Rentierism and Rivalry Between Riyadh and Tehran

This article was originally published in LobeLog. 

In response to the rivalry between Saudi Arabia and Iran, the United States has long pursued a strategy of counterbalancing, extending its security umbrella to cover the kingdom and the GCC states. But as promises of security fade in the face of decreasing belief in the American commitment, infighting in the GCC, and the advent of Saudi military adventurism, security is no longer a sufficient paradigm for policy that seeks to temper an intensifying regional rivalry.

In Saudi Arabia, a young Crown Prince, Mohammad bin Salman (MbS), is poised to rule a country that—on its current trajectory—faces a sustained economic decline as oil revenues shrink and the population grows. By contrast, having demonstrated considerable economic resilience under sanctions and significantly reduced its dependence on oil rents, Iran may finally be poised to achieve sustained growth.

This divergence in fortunes is at the heart of the regional conflict. Should MbS wish to prevent Iranian domination of the region, he will need to secure Saudi Arabia’s economic future and redefine the contribution of economic rents to state power—a puzzle of political economy. In the absence of any robust solution, he will resort, as most rulers do, to externalizing the political instability that will no doubt threaten him within the kingdom’s borders (see Vladimir Putin). The cynical war in Yemen gives an early indication of how such weakness may tragically precipitate further regional conflict.

The power differential between Saudi Arabia and Iran reflects the degree to which the kingdom remains a rentier state and the degree to which the Islamic Republic does not. In the assessment of political scientist Michael Herb, between 1972-1999, the “degree of rentierism” in Saudi Arabia was 80% while in Iran it was just 55%. To the extent that rentierism is understood as a fundamental liability in a country’s long-term political and economic stability, any intervention to temper the rivalry between Saudi Arabia and Iran will need to contend with the fundamental configuration of Saudi political economy, enabling moderation through strength.

Blurry Vision

MbS’s dramatic move to arrest scores of Saudi elites, including Minister of the National Guard Prince Mutaib bin Abdallah and the billionaire chairman of Kingdom Holdings Prince Alwaleed bin Talal, has been widely described as a “purge” or “soft coup.”

But as as executive director of the Arabia Foundation Ali Shihabi has argued, the arrests had little impact on MbS’s political fortunes. He writes, “In actuality, Saudi Arabia completed its political transition last June when King Salman replaced MBN with MBS as heir to the throne.” To this end, it is “wrong to interpret last weekend’s arrests as an action that materially increases the political risk to the monarchy.” Rather, Shihabi suggests that MBS intended to send a message “to political and economic elites that their entitlement to extreme wealth and privilege, and their impunity, is coming to an end.”

The economic consequences of the arrests could be significant. According to a statement on the arrests from the Saudi attorney general, “at least USD $100 billion has been misused through systematic corruption and embezzlement over several decades.”  Shihabi believes that MbS will seek the “recovery of substantial ill-gotten assets from many members of the elite” as part of his effort to correct for perceived abuses.

It is tempting to think, in accordance with MbS’s deliberate self-marketing as an earnest reformer, that the move against corruption is an expression of political strength. This may be true within the internal dynamics of the Saudi Royal family—no doubt his moves against family members were bold. But when viewed within the wider economic context, the need to vilify quasi-state appropriation of wealth in the kingdom speaks to a brewing economic crisis and an acute sense of weakness.

In July, the IMF revised down projections for Saudi GDP growth in 2017 to just 0.1%, with growth for 2018 projected at a paltry 1.1%. In the face of low oil prices and general underperformance, the Saudi economy is teetering on the edge of a recession for the first time since 2010. The overall value of the economy has fallen by over $100 billion in just three years.

Saudi Arabia remains a rich country. But a dwindling cash pile (down nearly $300 billion from the 2014 high) and the first indications of oil’s impending decline as a source of rents have triggered a time-bomb for MbS. The county’s population is ballooning, with the working age population set to grow by 6 million in a country with just 41% workforce participation. MbS is poised to be the first king in Saudi history for whom oil rents will not meet the country’s economic needs or help consolidate his absolute rule.

