State Capacity and Civil Unrest: A Political Economy Approach

State Capacity and Civil Unrest: A Political Economy Approach Dana Siegelman, MA Candidate in Middle East Studies, American University of Cairo, 2013 das76@aucegypt.edu Introduction According to the Arab Human Development Report in 2002, three deficits plagued the Middle East and North Africa (MENA). These were education, freedom of expression, and women empowerment. The report recommended reform in all three areas in order for Arab countries to improve economic development. The researchers highlighted progress and criticized clear deficiencies in governance, though offered little in the way of policy implementation. Without a definitive answer to explain the relationship between the economy, politics, and culture, the report ultimately had very little impression on MENA regimes, but did garner attention from social scientists. i Many are still debating the link between political liberties and economic development. This may be attributed to an ongoing debate in social science as to whether human behavior is derived from ideological or materialistic concerns. Theorists such as Pierre Bourdieu have sought to synthesize the two by presenting socio-cultural needs and the political economy as interdependent. ii His theories stemmed from Karl Marx and Max Weber; both saw the economy as playing a central role in government and culture. They split, however, in whether politics or the economy took precedence. This divide led to the development of modernization theory, in which political economist Samuel Huntington hypothesized that socio-economic changes would eventually give way to political reform. A few decades later, political scientists Clement Henry and Robert Springborg claimed just the opposite. iii

2 At this juncture, I pick up the debate. Do Henry and Springborg present a case for political precedence with their theory of state capacity and can this theory explain civil unrest in Egypt? It is my argument that Henry and Springborg offered an excellent tool for locating the political economy in the MENA and demonstrated the dialectic between political influence and capitalism. With respect to the Arab Spring however, their theory may not be strong enough to support their overall claim that politics drives economic development. iv In other words, the results of this study will not end the aforementioned debate, but contribute to its overall goal, which is exposing the connections rather than the separateness of ideology and materialism. Methodology and Key Terms State capacity is defined as the state s ability to to mobilize resources efficiently and effectively for sustainable development in response to the challenges of globalization. Henry and Springborg determined state capacity using three degrees of comparison. These are extractive capability, credible institutions, and reliable information channels. v Extractive capability refers to the administration of tax collection. Credible institutions carry out extraction as well as develop trust between polity and populace. Credibility is measured by transparency and accountability. As such, reliable information channels become a necessary axis in order to achieve the first two. The three vectors of state capacity are determined precisely as a result of polity decisions in Henry and Springborg s framework. vi Henry and Springborg defined MENA states as democracies, praetorian republics, or monarchies. In their definition of state capacity, monarchies perform the functions of an efficient government, are more open to market forces and globalization, but are the most aggressive against domestic change. Monarchies in the MENA are more distributive rather than productive states. Therefore, relatively free social services may be exchanged for loyalty to the regime. vii Democracies, on the other hand, are equipped to deal with globalization because they

3 are more open, competitive, and institutionalized than those of either the praetorian republics or monarchies, allowing their civil societies freedom to develop. viii Thus democracies have the most state capacity in which to extract taxes and promote positive economic outcomes. ix Finally, a praetorian republic, such as Egypt, seems to fall somewhere in between a representative and welfare state. It may have extractive capability but lacks sound institutions to monitor formal economic growth, from which taxes are drawn. Money in praetorian republics often flows through backchannels that escape oversight. As such, property rights are insecure and private industries are essentially punished for abiding by the law. The structural power of local capital, that which strengthens civil society and private growth, is simultaneously weakened by the extension of government management and limitation of government control. Praetorian republics fall behind both democracies and monarchies when it comes to the three vectors of state capacity. x According to Henry and Springborg, extractive capability, credible institutions, and reliable information channels are necessary to cope with globalization; otherwise, regimes with low capitalist development become susceptible to capital flight, labor migration, or bilateral dependency, i.e. extra-state influence. I seek to draw an additional link, which is between state capacity and civil unrest. Though not the original intent of Henry and Springborg, this paper accesses the three vectors of state capacity in Egypt to determine whether weak capacity plays a central role in civil strife and subsequent behavior. A quantitative approach, based on previously collected data, is used to support theoretical analysis. Structural Power of Local Capital Egypt s economic system is based in what Henry and Springborg called a capitalist legacy. The power of local capital is drawn from a capitalist legacy, which may be based in French, German, or Anglo-American capitalist systems. xi In most cases, the capital legacy of

