed the chain of authorities that increasingly form a “public order.”[11] Nevertheless, the anatomy of how these “new humans” armed with modern knowledge grasped political power against the long-standing clientelistic forces was left unanswered by him.

Here the question may not be so much about the emergence of a political coalition of reformists itself, but rather about why some coalitions succeed in installing effective bureaucracy while others have failed in doing so, for the coalition’s reform attempts are normally exposed to obstruction by veto players with vested interests from major political constituencies of the regime. In the eyes of rulers, depriving these vested interest players of their long-granted entitlements will risk the stability of their regime and/or their political and physical life; this “perceived reform-stability trade-off,” thus, in many cases, keeps them cautious toward changes that will drastically alter the existing clientelistic order—even when preserving the status quo will only gradually undermine the regime’s longevity. In other words, it is structurally difficult for rulers to be free from the belief that they must keep serving as generous providers of largesse, especially as the distribution of rents is precisely what has created and cemented the foundation of their political power.

These vested interest players also appear to be myopic: if they stop seeking rent and their obstruction of reform attempts, and instead cooperate in developing the state’s capacity, they will eventually attain greater gains from a larger economic pie. Then why do they remain against their own long-term interest? Here, rather than rationalist assumptions, insights from behavioral economics, which incorporates humans’ cognitive biases and the resultant systematic deviation from rational choice models, seem to better explain the behavior of these vested interest players. Their behavior is constrained by “bounded rationality” and subject to a range of human tendencies, such as the “endowment effect” (overvaluation of the item already in one’s hands)[12] and the “ambiguity effect” (aversion to risks when the probability of the alternative choice is unknown).[13]

The above, indeed, speaks to the sheer difficulty of developing governance capabilities in states where the reformist coalition is balanced by the groups of rent-seeking political clients. This, however, in turn suggests that when a change in these vested interest players’ cognitive patterns happens, a space can be created for the reformist coalition in its advancement of governance agendas in a more autonomous and influential manner. How possible are such situations? Such situations look abnormal, but recent studies by historians, in fact, indicate that these abnormal situations did occur and served as critical junctures for institutional upgrading in Western Europe and in East Asia.

Institutional upgrading in England and Japan: Implications for Gulf rentier states

For instance, Patrick O’Brien’s analysis of the restoration of the Stuart Dynasty following the turmoil of the English Civil War and the short-lived autocratic Cromwellian republic (1642–60) examines the behavioral change of the dynasty’s political clients.[14] These political clients, largely landed nobles, collectively relinquished their lucrative rent-seeking opportunities—tax farming—and agreed on initiating centralized taxation. This change was driven by their consensus on building a stable patron state even at the expense of their private interest, as, having experienced the crisis of their political lives in the period of Interregnum, they saw a loss of their privilege as a lesser evil than the lack of protection. They had learned that their continuous enjoyment of the entitlements under the previous clientelistic order had precipitated the decline of the dynasty. (Indeed, this awareness was a zeitgeist that Thomas Hobbes referred to as a “social contract” in his Leviathan (1651)—a recognized need for a strong state capable of providing security and collective goods that ensure the survival of individuals’ political and economic lives.) Hence, the nature of Parliament began shifting from the house of rent seekers to the house of pain sharers. This institutional upgrading paved the way for the stable dynastic state supported by capitalism-accommodating nobles, with the rise of a taxation administration (Board of Excise) operating as a competitive economic regulatory body.[15] O’Brien suggests the applicability of the same logic to major Continental European monarchical states in the period after the turmoil of the French Revolution and the Napoleonic Wars, where institutional upgrading led to their modern industrial growth in the mid-nineteenth century.[16]

In the late nineteenth century, Japan, headed by the emperor, also began its early industrial take-off. The origins of Japan’s governance capabilities date back to the institutional upgrading in two local samurai states, Choshu and Satsuma, which played leading roles in toppling the old Shogunate and formed the core of the restored imperial state. In these local states, reformist lower-rank samurais led administrative reforms in mid-century: through their cooperation with capable merchants and farmers, they built mercantilist local states and promoted proto-industrialization. According to Mariko Yamagata, what was common to these two local states was their experience of fiscal breakdown.[17] Insolvency placed samurais in these local states at an imminent risk of losing their political lives, and even the status of samurai in the case the reign of their lord granted by the Shogunate would be repealed. Thus, upper-rank samurais, who had previously gripped the control of the state’s fiscal and economy policy, had no choice but to grant space to the new meritocratic coalition. In contrast, in more fiscally-stable local states, lower-rank samurais’ reform attempts were effectively nipped in the bud by upper-rank samurais and their crony-capitalists.[18]

