The Political Economy of the Arab World: From State Building to Infitah

State Building and the Big Push Era

After gaining their independence, Arab nations faced a multitude of difficulties. They had to build essential infrastructure in the face of rapid population growth, limited financial resources, and a lack of qualified workers. With an underdeveloped private sector, governments assumed responsibility for advancing key economic sectors using profits from natural resources like oil, natural gas, phosphates, and iron ore — this approach is often referred to as “state capitalism”.

This strategy was shaped by the idea of a “big push” supported by economist Paul Rosenstein-Rodan and historian Alexander Gerschenkron’s concept of “late industrialization”. Both theories emphasized the need for coordinated investment led by the government to address poverty, drawing on insights from Soviet planning and experiences with the New Deal in the United States.

A focus on development that surpassed political differences was apparent in both monarchies and socialist republics. Certain Arab nations pursued heavy industries such as petrochemicals and iron/steel production, with external technical aid playing a crucial role. For instance, the USSR assisted in the construction of the iron/steel complexes El Hadjar in Algeria and Helwan in Egypt, while Gulf countries primarily depended on technical expertise from the US and UK.

From their independence to the late 1970s, Egypt, Tunisia, Iraq, Syria, and Algeria all followed models of a planned economy. They also implemented agrarian reforms and policies for industrialization. This approach was known as import substitution. Unlike the Latin American policy experiments that spared the private sector to some extent, Arab socialists opted for extensive nationalization while still retaining private property rights.

In Egypt under Nasser’s leadership, state-owned businesses were grouped into extensive umbrella organizations resembling the Soviet Ministries of Production. The majority of industrial investments and three-quarters of manufacturing value added came from the public sector, which also employed three out of five non-agricultural workers in Egypt (1). In addition, the Egyptian military was involved in supplying essential goods to the population — a role that continues today — and undertook major infrastructure projects like constructing the Great Aswan Dams, which were completed shortly after Gamal Abdel Nasser’s passing in January 1971.

In Algeria, the FLN established the core principles of national economic strategy in the charter of the Tripoli Congress of June 1962 and the Algiers Charter of 1964. The main goals were land reform, seizing control over the oil and gas sector as well as banking, and fostering heavy industry growth. State-controlled entities like Sonatrach for hydrocarbons, SNS for steel production, and Sonacome for metal trades were set up right after independence to showcase Algeria’s ambitions for development. From 1967 onwards, there was a shift towards investing in essential infrastructure that notably enhanced living standards. However, resource constraints and ideological limitations encountered during this socialist era ultimately led to significant shortcomings.

In the Arab monarchies, promoting a socialist and egalitarian model was not an option. However, the concept of the developmental state found its place. In countries like Morocco, Jordan, and the Gulf monarchies, ruling families realized that economic development and some sharing of wealth were crucial to strengthen their authority. The overthrow of Egyptian, Iraqi, and Libyan monarchies; the “Free Princes” movement in Saudi Arabia (1958–1962); as well as two attempted military coups in Morocco served as reminders to Heads of State about their responsibilities in this matter.

In Morocco, the government swiftly took control of industrial and service development. The “Moroccanization” law of 1973 allowed the royal family and prominent merchant families in Fez, Rabat, and Salé to obtain extensive agricultural land, as well as industrial and commercial assets previously owned by foreigners. Simultaneously, the State expanded its economic role through entities like CDG and SNI, along with nationalizing sectors such as banking, insurance, and basic industries. During the first three decades after independence, phosphate mining revenues empowered the state to pursue this interventionist economic policy.

In the Arabian Peninsula, traditional activities such as herding, cultivating oases, sea trade, and fishing were the mainstays of the economy. The discovery of oil in the 1950s has allowed the region’s countries to pursue an ambitious state-building agenda focused on developing infrastructure and public services. In Saudi Arabia, oil extraction brought significant changes to what was previously a vast desert inhabited by Bedouins (meaning “desert dwellers” in Arabic). A development strategy supported by American experts was put into action. Revenues from Aramco royalties were primarily directed towards economic and social initiatives like building roads, establishing power plants, constructing schools, and setting up hospitals.

