Economic reform in the Arab countries is not only about promoting development and prosperity. The economic systems are closely linked to the political systems and, in many cases, are intimately bound up with the regime in power. This is one factor behind the lack of progress towards genuine democracy.
Low taxes impede accountability
Taxes are never popular, and the higher the taxes are the more likely it is that people will demand a say in how the money is spent. High taxes, therefore, can act as a spur towards democracy and accountable government. Conversely, where taxes are low the pressure for democracy and accountability is likely to be less.
The Arab countries have notably low-tax economies. Among the Arab oil producers taxation accounted for only 5% of gross domestic product in 2002, rising to 17% in the non-oil countries – which is still very low compared with Germany (39%), Italy (41%) and Britain (37%).
Taking the Arab countries as a whole, oil provides most of the government revenue – though the figure fluctuates with oil prices. In 2001, oil provided 59% of Arab governments’ revenue, rising to 73% in 2006. Other non-tax revenue such as foreign aid and investment income accounted for a further 9% in 2006, with the result that only 18% of the governments’ revenue came from taxes. However, even this is deceptive because Arab governments rely heavily on indirect taxes – goods, services and customs duties – which are less likely than direct taxes to result in demands for accountability. Across the Arab countries, direct taxes provided just under 6% of revenue in 2006. As the Arab Human Development Report (2004) noted:
This type of tax structure also minimises the opportunity for citizens to protest against their government. Direct taxes, in particular income tax, are viewed as the category of tax that gives citizens most proof that they are contributing to the public purse. In Arab countries, the majority of tax receipts are derived from indirect sales and customs taxes hidden in the price … These types of tax typically conceal the direct link between tax payments and funding of the public purse, thus weakening public pressure for accountability.
At the same time, income tax revenue is negligible and tax evasion is on the rise, particularly among influential social groups, which, in principle, should shoulder the greatest burden in funding the public purse, if only as fair return for their greater share of power and wealth. Moreover, in Arab countries, the share of direct taxes appears to have dropped over time, as a result of increasing resort to indirect taxes [pp 152–3].
These financial arrangements can assist regime self-preservation in two ways. While low taxes help to relieve pressure for government accountability, high revenues from other sources (mostly oil) provide authoritarian regimes with the means to buy support. Having tasted the benefits of oil, Arabs have become increasingly aware of its negative effects. In 2005, in one of the Doha debates organised by the Qatar Foundation, a motion that “This house believes that oil has been more of a curse than a blessing for the Middle East” was carried by a large majority (63% to 37%). Speaking in favour of the motion, Hossein Askari (an Iranian-born professor at George Washington University and a former energy adviser to the Saudi government) told the audience:
Oil has been used as a crutch in this part of the world to avoid the reforms that are needed to create a vibrant private sector which would give jobs, productive jobs, and generate revenues for the government. Instead, oil has been used to create less productive government jobs and to give subsidies which are wasteful in order to buy loyalty amongst the peoples of the region.
Oil has also been used to buy very expensive and sophisticated weaponry, which has been used both internally and externally in the region … And of course in all of this, the western world has meddled … The western world has supported all manners of dictators in this part of the world – and it’s not because of your wonderful good looks – but it’s because of oil … Oil should have been and could have been a blessing. You don’t need a PhD to know that the more resources you have, you’re better off, but this oil has been mismanaged by the leaders and the governments of this part of the world, and the western world has also interfered and they also created problems. So on balance, what could have been has not been, and on balance, ladies and gentlemen, oil has been a curse.
Rentier states and regime survival
To a greater or lesser degree, most Arab countries can be described as rentier states because of their dependence on revenue from rents. “Rent” in this context means income from abroad which accrues mainly to the government and involves little productive work. Oil is the classic example but there are others: Egypt benefits in a similar way from the Suez canal and several of the poorer Arab countries receive substantial rent in the form of foreign aid.
