Locked Out of Development: Insiders and Outsiders in Arab Capitalism

Held on 1 March, 2023


Dr Steffen Hertog | Steffen Hertog is Associate Professor in Comparative Politics at the London School of Economics.

Dr Mehmet Erol | Mehmet Erman Erol is a political economist with a research focus on the (international) political economy of the MENA region.


Dr Steffen Hertog’s recently published book, “Locked Out of Development: Insiders and Outsiders in Arab Capitalism”, discusses the economic and fiscal factors of a so-called segmented market economy that contribute to the low dynamism of low- to mid-income Arab economies. Dr Hertog focuses on core members of the region such as Morocco, Algeria, Egypt, Jordan, pre-2011 Syria and pre-2015 Yemen, whose economic structures have not been influenced by major conflicts before the 2010s.

During the event, Dr Steffen Hertog and Dr Mehmet Erol discussed Dr Hertog’s findings and the most important economic and fiscal policy challenges today’s Arab economies face.

Insiders vs Outsiders: Creating the Divide

Dr Hertog’s key argument in his new book hinges upon the unique environment in certain Middle Eastern nations which has culminated in the creation of a distinct ‘insider’ and ‘outsider’ economy. According to Hertog, this dualist labour market, which privileges public sector workers, has been created through a long-term historical process. Hertog identifies this process as being a consequence of low state capacity within the Middle East, navigated alongside particularly high state ambitions.

Unlike in other regions, the public sector is particularly large in countries in the Middle East, with interventionist states integrating funding into a ‘feedback loop’, which privileges those within the public sector. In contrast, the private sector is severely lacking in many of these countries, with little incentive or mobility between this dualist labour market. Within the private sector, there is a small number of privileged workers, which gives birth to a particular form of crony capitalism within these states.

The Arab World vs the Wider Global South

Hertog utilised comparisons between his findings and the situation in other countries in the global South to reinforce his argument regarding the unique context of Middle Eastern capitalism. When comparing the labour market to that of Latin American countries, he identified the key role that democratisation played in de-privileging development insiders in these societies. In contrast, he notes that the state of democracy in the Middle East makes a similar reform process highly unlikely.

Identifying the role that international institutions such as the IMF have played in forcing development reforms in Sub-Saharan Africa, Hertog suggested that the comparatively soft international pressure enforced on the Middle East is another reason for the persistence of this dualist labour market in the region. Structural adjustment projects were not as ‘brutal’ for these countries.

He also highlights the particular nature of Arab-Nationalism as a quasi-socialisted inflected ideology as a factor reinforcing the interventionist nature of Middle Eastern governance. According to Hertog, value surveys have proven that Arab citizens rate their expectations of government provisions at a much higher level than those from other regions in the Global South. This attitude reflects the unique social contract in these countries which fosters the survival of such a socio-economic divide.

The Role of Foreign Direct Investment

In response to questions from the audience, Dr Hertog evaluated the impact of FDI on these economic processes, in particular reference to Chinese and Saudi Arabian investment. According to Hertog, Gulf capital in the region relies on politically connected actors, and actually serves to reinforce the existing system. He ascertained that the spread of Gulf investment in the region beyond the existing channels would not improve governments or lead to lower barriers to entry in private sectors.

Similarly, the introduction of more Chinese investment into the region would not have a positive impact on the existing structure, as it operates similarly to the Gulf in terms of politics. In this sense, he argued that FDO feeds back into the existing loop of ‘insider privilege’.

Highlighting a specific point of deviation from this trend, Dr. Hertog identified the positive qualitative impact of foreign investment in the Moroccan manufacturing sector. However, he contended that this is an unusual example in the region, and it contributes to Morocco’s peripheral positioning within his wider argument.

Looking Forward: How to Remedy the Problem

Looking toward the future, Dr. Hertog provided both a pessimistic and optimistic vision for the region. On the one hand, he foresaw negative long-term consequences for Egypt, which he envisioned as a situation of universal suffering within Egyptian society. In light of Egypt’s current spiralling economic situation, Hertog suggested that the most likely outcome would be that rather than outsiders receiving more privileges, insiders would also lose their privileges, resulting in mass poverty. Although he believed that this could level out in the long-term to produce a more competitive and balanced economy, mass suffering would be unavoidable in the short-term.

On the other hand, Dr. Hertog drew a more optimistic theoretical picture of the necessary political and economic adjustments which could be made in the region to improve the economic situation and soften the divide. He believed that the key to progress in this context is a genuine redistribution of benefits. To achieve this, there would have to be a reduction of insider benefits, which are then redirected to social services, wage supplements etc. Though possible in theory, the likelihood of these reforms remains unlikely, according to Hertog.

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