The Political Economy the Persian Gulf States

The Political Economy of National Security in the GCC States

F.Gregory Gause,III

 

 

What Security? For Whom?

By a conventional definition of security, that is to say protection from foreign military, the states of the gulf Cooperation Council (GCC) are more secure than at any other time in their independent existence. The defeat of Iraq in the 1990-91 Gulf War reduced the military capabilities and the political capacity of one potential threat. Iran’s military travail during its eight-year war with Iraq, its limited air power and nonexistent amphibious capability, and its own internal political and economic difficulties, render it an unlikely source of conventional military threat to the GCC states (the islands issue excepted). It seems unlikely that Yemen, so recently embroiled in its own civil war, is a serious military threat to its neighbors. Most importantly, the Gulf War demonstrated that the United States is willing to commit massive force to protect the GCC states from foreign invasion, providing those states with a powerful and credible deterrent against attack. While Saddam Hussein declares that he “won” the Gulf War because he is still in power, it is hard to imagine any other leader who would want to experience a similar “victory”.

     Limiting a discussion of security to so narrow a definition, however, would miss much of the political dynamics behind decisionmaking in both foreign and domestic policy in the Gulf states. It is regime security, not simply state security, that animates decisionmakers in the region. The former includes the latter, as ruling regimes for their own interests do not want to be subject to foreign attack, but goes beyond the external dimension of security to include domestic political stability. For example, it is safe to assume that the bombings of American military facilities in Saudi Arabia in November 1995 and June 1996 were a more serious and immediate issue on the Saudi security agenda than a hypothetical attack by either Iraq or Iran on Saudi territory. Policies aimed at regime security might be good for the population as a whole; they might not be. The focus for understanding how policymakers confront choices in the Gulf is not some Platonic notion of “national” security or a limited understanding of purely military security, but the idea of regime security.

     In most third World countries, the most serious threats to the security of ruling regimes (with some notable exceptions, like Kuwait) emanate from within their countries borders.1 These domestic threats to regime security are frequently tied up with foreign policy issues, as opposition groups look for support abroad and as the regimes’ dealings with the outside world (be it with the great powers, the International Monetary Fund, or international commercial and finical markets) materially affect their ability to manage their domestic societies and economies. Thus while no state in the international arena can ignore the possibility of a conventional military attack against it, the most immediate and salient threats perceived by state rulers to their security are very likely to be domestic, or some combination of domestic and foreign.

     In formulating their security strategies, the rulers of the GCC states have to face both the possibility of foreign attack and the need to maintain their domestic positions. Though I contend above that the likelihood of conventional military attack from their neighbors is now relatively low, these states live in a neighborhood that has seen two very destructive conventional wars in the Gulf, civil wars in Yemen, revolutionary upheaval in Iran and an armed insurgency in Oman. Even among themselves the GCC states have disputes over borders. They find themselves adjacent to the Arab-Israeli area, which has experienced five conventional wars, two civil wars (Jordan and Lebanon), and one sustained low-intensity conflict (the Palestinian uprising) since World War II. They cannot ignore conventional defense needs.

     At the same time, the regimes confront the continuous task of maintaining the domestic bases of their rule: the provision of welfare benefits to the population as a whole, the maintenance of the local groups with whom they are allied politically, and the care and feeding of the coercive apparatus-the regular military, police and secret services. In the 1970s and the early 1980s, when money was no object, the GCC states could address all these demands with little need to set priorities. Now, in a more constrained revenue environment, they face difficult tradeoffs

      The point of this paper is to highlight how the choices the GCC rulers face in the security realm, broadly understood, interact with each other. None of the individual issues that they face-military security, fiscal problems, economic development, demographic growth, political demands-can be seen in isolation from the other issues. The choices made in one area will directly affect the regimes’ ability to deal with other areas. More money for weapons purchases means less money for domestic social and economic purposes. Privatization of state-owned economic interests might relieve fiscal burdens and improve economic efficiency in the long term, but at the cost of price increases and unemployment. The imposition of taxes and the building of real citizen armies-two responses of state-builders throughout history to fiscal pressures and foreign threats-would place burdens on the citizenry that could call forth demands for political change. Reliance on the United States for external security is costly financially (big-ticket purchases for civilian and military purposes) and could have, over the long term, negative domestic consequences.

