The paradox of a “Rentier State”

By Azfar Mohammad

A topic of widespread global debate and concern today in the intellectual circles around the world focusses on one prominent issue, which is : Is the Middle East society compatible with the principles of democracy and how can democratic institutions take shape in the region? Many arguments or reasons have been stated for why democracy can’t take shape in the region ranging from “incompatibility of Islam to democracy” to “the tribal nature of arab societies” etc. However – in this article I would like to address this issue through the prism of an economic indicator i.e “the rentier nature of middle eastern countries” which is one amongst a plethora of factors affecting the non-development of more representative forms of governance in these states.

The term “rentier state” was first coined by an Iranian intellectual named Hossein Mahdavy through a paper he published in 1970 “The Pattern and Problems of Economic Development in a Rentier State: The Case of Iran”. Since then, the term “rentier state” has been commonly used in the context of natural resource rich gulf economies.Starting with the first discovery of oil in Middle East (Persia) in May 1908 by William D’Arcy the world continues to rely on Middle East oil even today to keep their economies running.

Iran was the leading supplier of oil and gas to the West until the reign of Mohammad Reza Shah Pahlavi who was removed from power after the Iranian Revolution in 1979, bringing the first Islamist government to power. Iranian Supreme Leader, Ayatollah Khomeini declared United States as the “Great Satan” and stopped dealing with US both economically and politically for its support to Israel. As Iranian oil shipments to the West dropped, Saudi Arabia stepped in to fill the void by cosying up with United States and covering up for the shortfall left by the plugging of Iranian supplies. This special relationship between United States and Saudi Arabia has been strengthened over the past decades and continues to this day. However,in recent times there have been a few signs of discomfort in this once unbreakable bond, with developments such as US discovery of shale oil which has reduced american dependence on middle east oil, gradual rapprochement of relations with Iran with the signing of the nuclear deal and differing positions of the two sides in the ongoing Iraqi and Syrian crisis.One weapon that Saudi Arabia has wielded on many occasions (and very successfully) in order to buy american patronage and influence is to continue the purchase of american manufactured arms and weapons, as it did once again recently, when during Donald Trump’s visit to Saudi Arabia in May 2017 an arms deal worth USD 350 Billion dollars to be spent over 10 years was concluded (out of which USD 110 Billion immediately).

An argument put forward by experts and analysts on why “rentier states of the GCC” have failed to develop politically, is due to the fact that accumulation of huge wealth in large “sovereign wealth funds” through international oil sales has allowed the leadership to run the affairs of the nation independent of any form of representative governance due to the non-taxation of its subjects. In the absence of taxation, citizens are relatively passive and less demanding of the state hence are easier to control. Whenever there are signs of restiveness in the population , for example during the Arab Spring in 2011, the rich rentier states (Saudi Arabia & UAE) have been able to subdue the rebellions by announcing social reform packages for the disgruntled sections of the society. In any society, an implementation of free market principles leads to the overall creation of institutional, governance and judiciary structures in the nation. This in turn provides more representation to the population in the running of the affairs of the economy and state.Incidentally, the governments of rentier states that rely to a large extent on the revenue from non-market forces ( read oil) have a much lesser motivation to open up the economy to free market principles which will lead to the dilution of their power and a loosening of grip on their subjects. These conditions and prevailing interests lead to the development of authoritarianism and dictatorships in such societies.

The concept of “Dutch Disease”, a term that was coined by The Economist in 1977 to explain the correlation between the decline in manufacturing sector in Netherlands and the discovery of Groningen gas field discovery in 1959 is pretty apt as a suitable example in the case of GCC nations. Most of the GCC nations have always relied heavily on oil and gas exports in order to raise funds. This resource became a curse for the overall development of the region, since the regimes did not pay much heed to the diversification of the economy (especially during the high oil price days) by focussing on the development of other critical sectors which strengthen the base of a nation such as manufacturing and heavy industry. Instead the revenue from oil was used to invest heavily in arms and weapons in order to win the patronage of United States and also to strengthen and prop up the regime’s power base in order to tackle any anti-regime forces both internally and externally. The development of natural resource sector has also led to increasing gender discrimination in the region. Women who are normally not associated with tough field jobs especially in the oil & gas extraction and production have been sidelined by the male-dominated industry (coupled with the patriarchal nature of middle east societies ) and hence have not been able to play a more proactive and important role in the evolution of their societies.For highly skilled work, most of the rentier states depend on expatriate workforce and hence the indigenous population is left to do non-important work which again has led to intellectual decay in the society over a period of time. The growth of an indigenous civil society is extremely important in the development and progress of a modern nation which is missing in most of the rentier states.