Since 1970, the Saudi government has initiated a series of five-year plans. These strategies, as per Tim Niblock’s examination (2), embodied a developmental model reminiscent of socialism but without actual implementation of socialist policies. The budget for the second plan was an impressive $150 billion and more than doubled for the third plan. By 1982, oil revenues had surpassed $300 billion compared to merely $5 billion in 1969. Notably, significant institutions such as the Public Investment Fund, Real Estate Development Fund, and Industrial Development Fund were established during this period. Rapid urbanization took place alongside substantial growth in administrative support through education scholarships abroad for nationals which led to the emergence of an urban middle class comprising public officials and small traders. As assessed by Tim Niblock, contemporary Saudi Arabia is deeply influenced by this era of state intervention and economic transformation driven by oil revenues.

The Emirates’ state-building model stands out as the most unique and innovative. From their humble beginnings as British-controlled trading posts, the “states of the truce” have rapidly evolved into symbols of modernity and even a form of Arab postmodernism in just a few decades. This remarkable transformation is largely attributed to the resolute leadership of two visionary figures: Sheikh Zayed bin Sultan Al Nahyan, Emir of Abu Dhabi, and Sheikh Rashid bin Said Al Maktoum, Emir of Dubai. Their persuasive efforts led to the successful integration of Sharjah, Ras al-Khaimah, Ajman, Fujairah, and Umm al-Qaywain into the new federation (3) — an uncommon feat in Arab state formation where sovereignty typically remains at a regional level. Under Abu Dhabi’s guidance, oil revenues were equitably distributed among less resource-rich emirates while substantial investments were made in education and infrastructure through federal initiatives. To address local labor shortages expediently for development purposes foreign workers were readily brought in without hesitation.

In the initial phases, responsibilities were split between Abu Dhabi and Dubai. The emirate of Abu Dhabi handled matters of sovereignty and the administration of oil revenue through its oil company and sovereign fund, while Dubai was positioned as an international hub for foreign investors. Despite the impressive appearance of this city-state with numerous skyscrapers, its economic prosperity is largely credited to Jebel Ali port, which opened in 1979 and has since become one of the world’s largest maritime centers. Additionally, Sheikh Rachid Al Maktoum established the adjacent Jebel Ali Free Zone in 1985 as a natural expansion. Furthermore, Emirates Airlines was established in 1986 to improve connectivity for the emirate and is now supported by an airport hub that ranks among the top five busiest globally — alongside Atlanta, Beijing, Los Angeles, and Tokyo.

Reform and Liberalisation

In the late 1970s, Arab countries faced mounting internal and external imbalances. The tightening of US monetary policy — the so-called “Volcker shock” — led to a severe recession in the United States and a global debt crisis. Fluctuations in oil prices disrupted the budgetary and current balances of nearly all Arab countries. The Gulf monarchies managed to mitigate these challenges by tapping into their foreign exchange reserves while other nations sought assistance from the IMF and World Bank, which came with demands for greater economic openness and liberalization in exchange for financial aid.

Tunisia and Egypt have led the way in this area. Both nations initiated early action by implementing Infitah (meaning ‘openness’ in Arabic) policies in the early 1970s, even before the IMF’s guidance. Tunisia’s Law 72 supported the establishment of foreign companies under an “offshore” regime with tax and customs exemptions, as well as ensuring free repatriation of capital. This has resulted in significant investment in the textile industry and tourism sector. In Egypt, President Anwar Sadat lifted restrictions on the private sector and encouraged Gulf investors to bring their petrodollars into the country, leading to a rapid influx of foreign capital specifically directed towards energy, tourism, construction, and real estate, as well as financial services.

In 1979, following the passing of Houari Boumediene, President Chadli Bendjedid assumed leadership in Algeria. He revamped state-owned businesses and redirected industrial attention towards consumer goods. Moreover, Bendjedid welcomed agricultural deregulation and progressively allowed foreign trade. This resulted in a rise in foreign products infiltrating the country’s markets known as souks el fellah — symbolizing a time of change. Nevertheless, the surge in imports harmed the nascent local manufacturing and food production sectors due to an inflated exchange rate that favored imports over domestic production.

In addition to opening up trade and reducing the value of national currencies, the IMF enforced a decrease in public expenditure. Morocco started this process in 1983. To illustrate the urgency of the situation, King Hassan II spoke about the imminent crisis facing Morocco during a session with parliament members. In Egypt, negotiations with the Monetary Fund in the late 1980s led to a devaluation of their currency, the elimination of multiple exchange rates, and a substantial decrease in tariffs. Meanwhile, Algeria faced severe challenges due to the oil market’s backlash in 1986; its currency weakened and debt payments ended up consuming all export revenues. It took considerable time for Algeria’s government to reach an agreement with the IMF which was only finalized in July 1994 amid security and financial crises — yet this did not prevent another significant depreciation of Algerian dinar by three-quarters once again.

