CHAPTER SEVEN: GLOBALIZATION AND THE POLITICS OF IDENTITY IN ETHNO-RELIGIOUS, CONSOCIATIONAL, AND ISLAMIC DEMOCRACIES Israel | Iran | Turkey | Lebanon | Conclusion | Endnotes | Table of Contents
REAL DEMOCRACIES IN THE MENA?
This category of democracies is too diverse for an exemplar to be useful, so we will deal separately in this chapter with Iran, Israel, Lebanon and Turkey. This raises the question as to whether the category of "democratic" is a meaningful one and, if so, should all of these countries be included in it? Indeed, only Israel has consistently managed to change its government through free and fair elections, the single best indicator of democracy. So by that single measure, Israel is the only established democracy in the MENA.
This definition is too restrictive, however, and overlooks the similarities of these states. Iran, Lebanon and Turkey have all had elections resulting in significant changes in their governments, although such elections are either rare (in the case of Iran), punctuated by military interventions (in the case of Turkey), or subject to considerable external influence, as has been the case in Lebanon, especially during the 1990s. So these are at least "one time" democracies, if not established ones. The transfer of governmental power through elections, even if uncommon, nevertheless sets these states apart from either the praetorian republics or the monarchies.
As the existence of free and fair elections resulting in governmental change suggests, the MENA democracies have all managed to institutionalize more effectively than praetorian republics or monarchies peaceful means for political competition over incumbency and formulation of public policy. This is not because social forces in these countries are fundamentally any less antagonistic than they are elsewhere in the region, including in the bunker states. The examples of Arabs and Jews in Israel, Christians and Muslims in Lebanon, Kurds and Turks in Turkey, and multiple linguistic groups in Iran suggest that the level of primordial hostility may be just as great between social forces in these democracies as it is in say Algeria, Iraq, or Yemen. Indeed, when political order has broken down in the democracies, the bloodletting has been of a magnitude that, by this measure, would qualify them as bunker states. But what differentiates the democracies from the other states is that at least intermittently they have managed to integrate those social forces into national political institutions, where they have contested for power peacefully, if not equally. The democracies, in other words, which may appear at a cursory glance to have weaker states than republics or monarchies, in fact have stronger ones as measured by their ability to integrate social forces into the body politic and give them the experience, at least once, that they can play a role in changing their rulers through the ballot box.
Magnitude of information flow, which is a correlate of democracy, tends to group these four countries at the top of the MENA tables. As Table xx presented in Chapter Three revealed, of the Arab states other than the mini-GCC states of the Gulf, Lebanon ranks highest on newspaper circulation, radio and tv ownership, and Internet hosts per capita. Turkey’s comparative ratings are similar to Lebanon’s. On all of these measures Israel ranks first, with the exception of Kuwait on newspapers, and the mini-GCC states on radio and television ownership. Iran tends to outperform the praetorian republics, but falls behind the monarchies and other democracies on these measures of amount of information flow. The MENA countries with the most Internet hosts per capita are, in descending order, Israel, the UAE, Kuwait, Lebanon, and Turkey. As regards freedom of information flow, which is highly correlated with the magnitude of flow, the "Triangle Index" combines and weights "the economic, social and information exchange foundations on which each country rests." In 1997 that Index’s ranking of 35 developing economies ranked Israel fourth, Turkey 24th, Tunisia 26th, Egypt 30th and Morocco 31st.(1)
That there is a relationship between the strength and autonomy of political institutions, on the one hand, and economic ones on the other, is suggested by the indicator of institutional credibility presented in Chapter Three, which is the ratio of contract intensive money to total money supply. The highest performers on this measure were in 1995, the last year for which full data is available, in descending order Israel, Lebanon, Kuwait, Bahrain, and Turkey. Iran outperformed Algeria, Egypt, Jordan, Libya, Morocco, Oman, Saudi Arabia, Sudan, Syria, Tunisia and Yemen. The citizens of these democracies tend to trust their financial structures more than do citizens in the monarchies and praetorian republics, pointing to the existence of an interaction effect between economic and political institutions and faith in them. Good politics may make for good finance, and vise versa.
The grouping of the democracies on the CIM index cannot be a byproduct of similar financial systems, for they are not. Israeli banking is run according to the French model, with ubiquitous governmental involvement in the allocation of credit. Turkey’s system is a replica of the German model, with concentrated but relatively autonomous banking, while Lebanon’s free wheeling financial sector is both deconcentrated and autonomous, more or less along American lines. Iran’s banking system is the most heterogenous, with the French model coexisting with Islamic practices.
As far as stock markets are concerned, Israel and Turkey’s are the most dynamic in the MENA, with the greatest number of listed shares, highest turnovers, and largest proportions of foreign investment, suggesting that a combination of size and diversity of economy, access to external investors, amount and reliability of relevant information, rate of return, and general confidence in the political system combine to attract investors. The Beirut exchange is overshadowed by Lebanon’s much more dynamic and aggressive banking industry, while Tehran’s exchange is, in relation to the size of the Iranian economy, minuscule.
Democracy in the MENA appears to be compatible with very different systems of banking and levels of development of equities markets, but those differences do not affect the willingness of the citizens of those democracies to be comparatively willing to entrust their money to financial institutions. They are not doing so, however, because those institutions are free from governmental interference. Democracy in the MENA, in fact, is accompanied by a high degree of state involvement in the economy, much more, in fact, than is gospel according to "serious economists." The Heritage Foundation country rankings on its Index of Economic Freedom, for example, are based on ten factors that are essentially surrogates for the ten commandments of the Washington Consensus. The Index scores Tunisia and Morocco (2.6 and 2.7, "mostly free") higher than Israel (2.8, also "mostly free"). Turkey, with a score of 3.0 is designated as "most unfree," as is Egypt at 3.5. The MENA democracies, although appearing to have political economies that are comparatively credible with their populations, still have a long way to go before they are well equipped to deal with the challenges and opportunities presented by globalization.
Most MENA political economies are affected by the "drag" factor of intra-regional conflicts, although in varying degrees. Israel, a virtual garrison state, is among those most affected, while Lebanon, sucked into the vortex of the Arab-Israeli conflict, has all but lost its sovereignty as a result of it. Post-revolutionary Iran was invaded by Iraq, against which it fought an eight year war from which its economy has yet to fully recover. Turkey maintains the largest standing army in NATO and is in a semi-permanent state of simmering conflict with Iraq and Iran.
Intra-regional conflicts clearly exact a heavy price from these democracies including, but not limited to, spending on their militaries. Regional problems, however, may be less important in structuring their political economies and determining their economic performance than strictly internal factors. Chief among these and common to all four countries is, paradoxically, a problem that is virtually the mirror image of the fundamental defect of state-society relations in praetorian republics. In those republics the state is either overly autonomous from society (i.e., the bully republics), or the prisoner of just one social force within it (i.e., the bunker republics). In the democracies, by contrast, the state has too little autonomy from society to make and implement truly effective economic policies. So while in the praetorian republics ruling elites have to utilize the state to subdue society, thus cannot grant it sufficient autonomy for effective capitalist development, incumbent elites in the democracies have to make expensive "side payments" to constituencies in order to retain their support. Such side payments include benefits of various sorts, as well as purposeful market distortions and privileged access to state structures. As a consequence, the fiscal and monetary discipline necessary for sustained capitalist development cannot be imposed. Whereas political elites in praetorian republics are in a sense enemies of their societies, in the democracies they are prisoners of them, having to bribe social forces to construct ruling coalitions.
