The Political Economy of the Middle East

351 Spath

Lecture outline

• Define Political Economy• Historical background on MENA’s Political Economy• Review Political Economy of Oil• The Political Economy of Demographics• Major challenges to MENA economic development• Strategies for development--how can things get

better?

Political Economy

An area of study focusing on the interaction between political institutions, the political environment, and the economic system.

Some topics: monopolies, rent-seeking, government fiscal policy, etc.

Political Economy Approach

A social scientific approach that assumes that individuals & groups

a) make political decisions that reflect economic preferences, or

b) make political decisions in the same way they make economic decisions (rational calculation of costs & benefits)

Historical Background• Effects of colonization on post-colonial states:

– Weak states with narrow wealthy elites– Poor infrastructures, exploited resources,

uneducated populations– Revolution & coups that result in strong, powerful

autocrats– State control & bloated public sectors

• Notable exceptions:– Lebanon: The Christian advantage– Algeria: Revolutionaries with little to work with– Turkey: A generation ahead of the rest– Israel: European training, militarism, aid & Nasdaq

Oil—a blessing or a curse?• Control of MENA oil by the “Majors”• Formation of OPEC (1960)• 1967 War and Qaddhafi’s precedent• Nationalization• The 1973 War & the embargo• US, European & Japanese responses• Oil & foreign intervention: 1953 coup in Iran, 1973

conflict, the New Great Game, Iraq & Kuwait, pipeline diplomacy, Oil in recent wars

• Oil & economic development: The “resource curse”, Rentier state & economic sectors

Is oil a weapon??

Natural Resources:

• Foreign aid in return for military assistance, alliance or diplomatic support

• Migrant labor—remittances

• Navigation—Suez

• Tourism & pilgrimage: holy places, historic sites, and recreation

• Banking

Services:

POPULATION GROWTH (1992)

Development Indicators

• GDP per capita and PPP

• HDI

• MENA countries rank below average in achieving decent quality of life for citizens

Classroom exercise

- Deconstruct R&W Chapter 7- What is State-Led Economics?- What are main points and arguments in the

chapter?

Key Points from R&W Ch.7

• Dominant Public sector (government involvement, acts as employer, sometimes manager)

• Need for revenues through taxation, resource revenue, tourism

• Monopolization of Industry

• Success based not on efficiency, but on other outcomes (jobs, social safety net, equity, self-sufficiency and state control) short-term gains

• ISI – Import substitution industrialization

• Overinvestment (contributes to short-term goals, but is not does not follow principles of efficiency)

Contradictions of State-Led Growth

• Decent performance in second half of 20th century

– Output and output/cap grew respectably

– Employment and structural change to industry was not underwhelming

• Given population growth, limited nat. resources (exc. oil), low literacy, instability, not too bad for starters. But development is long-term, not short-term.

BUT…

• Industry was not competitive on international market (‘infant industries’ never grew up)

• GOALS: supply cheap inputs for other industries; provide jobs for increasing labor force

• ISI – important substitution industrialization

– Trouble creating economies of scale

• State over-investment + high import/export ratio = DEBT

Major challenges to MENA economic development

• Short term goals of political elites• Debt• Bloated public sectors• Conflict, instability, sanctions, shifting alliances & wars• Corruption & nepotism• Inadequate laws & regulations = lack of private investment (*)• Poor fit among region’s economies• Unbalanced distribution of capital & labor• Distorted economies—rentier states• Demographic growth• Education• Technological depth• Brain drain

Capital investment in MENA

• Attracted 3% of $62bln Foreign Direct Investment into Less Developed Countries

• Offshore funds held by MENA nationals in 1994: $600bln

1994 numbers, R&W 224

How can things get better?• Political stability & reform• Avoiding failed paradigms: ISI, centralized management & crony

capitalism• Developing competitive advantages & export-led industries• Disengaging the state from industry & services• Reducing the size of the public sector (increase privatization)• Reduction of armament expenditures• Transparency in disposal of oil income• Regulatory reforms & independent court systems• Cross-investment & capital retention• Talent retention• Stabilization of population growth• Regional trade arrangements• Equity temporarily sacrificed for efficiency (reduce deficits - this hurts)• Avoid overkill – prevent downward spiral of contraction (need some state

involvement – borrowing, priming industries)

All of this requires CREDIBILITY

Why would private investors believe kings and presidents embracing economic reform verbally, especially when control is highly centralized in the leader’s hands?

These leaders must show that their commitments to economic reform are credible.

- Build reputation for consistency in reform

- Block retreats from reform

- Get help (IMF, World Bank, EU, etc.)

The MENA region