Is There an Arab Variety of Capitalism?

This paper argues that capitalism in Arab low- to mid-income countries is organized in a distinct and recognizable pattern. The key stylized facts are: a stretched, over-committed and interventionist state; deep insider-outsider divides in private sectors and labor markets resulting from lopsided state intervention; and low levels of cooperation and trust between state, business and workers. These features produce an equilibrium of low skills and low productivity that hampers private-driven growth in the region. Some fundamental parts of this story apply to underdeveloped economies in general, notably low government capacity and a segmentation of business and labor into formal and informal markets. Others, however, are regionally specific, including the relative importance and historical ambition of the state in the economy and, closely related, the relative size of the insider coalitions created through government employment and subsidies. Unusually rigid insider-outsider divisions are cemented by a particularly pronounced weakness of universal social security and safety mechanisms. As a result of uneven government intervention and market segmentation, trust and cooperation between state, business and labor are even lower than elsewhere, both on the individual and the organizational levels. Arab cronyism needs to be understood as a key feature of this larger complex of deep state intervention and rigid insider-outsider boundaries. The paper helps explain why cronyism has been so hard to eradicate, but also points to potential structural reforms that could contribute to reducing its incidence.