The oil factor: Regulatory agency creation in the MENA region

ABSTRACT

The regulatory governance literature has shown a rising interest in the development of the regulatory agencies in developing countries. We now have a relatively good number of studies on Latin America and Asia. However, there is, to date, very scarce knowledge about regulatory governance in the Middle East and Northern Africa (MENA countries), where regulatory agencies diffused less systematically and more slowly. This paper makes a first step towards filling this gap and, in doing so, it raises a general question about the role of oil and gas revenues in restraining the propensity for agency creation by national states. Making use of a cross-sectoral database about the creation of regulatory agencies in MENA countries, we discuss the relevance of states’ oil and gas revenue to explain their lower levels of agencification compared to other regions. A case study focused on electricity regulation in Algeria is also included for this purpose. We place several hypotheses considering variations in agencification over time and across countries, in order to strengthen our argument about the constraining impact of oil and gas rent on the process of regulatory agency diffusion that occurred worldwide in the previous decades.

KEYWORDS:

• Regulatory agencies
• regulatory governance
• MENA
• algeria
• electricity
• oil

Introduction

The regulatory governance literature has shown a rising interest in regulatory agencies in developing countries (Lodge & Stirton, 2002; Sosay & Zenginobuz, 2005; Özel & Unan, 2021). The focus of these studies ranges from the analysis of agency creation, to the measure of their independence and discussion of their role in sectoral policy-making once established. This literature features quantitative and comparative studies on regulatory agencies in Latin America (e.g., Jordana & Ramió, 2010; Jordana & Levi-Faur, 2006; Martinez-Gallardo & Murillo, 2011; Prado, 2012; Urueña, 2012) and on Asian countries (e.g., Dubash & Chella Rajan, 2001; Jarvis, 2010; Jayasuriya, 2009; Thiruvengadam & Joshi, 2012). From a cross-regional perspective, we also find both qualitative (Dubash & Morgan, 2013) and quantitative analysis of regulatory agency diffusion (Fernández-I-Marín & Jordana, 2015).

However, there is, to date, very scarce knowledge about the creation of regulatory agencies in the Middle East and Northern Africa (MENA), beyond a few case studies on large countries such as Turkey (Sosay, 2009) and Egypt (Badran, 2012). Yet, it is in MENA countries that regulatory agencies have diffused less systematically and more slowly than in any other region of the world (Figure 1). MENA was always the region with the lowest coverage of independent regulatory agencies (IRAs), and a larger proportion of them are characterized by a strong dependence on the executive – compared to similar agencies in other parts of the world (see online appendices for more details). Although in the 1950s and 1960s the agencification process in MENA countries was catching up with the rest of the world, it diverged from it in the early 1970s with a sudden stop in agencification. Although the creation of IRAs resumed in the late 1980s, it was at a slower pace and extent than in the rest of the world. What explains the particular reluctance to adopt regulatory agencies in this region? This represents a particularly puzzling empirical pattern, and in this paper, we discuss how a particular factor, the availability of oil and gas revenues for some states and its impact on the whole region, has partially neutralized common mechanisms of diffusion, limiting and slowing down the introduction of regulatory governance institutions in the MENA regions.

Figure 1. Percentage of agencies created (World vs. MENA).

Source: Based on Jordana, Levi-Faur, Fernández-i-Marín et al. (2011) and Fernández-i-Marín and Levi-Faur et al. (2022), and our own elaboration

We first revise the usual factors identified in the regulatory governance literature to make sense of the diffusion of regulatory agencies – coercion, competition, learning and emulation. We then turn to the literature specialized on the MENA region that emphasizes the highly conditional role of oil and gas on these countries’ political economies and political systems (Beblawi & Luciani, 1987; Chaudhry, 1994; Lowi, 2009; Schwarz, 2008) before elaborating on our hypotheses. We then analyse a series of graphs produced with quantitative data on agency creation in MENA countries, which we complete with a case study on the creation of the Algerian electricity regulatory agency, before concluding with our contribution to the literature on regulatory governance, on MENA countries political economy and policy diffusion.

The diffusion of regulatory agencies

Specialized administrative agencies have gained much importance in the 1990s with the rise of the New Public Management (NPM) doctrine (James, 2003; Pollitt et al., 2001). Aiming at modernizing public administration and increasing its performance by reproducing market-specific mechanisms in its functioning, NPM reforms have led to the structural disaggregation of the public administration via the creation of specialized and (semi-)autonomous administrative bodies. Whereas the characteristics of specialized administrative agencies vary widely across sectors and countries (Van Thiel, 2012; Verhoest et al., 2010) a key defining feature is their relative decision-making autonomy from the traditional hierarchical administrative system. As agencies have risen with regulation and the regulatory state (Christensen & Lægreid, 2006; Levi-Faur, 2005; Majone, 1994), it is in regulatory policies that they are more numerous and independent (Gilardi, 2008), leading to the concept of independent regulatory agencies (IRAs). Whereas the IRA model diffuses most intensely in utility sectors subject to liberalization processes, it has also been extended to sectors where markets pre-existed regulatory and NPM reforms, such as finance and risk regulation (Jordana, Levi-Faur, Fernández-i-Marín et al., 2011).

