Rent Seeking and Legal and Economic Malaise in Iraq and the Middle East
This afternoon I read a quite interesting 2005 symposium article by Jonathan Macey and Ian Ayres from the Yale Journal of International Law (those with Westlaw access can find it here) respecting precisely why it is that Middle Eastern systems have rules that make expansive private enterprise so difficult. Given my interest and scholarship in the field, I'm embarrassed I hadn't seen it earlier.
Taking the example of really absurd share capital requirements, the article posits the thesis that many of the Middle East's autocratic regimes do not want private enterprise to foster because it helps to create a strong and independent middle class over which the state will lose relative control. The authors think they are challenging my friend and colleague Timur Kuran's thesis that the shari'a is to blame, they say Islam could readily adapt, but I tend to think they might be talking past Timur than at him. Timur doesn't argue that Islam is incapable of adaptation or growth or that the path dependence that led to hesitation over the corporation was necessary because of Islamic teachings as opposed to historical social and political circumstance. In fact he offers adaptation respecting permissibility of coffee to demonstrate the ability of Islam to change precisely as Macey and Ayers suggest. More relevant, he discusses the liquid waqf to show how commercial adaptation should work. And certainly unless my recent presentation at Duke respecting the Death of Islamic Law was completely misunderstood by him (very unlikely), he doesn't dispute at all that Middle Eastern systems have adapted to accept the corporation by discarding the shari'a over such matters entirely. I think Timur is dealing with a particular historical phenomenon and an era that isn't quite that of Macey and Ayers, or possibly his ideas were less developed then than now.
In any event, in finding Macey and Ayers so interesting and scintillating, I don't find Kuran wrongheaded or misguided. And while I think Macey and Ayers are onto something, there might well be an element respecting the interests of the Middle Eastern autocrats they are in fact disregarding. After all, the share capital requirements, at least for domestic businesses, have been dramatically reduced over the past several years in any number of Middle Eastern states, once they became the object of focus by such esteemed individuals, and yet the central problem remains. It is very difficult to do business in the Middle East, one needs permits, licenses and stamps for everything, each takes time, energy and considerable money to obtain, and the ability to seek legal redress is difficult to come by. High share capital or no, the actual costs of opening a company are often prohibitive.
Again, some of this may well be to retard a middle class, but I'd like to offer an alternative, or perhaps accompanying and much more powerful, political and economic incentive for the rulemakers to keep things as they are, and this relates to rent seeking. In Alaa Aswani's first novel, the brilliant Yacoubian Building, a parliament member who bought his position from his activities in business is shaken down by higher ups in the government, who demand a fourth of his profits. Seeking to reduce this somewhat, the businessman seeks an audience with the "Big Man" to whom the profits are owed. Pardon the melodrama, but the meeting ends up being in a room where the Big Man is not present but his voice booms over a sound system and he cackles in laughter and threatens doom if the businessman challenges him (there was almost a Wizard of Oz quality to this). But one thing the Big Man does say is that the quarter profits are earned, because with them no ministries will interfere in the business by demanding permits, necessary licenses will be obtained, redress can be organized through courts or otherwise, and the like. In other words, rent, as none of this is actually productive, merely avoiding administrative hurdles that should not be there in the first place.
In my experience in Iraq, and particularly the northern Kurdish region, this is precisely what happens. Why does anyone cut Hero Xan, Jalal Talabani's wife, in on profits, or Barazani's son in law, or Koshret or whoever? Because in so doing, all of the daunting requirements that make private enterprise can be immediately removed. (To be clear, it's not that the Arab rulers of the south of Iraq are more honest, it's that power is more diffuse in Baghdad and so there are more people to pay off less). Share capital even if it was a problem could be dealt with by the higher ups, company licenses obtained, court dates sped, labor rules ignored, and the like.
So maybe Hero Xan does not want to see a middle class challenge her. I tend to doubt it, the woman can handle criticism, she's pilloried in the papers regularly and at times, like her husband Iraq's president, plays along in good fun. Of course if the middle class threatened her position it might be different and so, as I say, I think Macey and Ayers are onto something. But rather than the three steps ahead, of middle class might develop, they might challenge, I might fall, I wonder if it might just be the one more obvious step that is more powerful.