The much touted Vision 2030 plan is an attempt to defuse this timebomb through an expansive set of economic and social reforms. In the near term, MbS is aiming to introduce an additional $100 billion annually from non-oil revenue by 2020. As described in a fawning profile in Bloomberg Businessweek, MbS “has already reduced massive subsidies for gasoline, electricity, and water. He may impose a value-added tax and levies on luxury goods and sugary drinks.”

But taxing soda is not going to replace declining oil revenues, and the likely impact of the proposed reforms are being oversold. At a more fundamental level, there are no plans to introduce an income tax, and in order to stave unrest from the least fortunate Saudis, cash handouts are still planned. As though to burnish his populist chops, MbS told Bloomberg, “We don’t want to exert any pressure on [the poor]. We want to exert pressure on wealthy people.”

The prince's turn to populism may be a novel chapter in the House of Saud’s playbook for regime survival, but it reflects a confused approach to reformation of a broken political economy. By failing to consider the importance of taxation, MbS seems unwilling to renege on what historian Toby Craig Jones calls the “devil’s bargain” of Saudi political economy, where “no taxation without representation” is perverted to “no representation without taxation.”

To date, the essential challenge of Saudi political economy remains unaddressed. So long as the country’s rulers depend on a dwindling natural resource or the fickle commitment of international investors to drive economic growth, the state will remain weak.

Lessons From Iran

Across the Persian Gulf, Iran’s leaders have made their own Faustian bargains concerning political economy, but the 1979 revolution provided a hard reset that addressed the central liability currently facing their Saudi rivals. The revolution served to give the government more levers by which to grapple with the chief risk that plagues rentier economies—income inequality. Iran’s present level of income inequality, as measured by the GINI coefficient, is just below 0.4. At the time of the Islamic Revolution, the level was 0.5.

According to a growing body of evidence, Iran’s combination of resource rents distribution with a progressive income tax has been fundamental to the country’s ability to mitigate inequality, especially given that Iran’s large population renders resource rents alone an insufficient source of government revenue for this purpose. In 2015, for the first time in over 50 years, tax revenues surpassed oil revenues as the primary source of government income.

A recent study by economists Mohammad Reza Farzanegan and Mohammad Mahdi Habibpour of resource rents distribution in Iran concludes that “any transfer policy that uses oil and gas rents which are publicly-owned and managed in Iran will decrease income inequality and poverty.” However, the authors find that “resource dividend” (RD) policies that combine the distribution of oil rents with income tax have the greatest effect at reducing income inequality. In a sample of 140,000 households, the so-called RD policies saw the GINI coefficient fall from 0.44 to 0.32 in rural areas, and 0.39 to 0.33 in urban areas—reductions in line with the overall improvements in Iranian income inequality since the Islamic Revolution.

President Hassan Rouhani continues to battle stubborn inequality, and the perception of misappropriation of rents through government corruption is a major source of political contention. In this sense, Rouhani’s own campaign of arrests, largely targeting elites connected to Iran’s Revolutionary Guard, mirrors the moves by MbS. But there is a crucial difference. Rouhani is trying to address corruption because he needs to better distribute rents, half of which originate from taxation, in lockstep with economic expansion. MbS is namechecking corruption because he needs to consolidate rents as he faces a economic stagnation—a position of relative weakness.

A Common Aim

In a lengthy interview with the influential Iranian foreign affairs magazine Diplomacy, former Iranian ambassador to Riyadh Hossein Sadeqi makes an emphatic case that MbS will avoid repeating the “Pahlavi scenario,” largely because of a deliberate effort to seek advice from “intellectual centers” including think tanks and consultancies. Sadeqi acknowledged that “Saudi Arabia has a single-product economy in which corruption exists,” but he also puts faith in the country’s capacity for reform, highlighting early progress instituting the Vision 2030 reforms, particularly in a social context.