The literature has much discussed the drivers of this large institutional transformation, and policy diffusion approaches have played a central role in most of the interpretations (Gilardi, 2008; Jordana, Levi-Faur, Fernández-i-Marín et al., 2011). Policy diffusion is generally defined as the process through which policy choices in one unit are influenced by policy choices in other units (Braun & Gilardi, 2006; Dobbin et al., 2007; Gilardi, 2012; Shipan & Volden, 2008; Simons et al., 2006). Accordingly, it was expected that influence from other countries that already created agencies would facilitate agency creation in other countries. This influence across units has been conceptualized through four types of diffusion mechanisms: coercion, competition, learning and emulation. It is important to mention that the conceptualization and operationalization of the four mechanisms do not create consensus and are sometimes said to overlap and lack conceptual consistency (Blatter et al., 2022; Maggetti & Gilardi, 2016). Here, we take a pragmatic approach and focus on the most commonly used definitions of these mechanisms.

The first mechanism, coercion, refers to the strong influence of international financial institutions (IFIs) in the developing world. Essentially through conditionality of loans, IFIs would have been able to diffuse into the developing world neoliberal policies and instruments – such as IRAs – throughout the 1980s and 1990s (Henisz et al., 2005; Vreeland, 2003) as domestic governments needed external resources and technical assistance. The second mechanism, competition, refers to governments’ adopting IRAs to signal a credible commitment to pro-investment policies (Levy and Spiller 1994) or as a symbol of country innovation of modernity (Guidi, 2016; McNamara, 2002). In the face of global competition to attract private investments, as other countries create agencies in this view, governments are under pressure to create agencies as well not to lose opportunities. Both the coercion and competition mechanism assume developing governments’ need to attract external funding to finance their development.

The third mechanism is policy learning, i.e., policymakers’ updating their beliefs about relevant and effective policy objectives or instruments. Governments may adopt IRAs after learning about their positive effect in other countries. Such learning generally takes place through the diffusion of shared knowledge about effective policies within epistemic communities, international organizations and transnational policy networks. Governments’ participation into such networks may also trigger the fourth mechanism, emulation, whereby IRAs are created because they are perceived as legitimate (Fernández-I-Marín & Jordana, 2015; Gilardi, 2012). In the emulation mechanism, diffusion is driven by the government’s willingness to adopt an appropriate model. It is rooted in a more social understanding of actors’ behaviour (logic of appropriateness) than the learning mechanism, which assumes governments’ willingness to improve public policies and make them more effective (logic of consequences).

When addressing the factors affecting the reach of policy diffusion processes, the literature has focussed a lot on the type of relationship characterizing those units among which the diffusion operates. For example, diffusion was particularly prominent among capital competitors (Simmons & Elkins, 2004) or in situations of high power asymmetry (Simons et al., 2006). We also know that the intermediation of certain actors, such as epistemic communities, international organizations, or the European Union facilitate diffusion processes (Radaelli, 2000; Stone, 2004). Some studies have also investigated the individual countries’ characteristics on their openness to policy blueprints subject to wide diffusion, pointing at factors like governments’ ideology (Meseguer, 2004) or the number of veto points in the policymaking system (Gilardi, 2008). However, none of these findings allows to understand the limited diffusion of IRAs in MENA countries. To account for this phenomenon, we turn to the political economy literature specific to this region.

The limited diffusion of IRAs in MENA countries

Let us now turn to the MENA region and examine whether its specificities might, at least partially, neutralize the impact of these diffusion mechanisms. In this regard, we concentrate on the exceptional abundance of oil and gas resources in the region and the rent that it generates. This very particular feature is unanimously recognized as having a huge structuring impact on the development of MENA countries, in particular on the development and consolidation of autocratic regimes (Martinez, 2010) and on economic policies, that in many cases ended up being mere spending policies more than attempts to stimulate the economy (Beblawi & Luciani, 1987; Ross, 2012). The magnitude of the impact of oil and gas rent is such that it led to the development of a specific kind of state, typical of the region, commonly referred to as the ‘rentier state’ (Beblawi & Luciani, 1987). Not all countries in the MENA region have abundant oil and gas revenues, but the literature suggests that oil resources are diffused among countries in the region, creating a ‘rentier mentality’ affecting the whole region (Beblawi, 1987). Various mechanisms of rent diffusion across countries have been identified, such as international aid to politically closer states, indirect oil revenues from transit rights – for example, in Egypt with the Suez Canal or gas pipeline royalties, or remittances of migrant workers established in oil-rich countries – which can amount up to 85 per cent of the GDP in the case of Yemen (Chaudhry, 1997).

