The Coming Crisis in the Persian Gulf

Chapter 1

 

The Coming Crisis

In the Persian Gulf

Throughout the second half of the twentieth century, and particularly after the British withdrawal in 1971, the Persian Gulf experienced a series of political and economic jolts: two major oil shocks that affected the entire international community and outside powers; and a series of smaller conflicts and external interventions.

Out of this accelerating tumult of Gulf politics, it might have been expected that the region would have been transformed. Instead, it emerged almost unscathed-at least on the surface. Thirty years after the British withdrawal, the Arabs states of the Gulf region continued to be ruled by the same families, sometimes the same individuals, under the same traditional forms and within virtually the same borders that had engineered by the British political agents as they departed.

The dire predications of political observers in the 1960’s and 1970’s about the fragility of tribal monarchies and the inevitability of new political and social structures in response to wealth, education, travel, communications, industrialization, urbanization and the complexities of managing independent economic and foreign policies in a demanding international environment appeared to have underestimated the resilience of the Gulf plutocracies and their ability to translate oil revenues into political legitimacy and staying power.

The conventional wisdom of the 1960’s and 1970’s anticipated that these "family-operated businesses" would give way, under the pressure of either internal or external forces (or both), to political forms that more closely resembled the state-building experience of their neighbors in the Middle East or in the developing world more generally. Ironically however, the Middle Eastern states that experimented with local versions of socialism, nationalism, pan-Arabism, and other ideologies soon faltered or came to be perceived as politically bankrupt, while the oil principalities of the Gulf managed to sustain an impressive level of stability and domestic tranquillity despite the wars and revolutions that swirled around them.

So, by the mid-1990’s, the conventional wisdom had come full circle. The small states of the Gulf were seen as stable and reliably pro-Western, while the two larger states, Iran and Iraq had come to be seen, at least in the West, as implacably hostile and dangerous.

A Crisis in Slow Motion

Widespread agreement about the political realities of any set of countries always warrants a measure of skepticism, and that has been particularly true in the case of the turbulent waters of the Persian Gulf, where reassuring perceptions of stability have had an unpleasant habit of giving way to sudden and unpredictable political surprises. The Iranian revolution was proceeded by a nearly universal belief that the shah, whatever his failings, was politically secure. Even the shah’s bitterest enemies later confessed their astonishment at how quickly the seemingly impregnable facade of royal power eroded and crumbled in 1978.

Iraq’s invasion of Kuwait in 1990 belied the overwhelming consensus that Saddam Hussein would never invade a fellow Arab state, that his troop movements were part of a bluff, and that his territorial objectives were limited to a few border territories at most. That view prevailed, even in Kuwait, until Iraqi troops were descending into the outskirts of Kuwait City.

Reassuring scenarios are frequently accurate, and the conventional wisdom is usually the product of more than wishful thinking. Yesterday, as generations of political observers have learned, is almost always the best predictor of tomorrow. Complacency, however, is justified only if present assumptions are measured regularly against changing political realities.

Much of the analysis of the Gulf region has focused on state conflict. That is justifiable in view of recent history, and many aspects of interstate relations. Less attention has been devoted to domestic and essentially economic factors that are likely to shape developments in these states. Yet, the success of these states in resolving their internal contradictions will affect their perceived vulnerability to outside predators and their ability to respond to external challenges should they occur. Consequently, the following essay will attempt to provide a prognosis of the health of the Persian Gulf states, in full awareness of the limitations of generalizations about a set of eight different countries and recognizing that other factors may intervene, as they have in the past, to upset the domestic apple cart.

This paper briefly summarizes and examines the evidence that the eight states of the Gulf, as they approached the turn of the century, were experiencing a slow-motion crisis that had the capacity to transform their domestic politics, their relations with each other, and their relations with extra-regional powers. The evidence that such a crisis was brewing was omnipresent and widely reported, but it was no less widely discounted, because: (1) the symptoms were incremental and accumulative, rather than being a single dramatic threat; (2) the danger signals were largely associated with messy and ambiguous problems of domestic policy and governance, rather than a well-defined external enemy that could be confronted directly; (3) the cures for the problems were well known and prosaic, but also politically unpopular, so there never seemed to be an appropriate moment to take the kind of bold and painful action that was required; (4) the nature and urgency of the problems varied from one country to the next, so there was no agreement on a universal remedy or timetable; and (5) the states of the region had been living with these problems for decades, apparently without serious consequences, so their continuation for another day or week or year did not inspire a sense of urgency.

In short, the "crisis" did not appear to be a crisis at all. Instead, most observers saw only an accumulated series of background conditions that had come to be accepted as an integral part of the regional environment. Moreover, previous expressions of alarm about the fragility of relations between rulers and ruled in the Gulf had repeatedly proved to be unduly exaggerated or simply wrong. The burden of proof was on those who claimed that the sky was falling.

