Arab Political Economy: Pathways for Equitable Growth

Introduction

Despite immense hydrocarbon wealth, strategic location, and a youthful workforce, the Middle East faces profound economic challenges. The immediate geopolitical risks are obvious: cascading conflicts in Syria and Yemen, ongoing strife in post-uprising countries such as Egypt and Tunisia, and the lingering financial strain of the 2014 collapse in oil prices. But these pressing issues mask a more fundamental challenge facing the region: the rentier model and its redistribution mechanisms, upon which Arab economies were built, have unraveled.

In a rentier system, the state uses rents—payments received for the use of fixed factors of production¹—to fund vast networks of patronage and provide social services to its people. For years, rentierism derived from oil sales or other sources maintained the political and economic status quo in the Middle East. But lower oil prices, increased global competition, and growing populations have rendered this model unsustainable. This becomes even more apparent when compared with geographic regions that have experienced sustained, dynamic economic growth in recent decades, such as Southeast Asia.

As the old systems collapse, there has been no clear articulation of what will replace them. Besides the unescapable macroeconomic reorientations, constructing a new order requires states to begin confronting the patronage system and crony networks that distort economic outcomes and suppress job creation. The economic challenge is thus not merely technical, but profoundly political as well.

Each Arab country faces unique challenges in building productive institutional frameworks. Each state will need to find its own innovative sources of wealth and value production, improve their distribution of economic resources, and construct appropriate political institutions. But certain common elements are clear: New, successful Arab political economy models will require that leaders meaningfully invest in traditionally marginalized constituencies, such as youth and women. These models will also need to create rules-based regulatory frameworks that are fair and transparent to promote new standards of accountability. And any new system will need to create checks and balances that submit rent-seekers to genuine competition.

The Unraveling of Rentierism

After World War II, the Arab development model paired an emphasis on domestic production and trade protectionism, also known as import substitution industrialization, with strong nationalist undertones. In the early decades after the war, most Arab states achieved positive economic growth. Many made tremendous gains in life expectancy, literacy, and public health. In the 1960s and 1970s, the Middle East was the fastest growing region in the world, aided by the 1973 oil embargo.² That event permanently altered the structure of international energy markets and paved the way for the phenomenal hydrocarbon revenues to come. Over time, Arab states developed authoritarian bargains—implicit social contracts between governments and citizens, in which social welfare, jobs, and security were exchanged for political complaisance. The oil-exporting states, and the Gulf monarchies in particular, began to enjoy unprecedented wealth.

Every economy makes some use of rent, whether derived from property, tourism, natural resources, or other “gifts of nature.” But a rentier state is dependent on revenues generated from the extraction and sale of state-owned natural resources.³ In one of the oil-exporting states of the Middle East, only 2 or 3 percent of the workforce might be involved in oil extraction. But the revenue generated might account for 80 percent of government income.⁴ Thus, the prosperity of a Middle East rentier has depended far less on prudent fiscal management or the success of its private enterprises than on the price of crude oil.

While Arab elites enjoyed the benefits of the rentier system, they struggled to keep pace with soaring populations and the rapid movement of rural populations into cities. Most countries in the region responded to the resulting labor glut by transforming hydrocarbon rents into public sector jobs. This proved only a short-term solution. By the 1980s, the Arab republics, unlike their wealthier Gulf neighbors, found it increasingly difficult to generate the hard currency necessary to maintain their generous welfare systems. Facing growing urban poverty, unsustainably large public sectors, and severe fiscal strains, they gradually attempted to adopt liberal market reforms with the support of International Monetary Fund (IMF) and World Bank structural adjustment loans. In labor-abundant, resource-constrained countries like Egypt, Jordan, and Tunisia, public sectors were deregulated and privatized, marginally downsized from their peaks in the 1970s, and trade barriers were reduced.

But economic liberalization in the absence of meaningful political reform gave rise to crony capitalism. Privileged elites captured much of the gains of privatization, macroeconomic growth, and increased trade.⁵ As countries like Egypt, Jordan, Morocco, and Tunisia shifted to export-led growth strategies, the authoritarian bargain adapted to neoliberal economic policies. Because the private sectors remained dependent upon—even commingled with—government authority, they rarely developed as independent power centers.

Foreign investment remained low and high-productivity sectors, such as manufacturing, stagnated, while declining resources limited the ability of public sectors to accommodate young, educated job seekers. These trends resulted in a structural shift toward the informal and low-value service sectors, which provided generally unproductive, low-wage jobs.⁶ Middle East employment statistics are notoriously unreliable. However, according to some estimates, by 2010, only 10 to 15 percent of the labor force in Egypt, Morocco, and Tunisia, and even fewer in Iraq and Yemen, worked in the formal private sector (as distinct from the informal sector).⁷ At least until the recent drop in oil prices, public spending in the Gulf states remained buoyant and as many as 90 percent of economically active citizens in Kuwait, the United Arab Emirates (UAE), and Qatar were estimated to work in the public sector.⁸

Bloated state patronage networks have resulted in endemic levels of corruption. In Transparency International’s 2017 Corruption Perceptions Index, sixteen of the twenty-one Arab countries surveyed scored below the global mean of 43 (on a 0 to 100 scale).⁹ More than one hundred Arab thought leaders surveyed by Carnegie in 2016 found corruption to be the second-most pressing regional challenge, behind only authoritarianism.¹⁰ While corruption and economic capture are difficult to quantify, the World Bank has found evidence that politically connected firms enjoy economic privileges in a number of Middle Eastern countries, hampering the growth of younger, smaller firms that should act as engines of job creation.¹¹ In the decade prior to the 2011 Arab uprisings, macroeconomic indicators were generally positive.¹² But this economic growth came with heightened expectations for the governments of the region. With growing perceptions of corruption, festering poverty and underemployment, and continuing political stagnation, the explosion of public discontent was likely inevitable.

