Economic Liberalization and the Lineages of the Rentier State

The City University of New York
Economic Liberalization and the Lineages of the Rentier State
Author(s): Kiren Aziz Chaudhry
Source: Comparative Politics, Vol. 27, No. 1 (Oct., 1994), pp. 1-25
Published by: Ph.D. Program in Political Science of the City University of New York
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Economic Liberalization and the
Lineages of the Rentier State
Kiren Aziz Chaudhry
As the 1980s came to a close, economic liberalismassumeda virtuallyuncontestedposition
in development economics, signaling the triumph of what Hirschman called the
"monoeconomics" claim.' The central tenet of development economics-that late
developerswere vulnerableto severe marketfailureswhich presageda large role for the state
in economic planning-was thoroughlydiscredited.
in all its guises, came under
Etatisme,
attack, and "state shrinking,"privatization,and liberalizationbecame the watch-wordsof a
new ascendancy in developmentpolicy. In the popularrealm, economic liberalizationand
privatizationwere increasinglyviewed as indicia of a grand historical teleology in which
marketsand democracywere triumphant.2In scholarlydiscourse, where, beginningwith the
first critiques of modernizationtheory, the emphasis had been on explaining discontinuity
and diversity, the new orthodoxy reasserted the uniform laws of neoclassical economic
theory.3
In practice, of course, marketreformshave producedwidely divergentresultswhich belie
neoclassical assumptions about uniform human behavior and economic processes. This
essay focuses on the importantbut neglected issue of explaining the relative success of
marketreforms in two "'mostsimilarcases,"' Iraq and Saudi Arabia. Iraqand Saudi Arabia
initiatedeconomic liberalizationprogramsin the 1980s, when declining oil prices depleted
reservesand generatedsevere fiscal crises. Iraq'smassive reformprogramwas implemented
quickly and without opposition. In contrast, in "laissez-faire"Saudi Arabia, a much milder
liberalizationprogramwas stalled almost instantly throughopposition by business elites.
Identical placement in the international economy accounts for the contemporaneous
initiationof reforms in the two oil exporters. The dramaticallydivergent reform outcomes
illustratethe part of domestic political coalitions and institutionalstructuresin determining
them.
Explainingthe differencesbetween the reformefforts of Saudi Arabiaand Iraqhighlights
the primacy of politics in shaping economic outcomes and emphasizes the centrality of
historicalcontingencies in determiningsocial responses to economic liberalization.The two
cases show the utility of historical analysis in discovering the relative weight of political
coalitions, institutional structures,and policy in determining the outcomes of economic
liberalizationprograms.They suggest that the natureof initial governmentinvolvement in
the economy conditions not only the character,but also the very viability of futureefforts at
market reform. I trace differences in reform outcomes to the divergent patterns of
business-governmentrelationsupheldby Iraqiand Saudi itatisme, arguingthat the natureof
the state's involvement in the economy and different patterns of business-government
relations ultimatelydeterminereformoutcomes.
Taken together, the Iraqiand Saudi cases challenge the straightforwardrecipes for market
1
ComparativePolitics October 1994
liberalization put forth by neoliberal analysts. In explaining outcomes, neoliberal
developmentalists have emphasized the importance of "speed," "thoroughness," and
phasing, usually in a posthoc fashion.4 These explanations begin with a reified
concept- "the market"-and then proceedto illustratethe ways in which particularpolicies
either liberated or failed to liberate prices. These explanations do not capture, let alone
explain, the texture and diversity of outcomes in liberalizing late developers. The
experiences of Iraq and Saudi Arabia demonstratehow difficult it is to create and sustain
functioning market economies after long periods of itatismte. They illustrate the part of
historically constituted institutional, political, and economic relationships in forestalling
"transitions"to marketeconomies. As such, these cases providean opportunityto reflect on
the prerequisitesfor the constructionof marketeconomies and highlightthe internationaland
domestic processes throughwhich the institutionalunderpinningsnecessary for the creation
of marketeconomies can be eroded.
Drawing on the insights of the new institutionaleconomics and on examples from early
modern Europe, this paper outlines some basic prerequisites for the emergence of
functioningmarketeconomies in late developers. It then presentscase materialon the Saudi
and Iraqi reforms of the 1980s. Differences in business-governmentrelations in these two
'most similar cases" are traced to the way that key conflicts in the process of state and
market building in the period between 1930 and 1965 were resolved. Finally, both the
historical and contemporarycase material is situated in the broadercontext of economic
restructuringin late developers. I argue that initial state interventionsof the 1930s, born of
administrativeand political weakness or desperateeconomic crises, were expanded in the
1970s and early 1980s, when many developing countries gained access to large amountsof
foreign exchange through borrowing, aid, and oil revenues. To the extent that these
revenuesundercutthe emergenceof the institutionsand normsnecessaryfor the construction
of market economies, reliance on external capital inflows created large and perhaps
insurmountablebarriersto the creationof nationalmarketsin the 1990s.
Some Prerequisites for the Creation of Market Economies in Late Developers
It is perhaps necessary to begin by restating the most basic tenet of the institutional
economists: functioning national markets can not exist without legal, administrative,and
regulatoryinstitutionsmaintainedby the state. Self-regulatinglaborand commoditymarkets
do not automaticallyemerge in the absence of state action. Instead, they are conscious
institutional constructs rooted in historical trajectories and based on evolving political
choices. To create competitive markets, it is not enough to smash the state bureaucracythat
owns, controls, or regulatesgoods and services; rather,the instrumentsof the state must be
redeployedto performthe much more difficult task of indirectregulationand administration.
Commonly recognized in the literatureon regulationin advanced countries, this point has
somehow escaped the notice of currentadvocates of the free market in the Third World.5
Furthermore,the absence of state regulation results not in unbridled competition-the
uncertaintiesof such competition are unacceptableeven to entrepreneurs--butrather in
collaborative agreements among producers that either provide informal rules to govern
competition or directly create monopolistic conglomerates. Unregulatedmarkets develop
2
Kiren Aziz Chaudhrv
theirown form of organizationto stem uncertaintyand introducesome level of predictability
into commercial transactions.In the absence of state regulation, these agreementsevolve
into pacts that neglect the consumer and reflect only the preferences of investors and
entrepreneurs.6
More sophisticated defenders of free market economies accept the minimal role of
governmentin protectingcollective property,7defining the institutionalcontext within which
labor and business bargain, protecting consumers,8 and preventing the emergence of
monopolies. The developmentalistliteraturegenerally fails to recognize, however, that the
pervasivenessof the state in LDCs coexists with regulatoryand administrativecapacities of
a specific, narrow character.Governments in the developing world may directly control
large swatches of the national economy throughproduction,distribution,and price fixing,
but they rarely possess the qualities associated with Adam Smith's minimalist "watchman
state." Indeed, more often than not, state capacitiesto regulate, define, and enforce property
rights, dispense law, and tax are strictly circumscribed. To successfully make the
"transition" to a market economy, these capacities become absolutely necessary.
Understandinghow these capacities evolve, or fail to evolve, is crucial in understanding
both initial patternsof governmentinterventionin the economy and the currentcrisis in the
ThirdWorld and in the commandeconomies of easternEuropeand the formerSoviet Union,
where attempts to liberalize the national economy have repeatedly failed. Indeed, the
relative success of the Chinese reforms directly contradicts the neoliberal emphasis on
speed, comprehensiveness,and the incentive generatingpowers of privateproperty.Perhaps
imagining that institutional capacities to regulate market economies exist in LDCs,
economists have paid scant attentionto the process by which precapitalistmonopolies such
as guilds, merchants associations, and agricultural monopolies are eroded or to the
particularlydifficult process of regulating and undercuttingmonopolies and monopsonies
upheld through partnershipsbetween foreign companies and local businessmen. While
recognizing that over time national markets tend to generate monopolies and create
systematic social inequalities, economists neglect completely the role of state institutionsin
breaking down precapitalistarrangementsthat thwart the initial expansion of competitive
marketforces.
Although "transitions"to marketeconomies were not governedby any grandteleological
design, the historical account of early developers suggests several social, political, and
institutionalprerequisitesfor the creationof functioningnationalmarketsin late developers.
Recognizing that there is nothing "natural"or automaticabout the rise of marketeconomies
pushes us to reexamine the conventional account of the state's role in Third World
economies from a different angle, one which stresses the social and political rigidities that
governments must overcome to forge national markets. There are at least five basic
prerequisites for the creation of national markets: political will, normative choices or
political decisions, institutions,corporateinterestgroups, and marketculture. I discuss each
in turn.
Political process precedes bureaucraticrestructuringand administrativeresolve: the first
political choice that elites must make about markets is the decision to have them. As the
neoliberals recognize, there must be sufficient political will to withstand opposition from
shifting coalitions among the bureaucracy,consumers, businessmen, and workers. While
contemporaryaccountsof failed attemptsto liberalizebecause of oppositionfrom consumers
ComparativePolitics October 1994
and labor abound, the assumptionsembracedby development economists kept them from
appreciatingthe interestpolitical and economic elites may have in forestallingthe creationof
functioning national markets. Creating markets is politically dangerous. Functioning
markets provide opportunitiesfor mobility that undercutlineage and traditionalrights of
privilege, thus threateningthe statusquo. Marketscreate inequalitiesin wealth that may not
match existing patterns of income distribution, status, power, and entitlements; they
dislocate groups in both the political and economic realms.9
In Europethis process was long and drawn out and was manifested in the destructionof
the guild system, the erosion of the privileges of the nobility, the terminationof barriersto
rural-urbanmigration, and the displacementof rurallabor. Substantialvariation, reflecting
differences in timing and in the organizational characteristics of social classes in the
precapitalistera, existed among European cases.l0 For example, one may contrast the
relatively smooth transitionin eighteenth century England, where guilds were weak, with
the enormous barriersto the expansion of domestic marketsinto the hinterlandsof France
and Italy, where highly organizedurbanguilds forestalledthis expansion throughsanctions
and barriersto entry enforced by city administrations."
As in the case of early developers, the decision to create marketswas made and unmade
repeatedly in late developers. Even revolutionarysocialist regimes repeatedly revised the
laws governingthe privatesector.12Unlike early developers, where pressuresfrom emerging
urban groups coincided with the center's expanding fiscal appetite, market reforms in
contemporaryLDCs are opposed both by national entrepreneurialclasses accustomed to
high levels of protection and by labor and consumers. Only in cases where national
industrialelites have strong links to multinationals,as in Brazil, Argentina, and Mexico, is
there a strong constituency for opening up to internationalmarkets.'3 As a result, most
governmentsturn from the reforms early on.'4 Many countries, including Turkey, Egypt,
Chile, and Brazil, initiated liberalizationprograms more than a decade before their most
recent efforts only to backtrack.'5A corollary of the argumentthat marketsare conscious
constructs-in the same vein that commandeconomies are deliberatearrangements--is that
they are based, by design or default, on political principles(that is, who gets what, why, and
how)16and on choices about how individualresources, rights, aspirations,and possibilities
are reconciled with collective ones. The tensions and convergences between collective and
individualutilities have been a majortheme of political economics since the discipline was
born. While liberal developmenteconomists have focused exclusively on efficiency, those
familiarwith the debate on the role of the welfare state in advanced industrialdemocracies
will recognize the centrality of these issues, which are often cast as conflicts between
individualfreedom and social good.
