Chapter 3: Political Capacities and Capitalist Legacies

[ The state of reform | The reform of the state | The extractive capability | Accountability and Transparency | Capitalist Legacies | Typology of commercial banking structures | Prelininary conclusions about structural power | Challenges of Globalization | Table of Contents

A state is supposed to be strong and nimble to take full advantage of the accelerated flows of capital, goods, and information associated with the latest post Cold War spurt of globalization, but few states in the MENA seem to be in the running. Those with the biggest armies and police are still premised on a Soviet-American order that no longer exists. Algeria and Iraq are autodestructing, and Egypt and Syria maintain unsustainable public sectors. These four leading Arab states of the 1960s are hardly alone in the region in bearing the burdens of past economic achievements. Ten years after the collapse of the Berlin Wall the MENA still has more state enterprise than most former communist regimes. The latter are labelled "transition economies" in the international lexicon of political economy, whereas few of the MENA countries even rate inclusion in the burgeoning case studies of third world transitions to market economies.

Israel, Tunisia, Turkey, Jordan, and Morocco underwent substantial structural adjustment, however, and it is hardly coincidental that they, too, were the most active in forging agreements with the European Union and the World Trade Organization. They score highest on the intra-industry trade index and are apparently well positioned to further liberalize their trade and capital markets. Yet the early adjusters, like other states, are also constrained by their political and administrative capacities. This chapter therefore tries independently to compare the capacities of the MENA regimes to mobilize resources efficiently and effectively. Constraining or enhancing their abstract capacities, in addition to the scope and mix of reforms already undertaken, are the capitalist legacies which underpin their civil societies. Whether the legacy was "French," "German," or "Anglo-American" affects the structural power of a regime’s local capitalists. The strength of these legacies will be inferred in this chapter from an analysis of their respective commercial banking systems.

This overview of the relative capacities of MENA states and their respective markets to respond to globalization introduces empirical evidence upon which the typology that structures the remainder of the book is based. This typology groups these polities according to their structural features and the degree to which political competitiveness is institutionalized. The results of this categorization suggest support for the principal thesis of this book, which is that the rate of economic growth and integration into the world capitalist economy depends primarily upon any given country’s political capacities. In the MENA region such capacities are heavily indebted to the country’s colonial legacy and those capacities and legacies in turn are the main determinants of the structural power of capital in the nation state.

To foreshadow the typology in a nutshell: MENA polities consist of three major types--praetorian republics, monarchies and, lastly, democracies of varying degrees of institutionalized competitiveness. Each category is in turn comprised of sub-types. Praetorian republics are either "bunker" or "bully" states. In the former, political-military elites rule by coercion – from their metaphorical or, in some cases, actual bunkers -- because the state lacks autonomy from social formations, while in the latter the state enjoys some autonomy from social forces, whether traditional or modern. Praetorian republics ruled by "bullies" have some elements of both civil society and rational-legal legitimacy, which in turn reduce, but do not altogether eliminate, the importance of violence and coercion in political life. The structural power of capital, although negligible in praetorian republics governed by bullies, is noticeably greater than in bunker states, where security of property is insufficient to permit capital accumulation. Consequently the responses of the "bullies" to economic globalization are less brutal than those of bunker regimes. The limited capacities of the "bully" states, however, and the structural weakness of capital within them, to say nothing of their own political power requirements, have severely constrained their efforts to globalize. The MENA bunker states are Algeria, Iraq, Sudan, Syria, and Yemen, while Egypt, Tunisia and "Palestine" comprise the "bully" states.

MENA monarchies are such largely because the countries in which they persist were not subjected to as intense, protracted colonial influence as the praetorian republics, where lower strata were mobilized and ultimately removed monarchs or rendered their establishment impossible. Just as traditional political orders in the monarchies were less disrupted by colonial encounters, so, too, their commercial elites typically survived rather than being swept aside by either colonial settlers or radical nationalists. Thus both state and market in monarchies have had greater continuity than their equivalents among the praetorian republics, and the influence of the market over the state is usually greater in the monarchies than in these republics. It is not surprising, therefore, that monarchical polities and economies tend on the whole to be more open and competitive and hence display greater capacities to respond effectively to the challenges and opportunities of globalization. These capacities, however, are in all cases limited by the prerogatives of royal power, intent as it is on retaining its ruling status. The manner in which that power is exercised varies considerably. Among one group of monarchies, including Morocco, Jordan and Kuwait, power tends to be relatively dispersed and political competition comparatively institutionalized, while in the others, which are the remaining members of the Gulf Cooperation Council (i.e., Bahrain, Oman, Qatar, Saudi Arabia and and the United Arab Emirates) power is more concentrated in ruling families and political competition is less open, structured, or legitimate.

Finally, the MENA also includes polities that, with qualifying adjectives of various sorts, can reasonably be described as democratic. Turkey and Israel are "ethno-religious" democracies, in which secular Turks and Jewish (especially Ashkenazi) Israelis are privileged participants in their respective political systems, which deny equal rights to Kurds and Islamists (in Turkey) and to Arabs and, in much lesser measure, Sephardim (in Israel). Lebanon is a "consociational" democracy, in which elaborate institutional mechanisms based on elite consensus provide political modus operandi to enable competitive religious minorities to cohabit one polity. Conflict arises intermittently as a result of the need to renegotiate those institutional mechanisms, and also because of external factors. Lastly, Iran is by name and in fact an Islamic Republic and one in which citizens can change at least part of their government through free and fair elections, hence qualifying it as an Islamic democracy. Befitting democracies, the polities of these four countries are more open, competitive and institutionalised (with the partial exception of Iran) than those of either the praetorian republics or monarchies, and their civil societies are comparatively well developed. Political openness and pluralism in the democracies accounts in considerable measure for their greater capacity to adjust to globalization, but that capacity is also constrained by the intensity of the political identity questions that continue to bedevil these polities and which generally take precedence over issues of economic management.

That the tripartite categorization of MENA states reflects real political differences is suggested by the correlation between them and the degree to which political rights can be exercised and civil liberties are protected. Freedom House evaluates these two dimensions annually for most countries of the world, assigning numerical values to them, ranging from one (high, i.e., rights can be exercised and civil liberties are protected) to a low of seven. The four MENA countries we have labeled as democratic have an average total score on the two indicators, based on data for 1998-99 of 9, whereas at the other end of the scale the average score for the bunker states is 13. Arrayed between these two extremes are the three other types of states, ranked exactly as should be the case if the categories do indeed reflect political reality. The more liberal monarchies that permit a fair degree of political contestation score on average 9.3, followed by the "bully" states which average 11.5. Finally, in the conservative monarchies which have yet to fully legitimate and institutionalize political competition, the average score is 12.8. In sum, this schema, based on the structure and competitiveness of MENA polities, does indeed appear to reflect those dimensions, while it also arrays their economies in linear progression from those least to those most effective in adjusting to globalization.

