Executive Summary

This paper is focused on the details of the rentier state. There is ample literature available on the history of the Middle East and why the countries residing in that region came to be known as rentier states. This paper explains the concepts behind the rentier state theory. It will also shed light on the theory’s limitations. Recent studies and geopolitical environments around the globe suggest that the economic and political conditions and development in Middle Eastern countries cannot get explained with the help of the rentier state theory. And as times progress, it has become less and less relevant.

Introduction

Energy has always been a fundamental part of world politics. It has been responsible for shifting the authority and dominance from the hands of one country to the other throughout history. It has influenced alliances and wars between the world’s most powerful nations. The Middle Eastern countries play a vital part when it comes to the energy resources of the world. The political and economic framework in Middle Eastern countries is not the same as the countries in the West or even China, which is another essential country. It is safe to say that the political relations of the Middle Eastern world with the other powerful nations, especially those in the West or more particularly the United States, haven’t always been very cordial. They are often at an edge with each other. Middle Eastern countries follow the rentier state theory, and it plays a critical part in their political and economic development. However, as we approach modern times, the theory alone may not suffice to explain the countries’ political and economic development. The global energy geopolitics plays a vital role as well. A lot of research has been done on the rentier state theory in light of the Middle Eastern Countries. In this paper, we will be discussing the political and economic development of Middle Eastern Countries and whether or not the rentier state theory is enough to explain it, given the global energy geopolitics.

Rentier state

Let’s begin by explaining what a rentier state is. The rentier state theory aims to explain the politics and economics of the Middle Eastern countries. It was given majorly by Lisa Anderson (Anderson, 1987). Her work is based on the studies that majorly emerged in the 1980s (Altunisik, 2014). The idea of the rentier state was, however, first put forward by an Iranian academic by the name of Hossein Mahdavi (Mahdavy, 1970). It was further worked on by economists who put forward their work in the 1980s. Middle Eastern countries required another politic-economic framework because they are different from other countries in one central aspect. They are all oil-producing countries and, like mainstream countries, do not collect taxes from their population for revenue generation for the government. Instead, they collect rents and depend on them (Altunisik, 2014). Hence, the pace of economic and political development, and the approach towards it, is different in rentier states in comparison to rest of the world. They depend on their energy resources, and up till now, they seem to have been doing well, at least on surface level.

Altunisik (2014) mentions in his paper the three main characteristics of a rentier state. The first characteristic says is that revenues generated from oil get paid to the government as a form of rent. It makes oil a “strategic commodity,” hence, weakening the bond between the production price and the market price. The second characteristic points out that oil is sold and marketed in global economy to maximize revenues. And lastly, whatever profits get accumulated over time from the sale of oil in the global economy all comes under and in the hands of the state, which is solely responsible for deciding what they want to do with the money. Since these characteristics are prominently observed in Middle Eastern countries, they have earned the title of a “rentier state.” Concisely, a rentier state can be simplified as a state that depends on oil rent to sustain a major chunk of its economy and also use it as government revenues. It was later given by Luciani, who said that any country whose economic dependency on oil is up to 40 percent or more would get classified as a rentier state (Luciani, 1990). Based on this number, the following countries are rentier states: “Kuwait (88%); Qatar (87%); UAE (84%); Oman (81%); Saudi Arabia (80%); Bahrain (59%); Libya (58%); Iraq (n/a); Iran (55%); Algeria (53%); Yemen (46%)” (Herb, 2005).

Economic, Political and Social Implications of Rentier States

Rentier states are heavily dependent on oil and they accumulate profits earned from oil. Their economic framework does not include the usual modes of investment, interest, market prices, or various industries as in other countries. Hence, their growth and development, in comparison, gets affected. These arguments have been presented in the literature on rentier states. Mahdavy (1970) has talked about some of the economic effects in his article. Oil is a commodity that almost the entire world needs in one way of the other. So, of course, there is a significant inflow of money that goes into rentier states. It is much faster-paced than the revenue influx in mainstream economies where it is much smaller and slower. Now, this should seem to be a good thing for the oil states, but research and study suggest that this damages the economy and its steady development. Oil revenues have little to do with the local community and economy. They go directly to the state.  The oil industries do not contribute much to the domestic sector. It also builds up a façade of productivity and prosperity which surrounds a rentier state. The more accurate depiction includes development on surface level. Other sectors in the economy, and various other industries often go neglected (Altunisik, 2014).

