The Economy of the Gulf States

By Matthew Gray

Agenda Publishing

Copyright © 2019 Matthew Gray
All rights reserved.
ISBN: 978-1-78821-001-0

Contents

Preface, vii,
Note on transliteration and terminology, xiii,
List of tables and figures, xv,
Maps, xvii,
1. INTRODUCING THE GULF ECONOMIES, 1,
2. THE GULF ECONOMIC STORY, 21,
3. MEASURING THE GULF ECONOMIES, 65,
4. THE FORM OF THE GULF pOLITICAL ECONOMIES, 109,
5. HUMAN FACTORS IN THE GULF ECONOMIES, 143,
6. MAKING THE GULF ECONOMIES: UNIQUE FACTORS, 171,
Notes, 207,
Further reading, 223,
References, 227,
Index, 247,

CHAPTER 1

Introducing the Gulf economies

The Arab monarchies of the Gulf – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE) – seem to present something of a paradox. On the one hand, they have enjoyed enormous economic growth in the modern era, primarily thanks to their impressive hydrocarbon reserves. From small, modest cities as recently as the mid-twentieth century, Dubai, Abu Dhabi, Doha, Riyadh, and others have developed into global metropolises with their citizens enjoying standards of living comparable to those in North America and western Europe. Their economic transformation has been profound, bringing with it new technologies and industries, and accompanying improvements in people's lifestyles. On the other hand, this dramatic economic change has seemingly had little effect on politics. At first glance, Gulf societies seem conservative, hierarchical and reticent towards many forms of social change. Leaderships have faced occasional unrest, but with the arguable exception of Bahrain in 2011, have not confronted a genuine revolutionary impulse that risked bringing down the incumbent ruling family.

What this paradox in fact illustrates is that the political and economic systems of the Gulf are complex but relatively stable, shaped to a large extent by oil and its socio-political impacts, but not exclusively or overwhelmingly so. As elsewhere, political and social conditions in the Gulf are the result of a large and complex array of factors, not least of all economic ones. Oil and gas revenues certainly play a prominent role in this, providing enormous injections of (albeit unpredictable) state income and reducing pressure on the state to tax its citizens, but at the same time introducing other dilemmas, including a need for economic diversification and the creation of productive jobs outside the energy sector. While the leaderships of these states can at a fundamental level be categorized as authoritarian, other actors have agency as well, including clerics, tribal figures, and members of the business community. Politics does not, therefore, operate on a simple formula, but rather is the product of various channels of communication and negotiation between and within states and societies.

The Gulf states are of global strategic and economic importance, above all due to their oil and gas wealth, as shown in Table 1.1. The Middle East as a whole produced just under 32 million barrels per day (bbl/d) of oil, on average, in 2016. Of this, Saudi Arabia, the UAE, Kuwait, Qatar, and Oman accounted for over two-thirds, or an average of over 22.4 million bbl/d. A further 4.6 million bbl/d came from Iran, and over 4.4 million bbl/d from Iraq. The Middle East in 2016 contributed 46 per cent of global crude oil exports, and 17 per cent of refined hydrocarbon product exports, and was the source of all of the global increase in trade in these commodities. The majority of traded product, some 73 per cent, went to the rapidly-growing and energy-hungry economies of the Asia Pacific region, but with important exports to Europe and elsewhere. These figures were an increase of 5.7 per cent on 2015: a 3 per cent increase in Saudi production, and a more dramatic 18 per cent and 10.8 per cent increase from Iran and Iraq respectively. The region is also an important supplier of natural gas, producing 637 billion cubic metres (bcm) in 2016, of which the six Gulf states produced about two-thirds, or 420bcm. Iran's production, at 202bcm, was the largest in the Gulf. The region therefore matters greatly for global energy supply and for stability in the price of not just crude oil but also natural gas.

The Gulf matters to the global economy more broadly. Cities such as Dubai are becoming international trade and transport hubs; even a household name overseas, in Dubai's case. The Gulf 's enormous energy rents are important sources of international investment. The region is also seeking a more activist role internationally, whether in hosting major events such as the 2022 FIFA World Cup in Qatar, in providing aid to regional states and others, or in global cultural and media roles. Not least of all, the Gulf matters to global geostrategic dynamics and international security. Iran's nuclear programme was a source of international concern, and a possible trigger for military conflict, after its extent became clearer in 2002; the 2015 Joint Comprehensive Plan of Action (JCPOA) agreement, if it survives and succeeds, may have resolved this issue. Even then, Iran and Saudi Arabia are also locked in a struggle for regional dominance, competing by proxy through conflicts in Syria, Yemen and elsewhere. Meanwhile, Iraq's stability – already precarious after the 1990–91 and 2003 wars and the civil strife following the latter of these conflicts – was worsened by the rise of the so-called Islamic State, or ISIS, after mid-2014. While seemingly defeated, they may yet resurrect, whether in the same form or another. For all these reasons, the Gulf states cannot be ignored. They have the capacity to assist or undermine international security and economic stability, depending on the decisions they take and how they respond to events.

