The Economy of the Gulf States

WORLD ECONOMIES

A series of concise modern economic histories of the world’s most important national economies. Each book explains how a country’s economy works, why it has the shape it has, and what distinct challenges it faces. Alongside discussion of familiar indicators of economic growth, the coverage extends to well-being, inequality and corruption, to provide a fresh and more rounded understanding of the wealth of nations.

PUBLISHED

Matthew Gray

THE ECONOMY OF THE GULF STATES

Vera Zamagni

THE ITALIAN ECONOMY

© Matthew Gray 2019

This book is copyright under the Berne Convention.

No reproduction without permission.

All rights reserved.

First edition published in 2019 by Agenda Publishing

Agenda Publishing Limited

The Core

Bath Lane

Newcastle Helix

Newcastle upon Tyne

NE4 5TF

www.agendapub.com

ISBN 978-1-78821-000-3 (hardcover)

ISBN 978-1-78821-001-0 (paperback)

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library

Typeset by Patty Rennie

Printed and bound in the UK by TJ International

Contents

Preface

Note on transliteration and terminology

List of tables and figures

Maps

1. INTRODUCING THE GULF ECONOMIES

The scope and the focus

The place, the people, the cultures

The Gulf economies in the world economy

2. THE GULF ECONOMIC STORY

The historical evolution of the region

The origins of the contemporary Gulf states

The coming of the oil age, 1945–72

Oil booms and busts, 1973–89

From the Gulf War to the Iraq War, 1990–2003

The third oil boom, 2004–14

Paths taken and not taken

3. MEASURING THE GULF ECONOMIES

An overview of the six GCC economies

Basic sectoral structures

Macroeconomic settings and conditions

Migration and the Gulf’s labour markets

The international dimension

4. THE FORM OF THE GULF POLITICAL ECONOMIES

States and regimes

Political institutions

State capitalism, national oil companies and other state-owned firms

Merchants, businesspeople and multinational firms

Rentierism and socioeconomic forces in the Gulf

External dynamics in Gulf political economies

5. HUMAN FACTORS IN THE GULF ECONOMIES

Wealthy societies?

The Gulf’s unique demography

The dual labour market

Education, training and human capital

Gender issues

Youth and intergenerational dynamics

Societies, cultures and economic potential

6. MAKING THE GULF ECONOMIES: UNIQUE FACTORS

Richer than they are developed?

Personalized economies

Economic geography and the environment

Economic change and political stasis

Lingering reform imperatives

Lingering regional constraints

CONCLUSION: PROSPECTS FOR THE GULF ECONOMIES

Continuing and emerging energy issues

Opportunities and risks in the global arena

A unique region at a unique moment

Notes

Further reading

References

Index

Preface

The six Arab monarchies of the Persian Gulf – Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the United Arab Emirates (UAE) – are relatively small actors in the global economic system, but are of disproportionate importance because of their enormous reserves of oil and gas, and given the economic and strategic importance to the rest of the world of a stable supply of these commodities. These six states possess just under 30 per cent of the world’s proven oil reserves, and account for about 24 per cent of the global oil trade. For the Gulf states, hydrocarbons are crucial for the state’s ability to rule. Oil provides about half of the Gulf’s gross domestic product (GDP), with the importance of natural gas considerably smaller but having markedly risen so far this century.

For net hydrocarbon exporting states such as these, however, this bequest from nature is both a blessing and a curse. While striking oil may seem like a country’s equivalent of winning the lottery, and does create enormous windfalls that allow for rapid development, new infrastructure, and a greater economic power than otherwise, hydrocarbon revenues also have profound impacts on an economy. Rents impact exchange rates, or create inflationary pressure when exchange rates are fixed. Natural resources create highly-skilled, well-paying jobs, but relatively few of them, while also pushing up wages across the economy more widely. Oil demands large investments, which are diverted from elsewhere in the economy. And scholars have made a strong argument that oil-intensive economies are especially unlikely to democratize, and that rents may in fact create conditions for repression and, in some cases, internal or regional conflict. Historically, oil has attracted external attention and at times intervention in the region, which has rarely been welcomed and often has proven very disruptive. At the same time, the Gulf states have struggled to diversify their economies into new areas. The revenue from oil (and later, gas) has been simply too large, and the political bargains made among elites, and between state and society, would be imperilled by any reform that is excessively rapid or extensive. Given all this, it is perhaps not surprising that a former oil minister in Saudi Arabia, Sheikh Ahmad Yamani, is rumoured to have said All in all, I wish we had discovered water instead.

