predatory states and economic development with professor mehrdad vahabi

The Global Development Institute Lecture Series

#GDILecture@GlobalDevInst @

Mehrdad VAHABIUniversity Paris 8

[email protected] http://scholar.google.fr/

Predatory States and Economic Development

Global Development Institute Lecture Series at the University of Manchester

22 February 2017

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http://scholar.google.fr/

References

1) Vahabi, Mehrdad, 2016a, The Political Economy of Predation, Manhunting and the Economics of Escape, New York, Cambridge University Press.

2) Vahabi, Mehrdad, 2016b, "A positive theory of the predatory state", Public Choice, Vol. 168, Issue 3-4, Sept, pp. 153-175.

3) Pietri Antoine, Tazdait, Tarik and Vahabi, Mehrdad, 2017, “The Economics of Empire-Building: Predatory and Price Competitions”, Journal of Institutional and Theoretical Economics (JITE), Vol. 173, Forthcoming. Accessible on line DOI: 10.1628/093245616X14659946859954

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The Political Economy of Predation: Manhunting and the Economics of Escape

Cambridge University Press, 2016

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Introduction (1)

Manhunting: A particular form of predation characterized by ex ante domination of predator over the prey. The predator tracks the prey and the latter should escape to survive. (Ex: ethnocide, imperialism, colonization and the hunt of indigenous people, hunting of black/redskins, the poor, Jews, illegal immigrants/refugees, as well as tyranny). Manhunting destroys the state and leads to massive emigration (Scott, 2009; Vahabi, 2016): economics of escape

Conventional war: a battle over ex post domination similar to duel of honor (Ex: U.S. Civil War; Franco-Prussian war). The war creates the state (Tilly, 1985): economics of mobilization

Differences: 1)Asymmetrical (dehumanizing the prey) versus symmetrical relationships

(code of honor)2)Unilateral versus mutual exit3)Safe-killing versus uncertainty about the victory 4)Flight versus Fight

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Introduction (2)

Two forms of manhunting: inclusive (authoritarianism) and exclusive (redskin hunting)

Exclusive manhunting (A recent example, «Strategic manhunts»): Defense doctrine of U.S. during Donald Rumsfeld since November 2001 (Vahabi, 2016, chapter 3)

Inclusive manhunting (A recent example, political Islam) : The Islamic Republic of Iran and a confiscatory regime

Purpose of the bookViolence and economic development: Middle East since the occupation of Irak in

2003. The U.S., Iraq, and Iran (exclusive and inclusive manhunting)

Two dimensions of violence: violent conflicts and predatory states 1)The role of conflict in institutional change2)The predatory role of the state and its impact on economic development

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Agenda

I. State and Development

II. Captive and Fugitive Assets

III. Oil and Economic Development

III.1 Iranian Case: Agrarian Reform (1962-1971)III.2 Iranian Case: Military and Religious Foundations (2005-2013)

Conclusion

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I. State and Development (1)

Two perspectives on the state: 1) contractual perspective (neoclassical, neo-institutional, and Keynesian); 2) appropriative perspective (public choice, Marxism, anarchism) referring to forced capture.

1) Contractual perspective underlines the role of a developer state in protecting property rights and providing public goods and services, but does not deny the state predation. However, it emphasizes:

A. Contractual rationale of predation: involuntary transactions can be treated as if they are voluntary transactions (Political Coase

Theorem: PCT) (North et al., 2009; North et al., 2013);B. Everyone is a predator: A bandit, a revolutionary, a rebel or a tyrant are all assumed to be equally a looter (predator) or a potential looter, only those who lose are labeled as ‘prey’. This perspective describes predation from the viewpoint of the predator.

2) Appropriative perspective underlines the predatory role of the state in coercive appropriation and the mobility of agents and their assets in resisting predation. 8

I. State and Development (2)

Predation as a relationship between predator and prey Montesquieu, Quesnay, Mirabeau, Adam Smith, Sir James Stuart Mill emphasized

the role of ‘capital flight’ in restraining tyranny (Economists: Hirschman, 1970; Acemoğlu and Robinson, 2006) and (Political scientists: Rogowski, 1998; Przeworski et al., 2000; Scott, 2009; Clark et McGirr, 2010; Connolly, 2012; Freeman et Quinn, 2012).

