NS 4053 Spring Term 2017 Cammett Chapter 7

NS 4053 Spring Term 2017 Cammett: Chapter 7 Rise of State-Led Development

Overview I • Chapter attempts to: • Document the growth functions of the Middle Eastern state up to the 1980 s • Look into the contradictions that emerged and weakened stateled development and • Analyze the political forces that created resistance to reforms up until the late 1980 s when they became inevitable for most of the region 2

Overview II • Middle Eastern states were big until the structural adjustment policies of the 1980 s and 1990 s started chipping away at the dominance of the public sector • The states: • Employed large numbers • Monopolized resources and controlled • • Large investment budgets Strategic parts of the banking system Virtually all subsoil minerals and Basic infrastructure like roads, railroads, power, and ports 3

Overview III • Generally accepted by populations that the state and its leaders have • A right an obligation to set a course for society, and • An obligation to use resources to pursue that objective • In short a general acceptance of a high concentration of power • Economic • Administrative, and • Military 4

Overview IV • Author’s contention that it is more the politics of decolonization and development than cultural norms that accounts for the interventionist state in the Middle East • State seen as responsible for repairing economic damage resulting from colonial policies • Goal to • Overcome “backwardness” and • Build a prosperous, educated citizenry, a diversified economy and national power • These tasks and goals are culture-blind. • Basic similarities in goal orientation and intervention as • India, • Brazil, • Ghana 5

Structural Transformation I • Postcolonial era, leaders of Middle East states saw themselves as engineers and architects in charge of designing new societies • Point of departure for state was backwardness • An economy mired in production of cheap agricultural commodities requiring an unskilled workforce • The perpetuation of this system of production by denying education and the acquisition of modern skills to all but a privileged few and • Forcible integration into the global economy • Only the state could coordinate and mobilize resources to set economy on new course. 6

Structural Transformation II • Throughout region assumed private sector could not be relied upon to undertake the necessary resource mobilization and planning. Sector seen as too: • Weak financially • Close to a commercial and trading past rather than an industrial one and • Concerned with short-term profit • As a result, not able to extricate the economy from its trap • Entrepreneurs only enjoyed legitimacy in Lebanon 7

Structural Transformation III • As important as efficiency for state leaders was equity • Inequalities in income distribution and poverty were associated with colonial system of exploitation • Process of state intervention contributed to demise of some classes • Large landowners • Traditional craftspeople • While it promoted others: • Capitalist farmers • Bureaucratic middle class and • Small-Scale manufacturing class 8

Structural Transformation IV • At the time state intervention in the Middle East driven by two different motivations and strategies – both aiming at structural transformation of the economy • First, state nurtures and strengthens private sector in several ways through the provision of • Infrastructure • Raw materials, and • Semi-manufactured goods through its basic industries • In this process of accumulation, the state • transfers surpluses on its own operations, profits if any, and external rents to the private sector and • tries to absorb all major risks for that sector 9

Structural Transformation V • Second process – state finances its own expansion • “Socialist Transformation” has been used to describe this process • Turkey in the 1930 s • Egypt after the Socialist Decrees of 1961, but dropped after 1974 • Algeria 1962 -1978 • Tunisia 1964 -69 • Syria since 1963 and • Iraq until 2003 10

Structural Transformation VI • Initial calls for reform in such systems concerned with • Making the public sector more efficient • Reducing the deficits of specific enterprises • Increasing monetary incentives for workers • Allowing price increases • Linking budgetary support and banking credit to performance and • Reducing the number of public workers 11

Structural Transformation VII • Shirt was towards state capitalism • Began in Egypt 1965 when Nassar denounced the inefficient performance of the public sector • Algeria sometime between 19678 and 1969 • Discipline, productivity, and profitability became watchwords in new era, but frequently just slogans 12

Structural Transformation VIII • Summing up • Whether driven by socialism or not, Middle Eastern state took upon itself the challenge of • Moving economy into an industrial footing • Shifting population to the urban areas • Educating and training its youth • Redistributing wealth • Building a credible military force, and • Doing battle with the international trade and financial regimes that held countries back • There were no impediments to the expansion and affirmation of the interventionist state. 13

Ataturk I • Republic of turkey an example and model for many of the other states in the Middle East • Country achieved real independence in 1923 • By late 1930 s endowed with credible military structure, beginnings of a diversified industrial sector and a rapidly expanding educational system • Ataturk determined from outset to • Promote Turkey’s industrialization and • Liberate its economy from dependence on the West • Early strategy was to • Rely on private-sector initiative and • Avoid taxing the peasantry in order to finance industrial growth • Founded the Business Bank in 1924 to finance private enterprise 14