The first way in which the oil and gas rent might interact with the diffusion of IRAs relates to coercion and competition mechanisms. It seems likely that, thanks to the abundant financial resources coming from the oil and gas rent, almost all MENA countries are partly shielded from the conditionality mechanisms requested by IFIs and the dependence on private investors. In other words, as the coercion and competition mechanisms are based on incentives that assume the need for capital, the oil and gas rent in the region might partly neutralize their impact.

The third and fourth mechanisms, learning and emulation, are largely based on social interactions within global, regional or transnational communities or policy networks. In fact, many MENA countries are geographically very close to the European Union (EU). The EU has encouraged the creation of transnational and regional partnerships of all kinds hence favouring the circulation of policy ideas between Europe and MENA countries, as with the European Neighbourhood policy, the Union for the Mediterranean, and various Euro-Mediterranean regulatory networks that organize the exchange of ideas and experience at the regulatory level (Lenzi, 2014; Vantaggiato, 2019). So, it does not seem that the oil and gas rent influence the integration of MENA countries in such transnational and epistemic communities.

Nevertheless, we believe that the oil and gas rent can have an impact on MENA countries’ motivation to adopt the regulatory agency model under the learning mechanism by interfering with governments’ motivation to improve the institutional and policy effectiveness of the country. Most countries need economic growth to levy taxes to finance state functioning, so as to offer good public services and gain the population’s support. By contrast, in rentier states, the elite may capture part of the rent and distribute the rest to buy the population’s support, for example, via public service subsidies, and stay in power without economic growth (Luciani, 1987). In fact, after the first oil shock, the magnitude of the revenues was such that economic policies in MENA rentier states consisted in spending programmes – rather than growth seeking plans (Chatelus, 1987; Luciani, 1987). We suggest that this interference of the rent on governments’ need for a competitive economy (Beblawi & Luciani, 1987; Hvidt, 2013) partially neutralizes the incentives underpinning the diffusion of IRAs via learning.

Overall, we argue that the wealth generated by the oil and gas rent has shielded MENA countries from the conditionality mechanisms imposed by IFIs, the need to engage in investor-friendly signalling strategies and the pressure to adopt policies aiming at economic competitiveness. To evaluate this argument, we elaborate two hypotheses that relate to the evolution of oil prices (hypothesis 1), the difference between oil-rich and oil-poor countries (hypothesis 2).

The literature on the rentier state underlines that oil and gas rent incentives vary over time with the evolution of fossil energy prices, subject to important rise and fall since the 1950s. Consider that throughout the 1970s the prices of oil have come to be multiplied and/or divided by six. When the national gross domestic product (GDP) is almost exclusively composed of oil revenues or derivatives thereof, such as intra-regional foreign aid, royalties and workers’ remittances, as is the case for most countries of the region, oil prices have a dramatic conditioning impact on the elites’ capacity to adopt distributive policies and buy popular support. MENA governments are thus more likely to need foreign aid, investment and effective economic policies in periods of low prices of oil. We thus expect that regulatory agencies are more likely to be created in periods of low oil prices (hypothesis 1).

If we are to assess the impact of oil and gas rent, we cannot overlook the fact that not all MENA countries are rich in oil and gas, and those that have access to these natural resources do not enjoy it in similar levels of abundance. Despite the emergence of rentier dynamics at the regional level due to the diffusion of the rent among countries in the whole region, we might expect some differences in countries’ behaviour. The need to attract foreign investors shall not manifest equally for states enjoying a direct income from oil and for those benefiting from a diffuse effect through foreign aid, royalties or remittances. Our second hypothesis is thus that oil-poor states are more likely to create regulatory agencies than oil-rich states (hypothesis 2).

Methodology and operationalization

As our aim is to assess the relevance of the oil and gas rent, we concentrate on exploring its impact from different angles – rather than searching for an exhaustive explanation of the limited diffusion of regulatory agencies in MENA countries, which would require the analysis of other variables. To do so, we triangulate different types of data and analyses.

The first empirical section examines the general trends and relationship between oil and gas rents and IRA creation, based on the analysis of various graphs realized with quantitative data about IRAs creation in MENA countries. For the agency creation, we use data from an expanded version of the dataset on regulatory agency creation in 16 sectors and 85 countries (see Jordana, Levi-Faur, Fernández-i-Marín et al., 2011). The 16 sectors were selected for being most subject to regulation and agencification. This dataset identifies the year since a regulatory agency operated in any of the 16 sectors. To make data comparable across countries and sectors, we measure percentages of agency coverage over total possible cases. In other words, if the MENA region includes 20 countries, and in each country, we searched agency presence in 16 sectors, a full agencification in the MENA region (100 per cent coverage) would represent 320 cases of agency/sector activity.

