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In political science and international relations theory, a rentier state is a state which derives all or a substantial portion of its national revenues from the rent of indigenous resources to external clients. This theory was first postulated by Hossein Mahdavy in 1970. It was also in this article that the concept of external rent was first introduced.
The term rentier state has been used since the 20th century. It is most frequently applied to states rich in highly valued natural resources such as petroleum but can also include states rich in financial instruments such as a reserve currency. It can also be applied to nations which trade on their strategic resources, such as an important military base.
Dependent upon it as a source of income, rentier states may generate rents externally by manipulating the global political and economic environment. Such manipulation may include monopolies, trading restrictions, and the solicitation of subsidies or aid in exchange for political influence or conversely the solicitation of loans in exchange for the reserve currency, e.g., the United States.
Hazem Al Beblawi and Giacomo Luciani suggested four characteristics of a rentier state:
The emergence of the new oil states and their increasing importance in world trade in the 1970s brought a renewed interest in thinking on rentier economies in the aforementioned disciplines of political science and international relations. Examples of rentier states include oil-producing countries in the Middle East region including Saudi Arabia, United Arab Emirates, Iraq, Iran, Kuwait and Qatar as well as states such as Venezuela and Libya in Latin America and North Africa, all of whom are members of OPEC.
Rentier state theory has been one of several advanced to explain the predominance of authoritarian regimes in the Middle East and the apparent lack of success of democracy in the region. While many states export resources or license their development by foreign parties, rentier states are characterized by the relative absence of revenue from domestic taxation, as their naturally occurring wealth precludes the need to extract income from their citizenry. According to Douglas Yates, the economic behavior of a rentier state
embodies a break in the work-reward causation ... [r]ewards of income and wealth for the rentier do not come as the result of work but rather are the result of chance or situation.
Hazem Beblawi and Giacomo Luciani have argued that this could create a “rentier mentality,” while political scientist Fareed Zakaria has posited that such states fail to develop politically because, in the absence of taxes, citizens have less incentive to place pressure on the government to become responsive to their needs. Instead, the government essentially 'bribes' the citizenry with extensive social welfare programs, becoming an allocation or distributive state. The budget, in effect, is little more than an expenditure programme.
It has also been theorized that governments that rely to a significant extent on revenues from non-market sources are not compelled to apply free market principles to create an environment conducive to economic growth. Oil is in such demand that it does not require adherence to free market principles and economic freedom based on rule of law, security, a fair and transparent judiciary and property rights does not have to be nurtured. As a consequence, political freedom does not develop and efforts aimed at democratization are undermined.
Moreover, because control of the rent-producing resources is concentrated in the hands of the authorities, it may be used to alternately coerce or coopt their populace, while the distinction between public service and private interest becomes increasingly blurred. There is, in the words of Noah Feldman in his book After Jihad,
no fiscal connection between the government and the people. The government has only to keep its people in line so that they do not overthrow it and start collecting the oil rents themselves. (Feldman 139)
Consequently in these resource-rich rentier states there is a challenge to developing civil society and democratization. Hence, theorists such as Beblawi and Luciani conclude that the nature of rentier states provides a particular explanation for the presence of authoritarian regimes in such resource rich states.
Beblawi and Luciani identify several other characteristics particularly associated with rentier oil states. For example, where the government is the largest and ultimate employer, the bureaucracy is frequently bloated and inefficient – and indeed comes to resemble a rentier class in society. Moreover, local laws often make it impossible for foreign companies to operate independently. This leads to a situation where citizenship becomes a financial asset. To do business, foreign enterprises engage a local sponsor (kafil) who allows the company to trade in his name in return for a proportion of the proceeds – another type of rent. In addition, the oil rent leads to secondary rents, usually stock market or real estate speculation.
The crucial nature of oil has led to a situation where non-oil states have started to behave like rentier states. This can be seen for the region as a whole – so some states have been able to exploit location rent due to their strategic location, for example, as sites for military bases. More significantly, inter-state relations in the region have been affected as oil states try to ensure stability and tranquillity for their rent by buying allegiance from neighbouring states – in effect, sharing the oil rent. Beblawi and Luciani highlight the case of Egypt whose receipt of financial aid from oil-rich neighbours declined significantly after Camp David, and money going instead to Iraq, Syria and the PLO who were considered more assertive.
Importantly, scholars have tied rentier theory to the process of disenfranchisement and ultimately radicalization, posing that the breakdown of the citizen-state relationship can ultimately foster non-economically motivated radicalism. This is particularly important, given the geographic positioning of today's rentier states.