Ataturk II • In 1934 introduced First Five Year Plan • Blueprint for import substitution industrialization (ISI) • Major part of program involved developing a textile industry utilizing Turkish cotton and selling to a large domestic market • Often called the easy phase of ISI • Country went further launching projects in basic chemicals, cement, iron and paper • Plan added twenty new enterprises to the public sector • Second Five Year Plan was adopted in 1938 just before Ataturk’s death • Over one hundred new enterprises were planned and • First effects at “industrial deepening” were formulated • Part of the plan was to disperse industry in order to benefit backward areas, especially eastern Anatolia. 15

Ataturk III • In large part the private sector strategy of earlier years was abandoned • Some of the side effects of this big-push strategy began to make themselves felt during the 1930 s • Government ran a growing deficit due in part to an outsized bureaucracy • World War II interrupted the Second Five Year plan • Import substitution continued out of necessity with the disruption of Mediterranean shipping • Major shift in politics occurred after war with the emergence of a two party system • Democtatic Party rejected etatism in favor of liberal economic policy to befit commercial farmers and small industries 16

Ataturk IV • Military take over in 1960 ushered in another period of national planning and state-led ISI • Modified in the 1968 -72 Five Year Plan to put a greater burden of investment on the private sector • However, by end of the 1970 s the state sector remained the economy’s center of gravity • Public investment in manufacturing sector rose from 34% in 1965 to 65% in 1980 • Overall government spending had risen from about 18% of GDP in the 1960 s to 35% in the early 1980 s 17

Arab Socialism I • Would be an exaggeration to say that other states in Middle East slavishly imitated the Turkish experience • In fact state-Led ISI spread throughout the developing world after 1945 • Strategy had a logic independent of any single country’s efforts • One set of Arab states adopted the Turkish paradigm and went well beyond it • These states’ strategies were explicitly • Socialist and populist • Hostile to the indigenous private sector and foreign capital and • Aimed at far-reaching redistribution of wealth within their societies 18

Arab Socialism II • Strategy has not always been sustained and on occasion has been officially abandoned: • Egypt after 1974 • Tunisia After 1969, and • Sudan after 1972 • Principal experiments with the Turkish Paradigm were • Egypt 1957 - 1974 • Algeria 1961 -1989 • Syria 1963 – present • Iraq 1963 - 2003 • Tunisia 1962 -1969, • Sudan 1969 -1972 • Libya 1969 - present 19

Arab Socialism III • Basic assumptions underlying these experiments • First, profit and loss should not be the primary criterion for assessing public-sector performance – instead goal of success was • Creation of jobs • Provision of cheap goods • Introduction of new economic activity to remote or poor regions and • The achievement of self-sufficiency in goods of a strategic or military nature 20

Arab Socialism IV • Second, assumed that the operation of supply and demand was inferior to planning and the application of administered prices • Third, the large scale private sector was seen as untrustworthy • Most regimes nationalized the private sector or sharply curtailed its activities • Entire “strategic” sector such as basic metals, chemicals and minerals became reserved exclusively for public sector enterprise 21

Arab Socialism V • Fourth foreign investment was viewed with specision • The setting up of closed sectors for public sector enterprise underscores another assumption • There is nothing inherently inefficient about monopolies • For all this to succeed in promoting overall growth, industrialization and a more equal distribution of income: • The planners needed to anticipate accurately the complex interaction of all the economic variables • Managers needed to pursue efficiency even while protected by tariffs and • Civil servants need to put in an honest day’s work • By and large none of those requirements were met. 22

Arab Socialism: Egypt I • Egypt first Middle Eastern country in postwar era to adopt a strategy of radical transformation • In 1952 Egyptian monarchy overthrown by military coup led by Colonel Nasser and a group of his colleagues • From 1952 -56 Egypt promoted public sector growth as in Turkey • Either by helping the private sector or • Undertaking projects the private sector could not finance or manage, . • Not until the Suez War of 1956 that the pubic sector grew at the expense of the private sector 23

Arab Socialism: Egypt II • Because of the participation of Britain, France along with Israel in the attack, Egypt took over all their assets • In addition, failure of private sector to maintain levels of investment provoked wave of nationalizations through Socialist Decrees of 1961 • In one fell swoop Egyptian state took over most large-scale industry, all banking, insurance and other private assets • Bulk of agricultural property remained in private hands • First Five Year plan – straightforward ISI strategy • Problem – was the economy’s ability to earn foreign exchange • Although firms needed to import capital goods and raw materials to function, they could not generate the foreign exchange to pay for them 24

