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NS4053 Spring Term 2017 Cammett: Chapter 7 Rise of State-Led Development

NS4053 Spring Term 2017 Cammett: Chapter 7 Rise of State-Led Development. Overview I. Chapter attempts to: Document the growth functions of the Middle Eastern state up to the 1980s Look into the contradictions that emerged and weakened state-led development and

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NS4053 Spring Term 2017 Cammett: Chapter 7 Rise of State-Led Development

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  1. NS4053Spring Term 2017Cammett: Chapter 7Rise of State-Led Development

  2. Overview I • Chapter attempts to: • Document the growth functions of the Middle Eastern state up to the 1980s • Look into the contradictions that emerged and weakened state-led development and • Analyze the political forces that created resistance to reforms up until the late 1980s when they became inevitable for most of the region

  3. Overview II • Middle Eastern states were big until the structural adjustment policies of the 1980s and 1990s started chipping away at the dominance of the public sector • The states: • Employed large numbers • Monopolized resources and controlled • Large investment budgets • Strategic parts of the banking system • Virtually all subsoil minerals and • Basic infrastructure like roads, railroads, power, and ports

  4. Overview III • Generally accepted by populations that the state and its leaders have • A right an obligation to set a course for society, and • An obligation to use resources to pursue that objective • In short a general acceptance of a high concentration of power • Economic • Administrative, and • Military

  5. Overview IV • Author’s contention that it is more the politics of decolonization and development than cultural norms that accounts for the interventionist state in the Middle East • State seen as responsible for repairing economic damage resulting from colonial policies • Goal to • Overcome “backwardness” and • Build a prosperous, educated citizenry, a diversified economy and national power • These tasks and goals are culture-blind. • Basic similarities in goal orientation and intervention as • India, • Brazil, • Ghana

  6. Structural Transformation I • Postcolonial era, leaders of Middle East states saw themselves as engineers and architects in charge of designing new societies • Point of departure for state was backwardness • An economy mired in production of cheap agricultural commodities requiring an unskilled workforce • The perpetuation of this system of production by denying education and the acquisition of modern skills to all but a privileged few and • Forcible integration into the global economy • Only the state could coordinate and mobilize resources to set economy on new course.

  7. Structural Transformation II • Throughout region assumed private sector could not be relied upon to undertake the necessary resource mobilization and planning. Sector seen as too: • Weak financially • Close to a commercial and trading past rather than an industrial one and • Concerned with short-term profit • As a result, not able to extricate the economy from its trap • Entrepreneurs only enjoyed legitimacy in Lebanon

  8. Structural Transformation III • As important as efficiency for state leaders was equity • Inequalities in income distribution and poverty were associated with colonial system of exploitation • Process of state intervention contributed to demise of some classes • Large landowners • Traditional craftspeople • While it promoted others: • Capitalist farmers • Bureaucratic middle class and • Small-Scale manufacturing class

  9. Structural Transformation IV • At the time state intervention in the Middle East driven by two different motivations and strategies – both aiming at structural transformation of the economy • First, state nurtures and strengthens private sector in several ways through the provision of • Infrastructure • Raw materials, and • Semi-manufactured goods through its basic industries • In this process of accumulation, the state • transfers surpluses on its own operations, profits if any, and external rents to the private sector and • tries to absorb all major risks for that sector

  10. Structural Transformation V • Second process – state finances its own expansion • “Socialist Transformation” has been used to describe this process • Turkey in the 1930s • Egypt after the Socialist Decrees of 1961, but dropped after 1974 • Algeria 1962-1978 • Tunisia 1964-69 • Syria since 1963 and • Iraq until 2003

  11. Structural Transformation VI • Initial calls for reform in such systems concerned with • Making the public sector more efficient • Reducing the deficits of specific enterprises • Increasing monetary incentives for workers • Allowing price increases • Linking budgetary support and banking credit to performance and • Reducing the number of public workers

  12. Structural Transformation VII • Shirt was towards state capitalism • Began in Egypt 1965 when Nassar denounced the inefficient performance of the public sector • Algeria sometime between 19678 and 1969 • Discipline, productivity, and profitability became watchwords in new era, but frequently just slogans

  13. Structural Transformation VIII • Summing up • Whether driven by socialism or not, Middle Eastern state took upon itself the challenge of • Moving economy into an industrial footing • Shifting population to the urban areas • Educating and training its youth • Redistributing wealth • Building a credible military force, and • Doing battle with the international trade and financial regimes that held countries back • There were no impediments to the expansion and affirmation of the interventionist state.

