351 Spath
The Political Economy of the Middle East
Lecture outline
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Define Political Economy
Historical background on MENA’s Political Economy
Review Political Economy of Oil
The Political Economy of Demographics
Major challenges to MENA economic development
Strategies for development--how can things get
better?
Political Economy
An area of study focusing on the interaction
between political institutions, the political
environment, and the economic system.
Some topics: monopolies, rent-seeking,
government fiscal policy, etc.
Political Economy Approach
A social scientific approach that assumes
that individuals & groups make political
decisions that reflect economic preferences
or in the same way they make economic
decisions
Historical Background
• Effects of colonization on post-colonial states:
– Weak states with narrow wealthy elites
– Poor infrastructures, exploited resources,
uneducated populations
– Revolution & coups that result in strong, powerful
autocrats
– State control & bloated public sectors
• Notable exceptions:
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Lebanon: The Christian advantage
Algeria: Revolutionaries with little to work with
Turkey: A generation ahead of the rest
Israel: European training, militarism, aid & Nasdaq
Oil—a blessing or a curse?
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Control of MENA oil by the “Majors”
Formation of OPEC (1960)
1967 War and Qaddhafi’s precedent
Nationalization
The 1973 War & the embargo
US, European & Japanese responses
Oil & foreign intervention: 1953 coup in Iran, 1973
conflict, the New Great Game, Iraq & Kuwait, pipeline
diplomacy, Oil in recent wars
• Oil & economic development: The “resource curse”,
Rentier state & economic sectors
Is oil a weapon??
Natural Resources:
Services:
• Foreign aid in return for military assistance, alliance or
diplomatic support
• Migrant labor—remittances
• Navigation—Suez
• Tourism & pilgrimage: holy places, historic sites, and
recreation
• Banking
POPULATION GROWTH (1992)
Development Indicators
• GDP per capita and PPP
• HDI
• MENA countries rank below average in
achieving decent quality of life for citizens
Classroom exercise
- Deconstruct R&W Chapter 7
- What is State-Led Economics?
- What are main points and arguments in the
chapter?
Key Points from R&W Ch.7
• Dominant Public sector (government involvement, acts as
employer, sometimes manager)
• Need for revenues through taxation, resource revenue,
tourism
• Monopolization of Industry
• Success based not on efficiency, but on other outcomes
(jobs, social safety net, equity, self-sufficiency and state
control)  short-term gains
• ISI – Import substitution industrialization
• Overinvestment (contributes to short-term goals, but is not
does not follow principles of efficiency)
Contradictions of State-Led Growth
• Decent performance in second half of 20th century
– Output and output/cap grew respectably
– Employment and structural change to industry was not
underwhelming
• Given population growth, limited nat. resources (exc. oil), low
literacy, instability, not too bad for starters. But development is longterm, not short-term.
BUT…
• Industry was not competitive on international market (‘infant
industries’ never grew up)
• GOALS: supply cheap inputs for other industries; provide jobs for
increasing labor force
• ISI – important substitution industrialization
– Trouble creating economies of scale
• State over-investment + high import/export ratio = DEBT
Major challenges to MENA economic development
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Short term goals of political elites
Debt
Bloated public sectors
Conflict, instability, sanctions, shifting alliances & wars
Corruption & nepotism
Inadequate laws & regulations = lack of private investment (*)
Poor fit among region’s economies
Unbalanced distribution of capital & labor
Distorted economies—rentier states
Demographic growth
Education
Technological depth
Brain drain
Capital investment in MENA
• Attracted 3% of $62bln Foreign Direct
Investment into Less Developed Countries
• Offshore funds held by MENA nationals in
1994: $600bln
1994 numbers, R&W 224
How can things get better?
• Political stability & reform
• Avoiding failed paradigms: ISI, centralized management & crony
capitalism
• Developing competitive advantages & export-led industries
• Disengaging the state from industry & services
• Reducing the size of the public sector (increase privatization)
• Reduction of armament expenditures
• Transparency in disposal of oil income
• Regulatory reforms & independent court systems
• Cross-investment & capital retention
• Talent retention
• Stabilization of population growth
• Regional trade arrangements
• Equity temporarily sacrificed for efficiency (reduce deficits - this hurts)
• Avoid overkill – prevent downward spiral of contraction (need some state
involvement – borrowing, priming industries)
All of this requires CREDIBILITY
Why would private investors believe kings and presidents
embracing economic reform verbally, especially when
control is highly centralized in the leader’s hands?
These leaders must show that their commitments to
economic reform are credible.
- Build reputation for consistency in reform
- Block retreats from reform
- Get help (IMF, World Bank, EU, etc.)
The MENA region