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Extractive Growth, Saudi Style

In the last two blog posts (here and here) we discussed the emergence of extractive growth in the United Arab Emirates. The United Arab Emirates is of course not the only country in the Gulf that has achieved some growth under extractive institutions. Saudi Arabia is more important not only because of its dominant role in the oil market but also because of its more central role in the international events of the last decades.

There are several parallels but also important differences between the United Arab Emirates and Saudi Arabia. Both have achieved rapid growth thanks to oil, even if the United Arab Emirates is significantly richer, with almost twice the income per capita of Saudi Arabia. In both cases, the ruling families have been the main beneficiaries of this growth; in both cases, they have used the oil wealth in part to placate the population; and in both cases, the presence of a significant migrant population has been useful not only economically as a source of cheap labor but also politically in reducing any demands towards more inclusive institutions. But political dynamics have been quite different. Saudi Arabia has been much more repressive, and religion plays a more defining role both in the regime’s repression of basic freedoms, and at first paradoxically, in the few political challenges that have been articulated against it. The origins of these differences lie largely in Saudi history.

The foundations of the modern Saudi state were forged in the early 18th century when the upstart ruler of the small town of Dariyah near Riyadh, Muhammed Ibn Saud, entered into an alliance with Muhammed Ibn Abdul Wahhab, a religious leader with a particularly hard-line and a zealous following. Ibn Abdul Wahhab decried the departure from the purity of the Prophet and the caliphs, and advocated not only religious purity but also fighting the “infidels” which in this case included Muslims that were insufficiently pure according to Ibn Abdul Wahhab. The resulting “Wahhabi alliance” involved Muhammed Ibn Abdul Wahhab and his band of devoted followers supporting Muhammed Ibn Saud’s government and plans for increasing his influence in the Arabian Peninsula. In return, Ibn Saud would propagate this particular brand of religious fanaticism. It served Ibn Saud well, and by the beginning of the 19th century, the Wahhabi alliance that enabled Ibn Saud to dominate much of the Arabian Peninsula. At some level this is no different than other examples of rulers strategically using religion for state centralization, which we discussed here. But the ready availability of this religious force probably stacked the cards against the development of even the most embryonic inclusive institutions in the Arabian Peninsula, paving the way for a particularly authoritarian and repressive version of state centralization.

The Saudi expansion of the 18th century was finally checked and reversed when the ruler of Egypt, Mehmet Ali intervened. But the Wahhabi alliance was revived in the early 20th century when Abdul Aziz Ibn Saud took up the mantle. Using the power vacuum in the Arabian Peninsula resulting from the weakening of the Ottoman control over the area, he started a second Saudi expansion. Supporting this were again bands of devoted followers of Ibn Abdul Wahhab, called “brothers” (Ikhwan). These brothers would become Abdul Aziz Ibn Saud’s ruthless foot soldiers, turning their religious fanaticism into military might. Their value to Abdul Aziz Ibn Saud is explained by one of his advisers, Hafiz Wahba, as follows (quoted in Malise Ruthven, A Fury For God, p, 137):

I have seen them hurl themselves on their enemies utterly fearless of death, not caring how many full, advancing rank upon rank with only one desire — the defeat and annihilation of the enemy. They normally give no quarter, sparing neither boys nor old man, veritable messengers of death from whose grasp no one escapes.

It is this alliance that creates the repressive nature of the Saudi regime today and also its myriad of internal contradictions. For one, for the Saudi dynasty to dominate society, it would need to make the brothers and their religious zeal subservient to the Saudi state; not an easy feat. The conflict first broke out in 1929, when the brothers decided that Abdul Aziz Ibn Saud’s regime was not sufficiently pure, ultimately leading to the slaughter of hundreds of brothers by machine gun at Sibillah. But this did not end the Saudi dynasty’s manipulation of Wahhabism and religion. As oil came online, dominating and controlling Saudi society became even more important, and uncompromising religious fanaticism became even more useful to the Sauds. For all practical purposes, religion in Saudi Arabia is state controlled.

However, along the lines of the “obscurantist deadlock” idea we discussed here, the Saudi domination of religion and its repression of society under the banner of religious purity did not kill dissent but transformed it. Dissent would then take the only form allowed in Saudi society, where non-religious life was very severely constricted: an even more extreme form of Wahhabism, as unfortunately illustrated by the most famous of dissenters of Saudi Arabia, Juhayman, “the angry face,” whose two-week siege of the Grand Mosque led to hundreds of deaths in 1979, and Osama bin Laden.


Extractive Growth in the United Arab Emirates  

In the last blog post we showed how from 1928 until the 1960s despite the ever increasing flow of oil, the Al-Nahyan family, in the shape of Sheik Shakhbut bin Sultan Al-Nahyan, kept the country resolutely underdeveloped.