The data on oil and gas come from the World Development Indicators, an online dataset by the World Bank. Oil and natural gas rents are identified as the difference between the value of natural gas and oil production at regional prices and the total cost of production. We observe a large variation among the 21 MENA countries across a period of more than 50 years, from 1965 to 2019. To identify which can be considered oil and natural gas-rich countries in the region, we calculate the average of annual rents as the share of their GDP (summing gas and oil figures). To be considered a rich oil and gas country we adopted as a threshold level to obtain an average over the 20 per cent of GDP, and 9 countries emerged as rich ones: Saudi Arabia, Argelia, UAE, Oman, Qatar, Kuwait, Iran, Iraq and Libya (see the online appendices for more details).

In a second step, we complement this quantitative analysis with a case study in order to have a closer look at the causal mechanisms linking oil and gas rent and the government’s preferences and decisions about IRAs. We focus on the creation of a regulatory agency in the electricity sector in Algeria based on the least likely case rationale. Algeria is an oil-rich and especially gas-rich state, so it belongs to the population of cases that are most closely targeted by our hypothesis. Thus, we expect that the oil and gas rent works as counterincentives to the adoption of IRAs in Algeria. Yet there are other characteristics of Algeria that shall make it particularly permeable to neoliberal policy reforms compared to other oil- and gas-rich countries: its close vicinity to Europe, its relative low GDP per capita level and the serious debts that constrained the country’s economy until the early 2000s in the aftermath of the Algerian civil war. So, compared to most oil-rich countries, given its ambivalent set of incentives, Algeria has a hard case for oil and gas rent to neutralize the international diffusion pressure. Hence, if we find qualitative evidence that the oil and gas rent worked as counterincentive in the Algerian case – in spite of the incentives for economic reform stemming from Algerian’s particular history – we shall be confident that oil and gas rent shall also work as obstacles to IRAs diffusion in other oil-rich countries. Besides, the electricity sector is characterized by a particularly intense diffusion process worldwide which shall further limit the effect of the oil and gas rent and reinforces the logic of least likely case selection, meant to maximize the external validity of the findings. If the oil and gas rent is found to be strong enough to limit IRAs’ diffusion in the electricity sector, we can safely conclude that it shall be strong enough to limit IRAs’ diffusion in other sectors where diffusion processes have been less pervasive and intense.

Taking as a starting point the interdependencies between agency creation and liberal economic reforms, the case study embeds the analysis of the creation of the Algerian electricity IRA into a historical overview of Algerian liberal economic reforms and their interaction with oil price fluctuations on the global market. The data were collected through semi-directed expert interviews with international and local experts and stakeholders in 2018, consolidated and completed by the analysis of documents and secondary literature in 2021. Except for the short section on the pre-1999 period – for which most interviewees did not have first-hand information and where documents and secondary literature played an important role, the case study is almost exclusively based on the interviews and documents were only used to double check the information obtained by interviewees. For reasons of anonymity, particularly sensitive in autocratic countries, no direct reference is made to interviewees in the presentation of the case study.

Quantitative exploration of IRAs diffusion in MENA

Temporal patterns of agency creation in MENA (Hypothesis 1)

The general overview of the creation of IRAs in MENA countries and in the rest of the world reveals a distinctive pattern specific to the MENA region (Figure 1). On the MENA trend, we can distinguish four phases¹: phase 1 (1950–1974), phase 2 (1975–1988), phase 3 (1989–2008), and phase 4 (2009–2016); versus three phases in the global trend: before 1988, 1988–2002, and 2003–2016. This difference relates to the pre-1988s period in which we have one global phase of agency rise, but two different ones in MENA countries: a first phase of development of regulatory agencies (1950s-1973) and a phase of stagnation from 1974 onwards.

Between 1974 and 1988, whereas the worldwide trend continues to grow slowly but steadily, there is a sudden stop in the development of IRAs in the MENA region. In fact, 1973 is a key date in the political economy of the MENA region. It corresponds to the first oil shock, the moment from which oil revenues flooded massively in the region (see Figure 2). Oil prices have been multiplied by three between 1970 and 1974, and by six throughout the whole decade. For countries whose economy relies essentially on oil and gas – or on an indirect rent related to the exploitation of oil and gas in neighbouring countries, this means that governments’ budgets have exploded in similar proportions during this period. Oil price rises in the 1970s have fostered a very sudden and massive financial abundance, which has considerably transformed political systems and economic policies in the region (Beblawi and Luciani 1987). This temporal pattern of agency creation in the pre-1988 period fits very neatly our argument and, more generally, the rentier state theory, according to which massive financial abundance removes any incentive to carry out reforms. The expansion of reforms and creation of IRAs does, indeed, suddenly stop in the period of sharp oil prices increases, interrupting the phase of convergence between the MENA and world trends, i.e., a period of approximation of MENA countries’ evolution towards global standards in terms of regulatory agencies, that started in 1950.