Rentier patterns have played out differently in different contexts. The Gulf monarchies account for more than half of the Arab League’s combined gross domestic product (GDP) despite making up only 15 percent of its population.¹³ The combination of immense oil revenues, small populations, and, arguably, the political legitimacy that authoritarian one-party republics lack has allowed them to historically favor co-optation over coercion. Authorities redirect tremendous oil wealth into generous social welfare systems and government jobs, built on a foundation of tribal patronage. But the 2014 collapse in oil prices brought tremendous strains, particularly in Bahrain, Oman, and Saudi Arabia, which may, going forward, struggle to keep pace with high population growth.¹⁴ Moreover, Saudi Arabia, the United Arab Emirates, and, most significantly, Bahrain, have responded to the ongoing regional turmoil with increased repression against any form of political dissent.

The oil-exporting Arab republics—Algeria, Iraq, and Libya—also derive significant income from resource rents. Syria and Yemen were formerly oil exporters, but revenues have collapsed amid a combination of war, dwindling production, and declining prices.¹⁵ In these five countries, oil revenues have been disproportionately spent on repression and the military as well as captured by cronyism and corruption. The results are underperforming economies and particularly grievous failures in governance. Not coincidentally, these five states have been among the most conflict-ridden Middle Eastern countries in recent decades.

Poorer semi-rentier states make up a third category. Recent gas discoveries in the eastern Mediterranean might eventually create significant new revenue streams for the Levant.¹⁶ Egypt’s gas extraction is growing quickly, but with a population of nearly 100 million, it derives far less hydrocarbon revenues per capita than its richer peers. For now, Lebanon and Palestine have no hydrocarbon production, while Jordan and Morocco have marginal productions. Sudan and Tunisia, too, have modest but generally declining energy extraction industries. These states contain more than half of the region’s population but account for only one-quarter of its GDP. But despite low levels of hydrocarbon endowments, the rentier model permeated these countries as well. Rents took various forms, including Gulf investments, remittances, and alternative natural resource endowments, such as the Suez Canal in Egypt, potash in Jordan, and phosphate in Morocco. Their wealthier neighbors used oil revenues not just to purchase domestic political allegiance, but also across borders to buy loyalty from these poorer countries. Jordan, Egypt, and Palestine in particular benefited from foreign largesse from the Gulf and the United States, in return for diplomatic quietism. Remittances aside, these income streams accrue directly to governments, which then redistribute them among local patronage networks—through public sector jobs, preferential contracts to political insiders, or, in the case of Jordanian tribes, direct financial support.

The Middle East vs Southeast Asia: A Case Study in Divergence

In the early 1960s, the Middle East and Southeast Asia were both struggling with bitter colonial legacies that had already spawned a series of destructive regional wars and localized insurgencies. In both regions, countries attempted to overcome low levels of human development by embracing protectionist import substitution models. Egypt, led by Gamal Abdel Nasser, a charismatic military officer, bore some resemblance to Thailand, which was also led by a former military officer who had recently seized power.¹⁷ In 1960, the two countries were comparable in population (27 million people apiece) and per capita GDP ($631 and $571, as measured in 2010 dollars).

After seizing power in 1956, Nasser promptly nationalized the Suez Canal, sparking a geopolitical crisis. His ensuing political victory won him a widespread regional following, inspiring leaders from Libya to Iraq and beyond. His vision of a unified Arab world under Egyptian leadership combined the political appeal of pan-Arabism and anti-imperialism under an authoritarian socialist political model. To the terror of conservative monarchies, Nasserism seemed primed to become the favored political economy model for the Arab republics.

But after Egypt, and the broader Arab world, suffered a catastrophic defeat in the Six-Day War of June 1967, Nasser and his vision were immediately discredited. In the 1970s, as Arab societies struggled to cope with their defeat, an oil boom provided easy wealth for many governments. Yet despite economic advancement, political development lagged behind, and Arab states became increasingly repressive. Authoritarian republics went to great lengths to stage-manage a veneer of electoral legitimacy for their presidents-for-life.

Arab authoritarianism has sometimes coincided with important socioeconomic gains. Between 1970 and 2010, no country in the world made more progress on the human development index—a composite measurement of income, life expectancy, and education—than Oman.¹⁸ Iraq’s most impressive human development improvements coincided with the onset of Saddam Hussein’s despotic rule after 1969. Egypt made significant macroeconomic progress in the 2000s, before the corruption of then president Hosni Mubarak gave way to the January 25 revolution. But apart from these occasional success stories, Arab states have struggled and failed to articulate a coherent political economy model since the collapse of Nasserism.