This measured and hopeful assessment points to an important consideration for American policymakers. Shifting the emphasis in regional balancing away from military parity towards economic parity opens the door for a less confrontational dialogue between Saudi Arabia and Iran. The Iranian government has strong interests in Saudi Arabia’s economic stability. The international community should seek to ensure that a concerted program of training and technical assistance, rather than arms transfers to meet security demands, is made available to support MbS’s reform program.

Moreover, any program that seeks to address the residual challenges of rentierism could be a rare opportunity to bring senior Saudi and Iranian stakeholders around the same table to discuss how best to address destabilizing inequality and preserve standards of living in the post-oil world. The Iranian experience would be hugely instructive if Saudi leaders could be convinced to accept some well-intentioned advice.

Photo Credit: Wikicommons

Oil Giant Total Takes to Twitter to Underscore Iran Commitment

In an unusual move, Total's press office issued a series of tweets on Tuesday in order to correct an apparent mischaracterization of the company's position on its planned USD 4.8 billion gas deal in Iran. 

A piece published by CNN Money on Tuesday, and later echoed by Reuters, suggested that Total was "rethinking" its comittment to Iran in light of the company's large presence in the U.S. and President Trump's opposition to the Iran deal. The piece centered on comments made to CNN Money on the sidelines of an energy conference in Abu Dhabi, with Total CEO Patrick Pouyanné stating that "If there is a sanctions regime [on Iran], we have to look at it carefully... We work in the U.S., we have assets in the U.S., we just acquired more assets in the U.S." 

But a series of tweets from Total's official press office account have since sought to dispel the idea that there has been any change in the company's policy towards Iran. The tweets explain how the comments made by Pouyanné are consistent with those made in several interviews since Trump's de-certification of the JCPOA Iran Deal. 

Hey :) Total's position is & has been consistent on the matter. The CNN piece does not say anything new. Don't mind the tittle of the article...just focus on the quotes: "We are working on the project. We launched the tenders, we should award contracts by January." @yarbatman

— Total Press Office (@TotalPress) November 14, 2017

📢💬 @PPouyanne was very clear in an interview with @energyintel less than a month ago: "We signed the contract, we have launched the tenders, we are supposed to award contracts by year-end, so all that is fitting well in terms of schedule..."

— Total Press Office (@TotalPress) November 14, 2017

💬 "We’ll have clarity on situation before year-end. Congress has 2 months to decide what to do. If Total can do it in a legal way, we’ll do that project as we are committed to Iran. If we cannot do it, we’ll have to stop. It’s not politics, it’s just a matter of legal framework"

— Total Press Office (@TotalPress) November 14, 2017

Total's response clarifies that the company remains committed to its project in Iran's South Pars gas field and draws attention to an earlier interview in which Pouyanné stated he does not see a political barrier to conducting business in Iran. That Total is continuing to push ahead on its Iranian project demonstrates considerable resolve, especially given the company's extensive operations in both the United States and Saudi Arabia, two countries whose governments largely oppose Iran's economic opening. Indeed, the company has recently moved to more directly manage political risks by opening an office in Washington. 

Pouyanné's comments to CNN Money do however raise the possibility that the United States will reimpose secondary sanctions, which would penalize non-U.S. entities for conducting business with Iran. Such a "snapback" scenario would compel nearly all European multinational firms, including Total, to pull back from the market. Total, like many other companies, is simply waiting to see what legal approach Congress is likely to take. Pouyanné told CNN, "We are working on the project. We launched the tenders, we should award contracts by January... I hope by that time, Congress will have an answer for the president and the president will have to renew, or not [renew], the certification."

Encouragingly, it remains unlikely that Congress will opt for snapback, which would constitute withdrawal from the JCPOA. Total's landmark deal still seems poised to open a new era of energy investment in Iran. 