      In their effort to maintain their regimes’ security, the Gulf rulers face a number of what Marxist analysts used to call contradictions-conjunctions of circumstances in which the pursuit of one goal makes the achievement of other goals less likely, continuance of the status quo increases the pressures for radical change in the future, and difficult choices have to be made. This paper points to some of these contradictions. It makes no recommendations on how to deal with them. Those decisions are for people in the Gulf states themselves to make. Nor does it contend that the GCC regimes are unable to deal with these contradictions in ways that will preserve domestic stability and regional security.

 They have vast experience in navigating treacherous waters. They have ample, if reduced, resources financial, ideological and coercive-with which to confront their problems. It simply points out the potential consequences of various choices they could make in dealing with these contradictions.

 

CONTRADICTION NUMBER 1: GUNS VERSUS BUTTER

This is the fundamental choice that any state faces in considering its security

policy. What is unusual about the GCC states is that for most of the past twenty-five years, because of their vast wealth, they could have both as many guns and as much butter as they wanted. With each of the GCC states now facing budget

deficits and fiscal stringency, those days are over. Money spent on arms now

comes at the expense of other demands on state revenue, particularly domestic

social and economic programs.

     It should be pointed out that in our discussion of military strategy, the assumption is that the GCC states are seeking a purely defensive capability-to protect their borders from outside attack. That hardly limits the range of potential military contingencies that might confront them. Civil conflict in Yemen, naval tensions in the Gulf, a potential collapse of authority and descent into civil war in Iraq could theoretically tempt GCC states to deploy force beyond their borders. However, if the past is any indication, the GCC governments have neither the capability nor the political will to exercise military force outside their borders. The GCC states are focused on the least likely military threat to their security-direct attack by a regional state-and have little military capability to affect less direct but more probable security contingencies.2

     The military strategy of the Gulf rulers (with the exception of Oman) has for the last twenty-five years been to invest enormous sums of money in expensive and sophisticated military hardware, such as airplanes and tanks (and the physical infrastructure of bases to support them), with comparatively less emphasis on developing large and well-trained citizen armies. This reliance on a capital- intensive defense strategy has been dictated by a number of concerns. First, the big-ticket items are meant to make up for the relatively small size of the armies compared with those of potential enemies like Iran and Iraq. There has been a belief that high-tech weaponry can make up for inferior numbers, both in terms of deterrence and in terms of actual combat.

     Second, these weapons sales are in part an indirect way to pre-position equipment for foreign forces to use if the need arises. Desert Storm could not have been mounted without the extensive military base infrastructure that the Saudis built. Third, weapons purchases are seen as a way of solidifying the commitment of the seller to the security of the buyer. Having sophisticated American, British and French weapons-with the training and support they require-is a way to strengthen the West’s commitment to defend the GCC countries and support their regimes. Finally the financial interests of those in the GCC states who benefit from these large-scale arms deals cannot be ignored as a factor in explaining this strategy.

 

     The immediate costs of continuing this strategy, however, have become increasingly apparent. Since the Gulf War, Saudi Arabia has placed orders for approximately $35 to $40 billion in arms, at a time when the state foreign-currency reserves have been largely depleted, budgets are being cut, consumer subsidies are being reduced and the state’s debt burden is growing. In Kuwait, defense spending is taking up a larger and larger proportion of the state budget at the same time that the need for fundamental economic change (privatization, taxation, budget cuts) dominate the political debate. Even in Oman, geographically distant from the theater of the last Gulf War, defense has remained a sacrosanct aspect of state spending at a time when the International Monetary Fund (IMF) has suggested stringent austerity measures (though the most recent Oman five year plan calls for reduced defense spending in 1997 and beyond).3