Figure 2. Evolution of oil prices vs agency creation in the MENA Region 1950-2020.

Source: bp Statistical Review of World Energy 2020; Jordana, Levi-Faur, Fernández-i-Marín et al. (2011) and own elaboration.

It was only in the late 1980s, after a long period of low prices and as the international pressure for agency creation increased considerably, that agency creation started again in MENA countries. Yet this happens at a much slower pace than the rest of the world, so that the gap between the practices at the global level and in MENA countries is getting bigger and bigger over time. The rise of IRAs in the MENA countries in this period also follows key patterns of oil prices evolution. With the counter oil-shock of 1986, oil prices have sharply dropped. Whereas prices have already been declining since the 1979 peak relatively gradually, in 1986 oil prices have nearly been divided by 3 (from about 60$ to 20$ the barrel). According to the literature on the political economy of MENA countries, it is when oil prices are lower that the incentive to engage in economic reforms is higher. The counter-oil shock of the mid 1980s has certainly fostered an urge to reform the economy, contributing to the important rise of IRAs in the late 1980s. However, this rise in agencification also coincides with the acceleration of the global trend of agency creation. It is thus likely that the global IRA diffusion trend, most intense in this period, has also had an impact on the region. Hence, two explanatory factors combine at the same time: strong diffusion pressure of the regulatory agency model and the persistence of lower oil prices during a period of time. Since it is not possible to disentangle the extent to which the rise of IRAs in period three is due to one or the other explanation, the safest interpretation here is probably that both factors, the counter oil-shock and the global trend, played a role in agency diffusion in MENA countries in this third phase.

Finally, the transition between the third and fourth phases in the early 2000s also deserves discussion. As the global decline in agencification unfolds gradually, we see a sudden stop in agencification in MENA countries, which, again, follows another historical peak in oil prices in 2008 after a period of uninterrupted increase in oil prices since 2002. This suggests that the abundance of oil and gas rent intensified the otherwise more gradual trend in the decline of the agencification process. Besides, while the decline of the global agencification trend is, to a large extent, due to the gradual exhaustion of further possibilities for agencification (reaching about a degree of 65 per cent of agencification cases), this is not the case of the MENA agencification trend, which stops just after reaching a level of 30 per cent.

To sum up, the analysis of IRAs growth over time does lend strong support to our hypothesis 1. This is particularly clear about the period from the mid-1970s to the late 1980s, a period with a sudden stop in agency development in MENA region that corresponds to a massive rise in revenues thanks to the 1970s oil shocks. The following period marked by a rise in agency development coincides with the counter-oil shock, hence confirming the relation with the oil factor, although its explanatory power is certainly only partial here given that this period also corresponds to the global trend of diffusion of agencies worldwide. Finally, our argument is also supported by the last phases featuring a (second) sudden stop in agencification in the early 2000s following a new peak in oil prices, contrasting with a gradual deceleration of the global agencification trend.

Cross-Country patterns of agency creation in MENA (Hypothesis 2)

Let us now turn to our second hypothesis about the differences in agency creation between oil-rich and oil-poor countries. From Figure 3 we can see that oil-rich countries rely less on regulatory agencies than oil-poor countries (31 per cent vs 34 per cent). Although the difference is indeed thin, we also note that oil-poor countries do systematically rely more on IRAs than oil-rich countries. Since the access to independence of these countries in the early 1950s, there is no single point in time when oil-rich countries would rely more on IRAs than on oil-poor countries. If oil resources would not matter at all, we would rather expect to observe both periods where IRAs would be more present in oil rich and in oil poor countries. Since this is not the case, we interpret this as an indication that oil resources do have some impact on a country’s tendency to rely on IRAs, although this impact is limited. Observing a limited impact is consistent with the literature that revealed that the impact of oil and gas rent is diffused within the whole MENA region.

Figure 3. Agencies in oil-rich versus oil-poor countries (MENA region). Country-sector spaces covered by agencies.

Source: Based on Jordana, Levi-Faur, Fernández-i-Marín et al. (2011) and own elaboration

The sectoral breakdown of the cross-country patterns of agency creation provides highly interesting and complementary information. Whereas some sectors feature no difference between oil-rich and oil-poor countries, other sectors are characterized by a very marked difference. In utility sectors,² like telecoms or electricity, the trends of oil-rich and oil-poor countries are very close to each other. They even cross each other, which means that none of these countries’ group is particularly more prone to relying on IRAs than the other (Figure 4). In the financial sectors,³ we see a slight – but clear – difference between both types of countries, with oil-poor countries being slightly ahead of time over oil-rich countries regarding the creation of regulatory agencies until the late 2000s when both trends converge (Figure 5). This pattern contrasts sharply with the risk sectors⁴ where the difference appears very clearly, where only a few cases of IRAs creation can be observed in the region, most of them in oil-poor countries (Figure 6). Finally, the competition sector offers a highly compelling pattern, with none of the oil-rich countries having relied on a competition agency, while many oil-poor countries did (Figure 7).