Photo Credit: IRNA

The Other "Forgotten Man": A Look at Iran's Blue-Collar Workforce

Iran will soon witness a significant boost in its industrial output. Led by a resurgence in the auto sector, the country’s factories are receiving new investment, as major multinationals seek domestic and regional dominance across market sectors. Volkswagen will be building models in partnership with Mammut Khodro, while Mammut Diesel expands its production of Scania trucks. Renault will manufacture trucks in Iran with local partner Arya Diesel. Volvo has signed an agreement to build trucks in partnership with Saipa Diesel. The finalization of Renault’s long-awaited agreement to establish a new manufacturing joint-venture in Iran is expected soon. Peugeot, Daimler, and DAF are also also exploring local production. As the boom in passenger and commercial vehicle production in Iran picks up steam, a rather simple question remains unanswered—Who will build all of these new vehicles?

Iran boasts one of the largest blue-collar workforces in the Middle East. On the back of a population boom that began following the Islamic Revolution of 1979, Iran’s labor force has surged to reach over 27 million, roughly the same size as the labor force of Turkey, and over twice that of Saudi Arabia. The Iranian economy has struggled to absorb the influx of new workers, and the official unemployment rate remains stubborn at between 12%-14%, although some analysts believe the total is even higher. This simple fact explains two fundamental aspects about the dynamism of Iran's political economy. Firstly, the blue collar working class underpins significant consumer buying power. Secondly, the perseverance of Iran’s political diversity cannot be overlooked, especially not in a region where most such diversity has withered away.

Relief for blue-collar workers was fundamental to the early success of the win-win formula that drove the nuclear negotiations between Iran and the P5+1. The initial sanctions relief provided to Iran as part of the Joint Plan of Action (JPOA) focused on sectors which accounted for Iran’s largest employers, including the automotive sector. This was a direct result of advocacy of deal supporters in Washington, who argued that galvanizing Rouhani’s political base required showing tangible benefits to Iran’s blue-collar workers. As a result of targeted sanctions relief, the production of automobiles and commercial vehicles in Iran rebounded from 743,680 units in 2013 to 1,090,846 units in 2014, with year-on-year growth swinging from a 25.6% decrease to a 46.7% increase. This early success may have been the single-most important factor in validating the Rouhani administration’s gamble on diplomacy.

In the subsequent years, however, the importance of Iran’s blue-collar worker has been largely forgotten by business leaders and policymakers working on the implementation of sanctions relief. These stakeholders remain fixated with the Iran Deal’s role in the “Great Game” of the Middle East, and business leaders are focused on the intricacies of compliance and financing challenges as they approach Iran. In both cases, the international media is happy to play into the blind spots of the respective parties.

What has been lost is an appreciation that the “normalization” of relations between Iran and the international community is as much about elevating “normal Iranians” into a global consciousness, as it is about matters of international commercial, financial, and legal integration. While there has been progress in building awareness of Iran’s young and highly educated elite, whose start-ups and entrepreneurial verve play into the inherent coverage biases of the international media, a larger swath of society remains ignored. By a similar token, the rise of the “Iranian consumer” with untapped purchasing power and Western tastes has been much heralded, but the reporting fails to appreciate that Iran’s upper-middle class rests upon a much larger base whose primary economic function is not consumption, but rather production.

The struggle of the blue-collar laborer is one of the few truly universal experiences left in the world. The international fraternity of laborers is bound by a common set of anxieties which exist as much in Iran, as they do in Europe and the United States. These concerns range from access to healthcare to economic fears—all of which culminates in the stressful and all-consuming uncertainty of providing for one’s family.

The health risks faced by Iranian workers are well-documented in Iran’s extensive body of public health research. Issues include exposure to toxins, severe back and neck pain, and the workplace accidents. Most of the completed studies were based on research originally conducted among worker populations in Europe and the United States. The findings consistently suggest that the incidence of health issues adds considerably to the work-related stress of blue-collar workers, diminishing overall satisfaction with quality of life.