But not all parts of the Al-Nahyan family agreed with this choice. In the last decade of his reign, various factions contemplated what they might be able to do with the oil money. Moreover, it was patronage and resources which cemented the power of the Al-Nahyan’s as the leading dynasty of the country, and the unity of the Bani Yas started being threatened by the lack of resources flowing to the families comprising it. Things came to a head in 1966 and Shakhbut was ousted and pushed into exile by his own younger brother Zayed bin Sultan Al-Nahyan. Afraid of the unsustainability of his brother’s model of development, Zayed launched a major program of economic modernization and infrastructure building, the remarkable results of which you can see today in Abu Dhabi.

Zayed attempted to reconcile modernization with political stability with a particularly clever strategy. At the founding of the state in Abu Dhabi in the 18th century, the Al-Nahyan’s had cemented their leadership amongst the 30 odd groupings of the Bani Yas by an elaborate system of patronage. In the 19th century this was fueled by their control over the lucrative pearl industry of the Persian Gulf and payments from the British in exchange for help in eradicating piracy. It was this system of patronage which the policies of Shakhbut had jeopardized by the 1960s. What Zayed did was to use the oil money to build the institutions of a modern state and graft them on top of the traditional system of patronage. While before the different sections of the Bani Yas got patronage, now they got ministries, or parastatals, or highly lucrative funds in charge of investing the rents from oil production. The Abu Dhabi Investment Council (ADIC), a huge sovereign wealth fund started in 1977, was given primarily to the Suwdan section of the Bani Yas to dominate. Another such fund, the Mubadala Development Corporation, was given to the Al-Bu Mahair section to control.

Throughout the state, the old tribal alliances and loyalties predict appointment and authority. Take the Al-Mazrui, perhaps the most populous of the Bani Yas sections. After the 1960s the Mazari, just like the Suwdan, occupied many important positions in the state. Yousef bin Omar Al-Mazrui was the federal minister (for the UEA) of petroleum until 1994 when he was promoted to the even more important Supreme Petroleum Council. Ghanim bin Faris Al-Mazrui was secretary general of the ADIC. Other influential members of the family were made part of the Federal National Council (the consultative parliament of the UAE), director general of Abu Dhabi National Oil Company, the list goes on. Then there is Al-Qubaisi section of the Bani Yas. They have provided members for the Abu Dhabi executive council, a federal minister of state for cabinet affairs, a director of the department of civil defense and a chairman of the Abu Dhabi municipality.

The experience of Abu Dhabi, and indeed of the UAE in which Abu Dhabi plays a dominant role (for example entirely paying for the UAE army), is another example of what we call in Why Nations Fail extractive growth. The Al-Nahyan family dominates politics and the economy (since the state dominates the economy). There is no doubt that political institutions are extractive, even if economic institutions have become less extractive since 1966. Nevertheless, the Al-Nahyan family has managed to generate rapid economic growth for 30 years while maintaining its power by brilliantly adapting the traditional political system to a modern, at least in outward appearance, state.

Our framework in Why Nations Fails suggests that this sort of growth will ultimately become unsustainable — growth in Abu Dhabi and in the Emirates cannot continue unless the political institutions become more inclusive. But there are several challenges to such a political transition. The UAE has many distinct facets. For example the fact that only a minority of the people living there are citizens, while most are guest workers, may undermine the demand for political change by the citizens because they fear simultaneously empowering the foreigners.


The Strange Tale of Sheik Shakhbut  

Nestling at the Southern end of the Persian Gulf is the modern nation of the United Arab Emirates (UAE). The UAE was formed in 1971 from the amalgamation of seven different independent sheikdoms which had previously been part of a British protectorate called the Trucial States. The largest of these seven are Abu Dhabi and Dubai. Today the UAE is an oil fueled development success with astonishing urban development in Abu Dhabi and Dubai, the latter currently boasting the world’s tallest building. You can see signs of the remarkable transformation in the city state in the last 50 years in this picture.

But this was not always the case, even after the oil came on stream. Abu Dhabi has been run since the 18th century by the Al-Nahyan family, the dominant family in a loose confederation of families known as the Bani Yas. In 1928, Shakhbut bin Sultan Al-Nahyan inherited the title of Sheikh. Serious oil prospecting had begun in the Persian Gulf in the 1920s, but Shakhbut resisted giving any concession until 1939. Even after the oil and oil money began to flow, he resisted spending much of it on his kingdom. In the early 1950s he banned all new construction, including roads and required that anyone who wanted to build anything had to ask for his personal permission, which he rarely gave. He didn’t believe in schools either. In the early 1950s, the historian Christopher Davidson reports in his book Abu Dhabi: Oil and Beyond, Shakhbut was approached by the new ruler of Sharjah for advice concerning whether or not the sons of an exiled man should be permitted to remain in a school in Sharjah, Davidson notes (p. 35):

Shakhbut bragged that such a complication would never arise in Abu Dhabi because there was not even a single school.