Market economies, whether in Bangladesh or Sweden, are based on conscious choices
enforced through state regulation. Markets are not politically neutral. In contexts where
debate over the shape of the market coincides with questions centered on the territorial
boundariesof the state, the compositionof political community,and the allocation of initial
propertyrights, neitherliberalpolitical theorynor neoclassical economics is a useful starting
point. Wrenchingsocial strugglesprecede and shape the rules that govern the economy. The
Hungarianand Polish debates about how to privatizeexpose this void at the heartof liberal
theory and disclose the persistenceof a solid political cultureof economic egalitarianismin
these countries. It is, indeed, a symptomof the currentglobal climate and a testimonyto the
4
Kiren Aziz Chaudhry
depth of corruptionin the collapsing socialist regimes that many appearto view the market
as an equalizing force.'7 In most developing countries, political values and institutionsare
ephemeral, the borders of the state, formal markets, and informal markets are vaguely
defined, if at all, and connections between the economic and political systems are not
imbuedwith the legitimacyof proceduralnorms. Thus, the administrativeburdenof creating
markets must be accompanied by explicit political choices, which are, in turn, heavily
contested. It is not enough to legislate these "choices" from above. These decisions must, at
a minimum, have the support of entrepreneursand investors, on whose confidence the
marketsystem relies.
To call an economic regime a "~market"
system without reference to existing political,
social, and economic relationshipsis essentially meaningless. The term by itself fails to
describe the relative power of labor, producers,importers,and consumersor the constraints
under which they interact.'8 The argument becomes clearer when one considers that
England, Japan, Taiwan, and the United States have all been described as market
economies, even though they have vastly different incentive systems for producers,
consumers, and labor and are characterizedby divergent patternsof business-government
relations.19In the United States, the starkness of the political choices embodied in the
regulatoryregime are often concealed in traditionor hidden in complex tangles of evolving
legislation.20 Where the "free market" and individual freedom are definitive tenets of
national ideology, raising questions about systematic biases in the market and the legal
system that upholds it is considered unpatriotic,a gross violation of social gag rules. In
contrast, in countries trying to make the change from nonmarketto marketeconomies, the
politics of the rules that govern the marketbecome the focus of public debate, especially
when political liberalizationaccompaniesmarketreform, as in the cases of eastern Europe
and the former Soviet Union. Often explicit statementsof how the burdens of the market
mechanism are to be allocated are necessary to craft social consensus. These choices
embody repeated attempts to generate an acceptable way of dealing with the inherent
tensions among individual, group, and collective utilities.2'
The thirdprerequisitefor the creation of marketsis the resuscitationor creationof those
particularadministrative,extractive, and regulatoryinstitutionsthat maintainthe legal and
administrative foundations of the market and embody normative choices of ruling
coalitions.22These include extraction(taxation, informationgathering),administration(law,
property rights), regulation (currency, prices, collective goods, weights and measures,
banking, buildings, licensing), repression and enforcement (police, surveillance),
distribution (subsidies, transfers, gifts from funds not derived from domestic taxation),
redistribution(subsidies, transfers, social insurance, welfare programsfrom domestic tax
funds), and production.
These institutionalstructurescan not be assumed to exist. As I have argued elsewhere,
and as the two cases in this study show, institutionaldevelopment in late developers is
conditioned by internationaleconomic changes and their interaction with the national
political economy.23When the constructionof basic state institutionscoincides with large
inflows of external capital, the resulting bureaucracies develop uneven and lopsided
extractive, administrative,productive, and distributivecapacities. Both the development
economics and neoliberal schools view the market as a ready-made alternative to state
intervention.For the neoliberalsit is enough to smash the etatiste constructfor functioning
5
ComparativePolitics October 1994
nationalmarketsto emerge. Developmenteconomists, for their part, view state participation
in the economy as the burden of backwardness. Like the neoliberals,they assume that
marketsexist, with all their legal, regulatory,and administrativecharacteristics.They differ
from the neoliberal school in their prescriptionsand in their view that state control is
administrativelymore difficult than the alternative of creating and regulating national
markets.
As both the Iraqi and Saudi cases show, it is harder,under conditions of administrative
weakness, to create and regulate functioningnational marketsin goods, labor, and finance
than it is for governmentto manage all productionitself. At a practicallevel, creating and
regulating marketsrequires myriad financial, legal, and civil institutions, with stable and
firm long-term commitments to regulate the actions of producers, importers, and labor,
enforce contracts,and ensurethe free exchange of informationamong economic groups.24In
cases where the governmentbecomes the primaryemployer and producerand assumes the
role of setting prices, its task is reduced to monitoring the activities of corporationsand
agencies that it owns and manages.25 Direct state participation in the economies of
developing countries serves as an administrative shortcut and generates institutional
structuresentirely inappropriatefor creatingmarketeconomies.26At a purely administrative
level, the involvement of the state as a producer,direct employer, and lender in countries
lacking a regulatoryinfrastructureis simpler than, and thus preferableto, the much more
elusive alternativeof creating and regulatinga marketeconomy. It is thus not surprisingto
find that major attempts to reform the private sector in developing countries end with
nationalization.27Contraryto what Gerschenkronsuggested, governmentownershipis more
often a responseto the administrativeweakness of the state in developing countriesthan it is
a reactionto the privatesector's inabilityto providethe skills and capital necessaryfor bulky
investments.
Fourth, nationalmarketscan not function in contexts where primordialsentimentsinform
behaviorin the economic realm or where overlappingascriptiveand occupationalcleavages
become exceedingly politicized. The complex process through which economic groups
supersedeascriptiveones can be a result of state policies and/orstructuraleconomic change
that undercutsascriptiveidentifications,such as kinship and sectarianties. In bureaucracies
or sectoralgroupswhere corporateand primordialidentitiescoincide, effective bargainingis
impossible. I am not suggesting that such loyalties and groupscompletely disappearor that,
once gone, they can not reemerge. Rather, unless collective action based on common
economic interestssupersedesthese identities, at least in the economic sphere, the allocation
of goods in society can not, at the margin, be determinedby the price mechanism.
In many late developers, the promotionof the old bourgeoisie often conflicted with the
broaderand more pressing political goals of state building and national integration.On the
eve of independencein many countries, the private sector was, for a variety of historical
circumstances, dominated by an ethnic, sectarian, or regional group different from that
which controlledpolitical power. In these cases, the most intrusivepolicies of the state were
aimed, not at supplementingprivate capital to promote internationalcompetitiveness, but
ratherat creating a national bourgeoisie which would support the state, if not mirrorthe
ethnic, religious, sectarian, and tribal characteristicsof the new political and military
leadership. In Turkey for example. Ataturk viewed the haute bourgeoisie of Jews,
Armenians, Greeks, and Europeansthat had become entrenched through the successive
Kiren Aziz Chaudhrv
capitulationsof the declining OttomanEmpireas a threatto his nationalistmission. Building
a "national" economy meant replacing them with a Turkish bourgeoisie. The Egyptian,
Syrian, Iraqi, Yemeni, Lebanese, Malaysian, and Saudi cases show similarpatterns,as do
several Africancountries, includingNigeria, Kenya, and Uganda.28These cases suggest that
state interventionin the past had political motivationsrelatedto the more pressing projectof
national integration.As the Saudi and Iraqi materialdemonstrates,these motivationswere
critical in initial state interventionsand resurfacedin a different form when liberalization
was attemptedin the 1980s.
The characterof the state's initial involvementin the economy conditionsfutureattempts
to reform the system. Once governmentbecomes involved in governing the economy in
direct, intrusiveways, it becomes entwined in mediatingeconomic and social relationships.
Steppingout of such a role is both economically disruptiveand politically dangerous.Since
groupsdo not emerge fully grown the momentthe governmentdecides to withdrawfrom its
economic role, a regulatorysubstitutefor direct state involvementmust be found if relatively
stable agreements are to be forged between groups with conflicting interests. These
substitutes include alternative institutional mechanisms for resolving conflicts and the
revitalization,creation, or legalization of corporategroups in civil society.
Fifth, and finally, the emergence of corporate groups involves the replacement of
precapitalistloyalties with legally defined individualrights and corporateentitlements.This
transformationis the centerpieceof what I call, for lack of a betterterm, the "cultureof the
market." One aspect of this cluster of psychological and behavioraltransformationsis the
acceptanceand expansion of the notion of self-interestas a legitimateand dominantmotive
force for economic behavior.29 As Stephen Holmes has pointed out, the concept of
self-interest, so central to economic analysis, has been progressively simplified by
economists, concealing its historicalspecificity.30For marketrelationsto exist, self-interest
must displace other forms of behavioralmotivation, such as honor, altruism, revenge, and
racial and sectarianhatred. The acceptanceof rationalself-interest in the western tradition
was relatedto the emergenceof impersonalmarketrelationsand the demographic,political,
and social changes that accompanied them. Precapitalist forms of identification and
behavior, based on primordialties built on "'nonrational"and in some cases explicitly
communitarian notions, are antithetical to market relations because they introduce
uncertaintyand economically irrationalbehavior into a system that can not sustain them.
In the contemporarysetting, the "cultureof the market"also means the broadacceptance
of the rules that uphold this notion of self-interest. For entrepreneursin late developerswho
are accustomed to functioning on the margins of the formal market(if not entirely in the
black market),or alternativelyin an environmentdominatedby bureaucrats,this acceptance
requires internalizingthe norms that govern success or failure in a marketeconomy and
accepting a system of uniformly applied laws. This change comes hard in countrieswhere
ascriptiveattributesare a business credential.At a broaderlevel, the often noted distrustof
commercialprofit and wealth, so common in LDCs, must be replaced with the notion that
economic inequalitycan be legitimate.
Needless to say, these prerequisitesare linked so closely that it is possible to identify their
emergence only by tracing historical events in all their complexity. All the processes
described above have been and will continue to be discontinuous. They are not linear and
are, doubtless, in different stages of constructionor deconstructionat a given time in any
7
Comparative Politics
October 1994
particularcase. Historically, these processes evolved fitfully into systems that bear little
resemblanceto the liberaleconomists' marketideal, an ideal that has yet to be consigned to
its rightful place among other ideal-types. For contemporaryLDCs attemptingto construct
functioning market economies, these prerequisitescan rightly be seen as barriersto the
creationof marketeconomies.
