“In many Arab economies, good economic policies rarely constitute good politics”

An interesting article details the problems of the Gulf economies in the future.

It opens, “Five years ago, the Gulf states of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates shared a fiscal surplus of some $600 billion; by 2020, the International Monetary Fund predicts that they will have accumulated a combined deficit of $700 billion. Sustained low oil prices could make things even worse. This bad news is yet one more reminder of resource-rich Arab states’ need to build vibrant, diversified economies that can withstand the effects of oil price shocks. Although Arab governments have long recognised the need to shift away from an excessive dependence on hydrocarbons, they have had little success in doing so. Iraq, for example, set economic diversification as a core policy objective in one of its first five-year development plans in 1965—yet the country has only become more dependent on oil over time. In Qatar, Kuwait, and Saudi Arabia, too, diversification has been a central, yet largely unrealised, development goal since the 1970s. Even the United Arab Emirates’ economy, one of the most diversified in the Gulf, is highly dependent on oil exports”.

The piece mentions “Why have Arab governments consistently failed to diversify their economies despite tall promises and grand plans? The answer has more to do with politics than economics. Indeed, if diversification were as simple as importing technical blueprints from states that have already diversified their economies, such as Botswana, Malaysia, and Norway, it would already have been accomplished. The trouble is that in many Arab economies, good economic policies rarely constitute good politics, especially for ruling elites.  This is because the structural changes demanded by economic diversification—specifically, the production of a greater number and variety of high-value goods—promise to empower business constituencies that, flush with new income, could potentially challenge the ruler”.

The piece goes on to argue “In Kuwait, for example, the rise of an independent merchant class could undercut the power of the monarchy. If rulers in the United Arab Emirates have accepted diversification, meanwhile, it is partly because the Emirati private sector poses little political threat, since it is overwhelmingly reliant on foreign labour. For diversification to succeed, its political costs for elites must be offset: they need to know that they will gain more than they will lose from the reforms. Any serious discussion of economic diversification must therefore begin by recognizing that resource-dependent elites will have to be compensated for the losses they will risk”.

The report gives the example that “Countries that have successfully diversified have generally had political frameworks that could tolerate it and regional environments that encouraged it. Consider the example of Botswana, which at independence in 1966 was highly reliant on mineral extraction, particularly diamond mining, and since then has developed strong agriculture and tourism sectors. Botswana’s success can be attributed to a number of factors: the country inherited constituencies with diverse economic interests, among them farmers and herders; it also benefited from political competition and stable coalitions”.

The article goes on to mention “Arab states lack all three ingredients that facilitated economic diversification in these success stories: varied economic constituencies, strong political coalitions, and beneficial neighbourhood effects. Indeed, at the time of independence, many Arab economies did not inherit economic constituencies that could have gained strong political roles; instead, economic activity remained confined to royal circles. The discovery of oil compounded the problem, since it enabled rulers to tie down the merchant class in state contracts and other forms of patronage. Pervasive conflict in the region further undermined the prospects of private production by disrupting market linkages among states”.

Pointedly he writes that “To move away from their dependence on oil, then, Arab societies need to develop a new political settlement that forces elites to cede ground to the private sector. That, however, raises a difficult question: if a closed, resource-dependent economy benefits elites, what could possibly persuade those elites to allow for diversification? The answer likely lies in policies that compensate elites for the losses they suffer from a leveling of the economic field. China provides an illustrative example of this process: by incorporating business leaders into the Communist Party structure, Beijing managed to align economic reform with the interests of political elites. Or consider the case of Ethiopia, now among the world’s ten fastest-growing economies, which has set up party-owned enterprises supported by specialized endowments to promote investment in underdeveloped regions. Such models of party capitalism raise tough questions about market competition. But they nonetheless demonstrate that elites tend to favor an expansion of the economic pie when they stand as its lead beneficiaries”.

He concludes “Economic diversification in the Middle East is thus far from a technocratic affair. It carries deep power implications for ruling elites and for broader regional dynamics. If the Gulf states hope to reap the benefits promised by diversification, they should ameliorate the costs it might impose on ruling elites and exploit the benefits it offers the region at large”.

 

 

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