Securitizing the State: Development, Diplomacy, and Decline in Middle Eastern Military Economies

CEE Staff
Jan 27
21 min read

Updated: Nov 8

Executive Summary

Across the Middle East, a critical and often misunderstood phenomenon is reshaping economies and consolidating authoritarian power: the deep economic integration of national militaries. This paper provides a comparative analysis of the military-economic complexes in Egypt, Pakistan, Turkey, Iran, and Saudi Arabia, revealing a spectrum of models from the deeply entrenched, autonomous "praetorian landlords" to state-directed industrial projects. In Egypt, Pakistan, and Iran, military-run conglomerates have become dominant economic actors, controlling vast commercial empires that benefit from unparalleled legal and financial privileges. These military-economic empires, or "Milbus" as termed in Pakistan, distort market dynamics, crowd out the private sector, and create a powerful disincentive for political reform, as economic power and political influence become mutually reinforcing [1].

This paper argues that understanding these military economies requires a new framework that goes beyond traditional defense industrial analysis. These entities are not just businesses; they are instruments of geoeconomic statecraft and alternative providers of state capacity. They enable sanctions evasion, manage currency crises, and deliver infrastructure projects, creating a parallel system of governance that provides short-term resilience for authoritarian regimes but undermines long-term institutional development. The paper concludes with targeted policy recommendations for external actors, civilian governments, and military leaders to promote transparency, accountability, and a gradual, managed divestiture of military commercial assets, while also proposing new metrics for tracking and assessing the geoeconomic footprint of these military economies.

Introduction

The armed forces in several key Middle Eastern states have evolved far beyond their traditional defense roles to become dominant players in the national economy. This phenomenon, where the military functions as a major commercial and industrial conglomerate, has created a form of "praetorian capitalism" that is reshaping the region’s political and economic landscape [4]. These military-economic complexes, operating with significant legal, financial, and political privileges, control vast swathes of the economy, from heavy industry and construction to consumer goods and agriculture. This deep integration of the military into the economic sphere is not a monolithic trend; it manifests in different forms across the region, reflecting the unique historical and political development of each state.

This paper examines the military economies of five key regional powers: Egypt, Pakistan, Turkey, Iran, and Saudi Arabia. It analyzes the origins and evolution of these military-economic complexes, their impact on domestic politics and economic development, and their role as instruments of state power. The analysis is structured around three core themes:

Development: The historical and institutional origins of military-economic integration.
Geoeconomics: The role of military economies as instruments of state power, including their geopolitical and geoeconomic consequences.
Decline: The macroeconomic distortions and governance challenges they create.

By comparing these five cases, the paper reveals a spectrum of military-economic integration, from the deeply entrenched and autonomous military conglomerates of Egypt and Pakistan to the state-directed defense industrialization project of Saudi Arabia. Understanding this spectrum, and the geoeconomic functions these entities perform, is critical for developing effective policy responses that can mitigate the negative consequences of military-economic entrenchment while supporting genuine economic development and political reform.

Development: Historical and Institutional Origins

The military economies of Egypt, Pakistan, Turkey, Iran, and Saudi Arabia emerged from distinct historical circumstances, yet they share a common thread: the armed forces' central role in state formation and national development. In each case, the military's economic involvement was initially justified as a contribution to national development, a means to support veterans, or a way to leverage military capacity for civilian purposes. Over time, however, these economic activities have become deeply entrenched, creating powerful vested interests that resist reform.

Egypt: From Demobilization to Disjointed Dominance

The Egyptian military's entry into the civilian economy began in earnest after the 1979 peace treaty with Israel, which led to the demobilization of hundreds of thousands of soldiers [5]. President Anwar Sadat, seeking to redirect military capacity and prevent social unrest, encouraged the armed forces to establish commercial enterprises. This initial foray into the economy was modest, focused on small-scale manufacturing and agricultural projects. However, under President Hosni Mubarak, the military's economic role expanded significantly. Mubarak, himself a former air force commander, relied on the military as a key pillar of his regime, granting it increasing autonomy and economic privileges in exchange for political loyalty [6].

