Since the rent (i.e. the income derived from the gift of nature (Beblawi 1987, p.85.)) dominates a larger proportion of the GDP, a rentier state, in general, lacks a productive outlook. Other terms have also been used to defined a rentier state, such as allocation state (Luciani 1987) and distributive state, (Vandewalle 1998) are used interchangeably with rentier state. The use of these alternative terms emphasize the functions of state (allocation and distribution), instead of its source of revenue (the rent).
Rent and Rentier
The theory of rent dates to the classical eighteenth and nineteenth century economists Adam Smith and David Ricardo. Both defined rent as a distinct source of income. According to Smith (1974), .rent enters into the composition of the prices of commodities in a different way than wages and profit. High and low wages are the causes of high or low prices high or low rent is the effect of it. (p. 249). Ricardo (1960) observed that rent was a reward for, and not profit from, ownership of natural resources. In making this distinction, Ricardo stated, the laws which regulate the progress of profits and seldom operate in the same direction. (p. 270). To avoid misunderstanding, rent used in this context has nothing to do with rent, in the sense of rent for land or property. Rent strictly refers to financial income that is not matched by corresponding labor or investment. Rent-seeking behavior aims at avoiding competitive or market pressures to bring about distortions in ones own interest in the political sphere.
Balkan Rentier States
Rentierism provides a main challenge for the national economic development for many emerging economies especially Balkan states. Within the debates of resource curse, political and economic threats like Dutch disease, economic growth and a rent-seeking orientated domination of the resource sector are discussed.
In rentier states the economy is dominated by various external rents, e.g. through natural resources. This is the case in Azerbaijan and Kazakhstan. Both economies are highly resource-dependant (Auty 2006). The state as the main recipient of resource rents face their windfall profits from resource wealth which leads to an enormous rent-seeking potential for the involved political and economic elites. Moreover, like in most rentier states these two countries also emphasize less of their fiscal and monetary tools to guide their economies.
Welfare Economics and RentierEconomies
Referred to as rentier or distributive states, Saudi Arabia, United Arab Emirates, Bahrain, Qatar, and Oman have created extensive cradle-to-grave welfare systems consisting of free education, subsidized housing, free medical care, and guaranteed public employment. Beblawi and Luciani (1987) were among the first economists to describe the negative effects of welfare capitalism on the social fabric of oil-rich Gulf nations. They noted the disdain for work and lack of interest in formal learning. They introduced the term rentier mentality to refer to the disjunction in the popular mind between work and education and between income and reward. Further research by Amuzegar (1999), El-Ghonemy (1998), and Mazawi (1999) reinforced the prevalence of the rentier mentality as a causal factor in the poor educational performance of Arab students. By no means, however, are the Gulf nations unique in this regard (Ross, 2001). With few exceptions, resource-driven economies, whether they are mineral-based or oil-based, tend to be governed by autocratic elites, have weak civil societies, demonstrate high rates of illiteracy, and are prone to inter-ethnic strife.
Oil-Rich Rentier States
Despite enormous rents derived from oil and gas exports, oil-rich rentier states have been unable to diversity economically and as a result, display a remarkably uniform developmental path (Gause III, 1994 Shafer, 1994). Analysts point to the following reasons. The steady flow of wealth prohibits the need for taxation on personal incomes. Oil revenues are owned by government. Thus the extraction of oil and gas is basically an isolated, capital-intensive enterprise dominated by expatriate workers. The relationship between the citizen and the state is therefore fundamentally different from that found in non-resource-based societies. By exercising dominance over the economy, governments vest a wide variety of private interests in its stability, privileging its allies and punishing its opponents.
In the Gulf, the national government is typically the principal recipient and dispenser of rents. Its responsibility is to manage the flow of rents and distribute them by means of outright grants, entitlements, contracts, licenses, or state employment. The political economy is, therefore, arranged as a hierarchy of rentiers with the state at the top of the pyramid, acting as the ultimate support of all other rentiers.
Other analysts have observed that rent seeking tends to produce an inverted pyramid of social classes (Noreng, 1997). In the oil-rich economies, a large non-productive, consumer-driven, middle class dominates the social structure in the absence of a producer class. High levels of affluence create insatiable demands for foreign goods and products. Thus from a development perspective, the modern Gulf state demands those skills that can be attained only by accessing Western-style training and education.
