Beyond the rentier state: Can regionalism work for Arab states?

Khalid Abu-Ismail, UN-ESCWA Beirut Division Chief

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

The extensive literature on the political economy in Arab states features a distinctively important role for the rentier phenomenon (Richards and Waterbury, 1990; Cammet et al., 2015; El-Badawi, 2004 and El-Badawi and Makdisi, 2011 and 2017, El Badawi and Selim, 2016). The rentier state hypothesis attributes the region-wide governance deficit to a so called ‘authoritarian bargain’ where the state (aided by rents from oil-revenues) pledges to low inequality and rapid social and economic progress in exchange for limitations on political reform and democratic governance (Desai, Olofsgard and Yousef, 2009).

Against this historical and theoretical backdrop, three questions are of interest. First, has the rentier state model delivered on its end of the social contract? Second, given the legacy of the Arab uprisings and the present economic and social context, is this bargain sustainable? If not, going forward, can regional integration work for Arab States?

Has the rentier state delivered on its end of the social contract?

The development landscape has improved dramatically compared to the early 1970s. Progress in health and education has been particularly impressive, as can be seen in the evidence collected by the global Human Development Report of 2010 (UNDP, 2010). Both money-metric and multidimensional poverty rates (the former is often measured by the World Bank’s $1.9 dollar per day poverty line and the latter by UNDP and OPHI’s Multidimensional Poverty Index) are comparatively low in Arab States (UNDP, 2018 and OPHI, 2018). Complementing these results, income per capita rates (in PPP or constant prices) are on average higher than in other developing regions and inequality is relatively low (World Bank, 2016). Consistent with the authoritarian bargain narrative, socialist and redistributive state-led policies dating back to the 1960s and at least up to the early 2000s had produced a legacy of low inequality relative to other regions such as Latin America, for example (Abdel Gader, and El Badawi, 2002).

However, other studies, including the 2012 Arab Development Challenges Report, touched upon structural challenges that were overlooked by this narrative (UNDP, 2012). For example, the middle class, which represented the dominant economic group in most Arab countries, has been under significant pressure since liberalization in the early 1990s (ESCWA, 2014a). Poverty, when measured appropriately, is much higher than commonly thought. For example, according to a 2017 international report adopted by Arab countries, two-thirds of the population in the ten Arab countries, covering more than two-thirds of the population of the region, are either multidimensionally poor or vulnerable to poverty (ESCWA, LAS, UNICEF and OPHI, 2017). Likewise, a key challenge for the region is that the earning of the majority of the middle class in many countries are not high enough to protect them from poverty. Thus, even a small increase in prices will cause them to become poor or vulnerable to extreme poverty. Not surprisingly, recent inflationary episodes in many Arab countries, especially those in conflict, have significantly increased poverty and vulnerability. In effect, this may have caused the middle class to shrink to about one-third of the population from 2010.

Broader developmental impacts have been examined more thoroughly in the first Arab Human Development Report (UNDP, 2002). Along with its sequels, it highlighted deficits in freedom (or good governance), knowledge, and gender equality, particularly in power sharing and employment, a peculiarity that is quite perplexing given the high diversity among Arab States in income per capita and albeit to a lesser extent in human development. Of these three deficits, the lag in good governance is arguably the most significant and consequential on development outcomes. (Abu-Ismail et al. 2016).

The link between the rentier growth model and its socioeconomic consequences is well established. Thus, even with a more educated labor force and relatively high growth rates from 1990 to 2010, opportunities for decent employment fell short. The public sector could no longer become the main employer, especially after the 2000s, as a result of fiscal constraints which also led to dwindling public salaries and reduced quality of public service delivery in many labor-rich and oil-poor countries (ESCWA, 2014). Job creation principally occurred in informal low value-added activities, mainly services. Consequently, total productivity dropped, real wages froze, and vulnerability to poverty increased. Hence, even as extreme poverty fell in most countries, the fear of falling into poverty rose. In some, notably Egypt, poverty rates increased paradoxically alongside handsome economic growth during the period from 2000 to 2010. At the same time, inequality rose sharply, albeit without being captured by official statistics (Sarangi et al., 2015). Alvaredo and Picketty (2017) and the World Inequality Report (2018) suggest that when taking into account the share of top 10 per cent receivers of the region’s income, which is not captured in household survey data, inequality in the region is the highest world-wide.  

In this context, it is not surprising that Arab youth, particularly those with higher educational qualifications, became disenfranchised and increasingly sought to migrate, an option that became more difficult for the vast majority as Gulf Cooperation Council countries gradually changed their immigration policies in favour of a cheaper workforce from Asian countries (ILO, UNDP, 2012). Crony capitalism, resulting from the distorted privatization and liberalization that mainly benefited the ruling elites, served to exacerbate the sense of injustice, especially by middle class youth who saw no pathway for economic or social mobility. The end result, as seen in the uprisings, was the middle and working class’s shift in allegiance, which has tremendously benefited violent non-State actors (ESCWA, 2014a).

Is the rentier bargain sustainable?

