REPORT: The Politics of Economic Diversification in Oil-Dependent Autocracies

Dr. Marie Alienor van den Bosch. Photo Credit: Mercatus Center

By: Simon Machalek, Reporter 

On November 26th, Georgetown University’s Center for Contemporary Arab Studies (CCAS) hosted a talk by Dr. Marie Alienor van den Bosch, the Center’s Qatar Post-Doctoral Fellow. She also received her PhD in Politics from Princeton University and her MA from CCAS. The talk, titled “The Politics of Economic Diversification in Oil-dependent Autocracies,” gave an opportunity for Dr. Bosch to present her research and to examine multiple underlying trends occurring in authoritarian regimes, with a focus on the Middle East.

The great oil crash of 2014 caused oil prices to drop worldwide, leading to political strains for some major exporters and to economic stagnation. Such developments represent a major threat to oil-dependent authoritarian regimes, which rely on oil as their key income. In such autocracies oil represents a major part of the regime’s capacity to stabilize and secure itself from both internal and external threats. An interesting pattern occurred as a result of the oil crash: oil-dependent authoritarian regimes began to strengthen their efforts to diversify their economies. Economic diversification, as Dr. Bosch explained, is the process of shifting the economy away from a single income source toward multiple sources from a variety of sectors. In the context of oil-dependent autocracies, their leaders began to move their energy investments from depletable resources, such as oil, to nondepletable, renewable energy.

These efforts represent a puzzle to the existing literature on autocratic survival. The common view is that diversification is a zero-sum game in which the authoritarian leader loses in political power the equivalent of the amount of economic gains from diversification (for more information, refer to Matthew Fails’ and Marc Dubuis’ article titled “Resources, Rent Diversification, and the Collapse of Autocratic Regimes”) The result is that authoritarian incumbents usually do not pursue diversification, since it challenges their rule and makes them vulnerable. But this contradicts how some authoritarian regimes have been engaging in diversification reforms since the 1970s, as well as the more recent reactions to the 2014 oil crash.

After explaining this contradictory puzzle, Dr. Bosch presented the two major questions her research attempts to answer. First, her work looks at under what circumstances do autocracies resort to diversification. Second, her research explores when and why were these efforts profitable, generating income for the regime.

As Dr. Bosch explained, diversification efforts are put in place when they can become a strategic spending option for the regime, seen as essential for the regime’s stability. In autocracies, regime stability depends on the level of support and loyalty from influential political groups to the incumbent, who is under constant pressure. The power of influential groups and their ability to influence him or her is affected by their size and by their generational composition. The bigger the size of the political influential groups, the less access they will have to the incumbent, and the wider the generational composition of the group, the more success they will have in influencing the incumbent since they can push him or her to look ahead into the future.

Dr. Bosch’s research focuses on three countries: Libya, Indonesia, and Saudi Arabia. During her talk, Dr. Bosch primarily focused on explaining the situation in Saudi Arabia, which serves as an interesting case study because there has been a lot of variation in its diversification efforts and because there are multiple powerful political influential groups which have direct access to the King and his inner circle. Dr Bosch said that Saudi diversification efforts attempted to enforce two mechanisms.

First, investments into diversification sought to impact rent distribution. Rents – defined as the government income from resources like oil – are essential for regime survival, as they are allocated to important influential groups who in exchange promise loyalty to the incumbent, securing his or her rule. In Saudi Arabia, the leadership heavily invested in several development programs, which were officially meant to create job opportunities by massively investing in the modernization of agriculture. Dr. Bosch noted that although the programs had success in increasing production, they did not create jobs for Saudi citizens. In reality, the programs were never designed to increase job opportunities, rather, according to Dr. Bosch, they were created to distribute rents to business entrepreneurs from old merchant families. The programs were therefore successful in distributing rents to influential groups in Saudi Arabia, keeping these groups content and reducing the likelihood of any pushback and potentially regime instability.

Second, investments into diversification attempted to generate new rents, to be allocated to the next generation of incumbents. In order to secure the authoritarian rule looking ahead, the Saudi leadership significantly invested in the petrochemical industry. Observing how countries across the world are becoming less dependent on oil, investments into petrochemicals sought to generate an alternative source of income, in order to ensure the country’s future economic stability. Dr. Bosch explained that the program has been successful and that it has been increasingly generating important profit for the regime, which marks how creative authoritarians can be. This ability to adapt made the regime more prepared for an unanticipated decline in typical rent sectors, as it is now able to resort to readily available alternative sources.

Dr. Bosch concluded the talk with a wide pattern that she observed when doing her research. Authoritarian regimes sometimes intentionally invest into programs that are from the start designed not to generate profit. When the programs are not profitable, outsiders could understand such results as not successful. In reality, however, the programs are designed to primarily generate rent distribution opportunities, allocating funds to influential political groups.

For the incumbent, security is his or her primary concern, meaning that autocracies across the world widely and regularly invest in failed programs which buys support from powerful groups. This directly contradicts how investments programs are supposed to work in Western and capitalistic systems, and it shows how both sides use a different metric for evaluating the outcome of investment initiatives.

The talk greatly succeeded in illuminating not only how and why authoritarians resort to diversification, but more importantly, Dr. Bosch accurately explained how authoritarian regimes operate, how they secure their rule, and how they buy off loyalty from outside groups. Dr. Bosch’s findings come with important implications for policymakers and practitioners, as they explain what autocrats consider as strategic resources and how they adapt their investments following changes in industries.

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