Locked Out of Development: Insiders and Outsiders in Arab Capitalism

Low- to mid-income Arab economies have a segmented market economy due to an over-committed and interventionist state, deep insider-outsider divides, and an equilibrium of low skills and low productivity. This undermines cooperation between state, business, and labor, with insiders and outsiders being particularly stark, immovable, and consequential in the Arab world.

Format: Paperback / softback
Length: 75 pages
Publication date: 19 January 2023
Publisher: Cambridge University Press

The low dynamism of low- to mid-income Arab economies is attributed to a complex set of interrelated factors that constitute a segmented market economy. These factors include an over-committed and interventionist state with limited fiscal and institutional resources, deep insider-outsider divides among firms and workers that result from and reinforce wide-ranging state intervention, and an equilibrium of low skills and low productivity that results from and reinforces these divides. These mutually reinforcing features undermine comprehensive cooperation between the state, business, and labor. While some of these features are common to developing countries, others are regionally specific, such as the relative importance and historical ambition of the state in the economy and, closely related, the relative size and rigidity of the insider coalitions created through government intervention. Insiders and outsiders exist everywhere, but the divisions in the Arab world are particularly stark, immovable, and consequential.

Introduction:
The Arab world is characterized by a unique set of economic challenges, including low economic growth, high unemployment rates, and limited access to resources. One of the key factors contributing to these challenges is the low dynamism of low- to mid-income Arab economies. This paper aims to explore the factors that contribute to the low dynamism of these economies and propose solutions to address them.

Segmented Market Economy:
The low dynamism of low- to mid-income Arab economies is attributed to a segmented market economy. This type of economy is characterized by a limited number of large firms that dominate the market, a lack of competition, and a high level of government intervention. The government plays a significant role in the economy, providing subsidies, infrastructure, and social services, but it also intervenes in the market to protect domestic industries and maintain stability.

Over-committed and Interventionist State:
One of the key factors contributing to the low dynamism of low- to mid-income Arab economies is the over-committed and interventionist state. The state has a limited fiscal and institutional capacity to invest in infrastructure, education, and healthcare, which limits its ability to promote economic growth. Additionally, the state's interventionist policies create deep insider-outsider divides among firms and workers, which undermine cooperation and productivity.

Deep Insider-Outsider Divisions:
Deep insider-outsider divides among firms and workers are another factor contributing to the low dynamism of low- to mid-income Arab economies. These divides result from and reinforce wide-ranging state intervention, which creates a protected market for domestic industries and limits competition. Additionally, the divides create a sense of insecurity among workers, who fear that they may lose their jobs if they speak out against the government or criticize the private sector.

Equilibrium of Low Skills and Low Productivity:
The equilibrium of low skills and low productivity is another factor contributing to the low dynamism of low- to mid-income Arab economies. This equilibrium results from and reinforces the insider-outsider divides, as workers with low skills are often unable to access higher-paying jobs in the private sector, while those with high skills are often reluctant to work in the public sector due to the low pay and limited opportunities for career advancement.

Mutually Reinforcing Features:
The mutually reinforcing features of the segmented market economy, over-committed and interventionist state, deep insider-outsider divides, and equilibrium of low skills and low productivity undermine comprehensive cooperation between the state, business, and labor. This cooperation is essential for promoting economic growth and addressing social and economic challenges in the Arab world.

Solutions:
To address the low dynamism of low- to mid-income Arab economies, there are several solutions that can be implemented. First, the government should reduce its interventionist policies and promote competition in the market. This can be achieved by implementing policies that encourage foreign investment, promote entrepreneurship, and reduce barriers to entry for new businesses. Second, the government should invest in infrastructure, education, and healthcare to promote economic growth and address social and economic challenges. Third, the government should promote inclusive growth by addressing the needs of marginalized groups, such as women, youth, and people with disabilities.

Conclusion:
The low dynamism of low- to mid-income Arab economies is attributed to a complex set of interrelated factors, including a segmented market economy, an over-committed and interventionist state, deep insider-outsider divides, and an equilibrium of low skills and low productivity. To address these challenges, the government should reduce its interventionist policies, invest in infrastructure, education, and healthcare, and promote inclusive growth. By implementing these solutions, the Arab world can achieve sustainable economic growth and address social and economic challenges.

ISBN-13: 9781009045575