4 colonizers was disrupted more by praetorian republics than by monarchies. Egypt s system was primarily Anglo-American with constrained private capital based in the French system. It suggested that an active government role was necessary for ensuring a healthy economy. xii Following independence from the British, Egypt sought political legitimacy through large governmental sectors whereas monarchies and democracies opted to use market-based systems. These included more effective administration, and stronger if not necessarily more liberal information structures. xiii Resentment and fear of further imperial intervention caused praetorian republics to reject much of the capitalist legacies and limit the structural power of local capital. Egypt actually closed its economy to foreign investment. These decisions resulted in less attention to market forces and a more statist approach to economic development. xiv President Gamal Abdel Nasser implemented methods of Interventionalism in Egypt s economy, which tightened state control over public resources and nationalized companies that had previously been British-owned. By 1980, Egypt had more than eight million people working for the state, even after adopting certain liberal economic recommendations. xv As Henry and Springborg explained, Egypt cast about for ways to generate patronage from private economic activities, and otherwise relied on a bloated public sector to manifest support for the regime. xvi As a result, private companies in Egypt have endured prolonged and unnecessarily, restraining regulations. Statist policies encouraged many businesses to evade government supervision, leaving Egypt mired in corrupt business practices. Export-led growth suffered in Egypt because, as Henry and Springborg illustrated, the elite can rig local but not international markets. xvii Most significantly, a massive informal economy now exists where a formal economy should. xviii This includes goat on the roof businesses and drug trafficking. Of course, previously official businesses join the informal market to avoid reporting their financial

5 conditions, paying taxes, and enduring government intervention. xix Between 1998 and 2008 Egypt lost 488 domestic companies, many of which probably went into the informal economy. xx As of 2009, praetorian states had the largest informal economies in the region and the second largest in the world. xxi Presidents Nasser, Anwar El Sadat, and Hosni Mubarak preferred individual capitalists whom they could manipulate and trust, versus Anglo-American capitalism as a whole. xxii Commercial banking ultimately suffered the brunt of economic development by making loans under limited, statist conditions. xxiii Egypt, during the 1950s and 60s, nationalized private banks left by colonizers in order to regulate funds. xxiv For example, when the London-based Bank of Credit and Commerce International collapsed in Egypt, other banks were directed by the state to share in the loss by covering the insurance of money holders. xxv Praetorian republics have offered little autonomy to commercial banks, and, as such, business lobbies are forced to depend largely on their connections with influential cronies, political leaders, and foreign governments for credit and other favors. xxvi The Extractive Capability In response to the regimes failed introduction of economic reforms in 1977, which subsequently reduced food subsidies, violent riots broke out in Cairo and Alexandria. xxvii Two years later, Egypt experienced an oil crisis. At this time, Egypt was one of the biggest borrowers from the IMF, partially due to its inability to collect taxes from individuals and companies working away from official purview. xxviii By the 1980 s, while informal industry expanded, those private businesses, incapable of buying a seat at Mubarak s table were forced to make up for the informal economy by paying a higher share of taxes. xxix Despite the effort to raise and regulate taxes over many years, only 15.4% of Egypt s GDP in 2007 was made up of tax revenue