All MENA states, however, regardless of the degree of their institutionalized political competitiveness, confront major political obstacles that constrain their rate and extent of economic growth. Polities ruled from bunkers have insufficient state capacities, inadequate civil societies and much too fragmented capitalist legacies to formulate and manage effective strategies of economic development. Praetorian states ruled by "bullies" do have rudimentary civil societies and residual or recently developed capitalists, hence some resources with which to globalize. But neither these rudimentary civil societies nor surviving or emerging capitalists are provided sufficient scope or support by the anxious rulers of these states to interface with international capital in a manner that increases national wealth. While the monarchies grant still more space to civil society and tend to have more robust capitalists, they also seek to preserve their personal power by imposing oligopolistic control over the market, frequently through family connections. Such control on private business may be less onerous in monarchies than in the praetorian republics, but it nevertheless impedes the development of free, outward oriented markets. Finally, the primary business of the MENA democracies is not business, but the politics of identity and the containment or resolution of disputes that flow from those politics. Nevertheless, the freer flow of information in the democracies, their more robust civil societies and the greater autonomy of their capitalism from the state provide them significant advantages when confronting the opportunities and challenges of globalization.

 

The State of Reform (back)

Most of the MENA states are already integrated with the global economy in the sense of being highly dependent on foreign trade. Except for Egypt and Iran, imports and exports amount to over 50 per cent of each state’s GDP, ranging in 1997 from 54% for the region’s other most populous one, Turkey, to 90% for Tunisia and well over 100 per cent for Jordan. Real economic reform, however, is evident only in a few of them. The best indicators of structural adjustment are the extent to which a country has increased its export of manufactured goods and the degree to which it manufactures for international markets. Table 3-1 shows the early adjusters to be altering their economic strategies from import substitution to export-oriented development. Israel, Turkey, and Tunisia more than doubled their exports in manufactured goods from 1987 to 1997, while Jordan and Morocco also target much of their manufacturing to export markets. Israeli manufacture exports consistently comprise roughly 20 per cent of GDP. Turkey joined Jordan and especially Tunisia in manufacturing goods primarily for export markets by the end of the decade. Egypt, Kuwait, and Saudi Arabia also increased their manufacture exports, but they account for less than 2 per cent of Egypt’s GDP and 5 per cent of Saudi Arabia’s (primarily in the petrochemical sector) in 1997. Egyptian exports actually diminished from 13.5 per cent of Egypt’s total value added in manufacturing in 1991 to less than 9 per cent at the end of the period. Structural adjustment appears to have stalled, despite a doubling of Egyptian manufactures exported during the decade. Only Israel, Jordan, Morocco, Tunisia, and Turkey appear be developing export oriented economies.

Average tariff rates, reported in Table 3-1, are another indicator of the degree to which an economy has adjusted to the new international environment. Israel, Jordan, and Turkey lead the way, together with the GCC states, whereas Morocco and Tunisia, together with Syria and Egypt, still maintain relatively high tariff barriers. These Mediterranean countries still have a hard road ahead. Participation agreements with the European Community require them progressively to reduce the tariffs with their major trading partners, eliminating virtually all of them by 2010. The Tunisian government was generating almost one third of its tax revenues from import duties as late as 1996. When Egypt and Lebanon eventually sign up with Europe, they will face similar challenges. Syria has not officially engaged in adjustment programs with international financial institutions but appears to be less dependent on import duties for revenue than Lebanon.

Many countries in the region have made progress in stabilizing their economies. Standard indicators of reform include low rates of inflation, relatively balanced budgets, small differences between official and parallel market rates of exchange, positive real interest rates, and low charges of seignorage (a government's income from the depreciating currency it prints and sells to the public). On these dimensions the record is more mixed. Some of the early adjusters have faltered while others, like Algeria and Yemen, have surpassed them in stabilizing their economies.

Table 3-2 presents the relevant available information. After the heady price rises triggered by the October War, the wealthy Arab Gulf states brought their inflation rates under control by the late 1970s. Consumer subsidies helped to keep their annual cost of living increases minimal. Elsewhere only Jordan, Morocco, Tunisia, and Algeria, just barely, managed to keep average annual inflation in the single digits. Israel struggled more effectively against than Turkey, however. Finance Minister Shimon Peres' stabilization program of 1985 curbed Israel's hyperinflation, whereas chronic budget deficits fueled ever higher rates of inflation in Turkey. Egypt made substantial progress in the 1990s after being relieved of much of its foreign debt servicing. Although official data are not available for Lebanon, it has also brought its inflation down to single digits, but its fiscal imbalances may spell serious trouble. Another striking macro-economic development documented in Table 3-2 concerns Syria. Unlike the other Mediterranean Arab countries, it has drastically reduced its inflation and budget deficits without the help of IMF adjustment programs.

Most of the MENA countries have reduced their government budget deficits, whether or not they were undergoing official adjustment programs. Algeria, Iran, Yemen, and especially Syria registered notable successes, whereas Turkey experienced ever deeper macroeconomic trouble under a succession of unstable government coalitions. Of the early adjusters, only Jordan seems to have made a major effort to rein in its deficits. The traditionally wealthy Gulf states have experienced major difficulties controlling their expenditures. All of them are heavily dependent on oil revenues and cannot readily compress their expenditures in line with diminishing international oil prices. (more data needed on GCC here, I have it from ESCWA--fiscal adjustment in the GCC countries p 82 now complicated by the 1997-98 decline in oil prices)

Low but positive interest rates are another important sign of good macroeconomic management. In the comfortable days of ISI the state typically allocated credit to its favored customers at interest rates lower than the inflation rate. Any enterprise being favored with a loan, whether public or private sector, was in effect receiving a gift of the difference between the funds disbursed to them and the present value of the money it was contracted to pay back (in the depreciating local currency) at a future date--if indeed it ever repaid the loan. Early adjusters like Israel were hardly exempt from these practices. Shielded by American aid from undergoing the conventional adjustment processes with the IMF, Israel still subsidized its domestic interest rates until 1995, when they became positive for the first time in the country's history. Turkey slid back into negative rates after reforming them in the early 1980s, and Jordan was apparently subsidizing its elite of lucky borrowers as late as 1994 (look at Jor CMB data). Saudi Arabia does not appear in Table 3-2 but its specialized banks doled out interest-free loans as a way of distributing the oil revenues; the loans were cut back in the mid-1980s as the oil revenues diminished (Chaudhry 1997 tables p , SAMA 97, pp 213-16), and total net lending stopped after 1986. Debt repayments exceeded new lending every year thereafter except 1995 (when oil revenues temporarily rebounded).

Another indicator of financial stability is the degree of coincidence between official exchange rates and informal parallel ones. Table 3-2 presents the ratio of official to parallel rates for dollars in 1997. At the official rate, for instance, one dollar could be bought for less than one-quarter of the Syrian local currency charged on the black market. It is readily seen that the differences between official and parallel rates were greatest for Algeria, Iran, Libya, and Syria, whereas Sudan and Yemen had reduced theirs through progressive devaluations of their respective currencies.