Perhaps most important of all was the perceptual dilemma. Acknowledgment of impending political and social change in the Gulf on a substantial scale would demand a corresponding reexamination of policies by both regional and external powers. That in turn would place at risk comfortable practices and relationships that had evolved over time, often with considerable effort and even sacrifice. Since those arrangements were frequently beneficial-politically and personally-to decisionmakers and governments alike, there was reason to believe that undue emphasis on the dangers might prove to be a self-fulfilling prophecy. It was far from clear what actions policymakers could or should take that would not risk exacerbating the problems they were supposed to solve.

Policymakers, like other human beings, are not inclined to dwell on unpleasant consequences, especially when those consequences appear to be uncertain at best, far in the future at worst, and whose remedy risks being worse than the disease. Thus, officials inside and outside the Gulf were inclined to give lip service to the array of potential problems, contenting themselves with modest policy adjustments that pecked away at some of the most urgent symptoms but left the more stubborn structural issues largely unaddressed.

The slow-motion nature of the crisis provided an illusion of security. Despite persistent voices-many of them within the region-arguing that immediate action was required to halt an accelerating downward spiral, few policymakers were willing to break with established policies that had served them well for decades. The purpose of this paper is to heed those troublesome (and often tiresome) voices of dissent and to survey in brief compass the logic of apprehension, as the states of the Persian Gulf approached the year 2000.

It must be added that the urgency of the problems facing the states of the Persian Gulf was largely due to the catastrophic actions of one man. President Saddam Hussein of Iraq wrecked the comfortable status quo of the Gulf states at the same time that he wrecked his own country. His invasion of Iran in 1980 not only drained and weakened Iran but also absorbed some $35 billion in unpaid loans from Iraq’s Arab allies. Bankers estimated that another $65 billion in hard currency reserves was siphoned away from Kuwait, Saudi Arabia and other GCC states to pay for the military operations that ejected Iraq’s forces from Kuwait in 1991.1

The structural dilemmas of the Gulf states were not created by Saddam Hussein. They had been there almost from the start. But the immense costs of paying for his misadventures effectively wiped out the cushion of financial reserves that had been accumulated by the Gulf states from the oil boom of the 1970’s and brought the day of reckoning much closer than would otherwise have been the case.

 

 

 

 

 

Table 1.1

Oil Reserves and Population in Selected States/Regions

_______________________________________________________________--

Location

Percent of World’s Proved Oil Reserves*

Pop.(000)

Total**

No. of Pop.

That are Citizens

Saudi Arabia

25.7

18,000

12,000

Iraq

9.8

21,000

21,000

United Arab Emirates

9.7

2,400

600

Kuwait

9.5

1,800

700

Iran

8.7

60, 000

60,000

Oman

n.a.

1,900

1,400

Qatar

n.a.

500

140

Bahrain

n.a.

600

400

       

Persian Gulf states

64.9

106,200

96,240

North America

8.5

   

Former Soviet Union

5.5

   

_______________________________________________________________

*BP Statistical Review of World Energy 1996

**1996 estimates

The Myth of Wealth

Genuine security for a state may begin with military defense, but it is a mistake to define security solely in terms of military preparedness. Iran under the shah and the Soviet Union under the Communist Party were both superbly equipped to deal with almost any external military threat to the state. Yet those elaborate and expensive preparations offered no defense against-and may in fact have contributed to-the ultimate collapse of the regimes. In the words of a respected Arab observer: "We in Kuwait and many Third World countries have yet to learn the lessons of the collapse of the Soviet Union and the shah of Iran, where the main reason for collapse was the lack of available financial resources for the reinforcement of other necessary national security issues, in comparison with what was spent on the military sector." 2

The states of the Persian Gulf are anomalous in many ways, but their most distinctive characteristic in comparison with most other Third World states is their sustained access to very substantial financial revenues derived from the extraction and sale of oil. By an accident of geography and geology, the eight countries of the Persian Gulf, with a combined territory of 1.7 million square miles (about the size of the western United States) and a total 1996 population of about 106 people (roughly equivalent to Nigeria), sit atop the largest underground pool of oil in the world, some 65 percent of the world’s proven reserves.

This peculiarity of nature has inspired a number of myths. One is the myth of fabulous riches. Indeed, there are many individuals in the region who are wealthy almost beyond imagination, but the revenues of the eight Persian Gulf states are surprisingly modest by comparison to the mid-1980’s, when the price of oil collapsed, and their combined gross domestic product is comparable to Switzerland, a country of fewer than seven million people. To put it in perspective, in 1994 the combined GDP of all the states of North Africa and the Middle East, from Morocco to Afghanistan, including Israel, was considerably less than half the GDP of France.