     Citizens of the GCC states increasingly see that every riyal, dirham or dinar spent on arms comes at the expense of some other state spending project. Given the fact that high-tech weaponry neither deterred Iraq from invading Kuwait nor gave the GCC states the power to defeat Iraq, some now question the military usefulness of these kinds of arms purchases. In Saudi Arabia, Islamic activists called for the creation of a 500,000-man Saudi army to avoid reliance on outside forces for defense.’4 However, this alternative defense strategy-building larger citizen armies for conventional defense-raises numerous problems for the regimes.

     One problem is simply a matter of numbers. The combined citizen populations of the six Gulf monarchies is, by the most generous estimates, no more than 18 million. Iran’s population is 60 million. The inability of the GCC states to agree on a comprehensive, coordinated defense plan, as was suggested by Sultan Qabus during the 1991 GCC summit, exacerbates the problem of their small populations. They cannot effectively even pool their already-limited manpower resources for defense purposes. But numbers are not the whole story. The combined population of the monarchies is close to that of Iraq, but no one in 1990 suggested that they could themselves confront the Iraqi invasion of Kuwait. It is the political context of the states that renders a policy of self-reliance even less feasible than the numbers suggest.

     The  mobilization of citizen manpower into the armed forces would require obligatory military service, a very real demand of the state upon its citizens (one the United States, for example, has now chosen to avoid). A ruthless and efficient authoritarian state like Iraq or Syria can extract a large proportion of it’s manpower from society for military purposes. States animated by revolutionary fervor like Iran was in the 1980s, or by democratic ties of loyalty between citizen and state like Israel (for its Jewish citizens), can call upon the population for military service and receive enthusiastic answers. The Gulf monarchies lack these kinds of mobilization abilities.

     That lack is attributable to the fact that the Gulf monarchies used their oil resources to build a particular kind of rentier state: their social contract rests upon the provision of benefits to citizens, not the extraction of resources (taxes and service) from them. Instituting a national service requirement would upset that implicit deal between state and society. In the West, historically, the need to mobilize citizen armies contributed to pressures for popular participation in government. The ruling families in the Gulf want to avoid exacerbating the already-growing demands in their societies for greater participation. Moreover, from the perspective of rulers who remember the prevalence of Arab military coups in the 1950’s and 1960’s, permitting into the military groups whose loyalty to the regime is questionable would decrease rather than increase security.

     Military recruitment strategies in all the Gulf monarchies reflect these social realities. Only in Kuwait is there obligatory service, and before the Iraqi invasion such service was easily avoidable. All the other monarchies rely upon volunteer forces. Discussions in official Saudi circles immediately after the Gulf War about doubling the size of their armed forces, which would probably entail some kind of draft or obligatory service, appear to have been shelved.’5 In Oman, where the rentier phenomenon came latest, there is more prestige to military service-a result of both the Sultan’s very personal involvement in the command of the forces and the resources he devotes to them. In the other monarchies, military service is not as socially desirable a profession. With economic opportunities relatively plentiful for better-educated, young male citizens of these states, the incentives to join the military have been limited.

     Shi’i in Kuwait, Bahrain and Saudi Arabia rarely join their militaries and even more rarely advance in the officer corps, as a result of both government discouragement and social custom within those common ties.6 In Saudi Arabia there are persistent reports, unconfirmed and unconfirmable officially, that those who are not from Najd (Central Arabia) cannot advance in the military hierarchy and are barred from certain sensitive positions (such as fighter pilot). Needless to say, one-half of these states human resources, female citizens, are not available for military service. Taken together, these factors mean that the Gulf monarchies cannot and will not mobilize their resources for military purposes with the same efficiency as their neighbors. Demographic, social and political constraints combine to rule out a policy of self-reliance in security matters.