Arab Socialism: Egypt III • Nasser died in 1970 and successor Sadat pursued policy of economic liberalization aimed at • Reforming and streamlining the public sector • Stimulating the private sector • Attracting foreign investment and • Promoting exports • Public sector enterprise was sharply criticized for chronic inefficiency and large scale operating deficits • Still, Egypt’s public sector continued to grow throughout the 1970 s • Entering the 1980 s it included 391 companies, employed about 1. 2 million workers with a wage bill of over 20% of GDP • The return on its total investment was only 1. 5% per annum 25

Arab Socialism: Egypt IV • Counting the public authorities that ran everything from the Suez Canal to the Aswan High Dam, along with the civil service, the public and government sector in the early 1980 s before structural adjustment began • Had 3. 2 million employees – more than 40% of total workforce • Total public expenditure in 1980 represented 61% of GDP • Total Government revenues were 40% of GDP and • The public deficit was 20% of GDP – an extraordinary large imbalance by international standards. 26

Arab Socialism: Algeria I • Algeria one of the few less developed countries to rival Egypt in terms of weight and extent of public sector • Independent Algeria emerged in 1962 out of seven years war with France • Many leaders of the National Liberation Front (FLN) were socialists • From 1966 -89 most economic activity was reserved to the state • Collaboration with foreign firms was extensive but was carried out on a contract basis involving turnkey projects 27

Arab Socialism: Algeria II • With its First Four-Year Plan 1969 -73 Algeria launched a program built on heavy industry • Oil and natural gas were to serve two ends • First they would be a feedstock of a modern petrochemical sector • Second the earnings from their export would pay for the import of plant and capital goods for steel manufacture and vehicle assembly • Expected the agricultural sector would be an expanding market for the new products • The local private sector was regarded as irrelevant and foreign firms were seen mainly as providers of technology 28

Arab Socialism: Algeria III • By time Algeria initiated its Second Four-Year plan world petroleum prices had quadrupled • Algeria faced no financing problems in the mid 1970 s and • Algerian state was able to invest the equivalent of 25 -30% of GDP annually • However experience during this period demonstrated the weaknesses of state-led ISI • Rather than agricultural sector generating demand for new industrial products there was a general decline in agricultural production and country had to import food • Insufficient domestic demand meant that public-sector industries operated below capacity and at high cost so could not export 29

Arab Socialism: Algeria III • Attempts made to overhaul public sector • However still dominates the Algerian economy • In late 1980 s there were 50 pubic sector companies and 20 authorities employing 80% of the industrial workforce and accounting for 77% of industrial production • With the civil service, 45% of the non-agricultural workforce on the public payroll • Collapse of oil price in 1984 -85 forced Algeria to question the very premises of the strategy it had followed since the mid-1960 s 30

Arab Socialism: Syria and Iraq I • Beginning in 1956 both Syria and Iraq experienced growing influence of the same pan-Arab party the Ba’ath or Arab Renaissance Party • Since its founding in Syria after WWII this party has called for Arab unity and socialism • Major obstacle to its spread was perceived by its leaders to be Nasser’s Egypt especially its socialist phase after 1961 • Many policies of state intervention in Iraq and Syria sprang from its socialist ideology, but initially Ba’ath leaders afraid Egypt’s socialist transformation more attractive • Before Ba’athists neither Syria or Iraq had make significant advances at industrial production 31

Arab Socialism: Syria and Iraq II • With Ba’athists in full power, nationalization of Iraq’s the petroleum sector took place, 1972 -75 • Nationalization coincided with the first big increase in petroleum prices. • The state’s share in GDP rose to 75% in 1978 • By 1977 there were 400 public enterprises employing 80, 000 workers • They absorbed 60% of all industrial land commercial investment. • Total government employment in 1977 was nearly half the country’s organized workforce. • By 1980 one in four Iraqis was on the state payroll 32

Arab Socialism: Syria and Iraq III • After Saddam came to power in 1982 country faced continuous disaster • Iran Iraq War 1980 -88 – up to 21% of labor force drafted into the army and military expenditures rose to 60% GDP by 1986 • Oil production deeply reduced as a result of the destruction of oil exporting facilities in the South • Loss of production and oil revenue plus costs of reconstructing lost infrastructure amounted to more than $400 billion – more than 400% GDP for every year of the war • Iraq emerged from the war in 1988 with a GDP per capita lower than in 1975 • External debts of $86 billion – when started the war it had reserves of about $50 billion 33

