Rentier Curse and the Challenges to Development in the Middle East

Why does the ‘rentier curse’ represent such a challenge to development and political progress in the Middle East?

The rentier curse or resource curse is also known as the paradox of the plenty. It refers to the issue that countries with a dominance of oil wealth have a “perverse linkages between economic performance, bad governance and injustice.” Karl (2007, p. 37). The rentier curse, focuses on the inability of that nations with these abundant resources and their “constant motif” of not being able to reach their full economic or political “potential” Karl (2007). Rentier states tend to consistently show a pattern of having an inability to diversify its economies, of having inefficient state institutions, of having an absence of democracy, the power of national security states…” (Herb, 2019).

Rentier states tend to face the ‘paradox of the plenty’ because of the manner in which the states derive their fiscal revenue. In a state without a strong dependence on natural resource, the state derives a large fraction of their revenue through the taxation of individuals and business owners. This revenue is then forcefully distributed back into the society, amongst each individual citizen – though not equally. This creates a system, which maintains a strong degree of accountability and prevents the government from having an unfiltered access to the revenue generated. In a state with an abundance of natural resource, the “Rentier states derive a large fraction of their fiscal revenue from external rent, typically in the form of royalties, profit taxes or production sharing agreements with foreign mineral extracting companies” and state owned companies. This form of revenue generation in a rentier state prevents a need for the distribution of wealth to individual citizens or privately held companies. This creates a system, in which the need for rentier states to tax their citizens is alleviated and for the government to be the main recipient of the generated revenue. (Herb,2019 ; Beblawi & Luciani, 1987; Karl, 1997; Ulfelder, 2007). The ‘no tax’ system, created by the dependence of natural resource in rentier states causes a negative and unavoidable economic, political, and social consequence, which prevents development and progress in those states. It is important to make the distinction, that when discussing negative consequences, the effect that is being considered is of the population as a whole – not the effect on a small privileged social class.

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The lack of political development is epitomised by the axiom: “no taxation, no representation”. The autonomy from taxation reduces the need for the government to operate as a democratic system. As the government spending isn’t reliant on citizen taxation, its becomes autonomous from the society and ‘free’ from the obligations to its citizens. “Fiscal independency undermines public pressure on public officeholders to be accountable to their constituents.” (Ross 2012a). This allows for citizens to be less invested in government spending, as it doesn’t directly affect their wealth. The lack of dependency on citizens and the lack of accountability on the government prevents the “inevitable” development of a strong demand for democracy, and makes a democratic reform problematic (Hachemaoui, 2012). The states autonomy from taxation also allows for an unjust distribution of wealth within the state. The revenue earned by a rentier state is free to be distributed without any consequences or supervision. This allows for the wealth to be distributed in a politically charged manner to favoured sectors and social groups. This allows political leaders to use the revenue earned by the national oil companies as giant slush funds, to hide corruption and waste, and to commit under table deals with the police and military forces, that in exchange help maintain their position of power. It allows for political elites in rentier state to be “less likely to invest in productive enterprises, such as job-creating manufacturing industries, and instead pursue rent-seeking, that is, fight for control of these resources” (NRGI Reader, 2015). This in its essence, allows for the government to “buy” domestic peace and supress and opposing opinion, by positioning politicians at the centre of every economic need (Hachemaoui, 2012).

The unquestionable power awarded to politicians, allows for politicians to treat favoured members preferentially. The preferential treatments are manifested by means of the awarding citizens high positions in the military, the bureaucracy or even by means of assurance of government contracts and stipends. “In some cases, politicians or government officials have also purposefully dismantled societal checks or created new regulations to get access to these resources or to provide access to friends or family, a process nicknamed rent-seizing.” (NRGI Reader, 2015). This form of control fosters direct patron/client relationship within the society whilst causing a strong sense of competition between members of the society. The dependency on the government for any form of progress ensures a lack of unification within the society and ensures an inability to form a civil society that is able to maintain checks and balances on the government. This serves as an effective mean of dividing the masses while maintaining a strong degree of submission to the political powers. It also strengthens the lack of accountability available for political powers and allows for the revenue generated by the oil companies to be spent without any consequences. This form of division of wealth, allows for power to be distributed without transparency, preventing development and democracy in the Middle East by ensuring a lack of unification within the society and by ensuring no form of a measurable consequence for the wrongdoings and failures of the politicians.

When considering economic development in rentier states, the lack of development, is attributed to an economic pattern known as the Dutch Disease. The Dutch Disease is an economic problem which discusses the relationship between the growth of a successful oil industry and the decline of other industries because of it. It discusses the “crowding out of other industries, the domination of the public sector over the private sector, and the significance of the resources to finance extensive welfare and security states” (Herb, 2019).