  14. Ataturk I • Republic of turkey an example and model for many of the other states in the Middle East • Country achieved real independence in 1923 • By late 1930s endowed with credible military structure, beginnings of a diversified industrial sector and a rapidly expanding educational system • Ataturk determined from outset to • Promote Turkey’s industrialization and • Liberate its economy from dependence on the West • Early strategy was to • Rely on private-sector initiative and • Avoid taxing the peasantry in order to finance industrial growth • Founded the Business Bank in 1924 to finance private enterprise

  15. Ataturk II • In 1934 introduced First Five Year Plan • Blueprint for import substitution industrialization (ISI) • Major part of program involved developing a textile industry utilizing Turkish cotton and selling to a large domestic market • Often called the easy phase of ISI • Country went further launching projects in basic chemicals, cement, iron and paper • Plan added twenty new enterprises to the public sector • Second Five Year Plan was adopted in 1938 just before Ataturk’s death • Over one hundred new enterprises were planned and • First effects at “industrial deepening” were formulated • Part of the plan was to disperse industry in order to benefit backward areas, especially eastern Anatolia.

  16. Ataturk III • In large part the private sector strategy of earlier years was abandoned • Some of the side effects of this big-push strategy began to make themselves felt during the 1930s • Government ran a growing deficit due in part to an outsized bureaucracy • World War II interrupted the Second Five Year plan • Import substitution continued out of necessity with the disruption of Mediterranean shipping • Major shift in politics occurred after war with the emergence of a two party system • Democtatic Party rejected etatism in favor of liberal economic policy to befit commercial farmers and small industries

  17. Ataturk IV • Military take over in 1960 ushered in another period of national planning and state-led ISI • Modified in the 1968-72 Five Year Plan to put a greater burden of investment on the private sector • However, by end of the 1970s the state sector remained the economy’s center of gravity • Public investment in manufacturing sector rose from 34% in 1965 to 65% in 1980 • Overall government spending had risen from about 18% of GDP in the 1960s to 35% in the early 1980s

  18. Arab Socialism I • Would be an exaggeration to say that other states in Middle East slavishly imitated the Turkish the Turkish experience • In fact state-Led ISI spread throughout the developing world after 1945 • Strategy had a logic independent of any single country’s efforts • One set of Arab states adopted the Turkish paradigm and went well beyond it • These states’ strategies were explicitly • Socialist and populist • Hostile to the indigenous private sector and foreign capital and • Aimed at far-reaching redistribution of wealth within their societies

  19. Arab Socialism II • Strategy has not always been sustained and on occasion has been officially abandoned: • Egypt after 1974 • Tunisia After 1969, and • Sudan after 1972 • Principal experiments with the Turkish Paradigm were • Egypt 1957- 1974 • Algeria 1961-1989 • Syria 1963 – present • Iraq 1963- 2003 • Tunisia 1962-1969, • Sudan 1969 -1972 • Libya 1969 - present

  20. Arab Socialism III • Basic assumptions underlying these experiments • First, profit and loss should not be the primary criterion for assessing public-sector performance – instead goal of success was • Creation of jobs • Provision of cheap goods • Introduction of new economic activity to remote or poor regions and • The achievement of self-sufficiency in goods of a strategic or military nature

  21. Arab Socialism IV • Second, assumed that the operation of supply and demand was inferior to planning and the application of administered prices • Third, the large scale private sector was seen as untrustworthy • Most regimes nationalized the private sector or sharply curtailed its activities • Entire “strategic” sector such as basic metals, chemicals and minerals became reserved exclusively for public sector enterprise

  22. Arab Socialism V • Fourth foreign investment was viewed with specision • The setting up of closed sectors for public sector enterprise underscores another assumption • There is nothing inherently inefficient about monopolies • For all this to succeed in promoting overall growth, industrialization and a more equal distribution of income: • The planners needed to anticipate accurately the complex interaction of all the economic variables • Managers needed to pursue efficiency even while protected by tariffs and • Civil servants need to put in an honest day’s work • By and large none of those requirements were met.