The military's economic empire is organized through a complex network of conglomerates, each operating with minimal oversight and significant legal advantages. The National Service Products Organization (NSPO), established in 1979, is one of the largest, managing over 2,300 projects across 40 sectors, including food processing, construction materials, and consumer goods [7]. The NSPO employs an estimated 5 million civilians and uses hundreds of thousands of conscripts as a source of cheap labor [8]. The Ministry of Military Production (MOMP) and the Arab Organization for Industrialization (AOI) are additional pillars of the military economy, focusing on defense manufacturing and heavy industry, respectively [9].

These entities benefit from tax exemptions, access to state land at below-market rates, and preferential treatment in government procurement. As Yezid Sayigh documents in his seminal work Owners of the Republic, the Egyptian military's economic activities are characterized by a lack of centralized management, leading to duplication, inefficiency, and a failure to maximize the value of assets [10].

Under President Abdel Fattah el-Sisi, who came to power after the 2013 military coup, the military's economic dominance has reached unprecedented levels. Sisi, a career military officer, has positioned the armed forces as the primary engine of national development, awarding them massive infrastructure contracts and expanding their role in sectors from petroleum retail to media [11]. The military's construction arm has been at the forefront of Sisi's mega-projects, including the new administrative capital and the expansion of the Suez Canal, projects that have been criticized for their economic viability but serve to further entrench military power [12]. As Zeinab Abul-Magd argues, the Egyptian military under Sisi has become a "landlord," controlling vast tracts of land and using its economic power to shape the political landscape [13].

Pakistan: The "Milbus" Model

Pakistan's military economy, termed "Milbus" by scholar Ayesha Siddiqa, is similarly entrenched and autonomous [14]. Siddiqa estimates that military capital accounts for more than 6 percent of Pakistan's GDP, a figure that does not appear in the official defense budget and is not subject to normal accountability procedures [15]. The military's economic presence in Pakistan operates on three levels: institutional, through army-controlled public sector organizations like the Frontier Works Organization and the National Logistic Cell; through military subsidiaries, including the Fauji Foundation, Army Welfare Trust, Shaheen Foundation, and Bahria Foundation; and at the individual level, through a system of perks and land grants for serving and retired officers [16].

The Fauji Foundation, established in 1954 ostensibly for the welfare of veterans, has grown into one of Pakistan's largest business conglomerates, with holdings in cement, fertilizer, power generation, and food processing [17]. The Army Welfare Trust, Shaheen Foundation (Air Force), and Bahria Foundation (Navy) similarly operate vast commercial empires, often in partnership with civilian firms but always under military control [18]. These foundations enjoy significant tax breaks, access to state resources, and the ability to leverage military connections to secure lucrative contracts. As Siddiqa notes, the military's economic power and political power are mutually reinforcing: economic involvement gives the military a strong incentive to remain central to politics, as its political power facilitates its business activities, which in turn enhance its political influence [19].

The costs of Milbus, Siddiqa argues, are immense. While the military defends its economic role by highlighting the welfare it provides, claiming to feed 9 percent of the population, the reality is that military businesses are often inefficient and require bailouts from the government, burdening taxpayers [20]. More critically, the diversion of military officers into commercial ventures compromises military professionalism, as promising careers are redirected toward profit opportunities rather than defense [21]. The military's increasing control and visibility in society also stifles civilian economic development and reinforces the armed forces' central role in Pakistani politics, making a genuine transition to civilian rule exceedingly difficult.

Turkey: OYAK and the Technocratic Model

Turkey's military economy presents a distinct model, characterized by a more centralized and professionalized structure. The Ordu Yardımlaşma Kurumu (OYAK), or Armed Forces Pension Fund, was founded in 1961 after the military coup as a compulsory pension fund for members of the armed forces [22]. OYAK had two primary goals: to improve the socioeconomic conditions of officers and to provide capital for national development, fitting into the state's import substitution industrialization (ISI) strategy [23]. Over the decades, OYAK successfully transitioned from a key player in the state-led ISI era to a major force in the post-1980 neoliberal economy, shifting its focus to export-oriented manufacturing, purchasing privatized state assets like the Erdemir steel plant, and venturing into finance, construction, and transportation [24].