What is unusual is not the sheer magnitude of national revenues but the fact that most of these revenues are in the form of "rent" or royalties on the extraction and sale of oil., With the partial of Iran, these countries do not have a well-developed domestic industrial base.

Structural Distortions

Unlike the industrial states, the citizens of the smaller oil-rich countries are net consumers of national resources while contributing marginally-if at all-to revenues. Like inherited money, this "blessing" can be a curse in disguise. It produces a series of structural distortions that have troubling long-term implications.3

1.Budgetary Uncertainties. National budgeting is dependent on the vagaries of the international oil market. Despite their best efforts, these states have been unable to manage the price of oil. As a result, their annual budgets are based on estimates of a commodity market that can be buffeted by events over which they have little or no control. A political strike in the oil fields of Nigeria, an economic downturn in Southeast Asia, or advances in drilling techniques in the North Sea, for example, can all have a dramatic impact on national income and can produce an unexpected shortfall or a welcome surplus in any given year.

Many countries in the region have adopted the practice if budgeting for a price of oil substantially lower than their own official estimates. This may be prudent, but it demonstrates the uncertain nature of the entire process.

Table 1.2

Oil/Gas Revenues as a Percentage of Total Revenues

Country

1986

1991

1996*

Bahrain

58

60

65

Kuwait

43

30

73

Saudi Arabia

58

79

73

Qatar

n.a.

64

68

Oman

78

79

76

UAE

n.a.

83

84

Iran

40

51

65

       

_______________________________________________________________

*estimate

Source: The Petroleum Finance Co.

2.Dominance of the Public Sector.Typically, the state owns the important means of production, and a stifling public sector jealously preserves its prerogatives. The booming principality of Dubai, with a traditional trading culture, illustrates some of the potential benefits of free market economics, but even there the ruling family controls all the main sectors of the economy: real estate, banks, ports, heavy industry and the airline.4

The public sector is far more attractive to nationals, for a variety of reasons.

According to a female computer graduate in the UAE, "Jobs in the public sector are more secure, more comfortable and, above all, better paid. In addition, the work load is easier and working hours more flexible." She noted that the Civil Service Law stipulates a generous salary for university graduates working in the public sector, plus a wide range of benefits that cannot be matched by the private sector.5

As a consequence, however, the public sector in most of these states has become bloated to the point of becoming a self-defeating obstacle and is no longer available as a reliable career prospect for young people graduating in increasing numbers from local educational institutions. Thus, of 16,259 Saudis who graduated from Saudi universities in 1994, only 5,570 were able to find jobs in the public sector.6

3.Dominance of Foreign Labor. The absence of a vibrant private sector inhibits job creation, and this problem is exacerbated by the overwhelming reliance on expatriate labor. The extreme case is the United Arab Emirates, a country of 2.4 million people, three-quarters of whom are non-nationals. In 1995, more than 50,000 jobs were created in the industrial sector of the UAE; of those jobs, only 30 were taken by UAE nationals-an all-time low. In 1995, the total number of UAE nationals in local industries totaled only 736, representing 1.5 percent of the labor force.7

The Arab Gulf states are unique in the world in their reliance on imported labor. In 1995, expatriates reportedly comprised 90 percent of the work force in the United Arab Emirates, 83 percent in Qatar, 82 percent in Kuwait, 69 percent in Saudi Arabia and 60 percent in Bahrain.8 In the mid-1990’s up to 40 percent of Saudi Arabia’s annual oil revenue was repatriated to other countries in the form of remittances for foreign labor.9

In the years after the oil boom, foreign labor was indispensable to create almost from scratch a full range of infrastructure and services. The Arab states of the Gulf found themselves in the 1970’s with almost limitless financial resources, but their populations were too small and lacked the training and experience to undertake the massive and urgent tasks of nation-building. The importation of foreign labor was the necessary answer, and it was soon institutionalized on a formidable scale.

Over the following quarter of a century, the Arab oil states promoted population growth and offered unparalleled educational opportunities doe their citizens, with the objective of becoming more self-reliant. However, as new generations of young citizens graduated from college, they did not move into private-sector jobs as anticipated. Partly this was due to lack of interest, as indicated by the young UAE woman quoted above. But their aversion was equaled or exceeded by those with jobs to offer. "Why would I want to hire a Saudi?" a Saudi businessman once exclaimed to me. "By law, I must pay them more, I must give them an expensive package of benefits, and if they turn out to be poor workers, I cant fire them. I can hire energetic and well-trained Pakistani or Indian for and less money and no risk."

The logic was unassailable. Despite repeated government programs to "Saudi-ize" or "Bahrain-ize" the work force, foreign labor continued to dominate the economic scene and was actually on the increase in several Gulf states in the mid-1990’s. The solution was as clear as it was painful: higher standards and more practical educational training for national students to make them more competitive; unrelenting reduction in the number of work visas awarded to foreign laborers; and a leveling of the wage/benefit disparity between national and non-nationals. Although such measures might ameliorate the problem in the long run, the short-term effects would be sectoral labor shortages, inflation, and outrage from the powerful commercial interests. None of the governments were willing to pay that price.10

4.Unemployment As a result of the above conditions, burgeoning unemployment of nationals was becoming one of the most intractable and politically dangerous problems in the Persian Gulf in the 1990’s. If idle hands are the devil’s workshop, then that old villain was presiding over one of the growth industries of the region.

Although state and family support networks in the Arab welfare states served to alleviate the worst effects of unemployment and underemployment, a growing body of idle and disgruntled young people, many of whom had acquired a nominal university education, was a potentially troubling phenomenon that was steadily getting worse. The 1995 development plan for Saudi Arabia stated that 659,900 citizens (roughly 6 percent of the citizen population) would require new jobs over the following five years.11 Some economists clamed that unemployment among Saudi nationals in 1996 was 20 percent and climbing.12 In Iran, where 48 percent of the population was under the age of 18 in 199513 and where one million or more young people were expected to enter the labor force each year well into the twenty-first century, this problem was even more severe.

An independent Kuwaiti economist estimated that the GCC states alone needed to create 8 million jobs for their own nationals by the year 2010 in order to accommodate the growing numbers of young people entering the job market. "Planners and decision makers," he warned, "must …create enough jobs for the newcomers or face the alternative-severe unemployment with the possibilities of social and political extremism. All available signs point to the latter happening."14 Another respected Arab commentator in 1995 detected stirrings of potential unrest throughout the Gulf and argued that if existing problems continued to go unattended they could jeopardize the Gulf states "political and social cohesion."15

5.Inadequate Revenues. Revenues in the Gulf states were insufficient to keep pace with the growing cost of entitlements for a burgeoning population. In the early days of the oil boom, most of the oil-producing states created a social welfare network that was the most generous in the world. Free medical care, free education, low-cost housing, extremely inexpensive domestic telephone and transportation, and the world’s lowest prices for energy were among the benefits routinely provided to citizens of the region, often with no income tax.

At the same time, most of these states actively promoted population growth, creating a demographic explosion. In 1970, there were approximately 45 million people living on the shores of the Persian Gulf. By 1995, there were over 100 million people, and by the year 2010 there will be an estimated 162 million. Approximately two-thirds of the Gulf population is located in Iran, but the Arab Gulf states are steadily increasing their proportion of the total.16

Almost without exception, by the mid-1990’s these states were facing budgetary demands that exceeded their resources and were faces with the unpleasant prospect of reducing subsidies and cutting services that their citizens had come to expect as their birthright. The financial reserves that had been accumulated during the boom years of the 1970s were severely eroded by the costs of the war against Iraq in 1990-91.17

The rapid increase in population, with no corresponding rise in oil revenues, pushed budgets into deficit and eroded per-capita earnings. Per-capita annual income in Saudi Arabia in 1996 was only $6,900, compared with some $19,000 in 1980 at the height of the oil boom. By the mid-1990s, the income of the average Saudi had declined to less than that of some developing countries, and below the World Bank’s rich-poor median line of $7,620.18

Nemir Kirdar, president and chief executive officer of the Bahrain-based Investcorp, put it very bluntly in a speech to Gulf businessmen in Washington in late 1996: "Energy is not going to bring Gulf countries the wealth they enjoyed in the past. So the question is, how can these countries generate other sources of wealth?" There is, he added, "a decline in real per capita income and a growth in public deficit…To absorb their fast-growing population, the Gulf states need to create 200,000 jobs a year."19

Despite a temporary recovery of oil prices in the mid-1990’s, all of the Gulf states continued to operate at a deficit, and there was no indication that revenues from oil and gas, even when combined with modest increases in non-oil earnings, would reverse this trend for the foreseeable future.20

6.Absence of Popular Participation. Because of the reliance on oil, the social contract in most of the states of the Persian Gulf is peculiarly unidirectional and distributive. The national leadership collects the rents from oil and allocates them to citizenry, with little or no involvement by the populace. This is less true in Iran, where oil revenues are declining and where a popularly elected Majles (parliament) intervenes vigorously on issues of economic policy. The Kuwaiti National Assembly, which was reinstated after the war with Iraq, also exercises vigorous oversight on certain issues. But the general rule in the Gulf is a heavy-handed statism, with little or no popular public policy.

In the absence of an elected representative body (except in Kuwait and Iran), and with all media tightly controlled by the state, there was no safety valve for these societies to let off steam or to aggregate popular dissent in a peaceful or systematic way. On the contrary, in monarchies such as Bahrain, any expression of disagreement with the ruling family, or even peaceful calls for restoration of the constitution and parliament that had been unilaterally suspended in the 1970’s, were regarded as tantamount to treason and were punished by loss of employment, arrest, imprisonment or exile. The preferred response to political opposition in most of the countries of the Gulf under most circumstances was repression.