Arab Socialism: Syria and Iraq IV • With no prospects for recovery Saddam decided to invade Kuwait • Costs equally disastrous • Anglo-American invasion in 2003 destroyed $20 billion in assets • Losses of three wars reaches nearly $1 trillion – thirty times Iraq’s GDP in 2001 34

Arab Socialism: Syria and Iraq V • Syria • March 1963 military coup brought the Ba’ath party to power in Syria • Year later regime took over the country’s banks • 1965 far reaching nationalizations with share of industrial production increasing from 25% to 75% • Between 1970 and 1982 public sector rose in importance • Employment rose to half the workforce • Dominance of public sector achieved at the expense of economic efficiency • Strategic sectors became used to their privileges and low levels of performance 35

Arab Socialism: Syria and Iraq VI • In 1985 the state was responsible for over 60% of total investment, mainly through money losing public enterprises • The manufacturing sector remained one of the smallest in the Arab world producing about 6 % of GDP in the 1980 s • Syrian economy remained in a low-growth trap even as Bashar Al-Assad, succeeding his father in 2010 undertook a short-lived series of modernization measures • Cost of an immobilized economy has been Syria’s low GDP per capita (US 2, 623 in 2010) less than one-third of Lebanon despite fact Lebanon went through a civil war and Syria is self sufficient in agriculture and has some oil reserves 36

Arab Socialism: Tunisia I • Tunisia achieved independence in 1956 • Civilian rule until 1987 when General Zine el Abidine Ben Ali deposed Habib Bourguiba • During the civilian years Tunisia also built an interventionist state system that resembled those in Egypt, Turkey and Algeria. • State’s role in resource mobilization was until 1970 s overwhelming. • In 1981 state-owned enterprises accounted for about 60% of the value of manufacturing and had over 11% of the workforce. • Budgetary burden of state-owned enterpirses increased 4% from 1978 to 1981 • Private investment largely limited to consumer goods 37 production and tourism.

Arab Socialism: Tunisia II • As elsewhere, the approach before 1986 mainly one of stream-lining the existing economic strategy of state-led growth • Government supplying the intermediate goods that the private sector needed • Complex controls over prices, investments, trade, credit, and foreign exchange remained in place – as did the resulting misallocation of resources. 38

Arab Socialism: Tunisia III • Events in 1980 s made this policy unsustainable • Government tried to “grow through” external shocks • The international recession of the early 1980 s • Drought • Rising European protectionism and • Falling oil prices • Tunisia’s debt continued to grow – increasing from 38% of GDP in 1980 to 63% in 1986 • Current account deficit widened from 5% of GDP in 1980 to 11% in 1985 -86 • Budget deficit reached 5. 2% GDP in the five years before 1986 39

Arab Socialism: Tunisia IV • The government instituted some reforms including changes in consumer subsidy programs that provoked riots in January 1984 • Government retreated but the problems became even more severe. • By the summer of 1986 country had only a few days of import cover left. 40

Arab Socialism: Libya I • The Jamahira (“mass state”) of Libya represented combination of • Romantic revolutionary, • Islamic programs and • A kind of cynical authoritarianism. • As in all major exporting nations the state dominated the economy through controlling oil revenues • Case under the monarchy and remained the case after 1969 when the monarchy was overthrown by Gaddafi • He eventually elaborated a new theory of mass state in which all productive units and all workplaces were to be directly governed by popular congresses • Libya’s experiment on paper was one of worker self 41 management

Arab Socialism II • Beginning in 1979 Gadaffi expropriated all private industry • In 1981 all bank deposits were seized without warning • By this time three quarters of the workforce was on the public payroll • However Libyan state and regime never relly relinquished effective control of production and administration to popular committees. • Like other socialist countries Libya had multiyear development plans • Leadership did not allow people to question or change any of the plan’s major parameters 42

Liberal Monarchies: Iran I • Possible that socialism entails a significant public sector • Converse not true • Monarchies of Pre-1979 Iran, Jordan and Morocco all professed liberal economic orientation in which the private sector was to be the leading force • Yet statistical indicators of state activity show these countries had public sectors of a size and weight equal to that of the socialist countries • These countries show that we should not confuse state ownership with socialism 43