This book is an attempt to explain the origins, trajectories, features and challenges of these six Arab Gulf economies. This is no simple matter, because while oil has dominated these economies, their economies, and the factors forming and shaping them, are numerous and in many cases fiercely contested. In some ways the Gulf states escape easy explanation because they have had unique historical experiences. None were colonial possessions or controlled by mandate in the same sense as most other Arab countries, and one (Oman) was at one time a colonial power in the Indian Ocean region, although that noted, the Gulf region has been profoundly affected by external intervention by virtue of its geographical location, good ports, trading roles and, later, its oil wealth. In recent decades and as a result above all else of oil wealth, the Gulf states have not fit with typical development pathways: while their development was relatively late, when it came, it was so rapid that these economies were able to largely bypass the usual industrialization phase of development. As a result, again at least in part of oil, they have also been able to build relatively large and efficacious government bodies and state-owned firms, giving them an economic structure that is arguably state capitalist, but quite uniquely so; it is a very dynamic form of state capitalism, with little of the populism and economic nationalism that characterized other postwar state capitalist models. At the same time, the Gulf states have struggled to build large, globally-competitive economic sectors beyond oil and gas. The harsh, predominantly desert environment rules out most agricultural activities, as well as making climate change an especial risk for these countries, while their late development means that they lack the industrial capacity or experience of more mixed economies such as Turkey, Iran, or Egypt. Some, most notably Dubai, have carved a range of niches in areas from aviation and tourism to education and as a regional hub and transit trade port, becoming virtually a household name around the world and setting an example that others have tried to replicate, if selectively. Its grand projects, from the world’s tallest building to the development of gigantic offshore artificial island chains, attest to its outsized ambitions. Yet Dubai still faces some of the same constraints as the other Gulf states, plus a couple of unique ones too, and more importantly in a development sense, there is a limit to how many Dubai-style transformations are possible given the limits of the Gulf region’s power within the global economy.

This book takes up all of these questions, and others, in the course of seeking to provide a brief yet comprehensive profile of these six Gulf states. It is predominantly a blend of political economy and modern history. By political economy is meant that it examines the economies from perspectives where the economic and the political overlap and influence each other; in a subregion such as the Gulf, it is essentially impossible to separate the political and the economic from each other anyway. Some points are specifically centred on economic dynamics and require little political context, but in the majority of the book’s points of discussion, this is simply not possible. The Gulf states are fiercely contested political terrain, in which politics occurs among an array of societal actors and forces, between state and society, and between a particular Gulf state and other regional states or other international actors. At the same time as being a political economy, the book is a modern history insofar as its coverage and analysis is deeply embedded in historical context. There is a full chapter on the history of the Gulf – the longest chapter of the book – plus several other chapters include substantial amounts of modern history and other background and contextual detail. History continues to strongly ripple through the Gulf, and the subregion cannot be understood without a solid understanding of its past and of how this past continues to inform and shape the present.

