From Boom, Through Decline, To Failure

A Post-September 11th Examination of the Middle Eastern Rentier State

By
Controlled Burn June 9
From Boom, Through Decline, To Failure : A Post-September 11th Examination of the Middle Eastern Rentier State - Kevin Thurston

Introduction

In the months following September 11, 2001, world attention has shifted to the Middle East, prompting an extensive re-examination of the region's po­litical and economic condition. An optimist would shy from the results. The picture that emerges portrays the Middle East as a breeding ground for politi­cal instability, economic stagnation and religious fanaticism.

This essay argues that widespread economic dependence on rent from oil in Middle Eastern countries is at the core of this instability. In addition, this over-reliance on foreign petroleum earnings poses a danger not only to the Middle East, but also to the West - and particularly to the United States - if large-scale domestic reforms are not carried out soon. These assertions are most valid for Saudi Arabia and Iran, where oil constitutes 75 percent and 50 percent, respectively, of government revenue, and most definitively for Iraq, where the exact figures are not known, but are likely comparably high.1 Those that own and control petroleum resources have not only been able to determine state economic policy, but such control has also granted them extensive political power.

But conditions appear to be changing. Global economic fluctuation, the development of alternative energy sources by Western nations, and declining oil exports all serve to undermine the command-style economy that is preva­lent throughout the region. Hence, the Middle Eastern "rentier states" - so­ called because they draw most of their profit from external oil-generated rent, as compared to taxation on domestic production - risk not only economic decay if they do not reform, but also popular revolts that may undermine the author­ity of the national elites and may ultimately result in chaos and state failure. This essay examines the birth, rise and decline of the Middle Eastern rentier states over the past thirty years, and concludes with a discussion about their potential future. It begins with a theoretical framework of rentierism in the Middle East.

The Theory of the Rentier State

The theory of rent dates to the classical economists Adam Smith and David Ricardo, who in the late 18th and early 19th centuries described rent as a dis­tinct source of income. According to Smith, "Rent enters into the composition of the prices of commodities in a different way than wages and profit. High and low wages are the causes of high or low price; high or low rent is the effect of it."2 Ricardo observed that rent was a reward for, and not profit from, owner­ship of natural resources. In making this distinction, Ricardo said, "The laws which regulate the progress of rent are widely different from those which regu­late the progress of profits, and seldom [do they] operate in the same direction." Simply defined, rent is "income derived from the gift of nature."3 That it is a "gift" - something bestowed and not earned - is what gives rent its singular identity.4

Such effortlessly accrued income has garnered the "rentier"5 criticism from both liberals and historical structuralists. 6 Liberals maintain that a rentier is counterproductive and not guided by the "invisible hand," as evidenced by the fact that his self-motivated pursuits benefit only him and not society as a whole. Historical structuralists argue that the rentier uses his resource as an exploitive tool to extract unfair amounts of income from those who are less privileged. Economists of both schools of thought would no doubt accept that rentiers benefit from the produce without contributing any effort to obtaining it. Fur­ther, they would likely agree that, as Beblawi summarizes, a "distinguishing feature of the rentier ... resides in the lack of ... a productive outlook in his behavior," and that such behavior constitutes "a serious blow to the ethics of work."7 Beblawi expands upon these points by describing what he calls the "rentier mentality."

The basic assumption about the rentier mentality and that which distinguishes it from conventional economic behaviour is that it embodies a break in the work-reward causation. Reward - income or wealth - is not related to work and risk bearing, rather to chance or situation. For the rentier, reward becomes a windfall gain, an isolated fact, situational or accidental as against the conven­tional outlook where reward is integrated in a process as the end result of a long, systematic and organized production circuit. The contradiction between production and rentier ethics is, thus, glaring.8

The absence of productivity on the behalf of the rentier is crystallized in the second important underlying concept of rentier state theory: rent seeking. Each rentier economy has its rent seekers, or citizens who demand transfers of rent wealth from the state. Instead of producing and earning, people within the rentier state perform the parasitic function of living off of direct payments from the government. In other words, all of society survives "on the dole." Clearly, such a condition deviates significantly from an "optimal" configuration of an economy.

