A Note on Development Under Risk in the Arab World, Part 3

Ali Kadri

The Failure of Resource-Based and Finance-Based Development

(Part 3 in a Four-Part Series)

In every Arab summit since of the early 1980s, one could hear the refrain that development required diversification away from primary products. However, transforming countries into regional building-blocs to expand markets requires investment in intraregional infrastructure. Given the low rate of regional integration (intra-regional trade and investment are quite low, by global standards, UN 2011), moving away from oil appears to have never been a seriously pursued goal.

Other palpable indicators of diversification would include nurturing national industrialisation through protection and market expansion, and complementary development of physical and human capital. Both, however, exhibited declining rates. (Industrialisation, as measured by manufacturing, declined (UNIDO 2014), while structural unemployment rose (ILO 2014).) Once a merchant or extractive mode—as opposed to an industrial mode—takes hold of an economy, the extraction of surplus does not depend on value added. Exchange-based trade alone creates little added value—and entrepreneurs become economic introverts whose spoils arise from raising their income shares within their own fiefdoms.

When addressing the macro economy in this class of risk-exposed countries, questions have to be put differently. There is already the inherent weakness of being a colonially-bred late-developer. Naturally, colonialism blocks developing countries’ modernisation . Having an advantaged starting point and being secure—the opposite of what Arab countries are—matters in the race for development. Excluding the sparsely populated Gulf states, Arab countries represent less than half a percentage point of world purchasing power (WDI various years). In addition, the neoliberal resource-allocation mechanisms were like a tribute delivered to empire as a condition of surrender. In retrospect, the merchant class, in the wake of Arab defeats, used defeatism to drive an unconditional neoliberal policy agenda.

Consider why, when revenues from the export of primary commodities rise, the rate of retained savings dwindles afterwards, as in the aid paradox. The policy set-up is such that, as consumption (of the conspicuous type) rises, steadily drawing on national savings and reserves, less and less savings are left for investment in productive activity when oil revenues fall. The key idea is that an economic expansion or contraction could be triggered by an external shock; however, its magnitude and duration are determined by the adequacy of economic stabilisers, the sturdiness of the industrial constituents of growth, and the efficiency of institutions.

The prolonged economic stagnation in these countries (1 percent real GDP per capita growth on average between 1980 and 2010 (WDI various years)), therefore, raises more questions regarding the decision making processes behind macroeconomic outcomes: Why did governing structures, with foreknowledge that they had to diversify and support national industry, still fail persistently to implement such a project? The leading social forces, U.S.-led financial capital and the financially integrated local merchant class have become as one in their role in this regressive process. Austerity  reduces the share of wages everywhere, if by varying degrees, and boosts financial profit rates. Meanwhile, for lack of internationalist ideology and organisation, labour has become ever more divided.

For the sake of argument, let us follow another of the mainstream’s positions as applied to the Arab World—freeing the investment environment, which supposedly could have been a boon. In reality, the rates and quality of investment fell consistently over the neoliberal period (WDI various years). Without an investment guiding-institution and an insurance framework (covering war-like contingencies or force majeure losses), small, risky, and fragmented markets, presided over by a mercantilist-like class, channelled investment into short-gestating capital, speculative or non-productive activity, which in turn generated low productivity service-sector jobs.

Reducing public-sector job creation rate and investment did not better employment conditions. Alongside public-sector cuts, deindustrialisation reduced the rate of decent job creation far below the rate of new entrants into the labour force (UNIDO 2014). One has to keep in mind that population growth rates have tapered down steadily since 1960, so unemployment cannot be attributed to rising population levels—especially when macro policy since circa 1980 has lowered the rate of growth, changed its input composition, and lowered its reliance on upskilling national labour. Hence, rising unemployment and poverty were necessary outcomes of unconditional liberalisation.

The extractive and merchant bases of economic and political institutions are such that, where private and public interests meet, there is more antagonism than complementarity. Moreover, because of the material ties of the governing merchant class to international financial markets, as finance dictates lower labour shares through austerity, private interests exhibit a necrotrophic relationship with the public sector (they feed of it until it perishes). In a situation overdetermined by extra-national (militarised imperialism) and subordinately national (merchant class) forces, the end goal of the decision-making arrangement is not necessarily the well-being of the region.

Ironically, Milton Freidman’s “bang for the buck” appears to hold, but in reverse. Past social investment, market rigidities, and government intervention—sources that originate way back in the seventies and continue to impart welfare and a modicum of institutional integrity today—more than paid off their initial costs. All on its own, a social efficiency criterion under selective openness in which social investment and decent job creation was state-planned appears to have outperformed an economic efficiency criterion based on making prices “right” for growth. In short, the rigidities of the past contributed to enhancing health, education, productivity and the sort of self-reliance that boosted national security.

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