This paper argues that the low dynamism of low- to mid-income Arab economies is explained with a set of inter-connected factors that constitute a particular variety of capitalism which we call ‘segmented market economy’. These include an over-committed and interventionist state; deep insider-outsider divides in private sectors and labor markets that result from and reinforce lopsided state intervention; and an equilibrium of low skills and low productivity that results from and reinforces insider-outsider divides. These mutually reinforcing features undermine encompassing cooperation between state, business and labor. While some of these features are generic to developing countries, others are regionally specific, including the relative importance and historical ambition of the state in the economy and, closely related, the relative size and rigidity of the insider coalitions created through government intervention. Insiders and outsiders exist everywhere, but the divisions are particularly stark, immovable and consequential in the Arab world