Can the rentier state continue to survive under present global and regional circumstances? Evidence suggests not for much longer. First, the rents themselves are dwindling and population size is much larger hence the rent per capita is much lower than in the 1970s and 1980s. One ramification is that the region’s own consumption is projected to rise significantly, leaving less room for exports (ESCWA, Arab Vision 2030). Second, even with the recent rise in oil prices, long term trends will continue to be difficult to predict given uncertainty in global economic growth, geopolitical factors, availability of other sources (Shale oil) and the challenge posed by green technologies (low cost renewables). Third, in light of the above, workers remittances, which are still the main source of hard currency inflows for oil-poor Arab countries, are not expected to rise and may very well decline given the increasing pressure on fiscal space in the GCC, especially the KSA. Fourth, tourism receipts which are also a significant source of foreign exchange receipts have been hard hit since the uprisings and a rebound to the 2010 levels is unlikely in the short- and medium-run. Fourth, due to on-going conflicts and other factors, much of the physical capital has been destroyed, global and regional investment flows dropped sharply, and a significant share of the oil revenues are allocated to military expenditure.

These factors, put together, suggest many countries in the region are caught in a vicious cycle of low growth with rising poverty, vulnerability, and informality. Accentuating this downward spiral is conflict conditions and restrictive monetary policy in oil poor countries such as Egypt to encourage short-term capital inflows and maintain exchange rate stability, the effect of which is often overlooked or underestimated by policy makers. Consequently, foreign debt and debt service is projected to rise in many countries, which will add to the already high pressure on fiscal space for current expenditures, particularly social protection and public investment programs that are essential for the poor. (ESCWA rethinking fiscal policies 2017)  

The Arab rentier state, with its current institutional capacity and governance framework, is ill-equipped to address these multiple challenges. The policy responses proposed by the regimes since 2010 have been either offering additional rents (oil rich) and/or less space for real voice and accountability and other governance reforms (oil poor), essentially an extension of the very same trajectory that led to the uprisings.

What next?

Arab countries need to think beyond temporary fixes and address the root causes of endemic development challenges, which are not isolated from one another. The two region-wide priorities are ending conflict and reversing the trend of growing informalization of the labour market due to the concentration of economic activities in low value-added sectors. As argued in the Arab Vision 2030 Report (ESCWA, 2016), regional integration can support the transition from a rentier state to a developmental state, providing there is political will at the national and regional level to move towards two strategic objectives:

1 – Generalized condition of peace and region-wide systems of good governance

Attainment of peace and security through a new regional integration formula is an integral component of and a prerequisite for any future regional integration vision. Only then will the region be able to transform itself through a new development model. This requires a framework for bringing about peace solutions to ongoing conflicts, as well as transitional justice frameworks to heal post-conflict countries and assist these societies in moving forward. Such a new accountability framework should be based on the separation of powers, a functioning system of checks and balances and the right to information (e.g. open budget initiatives or transparent political decision making). In all Arab countries, the independence, integrity, and efficiency of the judiciary should be safeguarded, not only for the sake of a just system, but also as a critical factor for long-term productive investment. To implement all this, the redesign and empowerment of the League of Arab States is a must for it to function as a governing body overlooking the implementation of regional economic and social policies. It is self-evident that a common regional foreign policy and a common defence strategy are an integral part of this new system.

2 – Integrated economies with resource sustainability

Arab integration into Global Value Chains is an ultimate objective of economic integration in order to boost commodity exports, create decent jobs, and reduce poverty. This would require the establishment of region-wide infrastructure, energy, and renewable energy networks and the development of new routes to enhance regional supply chain efficiencies. Any regional integration scheme would also need to develop with the aim of diversifying patterns of intra-regional trade (in terms of commodity and services as well as in the direction of trade itself) and by consolidating economic and trade ties with neighbors and further to the east and the African continent. This would be aided by establishing an Arab Custom Union and reaching a regional agreement on trade in services. Eventually, convergence in trade policies and concurrently in macroeconomic policies (fiscal, monetary and exchange rate) can pave way for the preparation of a common currency. It would also necessitate a new regional financing mechanism such as the new Regional Bank for Reconstruction and Development with a large enough capital to support regional economic diversification goals and regional reconstruction and infrastructure projects.

These actions, the ESCWA projects, would not only result in a higher growth rate, but also in better outcomes of growth process to workers by generating around 60 million jobs by 2030 and guaranteeing their freedom of movement between Arab states. In the long term this will induce a rise in labour productivity and draw millions of workers away from low value-added informal sector activities, thus paving a way for their upward social and economic mobility. Eventually this employment-led structural transformation scenario would translate into lower poverty and higher human development outcomes, which themselves reinforce better institutions and economic growth: the vicious cycle of conflict and de-development is at once transformed into a virtuous one (ESCWA, 2016).

Finally, it would be naïve to think that a shift from the rentier state to a developmental state will be easy or that a move from nationalism to regionalism would happen instantaneously. Structural transformation and integration require planning, advocacy, and negotiation. It would also be naïve to assume these proposals would not be opposed by powerful vested interest groups, including the well-connected ruling elites and their cronies. But as argued earlier, the rentier state model has reached its limit and extending the business as usual scenario will not resolve the region’s long-standing development challenges. 



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