      Another strategy that might reduce expenditures somewhat is simply to give up any idea of self-defense, and rely completely on foreign alliances primarily with the United States-for security. Such a strategy would still be expensive, as Desert Storm and the October 1994 American “mobilization’ to meet Iraqi moves near the Kuwaiti border proved. Arms would still have to be bought, for pre-positioning forces. But the political costs of such a strategy would far outweigh any economic benefits. There is no guarantee that the United States could or would use its military to protect the regimes from every contingency, particularly domestic threats, that they might face in the future. Moreover, a policy that publicly handed over security matters to Washington would leave the GCC regimes even more vulnerable than they already are to charges from domestic and regional opponents that they are nothing but figurehead rulers and puppets of the United States.

 

     In the end, there are few realistic alternatives to the existing military strategy for the GCC states, short of drastic changes in their relations with their societies and with one another. At the same time, maintaining current levels of spending on arms puts enormous financial pressures on these states, particularly Saudi Arabia and Kuwait, at the same time that they are enforcing some measure of economic austerity domestically. Riyadh has recognized this dilemma in its efforts to renegotiate the payment schedules for some of its arms deals and to complete its recent purchases of commercial aircraft from Boeing and Macdonald- Douglas in stages over time.7 The issue for the GCC regimes is whether they can rein in spending on arms and military security enough to permit them to maintain adequate levels of domestic spending in other areas. It is to that basket of issues that we now turn.

CONTRADICTION NUMBER 2:

DEMOGRAPHICS VERSUS THE WELFARE STATE

All of the GCC states have very large rates of population growth. Between 1985

and 1991, the lowest growth rate in the GCC was in the UAE (3.1 percent per year) and the highest in Qatar (4 percent per year). By comparison, total Asian

population  growth during this period was 1.9 percent per year, and the total world growth was 1.7 percent per year.8 Growth rates declined somewhat in the mid-1990’s but each of the GCC states is projected to double its current population within 40 years if current growth rates are substained.9 While some of this growth came from migration, a large portion of it is accounted for by high birth rates and longer life expectancies. The age pyramids in the GCC states are heavily skewed toward the younger end of the population spectrum. Thus the governments of these states face growing demands on social services and the need to create employment opportunities for the graduates of the education systems the states themselves built.

     The problems of dealing with a growing, increasingly young population are not unique to the GCC states. What is different about their conundrum is that these larger populations are putting enormous pressure on welfare states constructed in the 1970s and early 1980s, when populations were smaller and revenue greater. When the GCC states faced a decline in oil revenues in the 1980s, they maintained government spending levels by drawing down their reserves and, in some cases, by borrowing on the international market and relying on transfer payments from neighbors. Those expedients are no longer available.

     The combination of maintaining high levels of social spending and supporting Iraq’s war effort against Iran in the 1980s, with the vast expenses of Desert Storm, has removed the cushion of financial reserves for Saudi Arabia and Kuwait. Estimates of Saudi reserves vary, from less than $10 billion to approximately $30 billion (down from well over $100 billion at the beginning of the 1980s), but it is clear that the government cannot finance continued deficits from that reserve. Saudi Arabian Monetary Agency (SAMA) maintains a foreign currency reserve of about $20 billion to support the Saudi rival; thus a large portion of existing reserves are “off limits” for meeting budget deficits.10

Al-Shall Consultancy estimates that Kuwait’s foreign reserves are around $35 billion (down from well over $100 billion at the beginning of the 1980’s), and that its foreign debt is approximately $30 billion. It estimates that, if current expenditure patterns continue, the Kuwaiti Fund for Future Generations will be completely depleted by the turn of the century.11

     Clearly for Saudi Arabia and Kuwait, living off reserves is no longer possible. Oman has run up against the limit of the willingness of international capital markets to finance continued deficits. Bahrain, which relies in some measure on Saudi Arabia to help it cover its budget deficits, faces the warning ability of Riyadh to do so. Even Qatar and the UAE, with larger financial reserves and smaller population-to-resource ratios, are experiencing fiscal pressures. Given growing demand on social services and limited ability to pay, the GCC states face two options: cut services or raise revenues. The first path holds the risk of alienating large portions of their populations who have come to expect extensive welfare state benefits as their right as citizens. It seems unlikely that oil prices will increase substantially over the medium term, so raising revenues means, in effect, “taxing” the population. The same political risk as that involved in cutting services applies.