Mobility includes invisibility (i.e., hidden ability) or the ability to be hidden: potatoes and cocaine

An important confusion between Appropriability and Mobility: ‘mobile/immobile’ assets considered as ‘inappropriable/appropriable’ ones.

Appropriability depends on the ability of the predator to capture and appropriate the prey, whereas the mobility refers to the ability of the prey to escape.

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2. State and Development (3)

The exit option of an asset hinges upon two distinct criteria: 1) Appropriability (predator); 2) Mobility (prey). Appropriability determines the benefits of predation and mobility decides the costs of predation.

1)Appropriability: assets are hardly subject to confiscation if (i) any attempt to transfer their property rights through coercion destroys them or reduces their value to almost nil. Ex: idiosyncratic assets (ex., human capital or investment in physical capital) are hardly appropriable whereas generic assets (ex., landed property) are easily appropriable; andif (ii) the costs of confiscation (including the costs of measurement) are higher than the benefits of confiscation. Concentrated assets are more easily appropriable than diffused ones.

2) Mobility: some assets can be easily displaced geographically (high ratio of value to weight, ex. alluvial diamonds) or can be easily hidden (ex., tubers, yams cassava). Mobility also refers to the possibility of altering political (authority) allegiance without any physical (geographical) displacement. Ex: vassals’ rebellion against princes in Germany during High Middle Ages (Volckart, 2002).

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I. State and Development (4)Mobility does not imply inappropriability: Alluvial diamonds are mobile but easily appropriable if concentrated in a region. However, human capital is both mobile and inappropriable (brain drain). Immobility does not imply appropriability: Investment in physical capital is immobile but inappropriable whereas land property is both immobile and appropriable.

Economic and booty values of an assetContrarily to the advocates of Political Coase Theorem (Barzel, 1977, 2002; Cheung, 1977, 1990; North, 1990), I distinguish between the value of an asset in a voluntary transaction and its value in an involuntary transaction.

Each asset has two types of value: economic and booty value. The economic value is determined in a voluntary transaction whereas the booty value of an asset depends on its exit option. The exit option of an asset is crucial in determining its value for the state; it is defined by the difference between benefits and costs of forced appropriation. 11

II. Captive and fugitive assets (1)

I. Pure captive assets satisfy both immobility and appropriability criteria. Ex. landed property (generic and immobile)II. Pure fugitive assets satisfy both mobility and inappropriability criteria. Ex. Human capital (brain drain) and famine goods: roots and tubers (having the hidden ability) such as yams, cassava, manioc, and yucca (Scott, 2009) III. Mixed assets satisfy only one of the criteria of mobility or inappropriability. There are two types: A) mixed captive assets that satisfy the immobility criterion and are inappropriable (foreign direct investment in physical capital); B) mixed fugitive assets that satisfy the mobility criterion and are appropriable (concentrated alluvial diamonds).

Figure 1. Types of assets and state space (Vahabi, 2016a)

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Pure captive assets

State space

Pure fugitive assets

Non-state space

Mixed assets (A et B)

Ambivalent (inter-state or between state and

non-state space)


Table 1. Types of assets and state space

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Type of assets Mobility (including hidden ability)

Appropriability State or non-state space

Examples

1. Pure captive assets No Yes State space Landed property and some natural resources

2. Mixed captive assets No No Ambivalent Physical capital investment, industrial

oil extraction

3. Mixed fugitive assets Yes Yes Ambivalent Alluvial diamonds, money, gold

4. Pure fugitive assets Yes No Non-state space Human specific assets,Sweet potato and other

famine goods


Strategies for extending state space: 1) predatory competition (the use of violence depending on the size of army); 2) price competition (competitive fiscal policy à la Tiebout)

The use of predatory competition (aggression) for including pure captive assets

The use of price competition (protection) for encompassing pure fugitive assets

The use of both aggression and protection for encompassing mixed assetsTwo different types of predatory states1) An inclusive predatory state: a state that adopts an inclusive strategy regarding mixed and pure fugitive assets (E-U 1850-1900, Chile during Pinochet and Iran during the Shah’s agrarian reform 1962-1971). Predation enhances economic development.2) An exclusive predatory state: a state that adopts an exclusive strategy regarding mixed and pure fugitive assets (political Islam and Islamic Republic of Iran: 2005-2013). Predation impedes economic development. 14

III. Oil and Economic Development (1)

Application of our theoretical framework to a particular type of predatory state depending on oil revenue

Natural resource curse

1) Economic: a stylized fact indicating that resource rich countries tend to grow slower than their resource poor counterparts. Causes: Dutch disease, rent-seeking, corruption, institutional explanations (Auty, 1993; Sachs and Warner, 1995; Van der Ploeg, 2011).