This long period of political and economic stagnation in the Arab world is evidenced by the six-decade divergence between the fortunes of the Middle East and Southeast Asia. Today, Egypt and Thailand are again led by former generals who came to power in coups. But Thailand’s per capita GDP has ballooned to twice that of Egypt’s. Yemen and Vietnam, both agrarian societies devastated by decades of civil war and political division, have long been among the poorest countries in their respective regions. But, in recent decades, Vietnam has quietly begun to stabilize and grow. Its per capita GDP has tripled in size since 1980 and it has emerged as a regional hub for electronics manufacturing. Yemen, meanwhile, has descended further into misery and its per capita GDP has shrunk to half what it was four decades ago.

No Arab country has averaged more than 3 percent per capita GDP growth during the last half century (see table 2). By contrast, only two Southeast Asian countries have failed to do so—one of which is Brunei, East Asia’s only petro-state and an absolute monarchy whose economy bears a greater resemblance to the Gulf monarchies than to its neighboring states.

What accounts for this tremendous divergence?

In the era of modern nation states, regional political economy models have tended to evolve with the region’s most powerful and successful states.¹⁹ Southeast Asian countries surely benefited from their proximity to Japan and, later, China, successively serving as models to (and fierce competition for) their neighbors.

There was no single Southeast Asian recipe for success. Like in the Middle East, Southeast Asian countries have spanned a wide range of political systems—parliamentary republics, constitutional monarchies, one-party communist states, a military junta, and an authoritarian city state. They have generally avoided a reprise of the catastrophic military conflicts of the 1960s and 1970s. In the Association of Southeast Asian Nations (ASEAN), they created a competent regional institution capable of promoting regional trade and global economic integration as well as regional stability.

But at the core of the half-century Asian “economic miracle” is a series of pro-growth policies adopted by the broader East Asia region. These policies were initially promulgated by Japan in the aftermath of World War II and then successively adopted and refined by South Korea, Taiwan, numerous Southeast Asian countries, and, eventually, China. These new policies encouraged strong education systems, high levels of domestic investment, macroeconomic stability, robust legal and regulatory frameworks, and meritocratic competition that created a cadre of talented technocrats generally insulated from political pressures.²⁰ In the 1960s, Indonesia, Malaysia, and Thailand were resource-based economies, dependent on timber, rubber, and rice exports, respectively. But, unlike the Arab states, these Southeast Asian nations gradually moved toward economies based on manufactured exports and free trade.

Nascent Regional Models?

If the Arab world has lacked dynamic engines of economic growth, it is in part because Egypt and Saudi Arabia—the largest Arab economies and most geopolitically important Arab states—failed to become dynamic economic powers in their own right.

Saudi Arabia’s Vision 2030 program, launched in April 2016, is arguably the most important socioeconomic modernization experiment in the Middle East. Borrowing directly from the UAE’s Vision 2021, which was released in 2010, the Saudi plan aims to reduce oil dependence and diversify its economy.²¹ A significant, and decades overdue, cultural and social opening is apparent in Saudi Arabia, the roots of which are already evident thanks to a new generation of Saudi women and men who are better educated, better traveled, and better connected to the world. But the challenge of creating a post-oil Saudi state, with a dynamic private sector and the capacity to meet the demands of its youthful workforce, is daunting. Success will depend as much on shrewd political management as it will on economic management. Crown Prince Mohammed bin Salman, the driving force behind Vision 2030, is a brash, charismatic, and energetic leader. But though his vision may be a more modern Saudi Arabia, it is not a liberal one. He has been an erratic leader who seems intent on consolidating power and unwilling to tolerate dissent, which may bode poorly for Vision 2030’s prospects.

In Egypt, the picture is more grim. Egypt has witnessed a sharp move toward brutal repression and authoritarianism. Although Cairo has undertaken some difficult economic reforms—most notably by floating the Egyptian pound, implementing a value-added tax, and reducing energy subsidies—the country is heavily indebted and continues to suffer from grinding poverty. It has favored large-scale, military-led megaprojects that do little to address human development deficiencies. Under President Abdel Fattah el-Sisi, Egypt has become significantly more repressive than it was in the years prior to the popular revolution that overthrew Mubarak.

Despite these challenges, the Middle East is not devoid of relative economic and political successes. The question is whether these successes can serve as broader models for the region.