Although the suppression of dissenting voices successfully maintained a facade of stability and control, repressive policies also drove the opposition underground and increased the likelihood that frustrated elements would resort to clandestine methods and acts of violence, particularly in circumstances of shrinking revenues and growing unemployment. The most violent disturbances of the early 1990’s occurred in Saudi Arabia and Bahrain, the two states that had virtually no representative institutions and that were the least tolerant of political criticism.

7.Lack of Accountability. The absolute control of states finances by the ruling families in the Gulf monarchies permitted no systematic accountability. This was not viewed as a serious problem so long as the pie was getting bigger and revenues were sufficient to cover public expenditures; however, demands for greater accountability began to be heard as these governments were forced to contemplate cuts in entitlements.

This was an embarrassment, since huge sums of money had been disappearing for years. Money derived from the sale of oil and duly reported in balance-of-payment statistics routinely failed to appear in the oil revenues reported in the state budgets. Between 1990 and 1994, the percentage of revenues missing from national accounts were considerable: 29.5 UAE; 23.7 percent for Kuwait; 18.7 percent for Qatar; 18.4 percent for Bahrain and 8.8 for Oman.21

Some of these funds may have been earmarked for defense and other legitimate purposes that frequently went unreported in the state budgets, but the magnitude of the missing accounts was so great that it raised suspicions.22 The personal nature of state bookkeeping was dramatically illustrated after the palace coup in Qatar in June 1995, when it was discovered that a substantial portion of the state revenues were held in private accounts in European banks in the name of the former amir and were inaccessible to his son, who replaced him.

The Case of Iran

Although the above comments were intended to apply in greater or lesser degree to most of the Persian Gulf, it is important to remember that these states have their own histories and their own special political, economic and social conditions. No single generalization will do justice to them all. Iraq was not discussed at all, because at the time of this writing it was ringed with international sanctions and its future relied more on the fate of a single man-President Saddam Hussein-than any combination of political or economic trends.

It is necessary, however, to draw a further distinction between the Arab states on one side of the Gulf and their Iranian neighbor on the other. Iran is by far the most populous country in the Persian Gulf, with a population of some 60 million in 1996. It controls half the coastline of the Gulf, including the northern shore of the vital Strait of Hormuz. It is the only regional state with direct access to three major bodies of water: the Caspian Sea, the Persian Gulf and the Gulf of Oman/Indian Ocean. It has its own distinctive culture, language and religious beliefs and has played a significant role in world history since at least the time of Cyrus the Great. Together with Egypt and Turkey-which are comparable in size, maritime access and historical continuity-Iran occupies one point of the core triangle that defines the enduring historical and cultural contours of the modern Middle East. It is the only country in the Middle East to have experienced a genuine popular revolution, the only state in the Gulf to permit universal suffrage in contested elections and the only state in the world to practice a unique blend of populist, constitutional and clerical rule.

Iran shares many if the dilemmas of the other Gulf states, particularly the reliance on oil as the source of most of its revenues. It is, however, the only country of the region to have a somewhat diversified industrial base. In addition to its exports of carpets and agricultural products, it manufactures steel, assembles automobiles, builds ships and small aircraft, and produces most of its own pharmaceutical, plastics and many other basic goods. Unlike the other Gulf states, Iran derives nearly 20 percent of its state revenues from taxes, including an income tax.

In contemplating the possible trajectory of the Islamic Republic of Iran into the twenty-first century, should the primary analytical weight be assigned to the word "Islamic" or "Iran"? From the very beginning, the rulers of Iran were confronted with the need to choose between the dictums of Islamic theology and the interests of the state. For the most part, state interests won. The most dramatic example of the subordination of religion to the Islamic state was the astonishing declaration mandate by Ayatollah Khomeini shortly before he died that the God-given mandate of an Islamic state was the "most important of the divine commandments and has priority over all derivative divine commandment…even over prayer, fasting, and pilgrimage to Mecca."23

In the first eighteen years of the Iranian revolution, government decisions in the areas of land tenure, birth control, divorce, labor law and banking, among others, came down in favor of pragmatism (or creative reinterpretation) over strict Islamic orthodoxy. The price, however, was a growing division between socially conservative factions favoring strict adherence to the revolutionary "line of Iman Khomeini," and reformist elements.

The revolution, the eight-year war with Iraq, declining oil prices, and profligate borrowing in the late 1980’s left Iran’s economy in perilous condition. The postwar binge of borrowing to pay for imports was one of the most costly errors that Iran made in the first two decades of the revolution. By 1996, Iran was saddled with a $23 billion debt and an annual payment schedule that amounted to as much as 25 percent of its anticipated oil revenues. This was further complicated by U.S. attempts to block foreign investments and trade.