Liberal Monarchies: Iran II • • The Iranian Case Reza Shah Pahlavi came to power in 1924 Some similarities with Ataturk in Turkey State apparatus and the armed forces grew side by side as in Turkey Depression pushed the Iranian state into ISI Private sector benefited from credit provided through state industrial bank as well as high tariffs. State also went ahead and created public enterprises in textiles, sugar, cement, and iron and steel. Reza Shah removed in 1941 by Allies and his son Mohammad Reza Phalavi became new shah 44

Liberal Monarchies: Iran III • Under the Shah Iran’s economic strategy had three key elements • Oil exports, • Continued ISI, and • Division between public and private sectors • State enterprises undertook deepening process in iron and steel, copper, machine tools, aluminum, and petrochemicals • Dynamic private sector, sometimes with foreign joint ventures, moved into finished metals, special stels, synthetic fibers and automobile assembly • In 1944 Iran established a Plan and Budget Organization and launched its first national plan • In this respect country well ahead of all countries in region except Turkey 45

Liberal Monarchies: Iran IV • System worked well up to early 1970 s • Reconciled the regime’s economic liberalism with a strong state presence in the economy • But in 1970 s very significant shift in division of labor occurred with lessons about logic of pubic enterprise in the Middle East. • With first great surge in petroleum prices in 1973 regime had a tremendous amount of revenues • Neither the Shah nor his advisors nor the state technocracy proposed investing these rents in private sector growth • New funds allowed the state to expand consolidate in an atmosphere in which public authorities largely disregarded the private sector 46

Liberal Monarchies: Iran V • By the end of the 1970 s • Government investment and consumption represented 43% of GNP • Military expenditures had resent to 10% of GNP • One quarter of the non-agricultural workforce – 1. 5 million were on the public payroll • Has the Islamic Republic of Iran reversed this pattern since 1979? • Constitution is explicit on role of public sector which is to include all major industries, foreign trade, major mines, banking, insurance, power, dams, major irrigation systems and transport 47

Liberal Monarchies: Iran VI • Shortly after Khomeini’s return to Iran wave of nationalizations took place • By end of 1982 the National Induatrial Organization controlled about 600 enterprises with 150, 000 employees • In addition Bonyads (charities) created to take over assets of the Phalavi family and the shah’s associates • In next decade the Bonyads would become the most influential agents in the economy • Under President Mahmoud Ahmedinejad they would come to be the main beneficiary of government privatizations • While no rollback of the state under the Islamic republic, clear the regime deeply divided on the issue of state ownership and intervention in the economy 48

Liberal Monarchies: Jordan I • Jordanian economy small and since Israeli occupation of the West Bank in 1967 severely truncated • Economy is dynamic and growing, but highly dependent on external assistance • Jordanian state has controlled the economy in three ways • First, direct recipient of external assistance allows government to direct investment • Taken the form of large scale joint ventures with state, foreign and local private capital in fertilizers cement etc 49

Liberal Monarchies: Jordan II • Second state lever has been the phosphate sector, the country’s largest export and foreign exchange earner • Third state lever has been the defense budget which was around 15% o. F GNP in 1988 • Army a major employer for the East Bankers who constituted the traditional base of support of the regime. • By the mid-1970 s about one half of Jordan’s labor force worked for the government in a civilian or military capacity • Jordanian economy grew rapidly during the first oil boom from the mid-1970 s to the mid 1980 s • Fueled by generous support from the Gulf states and labor remittances • By 1986 about 10% of the labor force worked abroad 50

Liberal Monarchies: Jordan III • Jordanian private sector has been given lead in promoting exports of fruits, vegetables and manufactured goods to Arab and regional markets • Given small population and narrow resource base would have been impossible to pursue an ISI strategy • Model came under stress in the mid-1980 s with the collapse of oil markets • Worker remittances and phosphate exports shrank • Budget and balance of payments deficits increased and Jordan started borrowing to avoid deep reforms • When in 1989 debt could not be serviced anymore Jordan had to turn to the IMF for support 51

Liberal Monarchies: Jordan IV • Since the mid-1990 s Jordan has developed a more reformist program • Received support from IMF and other Western donors 52

Liberal Monarchies: Morocco I • Morocco and Iran up to 1970 followed similar development strategies • Morocco like Iran had a strong entrepreneurial trading class • Country’s economic ideology has always been liberal and proprivate sector • While Morocco not an oil exporter it has been the world’s leading exporter of phosphates through the public holding company the Cherifian Phosphates Office (OCP) • State’s control of the economy taken form direct ownership of assets – mines, railroads, dams – and equity positions through pubic holding companies 53