  23. Arab Socialism: Egypt I • Egypt first Middle Eastern country in postwar era to adopt a strategy of radical transformation • In 1952 Egyptian monarchy overthrown by military coup led by Colonel Nasser and a group of his colleagues • From 1952-56 Egypt promoted public sector growth as in Turkey • Either by helping the private sector or • Undertaking projects the private sector could not finance or manage,. • Not until the Suez War of 1956 that the pubic sector grew at the expense of the private sector

  24. Arab Socialism: Egypt II • Because of the participation of Britain, France along with Israel in the attack, Egypt took over all their assets • In addition, failure of private sector to maintain levels of investment provoked wave of nationalizations through Socialist Decrees of 1961 • In one fell swoop Egyptian state took over most large-scale industry, all banking, insurance and other private assets • Bulk of agricultural property remained in private hands • First Five Year plan – straightforward ISI strategy • Problem – was the economy’s ability to earn foreign exchange • Although firms needed to import capital goods and raw materials to function, they could not generate the foreign exchange to pay for them

  25. Arab Socialism: Egypt III • Nasser died in 1970 and successor Sadat pursued policy of economic liberalization aimed at • Reforming and streamlining the public sector • Stimulating the private sector • Attracting foreign investment and • Promoting exports • Public sector enterprise was sharply criticized for chronic inefficiency and large scale operating deficits • Still, Egypt’s public sector continued to grow throughout the 1970s • Entering the 1980s it included 391 companies, employed about 1.2 million workers with a wage bill of over 20% of GDP • The return on its total investment was only 1.5% per annum

  26. Arab Socialism: Egypt IV • Counting the public authorities that ran everything from the Suez Canal to the Aswan High Dam, along with the civil service, the public and government sector in the early 1980s before structural adjustment began • Had 3.2 million employees – more than 40% of total workforce • Total public expenditure in 1980 represented 61% of GDP • Total Government revenues were 40% of GDP and • The public deficit was 20% of GDP – an extraordinary large imbalance by international standards.

  27. Arab Socialism: Algeria I • Algeria one of the few less developed countries to rival Egypt in terms of weight and extent of public sector • Independent Algeria emerged in 1962 out of seven years war with France • Many leaders of the National Liberation Front (FLN) were socialists • From 1966-89 most economic activity was reserved to the state • Collaboration with foreign firms was extensive but was carried out on a contract basis involving turnkey projects

  28. Arab Socialism: Algeria II • With its First Four-Year Plan 1969-73 Algeria launched a program built on heavy industry • Oil and natural gas were to serve two ends • First they would be a feedstock of a modern petrochemical sector • Second the earnings from their export would pay for the import of plant and capital goods for steel manufacture and vehicle assembly • Expected the agricultural sector would be an expanding market for the new products • The local private sector was regarded as irrelevant and foreign firms were seen mainly as providers of technology

  29. Arab Socialism: Algeria III • By time Algeria initiated its Second Four-Year plan world petroleum prices had quadrupled • Algeria faced no financing problems in the mid 1970s and • Algerian state was able to invest the equivalent of 25-30% of GDP annually • However experience during this period demonstrated the weaknesses of state-led ISI • Rather than agricultural sector generating demand for new industrial products there was a general decline in agricultural production and country had to import food • Insufficient domestic demand meant that public-sector industries operated below capacity and at high cost so could not export

  30. Arab Socialism: Algeria III • Attempts made to overhaul public sector • However still dominates the Algerian economy • In late 1980s there were 50 pubic sector companies and 20 authorities employing 80% of the industrial workforce and accounting for 77% of industrial production • With the civil service, 45% of the non-agricultural workforce on the public payroll • Collapse of oil price in 1984-85 forced Algeria to question the very premises of the strategy it had followed since the mid-1960s

  31. Arab Socialism: Syria and Iraq I • Beginning in 1956 both Syria and Iraq experienced growing influence of the same pan-Arab party the Ba’ath or Arab Renaissance Party • Since its founding in Syria after WWII this party has called for Arab unity and socialism • Major obstacle to its spread was perceived by its leaders to be Nasser’s Egypt especially its socialist phase after 1961 • Many policies of state intervention in Iraq and Syria sprang from its socialist ideology, but initially Ba’ath leaders afraid Egypt’s socialist transformation more attractive • Before Ba’athists neither Syria or Iraq had make significant advances at industrial production