A key distinction from Egypt and Pakistan is OYAK's structure. It is a highly centralized, institutionalized holding company run by technocrats, not active-duty officers [25]. While officers sit on the board, they have little influence on daily management, and all labor is civilian; conscripts are not used in OYAK firms [26]. OYAK's financing is based on compulsory pension deductions from its members and the predictable returns from its vast portfolio, which allows for long-term strategic planning and has enabled it to become one of Turkey's largest conglomerates, with nearly $20 billion in assets [27]. Unlike in Egypt, OYAK is fully separate and independent from Turkey's defense industry and does not invest in arms manufacturing [28].

Despite the military's political marginalization under the Justice and Development Party (AKP) since 2002, OYAK has continued to thrive, demonstrating that its economic power is not entirely dependent on the military's political dominance [29]. However, OYAK's historical ties to the military and its continued privileged access to resources and networks mean that it still operates with advantages not available to purely civilian firms.

As Zeinab Abul-Magd, İsmet Akça, and Shana Marshall argue in their comparative study, while both the Turkish and Egyptian militaries have used their political privilege to dominate their economies, they took different paths: Turkey's OYAK is a centralized, professionally managed holding company, while Egypt's military economy is a complex, decentralized network of multiple conglomerates with overlapping functions and less professional management [30].

Iran: The IRGC and the Revolutionary Economy

In Iran, the Islamic Revolutionary Guard Corps (IRGC) has extended its influence into vast economic sectors, controlling everything from construction and agriculture to black-market activities [31]. The IRGC's move into economic ventures began shortly after the Iran-Iraq War, when Supreme Leader Ayatollah Khamenei formalized a hierarchical structure that paved the way for privileges and economic perks for the country's leadership [32]. The IRGC's expansion accelerated during the 1990s under President Rafsanjani, who pushed for government institutions to engage in economic activities to improve the state budget, and grew rapidly during Mahmoud Ahmadinejad's presidency (2005-2013), when the government granted numerous no-bid contracts to IRGC-linked companies, particularly in critical sectors like oil extraction and pipeline construction [33].

A crucial pillar of the IRGC's economic operations is the Khatam al-Anbia Construction Headquarters, established to manage reconstruction projects after the war and now Iran's largest engineering and development contractor [34]. Khatam al-Anbia, with its vast resources and thousands of employees, controls significant infrastructure projects, including the construction of pipelines, roads, dams, and urban transportation networks [35]. Its largest projects are often awarded by the state without competitive bidding, allowing it to maintain a monopoly over critical infrastructure and energy projects. For instance, Khatam al-Anbia was awarded a $1.3 billion no-bid contract to build a gas pipeline from Asaluyeh to Iranshahr and several billion-dollar contracts for work in the Pars South oil field [36].

Integral to the IRGC's economic reach are Iran's bonyads, or parastatal foundations, that manage vast resources and assets [37]. While not directly managed by the IRGC, major bonyads such as the Bonyad Mostazafan and the Bonyad Shahid maintain close ties with the organization, controlling extensive resources in agriculture, tourism, and industry [38]. Through these bonyads, the IRGC maintains influence over many sectors of Iran's economy, solidifying its power and securing revenue streams that often bypass public oversight and accountability. The IRGC's connection to these charitable foundations helps it sustain public legitimacy by presenting itself as an institution committed to social welfare and economic development.

In addition to formal economic activities, the IRGC is widely believed to control a vast black-market economy [39]. Accusations from reformist political figures claim that the IRGC operates numerous unofficial ports, or "invisible jetties," where it facilitates the import and export of contraband, including alcohol and narcotics, making substantial profits on untaxed goods [40]. These black-market activities may contribute billions to the IRGC's annual revenue, feeding into its shadow economy and supporting not only the personal wealth of its leaders but also military initiatives and strategic goals, including its nuclear research and support for regional allies.

Saudi Arabia: Vision 2030 and State-Directed Industrialization

Saudi Arabia represents a fundamentally different model of military-economic integration. Unlike Egypt, Pakistan, Iran, and Turkey, where military-economic complexes evolved organically over decades, often with significant autonomy from civilian oversight, Saudi Arabia's military-economic ambitions are a recent, top-down initiative driven by the civilian leadership's Vision 2030 [41]. The primary goal is to localize 50 percent of the kingdom's military spending by 2030, a dramatic shift for a country that has historically been one of the world's largest arms importers [42].