Liberal Monarchies: Morocco II • Post 1973 surge in world petroleum prices followed closely by large jump in world phosphate prices • Moroccan state received windfall revenues and used them as Iran not to invest directly in the private sector, but to expand the public sector • Number of public sector firms increased from 137 in 1970 to 238 in 1976 • The share of the government and public sector in gross fixed capital formation reached 19 percent in 1977 • At least one quarter of the non-agricultural workforce was on the public payroll 54

Liberal Monarchies: Morocco III • Even at height of boom state expansion was partly financed by foreign borrowing • Expansion continued into 1976 even as phosphate prices collapsed by 47% • Deficit swelled to 20% GDP • Expenditures rose with • the beginning of the Saharan War—cost $300 million per year for a decade • Increased cost of consumer subsidies (rising from 1% of GDP in 1973 to 6. 9% in 1974) • The unwillingness to cancel investment projects and • The political fear of cancelling public-sector salary increases 55

Liberal Monarchies: Morocco IV • Government hoped the adverse price shock was temporary and tried to grow through the recession • Foreign debt rose from 20% of GDP in 1975 to early 60% in 1980 when debt service payments consumed 32. 7% of exports • As burden of debt became unmanageable, government forced to undertake stabilization measures • Obliged to • Restrict its current expenditures and investment and • Revert to its pre-1974 policy of stimulating the private sector and attracting foreign investment 56

Liberal Monarchies: Morocco V • However by 1983 foreign creditors refused to continue to finance budgetary deficits • Forced the country to turn to the IMF. • As usual the initial impetus for stabilization came from outside • In Morocco as in other countries of the region the first key agent of change was external. • Because of the high political costs of austerity, most countries of the region have found adjustment policies difficult to sustain. 57

Liberal Monarchies: Morocco VI • Morocco’s situation seems similar • Beginning in 1978 it • Reduced public spending on investment • Increased taxes • Restricted civil servants’ salary increases and • Slowed the growth of crediot to the private companies • Government retreated in 1979 granting • a 10% increase in civil servants’ salaries and • A $ 30 -40% increase in the minimum wage • Expanded food subsidies even as price of imported farm products rose. 58

Liberal Monarchies: Morocco VII • Second attempt at implementing a stabilization program was aborted when an extremely sharp rise in consumer prices (50%) and the government’s decision to reduce subsidies on food products led to major rioting in Casablanca in spring of 1981 • In two years following the Casablanca “bread riots” Morocco pursed an expansionist policy by borrowing more and more from abroad. • Drought added to the difficult situation accelerating ruralmigration and increasing the need for imports • The number of state owned enterprises rose to 700 by 1984 • By the middle of 1983 currency reserves were almost exhausted forcing the government to institute emergency measures to restrict imports. 59

Gulf Oil Kingdoms I • Gulf kingdoms - most conservative regimes in the Middle East • Also, have the largest state sectors • Conservative in the sense • Nonrepublican forms of government (powers of sovereignty not vested in the people) • A concern for the protection of Islamic values • A fierce anticommunism throughout the Cold War era, and • Dominant classes with roots in older maritime and trans-desert trading communities 60

Gulf Oil Kingdoms II • The regimes combine • Small populations • Little or no agriculture (Saudi Arabia exception) • No tradition of manufacturing and • Oil that has generated tremendous rents • Share of oil in GNPs in 1980 • Saudi Arabia 66% • Kuwait 51% • UAE 65% • Oman 69% • Kuwait’s low because country receiving dividends from past oil investments 61

Gulf Oil Kingdoms III • Large financial clout at disposal of the state – inevitable that most investment regimes would fall within the state sphere • Civil administration grew rapidly in these countries with the expansion of government activity • Saudi Arabia has gone further and established a giant public enterprise sector with more than 40 corporations in housing, storage, agriculture and basic industries. • Plan period 1976 -80 alone Saudi Arabia spent US$290 billion • Infrastructure, • Port development, and • New industrial cities at Jubail and Yanbu 62

Gulf Oil Kingdoms IV • Although goal to shift some of the burden of industrialization onto the private sector, industrialization that did take place mainly involved public-sector ventures with foreign capital • When oil revenues collapsed in the 1980 s Saudi Arabia • Reduced its expenditures by about half the reduction in revenues • Financed the deficit through internal borrowing • Over time the public investment program was sharply curtailed • However hiring in the public sector and the provision of public services actually rose 63