Figure 4. Agencies in utilities sector (MENA region, oil-rich vs oil-poor countries). Country-sector spaces covered by agencies.

Source: Based on Jordana, Levi-Faur, Fernández-i-Marín et al. (2011) and own elaboration

Figure 5. Agencies in the financial sector (MENA region, oil-rich vs oil-poor countries). Country-sector spaces covered by agencies.

Source: Based on Jordana, Levi-Faur, Fernández-i-Marín et al. (2011) and own elaboration

Figure 6. Agencies in risk regulation sectors (MENA region, oil-rich vs oil-poor countries). Country-sector spaces covered by agencies.

Source: Based on Jordana, Levi-Faur, Fernández-i-Marín et al. (2011) and own elaboration

Figure 7. Competition agencies (MENA region, oil-rich vs oil-poor countries). Country-sector spaces covered by agencies.

Source: Based on Jordana, Levi-Faur, Fernández-i-Marín et al. (2011) and own elaboration

The sectoral breakdown of the differences among countries reveals that the relatively low level of difference between oil-rich and oil-poor countries regarding agency creation is not necessarily due exclusively to a general relatively similar behaviour among these countries – due to the diffusion of the rent in the region. If the difference is low, it is at least in part because it aggregates the results of several sectors, some of them with no or little difference (utilities, finance) and others with very marked ones (risks, competition). This provides strong support to the general hypothesis about country differences and the impact of oil and gas rent, while indicating that this impact is sector-sensitive.

One possible explanation for this sectoral variation could be the intensity of the diffusion process. The more intense the diffusion process, the stronger the incentive underpinning diffusion and the less effective its neutralization by the oil and gas rent, the less difference between oil-rich and oil-poor countries. This conjecture works well with the data if we compare the utilities, financial and risk sectors. In the utility sectors, characterized by the most intensive sectoral diffusion process (Figure 8), we observe no difference between oil-rich and oil-poor countries. We observe a slight one in the financial sector, where diffusion is also very intense although less than in utilities. And in the risks sector, the flatter curve of diffusion indicating less intense diffusion matches a clear difference between both types of countries. This conjecture does, however, not work with the competition sector where we see both a very intense diffusion process and a strong cross-country difference. Further research is needed to account for this compelling cross-country empirical variation. For the purpose of this piece, we conclude that, although subject to sector variation, the difference between oil-rich and oil-poor countries’ propensity to create IRAs comes out very clearly from the data.

Figure 8. Diffusion processes of different sectors at the global scale (85 countries). Country-sector spaces covered by agencies.

Source: Fernández-I-Marín and Levi-Faur (2022)

Case study: Electricity in Algeria

Algeria is an important producer of oil and especially gas. As such, it suffers most political and economic challenges typical of rentier states, in particular an autocratic regime that derives its political legitimacy from rent-distribution, rent capture by the elite, clientelism-driven governance, strong dependence on the revenues from fossil fuel exports and low level of economic diversification (Talahite, 2012). Given this economic profile, Algeria is very sensitive to oil prices volatility. The first two oil-shocks in 1973 and 1979 have provided massive financial resources, which allowed the Algerian state to develop a socialist economy, based on accelerated industrialization and redistribution through subventions, public investment and job creation in public companies (Benabdallah, 2006).

This rentier state model collapsed with the 1986 oil counter-shock, as oil prices fell dramatically and, with them, states’ revenues. A brutal economic crisis ensued, featuring recession, goods shortages, removal of price subsidies and currency devaluation. Liberal economic reforms were introduced and loans were granted by the IMF to allow Algeria to continue importing essential goods (Talahite, 2010). Riots broke out in 1988, which the army repressed severely. To ‘put the pieces back together’, the up to then single party regime engaged in political liberalization (Lowi, 2004, p. 84). Shortly after the recently legalized Islamist party won the elections in 1991, the army made a coup d’état, triggering a civil war against the islamists that would last until 1999. During this violent period, on the economic front, the army put a stop to the liberal reforms engaged in the previous years. In 1993, unable to further reimburse its loans, Algeria was in near bankrupt. International organizations rescheduled the debt and imposed a traumatic structural adjustment programme (Mezouaghi et Talahite 2009: 16). Fully absorbed by interest repayments and civil war expenses, Algerian authorities did not have any leeway to reactivate the economy (Bustos 2003 17). Not anticipated by Algerian authorities, the 1986 counter-oil shock triggered a dramatic sequence of economic, social and political tragedies that lasted until the late 1990s.