When finally a school was opened in 1958, the ruler refused to allow any foreign teachers and banned all of the teaching materials in use in Dubai and Sharjah. The school had to close. When it re-opened in 1961, the teachers could only teach subjects related to Abu Dhabi; international history and geography were banned. In the mid 1960s the British agent for the Trucial States remarked (quoted in Davidson, p. 45):

it could hardly seem stranger that this potentially oil-rich town now consists of just barasti huts, a broken down market … and a few buildings out up by the oil company.

It certainly would seem strange to a development economist. Why not allow roads? Schools? But readers of Why Nations Fail and this blog will recognize that in fact neither the outcome nor the motivation was strange. Sheikh Shakhbut, like many autocrats before him, was afraid that promoting development would cause political instability and undermine the grip of the Al-Nahyan family on power. As Davidson himself notes (p. 32), Shakhbut

feared that any rapid oil-financed development would have far reaching socio-cultural consequences for Abu Dhabi.


Is Europe Saved?

September has been a good month for the euro-zone. Mario Draghi committed the ECB to buy unlimited amounts of sovereign bonds of troubled euro-zone countries. There are realistic plans for joint banking supervision. The German constitutional court backed the European Stability Mechanism (albeit with some reservations). And Dutch elections reaffirmed voters’ support for pro-Europe parties. There is a collective sigh of relief in Europe and around the world. European markets are rallying, and Spanish bond yields have already dropped and are expected to drop further in another auction on September 20.

So is Europe saved?

We think not. The problems underlying the European crisis were institutional. What we are seeing now are mostly short-term fixes, not true solutions to these institutional problems.

The roots of the crisis lie in the difficulty of operating a currency union without centralized fiscal authority. But that’s not all. The problem was made worse by implicit guarantees to markets concerning the sovereign debt of all euro-zone countries, which enabled Greece, Italy, Portugal and Spain to borrow at sharply lower rates than before. This then enabled the dysfunctional political economy in Greece, Italy and Portugal (and to some degree in Spain) to persist with borrowed money and transfers.

This is not to deny the role of the global recession in triggering the fiscal problems or the fear of contagion that increased the borrowing costs of Italy and Spain, plunging these countries into a more severe macroeconomic crisis. It is certainly not to deny that austerity measures have been counterproductive or that with the ECB balance sheet behind them, these countries and their banks will have some breathing room.

But the point remains that Europe’s underlying problems cannot be tackled by short-term fixes. For the euro to survive and contribute to European economic prosperity in the medium term, Europe needs to follow the example of the United States as it transitioned from the Articles of Confederation of 1781 to the U.S. Constitution, which entailed strengthening the currency union with debt renegotiation (with the federal government assuming state liabilities) and more importantly, meaningful fiscal centralization.

And yet, there is no realistic plan for true fiscal centralization in Europe. Fiscal centralization doesn’t just mean better monitoring Greece’s austerity plans. It means a European organization with the power to set taxes and harmonize labor, product and credit market institutions. But this is not possible without some centralization of political and military power. It was crucial that with the U.S. Constitution, political and military power shifted to the federal government.

This is not on the cards for Europe, not least because Greece or France or Spain wouldn’t accept the shift of economic, political and military power to Germany that this would entail. So for the time being, we have to make do with short-term fixes, and in all likelihood, Europe isn’t saved just yet.


Sex and Repression  

Lots of interesting details in Barbara Demick’s Nothing to Envy: Ordinary Lives in North Korea about how the highly repressive, extractive regime in North Korea works. Here is one that is fascinating: all sorts of sexual activity, including dating and kissing, are highly repressed in North Korea (Most marriages are arranged by families or by communist party officials and grandees). Most people would not have had a boyfriend or girlfriend before marriage, and unmarried men and women cannot be seen together. State officials and defectors to the South claim that there is no premarital sex in North Korea. And all this despite the fact that Kim Il-Sung discouraged early marriages, declaring that men should marry at 30 and women at 28. The state even regulates women’s hairstyles and length of their skirts. And this of course sharply contrasts with the much more permissive attitudes towards dating, sex and marriage in South Korea.

Perhaps there is a pattern here. Sex — of course for regular people not the elite and their thugs —was highly repressed and regulated in Mao’s China, Stalin’s Soviet Union, and Nazi Germany. Why would this be?

Could it be that authoritarian regimes cannot pick and choose which freedoms to recognize? Could it be that you cannot give people sexual freedom and then totally repress their political and civil rights?