Rents allow governments to shower largesse on the populace. This not only helps to keep them docile but simultaneously enhances the regime’s legitimacy and reinforces the image of the head of state as a father-provider to whom the public should show due gratitude. In oil-rich states the regime’s “generosity” can go to remarkable lengths: in Qatar, for example, it extends to providing university education abroad for any citizen who wants it. In the poorer Arab countries government hand-outs have traditionally focused on subsidising basic goods such as bread, sugar and fuel and the provision of non-essential government jobs – a practice that helps to keep down unemployment (another potential source of unrest) but also makes the employees and their families financially dependent on the regime.
In 2004, an extensive study of 107 developing countries through almost four decades found that “oil wealth is robustly associated with increased regime durability” and that “oil-rich states also have lower levels of social protest and suffer fewer civil wars than other developing countries”. The view that revenue from rents can help to perpetuate authoritarian regimes and thus impede progress towards democracy has widespread support among economists and political scientists.
However, this does not necessarily mean there is a direct causal connection between the two – otherwise periods of low oil prices would be catastrophic for the regimes that depend on oil. The 2004 study found that low oil prices did increase levels of social unrest, but not enough to seriously jeopardise the regimes – suggesting that “these regimes may have had robust social coalitions that went much deeper than the simple purchase of legitimacy” and that “they may have built institutions that could provide non-repressive responses to organised opposition”. In other words rents, in themselves, are not the only factor and their political value probably depends on how skilfully regimes make use of them.
HOLDING the reins of power allows Arab regimes to grant business privileges to themselves or others in exchange for support, or to restrict the business activities of those who are out of favour. “If you want to start a new company in Syria you’ve got to meet Rami,” the wife of a Syrian official said. “There’s a new private university starting up, but if I wanted to open a private school myself I would never get permission, even if I had the best teachers.” This is one of the main barriers to reform, she said – reform is a threat to those who have got rich through political connections.
The “Rami” who every budding entrepreneur in Syria must meet is Rami Makhlouf, a cousin of President Bashar, whose business interests include SyriaTel (the main mobile phone company), all the duty-free shops, various hotels, the Dunkin’ Donuts franchise and lots more besides. In 2008 the United States imposed sanctions on him on the grounds that he “improperly benefits from and aids the public corruption of Syrian regime officials”. A statement issued by the US Treasury said:
Rami Makhlouf is a powerful Syrian businessman who amassed his commercial empire by exploiting his relationships with Syrian regime members. Makhlouf has manipulated the Syrian judicial system and used Syrian intelligence officials to intimidate his business rivals. He employed these techniques when trying to acquire exclusive licences to represent foreign companies in Syria and to obtain contract awards ... Makhlouf has become a focal point of Syria’s telecommunications, commercial, oil, gas and banking sectors. Despite President Asad’s highly publicised anti-corruption campaigns, Makhlouf remains one of the primary centers of corruption in Syria.
Makhlouf’s influence with certain Syrian government officials has led to his being able to control the issuance of certain types of profitable commodities contracts. His close business associations with some Syrian cabinet ministers have enabled him to gain access to lucrative oil exploration and power plant projects. Makhlouf’s preferential access to Syrian economic sectors has led to complaints about him from members of the Syrian business community.
Benefiting from preferential access and using government contacts to intimidate rivals is not at all unusual among business figures associated with Arab regimes. Makhlouf’s misfortune was to be associated with a regime that happened to be targeted by the United States.
In Egypt, “the regime is businessmen,” Aida Saif al-Dawla, a political activist and professor of psychiatry, complained:
This is a time where you look at the political bureau of the ruling party and you look in the parliament, and if I asked you to divide them into politicians and businessmen, you wouldn’t be able to do it ...
Some of them became rich businessmen because of their association, some of them became associated because they are rich businessmen. If you are an Egyptian and you absolutely believe in private enterprise and free markets, and if you are not going to enter a territory which already has its tycoon, you will be more than welcome to join, and you will be invited to join the political bureau of the ruling party.
Source: What's Really Wrong with the Middle East, by Brian Whitaker (Saqi Books, 2009).