The Recession and the Reforms in Iraq3' and Saudi Arabia
In the 1970s. Saudi Arabiaand Iraqwent througha periodof intense statism underthe very
different labels of "laissez-faire" and "Arab Socialism." respectively. Both governments
initiated economic liberalizationprogramsin response to the recession of the 1980s. The
case materialbegins with a summaryof the reforms. I then offer a historical-institutional
explanationof the two oil exporters'divergent liberalizationexperiments.
In Iraq, both liberalizationand privatizationpolicies were pursued simultaneously.The
most far-reachingreforms were in the agriculturalsector. While halting attemptsto divest
state-owned farms and agriculturalprojects had begun in 1983, privatization began in
earnestin 1987 and gained momentumbeginning in the fall of 1988 afterthe cease-fire with
Iran was announced.32On the eve of the reforms, the government directly owned
approximately50 percentof all agriculturallands; by January1989, 88 percentof land was
privately owned, 11 percent was rented from the state by private companies, and only 1
percentwas state managed.33Promptedby the steady decline in agriculturalyields since the
mid 1970s, which generated a soaring import bill and created widespread rural to urban
migration, the new agriculturalpolicies reflected a radical shift in emphasis from equity to
efficiency. The privatizationof agriculturetransformedthe social organizationof ruralIraq,
where farmershad previouslybeen forced to join state-sponsoredcooperativesand collective
farms.34 The extent to which the socialist and collective farmingsector was held togetherby
law alone was reflected in the spontaneousdisbandingof agriculturalcooperatives in the
1980s after access to government credit was delinked from membership in the
cooperatives.5 To encourage farmers, the government doubled production subsidies for
wheat, rice, barley, corn, and tobacco in 1989.3"6
In additionto leasing state farms and distributingpreviously nationalizedland, a variety
of large poultry, dairy, and fishing enterpriseswas sold to the private sector outright. By
1989, nineteen of the state's twenty-nine poultry farms, three of the four large national
fisheries, six of the large poultryfeed projects, six of the ten large dairy farms, and virtually
all mills and bakerieswere privatized.37In industry,the Iraqigovernmentdivested itself of
seventy large factories involved in construction materials and mineral extraction, food
As it privatized, the government
processing, and light manufacturingin a single
year.removed barriersto private investmentthat had been
in place since the nationalizationsof
1964,39 including ceilings on private investments and the law against cross-sectoral
investment, designed to prevent the concentrationof private capital. Tax schedules which
had directly claimed up to 75 percent of profits and then allocated 25 percent of the
remainingprofits to workers' social security funds were annulled, and private industrywas
given tax holidays of ten to fifteen years.4?Underthe new Arab InvestmentLaw, Iraqissued
an open invitation to Arab investors and offered a wide range of incentives, including
8
Kiren Aziz Chaudhry
guaranteesagainst nationalization,unrestrictedprofit repatriation,a fifteen year tax holiday,
and free labor importpolicies.
In the service sector, the government sold small hotels and tourist resorts and leased
state-ownedgas stations to the private sector. In construction,which had been the preserve
of private companies all along, laws that gave preferential treatment to the six large
state-ownedcompanieswere repealed, forcing state constructioncompanies to compete with
private contractors even for government projects. Trade was liberalized, and export
promotion policies were promulgated.4' Imports, which had been completely statecontrolled, were liberalizedin 1987, with the provision that private sector importsbe paid
for with foreign exchange held outside the country.
Dramaticchanges occurredin social policy as well. Laborunions were dissolved outright,
and the minimumwage was abolished.42Under the laws of the Arab CooperativeCouncil,
founded in 1988, Yemen, Egypt, and Jordanwere permittedto export labor freely to Iraq,
which, along with the demobilizationof the army, put furtherdownwardpressureon wages.
The managerialtier of the bureaucracywas eliminated and politically neutralizedwhen 200
general directorshipsand their entire staffs were dissolved by decree. The organizational
structureof remainingstate-ownedindustrieswas revised to encourage productionthrough
bonuses, incentives, and management autonomy. Most important, the government
liberalizedprices, with drasticresults for the living standardof the average Iraqiconsumer.
Price controls on all but a handful of basic goods were removed. Previously, the state set
prices by selling importedand local goods directly in the marketthroughwell stocked retail
outlets. With cuts in government imports, access to state retail outlets was restricted to
high-level bureaucratsand the army under a new quota system.
Dramaticas they appear,the reformsdid not signal a fundamentalchange in the absolute
balance between public and private shares in industry. Despite a hike in private
investments,43the government'sshare in manufacturinggrew apace.44At no point did the
state's share of industrialproductionfall below 76 percent, and the government's intent to
maintaincontrol of the "commandingheights" of the economy was signaled by several new
joint ventures with foreign companies in automobile manufacturing,heavy industries, and
arms manufacturing.
In terms of pure efficiency, the private sector performedwell. Agriculturalproduction
doubled in one year, productivityin state-ownedfactories increasedby 27 percent between
1987 and 1988, and laborproductivityjumpedby 24 percent. In agriculturalproducts,yields
doubled in a single year. Industry'sperformancewas more difficult to evaluate because of
shortages of raw materials and spare parts. The new owners managed, however, to trim
labor costs dramatically, improve production methods, and substitute local inputs for
importedones.
In contrastto the Iraqi case. privatizationwas a minor part of reforms in Saudi Arabia,
where most industrial,agricultural,and service sector businesses were privately owned to
begin with. The emphasis, instead, was on taxation and on cutting budgetaryoutlays by
withdrawing consumption and production subsidies. Income and corporate taxes were
introduced, and the government announced its intent to begin collecting heretofore
unenforced taxes. New labor regulations were introducedto force the private sector to
replace cheap foreign labor with Saudis and assume the burdenof social security payments
previously covered by the government.45
9
ComparativePolitics October 1994
The governments of both oil exporters liberalized their economies in response to the
decline in oil prices, but the initial results of the reforms differed radically. In Iraq's
broad-basedreform, all previous entitlementsto the regime's constituencieswere abrogated
without a formal revision of the regime's ideology. The majority of the population,
especially the main beneficiaries of Iraqi itatisme, was hard hit: consumers, the
bureaucracy,labor, and the army-the core supportersof the regime-suffered high rates of
inflation and shortages in basic goods to which they were completely unaccustomed.The
demobilizationof the army in 1989 injected hundredsof thousandsof soldiers into a work
force saturatedwith migrantlaborersfrom the countries of the Arab CooperativeCouncil,
resulting in high levels of unemployment.46
Unlike the Iraqi liberalization,the Saudi reforms failed immediately. All those policies
which affected the entrepreneurialelite, including corporate and individual taxes, zakat
payments (Islamic tithes), progressive fees on the consumption of electricity, water, and
gasoline, the new Labor TransferLaw (requiringbusinessmen to get authorizationfor the
import of foreign labor), the Saudization Law (requiring businesses to hire Saudi labor
insteadof foreign workers), the new Social InsuranceLaw (requiringbusiness to pay social
insurancepaymentspreviously covered directly by the state budget), and the withdrawalof
agriculturalsubsidies were successfully opposed by businessmenand their collaboratorsin
the bureaucracy.Only those changes that affected either low income consumers or foreign
workers, including fees on passports, document verification, and revised customs duties,
survived.
In fact, the Saudi privatesector extractednew concessions from the governmentin direct
oppositionto the state's aims of cutting spendingand liberalizingprices. For the first time in
its short history, the state-sponsoredSaudi private sector united in the organizationalforum
of the Confederationof Saudi Chambersof Commerce to demand broad-basedprotective
measuresagainst foreign competition in commodities and contracts. Protectionistlaws that
had never been implemented during the boom began to be enforced in the recession,47
winning Saudi industrialists and importers protection against "unfair dumping and
competition from foreigners," more comprehensiveprotective tariffs, and substantialnew
indirect subsidies.48Efforts to achieve protection under the "buy Saudi" laws led to the
creation of a centralized agency composed of bureaucratsand chamber representativesto
ensure that all public needs were supplied with locally manufacturedproducts.49 Some
private sector elites even suggested that the government stop announcing tenders and
preselect local factories from which to purchasegoods.5"Further,in recognitionof massive
overcapacityin many industries,Saudi industrialistslobbied for export promotionsubsidies
so that they might compete in foreign markets.Whatprivatizationtherewas in Saudi Arabia
was, unlike in Iraq, risk free, both economically and politically:like previoussales of shares
in public utilities and other state industries, the sale of SABIC shares and public utility
companies in 1987 was, in response to business pressure,made on the basis of a 15 percent
guaranteedrate of return.
The concessions won by Saudi business were fantastic, particularlyin light of declining
state revenues and the high levels of governmentsupportalreadyenjoyed by local industry.
The governmentcapitulatedto business pressurequickly and completely. Strict guidelines
were issued requiringcontractorsfor state projects to use only local materials, services,
transport,insurance,food, and banking. In response to contractors'demands, as expressed
10
Kiren
Azi- Chaudhry
in the March 1985 Business Conference in Riyadh, the existing 30 percentrule stipulating
that foreign contractorssubcontractat least 30 percentof their projects to local companies
was expanded to require all contracts to be split into small enough portions for local
contractors.5'Wide-rangingpolicing powers were delegated to the Confederationof Saudi
Chambersto investigate complaints of local suppliers against governmentagencies and to
link up suppliersand subcontractorswith specific governmentprojects.52In December 1985
an export promotionagency was set up with the participationof 160 local businessmento
The successes of the Saudi
study and distributeexport subsidies to local manufacturers.53
businesselite in defining the termsunderwhich the postboomeconomy would functionwere
extensive and directly challenged the stated objectives of the government.
Despite its initial successes, especially compared with the spectacularfailures in Saudi
Arabia, Iraq's achievements in liberalizationwere short-lived. Ironically, the very factors
that guaranteedthe initial ease with which Iraq's reforms were undertakensealed their fate
in the medium term. First, the immediate aim of the government was to save foreign
exchange for rebuilding Iraq's war-ravagedeconomy and for new industrialand military
investments. Shortages in foreign exchange thus precipitateda severe credit crunchfor the
privatesector. By winter 1989 many factories lacked the necessary raw materialsand spare
partsto produceat full capacity. Declining production,shortages, and inflation emerged as
serious problems. Second, the method of privatizationin Iraq did not produce competition
among local industrialists. Ownership of the newly privatized enterprises was highly
concentrated:thirteenof the seventy large factoriesthat were privatizedwere bought by one
family; not counting agriculturalprojects, this same family owns thirty-six of the very
largest industriesand over 45 million squaremeters of land. Wary of each other, the legal
system, and the regime's commitment to uphold contracts, entrepreneursstructuredtheir
new investmentswith the exclusive aim of insulatingthemselves from each otherby gaining
controlof all upstreamactivities in a particularproductgroup. Thus, as in many othercases,
the sale of industries to the private sector in Iraq simply meant the transfer of public
monopolies to privatemonopolies, with the usual consequences for consumers.
The short-termproblemsof the transitionwere amplifiedby the regime's inabilityto craft
a stable set of propertyrights, which would have created confidence and encouragedIraqi,
Iraqiexpatriate,and Arab companies to make fixed capital investments.Partof the problem
was simple political insecurity,heightenedby the regime's refusal to recast political values
to supportthe economic dislocations of the 1980s (and especially the entrepreneurswho
benefited from those dislocations). By widely publicizing its withdrawalfrom the economy
and divesting itself of those industriesthat catered specifically to the needs of the average
consumer,the governmentfreed itself from directresponsibilityfor inflation, shortages,and
the mushroomingblack marketin goods, currencies,and services. Steppingout of its heavy
role in mediating the relationshipbetween producers, on one hand, and consumers and
labor, on the other, the governmentplaced the blame for economic hardshipssquarelyon the
shoulders of the newly affluent private industrialists. The resentments of consumers,
bureaucrats, and workers, who bore the burden of the reforms, were perceived by
businessmen as a political facility that the state could use with impunity against the new
entrepreneursat any time. Particularlyin light of the historical acrimony between private
capital and the Ba'thist state, the shaky foundationsof the political alliance on which the
reformsrested made businessmenreluctantto sink large amountsof capital into any venture
11
ComparativePolitics October 1994
that did not promise a total returnon capital within two years; goods were priced with such
profit margins in mind. Partly as a consequence, inflation was rampant. Access to
dollar-denominatedoil revenues freed the governmentfrom the effects of the deteriorating
value of the dinar, while Iraqi industrialistsand importersusing the black marketfor raw
materials, spare parts, and finished productspassed inflation on to consumers.
Finally, althoughextremelyefficient in directly managingproductionand distribution,the
Iraqibureaucracylacked the administrativecapacityto monitorthe increasinglylarge private
sector. These regulatoryproblemsprovedfar moredifficultthananticipated,particularlysince
the remainingfixed-pricegoods requirednew forms of cooperationbetween the bureaucracy
and privateenterprises.For example, a formidablereorganizationof the bureaucracybecame
necessarysimply to ensurethat breadreachedconsumersat the fixed prices. The absence of
investor confidence in propertyrights, the regime's avoidance of the difficult process of
generatingsupportfor its reforms,and the weaknessof the Iraqistate's regulatoryand extractive bureaucracyplungedthe Iraqieconomy into chaos at the turnof the decade and initiated
the government'sdesperatequest for new sources of foreign exchange.54
Explaining Relative Success: The Bourgeoisie and the Bureaucracy
The differences in the Iraqi and Saudi experiences with liberalization and privatization
during the recession of the 1980s can be understood by reviewing key junctures in the
economic historiesof the two countries. Variationsin the political coalitions which were so
critical in the reformperiodreflectedthe resolutionof priorconflicts in the two oil producers
which defined the contours of Saudi and Iraqi &tatisme.These conflicts cluster around
criticaljuncturesin the Saudi and Iraqigovernments'initial attemptsto create and regulate
national markets in the crises of the 1930s, 1940s, and 1950s. In both cases, attemptsto
regulate the economy at the initial stages of state building generated patterns of state
interventionwhich upheld radically different patternsof business-governmentrelations. In
the reform period, these differences came to the fore, conditioning the viability of market
reformsand ultimatelydeterminingeconomic policy.
In the initial periodof nationalconsolidationboth the Saudi and the prerevolutionaryIraqi
regimes were faced by organized and monopolistic merchantclasses. As in most other late
developers, the global economic crises of the 1930s created a pressing need for state
regulation. Simply to maintain their incumbency, both governments were pulled into
economic regulation, both to provide a modicum of economic stability and to protect
consumers, against organized conglomeratesof guilds in Saudi Arabia and against foreign
companies and their local collaboratorsin Iraq.
This initial confrontationbetween business and governmentdiffered radically in the two
countries. Indeed, the characterof the two business classes was very different. Iraq was
undercolonial rule. There, the domestic merchantclass was allied with foreign companies
who held legal monopolies and wielded much political power through the British
administration.Saudi Arabia, in contrast, had no history of formal colonialism. The Hijazi
merchantclass was confined to the small enclave of the Haj economy, and the foreign
presence there was minimal. The nascent Saudi bureaucracy,staffed by tribal groups from
the centralprovinceof the Nejd, was too weak to legislate directlyagainst the Hijazi guilds.
12
Kiren Aziz Chaudhry
In the late 1930s and 1940s the guilds and the merchantsbegan to hoard, creating inflation
and shortages and openly profiting from scarcity at the expense of consumers. The acute
sufferingof the general populationpromptedthe government'sfirst attemptsto undercutthe
power of the guilds and protect consumers.55These efforts failed, and the government
overcame the crisis throughforeign borrowingand grants. Eventually, new technologies of
coercion, transportation,and regulationtore at the complex relationsof the guild system and
introducednew realms of conflict that expanded the role of the state in adjudicatinglegal
disputes among the merchants and guilds. As political authority was consolidated, the
governmentbegan to decide key disputes. This new role gave the governmentthe leverage
it needed to undercutmonopolistic agreementsamong the Hijazi business class and initiate
the constructionof a unified nationaleconomy.
In the 1950s, when the Saudis adopted an import substitutionregime, the government
worked in concert with the traditionalHijazi merchanthouses, gradually expanding the
domainof the economic activities it regulated.This graduallyexpandingregulatoryrole was
utterlyreversedin the oil boom of the 1970s, when the governmentused its oil revenues to
create a new merchantclass which mirroredthe tribal and regional characteristicsof the
bureaucracy.There was never a direct and decisive conflict between the precapitalistguilds
and merchantsof the Hijaz and the Nejdis thatdominatedthe centralstate. The power of the
old merchantclasses was eroded instead throughthe state's sponsorshipof an alternative
middle class. It was this state-createdbusiness group, which had strongkinshipand business
links with the bureaucracyand the political leadership, that successfully opposed the
government'sreforms in the 1980s.
In Iraq, too, the regulatoryand administrativecapacities of the state were weak. In the
Mandate period, and particularlyduring the economic disruptions caused by the global
depressionand WorldWarII, Britishconglomeratesand local merchantswith monopolies in
trade and agriculturalproduce cooperatedto create widespreadshortagesthroughhoarding
and other speculative (and extremely profitable) activities.56 During World War II this
patternbecame commonplace in Iraq as in other places, precipitatingriots and fomenting
laborunrestamong Iraqiemployees of the large railway, oil, and port authorities.To uphold
commercial interests, the British, by their own unabashed account, frequently gained
concessions from the governmentthroughpolitical pressure, bribes, and threats.57
Parliament,in both the Mandateand post-Mandateperiods, was dominatedby a landed
elite that controlled virtually all the productive farmland and had a keen interest in
preserving the monopolies which collected, packaged, and transportedIraq's substantial
agriculturalexports.58Still, so great was the economic hardshipcaused by the speculation
and profiteeringof the privatesector duringthis period, and so widespreadwas the threatto
the incumbency of the regime, that the government attempted, albeit unsuccessfully, to
legislate against the "neutral"workings of the "market."
Unlike Saudi Arabia, business-governmentrelationsduring the British Mandateof Iraq,
as well as duringthe post-"independence"period, were markedby dramaticconfrontations
and devastatinglycostly failed attemptsto enforce price controls and curtail profiteering.59
Comprehensive attempts to regulate the economy began early on, first in 1939 with
Regulation 58, governing "Life during InternationalCrisis,"60and then in 1942 with the
"Law Regulating Economic Life of Iraq." The intention of the latter was to prevent
monopolies and price manipulationand to maintain requiredsupplies of basic goods. To
13
ComparativePolitics October 1994
achieve these aims, the government began to restrictexports, fix prices, and import basic
commodities to fill domestic consumptionneeds.6'
The Iraqi regulations failed miserably. For a variety of reasons, including weak
enforcement capacities, interference from the British authorities, the involvement of
powerful foreign companies, and the cohesiveness of the local merchantgroup, the private
sector was able to ignore the law. The results were devastating. Speculation,hoarding, and
profiteeringabounded,resultingin inflationratesof between 200 and 300 percentin the late
1930s and early 1940s,62 which continued on and off through the early 1960s.63 The
responseof the governmentto these repeatedadministrativefailures began with direct entry
into tradeto alleviate shortagesand lower prices64and reachedits zenith with the creationof
governmentmonopolies in agriculturalgoods.65
Together,regulatorystrugglesandthe pressingneed to createa unifiednationalmarketwere
linked up with the problemof regime maintenanceand nation building in both countries.
Historically,both regimes were dominatedby sectarian,regional, and tribalminoritieswhich
were different from, and opposed by, the commercial elites. Both the Saudi and Ba'thist
regimesassumedpoliticalpowerdespitethe oppositionof traditionalcommercialclasses composed of opposing regionaland ascriptivegroups;both faced the task of constructinga social
base of supportwhile undercuttingthe economic dominanceof their rivals.
Unlike Saudi Arabia, where the divide between the old Hijazi commercial class and the
Nejdi state was particularlystark, the social cleavages between business and state elites in
Iraqunderwentcomplex changes between 1930 and 1968. The commercialclass of Iraqhad
historically been dominatedby the Christianand Jewish minorities. Until 1950, when the
British arrangedto airlift the vast majorityof IraqiJews to Israel, commerce and banking
were dominated by a small Jewish minority who collaboratedwith British companies in
trade, finance, and service monopolies.66Meanwhile, an incipient Shi'i merchantclass was
growing in the south, largely in response to the Iraqi government's attempts to attract
capital: in 1932, in response to the mass migration of Iraqis to Iran during the acute
economic depression,the Iraqigovernmentoffered Persiansimmunityfrom taxationfor five
years if they became Iraqicitizens.67Then, in the early 1950s, when annual migrationsof
Iraqilaborersto Kuwait reached35,000 to 50,000, a law designed to attractKuwaiticapital
was passed which grantedKuwaitis the right to own land, commercialestablishments,and
industrialpropertyin Iraq. Many rich Kuwaitis and Persians settled in Basra,68and after
1951 a mix of Persianand Kuwaitimerchantfamilies, the vast majorityof whom were Shi'i,
replaced the Jewish merchantcommunity.69On the eve of independence, both the landed
and commercialelites of Iraqwere dominatedby Shi'as.
In both Iraq and Saudi Arabia, the deep primordialcleavages between the state and
business meant that the regulationof business was tightly entwined with pressing issues of
national integrationand state building. This linkage of economic and political tasks was
expressedin a particularlystarkform in Iraq, as a consequenceof the colonial legacy and the
strengthof private sector conglomerates.Whetherby historicalaccident or colonial design,
the militarywas composed of a differentprimordialgroup than the business class. By 1958,
when the Hashimite monarchy was overthrown, Shi'is dominated the ranks of both the
landedand merchantelite while the civil service and the armyremainedundercontrol of the
Suni minority.711
After the 1958 coup in Iraq, business leaders feared the populist agendas of the Suni
14
Kiren Aziz Chaudhry
military leaders who came to dominate politics. The most basic threat to the commercial
elite was the newly independentgovernment'sinterestin expandingcompetition, protecting
consumers, and undercuttingthe long-standing monopolistic pacts that bound domestic
commercialelites to the foreign corporationsthat had thrivedundercolonial rule.
During Abd al Karim Qasim's tenure immediately following the 1958 coup, private
investors, largelyof the Shi'i south, withheldindustrialinvestmentsand createdshortagesin
basic commodities in an attemptto destabilize a regime which was seen as being too close
to the CommunistParty. Despite Qasim's apparentsupportof local industry,his populism
was based on economic measures-limits on profits from consumer goods, cuts in prices
and rents, and land reforms-that were hardlydesigned to win the supportof the commercial
classes.7' The series of coups that followed Qasim's regime markedthe ascendanceof the
army and the initiation of the purging of Shi'i elements within the Ba'th party. Then, in
1964, underthe guise of preparingfor economic and political union with Nasser's Egypt, the
regime of Abd al Salam Arif, closely identified with the Suni north, nationalized all
agriculturallands, industry, banking, insurance, and services, which resulted after the
consolidation of land reforms in 1970s in the virtual elimination of the top layer of the
largely Shi'i commercialand landed elite.
The triumphof Iraq's "republicanmoment"was thus not supportedby its entrepreneurial
elites. While the nationalizationsof 1964 are often attributedto the Iraqi government's
preparationsfor economic union with Egypt, more likely reasons for the seizure of private
property can be found in the speculation, capital flight, and shortages that racked the
economy between the creation of the Joint PresidentialCouncil with Egypt in May and the
final nationalizationsin mid July. Having witnessed the fate of Syria's business elites in the
short-lived United Arab Republic, Iraq's Shi'i economic elites had both class-based and
sectarianreasons to oppose the unity agreement with Egypt. The behavior of the private
sector at this juncture added to already high levels of inflation.7' From incrementaland
sporadic entry into commodity markets and banking coupled with spates of unsuccessful
regulation, the Iraqi state finally began to manage all aspects of the economy from imports
and productionto distributionand retailing. Subsequent regulation restricted the private
sector to the confines of small industry,retailing, and transportation.
In both Saudi Arabiaand Iraq, the need to protectconsumersfrom dysfunctioningmarkets
was entwinedwith the politicalgoal of eliminatingthe strongholdof commercialelites bent on
subvertingthe political power of governmentscontrolledby opposing "primordial"groups.
The divergentpathsthatthe two countriestook are explainedby differencesin the characterof
the initialandcontinuingconfrontationsbetweenthe regulatoryaimsof the governmentandthe
interestsof the two highly monopolisticand powerfulprivatesectors. The abruptnationalization in Iraqwas the result,not of a strongerandmorepowerfulstate (thatcame later),but rather
of the insularityand strengthof the domestic privatesector and its foreign collaboratorswho
were dedicated,for a varietyof reasons, to the destabilizationof the populistregime of Qasim
and the Suni dominatedregimes that followed him in 1963 and 1968.
The structure of the two economies and Iraq's colonial experience are critical in
explaining the differences in the severity of the confrontationsbetween business and state.
Unlike the Hijazi commercial class, whose activities were confined to a small enclave
centered aroundthe annualpilgrimageto Mecca, the powerful foreign companies and their
collaboratorsamong Iraqibusinessmenextended into all aspects of Iraq's economy, and the
15
Comparative Politics
October 1994
export business led to substantialinvestments in infrastructurethat generated enclaves of
modern working class activism.
The originalconfrontationsbetween the governmentsof the two oil states and theirrespective privatesectorsmarkeda criticaljuncturethatdeterminedthe characterof state intervention
in the economy over the long term. In the 1970s, when enormous inflows of oil revenues
expandedthe economic role of the state in both cases and empoweredboth regimes to create
new social basesof supportin society, thechangesconformedto the outcomesof priorstruggles
between governmentand business. In Saudi Arabia,state contracts,loans, gifts, and a variety
of formal and informaldistributivemeasureswere used to create a large new entrepreneurial
elite with strongkinship and business ties to the bureaucracyand political elites. In Iraq, oil
revenues expandedthe government'srole in direct ownershipand control of industry,trade,
agriculturalservices, and even retailing.Throughdirect settingof wages and prices, the Iraqi
governmentcultivateda broaderlevel of economic dependencyamong laborand consumers,
who were protectedfrom inflationduringthe 1970s and the subsequenteight yearsof war with
Iran.The Iraqistate'score supporterswere locatedin the armyandthe bureaucracy.In contrast
to the Saudicase, so acutewas the Sunigovernment'ssense of threatfromthe Shi'i commercial
classes and theircosectarians,who form a majorityof the Iraqipopulation,that it took every
opportunityto eliminatethe Shi'i leadershipin boththe economic andthe socioreligiousrealms
throughmass deportations,imprisonment,and violence. Key positions in state institutions
increasinglybecome the preserveof individualsfrom the village of Takritand its environs,
many of whom were relatedto SaddamHussain, chairmanof the RevolutionaryCommand
Council. By the 1980s, then, bothregimes managedto eliminate,replace,or neutralizethe old
commercialelites, but throughremarkablydifferentprocesses.
In the recession of the 1980s, as both regimes tried to withdrawthe flow of oil wealth
from their respective clients in society, the forces of opposition to the liberalizationpolicies
were also very different. Variationsin the initial outcomes of the reformswere the result of
the different sources of social opposition to the new economic policies. In Saudi Arabia,
where a large state-sponsoredprivate sector existed, the commission entrepreneursjoined
with the bureaucracy,with whom they had strong business, tribal, and financial links, to
successfully oppose the state's attemptsto liberalize the economy. Unwilling to withstand
the disruption that the policies would have created in existing patterns of wealth and
privilege, and lacking the requisitepolitical will to overridetheirobjections, the government
withdrewthe austeritymeasuresalmost immediately.In Iraq, where no such state-sponsored
class existed, the regime overcame social opposition to the reforms by neutralizingkey
segments of the bureaucracyand labor at the onset and was able to push through a
comprehensivereformpackage. Political will alone, however, was not enough. Despite the
Iraqi regime's willingness to use draconian measures, its privatizationand liberalization
programquickly showed signs of failure. This failure was largely a consequence of the
regime's inability to create a system of propertyrights that was stable enough to attractthe
level of private investmentnecessary to sustain the successes of early marketreforms.
Forging States and Creating Markets in Late Developers
The Saudi and Iraqi experiences speak volumes about the obstacles to the expansion of
domestic marketsin late developers. They reveal the process by which nationalmarketsare
16
Kiren Aziz Chaudhry
formed and the administrativeand social rigidities that must be overcome for them to
function. When examined in light of broader processes of state building, national
integration,and the creationof a social consensus for radicalshifts in economic policy, their
programsshed light not only on the conflicting pressuresconfrontinga very special subset of
late developers with intimate ties to the global economy, but also on the common
experiences of late developers in the twentiethcentury.
Tracingthe differences in the ideologies of the two regimes is of little help in explaining
outcomes. Unlike the Soviet and eastern Europeancases, the reforms in Iraq and Saudi
Arabianeitherstemmedfrom nor generatedideological revisions. No attemptswere made to
redefinethe political values embodiedin economic relations. Both regimes are authoritarian,
but they are formally committed to fundamentally different ideologies. Saudi Arabia
professes an ultraconservativeversion of Hanbali Islam as its political ideology and has
always upheld its commitment to a laissez-faire economy. The Ba'thist regime that has
dominated Iraq since 1968, in contrast, is a secular socialist regime that has strong
similaritiesto Europeanvariantsof fascism. The real political economies of both countries
embody perplexing ambiguities. Ideologies aside, the role of the state in both economies
during the period underconsiderationwas large enough so that the creation of classes and
the distributionof wealth on a wide scale were seen as part of the normal range of policy
options.
If one accepts the view that the creation of functioning national markets requires basic
institutional,social, and political changes ratherthanthe simple withdrawalof state controls
on prices and the sale of state propertyto the privatesector, the dirigismeof the ThirdWorld
becomes more comprehensible.The argumentcan be stylized as follows.
The regulatorycapacities of LDCs were weak to begin with. The governmentsof many
developing countriesconfrontedthe task of creating domestic marketsin commodities and
labor at short notice, immediatelyfollowing the abruptwithdrawalof colonial powers and
with the explicit intentof replacingtradewith domestic manufacturedgoods. Evidence from
cases as diverse as India, Pakistan, Iraq, and Egypt suggests that governments in late
developers became directly involved in the economy by nationalizingforeign and domestic
assets and financial institutionsonly after long and frustratingfailures to tax, redistribute,
and regulatethe behaviorof privateactors following decolonization or during the systemic
crises of the 1930s and World War II. These exogenous shocks mark the junctureat which
the policies most harshly criticized by the economic liberals were initiated. The populist
agendasof the Nassers, the Bhuttos, and the Qasims demandedredistributionand regulation
of wages and prices which, in theory, could have been effected througha strong regulatory
and administrativeapparatusby taxing and regulating private industry, commerce, and
agriculturewithout directly taking over productiveassets.
In many cases nationalizationand direct controls on the private sector can best be
explained, not by privatesector weakness, but ratherby the inordinatestrengthand cohesion
of privateelites and their ability to thwartthe government'sregulatorypolicies. The import
substitution programs adopted by most developing countries in the 1950s and 1960s
involved the state in directly planning and controlling domestic investment and prices.
Unlike export-ledindustrialization,importsubstitutionprogramsdo not requiregovernments
to hold down domestic wages.7 Regimes with weak domestic legitimacy often designed
elaborateredistributivepolicies based on directly controlling the means of productionand
17
ComparativePolitics October 1994
fixing wages. Similarly, prices for basic necessities were often directly controlled through
state ownership. Importsubstitutionrequiredhighly intrusiveregulationthat enabled weak
administrativeapparatusesto directly manipulatethe economy but constrainedthe ability of
business to take advantage of new opportunities. The systems of licensing, preferential
finance, and price manipulationbecame pervertedover time, as the instrumentsof economic
control were increasinglyused to serve the political ends of incumbentregimes.