Gulf Oil Kingdoms V • Not until late 1990 s after running eighteen years of deficit in a row and sustaining negative economic growth for much of the period that the government decided to start implementing serious structural reforms to put economy on a more solid footing 64

Israel I • Israel shares many features with the socialist states of the Arab world and turkey • However number of factors made Israel’s experiment in state building unique • The taking over of all the property previously owned by Arab Palestinians who had left their homes during the hostilities of 1948 • Jewish immigrant population of Israel doubled between 1948 and 1952 • Israel, like Jordan had been dependent on external assistance and financial flows, and it is the state that controls the disbursement. 65

Israel II • What emerged in Israel by the late 1960 s • Large, paternalistic welfare state • Vaguely socialistic objectives and • Extensive public ownership • The Israeli variant of statist model implemented through state-owned or state-controlled enterprise • The trade union in the 1970 s had • 80% of the employed workforce • Controlling interests in several large coroorations and banks 66

Israel III • By the late 1970 s about 52% of the Israeli workforce was employed by the state • By 1983 government expenditures were as high as 91% of GDP • After the Labor Alliance lost power to the Likud in 1976 the government made important modifications to the country’s economic model and tried to • Contain government expenditures and • Promote exports through devaluation • However after 1973 • Growth slowed down resulting in Israel’s lost decade • State finances weakened • Government increasingly had to resort to printing money to finance budget deficits 67

Israel IV • By 1984 • Inflation was running close to 450% • Despite flows of concessional aid and grants external debt had risen to 62% of GNP, one of the highest ratios in the Middle East • In 1985 country introduced a stabilization plan • Cuts in government expenditures • Temporary freezing of prices and wages and • Increasing tax receipts. • Structural adjustment came later in an attempt to get the economy going again • Over time reforms led to a major reorientation of both the economy and politics with a much larger role for the private sector. 68

Contradictions State-Led Growth I • In many respects state-led growth achieved a great deal • Both absolute and per-capita national output grew at respectable rates in most countries even before oil boom • Structural transformation measure either by share of industry in output or by employment proceeded at a relatively good pace • However • Industry seldom internationally competitive and • Many “infant” industries never grew up • The stress on heavy industry and import substitution failed to create sufficient jobs for the rapidly expanding workforce. • The relative neglect of agriculture until the late 1970 s contributed to the widening food gap, and • Many countries continued to rely on external sources of investment capital and accumulate large external debts. 69

Contradictions State-Led Growth II • The goals of both social justice and national economic independence proved elusive. • Now widely acknowledged that state intervention in the economy and the public enterprise sectors have by and large malfunctioned financially and economically • Public enterprises • Other than oil have failed to generate profits • Constitute a net drain on state enterprises • To remain afloat have required subsidized credit and inputs, foreign exchange at preferential rates • Have not solved many of the social and economic problems they were designed to address 70

Contradictions State-Led Growth III • To often the wrong price signals led state managers to produce the wrong things with the wrong combination of inputs • Heavy industry grew rapidly • Agriculture and light industry relatively neglected • International comparative advantage was often ignored • Capacity utilization often low • Many countries in the region tried to invest more resources than were saved domestically • The resources gap – gross domestic investment minus gross domestic savings was large for some countries 71

Contradictions State-Led Growth IV • As the goals of efficiency, growth and national independence were only partially achieved, the ideal of increasing equity also proved elusive • Millions of good jobs were created and the provision of social services fostered some social mobility and helped create a new middle class • However gains came at a high efficiency cost as in • Expensive consumer subsidy programs • The swelling of ranks of public sector employees 72

Contradictions State-Led Growth V • Over time in order to protect the privileges of what would become an elite labor force • Interests of new entrants to the labor markets would have to be sacrificed • Budget constraints became more binding • Education and health systems deteriorated and became unable to continue promoting the equalization of human capital and the expansion of social mobility 73

Resistance to Reforms I • By 1980 s process of state-led intervention resulted in deep seated crisis in • The state sector itself and • In the economy in general • In time this crisis led to the retreat of the state • In Algeria retreat driven by an effort to make state intervention more efficient • In Turkey an assertive private entrepreneurial sector was ready to take over from the state role of leading the development process • Falling in between – Egypt and Tunisia where economic liberalization measures introduced in absence of strong private entrepreneurs 74

