The political economy of state-formation in the Arab Middle East: Rentier states, economic reform, and democratization

ABSTRACT

This article argues that rentier states stand in contrast to states that have to rely on domestic resource extraction. They display a particular path to state-formation that by and large defies the European path of state-formation: natural resource dependence (mainly oil dependence) has created weak states that are autonomous from societal demands and that do not rely on domestic taxation. State-formation has not been accompanied by political accountability, transparency, or what Charles Tilly has termed the ‘civilianisation of government’. In rentier states the expenditure side of public revenues is most clearly linked to a state-building agenda of creating societal peace and political acquiescence. On a theoretical level, this article offers a new reading of state-formation based on the form and the performance of the state. Focusing on a functional understanding of statehood, it thereby highlight where Arab states are strong (security function and in times of oil booms, welfare function) and where they are weak (representation function, and in times of fiscal crisis, welfare function).

KEYWORDS:

• State-formation
• rentier state
• political economy
• development
• taxation
• democratization

ACKNOWLEDGEMENTS

Earlier versions of this article have been presented at the Graduate Institute of International Studies (HEI) in Geneva, at the Fifth Pan-European Conference on International Relations, ECPR Standing Group on International Relation in the Hague (9–11 September 2004) and at the Second World Congress of Middle Eastern Studies (WOCMES) in Amman (11–16 June 2006). The author's thanks go to Richard Auty, André Bank, L. Carl Brown, Steffen Hertog, Oliver Jütersonke, Keith Krause, Marie Lafontaine-Schwarz, Philipp Stucki, Charles Tilly, Thomas Richter, Morten Valbj⊘rn, and the anonymous reviewers for comments and suggestions.

Notes

^aIn Morocco the fiscal year extended from July to June in 1999 and since 2001 extends from January to December. The period July–December 2000 was a transitional accounting period between fiscal years.

^bData excluding receipts from auction of UMTS mobile phone licenses of EUR 50.85bn.

^aAuthor's calculations based on Economist Intelligence Unit (various years, various countries), Central Bank of Tunisia, UAE Central Bank, Masrif Lubnan (Bank of Lebanon), Lebanese Ministry of Finance, and Oman Ministry of Finance. Only those states that list tax revenues as a separate item in public finances have been included here (n.a. = no numbers available;—= not applicable). The numbers for Egypt are from Richter (2004).

^bThe Paris Protocol of April 1994 (extended under the September 1995 Interim Agreement) gave the Palestinian Authority (PA) the right to set its own tariffs and to levy taxes. The Protocol stipulates that the value-added tax is to be based on the Israeli system and placed at 15–16% (lower than the 17% in Israel). The numbers assembled here are, however, misleading with regard to the nascent Palestinian's state infrastructural power, since the state of Israel is in fact collecting income tax for the PA from Palestinian workers in Israel. It can keep 25% of these earnings, but has to forward the rest to the PA. The income from this ‘clearance revenue system’ is the most important source of finance for the PA besides foreign grants. Estimates place it at over 60% of total revenues.

1. State-formation is understood here as the process by which the state not only grows in economic productivity and government coercion, but also in political and institutional power. It is thus closely linked to the process of the bureaucratization and the centralization of the state (Ayoob, 1996: 21). It also involves the elimination or neutralization of the internal rivals and the production of durable instruments of surveillance and control within the state's territory (Tilly, 1985: 181).

2. The term ‘Arab Middle East’ is used here in a political rather than in a geographic sense. It shall include not only the Middle East proper (that is, the Arab Mashriq region plus the Gulf peninsula), but also the North African states of Morocco, Tunisia, Algeria and Libya. The total number of states in the Arab Middle East thus includes 16 plus the special case of Palestine.

3. This view focuses on a state's purpose and its fulfillment of basic human needs. It also allows for a minimization of the role of the state and the role of non-state actors in the fulfillment of these basic needs (Oppenheimer, [1907] 1990: 47 and passim).

4. In support of seeing tax capacity as the key test for state capacity, see Barnett (1992), Hood (2003: 213), and Fauvelle-Aymar (1999: 391). State power is hence infrastructural power, namely, ‘the capacity of the state to actually penetrate civil society, and to implement logistically political decisions throughout the realm’. (Mann, 1993: 55).

5. A general personal income tax exists in both states since 1989. In Morocco, this was installed through law no 17–89 of 21 November 1989 (as published in the Official Gazette of 6 December 1989) and in Tunisia through law no 89-114 of 30 December 1989 (as published in the Official Gazette of 31 December 1989). Both countries also have a general company tax, in Morocco since 1986 and in Tunisia since 1989. An introduction to these tax laws is given in Butzclaar-Mohr (1992: 206–9).

6. All subsequent numbers are own calculations for the years 1999 to 2004, based on data from Economist Intelligence Unit (various years; various countries). Author's calculations.

7. This is the average over the period 1993–1996. See also Springborg and Henry (2001: 77).

8. The low level of taxation in oil rentier states might actually indicate that the state does not have to tax its people. Hence the need for taxation is low in these states, but not necessarily their capacity to tax (which might incidentally be the case also). More obvious is the case of states that rely on both taxation and rents, but which use indirect measures for raising revenues. Here the state clearly lacks capacity for it has to revert to indirect measures.

9. As historians of taxation have shown, this distinction is important: ‘The true magnitude and significance of the tax load have in the past been concealed from the people. The fiscal principle would have to yield to the economic principle; the direct method of raising state revenues should become the rule and the indirect method the exception.’ See Wicksell ([1896] 1988: 128) and Waterbury (1997: 171).

10. Some scholars have raised critical positions concerning this linkage and have questioned the democratizing power of taxation (Herb, 2003). In defense of our argument and in line with the evidence presented above, one should not look at a positive linkage between taxation and democracy (as done by these critiques) but rather at the flip side of the coin, which emphasizes that in the absence of taxation wealthy rentier states enjoy the privilege of disposing of their resource wealth freely and without demands for accountability. That is indeed the crucial difference highlighted by Luciani (1990) in his terminology of ‘allocation states’ and ‘production states’, respectively. The spending effect of rentier states – namely, oil wealth being spent on patronage and thereby inhibiting latent pressures for democratization – is by far more important. The link between rentier states and democracy is thus a negative one and the absence of rentierism is not a sufficient condition for democracy, but rather a necessary condition.

11. Esfahani (2006) provides an interesting modification to this argument in that he stresses the incomplete nature of these implicit social contracts and incomplete contracting as an obstacle to reform in times of crisis.

12. See also Schlumberger (2000).

13. Expectations voiced by scholars of the Arab world that political change in the aftermath of fiscal crisis would necessarily be democratic have not been met. While political change in state–society relations has indeed occurred (Moore and Salloukh, 2003), this has been unsustainable as the accompanying fiscal base of the state has not been expanded.

14. Waterbury (1998: 164) adds a caveat and cautions that it seems unthinkable to see the international financial institutions stand aside to see a fiscal crisis deepen sufficiently.

15. On the interference of Great Powers in the formation of states in the Middle East, Lustick (1997: 675) remarks: ‘When the ferocious men and women who built Britain, the United States, Germany, Italy, France and Russia used advantages over their neighbors for territorial aggrandizement and the construction of great national states, there was no external club of preexisting great powers able to penetrate their continents and enforce paralyzing fragmented status quo on behalf of “civilized” norms of interstate behavior’.