Rent appropriation and its consequences in Arab countries

Nader Fergany , Tuesday 24 Jul 2012

Arab states' reliance on rents has had a negative impact on economic growth and productivity and led to lack of democratic accountability

One of the main features of the preference for money over knowledge in Arab societies is the spread of rent appropriation in the region. Rent essentially means profit, financial or otherwise, derived from monopolising a material or symbolic asset. Rent appropriation is prevalent in the Arab region, not only at the level of states but also at the level of smaller social entities, such as the tribe, clan, family and individual.

At the level of states, Arab countries are divided into original rentier, and derivative rentier states. Arab oil-producing states belong to the first category since they monopolise the power to extract oil and directly own its revenues, while non-oil producing states have original rents from natural resources such as metal ore and other minerals, such as phosphate in Jordan and Morocco. They also receive a share of oil revenue from the remittances of their nationals working in Arab states and financial assistance from oil-producing Arab states, which exceeded $40 billion in 2010.

Non-oil producing Arab states also derive rents on natural or geographical advantages such as beach and history tourism, and revenue from the Suez Canal in Egypt. This supports the rent-based character of the economies of derivative rent appropriation. Some struggling Arab regimes have become addicted to dependence on aid from foreign donors, and some are original rent generators on the geo-strategic or political levels – such as Egypt because of its peace treaty with Israel, and now Yemen because of the West’s so-called war on terrorism.

As for smaller social entities, revenue is equally derived from access to the two sources of power in society, political authority and wealth, which have married in most Arab states and spawned a scourge of social injustice and corruption.

The first negative outcome of rent appropriation is the lack of a strong production base for sustained growth, and enough diversity to meet the needs of the people for a good standard of living. Rent appropriation avoids the difficulties of constructing such a productive structure and continuously developing it.

Easy rent appropriation, especially when abundant, enables privileged access to the luxuries of life. As for the local economy, why should anyone endure the troubles of establishing production projects if it is easy to monopolise the market of an imported commodity, or share with a small number of the ruling elite the profits of the few in this market. And may the difficulties of the acquisition of knowledge and hard work be consigned to the hell of those who have no other choice.

The second negative outcome of revenue acquisition is the elimination of the accountability of the ruler to the ruled, since the regime usually receives revenue directly and distributes it among society by employing it in various economic and social activities. This is unlike a relationship of accountability by the people of an elected government in democratic societies that forces the government to serve the people which are its primary source of funding through taxes.

The third negative outcome of rent appropriation is a drop in the social value of the determinants of social status in advanced production societies, i.e. knowledge acquisition, productive and dedicated work that feeds into high productivity and its steady increase.

Once the three negative outcomes of revenue acquisition combine, they result in a decline in the productive potential of a country, as well as a drop in individual and social productivity.

Statistics show that oil revenues are higher than all the other sources of public revenue in the Arab economies combined, while direct taxation – the crux of holding the regime accountable to the people – represents a tiny portion of this revenue.

GDP growth in Arab economies over the past five years was markedly slower in comparison to such rising giants as India and China. These two giants, unlike Arab states that remain separate, have chosen to partner with Brazil and Russia in a mega economic bloc known as BRIC.

Meanwhile, productivity is relatively low in all Arab economies and is a primary reason for economic backwardness. The problem of productivity is compounded if we exclude oil revenues from GDP in Arab oil-producing countries.

Statistics show modest productivity levels in Arab states in comparison to countries such as South Africa and Korea, or even key neighbouring states such as Turkey, or even the regional rival Israel.

The comparison is even more damning if we exclude oil revenues from GDP, since the larger portion of these revenues is attributable to a geographic advantage or rent rather than productivity. Thus, a comparison between Arab oil-producers and others, and Arab states and comparator countries is more accurate and precise. Therefore, once oil revenues are excluded from GDP when calculating productivity, the relative advantage in financial productivity in oil-producing Arab states diminishes in comparison to other Arab countries. Also, its rank drops further in comparison to other comparator states and Israel.


Short link: