Subsidy Reform and Tax Increases in the Rentier Middle East
A study from the Project on Middle East Political Science at George Washington University includes a contribution from fellow Jim Krane on subsidy reform and tax increases in the Middle East. To access his full report, download the PDF on the left-hand sidebar (see page 18).
Several recent developments challenge the conventional academic theories that model the governance parameters of the oil exporters of the Middle East. At least nine Middle Eastern governments have partially retracted energy subsidies which provided citizens with cheap fuel, electricity, and desalinated water. What is more, Saudi Arabia, the United Arab Emirates, and Bahrain have imposed a five percent value-added tax (VAT) on goods and services, including energy and food. Other countries, including the three remaining Gulf monarchies as well as Egypt, Algeria, and Iran, have levied VATs or announced plans to do so.
For autocratic regimes which fund their national budgets with oil and gas export rents, the imposition of taxes and retraction of subsidies runs counter to social contract stipulations enshrined in the rentier literature. Why?
The growing burden of domestic demand for oil and gas has begun to threaten the core rentier structure. High rates of energy demand growth are eventually incompatible with steady exports. Energy subsidies, a core element of rentier social policy, risk undermining the rentier economic structure, the rent lifeline that funds the state. Tax increases and subsidy reforms address the energy intensity (high per-capita demand) incubated by subsidies, as well as aim to reduce domestic consumption and preserve exports.
The politics of energy subsidy reform turn the theoretical convention about linkages between rent and Middle Eastern autocracy on its head. Rentier theory’s claim about oil’s influence on politics also works in reverse. Oil rents probably do increase the durability of autocratic regimes, but autocratic governance (at least in Middle Eastern oil exporters) also appears to increase demand for oil. That is because regimes stay in power not just by distributing oil rents, but also by distributing oil itself, a practice that stimulates demand. The Middle East’s oil-exporting states tend to be both autocratic and oil-intensive, a notion that has largely been ignored in the literature.
Rentier theory has largely been disengaged with the use of energy within rentier states, including the intensity of that use. Luciani, one of the few early rentier theorists to engage with domestic consumption, wrote in 1987 that oil “has value only to the extent that it is exported.” Minimizing oil’s domestic role was probably justified in the 1980s and 1990s, the classic period of rentier scholarship, when the Gulf states remained underdeveloped and lightly populated. Circumstances have changed. Energy products such as electricity and refined fuels have been distributed for decades at low, fixed prices which have encouraged demand for the domestic oil and gas used to produce them. In-kind energy distribution has, over time, greatly influenced residents’ consumption behaviors and preferences, as well as the physical shape of the built environment. The rentier economies of the Gulf exhibit per capita oil consumption that ranks among the highest in the world. That condition is a direct outgrowth of the pervasive and structural role of oil and gas in the formation of many of these states and their governance bargains, which has imposed deep influences on their institutional design and outcomes.
A useful way to envision these effects is as a second stage in the resource curse. Oil rents first helped cement tribal autocratic systems to survive modernization, and those systems, in turn, launched policies that made their states extremely energy-hungry. Oil bolstered autocrats and autocrats bolstered oil. The Middle East has maintained nearly six percent yearly growth in consumption over the four decades since 1973, a much faster rate of growth than the two percent world average. Over time, Middle Eastern oil export economies which faced few pressures to rationalize demand or reduce intensity of use became less competitive on an energy basis relative to importing economies. Availability of cheap oil created distinct physical, institutional, and sociological outcomes in the Middle East, incentivizing wasteful behavior and an energy-intense building and capital stock.
These new taxes and subsidy reforms would not seem remarkable in a participatory governance setting where economic and social policymaking sometimes requires corrective retrenchment. But in the rentier Middle East, they run contrary to four decades of scholarship. Academics have long held that the oil kingdoms of the Middle East are subject to a strict set of governance conditions. Rulers cultivate support from their citizens by providing them with welfare benefits and subsidies, funded through export rents. These rents were sufficient to eliminate taxes and other forms of extraction, thus allowing regimes to avoid accountability links with taxpayers. Energy subsidies have been described by scholars as “rights of citizenship,” provided by regimes in exchange for public acquiescence to autocratic rule. Were the state to break its side of the bargain, the theory suggested, the entire pact was liable to unravel.
These arguments proved robust during the 1986-2004 oil bust period, when oil rents were strangled by a 20-year glut in global supply. Despite intense fiscal privations that squeezed rentier distribution, none of the six Gulf monarchies raised energy prices or re-imposed taxation that had been phased out during the boom period. But in recent years something has changed.Initial signs that longstanding subsidy policy commitments were weakening came in 2010 when Iran launched a major increase in energy prices. Dubai followed with a more modest reform in 2011. Increases elsewhere, delayed by pan-Arab uprisings, began to unfold in 2014.
These price increases were greeted by a flood of complaints in social media. In Saudi Arabia, commentary ranged from outright support to personal attacks on ministers, technocrats and even royal family members. Cautious Saudis began tweeting pictures of King Abdullah unaccompanied by text. The portraits evoked the late ruler’s patronage of the poor as commentary on his successor’s turn toward extraction. Physical protests broke out in populous hydrocarbon exporters, including Iran and Algeria, as well as in Oman, where citizens picketed the Ministry of Oil and Gas after gasoline price increases.
The outcry over rising prices was met with stepped-up repression in most of the affected countries. The use of mild repression to quell breaches of the state-society pact is predicted by early rentier works, while later writing argues that the state prefers to head off dissent with patronage and consultation. The ongoing crackdowns on speech along with the state-directed murder of a Saudi dissident in Istanbul provided further evidence that benevolent characteristics of Gulf autocratic rule were eroding.
These developments suggest that a reassessment and update to theory is due. Rents certainly remain of primary importance to governance in these autocratic export states, but some rules that theorists have advanced over the past four decades now appear more like guidelines; and guidelines can be disregarded when circumstances allow.