A final indicator of macroeconomic balance is seignorage, the money a government makes by making money. Technically it is the annual change in holdings of reserve money. The more money a government prints, the greater its income from this inflation tax. Although imperfectly correlated with inflation, high amounts of seignorage point to macroeconomic instability and suggest that the government may be compensating for its inability to generate adequate revenues by other means (Snider 4-6). Weak sisters like Lebanon and Yemen, for instance, printed additional money worth up to 10 or 15 per cent of GDP in the early 1990s but had to cut back on this easy way of funding their fiscal deficits, if they were to bring inflation rates under some control. As Table 3-2 indicates, the only consistently prudent money managers in the MENA were Tunisia and the GCC countries. Of the early adjusters, Israel and Morocco were developing credible records after profligate pasts, but Jordan and Turkey remained incorrigible, as was Egypt despite its progress on other dimensions. Printing money to cover budget deficits, while a sign of weakness, is not necessarily irresponsible if inflation appears to be under control. (For instance, UNDP Morocco 2000 advised Morocco to take a bit more seignorage in the early 1990s to help balance its budget)

An ultimate overall measure of the need for further reform may be the sheer size of the respective public sectors. In the view of the Washington Consensus public sectors are inherently inefficient and must be privatized as rapidly as possible. From a purely economic point of view the evidence of their poor performances compared to private sector enterprises is overwhelming (Waterbury), although there is no reason to suppose that private sector monopolies would be any more efficient than public ones in achieving public goods. Competitive markets could in theory make public sector firms just as efficient as private ones. In the MENA as in most developing countries, the realities are more complex. Markets are not competitive, and the lines between public and private sector enterprise are not clearcut. Nor do private sector enterprises appear to be notably more efficient than public sector ones. A "private" company may be favored over a public sector company if the former is part of a political patronage network; indeed, a public sector manager may favor his private enterprise, or that of his cousin, over the public company -- privatizing profits while transferring losses to the public domain. In short, the size of a public sector seems less important than market structure and the aggregate agency costs required to keep enterprises efficient whether they be juridically part of the public or the private sector. Juridical notions also change, leading in Tunisia, for instance, to substantial amounts of privatization effected without any substantive change of managements or practices in view of pleasing international financial institutions (cite King if we can find an article or maybe Eva Bellin?).

At the risk of oversimplification, then, Table 3-3 presents the available data about public enterprises in the MENA. Of the countries listed, Algeria's public enterprises used to generate the highest proportions of GDP, followed by Sudan, Egypt, and Tunisia. Turkey’s public sector accounted for only 5 per cent of GDP in the mid-1990s, but it was apparently bleeding the public treasury annually of over 6.6 per cent of GDP -- almost as much as its burgeoning fiscal deficit. Earlier, Tunisia's average public sector deficit had been an astonishing 7.6 per cent of GDP; no recent data are available. Data are also missing on Iran and Saudi Arabia, but their public sectors are substantial. They consume proportionately as much commercial banking credit as Egypt's public sector. Privatization is on every country's agenda, but results have been meager to date. Turkey has led the way since 1988 in selling off public sector enterprises, followed by Kuwait, Morocco, and Egypt, whereas Iran, Jordan, Tunisia, and the UAE have sold off relatively little.

The early adjusters are obviously in need of further reform despite their relatively high scores on most of our reform indicators. The three top performers deserve special mention. Israel labors under a substantially heavier public sector burden and still must overcome a reputation for loose macroeconomic management (despite a tighter Central Bank), chronic fiscal deficits, and reliance in the final analysis upon continued American subsidies. Turkey faces much greater difficulties in these respects. Tunisia has the strongest record of responsible macroeconomic management and has greater potential than any other country in the region except Israel to be competitive in certain forms of manufacturing. The specter of competitive international markets, however, is a constant pressure for reform. Tunisia can no longer hide behind tariff walls or rely on customs receipts for close to one third of its tax revenues. Its public sector, though relatively small by regional standards, apparently drags down the rest of the economy yet may be too politically costly to sell off. Further adjustment is all the more necessary in the other MENA states, if they are to attract the domestic and international capital needed to control their growing unemployment and to contain social unrest.

The Reform of the State (back)

These states vary considerably in their political capacities. By "capacity" here is meant the ability of a regime to mobilize public resources and to use them efficiently and effectively (cf WB, WDR 1997, p 25). The principal component of capacity is the ability to extract taxes. As Ibn Khaldun explained in the fourteenth century, dynasties used to collapse periodically because their tax bases in these arid regions of transhumant tribes could not support a standing army and self-sustaining infrastructure. Obtaining steady sources of revenue, by hook or by crook, is central to any process of state building. In the MENA it was primarily foreign powers - Britain, France, and Germany prior to World War I -- that completed these processes: within the past century they controlled the entire region's public finances except those of Saudi Arabia and Yemen.

If the colonial powers used the revenues relatively efficiently for their special purposes, they hardly cared to promote those mainstays of efficiency and effectiveness, accountability and transparency in the conduct of public affairs. Accountability, including a relative independent judicary, is needed to protect property rights and to restrain the arbitrary behavior of public officials. Transparency enhances the efficient allocation of resources by enabling markets to function, and it reinforces accountability. As the World Bank observes, "A remote and imperious state, whose deliberations are not transparent, is much more likely to fall into the downward spiral of arbitrary rule and decreasing effectiveness." (p28) Without information neither markets nor institutions nor public opinion can check the descent. As presently constituted, few political regimes in the region display the combination of transparency and political accountability needed to attact private capital. Most of what little foreign investment the region does attract goes into sanitized international enclaves such as the petroleum and petrochemical sectors. The biggest challenges the regimes face are internal ones: to become more accountable and to lift their constraints on the free flow of information. Only then will the necessary external resources become available for economic development.

Israel and Turkey have progressed furthest in these respects, but their political economies, characterized by strong oligopolies and substantial public sectors, limit full disclosure and constrict domestic markets. Both countries are relatively liberal and democratic but not to their ethnic minorities and, like other MENA countries, they harbor strong "fundamentalist" social forces among their ethnic majorities that may paralyze economic policy and even challenge the legitimacy of their respective regimes. Like the others, their capacity for further reform and integration into the world economy may be constrained by these moralizing challenges to globalization. The influence that globalizers may bring to bear within a given regime depends only in part upon their political and strategies of coalition-building. More crucial to any economic reform program is the available political and administrative infrastructure and its reflective extensions in civil society. If the dialectics of globalization ultimately depend upon the form of capitalism already prevailing in a country and political choices to include or exclude political oppositions, any reform is also conditioned by the state's ability to mobilize resources, by the accountability of its agents to abstract rules and procedures, and by the transparency of the markets that they regulate. Extractive capability (with its associated instruments of coercion), credible institutions, and reliable information channels comprise the three distinct vectors of political capacity.

The extractive capability (back)

REVISE TO TAKE ACCOUNT OF SIZE OF PUBLIC PAYROLL [how?]

It is sometimes argued that the oil rich states have not developed representative institutions and traditions of accountability because they did not need to extract taxes from their populations. If there be "No taxation without representation," then why bother with representation in tax-free societies? Better still, the oil rentiers could distribute some of their rents to their people as social services and benefices in exchange for acquiescence to patrimonial rule. Other MENA states also indirectly benefit from the oil and other rents and are seen to be distributive rather than productive states. They, too, dismiss any claims for representation or accountability with "social contracts" promising a variety of social services in exchange for loyalty. On this view these states face a major crisis because they can no longer deliver the goods. As the rents evaporate, they must tax more and therefore presumably be subjected to greater accountability.

Table 3-4 indicates, however, that most of the non-oil states of the region already tax their citizens adequately, given their levels of per capita income. Virtually all of them, except Lebanon, Syria, and Turkey, capture over 20 per cent of GDP, whereas the oil rentiers tax much less. The biggest of them, Saudi Arabia, has one of the highest rates of general government consumption in the region but relies on oil for over 70 per cent of its revenues. Its rate of taxation, if any, is unavailable, and those Kuwait and the UAE amount to barely 1 per cent of GDP. The more diversified and poorer economies of Bahrain, Iran, and Oman tax in the 8 to 9 per cent range. Algerian nonhydrocarbon taxes are higher, but oil and gas constitute over 60% of government revenues (IMF Alg Stab & Trans 98, p 24).