2) Political: tendency of regimes richly endowed with natural resources to be more authoritarian and more prone to civil wars than those without such resources (Mahdavy, 1970; Karl, 1997; Herb, 2005 ; Ross, 2012, 2014).

Resource blessing or institutions curse“If a country does not have firmly entrenched restrictive institutions before it becomes fiscally reliant on resource revenue, then its unrestrictive institutions will persist and it is vulnerable to the resource curse.” (Haber and Menaldo, 2011, p. 199; Menaldo, 2016)

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III. Oil and Economic Development (2)

Oil as a mixed (pure) captive asset: 1) immobile; 2) appropriable/inappropriable: depending on the artisanal or industrial extraction requiring particular investment (Sovereignty and partnership: ISIS and Saudi Arabia)

Strategy of the state: maximization of oil or fiscal revenue? 1) Rentier state depends on the immobility of the resource and maximizes the current oil revenue; 2) Fiscal state mobilizes oil revenues to develop assets’ mobility (agrarian reform, industrialization, technological transfer and know how, investment in human capital)

Comparative study between two periods1) An inclusive predatory state: the Shah’s regime (1962-1971)2) An exclusive predatory state: the Islamic republic of Iran (2005-2013)

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III.1 Iranian Case: Agrarian Reform (1962-1971) (1)

An inclusive predatory state: the Shah’s regime (1962-1971)The ascending role of the U.S. instead of the United Kingdom in the Middle East, and its financial aid and bank loans to Iran, as well as its pressure on the Shah’s regime since the presidency of Kennedy to impose a strict budgetary discipline (reducing financial aids with increasing oil revenues). Economic crisis of 1958-1961 and the need for an agrarian reform: first led by Amini-Arsanjani (the law on the agrarian reform adopted on January 9, 1962), then by the Shah himself under the banner of ‘White Revolution’ adopted by a referendum on January 26, 1963.An agrarian reform from above and the gradual transformation of land owners into big bourgeoisie (January 1962-September 1971): Polanyi’s Grand Transformation (Polanyi, 1944) without democracy and agricultural surplus as a source of industrialization.

1) State’s autonomy from all social groups and classes: the personal autocratic power of the Shah2) The agrarian reform + oil revenues = positive linkage with the industrial and service sectors and negative linkage with the agricultural sector, a real disaster of the latter sector (authoritarian development)3) Rural migration, salarization and marginalization 4) Higher education, the making of technocrat layer, and improvement in health sector 17

III.1 Iranian Case: Agrarian Reform (1962-1971) (2)Inclusive autocratic regime: developing assets’ mobility and including mixed and fugitive assets

Table 2. Productive share of principal sectors in GDP

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Sectors 1962 (as a percentage)

1967(as a percentage)

Average annual rate of growth

Agriculture and cattle breeding

30.9% 23.4% 2.8%

Industry and minerals

12% 14.4% 12.7%

Construction 5,3% 6,1% 11.4%

Water and electricity 0.9% 1.2% 14.5%

Oil (Iran’s share) 11.6% 14.5% 13.6%

Other sectors 39.3% 40.4% 9.3%

Indirect taxes N.D. N.D. 11.7%

GDP N.D. N.D. 8.8%

III.2 Iranian Case: Military and Religious Foundations (2005-2013) (1)

2. An exclusive predatory state: the Islamic Republic of Iran (2005-2013)Political Islam and parallel institutions (a state in the state): the ascendancy of a theocratic confiscatory state and the deinstitutionalization of the formal state.Consequences: the development of parastatal sectors (religious or military Foundations) independent from the state and the traditional Shi’ite hierarchy under the supervision of the supreme leader on the basis of Shari’a.