The UAE has emerged as the most dynamic economy in the Arab world. Although it is a federation of increasingly authoritarian family-ruled emirates, it nonetheless enjoys a reputation as a country of economic opportunity, meritocratic accountability, and relatively liberal social norms. Unique among the Gulf monarchies, the UAE has made significant progress in diversifying away from hydrocarbon rents.²² Among the Arab states, the UAE consistently ranks near the top in human development and economic indicators.²³

But just as Singapore and Hong Kong play unique roles as high-end East Asian entrepôts, the UAE economic model may be of limited applicability to most other Arab states, which have much larger and more diverse populations. With the world’s eighth-largest oil reserves and a population of barely 1 million citizens, the UAE (like its archrival, Qatar) has benefited from the governance failures of its neighbors by capitalizing on comparatively sound governance structures. But these advantages do not appear so impressive against its economic peers in Asia, Europe, or North America, which the UAE lags behind significantly in most governance metrics.²⁴ The collapse, earlier this year, of one of Dubai’s premier private-equity firms (the Abraaj Group) has highlighted concerns over corporate governance and conflicts of interests.²⁵

Tunisia, meanwhile, has been cited by many Arabs as a potential political model. With high standards of women’s emancipation, an educated population, and a strong middle class, Tunisia is the only Arab Spring country to create a democratic constitutional order on the basis of consultation, political compromise, and citizen participation.²⁶ Nearly two-thirds of the participants in Carnegie’s 2016 Arab expert survey on Arab governance cited Tunisia as having the most effective governance in the Arab world.²⁷ But seven years after the Jasmine Revolution, the country remains in a state of near-permanent political crisis. Corruption is endemic, economic growth remains lower than it was in 2010, and Tunisia has not yet proven that it can fulfill the economic aspirations of its people.

Toward a New Arab Social Contract

Of all the economic challenges facing the Middle East, two stand out: the urgent and related needs for job creation—especially among the burgeoning number of unemployed youth—and for sustained, equitable macroeconomic growth.

Broadly speaking, there are four aspects of successful economic policymaking: supporting macroeconomic stability, building human capital, promoting international trade, and encouraging private enterprise.²⁸ While every Arab country faces a unique set of economic challenges, the broad contours of policies generally associated with equitable economic growth and job creation have been articulated in the academic literature and a series of international reports.²⁹

• Supporting macroeconomic stability includes controlling government deficit and debt levels and maintaining low inflation and stable interest rates. Oil-exporting countries have the added challenge of responsibly managing government spending across boom and bust commodity cycles. Several of the region’s poorer countries, including Egypt, Jordan, and Lebanon, rank among the most indebted countries in the world, hampering their long-term growth prospects.
• Building human capital, first and foremost, is about providing citizens with the tools to compete in the twenty-first-century knowledge economy, through the creation of dynamic education systems. Qatar, the UAE, and Tunisia, for example, are pursuing noteworthy improvements in education. Ensuring adequate legal protection for workers, including migrant workers across the region, is also critical.
• Promoting international trade can be accomplished through policies that expand the export-oriented segments of the economy, manage the exchange rate effectively, and remove obstacles to trade, such as tariffs, duties, licenses, and quotas. Oman and Lebanon impose low import tariffs and are relatively open to foreign investment. While Morocco has made progress integrating itself into global supply chains to European consumer markets, the Maghreb subregion remains one of the least economically integrated in the world.
• Encouraging private enterprise is critical if job creation is to reach its potential. This ultimately requires shifting the economy from oil-based and state-dominated to non-oil-based and private sector–oriented. Steps that have been articulated to generate private sector job creation, especially among small and medium-sized firms, include reducing onerous bureaucratic impediments to private enterprise; enacting flexible hiring and firing practices; reducing subsidies for politically connected and state-owned firms; increasing the transparency of procurement standards to reduce corruption; and expanding access to the 70 percent of Arab citizens who lack bank accounts through financial technology and microfinance. The UAE scores highest among Arab countries in the World Bank’s Ease of Doing Business ranking—twenty-first out of 190 countries—which considers variables such as permitting, infrastructure, credit access, and legal environment. No other Arab country ranks in the top sixty, highlighting the detrimental impact of protectionist policies, rentierism, and crony capitalism.³⁰

These policy priorities are easy enough to articulate but they can be extraordinarily difficult to implement. Economic reform is no mere technocratic exercise but a political process that gets to the heart of the division of spoils in a society. Economic reform and diversification have been catchphrases for at least two generations of Arab policymakers, especially during energy market bust cycles. But such reform efforts have consistently fallen short.

When crude oil reached a peak price of $115 per barrel in June 2014, the Gulf Cooperation Council countries, with the notable exception of the UAE, were not discernibly less dependent on oil revenues than during the first oil boom of the 1970s.³¹ Egyptian economic reforms during the 2000s coincided with a period of relatively robust macroeconomic growth, even as half the population continued to languish on $2 a day. The resulting public anger at corruption and inequality helped create the context for the January 2011 public uprising.³² In Jordan, successive attempts since the 1990s to move the country toward meritocratic institutions have been thwarted by political and economic elites.³³

The reasons for these and other failures are complicated and diverse, but a common thread runs through them. These failed efforts at reform were carefully calibrated to not fundamentally alter the central power dynamics of the prevailing elite bargains. As a result, they did not engender genuine economic or political competition. Leaders spoke of the need for reform, but their states continued to dominate economies and determine the winners, the losers, and their shares. Business elites continued to depend on government access for profits; in some cases, private industry, outside of the informal sector, evolved into an organic appendage of the state. Thus, the political economy of most Arab states became self-reinforcing, even amid successive reform efforts, as rentierism permeated most aspects of economic and political life.

The long history of Middle East reform efforts suggests that without taking on deeply entrenched beneficiaries of the rentier model and reversing the convergence of economic and political power into the same hands, meaningful change will be impossible. Patron-client networks cannot be addressed—let alone unwound—without deep structural changes, which requires new relationships between governments and citizens in the Arab world.