6 (compared to a relative 28.4% in democracies and 23% in monarchies). xxx Both brought in nearly twice as much in tax revenue than praetorian republics. xxxi When given the option, consumers tend to make purchases through the informal economy. xxxii Sixty-eight percent of Egypt s total GDP in 1990 was based in the informal economy (the largest in the world at the time), xxxiii and as of 2009, approximately 63% of Cairo residents lived in informal housing. xxxiv While certain oil Rentier states, with high oil revenues, can get away without taxing citizens, praetorian states are necessitated to tax their populations to sustain infrastructure and basic public services. The informal economy in Egypt has made this particularly difficult. xxxv In an effort to amend this, Egypt s Ministry of Finance reduced opportunities to skirt direct taxes on income in 2009. xxxvi It is my assessment that this move by the government acted as an impetus for future civil unrest. Surely those, such as a growing middle-class, whose jobs and/or needs necessitate paying taxes, will eventually make symbolic or material demands on the political system. xxxvii Institutional Credibility and Property Rights A report for USAID in 1976 claimed that if Egypt is to fully enter the modern world, the impetus and the means must come from outside. xxxviii In 1991, Mubarak implemented the Economic Reform and Structural Adjustment Program. This decision followed a US bailout in exchange for Egypt s cooperation in the Gulf War. xxxix Egypt was intended to privatize public banks and insurance companies as well as national industries that would encourage exports, but in reality, hardly did. xl Egypt maintained instate projects that relied on Egyptian consumers. Building took over as the fourth largest investment sector, after oil, manufacturing, and tourism, and Egypt s infrastructure rose and fell in a matter of years. Timothy Mitchell explained that the transnational and interdependent character of the international state system steered Egyptians away from diversifying their own economy. xli

7 The boom of commercial banks in Egypt since the 1970s meant more private industries would receive financial backing; however, many of them were partially owned by the state and much of the capital was allocated to a privileged handful of politically favored elites. Ironically, Egypt s market was squashed by these projects, going from 88% of import/export goods in 1985 to just 47% in 1997. It left the country dependent on oil revenues for 52% of its export income. xlii In order to insulate itself against the global market, the government manipulated the value of the Egyptian pound. In Henry and Springborg s assessment, a neoliberal approach to state building often pits the government against civil society. Egypt s weak state capacity meant it was unable to balance between state interests and global changes. The lack of institutional credibility revealed the amount of distrust between polity and populace. Henry and Springborg determined that The ability to access reliable information is key to attracting the local and foreign investment needed for economic development. xliii This institutional credibility refers to transparency and accountability in protecting property rights and the rule of law. Henry and Springborg applied a reductionist approach to Lewis Snider s correlation between contract-intensive money (CIM) and hard currency to discover levels of credibility in MENA states. That is to say, where government institutions are trusted, money will move from bank to bank. Where an informal and unstable economy exists, contracts will be carried out using hard currency and will generally be self-enforcing. Henry and Springborg felt institutional credibility could be determined by measuring money flowing outside of the bank against monies held in commercial banks, compared to a country s total GDP. xliv According to their research, MENA monarchies and democracies, between 2007 and 2008, had a proverbial handle on 90% or more of all money supplied by the government. Praetorian republics, on the other hand, ranked at the very bottom for government effectiveness. Egypt did only marginally better than other praetorian republics in the rule of law and overall

8 CIM. However, all praetorian republics fell notably below MENA democracies and monarchies in regulatory quality and control of corruption. As Henry and Springborg emphasized, People kept their cash under their mattresses. Similarly, when farmers in Egypt were given the freedom to manage their crops and produce, as they wanted, very few produced more to sell globally. Instead, most raised crops they needed for their families and did not grow a surplus to sell. xlv In other words, Egyptians did not trust the government to distribute and yield a profit with their crops and demonstrated the desire to control personal assets rather than invest in market forces. In a sense, this lack of institutional credibility reflected the earlier notion that strong nations needed weak institutions. The Keynesian approach to development was prominent in the 1950s, 60s, and 70s among praetorian regimes, which followed an Interventionalist, corporate model. The first goal of states, coming out of colonization, was nation building. Instead of creating reliable institutions, Egypt created a unity among workers in what was referred to as the corporate spirit. President Nasser called this experiment the alliance of workers. He believed ethnic and religious divides would be overcome through nationalist unionization, that multiple parties caused division and strife. Today, the weak credibility of Egypt s institutions is often regarded as purposeful neglect by the government. xlvi Trust in the regime over economic security has been deteriorating since the bread riots of the 1970s. The redistribution plans of the 1980s and the Washington Consensus privatization and deregulation plans in the 1990s led to the mobilization of labor unions. xlvii Police brutality and abuse of protestors lent itself to further unrest. The restructuring of Egypt s economy diminished job security. The regime further revoked civil liberties as it became more and more susceptible to foreign influences. The lack of credibility meant that, property the lifeblood of civil society suffered, whereas it remained considerably more secure in MENA s democracies