Macroeconomic changes were met with less pushback compared to the privatization of state-owned businesses, which directly challenged the traditional government-controlled model. Governments were in a tough spot as they faced pressure from entities like the IMF and foreign partners to hasten reforms, while also encountering strong opposition within their administration, public corporations, and specific private interests seeking to maintain their current advantages (4).

In Morocco, after extensive discussions, a national consensus finally emerged in support of privatization (5). The law of Morocconization was revoked in 1993 and allowed for increased foreign investment across various sectors including hospitality, retail, finance industry, telecommunications as well as water supply and electricity generation.”

In 1992, the Egyptian State started opening up the ownership of 200 public enterprises. The military took advantage of this by forming many joint ventures with both domestic and foreign partners. By using its influential parastatal organizations like the Arab Organization for Industrialization and the National Service Products Organization, the army has successfully adjusted to the new business-friendly environment and strengthened its presence in public works, energy, and manufacturing.

In Algeria, Prime Minister Ahmed Ouyahia hastily conducted a privatization program without prior consensus or an overarching vision which led to the liquidation of half a million public jobs. These job losses were not fully offset by opportunities created in a fledgling private sector leading to significant unemployment (6) — reaching one-third of the active population by 1998. Lastly, Tunisia and Syria witnessed privatizations primarily benefiting individuals closely connected to political power — a topic we will revisit later on.

Infitah Redux: 1990s — 2Ks

At the dawn of the 2000s, a new wave of reform and liberalization emerged, coinciding with greater integration of Arab countries into their regional and global environment.

Association agreements were signed with the European Union, and most Arab states joined the WTO, except for Algeria, Libya, Yemen, Sudan, and Somalia. Morocco, together with Egypt and Tunisia, was one of the founding members of the WTO. In 1996, it also entered into an association agreement with the European Union. The commitment to openness remained unwavering even through changes in government, including during Prime Minister Abderrahman Youssoufi’s tenure starting in March 1998. Throughout the 2000s, Morocco embraced significant economic liberalization and emerged as one of the most open economies in the region. To alleviate worries about the potential distortion of free competition by “royal capitalism,” some stakes in royal investment holdings were transferred to private local or foreign investors such as Cosumar and Lesieur Cristal. The remaining stakes have been centralized under a new holding company known as SIGER, which is intended to operate as a pan-African investment fund (7).

In 2001, Egypt entered into a partnership agreement with the European Union. During the early 2000s, supporters of Gamal Mubarak, the president’s favored son and prominent businessman, advocated for additional changes to propel Egypt towards a more internationally oriented growth strategy. Prime Minister Ahmed Nazif and his team of technocrats were tasked with implementing these changes which resulted in decreased trade barriers, improved administrative and customs processes, reduced tax burden, and activation of the QIZ program providing Egyptian manufacturers access to the US market. These free-market reforms led to annual growth rates between 7% and 8% from 2005–2008. However, they faced strong pushback from the public for failing to address social problems in a country dealing with widespread poverty.

Emerging from a period of turmoil and economic restructuring, Algeria worked to build confidence among its international allies. President Abdelaziz Bouteflika, who took office in 1999, led the country to sign an association agreement with the European Union in 2002 and resumed efforts to join the WTO. To attract foreign investors, Algeria introduced various incentives and updated its oil law in 2005. However, momentum for reforms dwindled significantly after that. In 2006, amendments made to the petroleum law were less favorable for foreign partners. By 2007, the balance shifted in favor of statists over liberals as they used specific legal schemes to gain priority access to assets sold by foreign investors. In July 2009, the implementation of the 51/49 regulation ensured that Algerian residents had majority ownership rights for all new investment projects within Algeria. It took another ten years before this regulation was relaxed again. These successive changes highlight the potential for reform efforts to be reversed and underscore the practical difficulty of overcoming resistance to change.

We cannot conclude our overview of the Infitah without mentioning Saudi Arabia. The country faced its first financial challenges after the first Gulf War, due to the enormous sums it had to pay for war-related expenses. However, it was the drop in oil prices in the latter half of the 1990s — reaching a low of $11 per barrel in November 1998 — that pushed the Saudi economy into crisis and prompted reform initiatives. In a significant address, Crown Prince and future King Abdullah announced an end to the welfare state and committed to economic liberalization as a necessity. A new investment code was issued in 2000, allowing foreigners to purchase real estate across the kingdom except in Mecca and Medina. The process of joining WTO gained momentum during this period and was eventually completed by 2005, making economic openness irreversible.