The long-term durability and stability of these systems depend on a number of factors. Not least – and perhaps the most commonly cited – is the end date for the oil era, either because reserves of oil (and eventually gas) will ultimately be exhausted, or because alternative sources of energy and the pressures of climate change will see the global demand for hydrocarbons decline strongly and irreversibly at some future point. At least one of these scenarios, most likely the latter, is indeed near-certain, although its timing remains a matter of conjecture. In the meantime, other challenges – overwhelmingly economic ones or ones with a strong economic element – will arise. These include the need to diversify the Gulf economies and create employment for rapidly-growing populations, the challenge from new technologies, the problem of low levels of innovation and entrepreneurship in these economies, the reliance on foreign workers, and regional security problems. Addressing all these, while maintaining economic performance and political stability, will be no small feat.

THE SCOPE AND THE FOCUS

Given the dynamics in the subregion and their economic power, the future of the Arab Gulf states' economies will, to a large extent, determine the future of the Gulf itself. The Gulf 's political systems and societies, in turn, will shape their economic bearings and performance. It is the relationships among this array of actors, forces, and dynamics that are the focus of this book. While focused foremost on the economies of the Gulf, it is strongly political economy in flavour since the political and the economic are especially difficult to differentiate, much less separate, in such highly personalized, state-led systems as these. This work includes a notable amount of economic and political history, as context but also to highlight the continuity of many key features.

The book argues that states, and at the summit of states the incumbent ruling families, all have strong control over their political economies and that rulers seek to maintain their rule using four overlapping mechanisms, all economic in nature, and with further assistance from a fifth. These four mechanisms are rentierism, state capitalism, neopatrimonialism and economic statecraft. Rentierism involves the use by rulers of rents (externally-derived income from natural assets such as oil and gas) to both coopt and repress society. A proportion of rents are allocated to society, in the form of public sector employment, public services, subsidies, and even direct payments, in exchange for their political acquiescence, while rents also finance small but effective militaries, security apparatuses and elite relationships. The Gulf's new form of state capitalism gives the ruling elite control of economies through the state ownership of key firms and assets, and by their strict regulation of the economy, including control of where the private sector can operate and the careful use of economic favours. Neopatrimonialism is the framework in which elite relationships are handled, in which leaders use layers of patron–client networks to distribute favours and opportunities, in exchange for support, loyalty, and information from institutions and social groups. Economic statecraft gives leaderships the chance to manage their external relationships, and in turn to develop their economies and gain further support from society, by linking economic and diplomatic goals. The use of aid programmes, major events, tourism, media resources, and investment for public relations ends abroad are the main manifestations of economic statecraft, enhanced by strong and consistent national "branding" messages. In combination, these dynamics allow regimes to be "soft" in their authoritarianism – to privilege cooptation over repression – while also ensuring that their control of the political economy is extensive and that any concessions to non-state actors remain controlled by the state and its upper elite. For additional efficacy, Gulf rulers also articulate to society broad narratives of regime legitimacy, drawing on historical precedent, religion, security, or other factors to claim both a right and a capacity to hold power. These claims do not compete or supplant the other four mechanisms, but rather take the state beyond simple cooptation and repression to enhance their popular acceptance and legitimacy. When combined effectively, these factors are a very effective strategy for regime maintenance and durability.

To cover such a breadth of issues in a brief analysis, certain limitations have been placed on the book's scope. First, the time period covered in the discussion is mostly limited to the post-1945 period, which also coincides with changes to the international order around that time. The post-Cold War period after 1989 is given particular attention, as it coincides with the current era of transformation in the Gulf, which arguably has been even more dramatic than during the initial exploitation of oil or the first two oil booms over roughly 1973–83. The period since 1990 has seen the post-Cold War order emerge, the US-led war on terrorism, changes to the geostrategic setting of the Gulf, a selective globalization in the Gulf political economies, an oil bust, then boom, then bust again, and the emergence of key global cities such as Dubai and Doha. Chapter 2 provides the only earlier history of the region to be found in these pages.