9 and in wealthy petrostates. xlviii Henry and Springborg saw the praetorian conundrum as both political and economic, what may be traced back to Huntington s King s Dilemma. As countries are forced to liberalize economically they may become increasingly constricting on civilian rights. xlix Emad Shahin further theorized, when you are economically not well-off, you open politically, and when you gain economic stability, you start to close politically. l State Capacity and Civil Freedoms Egypt very timidly adjusted its budgetary and economic policies to the new conditions of the global economy in the 1990s. Foreign debt increased. The disparity between rich and poor increased as well. Those living in abject poverty reached 25% of the population in 1996. li According to Egypt s former Minister of Finance Medhat Hassanein, Egypt s foreign direct investment (FDI) between 2006 and 2010 was substantially lower (by billions of USD) due to poor government oversight and political corruption, not to mention negative views of the Middle East, which kept shareholders and corporate executives from investing in the region. lii According to the MENA Development Report in 2009, macroeconomic uncertainty, tax rates, corruption, access to or cost of financing, and informal/unfair competition were the five most significant constraints in privatization and FDI as of 2009. liii Henry and Springborg found praetorian republics to be generally trapped between self-preservation and economic growth. The economic crisis of the mid-1980s, and the reforms adopted to overcome it the effects of which were often recessive - seriously affected the redistribution of resources and opportunities in praetorian states. The liberalization policies implemented in the 1990s through the IMF and World Bank loosened the government s grip over industry and caused it to tighten its grasp over civil liberties. liv The Voice and Accountability indicators in the 2004 and 2009 Freedom Press Index ranked MENA praetorian republics at nearly half and sometimes a third of democracies and monarchies in institutional reliability. Henry and Springborg believed the

10 Voice and Accountability rankings were correlated with a general freedom deficit that plagued the MENA, namely the limited rights of civil society, which they hypothesized would only act as a deterrent to further economic expansion lv Conclusion Praetorian republics such as Egypt have very little civil society, some rational-legal legitimacy, and a small amount of structural power for local capital. In other words, Their rule rests almost exclusively on the institutional power of the military/security/party apparatus. lvi Eva Bellin s conclusion that, Regime type, in the final analysis, is not determining, is dismantled by Henry and Springborg s research. lvii The fiscal disparity in praetorian republics is far greater than in the rest of the region. While business owners continued to secure credit in the form of favoritism and corruption, average workers made little more than a few USD a day. In fact, praetorian states were amongst the most impoverished in the world in 2002. lviii Furthermore, the populace held artificial rights in the veneer of elected legislatures, but in reality exercised no political will. Indeed, presidential elections were held just for show. lix Egypt s current civil unrest may be, in theory, traced back to its weak state capacity. The role of state capacity does more than reflect the type of polity; it may also determine the future ideological and materialistic demands of society. Globalization, in the 1990s, led to greater aspirations in praetorian populations concerning civil and political rights. Material gains urged additional socio-economic opportunities. More than any other indicator in the 2009 Arab Human Development Report, occupation and the economy were rated highest by those surveyed as What makes citizens feel most insecure? The runner-ups included physical security and politics. lx Public knowledge of government corruption and the small triumphs of past social