New Constituencies: Mobilizing Youth, Women, and Minorities

The changing demographics of the region provide some hope for breaking old barriers and bringing new dynamism. But this will require governments to treat citizens as integral partners in national projects and to invest them with the skills necessary to compete in knowledge-based industries.

This challenge is not unique to Arab governments. Southeast Asian economies faced, especially in the 1960s and 1970s, conflict, restive populations, and religious and ethnic divisions. However, these countries generally adopted “shared growth” as a fundamental development principle, which dictated that states had a responsibility to involve non-elites in political growth. Indeed, political leaders in Malaysia, beginning in 1969, and Indonesia, in the 1980s, tied their own legitimacy to the shared growth principle.

If Middle East populations are to mobilize toward economic modernization projects, two constituencies are particularly important: youth (the fifteen- to twenty-nine-year-old cohort) and women. Together, they account for roughly two-thirds of the populations of most Arab societies. Yet they do not have significant political influence in any Arab society. The age gap between young populations and aging leaders is dramatic in the Arab world. Although the region’s median age is only about twenty-four,³⁴ six countries are led by presidents or kings over eighty years old (Algeria, eighty-one; Kuwait, eighty-nine; Lebanon, eighty-three; Palestine, eighty-two; Saudi Arabia, eighty-two; Tunisia, ninety-one).

More significantly, Arab youth unemployment is estimated to be 25 to 30 percent, the highest regional rate in the world.³⁵ In several countries, including Egypt and Tunisia, graduate unemployment rates are higher still, evidence of significant squandered human capital. This unemployment challenge mirrors the region’s broader unemployment trends.

Addressing it requires chipping away at impediments to job creation, such as corruption, labor market restrictions, infrastructure deficiencies, and anemic financial systems.

It also requires efforts to enhance youth skills development. In addition to improved educational systems, vocational training has been found in other contexts to reduce youth unemployment. In several Southeast Asian countries, for example, governments helped to retrain low-skilled workers for more productive positions, thereby increasing both wages and exports.³⁶ Morocco has had a vocational training program in place since the 1980s, with hundreds of thousands of participants. Although the program has been administered by a monopoly service provider whose trainings are of uneven quality, studies suggest that participants have lower unemployment rates than Moroccan youths overall.³⁷

Two generations ago, the majority of Arab women were illiterate; today, they are the majority of university students in almost every Arab country.³⁸ However, their socioeconomic achievements have not been translated into economic or political power. The landmark 2002 Arab Human Development Report found that factors contributing to the economic and political marginalization of women in most Arab countries include traditional social and cultural norms, the undervaluation of women’s household economic contributions, rentier economic norms, reliance on foreign labor, the gender pay gap, and labor practice biases.³⁹

Although female labor force participation rates in Kuwait and Qatar are approaching levels found in the Organization for Economic Cooperation and Development, they have stagnated elsewhere. In the region as a whole, female labor force participation has risen only 1.5 percent since 1990, to 20.9 percent—the lowest level in the world.⁴⁰ Clearly, superficial gestures are not enough. For Arab countries to perform to potential, governments must open doors for women at every level of society. ⁴¹

For youth and women to better realize their economic potential, governments must internalize the need to promote the equality of all citizens. Many Arab countries are already deep into demographic transitions. Bahrain, Lebanon, and Qatar are approaching demographic maturity with sub-replacement fertility rates and median ages above thirty years old.⁴² Declining fertility rates mean that, in decades to come, the Arab countries could benefit from a demographic dividend as the working age population swells and the number of dependents, both old and young, narrows. In recent decades, Southeast Asian economies used such a dividend to springboard their economic development. However, should Arab countries fail to create meaningful economic opportunities, this dividend could become a demographic burden that hampers long-term prospects for growth.

New Incentives: Accountability and the Rule of Law

In the years ahead, achieving equitable economic growth and dynamic job creation will require that Arab governments move toward clear, transparent, and uniformly implemented regulatory frameworks. Each country faces unique sets of conditions and constraints. But it is indisputable that Arab countries need rules-based systems if they are to thrive in an increasingly competitive world. In post-rentier economies, new incentive structures will be needed to promote entrepreneurialism and human fulfillment. But this, too, requires that leaders subject entrenched economic elites to increased competition.

While those born to privilege enjoy substantial benefits in every society, intergenerational social mobility is notably low in Arab societies. The culture of wasta—an Arabic term referring to social connections willing to intervene to provide privileges, such as employment—can be pervasive and is widely perceived as unfairly impeding the prospects of those lacking powerful patrons. According to Arab Barometer polling data, the majority of citizens in six out of ten countries surveyed believe that family and tribal identities or political affiliations are at least as important as qualifications and experience in securing public sector employment.⁴³ A recent World Bank survey found that 50 percent of the employment inequality in Egypt can be attributed to circumstances beyond an individual’s control.⁴⁴ While there are as many as 150 initiatives across the region to promote entrepreneurialism,⁴⁵ they have generally under-delivered.