While building coalitions among social forces is common to many if not most political systems, in the MENA democracies the costs of coalition formation are escalated by the excessive fragmentation of political communities and a concomitant fracturing of political institutions, as suggested by the absence of majoritarian political parties in any of them. In Israel, Lebanon and Turkey the formation of government has traditionally been a laborious process of stitching together minority parties, with the glue being side payments to those parties and the social forces they represent. So in Israel, for example, the dominant Labor Party from 1948 to 1977 made a side payment to the National Religious Party to induce it into the governing coalition dominated by Labor secularists. That side payment took various forms, including the portfolio of education, which in turn provided the means for subsidies to be channelled to religious educational institutions. In the Islamic Republic of Iran, where political parties are illegal, virtually the entire governmental apparatus is an elaborate coalition of competitive factions to whom various sinecures and fiefdoms are parcelled out.
In all the democracies the primary business of government, as suggested by political rhetoric which focuses largely on ethnicity and religion, is wrestling with the various problems of political identity that beset these fragmented polities. Business in its pure sense is thus a secondary matter, as the raison d’etre of the state is not managing the economy to maximize growth, but utilizing resources to contain or resolve identity issues and conflicts. While the costs to economic development of this approach are substantial, they are not as high as the costs incurred by the praetorian republics, where the state seeks to stifle expressions of societal interests. It must, therefore, not only invest heavily in coercive resources, but it must dedicate state institutions to the control, rather than the development of the society and economy.
The conflicting identities that undermine political cohesion in the MENA democracies are in all cases multiple and overlapped with material inequalities, which further exacerbate conflicts. In Israel, the dominant Jewish majority is divided between Ashkenazim (European) and Sephardim ("Oriental"), and between secularists, ultra-Orthodox and Hasidim. The subordinate Arab population is divided between Christians, Druse and Muslims, differences that have taken on increasing social and political importance in parallel with increasing intra-Jewish tensions. While the two dominant Israeli parties have always been led by Ashkenazim, those parties have had to form coalitions with parties representing either Sephardim or Ultra-Orthodox, and occasionally even with Arab parties. These contending social forces have, as payment for their support of the coalition, been allowed to penetrate governmental institutions, including the public sector of the economy, converting them into resource-generating satraps. Down-sizing the state in Israel thus involves attacking power bases of contending groups. It could only be achieved through a broadly based compromise or by a very dominant, strong coalition, prospects for either of which recede ever further as ethno-religious identities increase in political salience. Possessing technology, capital and skilled labor in abundance, Israel’s primary economic problem is its inability effectively to deploy those factors of production. The state is preoccupied with maintaining socio-political harmony between competitive ethno-religious groups, to say nothing of national security, not with responding to the economic challenges and opportunities of globalization.
The Turkish Republic, the other ethno-religious democracy, labors under an even heavier burden of identity conflicts, a burden which its democracy has been unable continuously to sustain. On three occasions since the establishment of democracy in Turkey in the mid-Twentieth Century, the military seized direct power, while on a fourth, in 1997, it removed from power a duly elected Islamist government, replacing it with a weak governing coalition dependent upon itself. The self-appointed guardian of the Kemalist legacy of Turkish secularism, the military is necessarily in opposition to all non-secularists and non-Turks, the most numerous and politically important of which are Kurds and Islamists. While the military’s chosen instruments to deal with these social forces are coercive ones, the civilian political system, when it is allowed by the military to struggle with identity and other issues, responds much as the Israeli system has. Standard operating procedure is the making of extensive side payments to politicians and the social forces they represent in order to secure their support. For this reason the governmental budget remains in chronic deficit, inflation continues at one of the highest levels in the region, the Turkish lira steadily devalues, the public sector persists as a substantial net drain on national resources, and the state in general remains disproportionately large for the size of the economy. As in Israel, fiscal and monetary discipline have to be subordinated to the demands of forging ruling coalitions out of unruly, competitive and distrustful social forces, or to the subordination by coercion of one or more of those forces. Although Turkey’s factor endowment is not as generous as Israel’s, it is much more substantial than its economic performance indicates.
Lebanon’s democracy is typically described as "consociational," by which is meant that democracy is achieved in circumstances of societal fragmentation through the coalition building efforts of the leaders of those forces. Because of the centrality of political elites to the viability of the system, Lebanese political institutions are comparatively weak. Personal networks leading up to those elites constitute the main sinews of political, social and economic life. State institutions in Lebanon, even more than in Israel or Turkey, serve the function of maintaining socio-political tranquillity and ruling coalitions, which they do by virtue of being carved into precisely determined shares for each of the seventeen officially recognized "confessions," and by serving as conduits of patronage to them. Socio-political fragmentation in Lebanon is yet more pronounced than in either Israel or Turkey, so the primary challenge of government is simply keeping the country together. The only viable political economy in these circumstances is one in which the state does little more than adjust weights in order to maintain sectarian balance, leaving most of the tasks of economic management to others. The reaffirmation of laissez faire as being the only approach which the fragile political economy can sustain was provided in the wake of the civil war, when an attempt was made to construct a Sunni Muslim dominated, relatively activist state within the shell of the multi-confessional, laissez faire one. From 1992 to 1998 the government of Prime Minister Rafiq Hariri sought to erect a Saudi-style rentier state, an endeavour that ultimately collapsed because of the lack of economic resources, because of the political counter-mobilization of the other confessions, and because of ever-present regional factors, in this case the most important of which were Syrian calculations about Lebanon’s subordinate role in the peace process with Israel.(2) The paradox of the Hariri effort was that while it presented itself as an aggressive attempt at globalizing Lebanon, in fact it de-globalized what had been the most cosmopolitan of the Arab political economies. Whether a return to laissez fare is economically viable in the globalized world which has developed since Lebanon essentially collapsed in the mid 1970s is an open question, but its underlying political system essentially precludes any other model.
Iran is an outlier in the category of MENA democracies for two, seemingly contradictory reasons--it is the least "democratic" and the least fragmented into competitive social forces. The 1997 presidential election was free and fair and brought to power Muhammad Khatami, a liberal cleric whose electoral chances had been erroneously discounted by the powerful conservative clerics who, until that time, had the upper hand in government. Khatemi’s ascension to power, made possible by popular reactions against the conservative clerics, tended to even the balance between the two broad political forces, thereby causing competition between them to intensify. Although it has intermittently turned violent, that competition has been conducted essentially peacefully and within the institutions of the state, although not primarily, as would be the case in an established democracy, in the parliament. As is the case in the other MENA democracies, intense political contestation cannot be confined within the legislative branch, but spills over into all state structures, which are in turn subordinated to the interests of the competitive forces. As is the case with these three other democracies, the Iranian political system is unable to make and implement economically rational public policy, for the primary rationale of politics is conflict resolution.
The social forces most in conflict in Iran are not "primordial" as they are in Israel, Turkey and Lebanon, although antagonisms do exist between the dominant Farsi speaking Iranians, on the one hand, and minority Arabs, Azeris, Baluchis, Kurds and various other social forces, including Baha`is, on the other. Iran is in a post-revolutionary condition, in which the transition from revolution to an established order has not yet been completed, so there are fundamental conflicts between contending political actors, anchored in different social forces, over the very nature of the political system and, most importantly, the role to be played in it by Islam and the clerics who represent it. The Islamic democracy which Ayatollah Khomeini created has proven to be highly useful as a structure within which the competition over Iran’s post revolutionary future could be prevented from dissolving into chaos, but it has been inadequate as a system for economic management, as the country’s low growth and high inflation rates, depreciating currency and escalating foreign debt attest.