Social Polices and Political Independence
Despite the fact that governments in rentier states are relatively free from taxation and, therefore, fairly independent from society, it is still necessary for them to legitimize their power. As one obvious instrument is strategic social policy. This is the case not only in post-Soviet rentier states, but can also be regarded in rentier states of Latin America and the Arab World. Targeted instrumentalization of oil rents can be realized either through structural benefits, as part of a rent-based social policy (i.e. a free health and education system or specific types of addressed support for pensioners, etc.) or through selective benefits, such as ad-hoc benefit payments. Najam describe this strategy in rentier states as the cooptation instead of participation and alimentation instead of taxation.
European Rentier States and International Trade
The primordial observation is that the EU15 trade profiles differ with neighbors and with distant partners. The EU15 took advantage of its geographic location and was most successful in enhancing its exports to emerging and rentier countries located in Europe Periphery (Denis, Mc Morrow, Roger 2006). The EU enlargement and neighborhood policies have strengthened the effects of geography and have opened up new dynamic markets near at end (new member states and Mediterranean countries). The rentier states in the EU periphery have become major markets for the European exporters since the early 2000s.
The global economic crisis has hit all emerging countries since 2008 but the worst hit were the economies which were the EU15 most dynamic markets in the past ten years rentier states and emerging economies in Europe and its periphery. During the past ten years, the emerging economies, exporters of manufactured products or services, and the rentier states, exporters of primary products, have eroded the dominant position of the developed countries in world markets. The EU15 has lost less ground than the US or Japan. The EU15 has taken advantage of its geographical location to enhance its exports to the emerging and rentier countries located in Europe Periphery.
Sgard (2008) has put forward a model which aimed at combining private interests and market economy with a strong public policy, profoundly differs from that of countries which can be considered as rentier states as their economic rise is based mainly on exports of natural resources. Sgard (2008) has further emphasized that the distinction between emerging economies and rentier states makes sense when analyzing international trade since their integration into the world economy follows different patterns. For developed countries, both emerging economies and rentier states offer new opportunities for exports and investment at the same time, emerging economies may be a source of increased competition challenging the position of developed countries in the world trade of manufactured goods and services they are also their partners in the new forms of division of labor.
Classification of Rentier States
Although there are more than one classifications of rentier states, one of those classifications was done by Comptitivit des nations, Paris (1998). According to this classification, rentier states are countries which enlarged their share in world exports of primary goods (by more than 0.05 percentage point between 1995 and 2005) and which have more than 40 of their exports made of primary products. This group includes countries irrespectively of their level of income. In fact many rentier states have a level of income per capita comparable to that of rich countries. Among the 23 rentier states, fourteen are located in the Middle East and sub-Saharan Africa seven in the area Europe and its periphery, among which Russia and several countries which are part of the Commonwealth of Independent States (CIS) one in America and, one in Asia.
It must be underlined that, given the criteria used, the category as well as the definition of rentier states proposed here are relatively narrow compared to many other classifications. Moreover this classification is an evolving one and may change over time.
Rentier States and International Relations Theory
The concept of the rentier state offers interesting bridges in international relations (IR). In addition to this, the concept of the rentier state allows a broader conceptualization of the state in IR that links the internal form of the state to its foreign policy. Specifically in the case of rentier states, this is the economic foundation of the state which allows in boom periods the allocation of welfare benefits to society at large and which in times of fiscal crises sees a renegotiation of state-society relations and with it adjustments in foreign policies.
The IT theory of the rentier state also allows to analyze states that are both strong (in the area of security) and weak (in the area of representation and legitimacy) and to make predictions about their foreign policies. Since rentier states receive a substantial part of their revenues from the outside world, they show a remarkable different political dynamic than other states on the external side this means the primacy of foreign policy (and particularly foreign economic policy) and on the domestic side, the absence of democratic governance (Jackson 1990). Externally, the state becomes a rent-seeker in the international system and foreign economic actors receive particular importance as potential donors and rent providers, especially in times of fiscal crises.