In both these English and Japanese cases (both economies were commodity-exporting peripheries before their institutional upgrading), the behavioral change of the vested interest players occurred due to their strong feeling of the vulnerability of their patron dynastic state, and a predicted or experienced loss of their protection. Thus, they took a collective action of pain-sharing aimed at empowering the state to ensure their long-term survival. It was the moment in which private and public interests strongly overlapped in their eyes. As indicated by Prospect Theory of behavioral economics, they, finding themselves in the domain of losses, became risk-taking for this collective action, while they otherwise remained risk-averse when they saw themselves in the domain of gains.[19] This “cognitive change and collective action” approach may well complement existing hypotheses in the state formation literature such as war and elite politics.[20] In particular, it may identify more specific dynamics of elite politics concerning vested interest players and find commonalities between war and non-war shocks resulting in the similar outcome of institutional upgrading.

If this hypothesis of a patronage-to-governance transition applies universally, it should be able to explain, at least partly, the barriers facing Gulf rentier states in their institutional upgrading. In these states, due to their still-high distributive capacity, the vulnerability of the patron dynasty is not much felt by vested interest players (although, if low oil prices continue, the long-term fiscal sustainability of states with lower income per capita such as Saudi Arabia and Oman will be uncertain). Moreover, the majority of citizens in these states enjoy high income levels owing to broad public sector employment. Such wide and robust patronage networks host equally wide and robust veto forces, making pain-sharing considerably difficult. With the majority of political clients remaining risk-averse and sensitive to the reduction of their entitlements, the reform–stability trade-off perceived by rulers appears tangible, as hinted by the reinstallation of the public-sector benefits and the introduction of compensatory distributions along with fiscal adjustment programs in Saudi Arabia. Here, the two representative classical rentier ideas—distributional state (allocation state) and the dominance of patronage over meritocracy (rentier mentality)[21]—appear to remain relevant, albeit in a neoclassical way, involving the erecting of barriers to institutional upgrading.

Further research agendas

This essay clarifies two further research agendas. The first is the dynamics of the continuation of the institutional upgrading: even if reform were to be kicked off, whether its process continues until new, efficient, meritocratic institutions are consolidated is another issue. If pain-sharing political clients lose their patience, a behavioral reversal may happen, leading to their attempts to recover the lost rent-seeking opportunities. Such attempts would result in a counter-reform, renewed political struggles, and a continuous re-composition of patronage networks, rather than the development of governance capabilities. To keep such political clients away from resistance to the reform, some alternative gains need to be offered to them.

In seventeenth-century England, the economic growth resulting from the institutional upgrading discussed above benefited nobles who were landowners and agricultural producers; they also gradually coalesced into the circles of new economic elites in the financial and service sectors in London.[22] A comparable case is colonial Korea, where political clients of the Yi Dynasty, the yangban, were coercively pensioned off by the colonial regime, which attempted to reproduce Japanese institutions there. The colonial rule benefited these former administrative elites who were also landowners and agricultural producers through the introduction of modern technology and the export of their agricultural products to Japan.[23] The success of South Korea’s post-independence developmental coalition led by Park Chung-hee needs to be understood within this context: the absence of old nobles from the state apparatuses. For Gulf rentier states, it is, however, not easy to think of possibilities of a similar “pain–gain circuit” for their broad political clients. In these states, reform without sufficient alternative gains may easily lead to wide discontent—although their still-abundant financial capital may potentially be wisely deployed for less counterproductive re-cooptation.

The second research agenda is a search for the second-best option in case general institutional upgrading is unlikely to occur sometime soon. One possibility is a strategic empowerment of productive enclaves. A gradual aggregation of these enclaves has been a hope of reformists, but there may be room for doing more. One such way is to help develop organic relationships among these enclaves by facilitating their communication and creating productive patterns of interactions such as cooperation, competition, and a division of labor, whereas many of them currently operate solo or without sufficient external cooperation due to the segmented nature of the rentier state. Another possible approach is to support institutional spill-overs from these efficient enclaves to other state apparatuses through various means, including model-making and the movement of human capital; they may also contribute to the country’s education effort with the aim of expanding the future reformist population.