Clearly no form of government, including democracy, is without costs and benefits. The primary benefit of democracy in these four countries is that it has been comparatively successful in facilitating peaceful resolution of conflicts between competitive social forces. Only in Lebanon has a sustained blood letting occurred, but that was when the democracy broke down. In Turkey, the counter insurgency campaign against Kurds has been run by a military that is not under civilian control. These partial exceptions, when compared to much more devastating and protracted violence in Algeria, Iraq, Sudan, Syria, and Yemen, for example, suggest what a benefit societal peace truly is. On the other hand, that benefit comes at the very substantial cost of these countries’ abilities to respond effectively to globalization. Their governments are concerned primarily with resolving problems that arise from conflicting identities, not with imposing the economic discipline necessary for improved international competitiveness. Indeed, those two objectives are for the most part contradictory. Overgrown state structures, including large public sectors--with the partial exception of Lebanon--are retained precisely because those structures help to alleviate conflicts between competitive social forces. That the state is penetrated by at least some of these social forces is detrimental to economic performance, but it is less detrimental than if just one social force controls the state, or if the state is virtually autonomous from all of them, thus having to impose its will by the threat of force. In the brief sections that follow we will identify some of the economic costs that each of the four countries has had to bear as a result of its democratic political system.
ISRAEL [top]
Israel’s endowment of factors of production suggest that it should be the most successful MENA country in meeting globalization’s challenges. Its human resources are the envy of the region. Life expectancy, at 77.5 years, is the highest in the MENA. It is one of the few MENA countries that outperforms its level of income on the Human Development Index, as presented in Table 1-1. Perhaps most relevant to globalization is the fact that Israel has the highest percentage of scientists in its population of any country in the world, with 135 for every 10,000 citizens, compared, for example, to 85 in the US.(3) Israel, although having no oil, is almost as well endowed with capital as the MENA’s wealthiest oil exporters. On a per capita basis its GDP is higher than that of all but the minuscule GCC oil producers--Kuwait, the UAE, Bahrain and Qatar. If foreign public and private capital transfers are included, capital available per capita in Israel is the most in the MENA. FDI amounted to some $7.4 billion between 1993 and 1997 (see Table 2-7), compared to the next highest MENA performer, Egypt, at $3.9 billion. Israel receives more public foreign assistance per capita than any other country in the world if military assistance is included.
A superficial overview of Israel’s economic performance might suggest that it is cashing in on its rich factor endowment. Its manufactured exports rose from $7.2 billion in 1987 to $20.7 billion a decade later, making them the region’s most valuable, just ahead of Turkey’s at $19.7 billion (see Table 3-1). Of these exports, high-tech goods and services accounted in 1997 for almost one third, or some $6.2 billion, which is far and away the highest proportional and absolute amount in the MENA.(4) Its Intra-industry trade index rating of .584, the highest in the MENA, suggests that Israel is the most integrated into global commodity production chains (see Table 2-5). That Israel succeeded in bringing its import duties down from 4.9 per cent of total tax revenues in 1987 to only 2.1 per cent five years later and .5 per cent by 1997, the lowest in the MENA, suggests a commitment to become globally competitive, as does the fact that its effective duty rate of .7 per cent in 1997 was also the lowest in the MENA (see Table 3-1). The share of domestic credit provided to its private sector, which was about two thirds in 1995, is only below Tunisia’s (see Table 3-8). Outstanding economic performance, if that is what it in fact is, would be consistent with Israel’s relative political capacities, which, as shown on Table 3-7, are on all three dimensions--extraction, credibility and transparency--the highest in the region.
A more detailed examination of the economic data, however, reveals that Israel’s economic performance has been uneven. Among the first MENA countries to undergo economic stabilization, which it did in the mid 1980s, Israel has been unable to bring its inflation rate since then down even to the level of such MENA competitors as Jordan, Morocco, and Tunisia, to say nothing of the GCC countries, whose inflation rates are the lowest in the region (see Table 3-2). Israel’s budget deficit is the only one in the region, other than Turkey’s, to increase rather than decrease between the late 1980s and mid 1990s (see Table 3-2). These figures would suggest that Israel continues to experience difficulties in maintaining its stabilization measures. Its average per capita GNP growth rate, which at 4.5 per cent for the period 1965-75 was the highest in MENA, deteriorated in the following decade to 1.2 per cent, making it among the lowest in MENA. It recovered in the decade after 1985 to again become one of the region’s leaders, but after 1995 fell off rapidly, dropping by 1997 to a negative .6, compared to the MENA average of .8 (see Table 1-2). As has been the case virtually since the state’s foundation, Israel continues to run a significant balance of trade deficit. Israel’s economic performance has thus been mixed, suggesting that it is not utilizing its factor endowment as well as it could.
The explanation of Israel’s economic under achievement lies primarily with the nature of the state and society and the relationship between the two, which may in fact be too close from the perspective of economic competitiveness. Civil society in Israel has from the outset been closely tied to the state, the Zionist enterprise being a centrally organized one with capital provided through the organizations that ultimately became integrated into the state itself. Capital in Israel has traditionally been concentrated and lacking autonomy from the government. The close association with different elements of the Zionist movement of three of the four largest commercial banks illustrates the nexus between state and capital. Bank Leumi was founded shortly after the turn of the century by the Zionist movement, which continued to own it until, like the other big banks, it came under direct government ownership in 1983. Bank Ha’Poalim was controlled by the Histadrut, the Israeli Labor Federation, and Bank Ha’Mizrachi was owned by a movement of Orthodox Jews that constitutes one of the country’s political parties. What amounted to the nationalization of these banks in 1983 resulted from a financial crisis brought on by them having utilized their depositors’ funds to speculate in their own shares. The ensuing crash caused the stock exchange to be closed for two weeks as the government put together a rescue package that transferred to it controlling interest in the banks, where it remains.
Other indications of the "French" nature of the Israeli banking system are the lack of autonomy of the Central Bank and its requirement that commercial banks place on deposit with it a substantial percentage of their time deposits. This latter measure provides the government "cheap" money at the expense of depositors, increases the spread in interest rates between deposits and loans, keeps interest rates at high levels, and in general provides a disincentive for competitive banking. Having structured much of Israeli manufacturing and commerce into cartels, the government then utilized the banks to ration credit to them, something which the banks preferred as "it provided a guarantee in the sense of diminution of the risk incurred by the lending bank." (5)
Mirroring the non-autonomous, concentrated banking system, the Israeli economy until very recently was under tight governmental control. The cartels just referred to, which were founded during the 1930s and strongly supported by the chief business lobby, the Manufacturers’ Association, dominated the large scale "private" sector until the late 1980s and still play a major role. These cartels were supported not only by the allocation of credit through he banks, but by high tariffs and extensive export subsidization, the latter of which have now been reduced or eliminated. The companies within the cartels were and, in some cases, still are owned by the leading banks. The legal framework within which they operated typically provided monopolies and some, such as those regarding the importation, shipping and sale of oil, still do.(6) Alongside the nominally private cartels, the public sector provided for direct governmental involvement in the economy. As late as the mid 1980s it accounted for about a quarter of the ownership of the country’s largest fifty enterprises, and very much more if the Histadrut controlled companies are thought of as being in the public sector, which for all intents and purposes they are. Histadrut controlled companies accounted in the 1980s for about one fifth of all employment and an equal share of the GNP, bringing the total public sector’s share of ownership of large companies to more than half, its employment to more than one third of the country’s total, and its contribution to GNP to just less than one half.(7) The legacy of such direct state control and involvement in the economy is reflected by the continuing absence of large, truly private companies. None make it onto the list of the world’s largest 500 corporations. On the list of the MENA’s 50 largest ones, Israel contributes a handful, proportionately fewer than the relative size of its economy and fewer in absolute numbers than Turkey and several GCC countries.
