The Modern Middle East - A Political History Since World War I (Third Edition)
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This was the general economic predicament in which the countries of the Middle East found themselves by the mid-twentieth century. In many ways, the economic conditions of most Middle Eastern countries in the 1950s and 1960s were not that different from those in many other parts of the developing world at around the same time. The cumulative effects of the Great Depression of the 1930s and the Second World War had been ruinous for almost all countries of the Middle East. Before the 1950s, Middle Eastern economies had relied heavily on agriculture as their primary source of production and capital. The 1920s and 1930s had brought about a period of “deglobalization,” in which previously significant levels of capital flows to and from Europe, derived from the export of primary goods—such as cotton, silk, pearls, and fruits—were greatly reduced.1 Shrinking exports brought about deteriorating terms of trade and balance-of-payment difficulties, to which were added shortages and disruptions of various kinds during World War II. Although the consequences of World War II were not as devastating for the Middle East as had been the case with the First World War, the region’s economies did suffer as a result of the conflict. Iran, for example, was occupied by British and Soviet troops during the war and experienced severe shortages of basic foodstuffs and disruptions to its economy. Turkey, while neutral, was forced to keep a standing army some five hundred thousand strong, which affected its agricultural output.2 Egypt also experienced shortages and hardship during the war. Though it had a brief spurt of economic growth while it served as a base for British troops and was cut off from the rest of Europe, this limited economic progress was offset by its rapid population growth rate, so that per capita income showed no real signs of overall improvement from 1913 to the late 1940s. This appears to have been the case in Syria and Lebanon as well.3
Beginning in the 1950s, a new crop of state actors assumed power in various Middle Eastern countries. These nationalist leaders were painfully aware that their countries’ low-income, agrarian economies needed fundamental structural changes if they were to develop. At the same time, as we saw in chapters 7 and 8, they established “patron” states through which they sought to enhance their domestic legitimacy by providing employment and various means of political and economic patronage. This chapter examines the challenges these state actors faced in their quest to bring about economic development. Development, of course, is a process shaped by past limitations and present possibilities, and as such it cannot be adequately studied in a historic vacuum. Therefore, the chapter begins with a brief historical account of what the states of the Middle East have done since the 1950s to foster economic development. In the 1950s and 1960s, “statism” became the order of the day; it became even more extensive because of the economic upturn of the 1970s and then was haltingly and gradually modified beginning in the 1980s. Economic policies are shaped not only by the agendas and capabilities of state actors but also by the availability and mobilization of different resources. The emerging political economy of the region became one based primarily on “rent seeking,” with the intent of lessening the potential for economic grievances on the part of the populace. At the same time, few Middle Eastern states have been able to effectively manage or regulate the various sectors of the economy. Specif-ically, much economic activity remains either completely “informal” or, at best, “semiformal.” Increasing interaction with the global economy over the past few decades has not changed the dynamics underlying the region’s political economy in any fundamental ways. Naturally, intentions and outcomes are not always the same, especially in the emerging economies of the developing world, and for much of the Middle East development has been highly uneven at best and elusive at worst.
STATISM AND ITS AFTERMATH
By the mid- to late 1950s, the state was almost universally assumed in the Middle East—and elsewhere in the developing world—to be the actor most capable of fostering the structural transformations deemed necessary to bring about economic development. The state was therefore assumed to have a national duty to play a “major role . . . in the direction of the economy both directly through the operation of state-owned enterprises and indirectly through the management of the overall economy.”4 Statism—also referred to by its French variant, etatism—thus became the dominant norm in the political economy of the Middle East. As Alan Richards and John Waterbury argue, “The Middle Eastern state took upon itself the challenge of moving the economy onto an industrial footing, shifting population to urban areas, educating and training its youth wherever they lived, raising agricultural productivity to feed the nonagricultural population, redistributing wealth, building a credible military force, and doing battle with international trade and financial regimes that held it in thrall. These were goals widely held by state elites but poorly understood by citizens at large. There were no impediments, then, to the expansion and affirmation of the interventionist state.”5
These interventionist states ushered in what could best be described as state capitalism: a process of accumulation that gave rise to a state bourgeoisie, who in turn controlled but did not own the major means of production.6 The state accepted the general premises and practices of capitalist competition as effective means of generating economic growth. But it still saw a need for regulating the economy and did so extensively.7 “The economy, from the view point of state capitalists, is simply too important to be left to the ‘invisible hand’ of the marketplace. Individual capitalists, in their view, are too concerned with immediate profits to recognize either their own long-term interests or those of society as a whole.”8
Statism in the Middle East is generally dated from the 1950s to the late 1980s, although in at least two countries of the region, Turkey and Iran, it dates back to the 1930s. By the late 1980s, the developmental policies of the state had generally proven to be failures, thus compelling most states in the Middle East to embark on ambitious-sounding liberalization programs. Nevertheless, today, more than three decades after the start of liberalization programs, the extent to which statism has been dismantled is not at all clear. In many ways, as we will see later, statism remains the norm in the Middle East. Lately, however, many Middle Eastern states have been pretending to have more liberal, open economies.