It should be noted that rent seeking exists to various degrees within all economies. This does not imply, however, that all economies qualify as rentier systems. Just as there are no real examples of "pure capitalism" or "pure com­munism," likewise, a pure rentier economy does not exist. Buchanan elimi­nates ambiguity by defining a rentier state as "one where rent situations pre­dominate." Other political economists add that a dependence upon external rent is the key element in a rentier state.9

Two political ramifications of this circumstance are worth mentioning. One is that since revenues from foreign sources provide the state with the bulk of its income, the government has no need to tax its population. Citizens are therefore "far less demanding in terms of political participation"10 because of their lack of fiscal association with the state. Indeed, political economists often sum up rentier state theory in the adage "no representation without taxation."11

Secondly, since the economic fortunes of a rentier state do not rest on domestic production but rather on the international market, the governing body of such a system neglects to develop a strong domestic productive sector. As a result, society is almost entirely dependent on the government for employ­ment and welfare. Thus, the state is essentially a political and economic ruling class, dispensing wealth (rent) to the people for the dual purpose of providing benefits and buying off dissidents.12 This creates a tense situation. Citizens in a rentier state are constantly jockeying for the favor of the hand that feeds them.

The Emergence of the Rentier State in the Middle East

Dependence on external rent, which precludes taxation and debilitates domestic production, provides the clearest explanation for the incapability of rentier states to democratize.13 In a word, a society in which rent and rent­ seeking are extremely pervasive can quickly become "de-politicized."14 Middle Eastern oil-exporting countries offer vivid illustrations of this phenomenon. Indeed, as Beblawi has described, they are examples ''par excellence of rentier states."

In 1973, the convergence of the deeply rooted authoritarian political cul­ture of many Middle Eastern political regimes, oil, and an international politi­cal crisis sparked the emergence of a throng of rentier states. In October of that year, the Organization of Petroleum Exporting Countries (OPEC), prompted by Saudi Arabia, established an oil embargo on the United States and the Nether­lands in reaction to Western support of Israel during the Yorn Kippur War.15 The measure quadrupled the price of oil on the world market, causing global panic.

With few energy alternatives available in the world, consuming countries had little choice but to accept the increase in the price of petroleum. The situ­ation invited exploitation on behalf of the "price hawks" of OPEC, led by Iran, where the shah played auctioneer by selling his country's oil to the highest bidder.16 Fortunately for oil importers, the Iranian monarch's measures did not last long.17 Following a round of negotiations, OPEC hawks and Saudi Arabia-led doves settled at US $11.65 per barrel,18 OPEC's profit margins sky­rocketed. Considering that the cost of producing one barrel of oil was approxi­mately one U.S. dollar, OPEC countries were making $10.65 per barrel in rent. The enormous inflow of money to OPEC resulted in the acquisition of unprec­edented reserves, or what came to be known as "petrodollars."

"Petrodollarization" catalyzed the rise of many Middle Eastern oil-export­ing states in the world economy. Countries such as Saudi Arabia, Iran, Kuwait, United Arab Emirates and Oman that heretofore may have been considered "small" now had great impact on the price of the highly demanded commodity. However, the ascensions of these states to "big" country status were not free of negative consequences. Though newly rich, they were forced to confront a range of problematic issues that resulted from their reactive policy in 1973.