Ironically, although US leaders talk about democracy and human rights consistently but on the other hand they have ensured full support and backing to the authoritarian and monarchical forces in the middle east. Whether is was the Shah of Iran or the House of Saud, US has ensured adequate support towards the survival of these regimes in order to ensure continued and undisrupted flow of oil from the region as well as continuing the policy of selling arms worth billions of dollars to these countries in order to support its home grown arms manufacturing industry. When Iran elected Mohammed Mossadegh as the first democratically elected leader in 1953, United States orchestrated a Central Intelligence Agency (CIA) led coup to depose him and bring Mohammed Reza Shah to power as it feared a democratic Iran would be more difficult to manage the larger US ambitions in the region. Apart from this, for strategic reasons of maintaining military bases in the region, United States lends more support to authoritarian forces.Dozens of such examples of US support towards authoritarian regimes in resource rich nations spans across a large part of Central Asia, Middle East and Africa which continues to this day.So it does not come as a surprise when Human Rights Watch and Amnesty International are extremely vocal about human rights violations in Russia ( for geopolitical reasons) but are fairly silent on similar issues in places like Saudi Arabia. According to SIPRI (Stockholm International Peace Research Institute) figures for Annual Military Expenditures 2017, Saudi Arabia ranked at fourth place globally in terms of military expenditure , spending around USD 64 Billion which is very close to Russia’s annual expenditure of USD 69 Billion.It is the only non-superpower (current or ex) in the list of top 4 spenders globally. As a percentage of GDP, Saudi Arabia invested 10% towards military expenditure whereas the median for top three (US,China and Russia) is 3.5%. Majority of these dealings are with American Corporations such as Lockheed Martin, Boeing, Northrup Grumman, General Dynamics etc. So we can see there are larger interests at stake in maintaining the status quo.

Off-late winds of change have begun to blow in the region since the advent of Arab Spring in 2011 which led to the toppling of authoritarian regimes in Tunisia,Egypt,Libya and Yemen. Similar situations in rentier economies of Saudi Arabia, UAE, Oman and Kuwait were rather well managed by declaration of billion dollar social reform packages. However -since the oil price crash of 2014 the revenues of these rentier states have dropped substantially. This coupled with the need to finance wars in Yemen, Syria,Iraq and Libya is leading to a consistent dwindling of precious sovereign wealth fund reserves accumulated during the oil boom period. These wealth funds are expected to be exhausted in next 5 to 6 years at the current rate of expenditure considering the fact that oil prices remain stagnant or declines further. In 2016, for the first time in 10 years, Saudi Arabia announced that it would be going for a loan of USD 10 Billion from IMF repayable over 5 years. This coupled with the step taken to reduce public sector wages and subsidies speaks volumes of the current fiscal condition in the oil rich state.

Announcements have also been made by the GCC states to implement Value-Added Tax on certain transactions and commodities , something which was absolutely unthinkable until a few years ago.Considering these major developments of dwindling revenues from oil and gas export coupled with the implementation of new taxation norms is bound to develop conditions where the local population would want to get more involved in how the affairs of the state are run, than they ever have been in the past as had happened in the 18th and 19th century europe where the monarchies gradually became figureheads with the development of mature governance structures over time.

Taking these into consideration, will the leadership of the GCC states be more amenable to accepting a type of Kuwaiti constitutional monarchy model for now or will they come up with something more unique and more suitable to their local circumstances and conditions to address these concerns ? One thing is certain- that the relationship between the governing and governed will change substantially over the coming decade. The exact shape of the direction it takes is anybody’s guess, something only time will tell.