The favoritism, cronyism, and corruption inherent to most rentier economies create perverse incentive structures. If private sector opportunities are anemic, it can become rational to hold out for public sector employment, even at the cost of unemployment. There is little incentive for entrepreneurial risk-taking where bureaucratic impediments are high and failure, in some cases, could even result in imprisonment.

With improved labor markets, the private sector will become incentivized to hire and promote based on merit. Tax incentives and other subsidies can be shifted from mature firms to startups and young firms, which are likely to account for the majority of new jobs. Within government agencies, more proactive measures are needed to increase hiring on the basis of merit rather than on personal or political connections, though these measures may engender resistance from tribal and political elites, especially as governments are gradually reduced in size through attrition.

New Priorities: Institutions and Power Dynamics

Most Arab states are both pervasive and shallow. That is, they seek to permeate citizens’ lives but have limited ability to do so, in large part due to weak institutions that have repeatedly thwarted political and economic progress. More effective institutions would be built around capacity, efficiency, and transparency, giving municipalities and local communities greater latitude in managing their own affairs.

Amid the fraying of the old Arab social contract, citizens across the region are being told to expect increased taxes and decreased access to government jobs. As they are asked to do more for their governments, they will naturally ask what benefits they will receive in return.

The global technological revolution will be every bit as disruptive in the Middle East as elsewhere. In an era of big global data, governments that fail to promote economic transparency in all of its aspects risk being left behind. Citizens should be able to easily access information about laws and regulatory requirements, and governments should publish comprehensive information about who benefits from things like government contracting, subsidies, privatizations, and public land transactions. Outside donors—including the United States, Europe, the IMF, and the World Bank, which have often focused on macroeconomic indicators—should prioritize transparency and anticorruption measures in deciding the form and function of aid and loans.

A central conundrum of Arab political economy is how to reform a system that is deeply resistant to the solutions it desperately needs. All political systems are resistant to change, but competitive politics offers, at the least, vectors for pursuing reform. In most Arab countries, those who stand to lose the most from changes to the status quo are best positioned to oppose such reforms. Thus, the power structure of the Arab states must be understood as a central impediment to economic development. This configuration distorts economic incentives, impedes the emergence of a middle class as a plausible counterweight to the political elite, and results in socioeconomic stagnation. Ultimately, new economic models require innovative political arrangements that create checks and balances and submit rent-seekers to genuine competition.

Conclusion

The emergence of Middle East crony rentierism was not inevitable. Rather, it was the result of calculated behavior by an entrenched political and economic elite seeking to maximize its own interests. Where political and economic power is dispersed among various competing constituencies, institutional checks and balances and more equitable distributions of power can develop.⁴⁶ In most Arab states, the confluence of rentier economics and authoritarianism has led to a commingling of political and economic power. This is true in monarchies and republics, in oil exporters, and in the resource-poor.

The Arab Spring articulated a clear demand for political freedoms. But it was unable to articulate a coherent economic vision. How do Arab citizens and governments work to reconcile demands for both social protections and political freedoms? It requires a deep rethinking of the social and political pact between state and society, and necessitates the building of a new collective political culture apart from the traditional relationship between rulers and the ruled that has dominated the Arab world for decades.

Any comprehensive economic reform program naturally has winners and losers. Measures like improved transparency, advancements in the rule of law, and improved incentives for entrepreneurialism and private sector job creation will, with time, improve economic performance and reduce unemployment. But such reforms will naturally face resistance from the existing elite, whose ability to capture economic rent will necessarily decline as a result of the same measures.

The impediments to reform are substantial in the Middle East. To transcend them may require that Arab states, and their reformers, embrace new models that emphasize inclusive growth and give more responsibility, as well as more rights, to participating citizens.

If leaders both understand the urgent challenge of building modern economic institutions and are willing to take the necessary political steps to get there—in creating accountability, in subjecting rentiers to market competition, in confronting corruption, and in investing fully in their own citizens—then there are pathways toward dynamic, equitable, and sustained economic growth for the Arab world.

Notes

¹ Paul Samuelson and William Nordhaus, Economics, 19th ed. (New York: McGraw-Hill Education, 2010).

² Tarik M. Yousef, “Development, Growth and Policy Reform in the Middle East and North Africa Since 1950,” Journal of Economic Perspectives 18, no. 3 (August 2004): http://faculty.nps.edu/relooney/00_new_21.pdf.

³ The classic articulation of the Arab rentier state is Hezam El Beblawi, “The Rentier State in the Arab World,” in The Arab State, ed. Giacomo Luciani (London: Routledge, 1990).

⁴ “Economic Diversification in Oil-Exporting Arab Countries,” International Monetary Fund, April 2016, https://www.imf.org/external/np/pp/eng/2016/042916.pdf.

⁵ For fuller treatments of the post–World War II economic evolution of the Middle East, see Roger Owen and Sevket Pamuk, A History of Middle East Economies in the Twentieth Century (Cambridge, MA: Harvard University Press, 1999); and Ishac Diwan, Melani Cammett, Alan Richards, and John Waterbury, A Political Economy of the Middle East (New York: Westview Press, 2015).

⁶ Adeel Malik, “A Requiem for the Arab Development Model,” Journal of International Affairs 68, no. 1 (Fall 2014): 95–115.