The book is structured to make a key set of arguments about the nature of the six Gulf economies being examined. It seeks to strike a balance between depth and breadth of analysis. Its overarching theme, that any economic analysis of the region must include historical, political and societal analysis as well, and that the relationships between all these factors is more complex and subtle than typically presumed, is made across seven chapters. After an introduction, which also includes some elementary details about the subregion, Chapter 2 provides a historical survey of the subregion, primarily since the 1940s but with some discussion of its earlier history. It shows the immense importance of oil to the evolution of the region since the Second World War, while also cautioning against a focus on oil exclusively or overwhelmingly when seeking to understand contemporary economic dynamics. Chapter 3 provides some basic economic factual material on the six economies, covering their sizes, profiles, international linkages, and strengths and weaknesses. It contains the bulk of the straightforward economic descriptive material to be found here. Chapter 4 examines the form of the Gulf economies and is, in effect, the most fundamental political chapter of the book, although its discussions of the political do not stray far from their economic dimensions and impacts. It examines the roles of rulers, state institutions, state-owned firms, businesspeople and societal forces, among others. Chapter 5 examines the human resources side of these economies, looking at the demography of the Gulf, the dual labour market – relying so heavily, as it does, on foreign labour – as well as issues of education, training, gender, youth, corporate cultures, and workplace technological change. Many of these issues are typically examined in isolation, and have often been under-examined, by observers. Yet human factors have been central to many of the challenges faced by these economies, and will be crucial to the future success or failure of the Gulf’s ambitious development and diversification strategies. Chapter 6 provides insights on some of the less-common, or even unique, aspects of the Gulf’s (political) economies, including the high degree of personalization in them, the importance of patron–client relationships, issues of geography and the environment, reform imperatives, and wider regional opportunities for and constraints on reform and change. This chapter seeks to highlight what is unique or unusual about the Gulf states, while also discussing factors that will be especially important to these political economies and societies in the future. Finally, Chapter 7, the conclusion, brings the themes and arguments of the book together, while also making some cautious predictions for the short- and medium-term future. It is focused on the energy sector and the international environment, both of which are in a period of profound change at present. The book’s chapters vary in length and, to a lesser extent, in style, but each provides critical facts and analytical details that are essential to a comprehensive understanding and assessment of the Gulf. When taken in combination, these details paint an amalgamated but thorough picture of the pathways, dynamics and prospects for these six dynamic and important states.

The ideas in this book have been drawn from a range of works by others, duly cited (even though, for readability, I have tried to keep notes to a minimum). Crucial, too, are the innumerable conversations and debates I have had over many years. I would like to thank all the people – too numerous to name individually here – who have shared their insights, offered their analysis, or critiqued my assessments or assumptions. This includes interviewees over numerous visits to the Gulf since 1996, my students at the Australian National University over 2005–16 and at Waseda University since then, and the many colleagues with whom I share an interest in the Middle East in general, and especially the Gulf. More recently, I would like to thanks friends and colleagues in Tokyo who helped make my transition to life here so much easier than otherwise, and who have shown me so many aspects of this great city. At Waseda, I would like to thank the former Dean of the School of International Liberal Studies, Professor Adrian Pinnington, and Professor Keiko Sakurai, for bringing me in to Waseda and for helping make the move and the transition so smooth. Colleagues elsewhere in Tokyo have been very supportive; I particularly thank Professor Namie Tsujigami, now at Sophia University, for her support and advice. Among friends, I would like to particularly thank Mary and Woohyang (Chloe) for their advice about life in Japan and for the regular discussions and ideas that have supported my thinking, and Kazumi, whose personal and emotional support was so important, including for much of the period over which this book was developed and drafted.

I would like to thank Agenda Publishing for inviting me to write this book, and particularly Andrew Lockett, whose advice and encouragement as the commissioning editor was invaluable, and always clear and precise. Thanks also to Steven Gerrard, who so quickly and efficiently took the work through copy-editing and proofing, and on to publication. My gratitude also goes to the two anonymous reviewers of the first draft of the manuscript, who provided excellent feedback in the best spirit of peer reviewing: they were both strongly encouraging, while offering constructive advice on how to strengthen the manuscript, and locating more than one error which would have been embarrassing had it made it into print! This book is much stronger for the sharp advice and supportive ideas they both provided.

Finally, I thank my son Henry, who has been my greatest joy in life since the day he was born, and whose adventures in Australia, Japan, and occasionally the Middle East, have been so much fun for us both, as well as a constant reminder of the curiosity and wide-eyed wonder of children.