In 1999, Abdelaziz Bouteflika was elected president and managed to negotiate a ceasefire with the islamists. Having spent time abroad during the 1990s, he came back to Algeria with a positive take on liberal economic policies. Determined to set Algeria on a new positive path, he formed a government with economists, including former members of the World Bank (Mezouaghi, 2015, pp. 21–22). He invited Chakib Khelil, former Director of the Energy section for Latin America at the World Bank,⁵ to join his government. Khelil thus served as a minister for Energy between 1990 and 2010. The changing political context coincided with a rise in oil prices. Algeria seemed to be about to engage in a new salutary phase in its history. Several liberal economic reforms were launched, including in the electricity sector, with the adoption of the 2002 liberalization law that aimed at dismantling the monopolistic regime with a view to foster competition and efficiency in the Algerian electricity sector. Sonelgaz, the incumbent electricity and gas company, was unbundled. The law made it possible for third party to build a power plant, produce electricity, access the network and sell electricity to eligible customers.

In conjunction with these liberalization measures, the 2002 Law also sets the ground for the establishment of the Commission de régulation de l’électricité et du gaz (CREG), which became operative in 2005. The establishment of an IRA in electricity is strongly related to the liberalization of the sector, as it is a key piece in the electricity reform package, serving as a condition for the effectiveness of liberalization measures. Hence, as soon as liberalization reforms are adopted, the creation of an IRA follows quasi systematically. The main purpose of the establishment of CREG was to ensure transparency and non-discrimination in the decisions of tariffs applied to access transmission and distribution grids. Another key task entrusted to the CREG was the regulation of retail tariffs. Retail tariffs regulation is a highly delicate issue in developing countries, where low electricity retail tariffs serve as a social measure. Yet in a liberalized electricity system, retail tariffs reflect production costs. Hence, liberalization reforms require the removal of public subsidies that keep retail tariffs at an artificially low level, in order to allow market mechanisms to determine retail prices. This implies a significant increase in retail prices which is particularly sensitive in developing countries. This politically delicate task, consisting in gradually raising retail prices, was entrusted to the CREG. In the years following its creation, all attempts by the CREG to raise retail tariffs were blocked by the government (Commission de régulation de l’électricité et du gaz 2006, 2009, 2010). This systematic veto exercised by the government prevented the implementation of liberalization reforms adopted a few years ago, turning the 2002 liberalization law into dead letters.

As it happens, oil prices played a determinant role in inducing this lack of consistency. In Algeria, which developed as a socialist state after its independence, liberal economic reforms had only been engaged in situations of economic hardship, created by low oil prices. As oil prices rise, money flows back in the state’s coffers, and the state recovers the capacity to activate the economy with public investment and to redistribute the rent. Whether, in such a situation, a government decides to renege on previously engaged liberal reforms or not is another question, as alternative options are possible and agency plays a crucial role too (Lowi, 2009). But there is no doubt that rising oil prices shall provide the temptation to revert to deeply engrained practices of a state-led economy. This temptation is particularly high in the case of Algeria in the 2000s, still afflicted by the immense need of the society and economy to recover from that terrible decade it had just recently emerged from (Talahite, 2010, p. 16). This is why, during the second half of the 2000s, the reforms launched in the early 2000s were gradually abandoned, as Algerian authorities failed to follow-up on them. This pattern of temporal incoherence in policy orientations is also confirmed by more recent history. As a result of the 2013 oil counter-shock, oil revenues dropped dramatically, and the authorities re-considered the urgency to proceed to economic reforms. In the electricity sector, it was only in 2015 that the authorities started to increase retail tariffs that had been frozen for 10 years.

Algerian electricity case study and the four diffusion mechanisms

The creation of the CREG is embedded in the electricity liberalization reforms adopted in 2002. Therefore, the explanation behind the creation of the CREG should be found in the analysis of the adoption of electricity liberalization. When these reforms were adopted, Algeria was already over the structural adjustment process with the international organizations, so the reforms are not the result of conditionality mechanisms imposed by international organizations. Instead, the Bouteflika government was genuinely favourable to liberal economic reforms and liberalized the electricity sector on their own will. Interestingly, the personal trajectories of both Bouteflika and Khelil indicate the crucial role played by international epistemic communities and the learning process that followed from it for the adoption of electricity reforms and the creation of the CREG.