Civil society’s search for material resources thus inevitably led it to the state, with the politicians acting as doorkeepers. For the secular left the dominant role of the state, manifested especially as it was for them in the Histadrut, was ideologically acceptable while being sound tactically, for the left controlled that state without interruption from its formation until 1977. What is harder to understand is why the right, as represented by the Likud Party and its allies since 1977, has accepted more or less the same formula of quasi-socialism, ostensibly committed as they are--or at least as election propaganda would have it--to a free market economy.
That paradox is resolved with reference to two considerations--the primary objective and political base of the right. That objective has been to maximize the size of the country, not economic growth. Committed to Greater Israel, Likud and its allies have needed the state to fulfill their Zionist dream. Business, if left to its own devices, might well decide that a smaller Israel and peace with its neighbors would be better for business than an aggressive, expansionist state. Likud, in other words, has never really trusted the large scale, cosmopolitan private sector, nor been trusted by it. So a natural alliance between business and the political right has never eventuated, leaving the Labor Party to develop ties with the private sector. So Labor has been the principal architect of Israel’s most effective responses to globalization, including the original stabilization program, but there are real limits on how far Labor, given its heritage and continued linkages to labor, can go in fostering capitalism.
The political base of the right also impedes its embrace of capitalism. Increasingly that base has become Sephardim, the poorest, most marginal component of Jewish society. Constituents of the right are thus yet more demanding of social transfers and services than those of the nominal left, whose ideology and long established expectations also support such expenditures, even though their income levels and ties to the private sector may not. For coalitions of the right or left, therefore, reining in the budget is politically difficult to the point of being impossible, so deficits, inflation and pervasive governmental involvement in the economy continue to hobble Israel’s growth. The manner in which the budget has had to be trimmed reflects the political calculations of both left and right. Since stabilization commenced, public expenditure has fallen from 75/80 per cent of GNP to about 55 per cent. Those categories of expenditure favorable to business, including debt service, export and other subsidies and domestic defense procurement, have fallen most rapidly, while social transfers and services have actually grown in both absolute and percentage terms.(8) Although the public sector has been reduced, most notably through the sale of the Koor conglomerate and other Histadrut-owned enterprises, some components of it that are large employers, including electricity and telecommunications, have been expanded.
Israel thus has an extremely "brainy" economy, but one in which the brain power is not as effectively deployed as it would be were the two principal competitive political forces not both to look to the state for material resources in their efforts to gain and exercise power. Compounding the problem of the state being the main instrument to integrate highly disparate social forces, virtually all of which subscribe to the belief that the primary role of the state should indeed be that, is Israel’s capitalist legacy. It is, in comparison to the size and robustness of the economy, extremely poor, for the state led development from the outset, imposing a French model on the financial sector. Israel’s real capitalist tradition is barely a generation old, if by tradition is meant the high-tech private sector which is becoming the backbone of Israel’s attempts at export led growth. The entrepreneurs behind this drive typically emerged from the state itself, especially its military-industrial wing. So, for example, former computer engineers from the Israeli army established Checkpoint, a company which now commands 40 per cent of the global market for network firewall systems, which protect corporations from hackers. In 1997 Checkpoint exported $86 million worth of such products. Companies similar to this account for a very large proportion of the 109 Israeli firms listed on US stock markets, which have a total value of $29 billion. Israel has more than 3,000 high-tech start ups annually, more than any other country except the US.(9)
Israeli capitalism is thus "spinning off" from the state, a development that presumably will continue, but may or may not gather more pace. A resolution of conflicts with her Arab neighbors and final definition of the borders and nature of the state may well be preconditions for export led growth of East Asian proportions, the empirical preconditions for which Israel certainly already possesses. But as long as the Revisionist Zionist agenda preoccupies the right and as long as both major political forces remain finely balanced and unwilling to take the risk of leaving their moorings in the state to forge new coalitions with the private sector, the high-tech and other components of that private sector will remain hobbled by a state that is consumed primarily with resolving Israeli’s identity conflicts, rather that fostering more rapid growth.
TURKEY [top]
Turkey’s economic performance, like Israel’s, has been uneven, not realizing the potential inherent in its factor endowment, and considerably less than "serious economists" have hoped it would achieve. In the early 1980s, Turkey became a prize pupil of the IMF and World Bank, hence the recipient of massive infusions of public foreign assistance in support of stabilization and structural adjustment programs. By the end of the decade, however, when stabilization had achieved only mixed results and the prize pupil still baulked at implementing much of the structural adjustment program, the purveyors of the Washington Consensus lost interest in their one-time protégé. Turkey’s "stabilizing" role in the Arab-Israeli conflict, by which is meant its tacit support for the latter, combined with its renewed geo-strategic importance in the wake of the collapse of the Soviet Union, nevertheless ensured continuing external public support for its economy, albeit at reduced levels.
Residues of what was touted in the early 1980s as the Turkish economic miracle are still reflected in the data. GNP growth per capita (see Table 1-2) was higher in the decade after 1985 than in the decade before, and achieved almost 7 per cent in 1997, after Tunisia the best performance in the region. Manufactured exports as a percentage of GDP rose appreciably in the decade after 1987 (see Table 3-1), resulting in Turkey ranking fourth in the MENA on this measure by 1997, after Israel, Jordan, and Tunisia, but second in absolute amount, just behind Israel. Its growing integration into global commodity production chains is reflected in its score on the Intra-Industry Trade Index, which jumped from .159 to .284 between 1984-86 and 1992-94, placing it behind only Israel, Oman, and Tunisia, and at about the same level achieved by the Andean Pact countries. Despite shaky financial management and turbulent politics, Turkey during the 1990s continued to attract large amounts of foreign private capital, attracting more FDI than any other Muslim country in the region than Egypt (virtually all of whose FDI was concentrated in the oil industry) and, among these countries, the most private equity investment in its stock market (see Table 2-7). Contributing to Turkey’s attractiveness for investment has been its financial system, which boasts a comparatively large and active stock market (its value traded as a percentage of GDP being the highest in the region, see Table 3-8) and a deconcentrated, private sector led, competitive banking system. More remittances pour into Turkey than any other country in the MENA. It ranks fifth in the region on the CIM ratio measure of institutional credibility, seventh on the transparency index and eighth on the extraction index (see Table 3-7).
Uneven economic performance, however, is suggested in the first instance by measures of financial stability, which reveal extremely weak governmental discipline over the budget, given Turkey’s level of overall economic development. Turkey’s inflation rate, which vexed the "serious economists" throughout the 1980s, in fact has increased in the 1990s, reaching the region’s highest level of almost 86 per cent per annum in 1997, as compared to an average of 51 per cent in the 1985-89 period (Table 3-2). Driving this almost runaway inflation are large budget deficits, which have grown from 3.5 per cent to 8.4 per cent of GDP during the same period (Table 3-2). Its debt service ratio has in the 1990s remained just below that of the region’s worst offenders, Algeria, Iran, and Morocco (Table 2-8). Fiscal laxity appears to be due in considerable measure to the public sector’s drag on the economy which, despite extensive privatization in the 1990s that dropped its share of employment from 3.7 per cent in the late 1980s to 2.9 per cent in the 1990s, sucked up substantially more government provided capital in this latter period. Indeed, the public sector’s consumption of public monies more than doubled as a percentage of GDP over those years (see Table 3-3). Reflecting the surprising persistence of the public sector in this "prize pupil" economy is the fact that in the mid 1990s its private sector received credit that amounted to a lower percentage of GDP than all MENA countries except Algeria, Sudan, Syria and Yemen, hardly the company the "serious economists" would like Turkey to be keeping.