11 movements have created vulnerability in praetorian regimes such as Egypt by magnifying secular and unionist forces and encouraging public outrage against praetorian leaders. lxi Egypt, without state capacity to mobilize resources to respond to global forces and internal unrest, is left between one revolutionary group and the established order. lxii i Fergany, Nader et al. (2002). Arab Human Development Report: Creating Opportunities for Future Generations. United Nations Development Programme: Arab Fund for Economic and Social Development. ii Swartz, David. (1996). Bridging the Study of Culture and Religion: Pierre Bourdieu s Political Economy of Symbolic Power. Sociology of Religion. 57:1, 71 iii Henry, Clement M. and Robert Springborg. (2010). Globalization and the Politics of Development in the Middle East. Cambridge: Cambridge University Press. 2-3 iv Henry and Springborg 2-3 v Henry and Springborg 75-103 vi Henry and Springborg 2-3, 67-84 vii Henry and Springborg 75 viii Henry and Springborg 70 ix Henry and Springborg 75 x Henry and Springborg 75 xi Henry and Springborg 69 xii Yousef, Tarik M. (2004). "Development, Growth and Policy Reform in the Middle East and North Africa since 1950." Journal of Economic Perspectives, 18(3): 91 115, 93 xiii Henry and Springborg 87-9, 113, 162-3 xiv Henry and Springborg 2, 67-9 xv Shahin, Emad. (November 5, 2011). Public Sector. [Lecture]. Globalization, Development and Democracy in the Middle East. Political Science Department. American University in Cairo. xvi Henry and Springborg 163 xvii Henry and Springborg 163 xviii Bayat, Asef. (2010). Life as Politics: How Ordinary People Change the Middle East. Amsterdam: Amsterdam University Press. 91-5, 182 xix Kienle, Eberhard. (2001). A Grand Delusion: Democracy and Economic Reform in Egypt. London: I.B. Tauris., 151, Henry and Springborg 91 xx Henry and Springborg 91 xxi Henry and Springborg 109 and Becker, Kristina Flodman. (2004). The Informal Economy. Sida and World Bank Fact Finding Study. [Accessed December 4, 2011]. Available at http://rru.worldbank.org/ xxii Henry and Springborg 114 xxiii Henry and Springborg 89-90 xxiv Henry and Springborg 93-5, 170, Maxfield, Silvia and Schneider Ben Ross. Eds. (1997). Business and the State in Developing Countries. Ithaca: Cornell University Press. 5-7 xxv Mitchell 279 xxvi Henry and Springborg 95-7 xxvii Kienle 152

12 xxviii Henry and Springborg 21 xxix Bayat 37 xxx Henry and Springborg 77 xxxi Henry and Springborg 76 xxxii Bayat 47, 92 xxxiii Garcia-Bolivar, Omar E. (2006). Informal economy: is it a problem, a solution or both? The perspective of the informal business. Northwestern University School of Law. Law and Economics Papers. Berkeley Electronic Press. 7, originally credited to Johnson, Simon; Kaufmann, Daniel; and Andrei Shleifer (1997): The Unofficial Economy in Transition. Brookings Papers on Economic Activity, Fall, Washington D.C. xxxiv Sims, David. (2010). Understanding Cairo: The Logic of a City Out of Control. Cairo: The American University Press. 91 xxxv Henry and Springborg 109 xxxvi Henry and Springborg 79 xxxvii Huntington 87, 275-7 xxxviii Mitchell, Timothy. (2002). Rule of Experts: Egypt, Techno-Politics, Modernity. Berkeley, CA: University of California Press. 223 xxxix Henry and Springborg 169 xl Kienle 148 xli Mitchell 212, 230, 273-5 xlii Mitchell 275-8 xliii Henry and Springborg 84 xliv Henry and Springborg 80 xlv Mitchell 252 xlvi Shahin, Emad. (September 28, 2011). Strategies of Late Development. [Lecture]. Globalization, Development and Democracy in the Middle East. Political Science Department. American University in Cairo. xlvii Beinin, Joel. (September 12, 2011). Working Class Revolutions. The Nation. Available at LexisNexus Complete. 25-7 xlviii Henry and Springborg 81-2 xlix Huntington 177 l Shahin, Emad. Strategies of Late Development. li Kienle 145-7 lii Hassanein, Medhat. (November 13 th 2011). Provost s Lecture. Egypt s Economy: The Pathfinders. American University in Cairo. liii MENA Development Report: From Privilege to Competition: Unlocking Private-Led Growth in the Middle East and North Africa. (2009). Washington DC: World Bank, 10 liv Kienle 144 lv Henry and Springborg 84 lvi Henry and Springborg 162 lvii Bellin, Eva. (November 2004). The Political Economic Conundrum: The Affinity of Economic and Political Reform in the Middle East and North Africa. Carnegie Papers. No. 53, 9 lviii Arab Human Development Report 2002, 5 lix Diamond, Larry. (January 2010). Why Are There No Arab Democracies? Journal of Democracy. Vol. 21, No. 1 93-104, 99