In the Middle East and elsewhere, state actors opted for statist policies for three general, reinforcing reasons. First, in the absence of a preexisting industrial base and given the pervasiveness of economic and political underdevelopment, they saw the state as the primary agent capable of and responsible for effecting meaningful change, not only socially and politically but economically and industrially as well. Second, most nationalist leaders, especially the generation that came to power in the 1950s and 1960s, viewed the private sector with suspicion and skepticism, seeing it either as an agent of foreign capital or as economically parasitic, or both. This conviction was reinforced by a painful awareness of the state’s disadvantaged position in relation to many multinational corporations and thus the need for greater centralization and policy coordination in dealing with them. Related to this was a third and final factor, namely, the widespread adoption of ISI policies, with the state retaining for itself the role of a central actor. The hope was to satisfy the needs of the expanding domestic market for consumer goods and, at the same time, to eventually replace the export of raw materials with industrial and technological exports. As it turned out, it was in relation to this last goal that statism suffered perhaps its biggest setbacks.
Statism in the Middle East reached its peak in Algeria (1962–89), Egypt (1957–74), Iran (1962–present), Iraq (1963–2003), Libya (1969–2011), Sudan (1969–72), Syria (1963–present), Tunisia (1962–69), and Turkey (1931–83). Compared to that in the rest of the developing world, Middle Eastern statism has tended to be more extensive and deeper. According to World Bank estimates, for example, worldwide, state-owned manufacturing enterprises accounted for 25 to 50 percent of value added in manufacturing around the year 1980. The comparable percentage for Egypt was 60 percent and for Syria was 55 percent.
9 In Egypt in 1953, a year after Colonel Nasser’s coup, the total output from the public sector was £E128.0 million and from the private sector was £E736.6 million. By 1973, the year before President Sadat officially announced the open-door (infitah) policy and the start of his liberalization program, public sector output had grown by 11 times, to £E1409.8 million, while private sector output had grown by only 2.5 times, to £E1807.1 million.10 By the 1980s, the Egyptian public sector included 391 companies, employed 1.2 million workers, and had assets with a market value of £E38 billion.11
The state’s economic reach has been equally pervasive elsewhere in the Middle East. In Syria, between 1970 and the 1990s, there was a fivefold increase in the number of civilians employed by the state. By the early 1990s, the state employed some 700,000 civilians, of whom more than 420,000 were part of the state bureaucracy, and another 530,000 men and women served in the armed forces and the security apparatus, bringing the total number of individuals on the state’s payroll to 1,230,000.12 According to the state’s own figures, by 2007, despite the repeated promises of economic liberalization, of a total labor force of 4,950,000, more than one million individuals were still in one way or another employed by the state.13
In Algeria, similarly, the state became the biggest employer and the primary agent of industrial development, setting up a network of forty-five national industrial corporations (the biggest one being the gas and petroleum giant SONATRACH), eight banks and financial organizations, and nineteen national offices, all designed to ensure the state’s monopoly over virtually every facet of the economy.14 By the late 1980s, the state employed 80 percent of the industrial workforce and accounted for 77 percent of total industrial production. A total of 45 percent of Algeria’s nonagricultural labor force was on the state’s payroll.15
Equally high percentages of public employment were found in Iraq prior to the U.S. invasion in 2003: government employment in the late 1970s (410,000 people) amounted to nearly half of the organized workforce. The state also owned some four hundred industrial enterprises, employing nearly one in every four Iraqi citizens.16 Next door in Iran, the 1978–79 revolution ushered in a new wave of nationalization of banks and industry, and by the early 1980s the state owned some six hundred enterprises.17 In the 1980s, some four-fifths of all new jobs created were in the public sector, and by 1986 public sector employment accounted for 31 percent of total employment.18
Similarly high levels of government involvement are found in the economies of ostensibly “liberal” monarchies. In Jordan in the late 1990s, it was estimated that as many as 40 percent of all gainfully employed Jordanians worked for the state, ensuring an elaborate welfare and job protection system meant to sustain the Hashemite monarchy in power.19 In the oil monarchies of the Arabian peninsula, where the state owns and then distributes the revenues accrued from oil, the oil sector accounts for consistently high portions of the gross domestic products. According to 2009 estimates, revenues derived from oil constitute roughly 80 percent of total government income in both Saudi Arabia and Kuwait.20 Similarly, export revenues accrued from oil sales account for some 90 percent of Saudi Arabia’s total exports and 85 percent of Kuwait’s.21
Despite the pervasiveness of statism, extensive state intervention in the economy has failed to have the desired developmental effects in the Middle East. While brisk in the 1960s and especially in the 1970s, thanks to dramatic rises in oil revenues, the overall rate of economic growth in the Middle East over the past few decades—as measured by annual growth rates in the gross domestic product—has not been outstanding compared to that in other regions of the developing world (tables 5 and 6), even though oil prices exploded in 1973–74 and then briefly rose again in the late 1970s. When oil prices collapsed and the region experienced a general recession from 1985 to 1995, most Middle Eastern countries witnessed severe economic reversals. Only after 2000, when oil prices rose steadily before their spectacular collapse in 2007, did most Middle Eastern countries experience impressive rates of growth. Overall, the annual growth rate of the gross domestic product (GDP) in the Middle East and North Africa was nearly halved, from 8.5 percent in 1990 to 3.5 percent in 1997, before recovering to 5.2 percent in 2011. As table 6 demonstrates, the reversals were steep in Bahrain, Egypt, Iran, Jordan, Lebanon, and Tunisia. Turkey and the United Arab Emirates also experienced declines in their GDP in the mid-2000s, although they appear to have recovered by the late 2000s. Again, only significant increases in the price of oil helped the region’s economies in the early to mid-2000s.