Similarly, there are different political and social implications in a rentier state as well.Many of the most popular economic frameworks try and promote the idea of keeping the state intervention to a minimum in the economy of the country. Their involvement is to encourage the growth of the economy through policies and investments. Otherwise, it is highly dependent on market functions. The other role the government plays is to ensure welfare and security for the local population. Democratic governments also idealize autonomy and liberty for the citizens. All these values and concepts get contradicted inside a rentier state. The negation starts from the fact that the state is in direct control of the country’s most significant revenue resource, and also the sole bearer of all its fruits. So, the state automatically becomes very centralized and plays a vital role in the economy of the country (Luciani, 1987). However, there isn’t much the oil-state does for the local economy except for distributing the rent amongst them. They are majorly responsible for public goods and services and also are the main employers (Anderson, 1987). Rentier states still, however, do lack the proper frameworks for administration. Since they do not take taxes, most of their institutions, such as, fiscal, legal, or research institutions, are not well developed (Chaudry, 1989). So, rentier states are also “institutionally weak” (Altunisik, 2014).

The political and social structure of rentier states also impacts the general mindset of the people living in them. They have been conditioned over the years to accept these ways of things.They are not very concerned about development,in terms of industries and job markets, rather than what they can access from the state’s rent money. On the other hand, many outsiders are working in rentier states as well who come seeking jobs. The state does not give them the same incentives that are given to the natives, despite of their higher level of productivity and hard work in comparison. There are vast levels of disparities between them. Migrants don’t even get citizenship in Middle Eastern countries regardless of the decades they spend there and the services they do. It also impacts the unity and class system inside rentier states. The community gets divided as per ethnicities, tribes, or religion (Delacroix, 1980). Oil rents get given out in the forms of “employment, social welfare benefits, subsidies, and interest-free loans” or as a form of annual payments as is done in some Gulf monarchies (Altunisik, 2014).

The oil money has resulted in immense power in the hands of the rentier states’ leaders. It has helped them make powerful relationships and alliances with other influential groups, and similarly, it has also allowed them to downplay opposing powerful groups. Examples from Saudi Arab, Libya, and Iran can be given here. Oil revenues enabled the Nejdi al-Saud family to undermine and ignore the strength of the Hijazi group of merchants, which were a power threat to the state (Chaudry,1994). Furthermore, Libya was able to reform its political, economic, and social structure during the era of Qaddafi being a rentier state as well (Altunisik, 1994).

Similarly, the shah of Iran was able to dominate the “landlords and ulemas” due to the increase in oil revenues collected. It automatically shifted Iran’s power base paradigm. Homogenous cases of power are seen in other Middle Eastern countries such as Qatar and Kuwait as well. The bottom line, it has become the common conception around the globe that having oil resources means having power, and it is what the world is after, specifically the United States. Rentier states themselves function through this game of power influence. It further reinstates the fact that the weight of democracy or liberalization in these states is close to negligible. They are significantly bent towards authoritarianism (Luciani, 1987). There is hardly any political participation by locals in a rentier state (Anderson, 1987), which further indicates why the governments do not care for societal concerns or demands (Altunisik, 2014).

Limitations of a Rentier State and the Rentier State Theory

The rentier state theory, as seen above, aims to give a generalized, common framework that could fit in all the states that we know as rentier states. It tries to consolidate their similarities. We can also see from the literature presented above that rentier states have certain benefits and specific cons as well. As time has progressed and more research has surfaced, the rentier state theory has faced more criticism than applause. A prominent weakness in the theory is that it does not take into account, effectively, the differences between individual Middle Eastern countries (Altunisik, 1994).

Another problem with the theory is that it was based on previous studies and collection of histories.  It did not involve any quantitative or qualitative analysis of the earlier times or for the times to come. It also does not account for, of course, the changing climate of the world’s energy geopolitics. The advancements that were made in terms of technology got neglected as well. Scholars have also criticized the link between the theory and the concept of authoritarianism (Ohrulik,1999).  The logic behind taxation and distributive policies also remain ambiguous. They say that the two do not relate with each other unanimously (Altunisik, 2014). It should be noted that taxation has begun in some aspects, and increased in the rentier states.

These criticisms led to the need for the rethinking of the rentier theory model and to make some sound changes in it. First of all, new studies focused on including the effects of the individual state policies on their own political, and economic situation rather than considering them all as one. Via in-depth studies of these states separately, it was also revealed that they differed in terms of their oil-related histories, and social and political structures (Altunisik, 2014). Their historical accounts have greatly influenced the coalitions and social frameworks these states have formed over the years (Crystal, 1995). There also came an oil bust in the 1980s which did not go accounted for in the theory (Chaudry,1994). This downfall in prices of oil leads to the question of the sustainability of the rentier states. In times that the oil will not be sufficient to generate the expected and desired amount of revenue, what fiscal policies would these states need to adopt? It was a question of how the financial crisis would get controlled to maintain stability, which previously depended on the distribution of oil rents.