Iran responded to this challenge in three ways. First, it adopted a program of fiscal austerity to bring spending into line with revenues, and combined that with vigorous import substitution. Second, it continued to pursue its rural development program, in order to retain the support of disadvantaged sectors of the society who were the backbone of the revolution, while initiating an aggressive policy of birth control. Finally, Iran began a systematic effort to develop new markets in Central Asia, the Far East, South Asia, and East Africa, including the opening of a rail link from the ancient Silk Road to the Persian Gulf.

Iran’s progress, however, would be determined by its ability to resolve the contradictions in its own political institutions and policies. The struggle for the soul of the revolution, which revolved around personalities at least as much as actual policies, had unhealthy consequences for civil society. Each faction sought to quash opposing views, often by resort to extra-legal means, and tried to outdo others in reaffirming loyalty to the revolutionary principles of 1979. The outcome promised to be messy at best, possibly paralyzing the economy and society, and risking the loss of the modest gains that had been made since the early days of revolution.

Solutions

As is frequently the case with matters of public policy, the prescription is easier than taken. Various international institutions, private institutions and policy analysts have examined conditions in the gulf states, and their conclusions are much the same. The World Bank, in a report on the Middle East as a whole, said the region had suffered from falling oil prices, a failure to train workers, a lack of economic liberalization and privatization, excess bureaucracy and the waste of resources in inefficient state-owned enterprises. To reverse this, it noted, will take promoting non-oil exports, making the private sector more efficient, producing more skilled and flexible workers and reducing poverty by accelerating growrh.24

The International Monetary Fund, addressing the relatively comfortable United Arab Emirates, recommended a strong fiscal reform program while "reducing government subsides to the public and private sectors, cutting redundant labor in the civil service, rationalizing non-productive spending and introducing large-scale consumption taxes as well as taxes on income of individuals and companies."25 Similar prescriptions could have been written for virtually any of the Gulf states.

A simple glance at the list of the structural problems outlined above would suggest a set of fairly prosaic fiscal and public policy correctives: stimulation of an energetic private sector capable of generating jobs; privatization of many state-owned businesses; reevaluation of the extraordinarily generous entitlements that were adopted in the 1980’s; curbing population growth; gradual reduction of subsidies on goods and services; the introduction of taxes or user fees; improved education and training of citizens to make them more competitive in the private-sector market; removal of the many legal and financial benefits that skewed the labor market in favor of foreign workers; and political reforms that would permit a greater sense of public participation in the political process and, most importantly, a measure of accountability by ruling elites. Various combinations of these and other remedies began to be proposed by regional and international observers almost as soon as the nature of the problem became clear.

Although some of these adjustments had the prospect of being inconvenient or mildly painful, they were no more stringent than comparable belt-tightening measures adopted by other Third-World states, and even by a number of highly industrialized states during the late 1980’s and early 1990’s. Moreover, as a result of the slow-motion nature of the crisis, there was time to introduce reforms gradually and carefully, with due regard to public concerns and the state of the social safety net. In reality, most Third-World countries would gladly have exchanged places with the Persian Gulf states, whose problems seemed small in comparison with the "real" world, where energy was a debit on the national ledger, not a credit.

Prognosis

A number of adjustments were made by regional states in the early 1990’s in response to the problems outlined above. Most states cut back on expenditures, slashed funding for wasteful or misguided programs, reduced foreign aid,26 stretched (in some cases simply stopped making) debt payments, modestly increased the costs of some government-owned services and experimented gingerly with advisory councils that included citizens outside the royal families.

Perhaps the largest single change was the sharp reduction in the purchase of military equipment. Total arms purchases by the Persian Gulf states dropped from $62.3 billion in 1988-91 to $37.3 billion in 1992-95, a reduction of more than 40 percent.27 Although the Middle East in general, and the Gulf in particular, remained the most lucrative arms market in the world, by the mid-1990s it appeared that the days of the mega-deals were over, at least temporarily. This reduction in arms purchases, which had been predicated by Yahya Sadowski of the Brookings Institution,28 was not the result of a reduced concern about military security. On the contrary, it could be attributed almost entirely to fiscal constraints. It remained to be seen whether the brief increase in oil prices in 1996 would give rise to a new burst of military spending, as had happened on several occasions in the past.

Despite improved oil prices and diminished expenditures on arms, the underlying contradictions in the political and economic structures of the Persian Gulf states went largely unattended as these countries approached the twenty-first century. The government of Oman, faced with dwindling oil and gas reserves, in 1995 initiated a comprehensive study that showed promise of rationalizing its investments and planning over the next quarter-century. Kuwait, chastened by the catastrophe of the Iraqi invasion and prodded by the only authentic legislative assembly on the Arab side of the Gulf, established a measure of accountability in the management of its national finances. Iran, saddled with foreign debt and the threat of U.S. sanctions, took some preliminary steps in the direction of serious economic reform, although internal political rivalry limited the government’s ability to act, and constantly threatened to undo what had already been accomplished. Saudi Arabia instituted a series of monetary reforms to reduce its burgeoning public debt and budget deficit. None of the Gulf states, however, were willing to initiate the kind of far-reaching reforms that would address their fundamental structural dilemmas.