As discussed in the preceding section, rentier states are characterized by their dependence on external rent. Such was the case with OPEC countries after the implementation of the embargo. In Saudi Arabia, for example, oil production increased to 80-90 percent of GDP and more than 90 percent of export earnings.19 Similar figures were recorded in other parts of the region. In Kuwait, oil revenue peaked at 94.3 percent of GDP; in Oman it hovered around 90 percent of GDP.20

The economic rent generated by the immense gap between the cost of oil production and the high price of oil on international markets poured in directly to the government in these countries. As a result, petroleum-rich Middle East­ern regimes prospered greatly and gained command over their economies. This did not bode well for citizens of rentier states in terms of democratic develop­ment. In Saudi Arabia only a small fraction of the population - around 3-4 percent of the labor force - was directly engaged in the production and distri­bution of oil wealth following the embargo.21 The remainder of the population sought "secondary benefits of petroleum earnings, earnings that [were] redis­tributed domestically either by spin-off demands of the petroleum sectors or by government allocation."22 Indeed, as a result of the oil boom, entire economies were "arranged as a hierarchy of layers of rentiers, with the state or government at the top of the pyramid acting as the ultimate support of all other rentiers in the economy."23

Virtually no Middle Eastern state in the 1970's, not even on the periphery of the oil economy, was removed from the spoils. 24 As Beblawi summarizes, after 1973, "the entire Arab area - oil rich as well as oil poor - ... gained location rent."25 For countries lacking in oil resources such as Jordan, Yemen, Egypt and Syria, "the regional economy made itself felt through worker's remittances from oil-exporting countries, petrodollar aid and in some cases modest oil pro­duction." 26 With few exceptions, life, in terms of pure wealth, had never been so good for a region that until this period could have very well been described as an economic backwater.

Political and Economic Development within Middle East Rentier States

That oil brought tremendous prosperity to the Middle Eastern economy in the 1970's is unquestionable. It also emboldened elites by "supplying them with new and sophisticated means of coercion and control, thus rendering them (in many cases) more autonomous from their societies."27 This was only a short-term condition, however. In the long run, external rent would reveal its true nature-that of a "double-edged sword."28 As we will see, the oil-generated largesse of these regimes would, in time, ultimately prove to be the Achilles heel that made Middle Eastern elites vulnerable to political challenge.

In the first decade after the embargo, rulers of rentier states, for the most part, enjoyed tremendous wealth and unchallenged political authority in what amounted to "petrolic despotism."29 As Gause describes, leaders sustained themselves by dispensing benefits to appease different groups within the citi­zenry. Merchants and tribal leaders, who in the past held political roles, were bought off for a share of the state's new-found wealth. Intellectuals were ab­sorbed into responsible and high-paying government positions, which miti­gated their desires for formal participatory institutions. The rest of the popula­tion, having experienced the relative penury of the pre-oil boom period, happily received welfare payments and jobs from the government, and credited their improved conditions to the ruling classes. The few ideologues that called for radical or reformist changes were easily marginalized.30

The effects, of the stabilizing measures implemented by elites, however, give an impression that "is more a snapshot of the first effects of the rentier state1syndrome than a model of the dynamics over time of rentier state devel­opment."31 In truth, a combination of internal and external circumstances even­tually would serve to undermine the authority of the ruling class within rentier states; Domestically, the ballooning state apparatus began to cause social dis­content. With oil revenues multiplying throughout the 1970's and early 1980's, the role of the state as the supplier of jobs and benefits likewise grew. Addition­ally, taxation in Middle Eastern rentier states became unnecessary, since, as Gause points out, in some cases, "as much as 100 percent of government rev­enue [came] from petroleum royalties and similar non-tax sources." This greatly undermined popular political representation and economic self-suffi­ciency, which ultimately led to a call for more representative and responsible government.32

As a tide of popular dissatisfaction slowly rose within the Middle Eastern rentier states, global economic trends began to impact these societies as well. When the price of oil soared to its apex in the aftermath of the 1979 Iranian Revolution, many Western nations began looking to non-OPEC oil sources. Subsequently, Alaskan, Mexican and North Sea oil companies increased their market share, and new petroleum reserves were discovered in Egypt, Brazil, India and Malaysia. By 1983, "a combination of an increased non-OPEC share of the oil market· and the expansion of alternative sources of energy, such as nuclear power, induced a glut in the market" that had diminished OPEC's supply of world oil consumption by 18 percent from four years prior.33

