While East Asia’s economic success has soared in the past three decades, the Arab world has lagged behind. The University of Singapore’s Dr Ali Kadri takes a closer look at this frequent comparison and explores where things went wrong for Arab economies. “The reason for the poor Arab developmental showing,” he argues, “is that the citizens in the Arab world had been denied the right to make a choice and to materialise their ambitions through the state.”
By Dr Ali Kadri
Compared to the economic performance of East Asian countries, the poor performance of the Arab world is remarkable. Since 1980, the bulk of the Arab economies experienced a less than one percent yearly average growth of real GDP per capita, one of the highest income inequality and unemployment rates globally, the lowest rates of investment of all regions and, plainly, the highest rate of armed conflict. The developmental comparative with East Asia’s impressive economic results in the last three decades always appears to go in the direction of how successful economies managed to question and outmanoeuvre the neoliberal recipe. The East Asian performance is said to offer an alternative to the existing model, one grounded in the tangible economic success of a number of economies and, in some way, a model to emulate. The very emergence of the ‘East Asian Model’ has broadened the scope for thinking about developmental policies and the necessity for some degree of dirigisme.
The performance of many regions was contrasted with this triumphal story, including, that of the Arab region. It is doubtful, however, that this particular comparison is useful. Granted, this is not because the course of history is incapable of replication or because ‘all comparisons are lame.’ Nevertheless, the Arab world and East Asia do represent two cases of diametrically divergent social and historical processes. These regions were integrated with the global economy via two differing modes of capital accumulation. East Asia was linked to the global economy via the market expansion or commodity realisation route, while accumulation in the Arab world proceeds by encroachment and dislocation resulting from control over oil. These modes of integration contain the kernel of the whole developmental experience of the two regions.
In tangible terms, reaping the benefits of globalisation depends on the mode of integration with the global economy, which, in turn, depends on the particular set of social, macro, trade and financial policies. Judging by the performance record so far, the policies of the Arab region were inadequate for capturing gains from the global trading system. A brief comparative with the more successful South East Asia would illustrate the point:
- In social policies, relying on an industrial mode of development that requires healthier and more educated people in synchronisation with the technological base, East Asia emphasized investment in health and education, made the promotion of the knowledge and R&D central to their policies as opposed to being a residual outcome of fiscal balancing. Commerce, or buying from abroad and selling at home, makes up the bulk of value-added activity in the Arab world.
- In macro policies, East Asia directed investment into high productivity plants and equipment as opposed to the FIRE economies that came to characterise the Arab World (Finance, Insurance and Real Estate); employment generation became the key link in poverty alleviation.
- In trade, East Asia selectively protected nascent industries, especially those of science-related, value-added products; indirectly subsidised industry and promoted trade protocols with other nations for the purpose of promoting exports as opposed to the Arab World which relied on primary exports with little value-added.
- In finance, they deepened financial intermediation under the auspices of the state and screened foreign direct investment to ensure that it was related to market and efficiency seeking investment as opposed to the resource seeking FDI of the Arab World.
The immediate lessons to be drawn from the path of East Asia’s development are that macro policies need to be revamped to provide for more productive investment (plants and equipment), stronger public/private partnership, social policies integrated within the framework of the state and poverty alleviation central to macro policies. However, no two regions are alike. Unlike East Asia, the Arab World is a region in which conflict and institutional fragility weaken the security that would underwrite long term investment.
Hence, on the flip side, stronger security arrangements and institutional reforms allowing for transparency, accountability and broader participation from the citizenry assume the form of immediate policy measures capable of reversing the damming trend in the Arab World. Moreover, unlike many other developing countries, the Arab World is also a region of excess saving and, accordingly, it has a vantage point over some other developing countries to use money capital in the deployment of real resources. In view of their underdevelopment, Arab countries exhibit ample absorptive capacity and the injection of capital would translate into higher levels of output.
Unlike East Asia, however, the Arab World is a region that is poorly integrated, in terms of policy coordination, intra-regional trade (which is around 10 percent only), and intra-regional resource transfers and infrastructure. The Arab rent-grab mode thwarts regional integration. For the renties, wealth does not expand via integration with the rest of the Arab World whereas integration in East Asia, partly based on production sharing, is a cornerstone of development (the cost of transport in East Asia is minimal in comparison to the Arab World). One may assume that stronger Arab integration would allow for the retention of financial and human resources, of which the brain drain is the most visible symptom.
However, gauging Arab economic performance has little to do with how one or more factors. Initial endowments and resources differed between these two cases. A factorial explanation of the poor economic results of the Arab World, whether on account of the misallocation of resources, or whether oil was, in itself, a curse or not, would add little to understanding the problems of Arab underdevelopment. A proper explanation cannot be based on the premise that the Arab world started with more endowments than East Asia and performed miserably afterwards, which is the case. It also has little to do with the quality of initial endowment such as capital.