While the oil states may be undertaxed, most of the others are not. Would imposing higher taxes oblige them to be more accountable? The cross-national sample suggests instead that taxation rates are unrelated to accountability (agree with Waterbury in Entelis 1997, p 153). While Israel taxes the most and is also the region's model of representative democracy, Turkey, Kuwait, and Lebanon also feature relatively competitive politics yet tax less than their less accountable neighbors. Accountability and extractive capability should instead be viewed as two separate and distinct dimensions of a regime's political capacity for economic reform. A third ingredient of this capacity is the transparency of its political economy. Accountability and transparency are closely related but they are not identical. Accountability refers to the credibility of government institutions and the rule of law whereas transparency refers to free flows of information and the efficiency of markets in reflecting this information.

Oil in fact completed the job of colonialism in separating these dimensions, for transparency and accountability are usually byproducts in non-colonial settings of the administrative penetration of a society to extract the taxes. In her fascinating story of Saudi Arabia and Yemen before the 1973 oil boom Kiren Chaudhry shows how the young Saudi state overcame its Khaldunian dilemma by cutting deals with Hijazi merchants to build national markets and by imposing a common currency to facilitate tax collections, including a fair amount of direct zakat. It was only with the oil boom that the rational-legal tax bureaucracy atrophied, as distributive ministries acquired priority over the extractive core ministry of finance. A major consequence was a loss of economic information, the transparency needed to make national markets work efficiently. Ideological reliance on "free markets" for distributing oil rents resulted in a new class of Najdi capitalists in league with the midlevel Najdi bureaucrats who managed their allocations of oil revenues through state banks.

 

Accountability and Transparency (back)

The transparency and accountability required for economic development in the global economy cannot be directly measured like a regime's extractive capability. But bureaucratic penetration leaves other monetary indicators. One obvious concommitant of efficient extraction is a common national currency, for it is easier to collect money than bundles of dates or fractions of a goat. Paper or electronic transfers are yet another improvement over hauling sacks of coins or stacks of bills. In the twentieth century the construction of a state's extractive capability is invariably accompanied by progress in commercial banking, and banks are predicated on social trust - which may even survive the collapse of the state as in Lebanon in the mid-1970s. The scope and reach of commercial banking systems are easily measured by statistics routinely collected by the IMF since 1948. A recent cross-national study of the political capacity to adjust has used these data as a proxy for institutional credibility and accountability which roughly reflects our theoretical concern and usefully serves as a starting point for comparing the capacities of MENA countries. The "adequacy of institutions" to protect property rights and to guarantee contracts and the rule of law "can be approximated by the relative use of currency in comparison to 'contract-intensive money'" (Snider, 8) which lies within a country's banking system. As Lewis Snider explains,

Where institutions are highly informal, i.e. where contract enforcement and security of property rights are inadequate, and the policy environment is uncertain, transactions will generally be self-enforcing and currency will be the only money that is widely used. Where there is a high degree of public confidence in the security of property rights and in contract enforcement, other types of money that are held or invested in banks and other financial institutions and instruments assume much more importance." (Snider, 9)

Anyone who has lived in Algeria or Syria may intuitively agree. In each of these countries in the late 1980s the cash circulating outside the banking systems exceeded one-third of GDP! People kept their cash under the mattress and operated in flourishing informal economies of contraband (trabendo in Algeria) goods and undercover services. It may be a conceptual stretch to argue that the ratio of "contractive-intensive money" in banks to the total money supply (M2) also measures the more general credibility of institutions and property rights, but the results for the MENA seem plausible at the high and low ends of the spectrum.

As Table 3-5 shows, the highest performers (90% or above) include Bahrain, Kuwait, Lebanon, Qatar, and the UAE as well as Israel and Turkey, although Lebanon’s numbers may be inflated than most by the vast amounts of US greenbacks not counted in its currency supply (Corm in Nemat Shafik, Challenges, p 123). Those in the 80-90% range include Egypt, Iran, Oman, Saudi Arabia and Tunisia. At the bottom of the order Algeria, Iraq, Libya, Sudan, Syria, and Yemen are all "bunker states" which seem to have the least accountable or credible institutions. In other words, MENA’s democracies and monarchies appear on the whole to respect property rights more than do the praetorian republics, among which those led by bullies appear more accountable than those led by bunkered elites. If what is really being measured is the informality of the economy, then informal markets seem strongly associated with unaccountable government. A large informal sector of course also blunts a state's macroeconomic tools and dulls its extractive capability.

Finally, in addition to credible institutions, reliable channels of information are an important dimension of political capacity. Table 3-6 presents possible measures of transparency that capture a country's management of information, including per capita newspaper consumption and accessibility to the internet. These offer better indicators of transparency than radios or TV sets dominated by government propaganda machines, and newspaper readership is more closely correlated with internet usage than with the broadcasting media. Sheer quantity in these domains offer a fair clue to the quality and credibility of availability of information. When the countries are ranked by factor scores, it turns out that Tunisia is at least as shy as many other Arab states about public exposure, despite its progressive image as an early globalizer. Newspaper consumption suffers because most of the press is official and excruciatingly dull. Tunisia was expelled in 1997 from the World Press Association for failing to defend the freedom of its journalists. The authorities had banned the little of an independent press that existed in 1990 and delayed until late 1997 in permitting its citizens access to the Internet. Another early globalizer, Jordan, was almost as information shy. It banned its independent array of weekly tabloids in May 1997 on financial grounds that its judiciary subsequently ruled were unconstitutional - but most of them had meanwhile gone out of business and the prospect of new laws discourage them from returning. An international press monitor rated Egypt’s President Mubarak as well as Tunisia’s President Ben Ali among the ten worst enemies of journalism. Information timidity may turn out to be these regimes' Achilles heels -- by deterring the private investment they are trying to attract.

In short, the political and administrative capacities of the MENA present a mixed picture. Table 3-7 summarizes their relative rankings along the three dimensions of extraction, institutional credibility, and transparency. Israel is the only country to rank among the highest on all three dimensions. Turkey and Lebanon also rank among the highest on two of the three dimensions, and it is perhaps no coincidence that they are also, with Israel, the most politically pluralistic. Iran, the other relatively democratic state in the region, displays less impressive indicators but may be gaining transparency in ways not yet recorded in formal indicators. Some of the small monarchies of the GCC also seem relatively transparent and accountable, whereas the non-oil monarchies of Jordan and Morocco appear to have less credible institutions as measured by Contract-Intensive Money. Egypt and Tunisia score higher than the bunker states on most indicators of capacity. At the low end of the spectrum Algeria, Iraq, Libya, Syria, Sudan, and Yemen have the largest informal economies escaping administrative control. Algeria and Yemen still enjoy more freedom of the press than the others, but this bottom tier of states also appears most fearful of the internet. In sum, the data on political and adminstrative capacities suggests that the democracies are best endowed, that monarchies by and large do better than praetorian republics, and that the bunker states within this latter category have the least developed capacities.

These capacities seem ultimately to depend on the capitalist legacies that the independent states inherited, transformed, or tried to destroy. The states with the lowest political and administrative capacities also turn out to have the most diminished capitalist legacies.