The strategy rests on two main organizations: the General Authority for Military Industries (GAMI), the sector's regulator responsible for setting rules and policies, and Saudi Arabian Military Industries (SAMI), a state-owned enterprise wholly owned by the Public Investment Fund (PIF), created to be the national champion for defense industries [43]. SAMI is intended to be a major outcome of Vision 2030, developing local capabilities in both manufacturing and research and development [44]. The push for localization is also a form of strategic bargaining with foreign defense contractors: by mandating local production and partnerships, Riyadh is leveraging its massive defense budget to force technology transfer, create local jobs, and build a domestic industrial base [45].

This model is explicitly top-down and state-directed, a political and economic project driven by Crown Prince Mohammed bin Salman as part of a broader national strategy, not an independent venture by the armed forces themselves [46]. The Saudi military does not control SAMI or GAMI; rather, these entities are instruments of the civilian leadership's economic diversification agenda. This distinction is critical: while the Egyptian, Pakistani, and Iranian militaries have built economic empires that enhance their political autonomy and create powerful vested interests resistant to reform, the Saudi model aims to create a defense industrial base that serves the state's economic and strategic goals without empowering the military as an independent political actor.

Despite ambitious goals and significant investment, the Saudi defense industry faces challenges, including a historical lack of a domestic industrial base, the need to develop a skilled workforce, and the complexities of technology transfer and intellectual property rights with foreign partners [47]. As of 2023, the localization percentage in the military industries sector reached only 19.35 percent, indicating that achieving the 50 percent target by 2030 will require sustained effort and investment [48].

Geoeconomics: Military Economies as Instruments of State Power

The economic activities of Middle Eastern militaries extend far beyond domestic markets, increasingly serving as instruments of state power on the regional and international stage. This section examines how these military economies function in the geopolitical and geoeconomic spheres, acting as tools for sanctions evasion, alternative sources of state capacity, and drivers of dual-use technology development.

Geopolitical Consequences: Drone Diplomacy and Regional Influence

In recent years, the export of military hardware, particularly unmanned aerial vehicles (UAVs), has become a key tool of foreign policy for several regional powers. Turkey has been at the forefront of this "drone diplomacy," with its Bayraktar TB2 drones playing a decisive role in conflicts in Libya, Syria, and Nagorno-Karabakh [49].

The success of these drones has not only boosted Turkey's prestige as a military-industrial power but has also created a network of client states dependent on Turkish military technology, giving Ankara significant geopolitical leverage [50[. Iran has pursued a similar strategy, supplying its drones to a wide range of state and non-state actors, including Russia for its war in Ukraine, the Houthis in Yemen, and Hezbollah in Lebanon [51]. This proliferation of Iranian drone technology has allowed Tehran to project power across the region, challenge its adversaries, and circumvent conventional military limitations.

Beyond hardware exports, military economies are also used to build regional influence through infrastructure and construction projects. The Egyptian military's construction companies have been active in post-conflict reconstruction in Libya and Iraq, using these projects to secure political goodwill and advance Egypt's regional interests [52]. Similarly, the IRGC's involvement in reconstruction in Syria has created long-term economic dependencies that will ensure Tehran's continued influence in the country [53].

Geoeconomic Instruments: Sanctions Evasion and Strategic Autonomy

Military economies have proven to be highly effective instruments of geoeconomic statecraft, particularly in the context of sanctions evasion. The IRGC has developed a sophisticated global network of front companies, shell corporations, and illicit financial channels to circumvent U.S. and international sanctions [54]. This network allows the IRGC to continue exporting oil, accessing the international financial system, and procuring sensitive technologies, providing a critical lifeline for the Iranian regime in the face of "maximum pressure" campaigns [55]. The IRGC's economic power gives it a degree of strategic autonomy, enabling it to fund its regional proxies and advance its foreign policy goals outside the constraints of the formal state budget and international sanctions regimes.

While less overt than the IRGC, the military economies of Egypt and Pakistan also play a role in managing economic crises and enhancing state resilience. In Egypt, military-run enterprises have been used to stabilize the supply of essential goods during periods of high inflation and to manage foreign exchange shortages by prioritizing military-controlled import-export channels [56]. In Pakistan, the military's vast commercial holdings, including foreign investments, provide a source of off-budget revenue and foreign exchange that can be used to mitigate economic shocks [57].

