The Effects of Cross-National Investment on Domestic Governance in the Middle East

By Joseph Florence
Submitted to Session P5348 (Cross-National Research on Contemporary Middle East Politics, 2018 Annual Meeting
Pol Science
Egypt; UAE;
Banking & Finance;
LCD Projector without Audio;
This paper explores a conceptual puzzle introduced by increased financial openness in the Middle East. Since the 1970s cross-national financial flows grew exponentially worldwide. While such increases in international transactions have affected domestic politics in virtually every country, whether or not the governance outcomes are positive or negative remains unclear. Perhaps one reason for this uncertainty lies in the peculiarities of the regimes of the MENA region. Few are institutionally democratic, a common assumption held in macro-level research on the effects of changes in cross-national market activity.
In light of the gap between real world phenomena and academic investigation, this paper combines regional-level data analysis of firms and economic sectors with in-depth case study research on the United Arab Emirates and Egypt. Doing so, the paper examines the following questions: How do linkages with global markets affect the sectors, factors, or cleavages that comprise political interaction among ruling elites in a non-democratic regime? What role does international economic integration play in structuring regime-opposition contention? And how, ultimately, do changes in financial liberalization challenge the longevity and solidity of governance in the MENA region?
This paper argues that the economic sector into which investments flow functions as the foremost pathways through increased international economic openness drives governance trends. If a plurality of investments flow to the construction and real estate sectors, then increased exposure to international finance affects governance outcomes in a negative way. On the other hand, if these investments flow into other sectors of a country, such as the manufacturing or extractive sectors, then economic liberalization and political liberalization may occur hand in hand.
Additionally, the paper argues that the nature and intensity of regime-opposition interactions regarding policy making affect trends in capital openness. Leaders face two parallel pressures when developing policies related to cross-border capital flows: how to overcome domestic interests that object to change (often, but not always at the sectoral level) and how to direct liberalization so that it does not empower potential political rivals. Governments in the Middle East have employed a variety of means to overcome opposition to or assuage the burdens that may accompany economic reforms. These include appeasement (e.g., increased provisions for social welfare), repression and duplicity (e.g., violence and co-optation), and scapegoating (e.g., dismissing other members of the government).