Locked Out of Development: Insiders and Outsiders in Arab Capitalism By SteffenHertog. Cambridge University Press, 2023. 75 pages. $22, paper.

In this new study, Steffen Hertog examines the ideas that define contemporary Arab capitalism and their significant contribution to current practice. The book begins by arguing that pro-market reforms were the root cause of the social discontent that fueled the Arab Spring. Neoliberal policies, the author contends, have subjected many Arab citizens to the inequality and poverty generated by unchecked capitalism. Hertog outlines the basis for the book by explaining the political dynamics and development challenges in the Arab world that foster divisions between insiders and outsiders, leading authoritarian rulers to shape their state systems accordingly. Cronyism in the private sector further entrenches vested interests in specific regimes.1 Using the Social and Ecological Market Economy (SEME) framework, the analysis shows how countries are adapting to global pressures, with transnational ideological competition in the post-independence era of Arab nationalism reinforcing ambitious states across the region. In Chapter 2, Hertog asserts that when Middle Eastern and North African countries in the Arab region gained independence in the 1950s and 1960s, they were impoverished, underdeveloped, and had minimal state apparatuses. Nonetheless, they pursued more ambitious state-building paths compared to their counterparts in other developing regions, leading to consistently high government spending as a share of GDP. This period was marked by intense ideological competition, with Arab nationalists advocating for state-oriented, populist economic programs that resonated widely. Data indicate that fiscal crises and structural adjustments have impacted the region similarly to other developing areas, yet it has maintained its distinct statist character.2 This legacy is evident in high levels of public-sector employment and bureaucratic influence over labor markets and business activities, demonstrating the persistence of historically established institutions and suggesting a stable equilibrium. However, limited state resources and discretionary state intervention have created deep divisions between privileged insiders and marginalized outsiders. While the statist histories of Arab regimes and their economies are well documented, this study delves into the less-understood divisive consequences of today, examining the equilibria that perpetuate these divisions and hinder more inclusive development for workers and businesses. The following chapter shows that the distributive and welfare goals of Arab states remain robust, leading to significant improvements in schooling years and life expectancy since World War II, surpassing other developing regions. However, the commitment to large-scale public employment, while gradually decreasing, remains high compared to international standards, with Morocco's being the only exception. The Arab state maintains a significant presence in the economy through extensive distribution and deep bureaucratic control of markets. Analyzing the extent of this involvement is crucial for understanding the structure of Arab labor markets, corporate sectors, and skills systems, as well as how these interventions benefit insiders. Arab governments also provide goods to private businesses, with energy subsidies being a key channel benefiting both households and industry, often exceeding international averages. These payouts are crucial for crony networks in energy-intensive sectors. Additionally, the state plays a central role in the allocations of land and credit, with higher state ownership of banks compared to other regions. Despite the fact that recent fiscal crises led to cuts in industrial subsidies, regulatory intervention and protection remain vital for Arab businesses and are likely to persist. Hertog's evidence makes clear that state intervention influences economic incentives and outcomes. A long history of involvement in Arab labor markets has created rigid insider-outsider divisions, reinforced by political-feedback loops. Arab labor markets are divided into formal public employment, formal private employment, and informal private jobs. The informal labor force, defined as workers not contributing to social security, averages 65 percent across the Arab world outside of the Gulf monarchies, according to the International Labor Organization. While this is high, it is comparable to other developing countries. What is unique, however, is the high ratio of public to private employment within the formal sector, reflecting the region's large bureaucracies. Given the weakness of the formal private sector, new labor market entrants are more likely than ever to remain stuck in informal jobs, especially if they come from lower-class backgrounds. Across the region, 86 percent of workers between 15 and 24 are in informal jobs; they represent 64 percent of the total workforce.3 In Chapter 4, Hertog further analyzes the lack of mobility between labor-market segments in the Arab world. Few workers leave the public sector