Insiders and outsiders in Arab political economy

A short new book offers a clear and compelling explanation for MENA developmental failures

Welcome back to Abu Aardvark’s MENA Academy! My apologies for not posting for a while; I’ve been traveling the last two weeks, with a series of workshops and events in Paris, Rabat and Doha. But now I’m back and it’s time to get started with a fresh round of my weekly book review essays. Enjoy!

Steffen Hertog, Locked Out of Development: Insiders and Outsiders in Arab Capitalism (Cambridge University Press, 2022)

What explains the devastatingly poor performance of the core Arab economies over the last half-decade? What, if anything, differentiates those economies from the countries of other postcolonial developing regions? And why are the region’s economies so impervious to liberalizing reforms? In the short, incisive and important new book Locked Out of Development, Steffen Hertog takes on one of the biggest questions of MENA political economy and comparative politics. He argues that it isn’t just rentierism or oil. Instead, the key differences between Arab states and other emerging economies lies in “the very uneven exposure of Arab citizens and firms to markets, rooted in their uneven access to the state’s resources and protection.” This simple point offers powerful insights into one of the most politically salient and analytically urgent problems facing the MENA region, such as the current economic crisis of Lebanon and Egypt, where the vast majority of the population - the “outsiders” - is suffering from dizzying inflation, currency collapse, and shortages, while the “insider” elite carries on and keeps the restaurants and bars humming.

Hertog is best known for his scholarship on the Arab Gulf states, and particularly his book Princes, Brokers and Bureaucrats diving deep into the differential effects of oil rents on state capacity (for further development of those themes see his contribution to the POMEPS Studies volume on rethinking the rentier state). Over the last decade, he has been branching out to the broader regional political economy. He was one of the co-authors of the chapter on the political economy of development in our recent volume The Political Science of the Middle East - you can listen to him talk about that chapter on my podcast here. Here, he broadens his theoretical ambition to evaluate the core national economies outside the Arab Gulf, identifying commonalities in the patterns of development in Egypt, Algeria, Morocco, Tunisia, Jordan, Syria and (somewhat of an outlier) Yemen compared with comparable countries in other regions, without losing sight of each country’s distinctiveness.  

As an aside, it’s worth noting thaqt Hertog’s book comes out in the innovative new Elements format being pioneered by Cambridge University Press: short, conceptually focused interventions ideally optimized for classroom use and for broader public engagement.  I’m a big fan of this new format, which bridges a gap between academic journals (where articles tend to be highly specialized and often inaccessible) and full-scale monographs. It’s definitely worth checking out their offerings across a wide range of subjects and disciplines. The format here allows Hertog to focus in on one core dimension of MENA political economy, explaining and elaborating the theoretical concept and empirical implications of labor market segmentation to great effect.

Hertog grounds his analysis of MENA political economy in his observations about the structural differentiation of labor markets between insiders and outsiders (see his excellent contribution to our POMEPS Studies volume on labor and politics for a preview of this argument). One of the great strengths of the book is his continuously comparative sensibility, which fully places the Arab Middle East and North Africa within a comparative universe of post-colonial developmental states rather than treating them in isolation. To that end, he draws systematically on political economy literature from Europe as well as the Global South, with his core analytical framework of insiders and outsiders developed out of the European political economy literature and systematically evaluated cross-regionally.

Those comparisons between the Arab states and the rest of the world make the patterns in labor markets and developmental outcomes stand out in sharp relief.  To nobody’s surprise, I’d reckon, he shows the Arab world lagging deeply behind its counterparts across many indicators - but also exhibiting unusual strengths which are rooted in the political survival strategies of the developmental regimes which adopted them.  Public employment ranged between 20%-40%, far higher than any other region of the world. The ratio of state spending to GDP and the core government payroll continued to expand even during periods of privatization and liberalization, in contrast to regions like sub-Saharan Africa where public employment halved under suchg conditions.  Market outsiders paid the costs of reform, while insiders largely retained their protections.

It isn’t the size of the informal sector — an average of 65% — that is comparatively unusual compared to other regions, he notes. It’s the share of public employment in the formal sector that’s remarkably high – and, critically, the exceptionally low level of mobility between the sectors.  As he elegantly summarizes: “the insider-outsider system in the region’s labor market, although generous to a fairly large share of the population, is particularly rigid and inflexible: outsiders stay outsiders for longer and insiders very rarely lose their insider status.” The distinction between insiders and outsiders really matters: “where the Arab region stands out is the particularly steep difference between insider privileges and what is available for outsiders.”

The social safety nets which international financial institutions always call to cut and reform are indeed expensive drains on state coffers, he notes, but overall only South Asia has a lower ration of social safety spending to GDP.  Slashing food and fuel subsidies may reduce the strain on budgets, but it doesn’t touch the core problems he identifies: such cuts increase misery among outsiders, exposing them to ever more extreme market consequences, without typically touching the core protections enjoyed by market insiders.

Those trends, Hertog argues, are not just a budgetary burden to be dealt with through the privatization and liberalization policies advocated by international financial institutions like the IMF and World Bank. Those postcolonial developmental strategies created and sustained an unusually large public-sector constituency which served the survival interests of regimes, protecting those sectors from market forces at the expense of the rest of the population trapped in informal, unproductive economic sectors and unable to effectively organize politically to demand change. That isn’t to say that public sector employees aren’t suffering in times of economic crisis, such as those currently afflicting much of the region — but they are more protected than their outsider counterparts from the effects.

This labor market segmentation has deeply structuring effects across all levels of analysis, not only in obvious areas like employment or social protections. When it comes to education, for instance, Hertog argues that insiders have every incentive to obtain the credentials necessary for public employment rather than usable skills, while outsiders trapped in the informal economy show extremely low returns on investment in education. When it comes to political mobilization, Hertog argues that the most effective collective action tends to come not from the impoverished and neglected informal sector but rather from the publicly employed insiders determined to protect their relative social status and benefits. He touches briefly on a wide range of other related implications, such as how the nexus of corruption, cronyism, and regulatory regimes act as obstacles to entrepreneurship by market outsiders while empowering insider connected firms.

Locked Out of Development offers a short but powerful analysis of the distinctive patterns of political economy in the Arab Middle East and North Africa, with the insider-outsider market segmentation concept offering insight into a wide range of developmental pathologies. I’d recommend it for those interested in comparative political economy and in broader issues of comparative politics in the MENA region. It offers a good introduction to the region’s distinctive political economy, with an original and compelling argument about labor markets that should provoke both useful classroom discussion and avenues for future research.