Economics: Income and Rentier State Essay

Submitted By Briankwok
Words: 1432
Pages: 6

The Rentier State

Imagine an entire country receiving its income from one monopoly. This is the essence of a rentier state, a country that acquires substantial amounts of revenue by renting one of its resources to the rest of the world. Two countries, which both share common characteristics of rentier states, are Iran and Nigeria, controlled by autocratic regimes, not accountable to its citizens. However, the true distinguishing factor of rentier states is how they are doomed to failure in the long-term. The highlights to this theory are the vulnerabilities of a mono-producer, the disparities in rentier economies, and the social and political repercussions that result from this.

The most important characteristic of a rentier state is how highly dependant the country is on one source of income. With massive revenues generated by external rent, it liberates the state from ever needing to extract income from the domestic economy. This makes the government an allocation state rather than a production state, as there are minimal incentives to really produce anything on top of the mass revenues generated by the external rent. With the economy so dependant on one resource, the entire country lacks a diverse economy and is vulnerable to the external price shocks affecting that one resource. Like other mono-producers, rentier economies will suffer from steep revenue declines whenever demand for their product decreases. This happened in the 1980s to Iran, when oil prices crashed, slashing the revenues of all aspects of its economy that are related to oil production. Due to the lack of diversity in the economy, Iran was hit hard and forced to implement austerity measures. Being the second largest oil exporter in the world, Iran was even more exposed than other oil producing countries, resulting in its GDP declining nearly 50%. Such a sudden decrease in revenues drastically affected Iran’s economy, as cuts were made in many vital sectors of the financial system, in turn further damaging the national economy, forcing the country down a vicious cycle. Domestic food production began to prove insufficient, forcing Iran to import 65% of the food it needed. High unemployment and black marketing exacerbated these effects. As an attempt to reduce its dependence on the declining oil revenues, Iran desperately tried to diversify its economy by investing in key industries such as copper and steel. However, as Iran’s attempts did little to ameliorate the situation, the country is still unable to overcome its dependence on oil; therefore, the economic problems relating to its rentier stature continue to have its effects today.

Labor in a rentier economy suffers from distortion. For example, wages earned by some in a booming oil sector can artificially drive up wages earned by others in unrelated sectors through the ‘demonstration effect’, which is on a similar vein as ‘game theory’. The ‘demonstration effect’ is essentially the observation of the actions of others and their consequences and reacting in accordance to them. For example, a car factory raises the wages of its employees. In a nearby town, a textiles factory may have to raise the wages of its employees or risk losing its workers to the car factory. This exhibits how if certain wages are driven up in one sector the wages elsewhere may be driven up unnaturally as well. With this said, while such distortion exists in some sectors of the economy, the overarching theme is still a great disparity in wealth. This is all because only a few are truly engaged in the generation of the rent while the majority is involved in its distribution and consumption. Since the government is the principal recipient of the external rent it enacts the deals and takes in the revenue before allocating it into the public, leading to corruption and contributing to the distortion of income distribution. Therefore, while the economy may seem to be booming, there is great disparity in wealth. There is also