⁷ Diwan, Cammett, Richards, and Waterbury, A Political Economy of the Middle East, 282–3.

⁸ Michael Herb, The Wages of Oil: Parliaments and Economic Development in Kuwait and the UAE (Ithaca, NY: Cornell University Press, 2014), 21. Herb estimated 88 percent and 92 percent of Qatari (2010) and Emirati (2008) economically active citizens worked in public sector jobs, including at state owned enterprises. Although 20 percent of Kuwaitis worked in private sector jobs, many of these are believed to be paid for by the state.

⁹ Marwa Fatafta, “Rampant Corruption in Arab States,” Transparency International, February 21, 2018, https://www.transparency.org/news/feature/rampant_corruption_in_arab_states.

¹⁰ Perry Cammack and Marwan Muasher, “Arab Voices on the Challenges of the New Middle East,” Carnegie Endowment for International Peace, February 2016, https://carnegieendowment.org/2016/02/12/arab-voices-on-challenges-of-new-middle-east-pub-62721.

¹¹ “Jobs or Privileges: Unleashing the Employment Potential of the Middle East and North Africa,” World Bank, 2015, https://openknowledge.worldbank.org/handle/10986/20591.

¹² The 2000s saw the region’s fastest macroeconomic growth of any decade since the 1980s. “Real GDP Growth,” IMF DataMapper, International Monetary Fund, https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/MENA.

¹³ Authors’ calculations based on World Bank’s World Development Indicators. This includes foreign nationals, which account for roughly half the GCC population.

¹⁴ Rubina Vohra, “The Impact of Oil Prices on GCC Economies,” in International Journal of Business and Social Science 8, no. 2 (February 2017), https://ijbssnet.com/journals/Vol_8_No_2_February_2017/2.pdf.

¹⁵ For most of the last decade Algeria has derived between 20–35 percent of its GDP from oil rents, Iraq between 40–60 percent, and Libya between 35–60 percent, though these figures have fallen due to the collapse in oil prices. Authors’ calculations based on World Bank data, see https://data.worldbank.org/indicator/NY.GDP.PETR.RT.ZS

¹⁶ Michael Ratner, “Natural Gas Discoveries in the Eastern Mediterranean,” Congressional Research Service, August 15, 2016, https://fas.org/sgp/crs/mideast/R44591.pdf.

¹⁷ The concept of human development attempts to measure well-being beyond traditional economic measures like GDP, by accounting for factors like employment, health, and education. See, “About Human Development,” United Nations Development Program, http://hdr.undp.org/en/humandev.

¹⁸ “Human Development Report 2010: The Real Wealth of Nations,” United Nations Development Program, 2010, http://hdr.undp.org/sites/default/files/reports/270/hdr_2010_en_complete_reprint.pdf, p 27.

¹⁹ For example, Eric Hobsbawn argued that the modern European state system grew out of twin eighteenth century revolutions—with the English Industrial Revolution providing an economic template and the French Revolution serving as the embodiment of egalitarian political ideals. After the collapse of the Soviet Union, the states of the Organization of Economic Cooperation and Development seemed to offer a combined political and economic vision through their support for a series of pro-Western democratic transitions in Eastern Europe and the Washington Consensus economic policies, though this model has come under tremendous strain amid a global rise in populism.

²⁰ John Page, et al., “The East Asian Miracle: Economic Growth and Public Policy,” World Bank, 1993, http://documents.worldbank.org/curated/en/975081468244550798/pdf/multi-page.pdf.

²¹ For more on Saudi Vision 2030, see http://vision2030.gov.sa/en. For the UAE Vision 2021, see https://www.vision2021.ae/en.

²² Oil rents accounted for 39 percent of GDP in 1980 but only 14 percent in 2012, both years of relative price highs. “Oil Rents (% of GDP),” World Bank’s World Development Indicators, https://data.worldbank.org/indicator/NY.GDP.PETR.RT.ZS.

²³ The UAE is ranked 21 in both the “Doing Business 2018” and “Corruption Perceptions Index 2017” rankings. The second-ranked Arab countries were Bahrain at 66 and Qatar at 29 in the respective surveys. See, “Doing Business 2018,” World Bank, 2018, http://www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Annual-Reports/English/DB2018-Full-Report.pdf; and “Corruption Perceptions Index 2017,” Transparency International, February 21, 2018, https://www.transparency.org/news/feature/corruption_perceptions_index_2017.

²⁴ Shanta Devarajan and Lili Mottaghi, “Towards A New Social Contract,” World Bank, April 2015, p. 2012, http://documents.worldbank.org/curated/en/202171468299130698/pdf/956500PUB0REVI020150391416B00OUO090.pdf.

²⁵ Nicolas Parasie, “Investors Worry Dubai Isn’t a Western-Style Financial Center,” Wall Street Journal, August 2, 2018.

²⁶ Rached Ghannouchi, “Tunisia’s Culture of Cooperation and Compromise,” in “Arab Fractures,” Perry Cammack et al., Carnegie Endowment for International Peace, February 2017, http://carnegieendowment.org/2017/02/01/arab-fractures-citizens-states-and-social-contracts-pub-66612#ghannouchi.

