Structural reform, economic order, and development: Patrimonial capitalism

ABSTRACT

This contribution claims that structural economic reform, in a range of non-OECD countries, has led to capitalist, yet non-market economies which differ qualitatively from competition-based market systems. Patrimonial capitalism is an economic order that is shaped by the political order and power relations it enshrines, and is characterized by distinct features such as structurally higher transaction costs and a distinct relation between formal institutions and informal rules that govern exchange processes. It can flourish only in specific types of non-democratic political environments. While anecdotal evidence is presented from Arab cases, the concept's applicability is not restricted to any single world region. The findings are relevant for comparative economic systems analysis, but also for the practice of international cooperation because they can serve to better assess the political-economic context in which structural reform is supported, and to avoid errors that continue to be committed by international policy-makers in assisting economic reform processes worldwide. Conceptually, as is shown, neither neoclassical theory nor institutional economics provide adequate tools for assessing such questions on the economic orders level. This article therefore suggests a wider and integrated framework that also includes approaches established by political science and political and economic sociology.

KEYWORDS:

• Economic system
• economic reform
• development
• patrimonial capitalism
• Arab world
• political economy

ACKNOWLEDGEMENTS

The author wishes to thank Roy Karadag and Steve Heydemann for discussing earlier versions of the manuscript, and three anonymous reviewers as well as the editor for valuable advice.

Notes

1. While the suggested concept is terminologically reminiscent of the ‘varieties of capitalism’ (VoC) literature (e.g. Hall and Soskice, 2001; Jackson and Deeg, 2006; cf. also Crouch and Streeck, 1997), which has hitherto almost exclusively focused on OECD economies (an exception is Schneider, 2007) and on state policies governing capital–labor relations, outside the OECD world, (macro-) politics rather than (economic) policy is decisive for distinguishing varieties of capitalist economic orders. In this conclusion, the present contribution differs significantly form the existing VoC literature. Rather, the approach pursued here can be seen as related to the research agenda that Boettke et al. (2005) propose in their ‘New Comparative Political Economy’, even though it differs from the latter in that it focuses not on cultural or ethnographic, but on macro-political variables.

2. It may seem questionable to draw on illustrative evidence only. However, comparative empirical studies of several other cases have been conducted that support the argument for the region (e.g. Schlumberger, 2005). I therefore wish to emphasize here the analytical and theoretical implications, and to illustrate (rather than ‘prove’) these by some references to the region's experience. Second, country specialists will argue for the peculiarity of ‘their’ cases, and admittedly, this contribution makes some broad and sweeping generalizations. However, I would argue that the astonishing similarity of outcomes on the economic systems level (which is at the core of my argument) justifies this perspective, even though I do acknowledge that there are significant variations in the size of the respective markets and in the scope, pace, sequencing and timing of elements of reform in individual cases.

3. Examples of this have been studied with regard to Western societies (for the USA: Axelrod, 1986) and to ‘primitive societies’ (e.g. Posner, 1980).

4. See, inter alia, Bill and Springborg (2000); Eisenstadt (1973); Gellner (1987); Lemarchand (1981); Pawelka (1985); Roninger (1994); Roy (1994); Sharabi (1988); Springborg (1979); Theobald (1982); Weingrod (1977).

5. At the same time, this is the reason why I do not deal here with network theory or social capital approaches: insightful and well organized, Heydemann's (2004) Networks of Privilege is to date the only book on Arab economic reform based on such sociological approaches. Yet, the focus on identifying such networks, analyzing the multiple roles individuals can take on in a given social context, mapping varying and multiple group memberships and the like, all too easily diverts attention from the underlying constellations of power on which several of the contributions to this volume miss out. Social capital approaches, in their turn (cf. Baron et al., 2000; Field, 2003, for good overviews; cf. also Bourdieu, 1980; Coleman, 1994; Putnam, 1993, 2004) are problematic in that ‘social capital’ has been widely perceived as socially beneficial per se, even though its key proponents stress that ‘a given form of social capital that is valuable in facilitating certain actions may be useless or even harmful for others’ (Coleman, 1994: 302), and that ‘social relationships can sometimes serve to exclude and deny as well as include and enable’ (Field, 2003: 3). Apart from the question of how far the concept is able to ‘travel’, there is also the danger that it conveys unrealistic normative connotations which, then, leads applications to overlook power-based asymmetries in social relations.