     The GCC governments do realize that change is necessary, though not all have taken even the first steps to bring spending and revenues more into line. Saudi Arabia has gone the furthest in confronting its fiscal problems. Riyadh adopted a mid-course 19 percent reduction in its 1994 budget, which still ran a deficit of over $ 10 billion (US), and a further 6 percent reduction in the 1995 budget. The 1995 deficit was forecast to be $4 billion, as a result both of spending cuts and of state-mandated price increases on gasoline, electricity, work permits and visas.12 Government subsidies for agriculture, particularly wheat production, were reduced.13 With oil prices in 1995 running higher than budgeted, there was even hope that the deficit could be eliminated by the end of the year.14  However, it seems that the 1995 Saudi budget deficit was slightly higher than forecast, despite oil earnings between $3.7 billion and $4.0 billion more than earlier estamates.15 The Saudi used this cushion to pay off the reainder of their debt to foreign lenders and to begin to make good on late payments to local contractors and farmers.16  The 1996 Saudi budget deficit was approximately $4.5 billion, once again despite oil prices much higher than anticipated when the budget was adopted at the end of 1995, nearly 9 percent of total spending. The 1997 budget forecasts a similar deficit of $4.5 billion over 9 percent of total spending.17 Even with a concerted effort, controlling spending is proving a difficult task for the Saudis.

     The UAE raised fees in 1994 for health services and electricity, while keeping spending largely the same in its 1995 budget. Still, early estimates of the 1996 budget deficit put it at over 5 percent of the total federal budget.18 Qatar’s projected budget deficit for 1995-96 was nearly $1 billion in a budget of $3.5 billion, though it budgeted for a lower deficit, approximately $800 million, in 1996-97.19 Amir Hamad bin Khallfa Al Thani,  who deposed his father in June 1995, has initiated ambitious steps to increase Qatari gas production and to privatize parts of the economy, though the potential benefits of such steps can only be realized in the future.20 While increased oil production reduced Oman’s projected 1995 deficit, the government does not foresee a balanced budget until the year 2000, according to the most recent five-year plan.21 Bahrain was able to reverse a trend of rising budget deficits in 1996 only because Saudi Arabia transferred its portion of the revenues from an off-shore oil field that the two states share to the Bahrain government.22 Even with that new source of revenue, Bahrain projected a deficit of nearly $200 million in its 1997-98 budget, through that figure is much reduced from the deficit in the previous budget.23

     In November 1994 the Kuwaiti government announced plans to reduce spending in the 1994-95 fiscal year, which began in July, by 25 percent  in an effort to meet the expenses of the U.S. military mobilization mounted in reaction to Iraqi troop movements near the border in the fall of that year. The 1994-95 Kuwaiti budget adopted in July 1994 had a deficit of $5 billion in a total budget of $13.8 billion.24 Members of the Kuwaiti parliament fiercely criticized the government’s 1995-96 budget, which forecast a deficit of 1.6 billion KD ($5.3 billion), but the parliament adopted the budget nonetheless. Higher than expected oil revenues allowed the Kuwaitis to halve the deficit to 653 billion KD ($2.2 billion) when the books were closed for that fiscal year.25 Kuwaiti’s budget for 1996-97 had a projected deficit of $3.83 billion, 28 percent of the total budget.26