Incurable governmental profligacy stems from political weakness, a malady which the IMF and World Bank thought would be overcome by military rule in the early 1980s. That intervention was, however, a relatively brief interlude, for Turkish civil society is too developed for unveiled military rule to persist. The fragmentation of political parties is such that the largest of them does not obtain much more than a fifth of the votes in parliamentary elections. Underlying that fragmentation are rifts between competitive social forces that threaten and indeed have resulted in extensive violence over the past twenty years. The major task of Turkish democracy is thus attempting to resolve such conflicts as peacefully as possible, a task which requires much more liberal distributions of governmental resources than neo-liberal textbooks prescribe.
The utilization of governmental largesse for the political objectives of sustaining coalition governments and dampening societal conflicts dates to the commencement of competitive democratic politics at mid century. At that time the primary political divide was between the urban based elite whose power stemmed from the state, and rural social forces who felt and indeed were disadvantaged by the workings of that state. This divide continues to be a central one, but the political expression of the interests of those rural social forces that were first mobilized into politics against the then ruling Republican People’s Party by the Democratic and then Justice parties, has changed. Most notably that expression is now largely, although not entirely, within an Islamist framework. The thesis of a secular, state based civilian elite backed ultimately by an ardently secular military establishment, has over the past quarter of a century stimulated an Islamist antithesis that appeals to those who resent what they see as the privileges of that elite, although it is fair to say that both sides have drawn liberally upon the state’s resources when they have been in power. So while the Turkish--Kurdish ethnic conflict erupted into a civil war that has dragged on throughout the decade of the 1990s, it is not perceived by the secular elite to be as politically threatening as Islamism, for while Kurds could not actually displace that elite from power, Islamists could and nearly did.
It was that fear that led the military to dismiss from government in 1997 the Islamist Welfare Party, which had won more votes in the December 1995 elections than any other party. Following the dismissal the National Security Council, the organization through which military control over civilian government is exercised, instigated a purge of Islamists that resulted in the dissolution of the Welfare Party and the banning from politics of its leadership. Yet constraints on arbitrary rule are considerably greater in Turkey than in the Arab praetorian republics. The military could not "eradicate" Islamists as in Syria, for example. A new, successor Islamist party, the Party of Virtue, was permitted to form and contest the April, 1999 elections, in which, despite considerable harassment by the authorities, including threats to close it down, it managed to finish third in the balloting. Moreover, the Virtue Party has attracted yet more young, urban elements into its ranks, while further moderating some of the planks of the former Welfare Party’s platform, including disavowal of its opposition to entry into the EU.
The tenacity of Turkish Islamism reflects the strength of the thesis against which it is reacting, and the relative autonomy and power of the capital base upon which it rests. As for the thesis, it is the nexus of military--bureaucratic--entrepreneurial elites who have been the primary beneficiaries and wielders of state power under the Republic, first created in 1923. The ideological component of that thesis has been Turkish secularism, while its economic content was, until the 1980s, state led, import substitution industrialization ISI). When ISI had clearly run its course and the World Bank and IMF stepped in to help shoulder the financial burden at the outset of the 1980s, the state based elite rapidly shifted gears, presenting themselves as advocates of export led growth within the framework of a free market economy. But the nexus between those in the state and the large, cosmopolitan, primarily Istanbul based capitalists it had spawned remained in intact, although the latter came in the 1990s to advocate a much more open economy and even polity than the military and its civilian bureaucratic and political partners were willing to tolerate. The economy thus came to be a much more sophisticated and successful version of the crony capitalism which also emerged in Egypt at about this time. Intensification of conflict between the secular, state based elite, on the one hand, and Islamists and Kurds on the other, narrowed the space for the crony/entrepreneurs, whose clamorings in the early part of the decade for more economic and political freedom subsided as the conflicts intensified and the threat to their own interests as posed by Islamists became more apparent.(10)
That Islamism has been able to withstand the state’s heavy blows attests to the resources at its disposal. Its political leadership is comparatively sophisticated, at the highest levels having been active in Turkish democratic and even parliamentary politics for a quarter of a century. Necmettin Erbakan, the leader of the Welfare Party, for example, was actually a cabinet member in the 1970s. A host of the Party’s members cut their political teeth as mayors of Turkish towns and cities, including Istanbul itself. Islamist political leadership can draw on a dense network of Islamist social organizations that provide both human and material resources for political contestation. That Turkish Islamism has eschewed violence has also reinforced its position, for it has been hard to present it as being "beyond the pale." Its nonviolent approach results at least in part from Turkish democracy, which has offered that movement a path to power, albeit one strewn with obstacles.
But political talent, Islamist voluntarism, and a democratic system would, by themselves, be insufficient to sustain Islamism as the country’s largest and most effective political movement, were it not for the material resources upon which it can draw. Those resources include the large scale, formal financial system, a more informal adjunct of it, and the plethora of small and medium business enterprises owned and operated by provincial capitalists, especially those in the country’s heartland of Anatolia, whose cultural roots are Islamic and who resent the secularism and governmental privileges bestowed upon the big capitalist cronies of the military/political elite. Islamic banks in Turkey date to the early 1980s, when the then Prime Minister, Turgut Ozal, was seeking to develop economic linkages to the oil-producing Arab states and a domestic political counterbalance to the secular left, which he was seeking to destroy to help pave the way for structural adjustment. The Islamic banks founded then have prospered and provided a source of capital to a steadily growing small to medium Islamist business sector. Joining the Islamist banks have been numerous investment companies which, like their Egyptian counterparts, have specialized in serving the financial needs of Turkish workers abroad, especially those in Europe and which, precisely because they pose both economic and political threats to the state, have become the target of its retribution. As far as "Islamist capitalists" are concerned, their growing material and organizational capacities are reflected in MUSIAD, the Association of Independent Industrialists and Businessmen, which was founded in 1990 and has come to aggregate their interests and speak on behalf of them.
The globalization dialectic in Turkey has thus proceeded much further than elsewhere in the region, a consequence of the country’s more open polity and developed economy. Globalization spawned a first generation of state-linked capitalists, who, had they not been outflanked by a second generation of moralizers and hemmed in by them on side and the state on the other, might have been able to engineer a more thoroughgoing liberalization of the polity and economy. But their economic links to the state and fears of the Islamist challenge have led them to back peddle on earlier demands for reform.(11) This has, in turn, cleared the way for an Islamist antithesis, which is seeking a synthesis between the globalist challenge and an Islamist response. Because Turkey may be a model that other countries in the region might emulate, which in fact it has been in the past (Nasser, for example, was apparently much influenced by Ataturk and his state centered approach), and because the synthesis has developed further there than elsewhere, it is worth highlighting some of its key elements.
The economic response is an effort to reconcile globalism and Islam, not use the latter in an attempt to combat the former. That reconciliation, or synthesis, includes several dimensions. One is an embrace of the world capitalist economy and even the instruments of the Washington Consensus. The Welfare Party, for example, nurtured strong ties to the IMF and World Bank. A second is an embrace of the Washington Consensus itself. Indeed, having been less favored by the state than their secularist competitors, Islamist capitalists in Turkey are ardent free marketers, wanting the state to be dramatically downsized. The Welfare Party, for example, privatized at a faster pace than any other government in Turkish history. But the embrace of globalism is not uncritical nor without qualifications. For one thing it requires recognition and utilization of Islamic methods of finance. For another it seeks implementation of some elements of an Islamic "moral economy," in which competition is tempered by ethical and moral concerns. This particular element of the synthesis appears to grow out of the very nature of Islamsit capitalist enterprise in Turkey, which tends to be small and medium scale and family based. It is, therefore, stridently anti-labor union, arguing that commonality of interests of owners and workers, with recognition of their mutual and shared objectives, should provide the guidelines for any model of labor-management relations. Finally, the Islamist synthesis prioritizes the Islamic world as a source for capital and markets and general economic interaction.