Very little, for example, was being done in any of the Gulf states to promote genuine entrepreneurs by relaxing the suffocating hand of the state. Ass a consequence, these states were steadily sliding into a condition of comfortable stasis at a time when the world economy on which they depended was undergoing a dynamic transformation. In one decade, the World Bank noted in 1995, the Middle East and North Africa region went from the second-highest performer on income growth to last among regions of the world.29

Rising unemployment was the dangerous symptom where economics and politics merged. If the Gulf states could not provide the necessary jobs for their own citizens, they were certain to confront social and political pressures that could threaten the security of their governments as surely as any military attack. Jobs could be generated only by unleashing the creative energies of their own capital and labor, but this prospect was regarded by the existing rulers with unconcealed suspicion and fear that it would upset the balance of power on which their continued rule was based. The result was an uneasy paralysis.

In reality, the Arab Gulf states were faced with a dilemma. If they maintained the paternalistic statism that had served them so well for half a century, they risked a domestic struggle over a dwindling body of resources, compounded by the insistent voices of reform from their younger citizens who were increasingly educated, unemployable, and attracted to radical Islamic alternatives. If, however, they opened the system economically or politically, they risked setting in motion a set of vigorous new institutions that would almost inevitably challenge their ruling styles, if not their very legitimacy. Given this disagreeable choice, it is perhaps not surprising that the rulers’ inclinations were to stay with the status quo, to reform only at the margin, and to clamp down hard on any signs of serious opposition. That would preserve the golden goose in the short and middle term, leaving the future to their hitherto quiescent populations, while gambling that the vagaries of the oil market would once again come to their rescue. This tendency was reinforced by a brief increase in oil prices in 1996, which diminished any sense of urgency.

 

 

 

 

 

Table 1.3

Foreign Direct Investments Inflows

(1994 total=$225.7 billion

________________________________________________________________

European Union

32.6%

Asia

26.9%

North America

24.6%

Latin America

9.0%

Central & Eastern Europe

2.8%

Others

3.9%

GCC states

0.2%

________________________________________________________________

Source: UN World Investments Reports 1995.

The investment community, which voted with its own hard cash, was dubious. As indicated in Table 1.3, direct investments in the Gulf states was almost negligible in 1994. In fact, the estimated $250 billion in assets of wealthy Gulf individuals continued to flow out of the GCC states into safe havens abroad.30

A banker in the Gulf remarked that "Too much analysis leads to paralysis…They have diagnosed the problems to death. What governments need is the courage to apply the therapy…They have the money but they don’t use it properly."31 On this point, both critics and the defenders of the Gulf states could agree. The problems were not overwhelming, and the resources existed to solve them. Where observers divided was on whether the rulers of these states would demonstrate the skill, the wisdom and the political will to use those resources effectively while there was still time. Their record of performance in the 1980s and 1990s provided little grounds for optimism, although most analysts agreed that the crisis could probably be postponed for many years.

It remained to be seen if the unprecedented blessing of Persian Gulf oil in the late twentieth century would become the curse of the twenty-first. If vast resources that the countries of the Gulf inherited by virtue of a geological accident were harnessed, the welfare and domestic tranquillity of these states could be insured well into the next century. If however, this inheritance became a kind of drug, lulling governments into a false illusion of comfortable immobility, it could create the conditions for a level of social unrest and prolonged instability that could challenge the existing order and tempt forces within and outside the region to intervene out of fear or simple greed.

An Iranian woman reportedly commented that, "Iran will never be a happy place as long as we have oil. We could be Japan if we didn’t have oil."32 That was no doubt an exaggeration about Iran, and it was even more of an exaggeration if applied to the other Gulf states whose entire modern existence was a function of oil wealth; but it did capture the dilemma with admirable clarity.

At the end of the twentieth century, oil is almost universally seen as the deus ex machina for all political and social problems in the Gulf. In the twenty-first century, it might come to be regarded as the root of all evil.

 

Notes

1.Estimates as reported in the UAE Ministry of Information’s Daily News Digest, October 19, 1996.

2.Dr.Jasem K. Al-Sadoun, Chief Economic Analyst and General Manager, Al-Shall Consulting Group, and adviser to the Kuwaiti parliament, commenting on the proposed defense budget (Reuters, March 12, 1994)

3.For a detailed examination of the problem of resource-rich countries’ failing to live up to expectations, see Jeffery Sachs and Andrew Warner, "Natural Resource Abundance and Economic Growth," October 1995, reported in "Ungenerous Endowments," The Economist, December 23, 1995.