Following the end of the eight-year War between Iraq and Iran: the state’s dependency on the oil revenue

1) Rafsandjani’s two terms presidency (August 3, 1989- August 2, 1997)2) Khatami’s two terms presidency (August 2, 1997-August 3, 2005)3) Ahmadinejad’s two terms presidency (August 2, 2005-August 3, 2013)

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Figure 2. Value of Iran’s Oil Exports ($US Billion)

(X-axis shows the 1st to 8th years of each president’s term)

Ahmadinejad

Khatami

Rafsanjani


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Figure 3. Iranian Current Account Balance ($US Billion)(X-axis shows the 1st to 8th years of each president’s term)

Khatami

Ahmadinejad

Rafsanjani


Appropriating perspective of the state: Three confiscatory cycles1) 1979: Bonyad-e Mostazafan va Janbazan (BMJ, Foundation of the Oppressed and Self-Sacrificers) by confiscating the assets of the late Shah and 53 industrialists exiled in the aftermath of revolution (1979). Khomeini's injunction referred to these assets as ‘spoils’ and specified that ‘they must be kept and controlled separately from state properties under the Guardianship of the Jurist’ (Article 49 of constitution: seizing illicit assets from criminals).The size and scope of the BMJ is similar to that of a government (New York Times, Jan. 8, 1995) (10% of GDP-2006)

2) 1989: Setad (Headquarters for executing the order of the Imam) (Reuters Report, 11, 12, 13 Nov. 2013). An edict signed by Khomeini (1989) regarding the ‘abandoned properties’: “to manage and sell properties without owners and direct to charity” (A Custodian of properties); initially devised for 2 years, now it exists for 24 years. (Article 45 of constitution).Total amount of assets estimated at $95 billion ($52 billion, real estate; $40 billion, investment fund; $3.4 billion, a stake in telecommunications).

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3) 2005-2013: Sepah’s (The Revolutionary Guards) economic holdings and parastatal sector related to Khatam headquarter: 135000 employees, 8% state expenditures in infrastructures, seven billion dollars annual revenue (Harris, 2013; Vahabi, 2016, chapter 6; Coville, 2017).

Privatization: In 2004, Khamenei ordered a revision of article 44. In 2006, due to a ballooning budget deficit, Khamenei issued an executive order to privatize 80% of some state-owned enterprises (banks, insurers and oil-and-gas firms).

But how was privatization enacted? “Xoodemanisazi” The ‘privatisation’ trend consisted in transferring state

enterprises to the Foundations or to the parastatal sector (Adeli, 2004, pp. 474-75).

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Table 2. Transfer of property from state to parastatal sector

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President Presidential term Percentage of property transfer

Hashemi Rafsanjani August 3, 1989- august 2, 1997 6.9%

Mohammad Khatami August 2, 1997- August 3, 2005 4.1%

Mahmoud Ahmadinejad August 3, 2005-August 3, 2013 89%

Source: Harris (2013)


Appropriative regime and the loss of mixed and fugitive assets1) Brain drain: with the emigration of 150,000 to 180,000 educated and skilled individuals, Iran had the highest level of brain drain among 91 developing and developed nations, costing the government an equivalent of $50 billion in foreign exchange currency (2009 Annual Report of the IMF). 420,000 Iranians with higher education degrees resided in the USA of which 250,000 were physicians and engineers.

2) Transformation of specific assets to generic assets (dismantlement of enterprises, and trading their components): more than 50% of manufacturing sector3) Fall of productive investment (value-added) and growth of import of final products: -7,8%

4) Deindustrialization and the growth of mercantile activity, even in oil industry (lack of investment in infrastructure, renewing the machinery, refineries, equipment, exploration and extraction)

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Conclusion

Two opposing perspectives on the state: a normative public good one and a positive appropriating one

Public versus private goods (non-rivalrous and non-excludability) Captive versus fugitive assets (mobility and appropriability)

Inclusive versus exclusive predatory regimes: the Iranian case

Development as a result of a particular strategy by a predatory state combining predatory and price competition to include not only captive but also mixed and fugitive assets.

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A last glance at the picture …

Thanks for your attention

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