MATTHEW GRAY

Tokyo

Note on transliteration and terminology

There is no simple means of transliterating Arabic in English, since so many Arabic sounds lack a counterpart in English. The most scientific system, used by the International Journal of Middle East Studies and other major publications, adopts underdots, macrons and other symbols to try to present transliterations with precision. This, however, is arguably too specific for a book such as this one, targeting an audience that is presumed not to have had an exposure to the language. Whatever the shortcomings, I have adopted a fairly simple transliteration style here. For words that appear in English routinely, I have given them in their most common English format (thus, Emir, not ’Amīr; Qur’an not Qur’ān, etc.). This includes rendering some names in a way that is not exactly accurate: for example, the ruling dynasty in Saudi Arabia is usually given in English as Al Saud, even though a scientific transliteration would be Āl Suʿūd. I have used the former, however, for the lay-reader’s ease and with apologies to those who do read Arabic and who would have preferred a more precise transliteration. The only exception is where it is crucial to distinguish a word from another or to make a meaning completely clear.

I have also avoided presenting full Arab names. Most people are known by a few names only, still running to four or five or more names, including their first name, then their father’s first name, sometimes other indicators of lineage, and finally a dynastic or family name. This serves both to show their lineage and to distinguish them from other members of the extended family with the same first name. Full names, however, can be very lengthy, with considerably more detailed lineage. For example, the full name of the Saudi crown prince at the time of writing is Muhammad bin Salman bin Abdulaziz bin Abd al-Rahman bin Faisal bin Turki bin Abdullah bin Muhammad bin Saud. This is virtually never used in English, and rarely in Arabic, because of its length. More usual is to refer to him simply as Muhammad bin Salman, or Mohammed bin Salman (there’s that transliteration variation again!), and many in the press and academia have even adopted the initials MbS, or MBS, instead. Here I have kept names as brief as necessary for clarity.

Finally, a small note on dynastic names and terms. The word Al is usually used to indicate a dynasty name; it means something like of the line of or the family dynasty of. The ruling family of Saudi Arabia, for example, is usually referred to as the Al Saud. This is not the same as al-Saud: even though this is a common spelling, it is misleading, since al- is the usual transliteration of the Arabic definite article (which can appear in Arabic names sometimes, too).

Tables and Figures

TABLES

1.1 Gulf states’ oil and gas reserves and production, 2016

1.2 Arab Gulf states’ demographics

1.3 World regions’ shares of world exports, 1953–2016

2.1 Gulf states’ petroleum revenues, 1950, 1960, 1970

2.2 Gulf states’ petroleum revenues, 1970–83

2.3 Foreign workers in the Gulf, 1970–90

3.1 Gulf states’ GDP performance and indicators, 1975–2015

3.2 Gulf states’ basic socioeconomic indicators, 2016

3.3 Gulf states’ Human Development Index, 1990–2015

3.4 Gulf states’ government reserves, 2012–15

3.5 Gulf states’ inflation rates, 2000–15

3.6 Gulf states’ composition of trade and major trading partners, 2013

3.7 Gulf states’ sovereign wealth funds, 2017

FIGURES

2.1 Gulf oil production, 1906–50

2.2 Gulf oil production, 1951–72

2.3 Average annual oil prices, 1945–2016

2.4 Gulf GDP per capita, 1980–89

3.1 Gulf states’ oil and gas reserves per citizen, 2016

3.2 Gulf states’ oil and gas reserves-to-production (R/P ratios), 2016

3.3 GCC oil reserves as a share of the global total

3.4 GCC states: composition of GDP, 2015

3.5 Gulf states’ GDP with percentages captured by the state, 2012–15 average

Map 1 The Middle East

Map 2 The Persian Gulf

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.

Table 1.1 Gulf states’ oil and gas reserves and production, 2016

Source: Derived from data in the BP Statistical Review of World Energy 2017.

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 2016.¹ 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