Table of Content
1 Introducing the Paper
1.1 Political and Economic Globalisation
1.2 Privatisation Theory
1.2.1 Competition and Regulation Theory
1.2.2 How Risk and Uncertainty influences the Privatisation Process
2 Liberalisation in the Middle East
2.1 The Role of the World Bank
2.2 Effects of Neoliberal Economic Reforms
3 Case Study: Islamic Banking
“Hence the distinction between private and public is first opened, to allow the accusation of private greed to be made, and then closed again to remind everyone that the creation of new wealth still depends heavily on the activities of the state itself.”
Owen, 2001, p. 246
“It is not possible to see how a value system such as the Muslim religion can, in terms of autonomous ideological or textual impact, explain the history of economic behaviour; Islam, like all religions, has no definitive economic, financial or fiscal implications […] but it is equally compatible with private property, accumulation of wealth and trade”.
Rodinson, in Halliday, 2005, p. 289
It is claimed that Middle Eastern countries lack behind market reforms and show an antipathy towards neoliberal economic restructuring. This research paper looks into the logic of economic restructuring, whereby privatisation, competition and regulation theory build the framework for analysing market liberalisation in the Middle East. A case study on Islamic banking reflects the differences and challenges of respecting Muslim traditions at the one hand and Western financial practices on the other. It becomes paramount that economic restructuring is perceived mostly negatively by Muslim states and therefore, clashes with neoliberal understanding of pro-market reforms are inevitable.
1 Introducing the Research Paper
Liberalisation of and among Middle Eastern economies has been known differently to the ‘Western’ way of economic restructuring in terms of its point in time, length and political interests. This paper analyses some of the common features of economic restructuring experienced by the Middle East at large. The papers’ aim is to provide the reader with a clearer understanding of the logic of economic restructuring in the Middle East. Section I looks into the concept of economic and political theory of economic restructuring and privatisation. Liberalisation in the Middle East, its origins and consequences as well as the role of international organisation under Washington and Post-Washington Consensus are analysed in section II. The Middle Eastern banking sector is used in section III to offer a practical example of the challenges that lie ahead.
1.1 Political and Economic Globalisation
According to Owen (2001, p. 232) there are three aspects concerned with the role of state in post-Cold War globalisation: (i) the impact of globalisation itself, (ii) cross border flows of humans, capital, information and (iii) the government’s ability to manage their economy in terms of welfare services and market forces. The Middle East has been and is faced with globalisation. With reference to Halliday (2005, p. 314) there are three broad responses: participation, accommodation and denunciation.
Most governments are committed to freer trade and tariff reduction, but are conscious with opening up their local, national markets for competition. Often this commitment originates out of loan conditionalities and structural adjustment programmes of international organisations such as the International Monetary Fund (IMF), the World Bank and the World Trade Organization (WTO). Not every government and/or society is in favour of neoliberal reforms out of fear that globalisation might undermine domestic business interests.
Westernisation and shareholder wealth maximisation capitalism is not everywhere welcomed, in particular there where religion, tradition, norms, family values, business ethics and government regimes differ from the Western hemisphere. Socio-economic and political changes take time, demand a pro-attitude regime and open minds behind the designing, implementation as well as supervision of change management. However, what we – the West – consider to be good can/does differ from non-Western countries. That gave rise to the development of Islamic economics as an adversary to neoliberal economics. Often these differences are reflected in time scales and the order of how to restructure a country.
Recent corporate failures in America and Europe show that market economies do not need to be superior i.e. compared to communist systems. Over the last ten to fifteen years one could see a general world wide trend towards freer markets, more trade agreements, increased privatisation activity and the transformation towards democratic governments. Beside these trends one also starts to understand and in some instances to respect the diversity of market understanding, often guided under Islamic laws and norms.
Globalisation is perceived by some as a thread, by others as an opportunity. Whether globalisation is good or bad is a huge topic in itself. This paper however looks into economic restructuring which consists mainly of neoliberal economics, whereby globalisation is considered as something positive. An essential feature of globalisation is its impact on national politics, so Owen (2001, p. 238). The anti-globalisation movement highlights the diminishing national sovereignty through the drive for free trade and capital (Krugman and Obstfeld. 2003, p. 288). Wilson (2002, pp. 188) describes the globalisation process in the Middle East in terms of trade and financial dependence on industrialised countries and its cultural connection as well as religious conflicts. Furthermore, Wilson states that the impact of globalisation on the government is complex and multifaceted. Wilson (2002, p. 208) concludes that “globalization implies a different rather than a reduced role for governments in the Middle East […] protecting and promoting the vested interests of local economic elites in the face of global challenges”.