The economic downturn afflicting the Arab region exacerbated domestic political tensions. As jobs and benefits began to disappear, citizens of rentier states stepped up pressure on their governments. Ironically, rentier state edu­cational systems, funded by oil money, had by the 1980's produced educated populations that were politically informed and aware of the importance of cre­ating national solidarity. Rulers now confronted people with the "intellectual resources and proclivity to phrase their political demands"34 in ways that gave their call for reform greater legitimacy. One particularly effective method used by people under rentier regimes to express their desire for greater influence in the political decision-making process was the dissemination of petitions. Peti­tions against regimes gained popularity in the Middle East throughout the late 1980's, and were especially common in Saudi Arabia, Bahrain, Kuwait and Qatar.35

The reduction in demand plagued not only the rentier states, but also the peripheral states. Jordan serves as an excellent example. From 1973 and 1983, Jordan's GDP increased six-fold.36 However, in the mid-1980's it started to face "mounting balance-of-payments problems as its current account balance, which had been relatively stable through much of the 1970's, increasingly dipped into the red."37 By 1987, the deficit had grown to US$880 million, more than 25 percent of GDP. Unemployment rose sharply, and rioting protestors took to the streets of Jordan's towns and cities.38

Internal pressures to modernize from within rentier states escalated throughout the latter part of the 1980s and early 1990s. The year 1989 brought the collapse of rentierism in Jordan after the International Monetary Fund supplied loans to rescue the country's economy. In return for IMF support, the government promised to undertake a number of measures designed to promote economic stabilization. This did not come without a price. for' the Jordanian elite. Shortly after the crown prince admitted that "Jordan could not sustain the painful medicine of economic stabilization without political liberalization," the government grudgingly held parliamentary elections for the first time in fifteen years.39

Rentier states suffered another bruising setback as a result of the 1990-91 Gulf War.40 With Iraqi and Kuwaiti oil removed from the global market during that conflict, crisis returned to the Arab economy. The price of oil once more increased, causing consuming countries to again search for alternative energy sources. When OPEC finally returned to full output, the stability of rentier states was only partially restored. Although oil prices declined, antipa­thy among citizens toward their governments became even more acute because of the latest cycle of economic upheaval. This was particularly pronounced in Iraq, where economic sanctions imposed by the United Nations after the Gulf War decimated that country's oil wealth.41

By the mid-1990s, Middle Eastern rentier states were clearly in danger of failing. "The End of History" - Francis Fukuyama's renowned thesis that the triumph of liberalism in both political and economic terms brought about by the end of the Cold War meant that society's destiny had been fulfilled - implied that rentier states were relics, and that they had outlived their natural exist­ence.42 People throughout these economies were spurred on by the new world order. In the new liberal international climate, Middle Eastern elites were being forced to learn "the new language of politics," one that spoke of "participation, cultural authenticity, freedom, and even democracy."43 As one might imagine, this was, and remains, a difficult language for many rentier state regimes to master.

The Future of the Middle Eastern Rentier State

Considering the level of economic vulnerability in the Middle East, one is easily drawn to discussion on the fate of the troubled region. Luciani argues that rentier states are a "passing phenomenon" since oil, their main source of income, will not last forever. He predicts that based on the amount of oil re­maining in the region, the rentier states can survive for another four or five decades.44

This, however, optimistically assumes that rentier states invest present surpluses wisely. An analysis with greater emphasis on political factors yields different predictions. As discussed above, massive oil wealth gave rulers the resources to reduce demands for political participation in the early years of the oil boom. However, the process of state growth fueled by petrodollars eventu­ally led to mass movements of popular dissent throughout the Middle East. Educational expansion, financed by elites, ironically helped pave the way for demands for political participation from many levels of society. A more enlight­ened citizenry within rentier states compounded pressure on governments to reform, thereby calling into question the notion that oil wealth allows elites to "depoliticize" their subjects.45