Secondly, although an attempt has been made to include a breadth of topics in the following pages, some discrimination is necessary in terms of where to focus the analysis. As this work is designed to be an accessible one, there is little quantitative economic analysis included: readers looking for that angle are best consulting scholarly journals or specialized books. Rather, the analysis to be found here is grounded in the assumption that economic drivers and outcomes are both deeply embedded in the region's political, social, and strategic characteristics and imperatives. This arguably is the case anywhere, but is especially pronounced in the Middle East, and within that in the Gulf, where economic conditions and aspirations have regularly been frustrated by regional conflicts, problems of state formation, the weak political legitimacy of many leaders, rivalry from religious and other elites, and complex societal dynamics. The intricacy of these factors and their interconnections is such, however, that discussion of them is often brisk, although every effort is made to contextualize and explain them as fully as possible.

Perhaps the most important constraint is in the choice of countries that are included and excluded. The six Gulf monarchies of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE have been placed together in part for analytical convenience. They share similar broad features as economies and societies, including their reliance on hydrocarbon income; their Arab and predominantly Sunni Muslim traditions; their historical, tribal, and political linkages and similarities; and, albeit as a generalization, their political cultures. While they are far from identical – in fact, as will become evident, they are far more different than is often recognized – they share enough resemblances and connections that it makes sense to examine them together, highlighting their broad similarities while showing where they contrast as well. They are deeply interlinked by their shared histories, similar concerns about Gulf stability, and the prospects for economic cooperation. While they have disagreements, including the "Qatar crisis" in 2017 between Saudi Arabia, the UAE and Bahrain on the one hand and Qatar on the other, they are also strongly bound together too. Approaching them individually, for the purposes of this series, would have been needlessly limiting and inefficient. They vary greatly in geographical, demographic and economic size, and while they are very important globally, for both economic and geostrategic reasons, they are not equally so. This variation adds to the case for examining them collectively, while their similarities would have made multiple volumes extremely repetitive.

Although both Iran and Iraq are also part of the Gulf subregion, having a littoral boundary on the Persian Gulf and also being embedded in the Gulf's economic and strategic dynamics, this book does not cover those two states. They are very different economies to the six examined here. Iran's is a populist, Shia clerical, quasi-democratic government running a diversified economy but one deeply damaged by its 1978–79 revolution, the eight-year 1980–88 war with Iraq, and a range of international sanctions. Iraq's political economy has likewise suffered near-continuous conflict since 1980, first with Iran, then against a US-led coalition in 1990–91 and 2003, with sanctions over 1990–2003 also eroding its economic capabilities. Iran and Iraq are, therefore, profoundly different political economies to those of the six Arab monarchies, making any comparison of all eight Gulf states a messy, complex, and ultimately imprudent approach.

Finally, it is worth including a note here on terminology, especially the sometimes-controversial term "the Persian Gulf". Historically, "Persian Gulf" was the most commonly-used term, and by most measures remains so to the present day. Since the 1960s and 1970s, there has been a fiercely contested argument over this terminology, with the countries on the southern shores commonly referring to it as the "Arabian Gulf". This arose at a time when these states were gaining their independence, and the period was also a high point for pan-Arabist ideologies, into which then-Egyptian leader Gamal Abdul Nasser and later some Gulf leaders were trying to tap by their use of the term "Arabian Gulf". At certain times it has been known by yet other names, including the Sea of Qatif and the Gulf of Basra. Ultimately it is a rather pointless argument, reflecting Iranian nationalism on one side, and Arabism and nation-building on the other. The term "the Persian Gulf" is used here simply because that has historically been the more commonly accepted term, and remains the preferred term of the United Nations and other key international bodies, although "the Gulf" also appears regularly as a shortened form of this.

THE PLACE, THE PEOPLE, THE CULTURES

The term "the Gulf states" immediately betrays certain assumptions about Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE. There is the implication that they are fundamentally similar in cultural or other ways. This is, up to a point, true. However, they are conglomerated first and foremost because of their linked geography. They all have a coastline on the Persian Gulf, even though the length varies enormously, but as a result they are in geographic proximity to each other and share loosely similar climatic and other natural characteristics. As already noted, they are not the only states to possess a coastline along the Gulf. Iran actually possesses the single-longest stretch, at 1,176km, while Iraq, in contrast, has the shortest, at less than 58km, while of the six states that are the focus here, the UAE has the longest shoreline on the Gulf, at about 777km, followed by Saudi Arabia at 548km. Saudi Arabia is also by far the largest of the six states being examined here. Oman has a very long coastline, but nearly all of it falls on the Indian Ocean coast: in the Gulf, it has only a small area on the southern side of the mouth, along the Strait of Hormuz, cut off from the rest of Oman by the UAE.

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