Why is the Persian Gulf important economically?

Insights

Asset Rich, Transforming, And Full Of Opportunities

Our Expertise Insights The Arabian Gulf Economies

The oil and gas wealth of the Gulf countries has enabled one of the biggest economic booms in human history. However, fluctuating oil prices, ongoing replacement of fossil fuels and slow transformation of some economies, render to questioning if the Gulf economies are entering a period that might lead to deep economic turmoil.

Many other oil and gas producing countries have not been able to deal with economic crises despite having even bigger reserves and abundant water and farmland. Yet Gulf economies have shown themselves to be fundamentally resilient to turmoil.

In our report on the economies of the Arabian Gulf, we look at what makes them so resilient, and what is required for them to transform into post-oil economies. The report elaborates on factors such as:

- A strong asset position that provides the base for a formidable economic transformation and diversification plans - Why demand for fossil-fuel will continue into the foreseeable future - The region’s risk profile as a key transformation enabler

The report outlines areas of growth opportunities in the region over the next five years

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Change occurs rapidly in the Persian Gulf. While some states have capitalised on the fast-paced nature of globalised fiscal transactions and have become important markets for foreign investment, others have fallen victim to such speculations. The ‘Dubai Model’ of economic diversification is being re-evaluated as the GCC states continue to seek the best means of organizing their economies and competing within the global order.

Explaining the different ways in which globalising forces have shaped new dimensions to the political economy of the Persian Gulf states, this book evaluates the changes that have occurred, especially in light of the ongoing global economic crisis. Mutually beneficial rentier arrangements have guided the GCC countries formation of oil-based economies and labor relations in the past, but will this necessarily be the case in the future? This book addresses key issues including discussion on the future demographic aspects of the GCC ; the feasibility of establishing a GCC monetary union; the effects of rentierism on state autonomy; and analysis of sovereign wealth funds and Islamic banking models.

Table of contents

Acknowledgments

About the Contributors

1. Introduction Mehran Kamrava

Part I

Trends in the Political Economy of the Persian Gulf

1. The Persian Gulf in the Contemporary International Economy

Fred H. Lawson

1. The Political Economy of Rentierism in the Persian Gulf

Mehran Kamrava

1. The Sovereign Wealth Funds of the Persian Gulf

Jean-François Seznec

1. Knowledge Based Economies in the GCC

Kristian Coates Ulrichsen

Part II

People, Money, and Banking in the Persian Gulf

1. Étatisme Versus Market Driven Islamic Banking: The Experiences

of Iran and the Arabian Peninsula Compared

Rodney Wilson

1. Population and Human Capital in the Persian Gulf

Djavad Salehi-Isfahani

1. The Gulf Cooperation Council Monetary Union

Alexis Antoniades

Part III

Case Studies

1. The Dubai Model: Diversification and Slowdown

Christopher Davidson

1. Good, Bad or Both? The Impact of Oil on the Saudi

Political Economy Steffen Hertog

1. The Political Economy of Rentierism in Iran

Massoud Karshenas and Ziba Moshaver

Index

Reviews

‘An indispensible survey of three decades of developments in the political economy of states on both sides of the Gulf including Iraq and Iran. Includes most recent information on sovereign wealth funds, Islamic banking and the attempts at monetary union as well as the inside story of the collapse of the Dubai property market. A must for all those interested in the impact of vast oil wealth in this strategically important region.’ — Roger Owen, Professor of Middle East History, Harvard University

‘The book’s central thematic interest is the growing significance of the Persian Gulf on the global stage and the concomitant socio-economic changes these countries have been experiencing for the last ten years. … it presents a multi-faceted, subtle and complementary picture of the current economic dynamics in the GCC and Iran, the social and economic achievements, as well as the long-term trends plaguing the region’s development. … Undoubtedly, it is bound to become a key point of reference for any work on the economy and political economy of Iran and the Gulf monarchies and a prerequisite for researchers interested in the political economy of the Middle East and more broadly in post-rentier and developmental strategies in the region and elsewhere.’ — Dr Marc Valeri, author of Oman: Politics and Society in the Qaboos State

‘This unique collection, the first of its kind to focus explicitly on the political economy of the Persian Gulf countries as a group, brings together the best international scholars on the region to tackle issues of theoretical importance and political relevance.’ — F. Gregory Gause, III, Chair, Political Science Department, University of Vermont and author of The International Relations of the Persian Gulf

Editor(s)

Mehran Kamrava is Professor of Government, Georgetown University in Qatar, and directs the Iranian Studies Unit at the Arab Center for Research and Policy Studies. His books on Iranian and Middle Eastern affairs include Inside the Arab State and The Nuclear Question in the Middle East, both published by Hurst.  

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The six oil-producing monarchies of the Persian Gulf — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE — are among the most important but also the most enigmatic societies to study.

On the one hand, they produce strategic commodities — oil and gas — and are integrated into the global economy. Their sovereign wealth funds have substantial investments in Western economies, their currencies are pegged to the US dollar, and their state-owned companies are administered according to US management models. On the other hand, these states are portrayed as extremely vulnerable — to instability in Iraq, Iranian attacks, terrorism, Indian or Chinese influence, and, above all, the boom and bust cycles of world energy markets. For many years, leading financial institutions and analysts have called for the six Gulf states to invest in industries which are not directly tied to hydrocarbons.