Subsequent efforts included modernizing financial systems, launching ambitious programs for new cities such as KAEC, establishing a world-class university called KAUST, and initiating an energy transition through KACARE. Sweeping changes also occurred within the judicial system as the Supreme Court was established alongside appellate courts, and civil courts, and codified civil criminal procedures at an unprecedented scale. These economic reforms were accompanied by political strides towards societal inclusivity; King Abdullah extended voting rights to women in Majlis al-Shura -the National Consultative Council- along with newly established municipal councils.

Crony capitalism — is it a problem?

Some experts claim that the changes made in Arab nations were not genuine liberalizations. Unlike what happened in Poland, Hungary, China, or Vietnam, these top-down reforms did not lead to increasing economic and democratic opportunities.

Before we dive into that, it could be useful to explore how liberalization reforms unfolded in China. Following the passing of Chairman Mao, Deng Xiaoping famously encouraged his fellow citizens to “seek prosperity!” He also emphasized the significance of incorporating beneficial aspects of capitalism into socialism in a manner suitable for China. Two years after Mao’s passing, the Chinese government started by reintroducing freedom of pricing and individual property rights. It also set up free zones in the former “foreign concessions”.

Economic reforms then advanced “from the ground up,” as Chinese entrepreneurs from Hong Kong, Taiwan, and Singapore responded positively to Beijing’s call and invested billions of dollars in mainland China. This led to the establishment of thousands of assembly plants and industrial subcontracting, integrating them into regional and global production chains. The goal was also to improve living conditions for rural residents; authorities promoted semi-private industrial activities in villages for this purpose. Through Township and Village Enterprises, millions of local entrepreneurs became part of business networks formed by overseas Chinese communities known as Huaqiao.

Arab nations, on the other hand, have frequently undergone reforms that resulted in the shift from public monopolies to private oligopolies through processes such as licensing and privatization. These changes largely favored skilled operators who had flourished in the regulated economy and understood how to capitalize on its vulnerabilities. Established business leaders were accompanied by newcomers with influential ties within power circles, whether through family relationships or provided services. This insider position gave them a comparative advantage in seizing new prospects compared to individuals lacking familiarity with the complexities of power dynamics.

In a situation with unclear property rights and complicated bureaucratic processes, the new “oligarchs” focused on sectors such as retail, financial services, construction, real estate development, and mobile telephony that promised quick returns. It’s hardly shocking that the majority of investments during this liberalization period were directed towards these specific activities. Insiders gained significant advantages by obtaining approvals to operate in these sectors and reaped substantial benefits from their early market entry.

During the so-called Bahbouha period of the early 2Ks in Algeria, which refers to abundance in dialectal Arabic, entrepreneurs took advantage of networks they had patiently woven during the “Black Decade” of civil strife and terror of the 1990s. They earned their “patent of respectability” by proving their ability to operate in such a hostile environment. The Haddad brothers from Kabylie completed public works projects for the army in terrorist-infested areas. Meanwhile, the Benhamadi brothers opened their first electronic assembly workshop in Bordj Bou Arreridj within the Highlands and created Condor, now a national icon. As for Rafik Khalifa, founder of a group bearing his name, his rapid rise and equally spectacular fall illustrate an insider’s hubris who aimed to progress too quickly and extensively. At its peak, this pharmacist treated world celebrities but later experienced a collapse like a house of cards that precipitated losses estimated between 1.5 and 5 billion dollars for thousands of creditors and investors in his Khalifa Group.

In the Gulf monarchies, the economic opening has led to significant gains for the prominent merchant families and patronage networks associated with the ruling dynasties. In Saudi Arabia, wealthy merchant families from Jeddah and Najd have notably grown their wealth due to close connections with the royal family. The bin Laden family also achieved remarkable success through its founder Mohammed bin Awad bin Laden, who established a construction and public works empire after moving to Jeddah from Yemen in the early 20th century. His descendants further expanded this enterprise into one of the largest private conglomerates in the Middle East -the Saudi Binladin Group.

In Morocco, the prominent merchant families of Fez, Meknes, Rabat, and Salé seized the opportunity of liberalization reforms to expand their businesses. Well-established families with ties to Makhzen — the Royal Palace — such as Benjelloun and Lamrani, were associated with royal enterprises like ONA and public groups like OCP and SNI (before its acquisition by ONA), while also growing their ventures. This gave them an advantage in the privatization process that occurred in industries like real estate, tourism, and financial services starting from the 1990s.