The globalization dialectic has, however, been at least temporarily arrested in Turkey by a government intent on limiting, if not destroying the capacity of Islamism to formulate and enact its synthesis. Whether the synthesizers are able to withstand this pressure and return to the fray, will succumb to the pressure and be superseded by either the first moment secularists or much more radical moralizers, remains to be seen. In the meantime the Turkish state and economy are held hostage to these and other political struggles that limit the freedom of both political and economic markets.
IRAN [top]
The Islamic Republic of Iran has contributed much less to a viable synthesis between globalization and Islam than has secular Turkey. This paradox results from the fact that in post-revolutionary Iran there has been no sustained dialogue between globalizers and moralizers. The revolution swept away the secular, pro-western elite and delivered the state to Islamists, thus removing the thesis against which an Islamist antithesis could react. Instead of becoming a tool with which to forge a synthesis with globalization, the Islamic state turned in on itself, both because of the imposition of sanctions by the US, and because of the perceived need to consolidate and defend the revolution. Thus it became the exercise of state power, rather than a reaction against it or the use of it in the international economy, that has preoccupied Iran’s moralizers. And as in other MENA democracies, the state has been used more as a distributive tool to alleviate socio-political conflicts, than as an instrument with which to propel more rapid economic development.
To be fair, the regional and global contexts have hardly been propitious. Since the revolution of 1979, the Iranian government has had to contend with an eight year war with Iraq, an economic embargo imposed by the US, a massive influx of refugees from Iraq and Afghanistan, and two oil price collapses, one in the mid 1980s and another in 1998-99. But the instinctive impulse of Iran’s Islamist revolutionaries, once in power, was in any case inimical to economic growth or formulating a productive response to the challenges of globalization. That impulse included, as is typically the case in the wake of revolutions, nationalization of the means of production. In 1983-84, 28 of the country’s 36 banks, 13 of which had foreign partners, were nationalized, followed by forced mergers that reduced the number of banks to six commercial and three specialized ones and the number of total branches from some 8,300 to less than 6,600.(12)
In order to control private enterprises, including those formerly owned by the Shah’s Pahlavi Foundation, the mullahs established bonyads, or what a former Iranian Minister of Finance has referred to as "independent and monopolistic. . .mafia-type religious conglomerates."(13) Bonyads co-exist uneasily alongside a directly state controlled public sector comprised of yet other nationalized enterprises, as well those which the Islamic revolutionaries inherited directly from the Shah’s large public sector. Of these two "public sectors," the one under the direct control of various factions of mullahs, rather than the state itself--namely the one consisting of bonyads--is much the larger. The oldest and biggest bonyad, the Foundation for the Oppressed, which was formed to take control of the assets of the Pahlavi Foundation, "is second in size only to the central government." It is claimed by its president to be the largest economic enterprise in the Middle East.(14) It accounts for a fifth of all textiles and apparel produced in Iran, a quarter of the sugar, and about half the beverages, plus dominant shares of construction materials markets. A home-grown structural adjustment program that was launched just after Ayatollah Khomeini’s death by President Ali Akbar Hashemi-Rafsanjani, was bitterly and successfully opposed by conservatives, especially those entrenched in the bonyads. The privatization program ground to a halt by 1994, leaving the state and the bonyads in control of four fifths of the economy, producing some 5,000 different goods and services, employing about a fifth of the labor force and handling about three-quarters of all imports and achieving total annual sales of $3.5 billion.(15) The budget of the 404 largest public sector firms amounted to almost 40 per cent of GDP by 1997. The share of all public firms’ allocations in the general budget increased from 53 per cent in 1989 to 67 per cent in 1996. Their claim on bank loans during that period rose from 8 to 30 per cent.(16)
The combination of a massive, politicized but fragmented public sector, a large government penetrated by competing factions into which the Iranian revolution has evolved, and a rising level of poverty and unemployment with accompanying political apathy and antipathy, has led inexorably to distribution triumphing over production as the primary logic driving economic policy. Factions have vied with one another to build and service constituencies by distributing governmental largesse. As a consequence the usual indicators of fiscal profligacy, including high inflation, budgetary deficits and a declining currency, characterize the Iranian economy, whose inflation rates have been exceeded only by Turkey and Sudan in the 1990s.(see Table 3-2) The Iranian riyal, for which the government has established four exchange rates, trades on parallel markets at about one third of its nominal value. (See Table 3-2 ). In the late 1990s, Iran’s debt servicing as a percentage of its exports blew out to about one third, the highest in the region. (Table 2-8). Tariffs were doubled on "non-essential" imports in 1998 and many items added to the list of prohibited imports. Capital flight intensified as the end of the decade approached and capital available for investment declined, dropping from about one quarter of GDP in the mid 1970s to 15 per cent in the 1990s. As one Iranian economist has noted, "Iran’s post-revolution adjustment policy has protected private consumption at the expense of investment."(17)
The election of Muhammad Khatami as President in 1997 resulted in part from a wide-spread desire for improved economic performance, a desire to which his new government attempted to respond by fusing "development with social justice" as part of a strategy to satisfy both the champions of continued welfare subsidies and reformist technocrats.(18) But the combination of plummeting oil prices in 1998-99, division within Khatami’s own camp and, most of all, staunch opposition by the leadership of the conservative faction, entrenched in the bonyads and various parts of the state apparatus, caused the mild reform to be stillborn. Even luke-warm attempts to render more transparent the state’s accounts, which include large but unknown transfers and subsidies to the bonyads from the public treasury, ended in failure. In the first year of Khatami’s presidency no more than one fourth of the some 1,200 state enterprises even bothered to submit their annual financial reports. Although the finance minister promised closer supervision of public finances, some of the public sector companies financed by the state transferred money out of Iran and invested abroad "without the control authorities’ "knowledge of the nature and magnitude of these outlays."(19) Significantly, on our transparency index, Iran ranks only ahead of Syria and Yemen in the MENA (see Table 3-7).
The opacity of the Iranian political economy is purposeful, as competitive factions entrenched in the state use its resources to vie for power. As these struggles have intensified they have polarized the factions, which have coalesced into two basic camps. "Conservatives"--in the sense that they want to conserve what they see as the gains of the revolution--claim the mantle of Ayatollah Khomeini. They seek to maintain the rule of the mullahs, most especially through the supremacy of the post of velayat-e faqih, or religious jurist, which is occupied by their leading figure, Ayatollah Khamani`i. The Moderates, also known as liberals, reformers or technocrats, found their champion in President Khatami. They advocate greater respect for the rule of law, a commensurate reduction in revolutionary zeal, and more democracy, including an expanded political role for non-clerics.