Namely, you make it easier, more transparent, and less costly to open up a company, then the amount to pay the Big Man has to go down, ultimately to nothing. And it's hard to imagine the Big Men who run the place being much interested in that.
HAH
Taking the example of really absurd share capital requirements, the article posits the thesis that many of the Middle East's autocratic regimes do not want private enterprise to foster because it helps to create a strong and independent middle class over which the state will lose relative control. The authors think they are challenging my friend and colleague Timur Kuran's thesis that the shari'a is to blame, they say Islam could readily adapt, but I tend to think they might be talking past Timur than at him. Timur doesn't argue that Islam is incapable of adaptation or growth or that the path dependence that led to hesitation over the corporation was necessary because of Islamic teachings as opposed to historical social and political circumstance. In fact he offers adaptation respecting permissibility of coffee to demonstrate the ability of Islam to change precisely as Macey and Ayers suggest. More relevant, he discusses the liquid waqf to show how commercial adaptation should work. And certainly unless my recent presentation at Duke respecting the Death of Islamic Law was completely misunderstood by him (very unlikely), he doesn't dispute at all that Middle Eastern systems have adapted to accept the corporation by discarding the shari'a over such matters entirely. I think Timur is dealing with a particular historical phenomenon and an era that isn't quite that of Macey and Ayers, or possibly his ideas were less developed then than now.
In any event, in finding Macey and Ayers so interesting and scintillating, I don't find Kuran wrongheaded or misguided. And while I think Macey and Ayers are onto something, there might well be an element respecting the interests of the Middle Eastern autocrats they are in fact disregarding. After all, the share capital requirements, at least for domestic businesses, have been dramatically reduced over the past several years in any number of Middle Eastern states, once they became the object of focus by such esteemed individuals, and yet the central problem remains. It is very difficult to do business in the Middle East, one needs permits, licenses and stamps for everything, each takes time, energy and considerable money to obtain, and the ability to seek legal redress is difficult to come by. High share capital or no, the actual costs of opening a company are often prohibitive.
Again, some of this may well be to retard a middle class, but I'd like to offer an alternative, or perhaps accompanying and much more powerful, political and economic incentive for the rulemakers to keep things as they are, and this relates to rent seeking. In Alaa Aswani's first novel, the brilliant Yacoubian Building, a parliament member who bought his position from his activities in business is shaken down by higher ups in the government, who demand a fourth of his profits. Seeking to reduce this somewhat, the businessman seeks an audience with the "Big Man" to whom the profits are owed. Pardon the melodrama, but the meeting ends up being in a room where the Big Man is not present but his voice booms over a sound system and he cackles in laughter and threatens doom if the businessman challenges him (there was almost a Wizard of Oz quality to this). But one thing the Big Man does say is that the quarter profits are earned, because with them no ministries will interfere in the business by demanding permits, necessary licenses will be obtained, redress can be organized through courts or otherwise, and the like. In other words, rent, as none of this is actually productive, merely avoiding administrative hurdles that should not be there in the first place.
In my experience in Iraq, and particularly the northern Kurdish region, this is precisely what happens. Why does anyone cut Hero Xan, Jalal Talabani's wife, in on profits, or Barazani's son in law, or Koshret or whoever? Because in so doing, all of the daunting requirements that make private enterprise can be immediately removed. (To be clear, it's not that the Arab rulers of the south of Iraq are more honest, it's that power is more diffuse in Baghdad and so there are more people to pay off less). Share capital even if it was a problem could be dealt with by the higher ups, company licenses obtained, court dates sped, labor rules ignored, and the like.
So maybe Hero Xan does not want to see a middle class challenge her. I tend to doubt it, the woman can handle criticism, she's pilloried in the papers regularly and at times, like her husband Iraq's president, plays along in good fun. Of course if the middle class threatened her position it might be different and so, as I say, I think Macey and Ayers are onto something. But rather than the three steps ahead, of middle class might develop, they might challenge, I might fall, I wonder if it might just be the one more obvious step that is more powerful.
Namely, you make it easier, more transparent, and less costly to open up a company, then the amount to pay the Big Man has to go down, ultimately to nothing. And it's hard to imagine the Big Men who run the place being much interested in that.
HAH
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