Capitalist Legacies (back)

Political capacities are rooted in various capitalist legacies imported from the colonial powers. The independent states transformed and sometimes tried to destroy their imported varieties of capitalism, but the structural power of local capital remains a major factor that both lengthens the reach and constrains the power of the respective regimes. Structural power strengthens civil society, which is really no more than a capitalist construct shaped by international capital flows as well as by state regulations. While NGOs, political parties, and trade unions are important symptoms, the driving force of civil society is finance capital. Any winning coalitions of globalizers or moralizers will depend upon the domestic and international capital they can mobilize. Put differently, the politics of economic development does not occur in a vacuum of insulated policy-makers, but instead is driven by expectations of financial flows and investments of local and foreign business. Such is the structural power of finance capital, and it will vary considerably, depending on local capitalist legacies. How the local capitalists and labor interpret and articulate their interests will in turn condition the processes of structural adjustment and economic reform.

Monarchies tended to preserve their capitalist legacies and civil societies whereas praetorian republics tried to destroy theirs. The structural power of local capital can be independently assessed today by examining the structures of the countries’ respective commercial banking systems. Commercial banks offer an approximate picture of a country’s economy because they finance much of its real assets. An alternative source of finance capital is the stock market, but these markets so central to Anglo-American capitalism have not developed much in the region. Table 3-8 compares their capitalization and trading activity with stock markets from a sample of countries from other regions. Even in Turkey, where the stock exchange is relatively active, traditional lending remains the principal source of working capital for most enterprises (Hasan Ersel, email 15 May 1998). Primary share issues amounted to only 3 to 4 per cent of commercial bank credits extended in 1995, 1996, and 1997 (Hasan Ersel, email 23 May 1998, citing Central Bank Quarterly Bulletins 1997, Capital Markets Boards Monthly Bulletin, February 1998). Firms generally prefer to raise capital through commercial bank loans rather than to open themselves to equity markets. Stock markets require greater transparency than owners, accounting professions, and local governments are ready to provide. In the past decade, while eager international portfolio investors have pounced upon "emergent markets," the MENA has received minimal amounts of these capital inflows that became available to developing countries.

Most enterprises in the region, whether public or private sector, are heavily indebted to the commercial banks. They are not usually capable of financing their own growth through retained earnings, yet the owners do not wish to expose themselves to outside investors who would require information about their investment even if they did not actually challenge the owners for control of the enterprise. Whether the owner is a government, a private family, or an interlocking set of families, it is usually averse to offering the sorts of information a Securities Exchange Commission might require. In the absence of efficient capital markets, with their stringent information requirements, commercial banks bear the brunt of corporate financing.

Table 3-8 shows that total domestic credit in 1985 was approaching total GDP in Algeria, Jordan, and Yemen, and exceeding it in Egypt, Israel, and Syria. In states like Algeria, Egypt, and Syria, big investments and losses of public sector enterprises were financed by the respective commercial banking systems, and ratios of credit to GDP soared. The oil states, by contrast, did not need much credit; in Saudi Arabia the ratio was negative in 1983 (and more so in earlier years), but it has increased with declines in oil revenue. In the poorer MENA states credit was squeezed under stabilization and adjustment programs, government and public sector deficits trimmed, and consequently credit to GDP ratios diminished. By comparing the credit allocated to the private sector in column 3 with the total domestic credit of column 2, it is easy to see that the bunker states of Algeria, Syria, Sudan, and Yemen have crowded out and virtually excluded their private sectors from credit. Conversely, the Saudi state was a negative borrower in 1995, channeling funds into the private sector. The data for Israel, Kuwait, Lebanon, Morocco, and Tunisia are misleading because they include state enterprises in the private sector. In 1994 the private sector contributed only 37 per cent of Morocco's gross domestic fixed investment and 53 per cent of Tunisia's. These countries, and Israel, too, have substantial public sectors that tend to crowd out private businesses, but their private sectors are substantially better financed than those of Algeria, Sudan, Syria or Yemen.

MENA is hardly the only region to rely heavily on commercial banking credit. The advanced capitalist countries display higher ratios despite their more developed alternative sources of capital. The East Asians and Latin Americans, too, lean heavily on their banks. Comparisons between columns 1 and 2 show, however, that the Latin Americans went through the belt tightening experienced by many MENA states between 1985 and 1995, whereas the East Asian bank credits kept on expanding as percentages of GDP--even as their economies were expanding more rapidly than the MENA's or Latin America's. Before the crash of 1997 the only country where the credit ratios held steady was Singapore, where total domestic credit never exceeded 80 per cent of GDP after 1989. The commercial banks continued to play major investment roles in East Asia's "miracle" and were a principal source of trouble when the bubble burst. Table 3-8 also shows Japan's remarkable pattern of debt financing through its unprofitable banking system. Malaysia and Thailand appeared to be following suit, and Thailand's private sector banking system has largely fallen into government receivership (NYT 16.4.98). Suharto hesitated, before losing power, to clean up Indonesia's banking system because it sustained his patronage networks of crony capitalists (NYT 7.5.98).

Commercial banks clearly remain the principal allocator of finance capital for most of the developing world, much as they propelled the German economy a century ago, when capital was scarce and five or six Berlin banks gained control over much of German heavy industry. The German legacy may, as a Wall Street financier predicts (Economist 11.4.98, EMU-7), give way in Europe with the further integration of its financial markets to "a new colonization by Anglo-American financial markets." In much of the developing world as in Japan, however, commercial banks can be expected to maintain their preeminence even if they do not replicate the German model but stay instead in a French statist tradition. Their structures are the critical channel through which finance capital exercises structural power. Analysis of the commercial banking structures therefore offers a way of mapping the sources of structural power in a political economy.

Typology of commercial banking structures (back)

The critical dimensions of a banking system are its autonomy and competition among the banks. Autonomous and competitive systems exemplify an Anglo-American form of credit allocation, in contrast to the German pattern of autonomous oligopoly or varieties of state-managed systems. The structural power of capital is greater in autonomous than in managed systems, and is more concentrated in an oligopolistic than in a competitive one.

Locating a commercial banking system on either dimension is ultimately a matter of judgment rather than any simple measurement. Table 3-9 presents proxies for these dimensions – ownership of the banks and their degree of concentration -- that are easily measured but which also require some discussion. Private ownership does not necessarily mean a bank is autonomous, distributing credit according to rational business criteria. It is even difficult to categorize a bank as either government or privately owned because shareholders may include parastatals and other banks of mixed or foreign ownership. Private owners may owe their influence on the bank's credit policies more to their substantial political influence and connections than to their shares of capital. Policies pursued by the managers of a bank, moreover, do not necessarily implement the interests of the formal owners, whether they are predominantly public or private sector. Credit policies in particular, especially of public sector banks, are liable to be riddled with personal, political, or other unprofessional non-economic considerations. Thus simple categories like "public sector," "predominantly private sector," and "mixed" are difficult to apply to single banks, much less to the group of banks constituting a commercial banking system, and they do not carry clear cut indications about a bank’s relative autonomy. At the extremes, however, there seem usually to be differences between public sector banking systems and predominantly privately owned ones. One difference is that public sector banks are usually saddled with heavy non-performing loan portfolios and tend to generate lower returns on their assets than private sector banks. Another indicator of a system’s autonomy is the central bank’s method of regulating them. Autonomous banks, like state-managed ones, work best under strict prudential regulations, but these take the form of abstract rules governing their balance sheet ratios, not specific interventions over credit ceilings or allocations. State-managed systems tend instead to throw prudential regulations to the winds.