13 lx Arab Human Development Report 2009, 28 lxi Hilal, Leila. (November 10, 2011). Next Challenges for Tunisia. Foreign Policy. [Accessed November 20, 2011]. Available at ttp://mideast.foreignpolicy.com lxii Huntington 271 Works Cited Bayat, Asef. (2010). Life as Politics: How Ordinary People Change the Middle East. Amsterdam: Amsterdam University Press. Becker, Kristina Flodman. (2004). The Informal Economy. Sida and World Bank Fact Finding Study. [Accessed December 4, 2011]. Available at http://rru.worldbank.org/ Beinin, Joel. (September 12, 2011). Working Class Revolutions. The Nation. Available at LexisNexus Complete Bellin, Eva. (November 2004). The Political Economic Conundrum: The Affinity of Economic and Political Reform in the Middle East and North Africa. Carnegie Papers. No. 53 Diamond, Larry. (January 2010). Why Are There No Arab Democracies? Journal of Democracy. Vol. 21, No. 1 93-104 Garcia-Bolivar, Omar E. (2006). Informal economy: is it a problem, a solution or both? The perspective of the informal business. Northwestern University School of Law. Law and Economics Papers. Berkeley Electronic Press. Hassanein, Medhat. (November 13 th 2011). Provost s Lecture. Egypt s Economy: The Pathfinders. American University in Cairo. Henry, Clement M. and Robert Springborg. (2010). Globalization and the Politics of Development in the Middle East. Cambridge: Cambridge University Press. Hilal, Leila. (November 10, 2011). Next Challenges for Tunisia. Foreign Policy. [Accessed November 20, 2011]. Available at ttp://mideast.foreignpolicy.com Kienle, Eberhard. (2001). A Grand Delusion: Democracy and Economic Reform in Egypt. London: I.B. Tauris. Maxfield, Silvia and Schneider Ben Ross. Eds. (1997). Business and the State in Developing Countries. Ithaca: Cornell University Press. MENA Development Report: From Privilege to Competition: Unlocking Private-Led Growth in the Middle East and North Africa. (2009). Washington DC: World Bank

14 Mitchell, Timothy. (2002). Rule of Experts: Egypt, Techno-Politics, Modernity. Berkeley, CA: University of California Press. Shahin, Emad. (September 28, 2011). Strategies of Late Development. [Lecture]. Globalization, Development and Democracy in the Middle East. Political Science Department. American University in Cairo. Shahin, Emad. (November 5, 2011). Public Sector. [Lecture]. Globalization, Development and Democracy in the Middle East. Political Science Department. American University in Cairo. Sims, David. (2010). Understanding Cairo: The Logic of a City Out of Control. Cairo: The American University Press. Swartz, David. (1996). Bridging the Study of Culture and Religion: Pierre Bourdieu s Political Economy of Symbolic Power. Sociology of Religion. 57:1