It does have something to do with the choice of policy, but it is not whether the policies adopted were demand-determined, price-determined, neoliberal or otherwise. The reason for the poor Arab developmental showing is that the citizens in the Arab world had been denied the right to make a choice and to materialise their ambitions through the state. Although there were more Arab initial endowments, these were not the endowments of Arab citizens, and that makes all the difference.
In order to analyse whether it is at all possible to adopt aspects of the East Asian model as a guide for development in the Arab world, one needs to delve deeper than the apparent similarities between these two regions. One ought to periodise the crucial historical bifurcation at which these two regions parted in terms of development success. Until 1977, real per capita income in the Arab world grew at about the same rate as that of East Asia. However, since then, East Asia’s per capita income grew at a rate that allowed its per capita income to triple by 1996, while on average per capita income in the Arab world stagnated (to be sure as of the early 1980s).
The retreat could not be fully attributable to oil prices or revenues since the latter declined once and started to rise again as of the mid-1980s. Successive Arab defeats, compradorial ruling elites, and oil control, altogether represent the context for the agent of development and the core reason for Arab retrogression. The state was gradually stripped of a sovereignty whose substance is citizen’s security, hence losing autonomy over policy. This eroded sovereignty and failure of the state to combine security and developmental objectives constituted a failure of development. The ‘East Asian Miracle’ was based, among other things, on the existence of states that enjoyed a certain level of autonomy in relation to imperial reach and that managed to guide the processes of structural transformation and economic growth in tandem with their security concerns. They industrialised and built national security simultaneously. A state guiding the economy and building security at various levels, including freedom from want for its citizens, was deemed to be the key to the economic successes of these economies.
Primarily, East Asian states were integrated with the global economy via the commodity realisation side of capital accumulation or, the doux-commerce of selling and buying in markets. Economic value was created by industrialisation, rising productivity and social investment in labour. The Arab dystopia, however, as exemplified by the recent uprisings, began with the ebbing of the Nasserite period, the successive Arab defeats from 1967, and the rise of the rent-grab social model in Arab history. The Arab state has since come to be reduced to a repressive apparatus that administers strategic resources at the behest of foreign powers.
Arab states are integrated into the global economy via the channels of oil and conflict. The creation of economic value in a rent-grab mode of integration may be denying Arab development, but at the same time, it appears to generate more economic value to financial capital by the prolonging conditions of conflict in some instances. Control of oil and the positioning of certain powers vis-à-vis others in the Arab region may bolster their status and their share of the global wealth circulation in the financial sphere. For instance, invading Iraq may have cost the US 3 trillion dollars or more; compounded and measured against Iraq’s oil output over the next twenty years, the US Iraq-campaign appears foolish in terms of cost to the US: the Iraq campaign costs the US much more than Iraqi GDP compounded over twenty years. But when the great financial crisis set in, it was the dollar that was sought after as the world reserve currency and financial recourses never ceased to flow to the US, in spite of the fact that the US appears to have lost in Iraq and the international financial crisis started in the US. The taxpaying, working population in the US did indeed incur heavy losses as a result of war funding, but at the same time US-led financial capital drew enormous rents from a weakened Iraqi state, money expansion and the losses of others as a result of US militarily presence in the Gulf. In short, the US-led global financial elite is still ahead.
There is more to this type of accumulation by positioning in strategic regions (accumulation by encroachment) than double-entry accounting. In explaining this process, it is best to revert to the reasons given for colonialism. The third world was colonised because the coloniser can cheapen its assets, price its currency and extract values at will. The superficial explanation in terms of what it would cost the US in dollar form to occupy another country is misleading in this case. To begin with, the US is not homogenous. There are social classes that benefit from the war and others that lose. There is more of an organic relationship between US financial capital and other circles of financial capital than there is between it and the majority of working people in the US and US capital. There are also strong ties between Arab working people during the uprising and American working people, especially, the class that initiated the Occupy Movement.
The deployment of the concept of the nation state in explaining development is only valid to the extent that the state expresses the interests of the majority of working people. Insofar as Arab economic development can be explained in relation to East Asia’s, a point of departure would be to investigate the transfer of cheapened-value, human and otherwise, from the Arab world by means of development by encroachment. One may follow up with an assessment of the power structure and the rising rate of appropriation through financialisation, which remain the broad questions that cannot be addressed satisfactorily in view of the fast pace of globalisation.
Dr Ali Kadri is a Senior Research Fellow at the National University of Singapore’s Middle East Institute. Kadri was visiting fellow in LSE’s Department of International Development and head of the Economic Analysis Section at the United Nations regional office for Western Asia. He is curently conducting research on the political economy of development in the Arab World.