4.Robin Allen, "A thirst in the desert states: Oil prices are low and Gulf countries claim they need capital, but foreign investors are being thwarted," Financial Times, January 30, 1996, p. 1.

5.Interviewed in the Gulf News newspaper, cited in the UAE Ministry of Information’s Daily News Digest, May 1, 1996.

6.John Lancaster, "Young Saudis Find Job-Hunting a Real Chore," The Washington Post, January 3, 1995, p. 1.

7.Based on a report prepared by Dr. Soheir Elsabaa, cited in the UAE Ministry of Information’s Daily News Digest, May 28, 1996.

8.Economist Jasem K. Al-Sadoun in the Arab Times newspaper, cited in Reuters, February 5, 1995.

9.Henry Azzam, chief economist at the National Commercial Bank of Saudi Arabia, said remittances totaled $15.3 billion in 1994, and estimated them to stand at $14.5 billion in 1995, compared with an estimated oil revenue of $39 billion in 1995 (Reuters, May 30, 1996).

10.In 1996, the United Arab Emirates instituted an amnesty program to permit all illegal aliens to leave the country without penalty. The resulting exodus of nearly 8 percent of the population altered the demographic composition of the country and created a sharp downturn in the construction industry due to severe labor shortages.

11.Henry Azzam, chief economist at the National Commercial Bank of Saudi Arabia, op. cit.

12.Reuters, September 17, 1996.

13.Aloreza Mahjoub, Secretary-General of Iran’s Labor House, as quoted by the Islamic Republic News Agency (IRNA), January 22, 1996.

14.Jasem K. Al-Sadoun, Arab Times, op. cit.

15.Muhammad al-Rumaihi, editor-in-chief, Al-Arabi magazine, Kuwait, writing in Al-Hayat newspaper, April 19, 1995, as cited in Mideast Mirror, April 19, 1995.

16.World Bank, Social Indicators if Development 1995 (Baltimore: Johns Hopkins Press, 1996)

17.By most estimates, the Arab Gulf states spent some $35 billion to finance Iraq’s war against Iran between 1980 and 1988 and dearly $65 billion for the liberation of Kuwait from Iraqi invasion forces in 1991.

18.Robin Allen, "Pressures Mount as Oil States Dither," Financial Times, November 8, 1996, p. 2.

19.Cited in Robin Allen, November 8, 1996, op. cit.

20.For a more detailed examination of this point, see Vahan Zaoyan, "After the Oil Boom: The Holiday Ends in the Gulf," Foreign Affairs 74 (Nov/Dec.1995), pp. 2-7.

21.These calculations, by the Petroleum Finance Company of Washington, D.C., were provided by Vahan Zanoyan, Chief Executive Officer of PFC and a participant in two of the three Gulf/2000 conferences in 1994-95.

22.In the only case of its kind in the Gulf, the former Minister of Oil of Kuwait and four associates were under prosecution by the state in 1996 for allegedly amassing $36.7 million in illegal profits from the state-owned oil tanker firm in the 1980s (Reuters, September 4, 1996).

23.Cited in H.E. Chehabi, "The Impossible Republic: Contradictions of Iran’s Islamic State," Contention 15 (Spring 1996), pp. 135-54, which also includes a perceptive analysis of Iran’s religious/nationalist dilemma..

24."Claming the Future," (Washington, D.C.:The World Bank, 1995), pp. 4-8. A similar set of warnings and prescriptions can be found in "Sultanate of Oman: Sustainable Growth and Economic Diversification," World Bank Report No. 12199-OM, May 1994.

25.Cited in Agence France Press, January 28, 1996.

26.Foreign assistance by Saudi Arabia, for example, was $21.5 billion in 1980-84, $12.2 billion in 1985-89, and only $7.9 billion in 1990-94, a reduction of more than 60 percent in a decade (Arab Monetary Fund, March 23, 1996, cited by the UAE Ministry of Information’s Daily News Digest).

27.Richard F. Grimmett, "Conventional Arms Transfers to Developing Nations, 1988-1995, "Congressional Research Service, Library of Congress, August 15, 1996, p. 11.

28.Yahya M. Sadowski, Scuds or Butter? The Political Economy of Arms Control in the Middle East (Washington, D. C.: The Brookings Institution, 1993).

29."Claming the Future," op. cit., p.17.

30.Robin Allen, "A Thirst in the Desert States," op. cit., p. 17.

31.Ibid.

32.Quoted in Thomas L. Friedman, "Waiting for Ayatollah Gorbachev," The New York Times, September 8, 1996.

From: Gary G. Sick and Lawrence G. Potter Ceds.

The Persian Gulf of the Millennium: Essays in Politics, Economy, Security, and Religion. St. Martins Press; New York 1997.