fossilfuelopolis

Prospecting the academic grounds on global energies patterns

Rentier States

Definition

A rent refers to any surplus that is left over after all the costs of production have been met. It used to be paid to the owner of the land. In the nineteenth century, an old English term of Norman French origins, the feudal rente has pinned down this political economic concept.

Rent is one of four factor incomes. The other three are “wages”, “interest”, and “profit”. T.Malthus (1815) defined rent as “the portion of the value of the whole produce which remains to the owner of the land”. Ricardo (1921) defined it as “the gift of nature” paid to the owner for the “scarcity” if land, and its “difference in quality”.

If all costs (cost of seeds, tools, wages…) equaled the sale price, as might happen on marginally fertile land, the crop produced no rent. Cultivation of higher-quality land, on the contrary, could result in rent. Ricardo called this sort of income “differential rent” since it reflected the difference in land’s fertility.

A rent drawn from mineral lands was already considered by Ricardo, “Mines, as well as land, generally pay rent to their owners, and this rent is the effect and never the cause of the high value of their produce.”

Mineral rents reflect both the quality of the land and the market price for the ore. “The general rule is that deposits where rents are greatest are the one most profitable to exploit now, and are determined by the price of mineral on the present and projected future markets” (Pierce 1986: 99).

An often blurred distinction needs to be highlighted here: We often here about “Oil windfall profits” and this tend to be misleading. The laborer receives wages for his work, the creditor interest for scarcity of capital, and the entrepreneur profits when he successful manage risk. But the rentier receives his income only under entitlement of land ownership. And Yales to insist on the extended meaning of “rentier”: “Treating rent as a micro-economic category, something to be paid in particular place and time, tell us very little about the “rentier” as a large social actor, a member of a group or class who does not participate in the productive process, but still receive an income.”

Having incontexted the terms “rent” and “rentier”, we can now introduce the term “Rentier state” first used by the Iranian economist Mahdavy in 1970 to designate any country that receives on a regular basis substantial amounts of external economic rent.

When he first coined the expression, oil prices were around 3$ the barrel, so oil rents were still relatively small. Mahdavy cited Qatar and Kuweit as examples or countries with limited capabilities for industrialization and few alternative sources of revenues.

The seventies and eighties provided greater relevance to his concept: the price of oil rose tenfold to 35$ the barrel in 80 with no additional cost of production. Much of the oil price consisted of rent paid by companies to the producers states. Luciani reported in 1987 that “rents comprise 95 to 97% of gross receipts of low-cost oil.”

Characteristics of Rentier States

For Luciani (Beblawi and Luciani, 1987) the key feature of a rentier state is that it is liberated from the need to extract revenues from its own domestic economy.

Madhavy observing the Iranian oil industry’s underlined that its most significant contribution was to enable the Shah to embark on large public expenditure programs. Massive spending without having to resort to domestic taxation or burdensome public debt should have given Iran a short-cut to development. For Madhavy, “one of the most crucial problems that needs to be studied is to explain why the oil exporting countries, in spite of the extraordinary resources that are available to them, have not been among the fastest growing countries in the world” (1970, 432-434)

Luciani has tried to explain this puzzle by defining Production versus Allocation States, in the latter the government does not depend on domestic sources for its revenue, but on primary source of revenue in the domestic economy. Since domestic development is not directly related to government budget, an Allocation State “fails to formulate anything deserving the appellation of economic policy”. A rentier mentality characterizes such State, the absence of care for alleviation of poverty and human development which should “in most underdeveloped countries […] lead to public alarm and some kind of political explosion aimed at changing the status quo, in a rentier state, the welfare and prosperity imported from abroad pre-empts some of the urgency for change and rapid growth and coincides with socio-political stagnation and inertia” (Mahdavy, 1970-437).

The process characterizing the economic arena in a Rentier State can be explained as follows: “Reward becomes windfall gain, an isolated fact” (Luciani:52), income and wealth are seen as situational rather than as the end result of a long process of systematic and organized production.
“Jobs, contracts, and licenses are given as an expression of patronage and clientism rather than a reflection of sound economic rationale. Civil servants see their principal duty as being available in their offices during working hours. Businessman abandon industrial manufacturing and enter into real estate speculation […] Everybody knows getting access to oil-rent is how to get rich.”

Lack of inter-industry linkages

Decline in non-oil sectors

Why don’t we observe economic diversification?

The inflow of massive amounts of external rent is labeled in dollars; access to foreign exchange allow them to purchase consumable goods (food, medecine..), industrial technologies and high-skilled services without bearing the cost of balance-of-payment crisis or inflation to acquire these goods and services.

Yet, this continual inflow of foreign revenue usually premises to relax constraints on foreign exchange.

The rentier state usually uses its oil revenues to purchase imported goods (agricultural products) that will compete with domestic produce on local markets. This phenomenon combined with attraction of rural workers to urban areas where the oil revenues tend to be concentrated, it is usual to observe a decline in agricultural production.

We usually observe the maintenance of artificially high exchange rate for national currencies of these states to facilitate the purchasing power of their money. (A weak dollar as compared to the national currency allow for “cheap” imports). The relative price of imported goods becomes low enough to disadvantage domestic manufacturers locally and in external markets. Export-oriented industry loses its comparative advantage.

An example of Rentier States whose history is lenghtly described is Nigeria on this page.

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