for private employment, highlighting the rigidity and inflexibility of the insider-outsider system. Outsiders remain marginalized for longer periods, while insiders rarely lose their status. Street vendors—such as Mohamed Bouazizi, whose self-immolation set off protests in Tunisia—remain stuck, while bureaucrats in places like Egypt's Mogamma enjoy job security.4 Historically, public-sector employment facilitated social mobility and egalitarianism in the Arab world, particularly for individuals from less privileged backgrounds. Many past leaders, such as Egypt's Gamal Abdel Nasser, Syria's Hafez al-Assad, and Tunisia's Zine El Abidine Ben Ali, rose through the ranks of expanding military apparatuses before gaining political prominence. However, the limited availability of state jobs for new entrants now drives social exclusion. Generations within many families in the Arab world are divided, with parents often having higher incomes while their children possess more education. This dynamic can cause family tensions but also allows younger job seekers to rely on parental support while they wait for government jobs, though often unsuccessfully. Jordan is an exception to this pattern, thanks to its relatively larger fiscal resources from geopolitical rents, which have allowed it to offer a significant number of government positions to younger job seekers after the Arab uprisings. However, this has led to an unsustainable government debt load, reaching 90 percent of GDP in 2021.5 Several factors contribute to the deep segmentation of Arab labor markets. Besides the tight regulation of formal private employment that discourages hiring and firing, other factors include rigid and exclusive informal networks, the generous and inflexible nature of public sector employment, and contribution-based social security systems that favor insiders. In the Arab region, insider-outsider divisions are further strengthened by ineffective human-resource management and nepotism in private companies, which are also segmented into insiders and outsiders. Many job seekers find positions through friends or relatives, and both qualitative and quantitative research shows that informal social connections play a significant role in the economy and society. Formal private-sector jobs in Egypt and Tunisia are mostly reserved for educated individuals from privileged backgrounds, highlighting the importance of social networks.6 The World Economic Forum reports that in most Arab countries, including all republics, senior management positions are often held by friends and relatives rather than professionals chosen on merit. Young Arabs frequently criticize the prevalence of wasta, the reliance on informal connections for advancement. This issue is not just anecdotal; it reflects a “meritocracy deficit” that discourages youth from pursuing education and skills relevant to private jobs. Low skills in the population reinforce nepotism, which is further supported by limited competitive pressures on Arab firms. In Chapter 5, Hertog assesses how Arab policy making, which is reactive and built around insider interests, differentiates those countries from the new “state capitalism” seen in large emerging markets like China or Russia.7 State capitalism involves using productive state assets for diversification and geostrategy, whereas SEME frameworks are preoccupied with distributional obligations, limiting their long-term economic efficacy.8 SEMEs are more retrenched and less developmental or strategic, with little active industrial policy and heavily restricted state autonomy. This difference also sets Arab states apart from “state-influenced market economies” in some continental European countries, where the state provides more proactive economic guidance. The state's role in maintaining insider-outsider distinctions is not addressed in these alternative statist theories. Core Arab economies are characterized by deep segmentation and low dynamism, rooted in a history of extensive state intervention in the private economy and skewed resource distribution through public employment and subsidies. Despite decades of economic retrenchment, heavy state intervention continues, dividing firms and workers into insiders and outsiders. This static segmentation allows insiders to maintain low productivity and low skills, giving them a vested interest in preserving an uncompetitive system. Outsiders face high barriers to entry and have limited incentives to invest in skills, further reducing mobility from outsider to insider status. Hertog's study effectively shows that the region's development problem is not simply too much of a reliance on markets, as the conventional leftist view suggests, or too little of it, as the neoliberal perspective argues. Instead, it is the uneven exposure to the market, with excessive protection for insiders and harsh exposure to unregulated market forces for outsiders. Hertog emphasizes that this uneven protection has contributed to discontent and distrust, fueling regional unrest over the past decade through its negative impact on economic development and the exclusionary patterns it has created.