In the decade between 1973 and 1983, the inflow of wealth to many developing countries
in the form of aid, loans, oil revenues, labor remittances,and investmentfurthercurtailed
the need for marketreformand encouragedthe expansionof state controlof the economy. It
is critical to note that the characterof this expanded role was uneven: the expansion of
productive and credit-giving functions was not matched by advances in regulatory and
capacities. The bulk of external capital flows accrueddirectly to the
information-gathering
state, but even in countrieswhere the sources of externalcapital, such as laborremittances,
were privately controlled, the institutionalresponse of the state was to shrink regulatory
institutionsand pursuethe most politically convenient regulatorystrategiespossible. Access
to externalcapital inflows had a profoundinfluenceon the institutional,social, and political
structuresof recipientcountriesin ways that make marketreformsmore difficult now than at
earlier periods.
Thus, in sharp contrastto the neoliberal position, the evidence presentedhere suggests
that LDCs may be less preparedto undertakegenuine marketreforms now than at any time
in their postindependencehistory. The role of external capital inflows in retardingand
underminingthe very institutions,norms, and social changes that are critical to the creation
of domestic marketeconomies is nowhere clearer than in major oil exporters, where they
influencedthe structureand functions of state bureaucraciesby undercuttingregulatoryand
extractive institutions and augmenting the role of the state in direct production and
distribution.74Oil revenues, like state-controlledloans and aid, saved the governmentfrom
having to tax its population directly and enhanced the ease with which the state could
amelioratepolitical conflict by directlydistributingresourcesthroughgifts, subsidies, loans,
and state contracts. During the 1970s, distributionand direct state control of production
became the primary, if not sole, instrumentsthrough which oil exporters regulated the
economy. Along with extractive and regulatory institutions, capital markets, commercial
law, banking, and insuranceindustriesremainedunderdeveloped;the old bourgeoisie was
eliminated or driven into the lower echelons of the business community and replaced by
bureaucraticand privateelites with strong links to the state.
The inflow of oil revenues to state coffers in the 1970s expanded the role of the state in
major oil exporters to such a degree that even in those countries that professed to have
marketeconomies it was difficult to distinguish between the public and private sectors. In
Kuwait, Saudi Arabia, Libya, the UAE, Iraq, and Iran, oil revenues comprised over 50
percent of the GNP in the 1970s, giving the government ample funds simultaneously to
subsidize producers,importers,and consumers.The volume of these subsidies was such that
the price mechanismin labor, commodity, and financialmarketsceased to function. The key
difference between countries like Iraq and Libya, on the one hand, and Kuwait and Saudi
Arabia, on the other, was not the extent of state interferencein the economy, but ratherthe
size and composition of the state's client groups. The "socialist" oil states entered directly
into productionthemselves, taking over industry,agriculture,trade, and services, and they
18
Kiren Aziz Chaudhrv
used their control to uphold the living standards of a broad base of consumers. The
"capitalist"oil states, in contrast,distributedoil wealth to create clients in society who had
strong primordiallinks to bureaucratsand decision makers.
Through a variety of means, including state contracts and consumption, interest free
lending, and patronage, a class of private sector "commission entrepreneurs"emerged in
each countryduring the boom years. In all but the Kuwaiti case these groups were distinct
from the old merchantclasses. While the size of the client groups varied a great deal, oil
states uniformlypracticedcorporatismon a grandscale, using distributivepolicies to create
economic groups as a base of social support and to ameliorate conflict among sectoral,
occupational, economic, and social groups. Explicitly designed to depoliticize the
population,these distributivepolicies forestalledthe emergence of class conflict and public
debate about the ends of development and growth. In all cases, governmentsdeliberately
destroyed independentcivil institutions while generating others designed to facilitate the
political aims of the state. In Saudi Arabia, Iraq, and Libya, governments deliberately
destroyedthe strongholdsof the old privatesector, althoughthe means employed to this end
varied greatly. The new private sector elites emerged in a peculiar economic period where
quick profits and low risks were the norm. In the highly insulatedbusiness environmentof
the 1970s, these elites failed to develop the entrepreneurialskills that would enable them to
withstand either domestic or internationalcompetition. Social relations between business
and labor, importersand exporters, and other subgroupsof the business community were
heavily mediated by the state. As the bureaucracyand the political leadershipthemselves
represented particular sectarian, regional, and tribal groups, even in "capitalist" oil
exporters,economic success dependedless on skill than on ties with the government.In this
context, the cluster of behavioral and psychological developments described above as the
"cultureof the market"not only failed to emerge, but also were deliberatelysubvertedto
prevent the rise of social conflict and political opposition.
In the recession, when oil exporters faced pressure to cut state spending, rationalize
prices, and solicit the participationof the privatesector in economies suddenlyless insulated
from risk, none of the social and institutionalprerequisitesfor creatingcompetitivedomestic
markets existed. These societies and governments were singularly unpreparedfor the
untemperedravages of the internationaleconomy which were visited upon them during the
recession. Extractiveand regulatoryinstitutionshad atrophied;accountingproceduresin the
privatesector were primitive;and formal links among membersof the commercial-industrial
class and labor were weak. In institutional terms, the task facing the Iraqi and Saudi
governments in the recession was nothing less than a thorough reform of the public and
private sectors. This task entailed forging national regulatory, legal, and extractive
institutionsand their ancillaryinformationgatheringand enforcementagencies and creating
legal, accounting, and disclosure requirementsfor private business elites who had yet to
experience the burdensof regulation.The difficulties of these tasks were intensifiedby the
political economy of the prior decade. The oil state's abundantresources in the 1970s and
early 1980s had allowed it to postpone the creation of alternative mechanisms for the
expression and reconciliation of conflicting economic claims and interests. At the same
time, the distributionalpatternsof governmentspending intensifiedprimordialand regional
divisions. As a result, the confrontationbetween state and social forces during the mid and
late 1980s was particularly stark, both because of the cumulative effects of political
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ComparativePolitics October 1994
abstinenceand because primordialsentimentswere enmeshed in the strugglebetween groups
vying to protecttheir economic interests.
In this context, fiscal crises quickly became political crises. Governmentswith large client
bases were forced to withdraw the distributivepolicies of the 1970s and confront client
social groupsthatopposed austeritymeasures.The recession forced the oil states to meet the
fiscal requirementsof the state in a political context where grantingparticipationin return
for taxes was ruled out at the onset. One result of the apolitical years of the 1970s was that,
when the recession came, it was unclear who was entitled to bargainon policy issues. The
boom years favored individualor primordialgroup strategiesover sector-specificones, and
the awarenessof convergentor conflicting economic interestsremaineddormant.Few legal,
organized civil groups existed to aggregate and voice collective interests. The recession
forced the governmentto step out of a direct mediatingrole and to replace the distributive
bureaucracywith institutions that would provide for the aggregation of interests and the
resolution of conflicting claims, tasks which were made more difficult by the patternsof
state involvement in the economy during the previous decade.
Conclusion
In viewing marketsas "natural"constructsthat blossom without the perniciousinfluence of
the state, neoliberals skirt the critical question why late developers failed to create
functioningnationalmarketsto begin with. The notion that direct state participationin the
economy is a special burdenfor developing countriesassumes not only that marketswith all
their legal, regulatory,and administrativecharacteristicsexist, but also that state control is
administrativelymore difficult than the alternative of creating and regulating national
markets. Examination of how the exigencies of national integration, the sacrificing or
maintaining of distributionalcoalitions, and the simple act of staying in power have
influencedeconomic policy is crucial not only in explaining the dirigisme of the developing
world, but also in understandingthe severe problems confrontingcontemporaryefforts to
forge nationalmarketsin a finance-poorglobal economy.
While the immediatecause of the failure of the Saudi attemptsand the initial success of
the Iraqigovernmentis to be found in the organizationalstrengthof social groups opposed
to economic restructuring,both governmentsfailed in achieving even a partialtransitionto
a marketeconomy. To the extent that these cases illustratethe diverse sources of opposition
and resistance to "marketforces," they might be instructiveto the proponentsof the new
economic liberalism. If nothing else, the Saudi case shows that the private sector is not
always in favor of "markets."Indeed, the absence of a large and pamperedentrepreneurial
elite was critical in Iraq's initial reform successes. The issue whetherthe initial process of
marketreform might be easier in completely state-dominatedeconomies where a protected
entrepreneurialclass does not exist might be one focus of future inquiry.
On the other hand, the barriers to sustained investment necessary for competitive,
functioning markets are likely to be high in cases where potential investors fail to gain
confidence in the regime's commitmentto free enterprise.The Iraqi case demonstratesthe
importanceof confidence and clearly defined propertyrights in enabling initial successes to
be transformedinto lasting changes. In the economic crisis that followed the transferof
20
Kiren Aziz Chaudhry
public monopolies to privatemonopolies, the resentmentof labor and consumersagainst the
new privatesector elite in Iraqgrew. Having distanceditself from the shortagesand inflation
that accompanied the privatizationmeasures, the regime would certainly have won wide
support if it had decided to renationalize, repeating the pattern of profiteering, failed
regulation, and nationalizationthat unfolded between 1958 and 1964.
While majoroil exportersare unique in a varietyof ways, they share certainexperiences
with other late developers. Althoughthe particularcontoursof the liberalizationprocess and
the conflicts it evokes vary according to national circumstances, these cases demonstrate
how heavy reliance on external capital inflows can undercut the institutionaland social
changes necessary for successful economic liberalization. Entrepreneurialelites in all
countries with import substitution regimes are accustomed to levels of protection and
privilege that are inconsistentwith marketreform. As in the Saudi pattern,it would not be
surprisingto find that resistanceto economic liberalizationis located precisely in the upper
echelons of the private sector in developing countries. In contrast, in cases where the
dominance of the state has been almost complete, as in Iraq, the initial barriersto reform
may be easily surmounted with the requisite political will. To last, however, initial
successes require complex institutionaland social changes that are as likely to create the
conditions for renationalizationas to lay the foundations for a market economy. Even in
these "most similarcases," the social barriersto reformdiffer. Focusing on key juncturesin
the economic histories of Iraq and Saudi Arabia illuminates the ways that very different
economic regimes emergedin majoroil exporters.Thus, despite the deep similaritiesin their
economic structures, government attempts to craft and to implement radical changes in
economic policy can be expected to yield very different results. Policies may have their
genesis in a uniform set of economic crises, but outcomes can be understoodonly through
historicallygroundedcomparativeanalyses in the classical traditionof political economy.
NOTES
I am gratefulfor Ken Dubin's comments on earlier drafts of this paper. The researchfor this paper was conducted
under the auspices of the Harvard Academy for Internationaland Area Studies, with the support of the Kukin
Fellowship. Field work in Iraqwas funded by the Social Science ResearchCouncil. Field work in Saudi Arabia was
fundedby the Fulbright-HaysCommission and the Social Science ResearchCouncil. The views presentedhere do not
representthe opinions of any funding organization.