Real competition between banks is also less than self evident because banking is a relatively oligopolistic industry. Two indicators deserve consideration, the degree of concentration of the banking system and the financial performance of the banks. The German model presupposes a concentrated structure, in other words a small set of private commercial banks holding a large share of the markets for deposits and credit. A fair measure of financial health, however, is also required of the "good" oligopolists to sustain them in their dilemmas of common interest with other members of the cartel in rolling over their syndicated loans or bailing out their favored clients (Henry 1996). Analyses of financial performance coupled with an understanding of banking regulations and informal central banking supervisory practices can offer insights into the degree of genuine bargaining power a commercial banking deploys. Although no contemporary MENA system fully replicates Imperial Germany’s a century ago, concentrated systems with strong private sector finance performance can qualify for structural power. In more étatist systems the structural power of local capital is more problematic. It must be inferred from the market shares and financial performances of the privately owned banks. To the extent that these banks are really permitted to compete for loans and deposits, the public sector banks will usually be at a disadvantage, weighed down by non-performing loans from public sector enterprises. Thus an étatist system may eventually change into the more autonomous and competitive Anglo-American type. Such is the intention if not necessarily the outcome of the structural adjustment of the financial sector promoted by World Bank programs.

With some qualification, the proxies in Table 3 for autonomy and competitiveness still serve as a map for identifying structural power in the Middle East and North Africa. The banking systems fall into four quadrants (merging the lower righthand ones) which respectively exemplify an absence of private capital, tendencies toward state managed "French" capitalism, the concentrated "German" variety, and the Anglo-American model.

 

1. Exclusively public sector banking systems

Since state bureaucracies are usually ignorant of commercial banking practices, they find it difficult to establish publicly owned banks though easy to nationalize existing private ones. Exclusively public sector systems tend by default to be concentrated into a small number of state banks which will have amalgamated any more complex private sector. In their zeal for bureaucratic rationality the Algerians and the Egyptians in Nasser’s "socialist" years specialized their respective banks by sector, in utter defiance of rational economic notions of portfolio diversification. The Iraqi regime went a step further, controlling all transactions through one big state bank until the late 1980s, when a competitor was invented as part of an economic liberalization program. Syria, too, has just one big major bank and 4 small specialized ones.

In such systems the banks are simply the relays of a central treasury: symptomatically the governor of Algeria's Central Bank was viewed as subservient to the Treasury before the reforms of 1990 created a powerful Banque d'Algérie. There is no real banking, much less any structural power of private capital. Planners rather than bankers allocate the loans, although some finance capital may be siphoned off by corrupt officials to their brothers or cousins in private enterprises. Any loose investment capital avoids the banking system altogether and simply contributes to a huge informal economy. One indicator of the informal economy is simply the cash outside the banking system (IMF line 14a), measured as a percentage of the GDP.

Table 3-10: Cash outside banks as a percentage of GDP

 

Algeria, Egypt, Jordan, and Syria were in a club by themselves until the 1980s, whereas monetary systems reputed for their sound management, such as Bahrain and Tunisia, illustrated much lower ratios. The cash ratio remains high in Jordan because the dinar also services the West Bank. Conditions in Iran at the time of the Revolution apparently also led to some hoarding of cash, but subsequently Iran's Central Bank restored order. Sharp drops of cash in circulation also document Egyptian and Algerian efforts to reform their financial systems. Significantly in Algeria, however the compression of the money supply did not lead to storing greater portions of it in the commercial banking system. Cash outside the banking system as a proportion of money supply (Table 3-5) remains especially high in Algeria, Sudan, Syria, Yemen, and possibly in Iraq, where no current data are available. These states also qualify as bunker capitalist regimes whereas Iran and Israel do not.

Iran and Israel also display concentrated banking systems but they seem much more efficient, using less cash and lending more to their respective private sectors (Table 3-8). They also support active stock markets. Technically Israel’s banking system is still almost exclusively public sector because the banks fell under state receivership in 1983 after they had bid up their shares too much on the Tel Aviv Stock Exchange. Earlier, the public/private distinction was never clear in Israel, where Hapolim Bank until recently was controlled by the Histadrut, the trade union federation, and Bank Leumi appeared to be a parastatal emanation of the Jewish National Fund. A prominent Israeli political sociologist argues that Israeli statism dwarfed any real private sector capitalism and stunted the development of civil society until the late 1970s (Norton vol 2). The banks are currently being privatized, however, and will possibly exemplify the German model -- with four commercial banking groups dominating the system and pumping substantial amounts of credit to the private sector. Any structural power of private capital will be reflected in the relative health of the principal private sector banks, when and if they are privatized. "Relationships among the big banks, and between them and the largest nonfinancial corporations, are in a state of flux that has partially opened up the commanding heights of the economy to new players," Michael Shalev (1998) reports. Some of them are foreign multinationals.

It is unlikely that Iran or the Arab states will convert their banking systems to the "German" model under similar conditions, though private Arab investors and multinationals could probably rival the Jewish diaspora in mobilizing the necessary resources.

 

2. Mixed ownership, but still heavily concentrated in public sector banks

In this transitional system the public sector banks still dominate credit allocation and hold 60 to 70 per cent of the market. Whether fragmented or concentrated, the private sector banks remain locked into the public oligopoly, and efforts to break away from it may be suppressed by a regime intent on preserving its patronage networks. However, in the present era of structural adjustment and financial globalization, regimes are under pressure in the MENA as well as in Indonesia to privatize their banks and clean up their portfolios of non-performing loans.

Countries in this category include contemporary Egypt, Sudan, and Tunisia. Most banks are nationalized but seem, except in the Sudan, to finance a substantial private sector. The structural power of local private capital remains minimal, however, reflecting its fragmentation and subordination to the public sector in the banking system. To the extent that there is any recognizable capitalist system, it is of the "French" étatist variety. Sudan, since being brought under a bunker capitalist regime in 1989, no longer really qualifies. In Egypt and Tunisia stock markets are developing but they remain heavily influenced by the banks and public sector authorities. In Tunisia the Central Bank's Annual Report 1996 reported, for instance, that "the banking system holds more than two-thirds of stock exchange capitalization and over 90% of the securities listed on the exchange." The Report also noted that "the active role played by the banks" bid up stock prices through the first quarter of 1995 but could not sustain them. One is reminded of Emile Zola's fictionalized account in L'Argent of a classic nineteenth century French bank bidding up its shares on the Paris Bourse. In Egypt the dramatic escalation of share values on the Cairo exchange in 1997 resulted primarily from purchases of those shares by the government, primarily through the four public sector banks.

Business lobbies do not have independent financial resources. They rely on crony capitalist networks close to their respective political leaders and, to some extent, upon outside aid from external parties. For instance USAID finances the Egyptian Center for Economic Studies, an economic policy think tank sponsored by Egypt's leading business lights including Gamal Mubarak, one of the president's sons. Just as the United States wishes to promote the Washington Consensus to developing countries, so some of these countries with large public sectors wish to project themselves as liberalizing in order to attract foreign capital. The business lobbies lack autonomy because they have few independent resources and depend largely upon their connections with influential cronies and political leaders for credit and other favors.