Alternative State Capacity: Infrastructure, Crisis Response, and Parallel Governance

In states with weak civilian institutions, military economies often function as a form of alternative state capacity. Military-run construction and engineering firms are frequently called upon to deliver large-scale infrastructure projects, such as roads, bridges, and dams, that civilian agencies are unable to execute efficiently [58]. In Egypt, the military has become the state's primary infrastructure provider, a role that has been praised by some for its efficiency but criticized by others for its lack of transparency and its corrosive effect on civilian institutions [59].

Military economies also play a key role in crisis response. In the event of natural disasters, such as earthquakes or floods, the military's logistical capabilities and engineering assets are often the first to be deployed, providing essential services that civilian agencies are ill-equipped to deliver [60]. While this can be a vital function, it also reinforces the perception of the military as the only competent institution in the state, further marginalizing civilian authorities.

The long-term consequence of this reliance on military economies for essential state functions is the creation of a parallel system of governance. As military-run enterprises take on more and more of the responsibilities of the state, they create a shadow government that operates outside the normal channels of accountability and oversight [61]. This provides short-term resilience for authoritarian regimes, but it comes at the cost of long-term institutional development, as civilian agencies are never given the opportunity to build their own capacity.

Dual-Use Technology and Innovation Ecosystems

The development of dual-use technologies is another critical dimension of military-economic integration. Turkey's success in this area provides a notable contrast to the failures of other regional powers. The investments made by OYAK and other Turkish conglomerates in the automotive, electronics, and machinery sectors created a broad industrial and technological base that was later leveraged to develop a world-class drone industry [62]. This success was driven by a combination of factors, including a competitive domestic market, a focus on export-oriented manufacturing, and a deliberate strategy of technology acquisition and adaptation.

In contrast, Egypt's vast military-industrial complex has largely failed to produce competitive dual-use technologies. Despite decades of investment and privileged access to resources, Egyptian military factories continue to produce outdated and low-quality civilian goods, and the country remains heavily dependent on foreign suppliers for advanced military technology [63]. This failure can be attributed to a lack of competition, a focus on rent-seeking rather than innovation, and the isolation of the military economy from global technology networks.

Iran represents an intermediate case. The IRGC, driven by the necessity of sanctions, has developed a niche but effective capability in dual-use technologies, particularly drones and missiles [64]. This has been achieved through a combination of reverse engineering, illicit procurement of foreign components, and a focus on asymmetric warfare capabilities. While not as technologically advanced as Turkey, Iran's drone program has proven to be a highly effective tool of geoeconomic statecraft.

Decline: Macroeconomic Distortions and Governance Challenges

While military economies may provide short-term benefits in terms of crisis management and infrastructure development, their long-term impact on economic and political governance is overwhelmingly negative. The privileged position of military-run enterprises creates significant macroeconomic distortions, while their lack of accountability undermines good governance and the rule of law.

Crowding Out the Private Sector

The most significant economic cost of military-economic integration is the crowding out of the private sector. Military-run businesses, with their access to cheap labor, tax exemptions, and preferential treatment in government procurement, have an unfair competitive advantage over civilian firms [65]. This makes it difficult for private entrepreneurs to compete, stifling innovation and investment. In Egypt, the military's expansion into almost every sector of the economy has led to a sharp decline in private investment, as local and foreign investors are unwilling to compete with an entity that can change the rules of the game at will [66].

Inefficiency and Rent-Seeking

Protected from competition and insulated from market discipline, military-run enterprises are often highly inefficient. The focus is on rent-seeking—using political connections to secure profitable contracts and market monopolies—rather than on improving productivity or innovation [67]. This leads to a misallocation of resources, as capital and labor are diverted to unproductive sectors of the economy. The result is lower economic growth, higher prices for consumers, and a lack of international competitiveness.

Lack of Transparency and Accountability

Military economies operate in a legal and political gray zone, with minimal transparency and accountability. Their budgets are often secret, their financial statements are not subject to public audit, and their operations are shielded from parliamentary oversight [68]. This lack of accountability creates fertile ground for corruption and abuse of power. In Pakistan, the National Accountability Bureau has been reluctant to investigate corruption allegations against senior military officers, highlighting the impunity with which the military operates [69].