Resistance to Reforms II • By 2010 on the eve of the Arab uprisings, most countries of the region had move to a system in which most of the production took place in the private sector. • States in the Middle East had also put themselves in a position to • Provide privileges to preferred entrepreneurs and • Exclude those they did not favor from operating with the same conditions. • Even when the failure of state-led growth obvious reforms not initiated. • Not always possible to discern which groups, organizations or class interests carried the most weight in promoting or defending the state’s role in the economy 75

Resistance to Reforms III • After 30 years of strong state intervention a multitude of powerful bureaucratic, managerial, and political interests that stood in the way of any cut-back in state activities. • Organized labor generally opposed to reform because of relatively high wages and benefit packages • Managers of public assets also resisted reform efforts – preferred bailouts instead • International donor community found public-sector enterprises attractive because they could bypass cumbersome bureaucratic agencies to promote projects • Bilateral donors also liked public enterprises because they could directly promote their equipment and technology • Private sector enjoyed cheap inputs from the state enterprises 76

Delaying Reforms/Structural Adjustment I • Timing, pace and content of structural reform efforts in the MENA region have varied widely across countries but in all cases reforms were resisted and delayed as long as possible. • Common elements of reform efforts that have had major political consequences include • Restraining public expenditures • Holding in check if not reducing he size of the pubic enterprise sector • Stimulating private enterprise and investment and • Removing subsidies on consumer goods, agricultural and industrial inputs and credit 77

Delaying Reforms/Structural Adjustment II • In addition there have been efforts to • Liberalize foreign trade • Reduce the tariff protection of domestic producers and • Stimulate export sectors of the economy • Each of these moves produces winners and losers • Combining them all at once in reform efforts wouold have been likely to send shock waves through well established coalitions of economic interests and beneficiaries of the status quo • Major risk perceived by political leadership is austerity will provide violence especially among urban populations • Many cases of protests over cost-of living increases 78

Delaying Reforms/Structural Adjustment III • Two kinds of response to economic pressures leaders can adopt • First – reject structural reforms • Often citing consequences for equity and likelihood of economic stagnation • Sometimes quietly pursuing just enough reforms to keep system afloat • Second option – accept reforms • Take the lead in devising reformist programs purely out of domestic concerns and because they make sense 79

Delaying Reforms/Structural Adjustment IV • First strategy often used in region as long as governments could borrow way to delay reforms • In end foreign resources more often used to pay for current consumption rather than to increase production • Eventually as foreign debt snowballed new borrowing used to cover payments on past debt, leading to a mounting debt trap • But debt financing not sustainable in absence of deeper structural reforms. • In early and mid-1980 s Turkey, Egypt, Sudan, Tunisia and Morocco all wrestling with structural adjustment programs 80

Delaying Reforms/Structural Adjustment V • Strategy typically taken up as long as countries could avoid adjustment because • they could count on oil revenues such as Iran and Algeria or • Strategic rents such as Egypt • Second strategy best illustrated by • Reform programs implemented by Turkey in 1980 and to a lesser extent • Tunisia and Morocco in the mid-1980 s and Jordan in the late 1980 s. 81

Delaying Reforms/Structural Adjustment VI • Policy changes included • Sharp increases in prices of public sector goods • Elimination of a wide range of price controls • Major currency devaluation • Export incentives, • Favorable legislation foreign investors and • Curbs on government spending 82

Conclusions I • By early 1990 s Middle Eastern societies and developing economies as a whole had come to the end of a major historic development phase • State led growth had brought about a certain amount of structural transformation but • Rapid population growth and • Collapse of oil prices overwhelmed the income-raising effects that such transformation was presumed to yield • The state overextended its capacity to manage and guide increasingly diversified economies • It was able to give a big push to industrialization but unable to deal with • complexities of industrial “deepening” – the efficient use of labor and capital or • the need to export in highly competitive world markets 83

Conclusions II • Adding to the complexity brought about by state intervention was the creation of new social actors and interests that benefitted from state policies • Over time these groups became entrenched in their economic niches • Although multiple forces were blocking reforms, in the en public sectors and big government seemed to have mostly preserved their dominance in Middle East economies • Reason – unwillingness to open up politically and the power public the public sector offers political leadership • to preempt resources from actors outside the state system and • to control strategic sectors of the workforce 84

Conclusions III • To some extent equity – in form of • redundant labor, • relatively high remuneration, • low productivity and • inefficiency • have been combined and paid for through deficit financing and borrowing abroad • But when creditors refuse to advance new lines of credit until the fiscal mess is cleared up, the painful day of reckoning can no longer be postponed 85