The benefits generated by this top-down liberalization may cause those who receive them to resist additional economic liberalization. This resistance could ultimately lead to private interests taking control of the state, resulting in what is known as “crony capitalism.” Jacques Ould Aoudia suggests that these benefits are established under state protection, yet it’s also noted that private actors hold significant sway over the state, influencing laws and creating loopholes for their advantage. Economist Anne Krueger introduced the idea of “rent-seeking” activities, which thrive when private companies enjoy significant protections.

The conditions in Tunisia, Egypt, and Syria before the revolutions of 2011 showcase the expansion of collusive capitalism resulting in a specific type of favoritism. The ruling families in these nations have seized economic power either directly or through different middlemen with wide-ranging connections to supporters and patrons. These autocratic governments have evolved into actual kleptocracies, sparking increasing resistance from the populace.

According to research from the World Bank, businesses controlled by the Ben Ali family made up only 1% of employment and 3% of Tunisian GDP. However, they managed to generate one-fifth of all profits earned by Tunisian companies! The industries where these companies operated were given much more protection compared to the sectors they avoided. Another study focused on Egypt revealed that “politically affiliated firms” accounted for 60% of Egyptian firms’ profits during Mubarak’s presidency. Despite representing just over a 10% share in employment, they received all bank credits. While there are some methodological shortcomings to acknowledge — especially in defining “politically connected company” — these studies emphasize excesses that have been corroborated by numerous testimonies collected after the uprisings in 2011.

In Syria, since Bashar al-Assad took office, the Baath Party officials and intelligence agencies in Syria have been making use of new business opportunities. Rami Makhlouf, who is Assad’s cousin on his mother’s side, leads a group of businessmen with close ties to the government. By acquiring one of the initial mobile phone licenses granted by the Syrian government, Makhlouf turned his company Syriatel into a profitable venture that enabled him to enter into real estate and media through his holding company Al Cham. Alongside this growth were individuals connected to past leaders of the Syrian intelligence services within Rami Makhloufs’s circle.

Can we see crony capitalism and its nepotistic variants as defining features of the Arab economies? This viewpoint is put forth by scholars such as Ishaq Diwan and Adeel Malik. It aligns with the perspective of Bretton Woods institutions on the insufficient liberalization of Arab economies. Yet, upon broadening the perspective, the concept of an “Arab exception,” rooted in a particularly toxic institutional strain, does not withstand scrutiny. Patronage and nepotism are prevalent in many emerging economies with underdeveloped regulatory institutions and unenforced rule of law.

Indonesia, the largest economy in Southeast Asia, serves as a prime example. Despite being lauded by Bretton Woods institutions for overseeing Indonesia’s “economic miracle,” President Suharto faced a downfall after the 1997 Asian crisis. This marked an end to his unchallenged three-decade rule. Following the Asian crisis, the IMF and World Bank shifted gears, highlighting crony capitalism as a key factor in the crisis. They advocated for increased liberalization of the region’s economies alongside stringent monetary and fiscal policies to address this issue.

Economist and Nobel Prize laureate Joseph Stiglitz argued that the analysis of the crisis and suggested solutions were deeply flawed. He argued that the ill-managed neo-liberal policies advocated by the Bretton Woods institutions worsened the Asian crisis by exposing fragile financial systems in those countries. This caused local banks to struggle with large amounts of foreign capital coming in, which led them to take risky actions like borrowing more from overseas and lending without much scrutiny to real estate developers. These policies were more responsible for the collapse than crony capitalism.

Under the leadership of Mahathir Mohamad, Malaysia took a different approach by resisting calls for neoliberal policies and instead implementing administrative controls to manage financial challenges. This approach was initially criticized by international institutions but ultimately proved successful in overcoming the Asian crisis. In contrast, Najib Razak’s government, which followed neoliberal principles, saw an increase in corruption and nepotism after the Great Financial Crisis. This led to a major financial scandal and loss of power in the 2018 parliamentary elections to none other than Mahathir Mohamad at 92 years old. He pledged to eventually pass on leadership to his former opponent, Anwar Ibrahim, after a transitional period, and he followed through with this promise. The experiences of Indonesia and Malaysia provide a contrasting perspective on the effectiveness of neoliberal policies in addressing economic challenges.

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