Undermining Democratic Governance

The ultimate cost of military-economic integration is the erosion of democratic governance. When the military has a significant economic stake in the status quo, it has a powerful incentive to resist political reform and maintain its privileged position [70]. The military's economic power gives it a degree of autonomy from civilian control, allowing it to act as a state within a state. This makes a genuine transition to democracy all but impossible, as any attempt to subordinate the military to civilian authority would threaten its economic interests.

Comparative Analysis: A Spectrum of Military Autonomy

The five case studies in this paper reveal a spectrum of military-economic integration, ranging from the deeply entrenched and autonomous military conglomerates of Egypt, Pakistan, and Iran to the more professionalized and technocratically-run pension fund of Turkey and the state-directed industrialization project of Saudi Arabia. The table below provides a comparative overview of the key features of each model.

Feature	Egypt	Pakistan	Turkey	Iran	Saudi Arabia
Primary Entity	NSPO, MOMP, AOI	Fauji, Bahria, Shaheen Foundations	OYAK	Khatam al-Anbia, Bonyads	SAMI, GAMI
Ownership	State/Military	Military Foundations	Pension Fund	Parastatal/IRGC	State (PIF)
Management	Active-duty officers	Retired officers	Technocrats	IRGC commanders	Civilian/Technocrats
Labor	Conscripts & civilians	Civilians	Civilians	Civilians & IRGC members	Civilians
Financing	State budget, revenues	Revenues, investments	Pension contributions, revenues	State contracts, revenues, illicit activities	State budget (PIF)
Transparency	Opaque	Opaque	Partially transparent	Opaque	Partially transparent
Primary Role	Economic conglomerate, infrastructure	Economic conglomerate, welfare	Pension fund, investment	Economic conglomerate, sanctions evasion	Defense industrialization
Political Autonomy	High	High	Medium	High	Low

This analysis highlights the critical distinction between military economies that have evolved organically and have a high degree of autonomy from civilian control (Egypt, Pakistan, Iran) and those that are more institutionalized and subject to some form of oversight (Turkey, Saudi Arabia). This distinction has important implications for the prospects of reform.

Policy Recommendations

Addressing the challenges posed by military-economic integration requires a nuanced and context-specific approach. The following recommendations are targeted at external actors, civilian governments, and military leaders.

External Actors (U.S., EU, IMF, World Bank)

Seek Transparency and Accountability: External actors should make transparency and accountability in the military-economic sector a key condition of financial assistance and security cooperation. This includes insisting on the public disclosure of military budgets, the auditing of military-run enterprises by independent civilian bodies, and the application of civilian procurement rules to all government contracts [71].
Support Private Sector Development: International financial institutions should prioritize support for private sector development, creating a level playing field for civilian firms to compete with military-run enterprises. This includes providing access to credit, technical assistance, and legal support for private entrepreneurs [72].
Condition Military Aid: The U.S. and other major arms suppliers should condition military aid on progress towards the professionalization of the armed forces and the divestiture of their commercial assets. This includes providing training and technical assistance on civil-military relations and the role of the military in a democratic society [74].

For Governments

Create a Level Playing Field: Civilian governments should take steps to create a level playing field for all economic actors. This includes eliminating tax exemptions and other privileges for military-run enterprises, enforcing competition laws, and ensuring that all government contracts are awarded through a transparent and competitive bidding process [76].
Negotiate Managed Divestiture: In the long term, the goal should be a gradual and managed divestiture of military commercial assets. This could be achieved through a process of privatization, with the proceeds used to fund military pensions and modernization. The experiences of countries like China and Argentina, which have successfully divested their military economies, can provide valuable lessons [77].
Focus on Professionalization: Military leaders should recognize that their primary responsibility is national defense, not commercial enterprise. A focus on professionalization, training, and military readiness will enhance the prestige and effectiveness of the armed forces more than any business venture [78].

Conclusion

The deep economic integration of Middle Eastern militaries poses a significant challenge to the region's long-term stability and development. While these military economies may provide short-term benefits in terms of crisis management and infrastructure development, they come at a high cost: the crowding out of the private sector, the entrenchment of authoritarian rule, and the erosion of good governance.

Addressing this challenge requires a concerted effort from external actors, civilian governments, and military leaders to promote transparency, accountability, and a gradual return of the military to its traditional defense role. The future of the Middle East may well depend on whether these praetorian landlords can be convinced to give up their economic empires and embrace a new role as professional soldiers in a democratic society.