Five Schemes to Generate Income in the Arab World and Worsen the Crisis

States in the MENA region suffer from fragmentation and authoritarianism but with Western help, they are surprisingly capable of innovative revenue generation. A tongue-in-cheek assessment of five methods.

Kuwait City, 14th Feb. 2018. — International donor conference for the reconstruction of Iraq
Gustavo Ferrari/dpa/alamy

For a brief moment it looked like the revolutions of the Arab Spring could break decisively with the Middle East and North Africa’s heavy legacy of colonialism, conflict and authoritarian governance. Thankfully, the West astutely seized this historical opportunity and put a massive program of investment, education and exchange in place, instead of fielding its more traditional approach of rhetorically condemning authoritarianism and bombing Libya. This thoughtful approach was followed up by critical coverage of Saudi Arabia in the New York Times, hard-hitting UK/US political engagement with countries like Egypt and Saudi Arabia with a view to large scale and persistent human rights violations, and a consistent Western stance on Palestine. But despite these best efforts it was not to be. Today, the prospects for better governance in the MENA region suffer from a mix of fragmentation and a “return of authoritarianism”.

The common wisdom appears to be that fragmentation and authoritarianism will continue, despite the region’s many socio-economic challenges that these forms of governance are ill-suited to deal with. Nevertheless, not all hope is lost. Just as Western nationalist-populist parties (such as the French Front national) and governments (such as in Hungary) have been rather good at securing European Union subsidies and foreign funding while polarizing their societies and diminishing the rule of law at home, so are their fragmented and authoritarian cousins in the MENA region quite capable of innovative revenue generation. Tongue-in-cheek, we take a closer look at five methods that really caught our attention.

Conduct an “anti-corruption” purge

We give Saudi Arabia’s recent “corruption crackdown” our innovation top spot. This revenue generating strategy put an impressive $106 billion into the Saudi state’s coffers in the span of a mere few weeks by arresting some of the Middle East’s richest men and then letting them trade their riches for freedom. Note that this figure is roughly the size of the GDP of Morocco or the Ukraine. Given the country’s annual deficit of around $50 billion, it can now breathe easy for at least another two years without any need for belt tightening. Although some foreign analysts wondered whether the crackdown was not actually a masked power grab, the key concerns from a rather unperturbed West were rattled investor confidence and the impact of the arrest of prince Alwaleed on his stake in Twitter.

Our assessment: expect a one-time boost of at most $106 billion with a difficulty rating of 7 out of 10. Required: a local branch of the Ritz Carlton for “confessions.”

Claiming fictitious income

Second, it has been common practice for governments of poorly governed countries to spend like there is no tomorrow and to apply for debt relief from the Club de Paris when the patience of international lending markets runs out. Western countries support this practice by accepting token fiscal reforms in return for lending. These tend to be rapidly forgotten. Presumably this is for the sake of global stability—Afghanistan, the DRC and Mali are among the beneficiaries. True to their reputation for commercial savvy, the Lebanese government just took this strategy to a whole new level by pretending it already earned $200 billion from offshore gas exploration while not even a single exploration well has been drilled. It is impressive financial innovation to have Bank Audi—as “independent financial institution”—generate a “reliable” estimate of an unproven revenue source that is in part located on a disputed boundary—and to use the money immediately to “boost the economy.”

Our assessment: expect a one-off $200 billion tops with a difficulty rating of 9 out of 10. Required: good salesmanship and a story people want to believe.

Renting land to foreign armies

We give our third place to a variant of the “think global, act local” strategy. Small countries have to be creative to generate substantial revenues. European countries like Liechtenstein, Luxembourg and even the Netherlands have found their niches as tax “roundabouts” and “havens,” but such incentives only go so far in fragile or autocratic states. Djibouti has pioneered a novel approach to this problem. Although lacking in arable land, it does feature a sandy coastline along the busy Gulf of Aden. It is also a stone’s throw from conflict in Yemen, Somalia and South Sudan. Djibouti has capitalized on its location by renting out land to foreign militaries. It now hosts the bases of France, Italy, Japan, Saudi Arabia, the United States, and China. Not wanting to be left out, India, Russia and Turkey appear to be interested too. With the most expensive bases fetching in a rumored $20-100 million a year, their total revenue could generate about half the government’s annual revenue. An alternative for larger countries is to become a favored military ally of the United States—think Pakistan, Israel or Egypt—which will secure billions in direct military assistance irrespective of the quality of governance.

Our assessment of the “small country variant”: expect a modest, but regular $10-300 million a year with a difficulty rating of 4 out of 10. Required: geo-strategically relevant real estate.

Organizing a donor conference

A fourth strategy is to organize a “donor conference” in a bid to have the international community pick up the tab for reconstruction after a conflict that was at least in part of the host government’s own making. Typically, these conferences secure a mix of vague promises of aid, concessionary lending and commercial loans from which Western companies profit handsomely. The Iraqi state innovated this well-rehearsed classic for its Kuwait conference by producing a reconstruction framework that looks like it has been written by the World Bank. Featuring perfect aid speaks, it glosses over key problems like Sunni marginalization and Kurdish autonomy. For example, several participants to the Kuwait Conference indicated to the authors in confidential correspondence that the Iraqi government purposely concentrates investment on Shi’a areas and that Prime Minister Al-Abadi in fact blocks much-needed anti-corruption measures that could reduce the level of Shi’a elite capture of the Iraqi state. Yet, Iraq nevertheless managed to secure about $30 billion with its glossy prospectus. Not bad considering that this figure equals about half of Iraq’s oil revenue in 2017.

Our assessment: expect $4-30 billion every decade with a difficulty rating of 4 out of 10. Required: a prior conflict or humanitarian catastrophe.

Producing, selling or transiting drugs

If all else fails, a country can always use state prerogatives to make money from the illicit global drug trade that exists largely thanks to Western demand. The fortunate few—like Afghanistan (opium), Lebanon (hashish) or Morocco (cannabis)—can engage in production directly. For example, in Afghanistan many poppy farmers are taxed in a process that “implicated virtually the entire government.” But there are also opportunities to use state forces, diplomatic passports and shipping registers in the global drug supply chain. For instance, the US Department of Justice just asserted that both the Iranian Revolutionary Guards Corps and Hezbollah are engaged in massive drugs smuggling operations into the US. If true, this method has the additional benefit of being a handy sanction buster. Both criminal intermediaries and respectable offshore firms in places like Barbados or Bermuda are happy to help. For extra effect, one can copy the Malian playbook and land a Boeing 727 full of cocaine in the desert with the authorities blocking investigations.

Our assessment: expect $0,5-5 billion a year with a difficulty rating of 3 out of 10. Required: production or transit assets.

There is clearly no shortage of innovative fundraising strategies for cash-strapped states in the Middle East and North Africa. Global business interests, geopolitical competition and Western demand for opiates make useful partners for kleptocracy and autocracy. The duplicity of international crisis management and peace building—doing just enough to avoid the charge of just standing by and watching—perpetuates a self-reinforcing cycle of misery with a few band aid fixes slapped on. That seems to suit many MENA and Western governments just fine.