The Middle East and Central Eurasia has become one of the most important regions in the world due to its exponential economic growth over past decades. As as result of this geopolitical and economic importance, more focus has been put on rentier states in the region and their relationship with energy and authoritarianism.
Rentier-states are states whose national revenues are disproportionally comprised from the rent of national resources to foreign consumers. However, increasingly many of these states are facing something called the resource curse - the paradox when a state has large mineral wealth and exports its raw materials, thus implying vast revenue creation, but then long-term economic growth declines as these raw materials run out and the state’s economy isn’t diversified enough to sustain itself.
The reasons for Arab oil and gas-based rentier-states facing resource curses is multi-faceted, with the crux of the issue stemming from poor economic policy, the underlying system of governance and the lack of institutional integrity of each individual state.
Primarily, the resource curse occurs due to short-termist economic policy employed by resource-rich states and after the inevitable drop in supply and/or demand occurs their national revenue plummets and economic development slows or stops.
This was seen in Iraq as over 99% of its exports were of its natural resources, however, in the last decade the demand for their exports has dropped which has facilitated a drop in economic growth and development, with per capita income and gross domestic product (GDP) stagnating since 2005.
This was caused by a short-term fiscal policy that neglected the need for a strong diversified economy, thereby causing a resource curse. Similar economic policies were averted by states such as Iran and Israel, as they adopted a broad fiscal policy of sectoral diversification which prevented the economic and developmental disadvantages of resource curses.
Resources curses are also caused by the system of governance that is prevalent in states reliant on resource exportation. Rentier governments are highly resistant to change as they often hold a monopoly on power and control the economic direction of the state.
As such, resource curses can manifest aggressively because the modes of governance necessitate the reliance on rents from vast resource exportation, facilitating the eventual economic downturn when supply slows or demand drops, limiting future economic growth.
Similarly, this begets another cause for resource curses, being the lack of institutional integrity of a state. Without appropriately strong public and private institutions that can regulate, oversee and intervene in economic development and strategy then development is likely to slow, thus realising the resource curse.
These states also face the issue of the persistence of authoritarian regimes, which is caused by a lack of incentive and opportunity to democratise due to the unchallenged political, legal, economic and military power in their state which is near-impossible to displace.
This is evident in all five Central Asian states as they have maintained a strong executive authority, with weak, compliant legislatures, with a similar situation existing in the Arab and non-Arab Middle East. This is seen in Kazakhstan, as its system of governance has no incentives for democratisation because its authoritarian regime has prevented the establishment of free markets, labour protection and political inclusion, thus, regimes are perpetuated by ruling elites and technocrats.
As a result, the potential for good governance and transparent political environments are limited because of the grip the ruling parties have on power. However, I would add that the endurance of authoritarianism is not necessarily permanent, as democracy needs time to grow; it is unrealistic states get it the first time of trying.
When one turns to the possibilities for economic diversification and development in the Arab resource-rich states one can see plenty of opportunity. By many metrics, the Arab region has registered improvements in economic development, as the 2011 UNDP-Arab Development Report notes how there has been a respectable decline in human poverty, with Human Poverty Index of the region falling from 31 in 1997 to 23 in 2007, with the highest decline of 45% in Gulf Cooperation Council states.
It also notes how the more diversified economies of the Mashreq and Maghreb, Syria and Algeria were able to reduce poverty, increase democratic participation and increased GDP per capita growth, with the latter averaging a 2.4% annual rise.
Furthermore, the UNDP Report identifies the positive strides taken by some regional states towards “employment-led growth”, ensuring that economic diversification and development benefits the poorest in society and increased incomes in real term.
This is evidenced by Saudi Arabia; whose Vision 2030 programme seem them funding over 80 projects to catalyse sectoral diversification and comprehensive bottom-up economic growth. For example, by shifting away from a dependence on resource exportation, it has invested over $64 billion in its entertainment sector, along with social reforms in an attempt to promote Foreign Direct Investment (FDI) and expand its tourism sector.
These developments have been compounded by states’ bilateral and multilateral efforts to diversify their economies and increase private sector growth, such as agreements with the International Monetary Fund (IMF) to commit more than $15 billion in Jordan, Morocco, Pakistan and Tunisia will support macroeconomic adjustment. This has been coupled with greater economic cooperation with Western nations and organisations, as shown by the development of the Nabucco pipeline which necessitated cooperation between the US, EU and Iran, among others, to reach the mutually beneficial aim of advancing resource security for the US and EU and economic cooperation for Iran.
However, there are also many impediments to economic diversification and development in Arab resource-rich states, primarily poor human development. This is due to, according to the UNDP, poor government expenditure of public money, high levels of state corruption and limited funding for the operation and maintenance of public assets.
These issues are compounded by weak government-led sectoral expansion, as seen by the manufacturing industry remaining marginal in the region, only contributing 10% of GDP and employing only 8% of the workforce. A major impediment is that economic growth in the region has not been inclusive, with most of the economic activity concentrated in the hands of a small politically well-connected business elite, thereby hampering the grass-roots economic growth that developing states need.
Unemployment rates still remains the highest in the world, with many Arab states having youth unemployment levels of well over 30%, which limits social and economic development as the populace has restricted wealth, limiting domestic economic stimulation.
The region has acknowledged the economic and political threats it is facing and is taking strides in the right direction in finding effective solutions, however, much is still left to be done.
Author: Thomas Jørner
Thomas is a student of Politics at the University of Copenhagen.