The economic conditions of rentier states deteriorated with the slump in oil prices. Since the states had not previously worked on other viable sources of revenue to meet the demands, they faced complications. There was a risk for social unrest as people would no longer be able to get the same chunk of oil rent, but the states could not afford this either because this would lead to their opposers and rivals to believe that the states’ power had been compromised. Sure enough, Saudi Arab and Libya weren’t able to successfully control the crisis. On the other hand, Kuwait, having well-organized business institutions as well, was able to handle the crisis effectively. In fact, for businesses in this gulf state, this was an opportunity to grow and develop further and restructure the economic framework of the country. It also brought political stability as the state now depended on these business elites for the power image in front of opposing groups (Karl, 1997). Similar events followed in Qatar as well despite a weaker business system initially.

The banking and financial sector of rentier states or Middle Eastern countries is also quite flawed. Once again, it is highly influenced by the state, and even private banks are discretely working as state-disguised institutions. Secondly, of course, the fluctuations in oil prices and the oil market directly impact the financial sector as well. The function of financial markets is to facilitate consumption and provide investment to businesses. Still, they do not assume this role at all in rentier states, which makes one question their existence in such an environment in the first place. All the handles of the financial sector are in the hands of the regime, and it has suffered from a severe lack of reform in comparison to the rest of the world (Creane et al., 2003). It shows a sustained disparity between the political economy and society, and it is also one of the main characteristics of a rentier state. They discourage reforms and liberalization since the state is adamant about safeguarding its own interests only.

Over the years leading to present times, the rentier theory has become limited mainly to the lack of democracy in the Middle Eastern states and their persistence towards authoritarianism. Even though the world has seen several waves of democratization, but Middle Eastern countries continue to resist it (Brynen, n.d.). It was stated by academics such as Michael Ross that that “the oil-impedes-democracy claim is both valid and statistically robust; oil does hurt democracy” (Ross, 2001). There was also stagnation in social growth, development, and modernization of the state. All these factors become a hindrance in the democratizing of a nation.

Conversely, some studies put forward the argument that the rentier states have wisely used the oil wealth for the betterment of the society and economy, and the criticisms made on their methods are exaggerated for the worse parts (Altunisik, 2014). Furthermore, Benjamin Smith (2004) also emphasized that even though Middle Eastern states faced economic and political shortcomings during oil price slumps, it did not shatter the overall survival of the states in the long term. However, these counter-arguments don’t do much to justify the incompetency of the rentier state theory.

The rentier state theory is also not sufficient to stand alone for all Arab or Middle Eastern countries. Countries such as Syria, Egypt, or Jordan simply do not fit in the same paradigm. While all Middle Eastern countries lack most natural resources, these three lack even oil. It means they do not benefit like other rentier states. Neither do they have that sort of wealth. And yet they maintain the same outlook towards how the state runs, meaning that other institutions, including democracy, are not developed. They want to keep the same kind of political and economic structure as their oil-rich neighbors (Malik, 2017).These countries are known as MENA economies, which stand for the Middle East and North Africa. They have faced war as well, which has led to further downfall in political and economic stability and growth (The World Bank, 2017).

The MENA states still, however, have been able to accumulate some revenue through three primary sources, which are “aid, remittances, and rents from government regulations” (Malik, 2017). They get foreign aid way more than other needy and low-income countries around the globe, which is peculiar. Even countries with sufficient oil resources such as Iran and Bahrain got to share foreign aid. It is suggested that this because of their strategic position. It shows how geopolitics is in play, which is beyond what rentier state theory can explain. These countries also have many expatriates working and earning.  The state receives a massive portion of its GDP via remittances from these expatriates. For example, Jordan and Lebanon’s 20% GDP consists of these remittances (Ahmad, 2012). Remittances help relieve some of the political pressures off of the government of these states, making them less concerned about the public and increasing unemployment (Malik, 2017). All this makes the relevance of the rentier state theory loom larger as a question mark.

Furthermore, remittances also play a part in slowing down long-term economic growth (Rajan and Subramanian, 2011). They act as a protective shield along with the incoming foreign aid, weakening the prospects for economic reforms. Last but not least, the third resource is government rents. All these states are centralized with their governments at the centre of everything, the same as all rentier states. It gives birth to monopolistic type of behaviour where prices are controlled and in hands of the government rather than the market. The states also place and face trade barriers, which further hinders economic growth. Furthermore, there is not much fiscal monitoring in these countries, and elites often abuse their influence to accumulate these rents (Malik, 2017).