Table 5.GNP and GDP Average Annual Growth Rate in Developing Countries
SOURCE: World Bank, Development Indicators Database, “GDP Growth (Annual %),” http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG.
Statism brought with it largely stagnant economies. This stagnation resulted from a combination of factors. To begin with, these economies have been run by highly bloated and inefficient bureaucracies that continue to be mired in red tape, corruption, and nepotism. In every country in the Middle East, corruption was, and remains, a pervasive obstacle to substantive economic development.22 The problem of “urban bias” and the preference for industrial development over agriculture have led to a near-total neglect of rural areas. This has resulted in increasing levels of dependence on agricultural imports and an exodus of rural migrants into the cities. The region’s aridity and water scarcity have not helped agricultural development. Even in Egypt, where agricultural output showed some modest increases—2.9 percent annually in 1960–70, 3.0 percent in 1970–80, 2.6 percent in 1980–89, and 4.5 percent in 1991–2000—such gains could hardly keep pace with the growth of the population (see chapter 11). Additionally, levels of agricultural production are kept in check by patterns of land ownership and land use that often resist technological improvements and efficiency.23 In Saudi Arabia, in the 1980s and 1990s the government pumped millions of dollars into expanding agricultural output both through direct investments and through massive subsidies and other incentives given to private farmers.24 However, the country’s harsh climate and inefficient farming practices undermined the possibility of profitable yields, and the program was eventually abandoned.
Table 6.Growth of GDP in Selected Middle Eastern Countries, 1980–2011
SOURCE: World Bank, Development Indicators Database, “GDP Growth (Annual %),) http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG.
Besides bureaucratic red tape and neglect of agriculture, statism had other structural limitations that severely inhibited industrial development on a national scale. Consumer prices continuously rose, forcing many states to embark on extensive subsidization programs for basic foodstuffs and other essential items. Despite overwhelming attention to industrial development, domestic industry was hardly competitive internationally, and, if given a choice, consumers frequently preferred foreign products over domestic ones. Most industrial enterprises also operated at far below capacity. Industrial imports remained consistently high, therefore, as domestic industry lagged behind in quality and caliber of production.25 The state’s attention to heavy industries—steel mills, power plants, automobile assembly plants, and the oil sector—also impeded the emergence of nationwide industrial linkages, resulting in the underdevelopment and inefficiency of various other sectors of the economy, such as banking, insurance, construction, and transportation. The state then had to either fill the ensuing gaps itself or turn to foreign enterprises to do so, thus contradicting its own ideological justifications for economic intervention. Inadequate planning and lack of sufficient technical and administrative resources only exacerbated the situation. The difficulties experienced by Algeria in many ways mirrored those experienced by other states of the Middle East: “As pressures grew to meet unrealistic targets, the central planning office and the larger state corporations were frequently overwhelmed by the magnitude of their tasks. Programs were subject to long delays and escalating costs. State corporations let contracts to foreign companies to build complex turnkey ent
erprises, which greatly increased development costs and at the same time created new dependency on foreign suppliers and expertise. The avoidance of such dependency had been one of the primary goals of the national economic strategy. The process also stamped the emerging industrial infrastructure with a technological incoherence that inhibited integration.”26
At the same time, states proved woefully incapable of providing adequate employment opportunities for new entrants into the job market, resulting in chronic unemployment and underemployment, especially of the youth. Those who could, migrated to the oil monarchies of the Persian Gulf—especially to Kuwait, Qatar, and the UAE—but in most cases such migrations were temporary and did not address structural economic shortcomings in the sending countries. As table 7 indicates, current and future employment prospects are particularly bleak in countries such as Morocco, Tunisia, Egypt, Syria, Iran, Iraq, and Saudi Arabia, where millions of new jobs need to be created for new job seekers every year. According to the World Bank, countries in the Middle East and North Africa needed to create one hundred million jobs between 2000 and 2020 in order to absorb the unemployed and new entrants to the market.27
Table 7.Number of Jobs That Need to Be Created in Selected Middle Eastern / North African Countries (2010–20)
a Equals total labor force in 2020 minus total labor force in 2010. International Labor Organization, LABORSTA database, 6th ed., October 2011, “Economically Active Population, Estimates and Projections,” “Data for All Countries by 5 Years Age Groups and Total (0+ and 15),” http://laborsta.ilo.org/applv8/data/EAPEP/eapep_E.html.