Every economic activity is based on two components: effort and reward. However, rent is the income derived from possessions. Rentier is the individual, entity, or collectivity that extracts the reward from renting his possession instead of actively participating in economic activity.
A rentier state derives its income exclusively/predominantly from external rent; even though every economy is partly based on generation rent through gifts of nature. In a rentier economy, 2-3% of the population– aka rentier class – engages in generation of rent; while majority is involved in its distribution and utilization. Government is generally the main recipient of rent and distributes it among the populace through large bureaucracies and domestic allies – the local elites who loyalties are bought through royal bestowments. States becomes the source of public goods like education, health, employment, infrastructure etc. and private favors like government contracts, lands etc. Hence, the business of government usually takes the form of patrimonialism and clientelism. Often the borders between private and public sector gets blurred as ruling intelligentsia and bureaucracy engage in businesses based on the capital supplied by rent. Government takes the role of the prime mover of the economy and the ultimate employer. However, rent is not only exclusive to the rentier state, but second order rentiers also emerge in the long run.
Accordingly, citizenship becomes a source of economic benefit and yet another entity to rent. Foreign investors and workers are required to operate through a trustee or kafil. Some also engage in real estate for the state is always willing to buy land as favor to citizens and often the exaggerated prices lead to stock market speculations. The exclusive economic privileges and no incentive to work create a productivity gap that is filled by expatriates who despite of being the most productive inhabitants enjoy minimum civil rights and are often excluded from the body politic. Such situation creates rentier mentality; people have no incentives to work and don’t engage in productive activities – that are mainly carried out by the guest workers. This mentality also seeps into the region and even the non-oil rich states exhibit the same illness with workers working in the rentier states and sending remittances while their families enjoy a life of relative luxury without engaging in any productive activity at home.
Whole Middle East is somehow dependent on rent:
- More than half of the government’s revenues in Saudi Arabia, Bahrain, the United Arab Emirates, Oman, Kuwait, Qatar, and Libya have, at times, come from the sale of oil.
- The governments of Jordan, Syria, and Egypt variously earn large locational rents from payments for pipeline crossings, transit fees, and passage through the Suez Canal.
- Workers’ remittances have been an important source of foreign exchange in Egypt, Yemen, Syria, Lebanon, Tunisia, Algeria, and Morocco, although these rents go (at least initially) to private actors, not the state.
- The foreign aid that flows to Israel, Egypt, and Jordan may also be considered a type of economic rent. Inter-Arab aid is also aimed at avoiding troubles and forging alliances.
Some suggest enormous oil-wealth is hindering democracy in the oil rich Middle East. However, level of political participation generally increases with national wealth. Then why don’t we see demands for participatory government increasing in the Middle East? It is due to:
- Rentier effect: resource-rich governments use low tax rates and patronage to relieve pressures for greater accountability. The spending effect, taxation effect, prevention of opposition group formation through deliberate institutional design hindering direct participation as well as the patronage of powerful families reduce the pressure for democratization.
- Repression effect: resource wealth retards democratization by enabling governments to boost their funding for internal security. Governments maintain strong security forces to protect the domestic status quo for conflict with the population groups concentrated in resources rich area is always a possibility, and also to counter the external threats. Role of mukhabarat in repression of populace is prominent.
- Modernization effect: growth based on the export of oil fails to bring about the social and cultural changes like increased social-political awareness due to high level of education and occupational specialization tend to produce democratic government.
How durable are the rentier states? Not much. The aforementioned political arrangements last as long as the oil/resource rent is pumping in. Depleting oil reserves coupled with plummeting prices in international markets and a global race to switch to alternative forms of energy may soon bring the rentier economies to their knees as they will struggle to supply the enormous levels of public goods and maintain a repressive apparatus at home. Not to mention the poorly developed political institutions, absence of formal rules of succession, and inexperience of running a competitive economy will acerbate the problems created by the demise of rent based economic system.