The continued fall in demand for OPEC oil also has hastened the decline of rentierism. In 1973, OPEC produced 31 million barrels of petroleum per day, and exported 29.5 million barrels of that amount. In 2001, the oil cartel pro­duced 30.4 million barrels a day and exported 24.4 million. Meanwhile, non­OPEC production rose from 26.2 million barrels per day in 1973 to 45.4 million in 2001. Today OPEC's market share is too low for it to monopolize the price of oil, and future estimates point to even greater shrinkage.46 This trend has had a particularly negative effect on semi-rentier states.47 As the case of Jordan suggests, the forces of political modernization are much more difficult to sup­press once oil wealth (read 'location rent') evaporates. With each new reces­sion, rentier states are therefore forced to consider pursuing "a process of di­versification of their domestic economic base and gradually turn into produc­tion states."48 This prospect has led one expert to conclude that "economic crisis in the Arab world could pave the way for the restructuring of state­ society relations on a more democratic and participatory basis."49

Lending even greater support to the argument that the collapse of Middle Eastern rentier states is imminent are the repercussions of the terrorist at­tacks on New York and Washington, D.C. on September 11, 2001. Although oil prices initially peaked as global markets reacted in alarm to the events, they slid below OPEC's target range of $22-$28 per barrel50 within a few weeks of the catastrophe. Many analysts linked the falling price of oil to a non-tradi­tional U.S. military response that was not predicted to be petroleum-inten­sive. 51 Others blamed the recessionary trends in the largest oil consuming economies, mainly the US and Western Europe, for the decrease in demand for OPEC's oil.

As oil prices dropped to their lowest level since 1991, 52 U.S. President George W. Bush and other leaders of the Group of Seven industrialized nations increased pressure on oil producers not to cut output in light of the tender world economy. Fearing prices would continue to plummet, the oil cartel took its chances by announcing that it would slash production by 1.5 million bar­rels a day as of January 1, 2002.53 Consuming nations did not meet the deci­sion with approval. Bush's subsequent declaration on January 28 that Iraq and Iran were members of an "axis of evil" may in part have been motivated. by his disgust for their economic practices.54

Current economic conditions are just as, or perhaps even more, damaging to the Middle Eastern rentier states than earlier episodes of regional economic turmoil discussed in this essay. That said, it would be naive to believe that the Arab oil regimes are prepared to give up their mode of economic operation or relax their political grip over their societies. As executive director of the Inter­national Energy Agency, Robert Priddle, said, "When you have a set of ... coun­tries, for whom oil is an absolutely overwhelming source of revenue, I don't think they are going to give up their present mode of operation very easily."55 Add the thread of authoritarianism that runs throughout much of Middle East­ern politics, and Priddle is certainly strong in his assertion. Clearly, fundamen­tal changes will not occur without the proper mixture of foreign and domestic dynamics. Traditional political volatility in the Middle East, however, leads to the expectation that the forces necessary to upend rentier states will eventu­ally converge.

Conclusion

As we have seen in the above analysis, there is a pressing need for reform in the Middle Eastern states that are dependent on external rent from oil. Peaceful change, though, is far from assured. Ruling elites in the Middle East will continue to try to employ various methods of repression, bribes, and even weapons of mass destruction, as is the case in Iraq, to keep the system that preserves their authority from fragmenting.

In spite of this, the simple fact is that "a viable civil society and a partici­patory political system [will be essential to] ensure sustained development and political stability''56 in the region. Rentier states, as has been discussed, do not provide for such things. Moreover, anarchy, to which rentier states are prone without reform, is certainly not a viable wave of the future.

Similar to the Soviet Union toward the end of its existence, the rentier states of the Middle East are rotting from within. And, like the USSR in the late 1980s, they are primed for failure.57 One hopes that when the end comes the rentier systems will quickly and quietly fade into history. However, in a place as violent and unstable as the Middle East, the likely outcome will be some­thing far less palatable.

Kevin Thurston is an M.A. candidate at The Johns Hopkins University - SAIS Bologna Center. Previ¬ously he worked at the Salzburg Seminar, an international conference center in Salzburg, Austria and volunteered on a kibbutz in Israel.