The Economy of the Gulf States

Matthew Gray

• Publisher: Agenda Publishing
• Year: 2018
• Print ISBN: 9781788210010
• eBook ISBN: 9781788212106
• Topic: Política y relaciones internacionales
• Subtopic: Historia de Oriente Medio

The six Arab monarchies of the Persian Gulf – Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the United Arab Emirates – have a disproportionate importance in the global economic system because of their enormous reserves of oil and gas.

Matthew Gray provides a brief yet comprehensive profile of these six Gulf states and their modern political economy. Focusing on the postwar period, particularly the last 20 years, he examines the key factors that have shaped these nations' economies and enabled them to bypass typical development pathways.

The book explores how the combination of rentierism, state ownership of key firms and assets, and the use of patron–client networks to distribute favours and opportunities, has created a very effective strategy for regime maintenance and durability. However, the book also outlines how cooptive bargains with society have given the Gulf states a unique set of economic problems, including low levels of innovation and entrepreneurship, reliance on foreign workers and an inflated public sector. With the global demand for hydrocarbons set to decline, the need for the Gulf states to diversify their economies, expand the private sector, and build a more diverse taxation base has become ever more pressing. The book explains the importance of these challenges, which, along with those of geography, regional security, rapidly growing populations, and sectarianism are likely to test the Gulf's new generation of leaders.

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

Country	Oil reserves (billion bbls)	Average daily oil production (million bbls/day)	Gas reserves (trillion m^3)	Annual gas production (billion m^3)
Bahrain	NA	NA	0.2	15.5
Kuwait	101.5	3.2	1.8	17.1
Oman	5.4	1.0	0.7	35.4
Qatar	25.2	1.9	24.3	181.2
Saudi Arabia	266.5	12.3	8.4	109.4
UAE	97.8	4.1	6.1	61.9
Iran	158.4	4.6	33.5	202.4
Iraq	153.0	4.5	3.7	1.1
GLOBAL TOTAL	1,706.7	92.2	79.4	3,551.6

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 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 ...

Table of contents

• Cover
• Series Page
• Title Page
• Copyright Page
• Contents
• Preface
• Note on Transliteration and Terminology
• List of Tables and Figures
• Maps
• 1. Introducing the Gulf Economies
• 2. The Gulf Economic Story
• 3. Measuring the Gulf Economies
• 4. The Form of the Gulf Political Economies
• 5. Human Factors in the Gulf Economies
• 6. Making the Gulf Economies: Unique Factors
• Conclusion: Prospects for the Gulf Economies
• Notes
• Further Reading
• References
• Index