  32. Arab Socialism: Syria and Iraq II • With Ba’athists in full power, nationalization of Iraq’s the petroleum sector took place, 1972-75 • Nationalization coincided with the first big increase in petroleum prices. • The state’s share in GDP rose to 75% in 1978 • By 1977 there were 400 public enterprises employing 80,000 workers • They absorbed 60% of all industrial land commercial investment. • Total government employment in 1977 was nearly half the country’s organized workforce. • By 1980 one in four Iraqis was on the state payroll

  33. Arab Socialism: Syria and Iraq III • After Saddam came to power in 1982 country faced continuous disaster • Iran Iraq War 1980-88 – up to 21% of labor force drafted into the army and military expenditures rose to 60% GDP by 1986 • Oil production deeply reduced as a result of the destruction of oil exporting facilities in the South • Loss of production and oil revenue plus costs of reconstructing lost infrastructure amounted to more than $400 billion – more than 400% GDP for every year of the war • Iraq emerged from the war in 1988 with a GDP per capita lower than in 1975 • External debts of $86 billion – when started the war it had reserves of about $50 billion

  34. Arab Socialism: Syria and Iraq IV • With no prospects for recovery Saddam decided to invade Kuwait • Costs equally disastrous • Anglo-American invasion in 2003 destroyed $20 billion in assets • Losses of three wars reaches nearly $1trillion – thirty times Iraq’s GDP in 2001

  35. Arab Socialism: Syria and Iraq V • Syria • March 1963 military coup brought the Ba’ath party to power in Syria • Year later regime took over the country’s banks • 1965 far reaching nationalizations with share of industrial production increasing from 25% to 75% • Between 1970 and 1982 public sector rose in importance • Employment rose to half the workforce • Dominance of public sector achieved at the expense of economic efficiency • Strategic sectors became used to their privileges and low levels of performance

  36. Arab Socialism: Syria and Iraq VI • In 1985 the state was responsible for over 60% of total investment, mainly through money losing public enterprises • The manufacturing sector remained one of the smallest in the Arab world producing about 6 % of GDP in the 1980s • Syrian economy remained in a low-growth trap even as Bashar Al-Assad, succeeding his father in 2010 undertook a short-lived series of modernization measures • Cost of an immobilized economy has been Syria’s low GDP per capita (US2,623 in 2010) less than one-third of Lebanon despite fact Lebanon went through a civil war and Syria is self sufficient in agriculture and has some oil reserves

  37. Arab Socialism: Tunisia I • Tunisia achieved independence in 1956 • Civilian rule until 1987 when General Zine el Abidine Ben Ali deposed Habib Bourguiba • During the civilian years Tunisia also built an interventionist state system that resembled those in Egypt, Turkey and Algeria. • State’s role in resource mobilization was until 1970s overwhelming. • In 1981 state-owned enterprises accounted for about 60% of the value of manufacturing and had over 11% of the workforce. • Budgetary burden of state-owned enterpirses increased 4% from 1978 to 1981 • Private investment largely limited to consumer goods production and tourism.

  38. Arab Socialism: Tunisia II • As elsewhere, the approach before 1986 mainly one of stream-lining the existing economic strategy of state-led growth • Government supplying the intermediate goods that the private sector needed • Complex controls over prices, investments, trade, credit, and foreign exchange remained in place – as did the resulting misallocation of resources.

  39. Arab Socialism: Tunisia III • Events in 1980s made this policy unsustainable • Government tried to “grow through” external shocks • The international recession of the early 1980s • Drought • Rising European protectionism and • Falling oil prices • Tunisia’s debt continued to grow – increasing from 38% of GDP in 1980 to 63% in 1986 • Current account deficit widened from 5% of GDP in 1980 to 11% in 1985-86 • Budget deficit reached 5.2% GDP in the five years before 1986

  40. Arab Socialism: Tunisia IV • The government instituted some reforms including changes in consumer subsidy programs that provoked riots in January 1984 • Government retreated but the problems became even more severe. • By the summer of 1986 country had only a few days of import cover left.