6. The standard textbook reading is by Bill and Springborg (2000). Maybe the best elaboration of neopatrimonialism is by Pawelka (1985: 22–99); cf. also Bratton and Van de Walle (1997), and Erdmann and Engel (2007) for a review of the concept.

7. It seems necessary here to point to the fact that while Arab socio-economic systems and economies differ in many important respects (nominal organization of political regime between monarchies and republics, resource-rich vs. resource-poor economies, size of the domestic market, etc.), the mechanisms of patrimonial capitalism that is based on a particular relationship between formal rules and informal norms do not differ from one case to the next. While one could thus establish typologies of various (political) economies in the region, those that underwent structural adjustment share as their common denominator that they all are characterized by neopatrimonial political arrangements with a predominance of informal wasta in economically relevant interactions between big business and the state, and which resulted in patrimonial capitalist economic orders.

8. From this perspective, the efforts by the new institutionalists at integrating their findings into an orthodox approach may even be inconsistent in themselves. But elaborating on this is clearly beyond the scope of this article.

9. While it is true that, as is shown below, the implementation of structural adjustment did not follow the orthodox path, its design and theoretical underpinnings did (see Tahir, 1997).

10. This is so because the conservative, business-friendly monarchies had established just as large public sectors as had the ‘socialist’ republics (Glasser, 1995).

11. On the backgorund cf., inter alia, Williamson (1990, 2000) or Glover (1991).

12. There is by now a large body of literature that confirms this point. Apart from some collections that treat the Middle East as a region, there are abundant studies on individual cases. As a few examples among many others, see Perthes (1995) and Heydemann (1992) on Syria. On Jordan, see Schlumberger (2002), Wils (2003) and Alissa (2007); on Egypt, cf. Kienle (2001), Henry and Springborg (2001) and Mitchell (2002: Chapter 9); on Yemen, see Albrecht (2001); on Algeria, cf. Tlemçani (1999) or Werenfels (2002); and on Tunisia cf. Murphy (1999) and Erdle (2004), for North Africa: Dillman (2001).

13. I exclude the special case of Iraq under Saddam where ‘normal’ economic policy making has not been possible since 1980 due to protracted wars and the UN sanctions regime up to the 2003 war, as well as the oil-rich Gulf monarchies which, due to the abundance of mineral resources were able to avoid adjustment policies of the Washington style (Saudi Arabia, Qatar, Bahrain, Kuwait, the UAE, and Oman). For a stronger argument that the mechanisms presented here for the Egyptian case hold true for all Arab countries that underwent structural reform, see the empirical parts in Schlumberger (2005: 76–232).

14. The fact that banking privatization has now finally started (with the sale of the Bank of Alexandria in 2006 and the surprising announcement of the Egyptian prime minister to sell 80% of the Banque du Caire (BdC) in summer 2007) confirms rather than contradicts my argument, given that these measures were carried out in total lack of transparency; even parliamentarians had no knowledge of the governments' plans to sell the BdC, and the secrecy over the privatization decisions triggers rumours about who benefits. There are also speculations that the majority sale of BdC was necessary to provide a 10% input to obtain a World Bank loan, and that the crippling non-performing loans to influential businessmen had been one factor that was deliberately used to decrease the bank's value when sold – potentially with post-privatization with shares owned precisely those businessmen (cf. Howeida, 2007).

15. Of course, reforms also included the revitalization of the capital markets in Cairo and Alexandria, but these remain small in size and relevance for the financial sector as a whole when compared on a global level.

16. Defined as the percentage of trade turnover divided by two of the GDP.

17. Nobody has described this more lucidly than Werenfels (2002) for the Algerian case.

18. At least if the term is defined simply as, for instance, in Samuelson and Nordhaus (2000: 248): ‘By this, we mean that capital, land and assets are largely privately owned’.

19. Not surprisingly, competition policy was one of the key fields not only left out in the entire course of the 1990s by the international players involved in Egypt's economic reform process (and this is representative for the region), but also the one most fiercely opposed by local privileged groups. It was only in the early 2000s that a draft bill entered the Egyptian parliament – and was rejected. Until now the regime has succeeded in avoiding the establishment and enforcement of effective competition policies.