According to Heydemann (2004, p. 7) politics of economic reform were initially concerned with how liberalisation works. In his paper, Wilson (2002, p. 198) refers to Bradley Glasser who suggest that neoliberal economic reforms as in Turkey have been merely implemented due to their foreign exchange crisis. Neoliberal Western economics understanding differs fundamentally from Islamic economics. Kuran (1996, p. 438) a strong critic of Islamic economics defines its purpose as to “help Muslims from assimilating into the emerging global culture whose core elements have a Western pedigree. […] its chief instrument for fighting assimilation is the guilt that it fosters by characterizing certain universal economic practices as un-Islamic”. Islamic economics wants to resist universal human morality and is driven by cultural rather than economic concerns. The next sections explains the rationale behind privatisation, regulation and competition theory as well as its connection to risk.
1.2 Privatisation Theory
Privatisation is perceived as the process of transferring and selling assets (for instance as 100 per cent equity or as a lease) from the public to the private sector. The term privatisation can comprise a multitude of products designed to change the status quo of a business or industry (Clarke, 1994, p. 355). Confidence in the power of markets has shifted from state to private ownership in many countries. With regard to privatisation, Williamson (1999, IIE) states, that the great merit of privatisation is when it can be used to further competition. Privatisation is supposed to attract domestic and foreign investment. Well conducted privatisation with competitive bidding can raise efficiency and improve public finance that benefits all.
What motives have driven governments to transfer resources? Heather (2002. pp. 225) as well as Lipczynski and Wilson (2001, pp. 386) outline four major arguments in favour of privatisation. Firstly, privatisation leads to greater competition in product and services which lead to the pursuit of strategies aimed at improving efficiency, in particular cost efficiency as profit is a powerful motivator. Secondly, it increases discipline of capital markets which leads to greater capital market incentives for managers and firms to perform well. These incentives can be examined with reference to principal agent theory that describes the separation of ownership and control.
Bayliss and Cramer (in Fine, Lapavitsas and Pincus, 2001, p. 57) claim that the privatisation ‘’process streamlines the relationship between enterprise owners and managers and thereby improves performance’’. One could strongly argue against this statement as the streamlining of this relationship bears threats as well as opportunities i.e. opportunistic behaviour. Therefore, the goals of the principal (owner) have to be translated into the goals of the agent (manager) who in return gets motivated through incentives. This is a highly debatable topic in itself, but needs to be addressed. Thirdly, privatisation reduces government borrowing and government controls. In some instances privatisation can increase government revenue; however, this argument is very weak. Furthermore, it can be argued that resources would be better off in the private sector and that privatisation could lead to a greater share of ownership. This is considered good for a democratic society, however the evidence is weak. If a large proportion of people hold shares, then they have an interest in the capitalist system, so Heather (2002, p. 226).
On the other hand the arguments against privatisation are as follows. There is the debate of natural monopolies versus private monopolies, the transfer of monopoly from public to private ownership. Secondly, there is the threat of short-termism, meaning short term gains may be offset in the longer term by losing profit making potential. In case of a break up of monopolies economics of scale (reduction in unit cost as a result of increasing the volume of capital) and scope (increasing the range of outputs produced) might be lost. Further, staff lay-offs are commonly associated with privatisation. Moreover, it might be hard to introduce competition.
A huge problem with privatisation is that of allocative efficiency (the optimal allocation of scarce resources), where price and output decision will reflect rather private than social welfare. According to economic theory there are two principals on how to control privatisation abuse: price control and deregulation. In a situation of monopoly power most economists would argue that setting price ceilings is okay. Heather (2002, p. 229) states that if governments enforce a price ceiling at the social optimum it can cause a price output decision which is consistent with consumer welfare maximisation.
An alternative to price controls is deregulation, the removal of government controls of an industry. Sometimes deregulation might be better than price controls, but it is problematic in some markets. Privatisation raises essential questions of the role of government in modern society. Clarke (1994, p. 101) expresses doubts where governments may receive short-term benefits due to changes in staff level which is compensated through a loss of control of service delivery. Less developed countries tend to privatise public enterprises, if they are confronted with financial losses, if international aid donors and aid agencies put pressure on and in the event where governments reduce subsidies. However, these countries often face problems with privatisation due to the lack of efficient capital markets, a sometimes opposing trade union movement, loss-making enterprises and poor infrastructure, as outlined by Clarke (1994, pp. 354). Privatisation enhances the incentives and opportunities for corporate theft (see section 1.2.1).
Stiglitz’s argument (2002, p. 88) is, that countries need to consider alternatives to the Washington Consensus. Through democratic political processes these countries need to make choices for themselves. “The essence of freedom is the right to make a choice – and to accept the responsibility that comes with it.” Privatisation raises a lot of questions such as: Whether privatisation is the most important policy? In which sequence should privatisation be implemented? What are the costs and benefits to all stakeholders involved?