  41. Arab Socialism: Libya I • The Jamahira (“mass state”) of Libya represented combination of • Romantic revolutionary, • Islamic programs and • A kind of cynical authoritarianism. • As in all major exporting nations the state dominated the economy through controlling oil revenues • Case under the monarchy and remained the case after 1969 when the monarchy was overthrown by Gaddafi • He eventually elaborated a new theory of mass state in which all productive units and all workplaces were to be directly governed by popular congresses • Libya’s experiment on paper was one of worker self-management

  42. Arab Socialism II • Beginning in 1979 Gadaffi expropriated all private industry • In 1981 all bank deposits were seized without warning • By this time three quarters of the workforce was on the public payroll • However Libyan state and regime never relly relinquished effective control of production and administration to popular committees. • Like other socialist countries Libya had multiyear development plans • Leadership did not allow people to question or change any of the plan’s major parameters

  43. Liberal Monarchies: Iran I • Possible that socialism entails a significant public sector • Converse not true • Monarchies of Pre-1979 Iran, Jordan and Morocco all professed liberal economic orientation in which the private sector was to be the leading force • Yet statistical indicators of state activity show these countries had public sectors of a size and weight equal to that of the socialist countries • These countries show that we should not confuse state ownership with socialism

  44. Liberal Monarchies: Iran II • The Iranian Case • Reza Shah Pahlavi came to power in 1924 • Some similarities with Ataturk in Turkey • State apparatus and the armed forces grew side by side as in Turkey • Depression pushed the Iranian state into ISI • Private sector benefited from credit provided through state industrial bank as well as high tariffs. • State also went ahead and created public enterprises in textiles, sugar, cement, and iron and steel. • Reza Shah removed in 1941 by Allies and his son Mohammad Reza Phalavi became new shah

  45. Liberal Monarchies: Iran III • Under the Shah Iran’s economic strategy had three key elements • Oil exports, • Continued ISI, and • Division between public and private sectors • State enterprises undertook deepening process in iron and steel, copper, machine tools, aluminum, and petrochemicals • Dynamic private sector, sometimes with foreign joint ventures, moved into finished metals, special stels, synthetic fibers and automobile assembly • In 1944 Iran established a Plan and Budget Organization and launched its first national plan • In this respect country well ahead of all countries in region except Turkey

  46. Liberal Monarchies: Iran IV • System worked well up to early 1970s • Reconciled the regime’s economic liberalism with a strong state presence in the economy • But in 1970s very significant shift in division of labor occurred with lessons about logic of pubic enterprise in the Middle East. • With first great surge in petroleum prices in 1973 regime had a tremendous amount of revenues • Neither the Shah nor his advisors nor the state technocracy proposed investing these rents in private sector growth • New funds allowed the state to expand and consolidate in an atmosphere in which public authorities largely disregarded the private sector

  47. Liberal Monarchies: Iran V • By the end of the 1970s • Government investment and consumption represented 43% of GNP • Military expenditures had resent to 10% of GNP • One quarter of the non-agricultural workforce – 1.5 million were on the public payroll • Has the Islamic Republic of Iran reversed this pattern since 1979? • Constitution is explicit on role of public sector which is to include all major industries, foreign trade, major mines, banking, insurance, power, dams, major irrigation systems and transport

  48. Liberal Monarchies: Iran VI • Shortly after Khomeini’s return to Iran wave of nationalizations took place • By end of 1982 the National Induatrial Organization controlled about 600 enterprises with 150,000 employees • In addition Bonyads (charities) created to take over assets of the Phalavi family and the shah’s associates • In next decade the Bonyads would become the most influential agents in the economy • Under President Mahmoud Ahmedinejad they would come to be the main beneficiary of government privatizations • While no rollback of the state under the Islamic republic, clear the regime deeply divided on the issue of state ownership and intervention in the economy

  49. Liberal Monarchies: Jordan I • Jordanian economy small and since Israeli occupation of the West Bank in 1967 severely truncated • Economy is dynamic and growing, but highly dependent on external assistance • Jordanian state has controlled the economy in three ways • First, direct recipient of external assistance allows government to direct investment • Taken the form of large scale joint ventures with state, foreign and local private capital in fertilizers cement etc

  50. Liberal Monarchies: Jordan II • Second state lever has been the phosphate sector, the country’s largest export and foreign exchange earner • Third state lever has been the defense budget which was around 15% oF GNP in 1988 • Army a major employer for the East Bankers who constituted the traditional base of support of the regime. • By the mid-1970s about one half of Jordan’s labor force worked for the government in a civilian or military capacity • Jordanian economy grew rapidly during the first oil boom from the mid-1970s to the mid 1980s • Fueled by generous support from the Gulf states and labor remittances • By 1986 about 10% of the labor force worked abroad

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