20. The following list tries to define an economic order that will look familiar to many empirically. It has been given various ad hoc labels and is often called ‘crony capitalism’. Such terminological suggestions, however, have serious disadvantages compared to the concept proposed here: while ‘crony’ does refer to the personalistic traits of exchange processes characteristic of this system, the term lacks both the genuinely political dimension that shapes its emergence and existence and the vertical-hierarchical dimension of asymmetric power relations between ruling elites and their clients that is conveyed by the term ‘patrimonial’. Moreover, the term ‘crony capitalism’ lacks analytical depth; it is poorly defined and cannot be verified or falsified in analyses; rather, it describes only very vaguely a system that has been outlined here in a way that should allow for testing.

21. While, to give but one example, tariffs have significantly been lowered in all Arab countries under structural adjustment, governments have proven extremely creative in maintaining non-tariff trade barriers that are applied inequitably and thus help preclude international competition in those areas where politico-economic ‘entrepreneurs’ hold high stakes and aim at perpetuating non-market privileges.

22. Apart from that, it is also likely to lead to economically inefficient investment decisions or even investment shortfalls. Jordan, for instance, is among the five water-poorest countries in the world. Nevertheless, roughly two thirds of its water usage are in agriculture, although the sector's contribution to GDP reaches between only 2% and 3%. It is no secret that a main reason for this allocation pattern is the close alliance of a handful of large landowners with the Crown. The former grow fruit and vegetables such as tomatoes or water melons in areas such as the Jordan valley. Resistance to control water usage here even takes on violent forms and employees who were supposed to assess the amounts of groundwater taken from wells were reportedly simply shot dead (off-the-record interview with a former Jordanian Minister of Water and Irrigation, Amman, 17 July 2005). See also Sadowski's now classical ‘Political Vegetables’ (1991).

23. That in patrimonial capitalism the market mechanism is structurally ruled out in core areas of the system has nothing to do with the fact that markets are imperfect wherever they exist and that market failures are known even in competition-based economies. In market economies, it is the regulatory power of the state that, by politically setting rules in conformity with the market, is able to either revitalize the market through enforcement according to the rule of law, or to compensate losers for its failures. Rather than market imperfections, in patrimonial capitalism we could speak of the ‘perfection’ of a non-market order that is efficient not in generating social welfare, but in maintaining political (and economic) power.

24. In addition to the remarks above, those investments that do flow into the Arab countries are (with some noticeable one-off exceptions such as the sale of GSM licenses) mostly in the capital intensive oil and gas sectors. Up to now, more than half of all direct investment went to Saudi Arabia and Egypt alone, which renders the picture for the remaining 17 countries – again despite differences – even more gloomy.

25. I am aware that the argument presented here would benefit from more data that could more directly support it, but here lies a logical problem: it is in the very nature of informality that it cannot be measured by quantified indices. Thus, arguments that draw on informality as an explanatory variable are always open to critique from this side, and it remains a question of plausibility whether or not one subscribes to them. However, in view of the available micro-evidence that exists for Arab countries (see, inter alia, the literature referred to in note 12), the concept of patrimonial capitalism explains economic outcomes on a macro-level, as well as available data, more stringently than other concepts.

26. Italy under Berlusconi may be considered a case where structures began to take hold that remind us of the phenomena addressed here, but where elections put an end to Berlusconi and his cronies' non-market efforts at politically controlling economic outcomes and at impeding enforcement of the rule of law. The Italian example thus confirms the claim that non-democratic rule is a necessary (though not sufficient!) condition for patrimonial capitalism to emerge and survive.

27. To take but few examples, cf., e.g. on Russia: Ledeneva (1998, 2001), Rutland (2003), Fabry and Zeghni (2002); on South East Asia: Kang (2002); on sub-Saharan Africa: Caffentzis (2002).

28. Political embeddedness refers to the ‘manner in which economic institutions and decisions are shaped by a struggle for power that involves economic actors and non-market institutions’ (Zukin and DiMaggio, 1990: 20).