While the case study is a case of IRA creation in a gas-rich country out of learning, it also shows that this learning process is highly dependent on oil prices. In periods of low oil prices, Algerian authorities have adopted liberal reforms to redress the economy, on which they failed to follow-up when oil prices rose again in the 2000s, reverting instead to the old habits of state-controlled economy. Beyond the creation of the CREG, the case study also shows how the oil and gas rent interferes with the coercion mechanism. When oil and gas revenues are high, the reserves accumulated do help tremendously countries to assert economic sovereignty and establish financial independence from international organizations and private foreign investors, as was the case in Algeria before the 1986 oil counter-shock and during the 2000s. Things turned out very differently with the oil counter-shock, which ended up, amongst others, in a very severe structural readjustment programme in which many economic reforms were imposed by international organizations. In fact, the case study underlines the crucial role of the temporal dimension in the impact of oil and gas rent. Algeria’s economic policies are characterized by some incoherence. We observe a lack of consistency in the implementation of reforms in the face of changing circumstances, in particular depending on the evolution of oil prices (Ouchichi, 2017).

A detailed study of the Algerian electricity sector confirms the causal mechanisms playing out between oil and gas rent and IRA creation. It shows the highly conditioning impact of oil prices – hence of the magnitude of the rent – on governments’ capacity to develop economic sovereignty and on their (lack of) interest in implementing liberal policies and creating agencies. Doing so, it reduces governments’ sensitiveness to the incentives underpinning the coercion, competition and learning diffusion mechanisms. As it allows to confirm the causal mechanisms hypothesized, the case study consolidates the results obtained in the first section based on the analysis of the quantitative data.

Conclusion

In the face of the empirical puzzle about the very limited diffusion of IRAs in MENA countries compared to other regions of the global South, we have proposed an explanation based on the abundance of oil and gas in the region. We argue that the financial abundance deriving from the oil and gas rent has partially neutralized the incentives underpinning the diffusion of IRAs because it reduces governments’ need for financial aid, for private investments and for adopting effective economic policies. Our data first show that the specific temporal pattern of IRA creation in the MENA region follows that of oil prices evolution, with periods of very high oil prices systematically followed by a stop in the expansion of IRAs in MENA countries – hence producing divergence between the trends characterizing IRAs expansion in MENA vs in the rest of the world. Second, we show that oil-rich countries are, overall, less prone to IRA creation than oil-poor ones, this difference being particularly compelling in some sectors, such as competition where about half of the oil-poor countries did create a competition agency versus none among oil-rich countries. Finally, our case study of the creation of the electricity regulatory agency in Algeria consolidates these findings by providing qualitative confirmation about the causal mechanisms at stake, in particular showing how the country’s economic sovereignty and attempts to stimulate the economy with policy reforms varied over time depending on oil prices.

By focusing on the oil and gas rent, this study did not consider other factors that may play an equally important role in limiting the diffusion of IRAs in MENA countries. The relationship between MENA countries and the European Union based on the European Neighbourhood Policy varies depending on the geography, with Gulf countries staying apart. This difference deserves to be explored and its impact evaluated. Also, the absence of democracy in most countries in the MENA region probably combined to make MENA governments’ even more reluctant to the creation of IRAs (Koop & Kessler, 2021), as far as social and political demands were not significant in the political economy of most of these countries to activate policy changes, and most regimes in the region preferred to subsidize public services, if needed, than open markets or empower consumers. Future research is needed to consolidate the findings and, especially, to investigate the relative explanatory power of natural resources compared to other factors, such as the relationship to the European Union and political systems, as well as their interaction with them (see Koop & Kessler, 2021 for a work in these lines).

This study makes several contributions to the literature. It provides an explanation for the limited diffusion of regulatory agencies in the MENA region and, more generally, shows how natural resources and economic profile of a country have an impact on its propensity to follow the agencification trend. It also contributes to the literature on political economy in the MENA region by turning the spotlight on regulatory agencies as a manifestation of MENA’s countries limited engagement with neoliberal policies. Finally, we also push the boundaries of the literature on policy diffusion by approaching the diffusion mechanisms as a series of incentives (for getting funds, legitimacy or effective policies) that interact with national conditions that can modulate their effectiveness. We hope that this piece will encourage scholars to pursue the research on the limits to the diffusion of agencies, on the adoption of neoliberal policies in the MENA region and on the interaction between policy diffusion trends and national factors.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplemental data

Supplemental data for this article can be accessed online at https://doi.org/10.1080/13629395.2022.2089815

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Additional information

Funding

The work was supported by the European Commission [748135].

Notes

1. We refer to the phases as periods in which the orientation of the corresponding line is stable. The transition between phases corresponds to the first year on which the change in the line’s orientation is visible.

2. Utilities sectors refer to electricity and telecommunications regulation (Jordana, Levi-Faur, Marín et al., 2011).

3. Financial sectors groups the regulation of various types of financial products, which includes financial markets, securities, insurance and pensions (Jordana, Levi-Faur, Marín et al., 2011).

4. Risks sectors groups relates to regulation that aims at mediating the negative externalities of markets. They include: health provision, food safety, pharmaceuticals, work safety and environment (Jordana, Levi-Faur, Marín et al., 2011).

5. Chakib Khelil : Biographie, Chakibkhelil.com [archive], consulted on 29.07.21.