The steadily intensifying struggle between these two factions has resulted in the state being carved up between them, such that each controls counterbalancing fiefdoms. The constitutional/legal structure of the Islamic Republic, which is extraordinarily elaborate, is both the result of and a continuing cause of this fragmentation. The executive and legislative branches consist not just of a single executive and legislature, but of numerous institutions assigned roles in both domains. The supreme leader, or faqih, is counterbalanced by the President, and both have to deal with the Assembly of Experts, the Council of Guardians, and the Council for Discernment of Expediency, to say nothing of the parliament and the various components of the executive branch, almost all of which share in Byzantine fashion numerous executive and legislative functions. Roughly speaking the Conservatives, whose champion is the faqih, are entrenched in what might be thought of as those institutions that parallel the normal state structure, within which the Moderates, led by President Khatami, are entrenched. So, for example, the Moderates tend to control the Council of Ministers, the Central Bank, and mayors, whereas the Conservatives hold sway in the judicial branch, the legislature, and the Assembly and Councils identified above.(20) In the economic domain, the major bases for the Conservatives are the bonyads as well as the networks of religious institutions that generate revenues, whereas the Moderates, centered as they are more in the executive branch, are responsible for the governmental public sector as well as the treasury, through which taxes, as well as oil and gas revenues, nominally pass. Complicated as this structure is, it is made yet more elaborate and inefficient by competitive jurisdictions between various ministries, such as the three that are responsible for eduction (e.g., Eduction, Higher Eduction, and Islamic Guidance) or agriculture (Agriculture, Sazandegi and Cooperatives). The vital means of coercion are also divided between the two major factions, with the Conservatives having much the larger share.
Such governmental complexity precludes transparency and renders personalistic connections vital to the conduct of any business, small or large. Thus the factions rest upon patronage networks that weave down through the state and into society, thereby integrating social forces into the governmental structure itself, which enjoys no autonomy or institutional integrity. Democracy, which in Iran takes the form of different components of the state and quasi-state being penetrated and controlled by competitive political factions roughly representing different social forces, has had obvious costs and maybe some not so obvious benefits.
The costs are born principally by the economy, which is viewed essentially as a pie to be carved up by the competitive factions, rather than as a cluster of factors of production that need to be integrated by appropriate public policy and actions of private actors. As a leading economist of Iran has noted, its economy resembles that of a centrally planned one but "without the central planning."(21) Iran’s non-oil exports have slid steadily in the 1990s, making the country yet more dependent upon oil than it was under the Shah. The Islamic banks created in the early 1980s, like all other financial institutions, operate in conditions of near-chaos that prevent them from developing any significant capacities to assess risks and utilize their capital accordingly, to say nothing of their inability to forge a new synthesis with secular globalization. The deglobalization of Iran results less from the embargo imposed upon it by the US than by the nature of its political system. Accordingly, when that embargo is lifted, as by 1998 it began to be, the capacity of Iran to respond is too limited for it to take much advantage of more favorable regional and global contexts.
But the benefit of this fragmented, Islamic democracy is that it probably has helped avert degeneration into serious political violence, even civil war, which might have happened were it a more authoritarian, winner--take--all system. While this prospect cannot be entirely discarded and growing economic pressure may ultimately contribute to its eventuation, the democratic characteristics of the Islamic Republic have given large numbers of Iranians stakes in the system and have prevented a single target of popular wrath from emerging. As presently constituted, however, the political economy is not sustainable for it cannot provide the preconditions for the emergence of a successful Islamic or any other form of capitalism.
LEBANON [top]
The paradox of the Islamic Republic of Iran is that it has contributed less than the secular Republic of Turkey to the development of a synthesis between globalization and Islam. This unexpected outcome results primarily from the fact that Iran has deglobalized since the revolution, a consequence of sanctions being imposed upon it and of the bifurcation of the state between competitive factions, which has caused the economy to be inward, rather than outward looking. Lebanon, in which a similar bifurcated state emerged in the 1990s, also has a paradoxical relationship with globalization. The most globalized of Arab countries until the mid 1970s, when civil war essentially removed it from the global and even regional economy for fifteen years, Lebanon embarked on a reconstruction program in the early 1990s that has in fact deglobalized it. Further adding to the paradox is that the reconstruction program, led by Prime Minister Rafiq Hariri between 1992 and 1998, was presented as a plan to restore Lebanon to its role as regional entrepot, to become once again a twentieth century version of Phoenician mercantilism. The political economy of Lebanon has thus traced a path that is the obverse of that followed by the praetorian Arab republics. When they were pursuing policies of import substitution industrialization and essentially isolating their economies, Lebanon was their window on the world, a cosmopolitan, essentially free-trade area governed with the light hand of laissez faire, which was sufficient to stabilize the currency, all that was really required as Lebanon’s vigorous mercantile capitalism did the rest. But when the praetorians commenced their cautious, controlled openings to the global economy in the 1980s and 1990s, Lebanon emerged from its civil war to embrace not global capitalism, but a provincial, dirigiste protectionism from which it has yet to emerge.
During the decade of the 1990s Lebanon basically squandered its factor endowment in pursuit of an inappropriate development model that resulted from political, not economic calculations. Lebanon has the highest literacy rate in the Arab world and, as revealed in Table 1-1, on the index of human development outperforms its GDP rank more than any other MENA country, with the exception of impoverished Yemen, which does well on this measure precisely because of its poverty. Comparatively well developed human resources have been matched by the nominal availability of capital. Between 1993 and 1997, Lebanon received more than a quarter of a billion dollars of FDI and managed to float externally almost $2 billion in government bonds, more than any other MENA country other than Turkey (see Table 2-7). Our evaluation of relative political capacities, as provided in Table 3-7, shows that while its extractive capacity places it in about the middle of the range of MENA countries, it ranks second on the credibility index and sixth on transparency, preceded only by Israel and the mini-states of the GCC.
But performance indicators for the economy in the 1990s tell a very different story.
Although basic economic data is scarce for Lebanon because it still has not rebuilt its capacity to gather and report it, what is available reveals inadequate performance. As a result of heavy governmental borrowing, its debt service ratio began to balloon out toward the end of the decade, more than doubling in the single year 1996-97 (see Table 2-8). Central government debt as a percentage of GDP had started to climb some three years earlier, and by 1997 had reached almost 100 per cent, the second highest proportion in countries for which data is reported on Table 2-9. Debt service by 1998 consumed half of all governmental expenditures, which, when combined with civil service salaries, which consumed an additional two-fifths of the government’s budget, resulted in only 6 per cent being available for capital expenditures. This is an exceedingly low proportion and absolute amount for a country nominally in the process of post-war reconstruction. As governmental profligacy was increasing in the 1990s, growth rates were steadily dropping, from 8 per cent in 1994 to 3 per cent three years later. The government’s voracious appetite for credit sucked funds away from the private sector as Lebanon’s private banks purchased about three quarters of the T-bills issued during the decade, which have come to constitute the bulk of the loan portfolios of many if not most of the banks. T-bills were paying in the mid and late 1990s interest at 18 per cent and more, making domestic financing far too expensive for Lebanese businesses.(22) The banking sector, however, being drip fed by T-bills, reported record earnings as taxes, in effect, were being converted into bank profits. The downward economic spiral also dragged Lebanon further away from the global economy, as tariff rates had to be raised in desperate efforts to raise revenues to reduce ballooning deficits. By 1997 some 40 per cent of those revenues came from tariffs, probably the highest proportion in the MENA. Lebanon’s balance of trade had, by 1998, become spectacularly negative, with exports of some $1 billion and imports of $8 billion.
The paradox of Lebanon, the putative inheritor of the Phoenician mercantile tradition, becoming an enclave, inward looking economy, just as most other MENA economies were beginning to look outward, results from regional and domestic political factors. Chief among the former is increasing Syrian control of the country, especially after 1990. While Syria may want its own Hong Kong, it has exerted too much control over both the polity and the economy for Lebanon to play that outward oriented role. Domestic political factors, which are shaped by Syria’s presence, can be summed up as efforts to displace the state based on consociational democracy with a more unitarian one, an effort which appears ultimately to have failed, as symbolized by the removal of Prime Minister Hariri in the fall of 1998.