From the above analysis, it can be seen that the rentier state theory that revolves around only one main component of the Middle Eastern countries, that is, oil, is not sufficient to explain the rest of the complexities these countries face. Many would disagree, that oil resource is the only lethal element to the political and economic growth of Middle Eastern countries. It is important to note that rich Middle Eastern states do not only have a market for oil but also a market for capital. They provide monetary funds and investments to foreign countries as a geopolitical measure, which helps them to sustain their image as being influential. They also finance the less-richer Middle Eastern states such as Egypt, Jordan, and Yemen as the last straw in these countries’ financial struggles.

Similarly, a lot of money also goes to military-related investments, since terrorist organizations in the Middle East are active, and this investment is on the rise. These terrorist groups present a threat to the rest of the world as well. Hence, the need for Middle Eastern states to have an authoritarian approach in the broader geopolitical framework arises (Malik, 2017). The rent system in the middle east is the main reason behind its lack of political and economic growth and reform, and it is, at the same time, challenging to remove as the people have become dependent and used-to it. The authoritarian regimes continue to last despite occasional pitfalls. A lot is at play here, as discussed earlier as well. Many elite and influential groups and coalitions that benefit fromMiddle Eastern methods, and they also play a role in the global geopolitics, would not want this framework to change.

When we look at the current times, we can also observe how some of the states that are so-called rentier or oil-dependent as part of the rentier state theory are not so much of that anymore. A highly applicable example of this is Dubai, which is the largest Emirate from the United Arab Emirates. This state has become one of the most popular tourist spots and a business hub. It is highly diversified, and much away from oil as a primary source of revenue for the economy. It is also highly developed and technologically well-equipped. The state authorities there promote privatization, and the rentier mindset has drastically decreased over there. Hence, this brings up the question of whether or not UAE qualifies as a pure rentier state and whether the rentier state theory is sufficient to describe its political conditions (Zicchieri, 2016). Herb (2005) presents further shortcomings in the theory as well. First of all, wealth in the rentier states is not only a result of oil-rents, as we see from the Dubai example, so it is wrong to assume that. So, wealth cannot be broadly framed to be responsible for the failure of the formation of democracy in Middle Eastern States.

Another significant observation is that the political structure of Middle Eastern states such as the UAE is highly influenced by their histories. The people have been used-to for hundreds of years to form tribal links and to have communal unities while being ruled by one ruler. It is not just a result of rentier-ism. The social constructs in these states have modernized over the years slowly to adjust, but they can still be linked back to their historical origins. Furthermore, the rentier state theory also does not include the domestic economy of the states and hence, also does not have space for the current non-rent economic changes and developments taking place over there. These developments are perhaps most prominent in the UAE, which is also working towards diversifying its economy and taking it away from oil dependency (Hvidt, 2013), promoting the private sector (Toledo, 2013). The rentier state theory ignores all these advancements. While many other Middle Eastern countries may not have reached the level of UAE and may seem to conform to the theory more, the argument still cannot be forgone because UAE is also a significant part of the Middle East.

The only thing the rentier theory focuses on, and deems responsible for the social, economic, and political conditions of the Middle Eastern countries, is oil-rents or other rents. It does not take into account the increased participation of foreign organizations in the policymaking processes and all the geopolitics that is involved. So, RST fails to provide reasoning’s for civil unrest, or its risks, in different states as it cannot explain geopolitical, foreign relations. RST also ignores merchants and business elites that are becoming increasingly influential in the Middle Eastern countries unlike before, making it no longer relevant and consistent with the recent changes in the political-economic structure.

Conclusion

Conclusively, it can be said that the rentier state theory is indeed not sufficient to explain the development and growth of the politics and economy in the Middle Eastern countries. While it may be relevant in the past because its entire premise is history and the states’ availability of oil as a source of revenue, in the present times, a lot more comes into play. Middle Eastern countries have evolved ever since the theory came into existence by a great deal. And The global paradigm of power is shifting as well, now more than ever and geopolitics plays a vital role in that. But the rentier state theory is not much concerned with geopolitics. While we do not have to discard the theory altogether, it is safe to say that its relevance has decreased significantly today and for the future. Beblawi (1987) noted that “there is no such thing as a pure rentier economy.”

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Belbin’s Theory on management applications