[1] Daron Acemoglu, Francisco A. Gallego, and James A. Robinson, “Institutions, Human Capital, and Development,” The Annual Review of Economics, Vol. 6, 2014, pp. 875-912.

[2] Herizal Hazri and Nina Merchant-Vega, “Malaysia’s Middle Income Trap,” The Asia Foundation, 26 January 2011.

[3] Peter B. Evans, “Predatory, Developmental, and Other Apparatuses: A Comparative Political Economy Perspective on the Third World State,” Sociological Forum, Vol. 4, No. 4, 1989, pp. 561-587.

[4] Steffen Hertog, “Defying the Resource Curse: Explaining Successful State-Owned Enterprises in Rentier State,” World Politics, Vol. 62, No. 2, 2010, pp. 261-301.

[5] Mary Ann O’Donnell, Winnie Wong, and Jonathan Bach, ed., Learning from Shenzhen: China’s Post-Mao Experiment from Special Zone to Model City (Chicago: University of Chicago Press, 2017).

[6] Evans, “Predatory, Developmental, and Other Apparatuses,” p. 584.

[7] Fukuyama, “What Is Governance?,” pp. 347-348.

[8] Rolf Schwarz, “The Political Economy of State-Formation in Arab Middle East: Rentier States, Economic Reform, and Democratization,” Review of International Political Economy, Vol. 15, No. 4, 2008, pp. 615-616.

[9] Tuong Vu, “Studying the State through State Formation,” World Politics, Vol. 62, No. 1, 2010, pp. 148-175.

[10] Francis Fukuyama, “What Is Governance?,” Governance: An International Journal of Policy, Administration, and Institutions, Vol. 26, No. 3, 2013, p. 351; Jonathan R. Stromseth, Edmund J. Malesky, and Dimitar D. Gueorguiev, China’s Governance Puzzle: Enabling Transparency and Participation in a Single-Party State (Cambridge: Cambridge University Press, 2017), p. 4.

[11] Pierre Bourdieu, “From the King’s House to the Reason of State: A Model of the Genesis of the Bureaucratic Field,” Constellations, No. 11, Vol. 1, 2004, p. 33.

[12] Rick K. Wilson, “The Contribution of Behavioral Economics to Political Science,” Annual Review of Political Science, Vol. 14, 2011, p. 213

[13] Jonathan Baron, Thinking and Deciding, 4th Edition (Cambridge: Cambridge University Press, 2008), p. 281

[14] Patrick O’Brien, “The Nature and Historical Evolution of an Exceptional Fiscal State and Its Possible Significance for the Precocious Commercialization and Industrialization of the British Economy from Cromwell to Nelson,” Economic History Review, Vol. 64, No. 2, pp. 408-446.

[15] William J. Ashworth, “Quality and the Roots of Manufacturing ‘Expertise’ in Eighteenth-Century Britain,” Osiris, Vol. 25, No. 1, 2010, pp. 231-254.

[16] O’Brien, p. 436.

[17] Mariko Yamagata, “Yūhan no Hansei Kaikaku to Senbai-sei,” Rekishi Hyōron, No. 717, 2010, p. 66.

[18] Ibid., p. 75.

[19] Rose McDermott, James H. Fowler, and Oleg Smirnov, “On the Evolutionary Origin of Prospect Theory Preferences,” The Journal of Politics, Vol. 70, No. 2, 2008, pp. 335-350.

[20] Vu, “Studying the State through State Formation,” p. 152.

[21] Hazem Beblawi and Giacomo Luciani, The Rentier State (London: Croom Helm, 1987).

[22] P. J. Cain and A. G. Hopkins, British Imperialism, 1688–2015 (London: Routledge, 2016), pp. 73-115.

[23] Atul Kohli, State-Directed Development: Political Power and Industrialization in the Global Periphery (Cambridge: Cambridge University Press), 2004, pp. 42-45.

Exploring why institutional upgrading is not so easy in rentier states