1. AlbertHirschman,"Rise and Decline of DevelopmentEconomics." in Albert Hirschman,Essays in Trespassing
(New York: CambridgeUniversity Press), pp. 1-24.
2. FrancisFukuyama,The End of Historyand the Last Man (New York: Free Press, 1991). See also Jan S. Prybyla,
"'TheRoad from Socialism: Why, Where, What and How," Problems of Communism,40 (January--April1991), pp.
1-17.
3. See, for example, Hernando De Soto, The Other Path: The Invisible Revolution in the Third World (New York:
Harper and Row, 1989); P. T. Bauer, Dissent on Development: Studies on the Debate in Development Economics
(Cambridge,Mass.: HarvardUniversity Press, 1972); RobertBates, Marketsand States in TropicalAfrica (Berkeley:
University of CaliforniaPress, 1981); Robert Bates, "Governmentsand AgriculturalMarkets in Africa," in Robert
Bates, ed., Toward a Political Economy of Development:
A Rational Choice Perspective (Berkeley: University of
California Press, 1988), pp. 331-358; Deepak Lal, The Poverty of Development Economics; Bela Balassa et al.,
"TowardRenewed Growth in Latin America" (Washington, D.C.: Institutefor InternationalEconomics, 1986).
4. Bela Balassa, "Policy Choices in the Newly IndustrializingCountries," and Jeffrey Sachs, "Polandand Eastern
Europe: What Is to Be Done?," in Andras Koves and Paul Marer, eds., Foreign Economic Liberalization:
21
ComparativePolitics October 1994
Transformationsin Socialist and Market Economies (Boulder: Westview Press, 1991), pp. 71-80 and 235-246,
respectively;ArmeaneChoksi, et al. "The Design of Successful TradeLiberalizationPolicies," in Koves and Marer.
eds., p. 55; ThorvaldurGylfason and Marian Radetzki, "Does Devaluation Make Sense in the Least Developed
Countries?,"EconomicDevelopmentand CulturalChange, 40 (October 1991), 1-25; Bela Balassa, New Directions in
the WorldEconomy(New York: New York University Press, 1989), p. 27.
5. See essays in Roger Noll, ed., RegulatoryPolicy and the Social Sciences (Berkeley: University of California
Press, 1985). For a critique of the British neoliberals, see Dieter Helm, "The Economic Bordersof the State," Alan
Ryan, "Value-Judgmentsand Welfare," AmartyaSen, "The MoralStandingof the Market,"and ChristopherAllsopp,
"The Macro-economic Role of the State," all in Dieter Helm, ed., The Economic Borders of the State (London:
Oxford University Press, 1989).
6. Yair Aharoni, The Evolution and Management of State Owned Enterprises (Cambridge, Mass.: Ballinger
Publishing Company, 1986), pp. 69 and 105: and Mitchel Abolafia, "Self-Regulation as Market Maintenance:An
OrganizationPerspective." in Noll, ed., pp. 312-343.
7. Fred Hirsch, The Social Limitsto Growth(Cambridge,Mass.: HarvardUniversity Press, 1976).
8. See LauraNader and Claire Nader, "A Wide Angle on Regulation:An AnthropologicalPerspective," and Carol
MacLennan,"Comment," in Noll, ed., pp. 146-148.
9. Ivan Szelenyi, "EasternEuropein an Epoch of Transition:Towarda Socialist Mixed Economy?,'"in Victor Nee
and David Stark, eds., Remaking the Economic Institutions of Socialism: China and Eastern Europe (Stanford:
StanfordUniversity Press, 1989), pp. 208-232.
10. For differentviews, compareBarringtonMoore, Social Origins of Dictatorshipand Democracy (Boston: Beacon
Press, 1966), pp. 413-432; Gregory M. Luebbert,Liberalism.Fascism. or Social Democracy: Social Classes and the
Political Origins of Regimes in Interwar Europe (New York: Oxford University Press, 1991); and Alexander
Gerschenkron, Economic Backwardness in Historical Perspective (Cambridge, Mass.: Belknap Press of Harvard
University Press, 1962).
11. David Landes, The Unbound Prometheus: Technological Change and the Industrial Revolution in Western
Europefrom 1750 to the Present (Cambridge:CambridgeUniversity Press, 1987), p. 134.
12. See Benjamin Cohen and Gustav Ranis, "The Second Postwar Restructuring." in Gustav Ranis, ed.,
Governmentand EconomicDevelopment(New Haven:Yale UniversityPress, 1971), pp. 231-468, for a discussion of
the first such "liberal" shift in LDCs.
13. Pierre Ostiguy, "PrivatizationProcesses: The Latin American Experience in Perspective." unpublishedpaper,
University of California, Berkeley, May 1991.
14. The experiences of African, Turkish, Indian, Egyptian. Algerian, Tunisian, Libyan, and Latin American
countrieshave been far from encouraging.See Atul Kohli, "Politics of Economic Liberalizationin India," John Staatz
et al., "Cereals Market Liberalizationin Mali," Pan Yotopoulos. "The (Rip) Tide of Privatization:Lessons from
Chile," Henry Bienen and John Waterbury,"The Political Economy of Privatizationin Developing Countries," Peter
Heller and ChristianSchiller, "The Fiscal Impactof Privatization,with Some Examples from Arab Countries," and
William Glade, "Privatizationin Rent-Seeking Societies," all in World Development (1989); Jon Marks, "Algeria
Breaks with the Past," Middle East Economic Development (MEED). Apr. 14, 1989, "Infighting Leads to PM's
Dismissal," MEED, Sept. 22, 1989, "Setting the Course for Reform," MEED, Sept. 29, 1989, "ReformGets Only
Qualified Support,"MEED. Dec. 15, 1989; Angus Hindley, "GaddafiKeeps a Check on Reform," MEED, Nov. 17.
1989; Roger Leeds, "Malaysia:Genesis of a PrivatizationTransaction."and Elliot Berg, "The Liberalizationof Rice
Marketingin Madagascar,"both in WorldDevelopment(1989).
15. Joseph Ramos, "Stabilization and Adjustment Policies in the Southern Cone, 1974-1983," CEPAL Review
(April 1985), 85-109; and Victor Tokman, "Global Monetarism and Destruction of Industry," CEPAL Review,
(August 1984), 107-121.
16. Cf. John Zysman, Governments,Marketsand Growth:Financial Systemsand the Politics of IndustrialChange
(Ithaca:Cornell University Press, 1983), pp. 11-80.
17. David Stark, "Privatizationin Hungary:FromPlan to Marketor from Plan to Clan?," East EuropeanPolitics and
Societies. 4 (Fall 1990), 351-392.
18. Studies of the Japaneseeconomic system and successful cases of interventionin Korea, Taiwan, Singapore, and
Hong Kong have been at the forefrontin reexaminingthe various forms of state interventionwithin a marketsystem.
See Robert Wade, "East Asia's Economic Success: Conflicting Perspectives, Partial Insights, Shaky Evidence,"
WorldPolitics, 44 (January1992), 270-320.
22
Kiren Aziz Chaudhrv
19. Peter Hall, Governingthe Economy:The Politics of State Interventionin Britain and France (New York:Oxford
University Press, 1986). pp. 34-37, 229-283.
20. See MacLennan,"Comment," in Noll, ed., esp. pp. 168-169.
21. John Zysman and Gabriel Eichler. "L'apr6sCommunisme:Une troisibmevoie?," Le Dibat, 59 (March-April
1990).
22. The list deliberatelyexcludes representativeinstitutions.While it is clear that marketeconomies requireaccess to
information, they do not require mass democracies. Issues of political control and the substance of the property
regimes upheld by and embodied in state institutionsare addressedin the case material.
23. Kiren Aziz Chaudhry,"The Myths of the Marketand the Common History of Late Developers," Politics and
Society, 21 (September 1993).
24. MustaphaNabli and Jeffrey Nugent, "The New InstitutionalEconomics and Its Applicabilityto Development."
and Douglass North, "Institutionsand Economic Growth:An HistoricalIntroduction.'"both in WorldDevelopment, 17
(1989), 1333-1347, 1319-1332.
25. In particular,as Nicholas van de Walle has noted, informationcosts are higher for state regulationthan for state
ownership. Nicholas van de Walle, "Privatization in Developing Countries: A Review of the Issues," World
Development, 17 (1989). 607.
26. Recent work on taxation presents powerful evidence for this claim. See Athar Hussain and Nicholas Stem,
"Economic Reforms and Public Finance in China," Gur Ofer, "Fiscal Development and Economic Reforms in the
Soviet Union, 1991: Can a GradualReform Work?," Robert Holzmann. "Tax Reform in Countries in Transition:
CentralPolicy Issues." and Berry W. Ickes and Joel Slemrod. "Tax ImplementationIssues in the Transitionfrom a
Planned Economy," all in Pierre Pesticau, ed., Public Finance in a World of Transition, supplement to Public
Finances/FinancesPubliques. 47 (1992).
27. Van de Walle, pp. 602-603.
28. Paul Kennedy, African Capitalism: The Strugglefor Ascendancy(London:CambridgeUniversity Press, 1990),
esp. chs. 1-4.
29. Albert Hirschman, The Passions and the Interests: Political Argumentsfor Capitalism before its Triumph
(Princeton:PrincetonUniversity Press, 1977).
30. StephenHolmes, "The Secret Historyof Self-Interest,"in Jane Mansbridge,ed., BeyondSelf-Interest(Chicago:
University of Chicago Press, 1990), pp. 267-286.
31. The case materialpresentedhere draws heavily on materialcollected in Iraqand on interviews of businessmen,
bureaucrats,policymakersand labor leaders in Baghdad in October-December 1989.
32. See Robert Springborg, "Infitah, AgrarianTransformationand Elite Consolidation in ContemporaryIraq."
Middle East Journal, 50 (1986).
33. Governmentof Iraq, 1988 Statistical Yearbook,p. 130. Government-ownedgrain farmswere huge; two of these,
for example, were 29,000 and 25,300 donums each.
34. Governmentof Iran, Statistical Yearbook, 1988, p. 128.
35. From 1,635 cooperatives with 23,109 members in 1975, the numberof cooperatives plummetedto 713 by the
end of 1988. Collective farms declined from seventy-nine to seven: and specialized cooperatives shrankfrom 173 in
1975 to fifty-two in 1988. See Robin Theobald and Sa'ad Jawad. "Problemsof Rural Development in an Oil-Rich
Economy: Iraq 1958-1975," in Tim Niblock, ed., Iraq: The ContemporaryState (London:Croom Helm, 1982), p.