The increased revenue available in in natural resource industries negatively impact other sectors of the economy. The export-based sector, is a sector that is significantly affected by the growth in the natural resource industry, as it causes an inflation in the currency rate and shift the labour force and capital from the non-resource sector to the resource sector. This reduces economic stability, as it becomes significantly more cost efficient to import products from overseas than to manufacture products domestically. Consequently, reducing the demand for locally manufactured products. Michael Ross states “These impacts can be minimized if the country has the absorptive capacity to transform resource revenue inflows into tangible investments, such as roads and electricity; the government uses resource revenues to make investments in the economy that generate non-resource sector growth; or the government places a portion of its resource revenues in foreign assets.”

Another factor that makes a nation with an abundance of natural resources to be less economically stable is the lack of oil security. The amount that governments collects in resource revenues can change drastically from year to year because of changes in prices and production ability. This instability often caused Governments to get trapped by overspending druring a boom cycles, and to have to halt such projects when revenues decline. In addition, governments often over-borrow because they have improved credit-worthiness when revenues are high. This can eventually lead to crippling debt.

An equally important issue, that is preventing economic development is the very structure of the labour market. The structure of the labour market cause a “distinctive problems of employment which those economies have created, and the political expectations about the state which they have generated” (Herb 2019). The booming economy of the rentier state creates an expectation within citizens of the availability of jobs while attracting labour forces from surrounding countries. Private sectors tend to favour hiring foreign workers, as it tends to be more cost effective, while the government sector is forced to hire from within the state. The providence of employment to citizens and the dependence on foreign workers, the accommodation of infrastructure and resources for the foreign labourers are highly costly.

Another factor that hinder economic development in the Middle East is the lack of a substantial amount of potential growth in a rentier state. Rentier states, have displayed a lack of employment opportunities even when the economic cycle is in a boom. The following statistic prove how, when non- oil GDP was appreciating, the domestic economy and government spending increased but there was a not an increase in amount of employment opportunities during the period. “According to the 2013 Labour Force Survey, out of a working-age population of 696,200, the labour force participation rate was only 30.6 per cent (NSD 2013: 5). In the same survey, 483,000 were categorised as ‘inactive population’, out of which 37 per cent were involved in subsistence foodstuff production (ibid.). In 2010, the total amount of those employed in the private sector was 46,700 (NSD 2012: 3); in 2016, this number was estimated to be 58,200 (NSD 2017: 3).” (Neves, 2016). The un sustainable balancing act between providing employment for citizens and non-citizens prevents economic diversification, by so prevent economic development in the Middle East. “These challenges are seen most acutely in Saudi Arabia, where Crown Prince Mohammad Bin Salman has been pushing an ambitious agenda of social and economic change ostensibly aimed at transitioning the country to a post-oil future. (Herb, 2019)”

The lack of economic stability due to the boom and bust cycle also prevents social development within the rentier states. Rentier states, where citizens are dependent on natural resources tend have “high poverty rates, poor health care, high rates of child mortality, and poor educational performance given their revenues” (Karl, 2004). The boom cycle in a rentier state offer citizen a ‘high- high’. During a boom cycle the rate of unemployment decrease, average income per capita increases rapidly and social comfort increases. The sudden influx in benefits and monetary gain, cause citizens to participate and eventually become depend on sectors that are thriving during the bust period. This is seen in the analysis of the statistics of the per capita oil exports in the Middle East in 1970, when it was in a ‘boom’ cycle. “It soared from $270 in 1970 to $2042 in 1980, and this fuelled accelerated economic activity.” (Karl, 2004). While this influx offers immense financial gain, boom cycle eventually turn into bust cycles. As boom cycles calm down, and the sectors that were thriving, become volatile, the income per capita significantly decreases. The previous heavy reliance, dependency and enjoyment of the boom cycle leads to a sudden influx of people living under the poverty line and with that, poor health care and high mortality rates. It is also interesting to note, that education standards in oil dependant states tend to be significantly lower than non- oil dependent states. Scholars have also attributed the lack of economic stability as a reason that educational development isn’t possible. It is theorised that because of the possibility of heavy financial rewards during a boom cycle, the current desire to enjoy the wealth is placed to be more important than a “long term investment in educational facilities” “ Perhaps because the high skill level needed by oil-rich countries in their leading sector can be bought or imported, their governments do not face the same urgent educational imperatives and may underrate the need for strong educational policies. (Karl, 2004)”

British economist John Kay supports the contention that boom and bust cycle of rentier states prevent social development and argues that “resource wealth mostly reduces standards of living because it diverts effort and talent away from wealth creation”

References:

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