Throughout the last 25 years, the Emirate of Dubai appeared to have made great progress in addressing these concerns. Not only did the Jebel Ali Free Trade Zone and similar large projects attract international investors, but Dubai also seemingly made great strides forward in establishing the rule of law, including World Trade Organization (WTO) compliant courts. This did not mean Western-style democratic government, but aspiring to a model similar to that of Singapore, where institutional investors could feel safe. The results were impressive: Dubai’s leaders took out enormous loans to finance ever more ambitious projects, such as the Palm Islands and a stock market to rival London, Tokyo, and New York. They also developed close links to US and European financial institutions.

The success of Dubai compelled other states in the Gulf to replicate its approach. Most of the other emirates and the Gulf states integrated themselves into the global economy. They reached bilateral and multilateral free-trade agreements with the US and other major global actors, and they became members of the WTO. Gulf governments also implemented common legal and tariff regimes and announced future plans to further integrate their economies through the establishment of a common currency and central bank, along with regional railway, water, and electrical grids.

During the last five years, the Gulf states have invested in environmentally friendly development projects and green energy sources, and have signalled their intention to develop nuclear power and sustainable fuels. These types of investments could prove to be valuable, since the Obama Administration has stated that it will reverse its predecessor’s practice of stalling the implementation of all new global environmental proposals for as long as possible. Alternative energies already were becoming cost efficient as of 2008, as the price of oil skyrocketed to $145 a barrel. A year later, however, it is clear that Dubai’s economic model is not sustainable and that the optimism tied to both regional integration and to non-oil industries in the Gulf was partially misplaced.

To begin with, Dubai failed to maintain the confidence of international investors, who came to the conclusion in 2008 that the Emirate’s financial authority was too loose and opaque to meet global business standards. It is unlikely that Dubai will regain the trust of the financial community or win back investments soon. The impact of this loss of confidence was clear in the second half of 2008, when oil prices dropped and the Gulf’s economy slowed. Dubai soon found that it could not secure the new loans necessary to meet its obligations. Desperate for capital, Dubai’s leaders turned to their oil-rich neighbor, Abu Dhabi, whose leaders provided the funds to bail out their fellow royal family.

Dubai’s request for assistance showed that the new non-oil industries had done precious little to change the region’s economic and political dynamics. Their profits and those of Dubai effectively rested on a sea of oil. Power remained where it has for decades — in the hands of the ruling families who control vast oil revenues and the region’s patronage networks. Nor are new non-oil industries likely to change this dynamic, since the percentage of world oil exports coming from the Gulf will actually increase in the next 25 years. While oil prices are down from the highs they reached in summer 2008, they are still high enough (approximately $50/barrel) that Gulf oil exporters can easily meet their basic needs. Indeed, the incentives are not there for Abu Dhabi or any other oil-rich Gulf state to abandon hydrocarbons as their economic base.

At the same time, oil’s reduced price means that the other potential sources of power that Gulf leaders had explored are no longer economically viable. While it is true that the UAE has made serious inquiries into nuclear power, this and other projects will not materialize for a long time. Gulf states also must factor in the costs of securing nuclear facilities from attack or sabotage and of safely disposing of nuclear waste.

Equally important, the rise of non-oil industries deepened the region’s dependence on foreign workers. Although recent investments in universities may one day produce a well-educated indigenous workforce, it is unlikely that the Gulf states will be able to benefit as quickly from these new schools as South Korea and other developing societies have. Building up human capital takes time, and the incentives are not in place to hire these workers once they enter the labor market. Private businesses, especially in services and industry, continue to employ foreigners and to ignore government demands to hire Gulf nationals. Businesses in GCC countries repeatedly argue that there is no way that they could be competitive internationally unless they take advantage of labor markets beyond the Gulf. In Saudi Arabia this problem is especially acute, since many occupations that are held by women in other parts of the world — i.e., waitressing, basic retail, etc. — are held exclusively by men. Ironically, the more the Gulf states invest in non-oil industries, the more foreign workers will dominate the region’s workforce.

That said, the Gulf states are complex and heterogeneous societies which have undergone breathtaking socioeconomic changes in recent years. They are expanding close economic ties with a variety of states around the world, such as China, but it is unlikely that their strategic partnership with the United States (and the peg to the US dollar) will end in the near future. It is equally unlikely that their ongoing dialogue with Iran will bear any fruit, since Tehran’s repeated demand in these discussions — the complete withdrawal of foreign (i.e., US) forces from the region — is unacceptable to Gulf governments. Nor are the Gulf governments likely to abandon hydrocarbon exports and foreign labor, since they are the most cost effective mechanisms for their companies to operate in the global economy. It may take decades before we see a regional economy that is not tied to the boom and bust cycles of global energy markets.

But these types of problems are manageable. Though the Gulf states may have become angst-ridden in recent years, they have tremendous resources at their disposal with which to provide for their people and to meet all challenges.

The Middle East Institute (MEI) is an independent, non-partisan, non-for-profit, educational organization. It does not engage in advocacy and its scholars’ opinions are their own. MEI welcomes financial donations, but retains sole editorial control over its work and its publications reflect only the authors’ views. For a listing of MEI donors, please click here.