3. Predominantly private sector and concentrated

This category approximates the classic German syndrome if the banks are privately owned and universal, operate like an oligopoly, and provide most of the finance capital to the real economy. However, a high degree of formal concentration is also compatible with the Anglo-American variant of capitalism if it is supported by an active stock market. Britain has a highly concentrated retail banking system, consisting of four big national banks, but the City also features one of the world's leading stock exchanges and many merchant or investment banks. Formal levels of concentration do not indicate how competitive a banking system really is without taking other variables into account. For the present purposes concentrated systems are defined as having HHI ratios (the sum of the squares of their market shares of deposits) above 16 per cent, but some of the less concentrated systems may behave as oligopolies and some of the more concentrated ones may behave competitively.

The MENA's relatively concentrated, predominantly privately owned banking systems include some, but not all of the Arab monarchies. The capital-rich Arab oil states probably do not need the capital rationing associated with Germany's industrialization a century ago. Their ruling families, however, seek to keep control over their budding capitalists by allocating capital through through commercial banking systems, presumably as long as these banks remain in reliable hands. Others, notably Kuwait, may be in a process of transition toward the British model, and all of them have established stock markets, although turnovers remain low. Bahrain may also be in transition. Like Britain, Bahrain has a relatively small number of onshore commercial banks, and its stock market, although still limited in turnover, is relatively highly capitalized with other GCC as well as Bahraini companies. In East Asia a more developed "British" illustration would be Singapore.

The most striking illustration of the German model in the Arab world is the Moroccan system, consisting of one relatively large bank about to be privatized and six others that collectively dominate the market (HHI=17.3%, 1996). The Casablanca Stock Exchange, while encouraged by the authorities as well as international financial institutions, remains small with little turnover and is almost as dominated by the commercial banks as its sister in Tunis. The German model of universal banking had been assimilated by earlier generations of French capitalists who colonized Morocco, and decolonization left the system relatively intact when the monarchy acquired control in 1980 over the Omnium Nord-Africain (ONA), the colonialists' principal industrial conglomerate. Through the ONA the monarchy also acquired a dominant interest in Morocco's best performing banks and holdings in some of the others before embarking in 1991 on financial liberalization and lifting various credit constraints. In Morocco the commercial banking oligopoly articulates the structural power of private capital but the king reserves enough of it to keep discipline from within.

 

Other monarchies may be employing similar strategies. Jordan's banking system is almost as concentrated (HHI=16.5%, 1996) as Morocco's. Its two largest commercial banks command about 50 per cent of the total deposits. Jordan's stock market has recently been organized to assure greater transparency, but the country is small and capital seems highly concentrated, like Morocco's, in palace circles. In addition to anecdotal evidence, high spreads between the interest banks receive from borrowers and the rates they pay their depositors suggest oligopolistic behavior characteristic of the German model. However, the major banks do not appear to be linked to conglomerates or holding companies as in Morocco.

The Moroccan variation lends itself to family domination with collusive bankers expected to keep the family business secrets. On the other hand, in the rich countries where some of the oil rents have been distributed among merchant families, control of a banking system may have less strategic significance than in poorer countries, such as Morocco and Jordan. Kuwait is an obvious example of competitive markets and competitive politics; families compete for influence in commercial banking, on the Kuwait Stock Exchange, and in parliament. In terms of a formal ratio, its commercial banking is slightly more concentrated (HHI=17%, 1996) than Jordan's, but its real behavior seems to be more competitive.

4. Predominantly private and relatively unconcentrated

This "American" structure of commercial banking may be viewed as optimal for credit allocation by the World Bank and other mainstream economists because it connotes competitive financial markets. Saudi Arabia, rich in capital like America, appears to be its best exemplar in the region. Saudi Arabia's commercial banking system looks similar to Kuwait's, but its formal concentration ratio is lower (HHI=13%, 1996), suggesting a greater potential for competition. Saudi Arabia has 11 banks, including a very profitable Islamic one which is also the world's largest of this type of enterprise and the fourth largest of the kingdom's commercial banks. The largest Saudi bank had only 23 per cent of the deposits in 1997, and the top four held 60 per cent. Except for the smallest of the eleven, all appeared healthy and profitable, but information on their spreads is not available.

Saudi Arabia’s financial system in reality, however, may be almost as étatist as Egypt’s or Tunisia’s. Over half of the credit is still allocated through specialized state banks, not the commercial banks, and the banking system is not fully open to competition. For at least a decade two major conglomerates of Islamic banks have attempted without success to establish commercial banks in Saudi Arabia. Each of them is Saudi-owned, one by a son of the late King Faisal and the other by a self-made businessman. Saudi Arabia's stock market is also thin, despite its relatively high capitalization.

Despite the structural power of capital evident in the commercial banking system, Saudi politics are much less open than Kuwait's, or even Morocco’s or Jordan’s. One reason why civil society in Saudi Arabia has yet to emerge strongly from this material base is that much of that base remains under the direct or indirect influence of the Saudi ruling family and its Najdi allies. The Saudi family, moreover, is far larger than its royal counterparts elsewhere and exerts much more direct control. Nevertheless, the existence of a substantial material base upon which civil society ultimately could draw suggests the potential for political liberalization in the future. Moreover, the size of that base and its relative diversity indicates that the Anglo-American model may be comparatively easy to implement in Saudi Arabia. The Saudi Arabian Monetary Authority (SAMA), a product of American technical assistance and a de facto central bank, could ultimately play the role of midwife in the birth of such a system.

Until very recently Turkish capitalism seemed largely inspired by the German model, although its commercial banking system retained a significant public sector. Turkey's structural adjustment loan for the financial sector was not fully disbursed in 1988 because the government could not carry out certain commitments concerning the reform of Ziraat Bankasi, the public sector agricultural bank that holds a quarter of Turkey's commercial bank deposits. Ziraat is also the government's principal patronage vehicle for rallying votes from the countryside. Turkey's commercial banking system features a core of dynamic private sector banks linked to major industrial conglomerates, but it has become considerably less concentrated (HHI=9%, 1996) than Morocco's (HHI=20.6% in 1995). Despite its historic ties to the German model (Henry 1996: 100-106), Turkey seems to be moving toward the diversified Anglo-American model. Its stock market is by far the most active in the MENA and offers an alternative to finance capital dominated by a small number of holding companies and commercial banks. Whether through its business conglomerates represented in TUSIAD or through impersonal market forces, private capital seems to have acquired some structural power. TUSIAD has greater voice in economic policies than the Egyptian Businessmen's Association, for instance.

Meanwhile, the least concentrated and apparently most free-wheeling banking system in the region is Lebanon's. Despite growing concentration since the mid-1980s, none of the 80 banks holds more than 13 per cent of the market and the top 4 less than one-third (HHI=4.7%, 1996). Even so, its spreads between the going rates for loans and deposits are relatively high, suggesting oligopolistic "cooperation" among this multiplicity of banks. Banking may be undergoing a second metamorphosis in Lebanon. Originally converted during the postwar boom from French to American style capitalism, it was becoming more concentrated under the impact of Lebanon's billionnaire prime minister, Rafic Hariri. In addition to formal mergers informal understandings in effect limit competition. Coupled with lucrative government borrowing, Hariri’s private conglomerate was acquiring control over much of the banking system and the real economy until Lebanon’s new president accepted his resignation from office in 1998.