Hariri, the country’s "merchant prince" who had made his fortune in Saudi Arabia, seduced his countrymen with a dream of an entirely new, steel, glass and concrete Beirut that would be the financial center of the MENA region. The Faustian Bargain he was offering was that in return for promises of petro and other dollars flowing into the country, thereby stabilizing the Lebanese Pound, they would award him the right to run the country’s affairs. The residual state was placed at the disposal of the warlords who had been recycled as politicians, giving them governmental resources to be doled out to their followers. Having struck this bargain upon coming to power in late 1992, Hariri immediately set about building his own state alongside the decrepit, confessionalized, patronage based one that he had inherited and which he essentially turned over to the other politicians.
Hariri’s state consisted of an opaque mix of public and private institutions. He imposed his confidants on the commanding heights of the state, which were those that channelled the flow of public monies. His former stock broker at Merrill Lynch became the head of the Central Bank, for example, whereas the Ministry of Finance was given to the chief financial officer for Hariri’s business conglomerate. Solidere, a private company founded and controlled by Hariri, was ceded ownership of central Beirut, whereas the Council for the Development and Reconstruction of Lebanon, nominally a governmental agency but one under the direct control of Hariri’s team, was awarded a virtual monopoly over governmental construction, a monopoly which it used, among other things, to provide a vast network of infrastructure for Solidere’s city center. From this public/private base Hariri reached out to bring the media and banking sectors under his control, buying up the most prestigious newspapers and television stations and taking controlling interests in the country’s most profitable banks, yet further enriched by the T-bills that Hariri’s Central Bank auctioned off.
Hariri, in sum, created a business enterprise, cum state, alongside the rickety old confessionalized state that he had inherited. As the years went on, "his" state came to control a much larger share of the public purse than the nominal state. Lest the mounting opposition to what increasingly in the street was being referred to as the "theft" of the country crystallize, Hariri bought the largest bloc of deputies in Parliament.
In the end Hariri could not deliver on his bargain and was sacked by the Syrians, who had come to view him as a liability and possibly a traitor as well. He could not provide the flow of funds he had promised because the public/private state he was constructing, modelled in part on the tribal/merchant states of the Gulf, was inimical to attracting large amounts of external capital. Those rentier states, after all, exist on domestically generated resources and do not attract external investments. The transparency required for such investments, to say nothing of overall political stability and physical infrastructure, were all missing in Hariri’s Lebanon. Thus, lacking his own oil rents, he had to beg his Gulf backers for intermittent infusions of capital to keep his sinking ship of state afloat, but more capital than that he could not induce into Lebanon. In the meantime, the confessionalized state had to be fed more patronage to pacify the increasingly discontented politicians and their clienteles, thus draining yet more resources away from redevelopment. Hariri’s Lebanon, in sum, was an attempt to build a rentier state without domestic rents, a venture that was doomed from the outset.
So Lebanon wasted the decade of the 1990s pursuing a false dream. It is in need of an entirely new model of political, economic, and physical reconstruction that is consistent with its factor endowment and political capacities. Its consociational democracy, which was essentially put on ice during most of the decade as the failed effort at building a rentier state without rents progressed, will ultimately have to forge the new model, or the state will be subsumed by Syria. Like the other MENA democracies, what Lebanon did in the 1990s was to use the state to provide sufficient integration of competitive social forces to reduce
the likelihood of violent socio-political conflict. In that it succeeded, but at the cost of provincializing an economy that was ostensibly to be in a process of post-war reconstruction. As in the case of the other democracies, it is clear that an appropriate model is one that seeks to limit the scope of the state, for the integration of social forces into it causes it to be driven by political, rather than economic logic. For Lebanon this was in fact the historic role model for the state, a model that many believed is what Hariri was attempting to implement, but in fact he was not. While a return to the laissez faire state of the pre-civil war era is impractical for many reasons, a more muscular version of that state would be consistent with its historical traditions, the limits imposed by the fragmented society, and with Lebanon’s economic factor endowments. But that a state that has been so marginalized by both external and internal actors can regain control of the country’s fate, remains to be seen.
Conclusion [top]
The MENA democracies govern societies that are sharply fragmented and threatened by the ever present danger of violent political conflict. For the most part they have done a better job in managing this conflict than have the bunker states, where the solution to societal conflict is for one social force to seize the state and seek to impose its will on the others. The democrats probably spend less on side payments to those social forces than either the bunker or bully praetorians spend on control and coercion. And the indirect costs to economic development of side payments are probably on balance less than the costs of obtrusive state control, which in the most dramatic cases have involved pulverization of capitalists and civil society, leaving the state without societal mechanisms to respond to whatever opportunities public policy might provide. Thus the democrats are rather more capable of meeting the challenges of globalization than the praetorians, but, because they govern more fractious societies, not appreciably better placed than at least some of the monarchies. By and large, however, the democrats are less frightened of information flow, have stronger civil societies, more developed and competitive economic institutions, lower transaction costs, better established external linkages and, in general, are more cosmopolitan than either the praetorians or the monarchies. But in all MENA democracies, political systems continue to impede more rapid growth because questions of identity and security take precedence and drain resources.
Endnotes [top]
1. Egypt: A Comparative Study of Foreign Direct Investment Climates. Cairo: Submitted to USAID by Nathan Associates (20 August 1997), pp. 151-152.
2. Syria came to believe that Prime Minister Hariri had developed a back channel to Israel, an imitative which, if true, would seriously compromise the Syrian bargaining position.
3. Ross Dunn, "High-Tech Success beats toil in the Soil," Sydney Morning Herald (29 April 1998), p. 11.
5. Yakir Plessner, The Political Economy of Israel: From Ideology to Stagnation. Albany: State University of New York Press, 1994, p. 170.
8. Michal Shalev, "The Israeli Political Economy," Middle East Report (Summer 1998), pp. 31-33.
10. Ayse Bugra, "Class Culture and State: An Analysis of Interest Representation by Two Turkish Business Associations," International Journal of Middle East Studies, 30, 4 (November 1998), pp. 521-539.
11. Bugra, "Class, culture and state."
12. Hamid Zangeneh, "The Post-Revolutionary Iranian Economy: A Policy Appraisal," Middle East Policy, 6, 2 (October 1998), p. 123.
13. Jahangir Amuzegar, "Khatami’s Iran, One Year Later," Middle East Policy, 6, 2 (October 1998), p. 90.
14. Hossein Akhavi-Pour and Heidar Azodanloo, "Economic Bases of Political Factions in Iran," Critique: Journal for Critical Studies of the Middle East, 13 (Fall, 1998), p. 80.
15. Amuzegar, "Khatami’s Iran," p. 90.
16. Djavid Salehi-Isfahani, "Labor and the Challenge of Economic Restructuring in Iran," Middle East Report, (Spring 1999), p. 35.
17.Salehi-Isfahani, "Labor and the Challenge," p. 35.
18. Amuzegar, "Khatami’s Iran," p. 86.
19. Amuzegar, "Khatami’s Iran," p. 90.
20. Akhavi-Pour and Azodanloo, "Economic Bases," pp. 70-72.
21.Salehi-Isfahani, "Labor and the Challenge," p. 35.
22. See Guilain Denoeux and Robert Springborg, "Hariri’s Lebanon: Singapore of the Middle East or Sanaa of the Levant?" Middle East Policy, 6, 2 (October 1998), 158-174. [top]
Last updated 2 January 2000 | Globalization seminar | Table of Contents
Department of Government, College of Liberal Arts, University of Texas at Austin.
Questions, Comments, and Suggestions to chenry@gov.utexas.edu