Alongside health concerns, Iranian blue-collar workers, both male and female, bear the fundamental burden of providing for their families. In this regard, there remains considerable skepticism of senior management. A 2013 study which looked at the sentiment of workers from at Iran Khodro and Saipa, Iran’s two largest automakers, found that staff report  “top management commitment” to high standards “is not positively related to staff degrees of freedom of choice” for the workers. This means that while the managers at Iranian auto companies may demonstrate their commitment to their staff with training programs and performance-based remuneration opportunities, Iranian auto workers still feel they are at the mercy of their superiors, ultimately hurting overall employee satisfaction. Given that Iran does not permit organized labor, this feeling of vulnerability is especially acute, particularly when companies are late making payroll or fail to improve safety standards.

In the West, the power of working class voters has reasserted itself with the Brexit referendum outcome and the election of President Trump, who boasted of his commitment to America's "forgotten man"—the blue-collar worker—in his inaugural address. Elections in France and Germany also loom large. Behind these electoral shifts is a heightened awareness of the malaise in the working-class heartlands of these countries. Yet while the frustrations of the working class are now better understood by voters across the political spectrum, the mere existence of the working class in economies such as Iran has not been fully acknowledged in these countries, despite the remarkable similarities in the Iranian blue-collar experience.

The only substantive difference between the Iranian and Western working class is that the two groups are demanding opposing solutions from their governments. Whereas voters in the United States and Europe are pushing for a protectionist turn in economic policy in order to protect jobs and wages, working-class voters in Iran have given their mandate to a plan which hinges on the forces of globalization. Having experienced the abject failure of protectionist policies in the Ahmadinejad administration, when Iran’s industrial output cratered under international sanctions and general mismanagement, Iran’s working-class is betting on the success of a different approach.

As the Iranian presidential election looms, a renewed mandate for the Rouhani administration will depend on the ability to demonstrate that sanctions relief has created high-quality employment opportunities, particularly for younger Iranians who face the highest levels of joblessness. Rouhani has succinctly described his vision in stating that “The future path of the Islamic Republic of Iran is the path of economic growth, non-oil exports, attracting domestic and foreign capital, and creating jobs for the educated.” Taking his statement as a “to-do” list, the Rouhani administration has already unlocked economic growth through economic reforms and revitalized non-oil exports through the lifting of sanctions and stimulus programs. Today, domestic and foreign investor capital is slowly being deployed. Job creation, of the kind that supports social mobility, is the remaining objective.

In accordance with Rouhani's vision and the tenor of Western populist politics, major multinationals looking to engage Iran need to consider their own blue-collar stakeholders, both in Iran and at home. Surprisingly few multinationals have touted the job-creation benefits of expanded trade with Iran. One of the few examples can be seen in Boeing’s statement following the finalization of its contract to supply 80 aircraft to Iran Air. In a clear nod to the rhetoric of the Trump administration, Boeing declared that “new orders will support nearly 100,000 U.S. jobs” within the company’s larger supply chain that “currently supports more than 1.5 million U.S. jobs.”

Troublingly, working-class voters in the West are empowering political parties that are either ambivalent or openly antagonistic towards the Iran Deal. In the United States, public sentiment towards Iran remains dire, with American voters considering Iran their second greatest enemy, only after North Korea. Many of these voters fail to recognize that their own job security could be tied to the trade opportunities represented in post-sanctions Iran. They are also unaware that the potential failure of the Iran Deal would principally hurt fellow blue-collar workers who are similarly at the mercy of forces beyond their control.

The great irony is that if there is indeed a breakdown in Iran’s new, improved relations with the international community because of electoral apathy in the West, it is Iran’s blue-collar workers who will be the first to suffer. Should sanctions "snap back", the layoffs in the manufacturing sector would be swift. In the event of possible global political conflict, Iranian conscription would draw indiscriminately from the ranks of its blue-collar labor force. 

In some sense, the full range of stakeholders, including business leaders, policymakers, and the media, continue to look at the Iran Deal through a lens that dates back to 2016 when JCPOA was formally implemented. The ground has shifted since then and new ways are needed to think about the Iran Deal in the current political and economic climate. By connecting the fortunes of blue-collar workers in Iran with those of their Western counterparts, a more powerful model of normalization might be found.

Photo Credit: Atta Kenare