Preliminary conclusions about structural power (back)

From this brief inspection of the MENA's stock markets and commercial banking systems it is possible to come to some preliminary conclusions about the potential of business interests to influence government policies and encourage greater accountability. The greater the structural power of capital, the greater the possibilities that the business community can engage in effective collective action and articulate various sectoral interests and the greater, too, the resulting developmental capacities of the state. Local capital both reinforces and constrains these capacities. It strengthens them by offering a tax base, information, and economic opportunities but also projects a variety of interests to be satisfied.

There will be structural power under any form of real capitalism, whether "Anglo-American," "German," or "French," and stock market activity and commercial banking structure and performance can indicate the degree to which these respective forms are developed. Since the stock markets remain underdeveloped, the "German" and "French" models are currently more prevalent. The German model, however, seems largely confined to monarchies in which patrimonial controls may underlie the nascent financial and industrial cartels. It is a major asset for their regimes as long as insiders hold the levers of financial power because they then extend the regime's reach and patronage networks into the private sector. The system resting on oligopoly is inherently unstable, however. If opened to international capital, the newcomers could undermine it. Or the insiders may become more independent and use their financial power to make the regime more accountable.

 

The French model operates under a different set of constraints stemming from the region's legacy of state capitalism and big public sectors. Commercial banking systems still operate under these constraints, and the relative weight of private capital remains very limited. Regimes with big public sector banks, including all of the praetorian republics, may go through the motions of structural adjustment but still prevent the rise of autonomous private sectors in order to keep control of civil society and to preserve their own patronage networks. The policy outcomes safeguard the regime at the expense of long-term development.

 

With the possible exception of Israel, which could deepen a "French" variant of capitalism or consolidate a "German" orientation once its banks are privatized, structural power still seems very limited in the region. Only Turkey and possibly Kuwait stand out as financial environments in which private capital enjoys relative autonomy and can support various articulations of business demands. Its healthy and apparently competitive commercial banking system suggests that Saudi Arabia, too, might support a limited articulation of business interests, albeit within a less liberal political framework. Private Saudi investors have a weapon of growing importance in an oil glut: they may choose not to invest in their country.

Challenges of globalization (back)

The countries that face the greatest problems of adapting to globalization are those with minimal capacity, small private sectors, and big state banking systems. Civil society is weakest, forms of association less developed than in the rest of the region. Algeria, Iraq, Libya, Sudan, Syria, and Yemen, all praetorian republics ruled from bunkers by political military elites, display the lowest levels of capitalist development. They are also the countries with the largest informal economies. Indeed, many of the most dynamic elements of their civil societies have emigrated. While capital flight and labor migration are not confined to these countries, they are its most prominent exemplars. Algerian workers have a longer history and a more substantial presence in France than their Moroccan or Tunisian counterparts. Private Algerian capital is in France, not Algeria, and the development of the private sector in Algeria will depend upon it. Algeria does have capitalist traditions but they are French, and its painful adjustments to the new world order will be along "French" lines like Egypt's and Tunisia's. Syria, too, enjoys close historic ties with France, and Lebanon, though no longer quite French, serves as its relay, a haven for private capital as well as outlet for a million Syrian guest workers (in addition to the army). But whether these special ties pave the way to broader globalization, or lock these countries into relations of bilaterial dependency, remains to be seen.

Each variety of capitalism carries threats and opportunities to incumbent regimes, but the Anglo-American variety of capitalism being promoted by international financial institutions appears to be the most threatening to them. It offers more ready access to foreign capital than the French or German models, but at the cost of giving up the decisive control over the private sector that credit allocation guarantees. Turkey has come closest to taking these risks just as it has benefited the most from influxes of foreign portfolio capital as well as other forms of private investment. Lebanon by contrast is a parody of the Anglo-American model; until recently, at least, its capital structures were becoming concentrated into those of a banana republic. Ironically the most effective guarantor of the Anglo-American model in the region may be Islamic banks and businesses. Their mediation may empower some countries successfully to engage in globalization.

On the domestic front most of the regimes seem to have effectively contained their nascent capitalist classes. Either they tie them into public sector or political networks as in Egypt, the Palestine Authority, or Tunisia, where the state still dominates credit allocation, or they give them a semblance of autonomy in conglomerates directly or indirectly under patrimonial control, as in Morocco. There may be some leakage from the monarchial oligopoly in Saudi Arabia, whether to dissidents like one of the Bin Laden family or to new combinations of law-abiding capitalists financed by the relatively competitive banking system. These developments, coupled with Islamic finance, will be discussed in chapter 7.

For most of the MENA the major structural challenges to incumbent regimes lie outside, not inside their respective countries. The globalization of capital has major implications for every political economy in the region, including those traditionally financed by oil rents. Oil revenues are expected to remain relatively low in the foreseeable future, so that Gulf states will be strapped for current expenditures as well as necessary investment. Every country needs either to attract substantial foreign private capital or to incur potentially destabilizing increases of either domestic debt or unemployment. Globalization also works the other way; a major stimulus to Tunisia's financial reform was the fear of capital flight. Despite capital controls, it becomes increasingly difficult to keep capital at home. Estimates of Arab capital invested abroad range from $350 to $670 billion, with $500 bn being a commonly accepted figure. (World Bank 1995: 6; Adnan Al-Hindi, APF 21.4.98).

To attract more of this capital, governments in the region are already sprucing up their stock exchanges. Yet the banks, which tend to dominate local stock markets, may resist greater transparency; so also may their political authorities, whose patronage networks might be exposed. In the MENA economic and political information do not lend themselves to easy segmentation. Especially in the smaller states political and economic elites may be too intermixed to accept the transparency of open markets. Yet the regimes face pressures to open up in order to attract more foreign investment. No region of the world is in greater need of economic growth to absorb growing legions of the unemployed, yet the growth prospects of the region are the world's poorest.

With more globalization of capital --if the MENA is to get its fair share -- the structural power of foreign capital may be expected to reinforce local capitalists and other elements of civil society more than their incumbent information-shy regimes. The "German" model has been employed in defense of patrimonial rule in Morocco, and cruder state oligopolies have serviced the political networks supporting their respective regimes. Accelerated global flows of capital, however, tend to undermine any oligopoly's control of capital markets. If activated sufficiently to attract significant foreign portfolio investment, stock markets become alternative sources of financing for local capitalists whom local oligopolists can no longer exclude. As the capital pie expands, governments may become less able to control its allocation either directly through public sector banks or indirectly through their crony capitalist conglomerates. Turkey, the region's bellwether, best illustrates the transition toward more competitive capital markets.

The prospect of attracting more foreign capital may challenge a regime to devise new strategies and frameworks for balancing or playing off local and international capital. The predominantly public sector commercial banking structures of the region's statist and post-statist economies are under siege, as credit rating agencies and international financial institutions call on their governments to clean up their public sector bank portfolios and privatize them. But besieged regimes can delay, privatize in ways that keep state managements intact, and try through the banks and parastatal investment funds to keep control of the stock markets. Rather than develop more transparency, they may engage in a rhetoric of economic and political liberalization and try to coopt foreign as well as local capitalists into their patronage networks. If international portfolio managers bought into Thailand's corrupt and opaque financial markets, then why not into selected MENA countries? Global capital markets have structural power to which regimes are presently fine-tuning their responses because they need better access to these markets. Most of the regimes hesitate, however, to open themselves to the indiscriminate workings of Anglo-American capitalism and its requirements for timely information and accountability. Yet the hesitations may have severe opportunity costs, by delaying the capital investments and associated economic growth needed to attack the region's unemployment problems and to contain its rising social movements.