²⁷ Cammack and Muasher, “Arab Voices on the Challenges of the New Middle East.”

²⁸ “World Development Report 1991: The Challenge of Development,” World Bank, 1991, https://openknowledge.worldbank.org/bitstream/handle/10986/5974/WDR%201991%20-%20English.pdf?sequence=1&isAllowed=y.

²⁹ Examples include especially the succession of “Arab Human Development Reports” beginning in 2004, as well as other IMF and World Bank reports including “Jobs or Privileges” (World Bank, 2015), “Unlocking the Employment Potential in the Middle East and North Africa” (World Bank, 2004), “Trade, Investment, and Development in the Middle East and North Africa” (World Bank, 2004), “Breaking the Oil Spell” (IMF, 2016), “Economic Diversification in Oil-Exporting Arab Countries” (IMF, 2016), and “Regional Economic Outlook” (IMF, biannual).

³⁰ “Doing Business 2018: Reforming to Create Jobs,” World Bank, 2018, http://www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Annual-Reports/English/DB2018-Full-Report.pdf.

³¹ In Kuwait, Oman, and Saudi Arabia, oil rents as a percent of GDP were equal to or higher in 2012 than in 1974. The drops in Bahrain and Qatar reflect diminishing supplies and a shift to natural gas. Authors’ calculation from “Oil Rents (% of GDP),” World Bank’s World Development Indicators, https://data.worldbank.org/indicator/NY.GDP.PETR.RT.ZS.

³² “Egypt: The Arithmetic of Revolution,” Gallup, undated, http://news.gallup.com/poll/157043/egypt-arithmetic-revolution.aspx?version=print.

³³ Marwan Muasher, “A Decade of Struggling Reform Efforts in Jordan,” Carnegie Endowment for International Peace, May 2011, http://carnegieendowment.org/files/jordan_reform.pdf.

³⁴ “The Future of World Religions: Population Growth Projections, 2010-2050:

Middle East-North Africa,” Pew Research Center, April 2, 2015, http://www.pewforum.org/2015/04/02/middle-east-north-africa/.

³⁵ Masood Ahmed, Dominique Guillaume, and Davide Furceri, “Youth Unemployment in the MENA Region: Determinants and Challenges,” International Monetary Fund, June 13, 2012, https://www.imf.org/en/News/Articles/2015/09/28/04/54/vc061312.

³⁶ Brahim Boudarbat and Daniel Egel, “The Effectiveness of Vocational Training

in Morocco: Quasi-Experimental Evidence,” Regional and Sectoral Economic Studies Journal 14, no. 2 (2014), http://www.usc.es/economet/journals2/eers/eers1428.pdf.

³⁷ Ibid.  

³⁸ “Education: Completion: Percentage of tertiary graduates: Percentage of female graduates by level of tertiary education,” United Nations Educational, Scientific and Cultural Organization (UNESCO) Institute for Statistics, http://data.uis.unesco.org/index.aspx?queryid=165. Morocco (2016) and Jordan (2012) are the only countries with majority male university populations, though data is not available for Iraq or Yemen. As of 2016, more than 60 percent of college students are female in Algeria, Bahrain, Palestine, Qatar, and Tunisia.

³⁹ Nader Fergany, et al., “Arab Human Development Report 2002: Creating Opportunities for Future Generations,” United National Development Program, 2002, http://www.arab-hdr.org/Reports/2002/2002.aspx.

⁴⁰ “Labor Force Participation Rate, Female (% of Female Population Ages 15+),” World Bank’s World Development Indicators, https://data.worldbank.org/indicator/SL.TLF.CACT.FE.ZS.

⁴¹ These recommendations were informed, in part, by: Nader Fergany, Islah Jad, et al., “The Arab Human Development Report 2005: Towards the Rise of Women in the Arab World,” United Nations Development Program, 2006, 18–20, http://hdr.undp.org/sites/default/files/rbas_ahdr2005_en.pdf.

⁴² “Field Listing: Median Age,” from “The World Factbook 2017,” Central Intelligence Agency, https://www.cia.gov/library/publications/the-world-factbook/fields/2177.html.

⁴³ “Arab Barometer Wave IV,” Arab Barometer, conducted 2016–2017, http://www.arabbarometer.org/waves/arab-barometer-wave-iv/.

⁴⁴ Nandini Krishnan, Gabriel Lara Ibarra, Ambar Narayan, Sailesh Tiwari, and Tara Vishwanath, Uneven Odds, Unequal Outcomes: Inequality of Opportunity in the Middle East and North Africa (Washington, DC: World Bank, 2016), https://openknowledge.worldbank.org/handle/10986/24596.

⁴⁵ “Accelerating Entrepreneurship in the Arab World,” World Economic Forum with Booz and Company, 2011, http://www3.weforum.org/docs/WEF_YGL_AcceleratingEntrepreneurshipArabWorld_Report_2011.pdf.

⁴⁶ See for example, Douglass C. North, Structure and Change in Economic History (New York: W. W. Norton & Co., 1981) and Daron Acemoğlu and James Robinson, Why Nations Fail (New York: Crown Business, 2012).