204; and Governmentof Iraq, Statistical Yearbook,1988, p. 125.
36. Total subsidies for grains were over ID 300 million in 1988. The subsidizedgrain purchaseprices were raised in
September 1988 as follows (all figures in Iraqidinars per ton): wheat, 270 (from 170); rice, 500 (from 400); barley,
180 (from 120); corn, 550 (from 450). Whetheror not these subsidies raisedthe domestic price of these productsabove
their internationalprices depends on whetherthe dinar is valued at the official or black marketrates. For example, the
internationalprice of wheat is about $170/ton. Using the official and black market exchange rates, the domestic
purchaseprice of wheat in 1989 would have been $891 and $90, respectively. Even if calculated at the black market
rate, at which prices were well below internationalprices, the difference between the price at which wheat was bought
and the price at which the government provided it to the private bakeries, $80 per ton, representeda subsidy to
consumers.
37. All of these enterpriseswere very large. For example, the capacity of each poultry farm was between 100 and
270 million eggs. The capacity of the dairy farms was at least 800 milk cows each. In at least three cases, the dairy
farms were in mint condition. At the end of 1989 the governmentstill owned two of the twelve mills and fourteenof
the twenty bakeries.
23
ComparativePolitics October 1994
38. Sixty-six factorieswere sold by auction, and four were transferredto the "mixed sector," in which the Industrial
Bank, individuals, and other mixed sector companies hold shares.
39. By 1983 the investmentceilings had alreadybeen raised to ID 2 million and ID 5 million for solely owned and
limited share companies, respectively.
40. In 1987 the maximumtax on industrialprofitswas lowered to 35 percent, then in 1989 all industrieswere given
a ten year tax holiday.
41. Export promotiontook the form of preferentialaccess to foreign currencyfrom the state at a one to one ratio
(compared with the official rate of ID/3.3$ and the black market rate of 3.3ID/$), provided that export earnings
covered the importcredit by 120 percent within two years.
42. The right to form new unions applies only top private sector establishmentswith over fifty workers, a category
which covers only 8 percentof the total industrialwork force. Priorto its dissolution, the GeneralUnion of IraqiLabor
had a membershipof 1.75 million.
43. Licenses grantedfor privatefactories to be set up with the use of foreign exchange held abroadincreased from
seven in 1987 to sixty-threein 1988 to 117 in 1989. However, total investmentsin these factorieswas small, comprising
only ID 17 m in 1988 and ID 33 m in 1989. At the official exchange rate, the 1989 figure comes to about $99 million.
Most of the planned private investment is in plastics (60 percent), the rest in textiles and construction(15 percent),
food processing (15 percent), and metal industries(10 percent).
44. Governmentinvestment in downstreampetrochemicalprojects in 1989 alone was $3 billion.
45. Kiren Aziz Chaudhry, "The Price Of Wealth: Business and State in Labor Remittance and Oil Economies"
(Ph.D. diss., HarvardUniversity, 1990).
46. The Arab CooperativeCouncil (ACC) with Egypt, Jordan, and Yemen as members was formed in late 1988
under Iraqi leadershipas a counterpartto the Gulf Cooperative Council, an economic and military alliance of the
United Arab Emirates, Kuwait, Saudi Arabia, Bahrain, and Qatar.
47. Kingdom of Saudi Arabia, Royal Decree M/14, 7/4/1397 (1979).
48. The Center for Finance and Investment, The Present Conditionand Future of the Saudi Private Sector, Report
Preparedfor Riyadh Chamberof Commerce. 1986, p. 183.
49. Ibid., pp. 173-174, 176.
50. Interview, MuhammadAl Muammar, Chairman, Committee on Industry, Riyadh Chamber of Commerce,
Riyadh, December 20, 1985.
51. Economist Intelligence Unit, Annual Supplement:Saudi Arabia (London: Economic Intelligence Unit, 1985).
The old 30 percent rule, in place since 1974, forced foreign contractorsto subcontract30 percent of government
projectsto Saudi firms.
52. Standardforms for public sector contracting,consulting, and supplies were issued in Al Riyadh, (Daily), Nov. 6,
1984, p. 7. The implementingrules for revised "buy Saudi" regulationsand subcontractingwere issued in Ministryof
FinanceCircular.No. 5767/404, August 6, 1984. and supplementedthe Council of MinistersDecree 124, 29/5/1403
(1983).
53. Arab News, Dec. 10, 1985. The Export Promotion Committee worked with a newly created Exporters'
Association created in 1985 in the Riyadh Chamberof Commerce. Interview, Abdulrehmanal Jeraisy, Chairman,
Committeefor Trade, Riyadh Chamberof Commerce, Riyadh, December 16, 1985.
54. Kiren Aziz Chaudhry,"On the Way to the Market:Economic Liberalizationand Iraq's Invasion of Kuwait,"
Middle East Report (May-June 1991).
55. By the mid 1950s. the government regulated profit margins on basic foodstuffs and other commonly used
merchandise.See Amr Malaki, 1281/4/12, 1377/4/12 (1956).
56. Often merchantswould create shortagesby getting licenses but not using them, therebycreating ideal conditions
for the earningof windfall profits. EconomicReport, July 1951, PRO EQ 1013/8, v. 91644. After the departureof the
Jewish merchants,theirBasrawireplacementspreventedconfiscatedJewish merchandisefrom being unloadedonto the
marketto maintainscarcities which were the source of their profits. Basra Report, May 1951, PRO EQ 1013/6, v.
91644.
57. For evidence of official collaborationin British commercial interests' bribery of Iraqi officials, see PRO VQ
1154/1-9, v. 111019. Pressurefor help in getting contractsis cited frequently.See, for example, PRO EQ 1156/1-3,
v. 104702. In 1940 laws were passed restrictingtradesto Iraqis, but Britainforced the governmentto exempt British
Indian subjects. E 2428/93 and 2575/2428/93, 15 and 30 August, 1940, respectively, both in v. 24562. The weak
bargainingpower of the governmentis reflected in repeatedattemptsto nationalize power companies even after the
24
Kiren Aziz Chaudhry
general fear of nationalizationresulted in the foreign company's refusal to make adequateinvestmentsto meet future
projectedneeds. "Nationalizationof Power Companies," PRO VQ 1533/1-15, v. 111036, 1954.
58. For a detailed analysis of the composition of the parliament,see HannaBatatu, The Old Social Classes and the
RevolutionaryMovementsof Iraq (Princeton:PrincetonUniversityPress, 1978), pp. 178-179; compareTable 5-3, pp.
58-61, with Table 9-14, p. 313.
59. See, for example, the accountof the merchants'resistanceto the ministryof agriculture'sannouncementof fixed
commissionson agriculturalmachinery,MiddleEast Report, February,1954, PRO VQ 1101/4, No. 2, v. 111005. The
powerfulJewish communityopposed the Banking ControlOrdinanceof 1950. Of their opposition, the British wrote,
"it is generallybelieved that it was in orderto preventthem from trying to block it in parliamentthat the Ministerof
Financedecided to put it into force by special ordinance." The law placed a minimal capital requirementon money
lendersand requiredlicensing. See Control of Banking Ordinance, Law No 34 of 1950, PRO EQ 1117/1, v. 82434,
1950. After the legislation went through,there was a run on the banks. "Reportfrom Sir Henry Mack", Baghdad, 23
March, 1950, PRO EQ 1103/1, PRO EQ 1103/1, v. 82422.
60. This law created a central supplies committee, restrictedexports, and is expanded in Ordinance63 of 1939 to
preventreexportof local or importedproducts. See PRO E 6579/78/93, vol. 23203, 1939.
61. The April 1942 Law Regulating the Economic Life of Iraq is reproducedin PRO FO vol. 31360, E 3292.
Regulations for the Occupation of Immovable Propertyallowed the government to occupy any propertynecessary
duringthe war and authorizedit to take possession of commoditiesand sell them at fixed prices, use compulsorylabor
service on fixed wages, and take over and operatemills, factories, and transportationfacilities. See Law 27 of 1942,
PRO FO v. 31360, E 4250/17/93.
62. EconomicReport, 22 October 1942, PRO FO E 6607/31/93, vol. 31361.
63. Batatu, pp. 470-471.
64. For a detaileddiscussion of governmentpolicy, see "Review of CommercialConditionsin Iraq," 22 December,
1944, PRO E 7888/7888/93, v. 40109; Basra Report, December 1952, PRO Q 1015/1, v. 104664; and Economic
MonthlyReport, January1951, v. 91644.
65. See Basra Report, January1953, PRO Q 1015/2, v. 104664.
66. The total Jewish population was estimated to be 90,000 in 1938, or slightly more than 3 percent of the
population."Reportfrom Sir Henry Mack," Baghdad, 23 March, 1950, PRO EQ 1103/1 v. 82422. According to the
British records, as many of 75 percent of importers,exporters, and commission agents were Jewish, as were many
retailers. All of the money changing and informal lending to retailers and wholesalers was controlled by Jewish
community.BaghdadReport, 21 March, 1950, PRO EQ 1103/2, v. 82422. The three British banks, Easter, Imperial
Bank of Iran, and OttomanBank, were used mainly by foreign companies and by the money changersthemselves. In
1938-1939, of the 498 membersof the BaghdadChamberof Commerce, 212 were Jewish, 87 were Shi'i, 43 were
Christian,and 156 were Suni. Figures are drawn from HannaBatatu, The Old Social Classes and the Revolutionary
Movementsof Iraq (Princeton:PrincetonUniversity Press, 1978), p. 245.
67. "Economic Situation in AmarahLiwa," 1932, PRO E 3627/3627/93, v. 16049.
68. This policy was describedby the Britishas "rathera first step in tryingto get the Kuwaitisto invest some of their
embarrassinglylarge oil wealth in SouthernIraq and leaving the Iraqi governmentpresumablyto spend its new oil
riches in Baghdadand NorthernIraq." Basra Report, March 1953, PRO EQ 1015/4, v. 104664, p. 3.
69. Basra Report, February,1950, PRO EQ 1013/3, v. 91630.
70. Batatu, pp. 49, 271-272.
71. See Fran Hazelton, "Iraq to 1963," in Saddam's Iraq: Revolution or Reaction? (London: Committee against
Repressionand for DemocraticRights in Iraq, 1986), pp. 1-29.
72. See U. Zaher, "Political Developments in Iraq, 1963-1980," in ibid., pp. 30-53.
73. For a broad comparison of import substitution regimes, see David Felix, "Import Substitution and Late
Industrialization:Latin America and Asia Compared," WorldDevelopment, 17 (1989), 1455-1469.
74. Kiren Aziz Chaudhry,"The Price of Wealth: Business and State in Labor Remittance and Oil Economies,"
InternationalOrganization,43 (Winter 1989).
25