     The increase in oil prices during 1996, of about $5 per barrel for the OPEC “basket” price, lessened the fiscal pressure on all the GCC governments. However welcome that windfall was, it did not change the structural pressures these states face in funding the extensive array of social services they took on in the 1970s. In fact, if this (possibly temporary) increase in oil revenues deflects the governments from pursuing efforts to scale back spending, its long term harm will far outweigh its immediate benefit.27 The few efforts at belt-tightening already undertaken hardly encompass the universe of hard economic truths that the GCC states face. The governments will simply be unable to fund the generous and extensive social welfare policies they adopted in the 1970s at current rates of population growth. The state sector cannot absorb the growing number of job-seekers graduating from the local universities. An increasing number of children have to be educated in the state school systems. As life expectancy rises, the health costs of caring for the population will increase.

     Two questions present themselves. First, can these efforts to cut spending and/or increase revenues bring the fiscal house of the GCC states in order when demand for social services will continue to increase? There is no hard evidence to answer this question, since much depends on the choices these states make in the future. However, there is certainly a sense that the austerity measures taken by some of the GCC states are the beginning, not the end, of what will be a prolonged readjustment period. It is unclear whether the governments will have the wisdom and the political will to use the cushion provided by the 1996 oil price increases to facilitate such a readjustment, or whether the increased revenue will lull them into a false sense of security.

     Second, what will the political consequences of the new austerity, if it is that, be in states where the past twenty years (if not more) of politics has been based on an implicit social contract between rulers and ruled, in which the former receive loyalty (or quiescence) and the latter a vast array of social services? It is interesting to note that, while some GCC states have raised fees for highly subsidized services, none has taken what would seem to be the natural way to meet the fiscal crunch-imposing taxes. It is also interesting to note that the belt-tightening has been accompanied by efforts by the regimes to give at least the appearance of more institutionalized consultative mechanisms for eliciting the populations’ views of politics. Oman, Saudi Arabia and Bahrain all appointed new majalis al-shura (consultative councils) since 1990. Kuwait restored its elected parliament in 1992. The new amir of Qatar has promised elections for municipal councils in 1997. Saudi Arabia and Bahrain in 1995 also made sweeping changes in their cabinets (though not in the “political” ministries that are the reserves of the ruling families), bringing in new faces to deal with their economic problems. It is clear that the rulers feel the need to make some gestures toward their populations as they enforce, or contemplate enforcing, economic hardship.

CONTRADICTION NUMBER 3:

THE ‘PRIVATE SECTOR” VERSUS STATE OBLIGATIONS

One of the ways that GCC governments hope to deal with the new financial realities they face (or at least one of the ways they talk about dealing with those realities) is through privatization of state-owned and -controlled companies. The belief is that privatization will give the states a one-shot revenue boost while relieving them of the long-term burden of maintaining inefficient companies and/or producing subsidized goods and services. (There is little talk of privatizing very successful operations, like the Saudi Arabian Basic Industries Corporation-SABIC.) Kuwait has moved the farthest in actual privatization plans, auctioning its stake in the National Industries Company, the largest industrial firm in Kuwait outside of the oil sector, setting up a private sector company to own and manage gasoline stations belonging to the Kuwait National Petroleum Company, and divesting itself of its 12 percent stake in the Gulf Bank. Kuwait eventually plans to privatize sixty local firms and public utilities, of which seventeen have already been sold.28

     Oman has adopted plans to privatize some concerns (like the state electric company) and opened up new projects in the energy sector to domestic and foreign private capital.29 Qatar has also sought foreign investors in its plans to develop its massive offshore gas reserves, and plans to institute a domestic stock market and to divest at least some of the government’s share in local companies through that market.30 Leaders in both Saudi Arabia and Kuwait have spoken publicly about privatizing their national airlines. As of the end of 1996, there were more privatization plans than actual privatization’s in the GCC, but it is increasingly seen as one relatively painless way to deal politically with the consequences of the new fiscal austerity.

     The problem with privatization plans, however, is that they are not costless politically. If they are to work-if the privatized companies are to be able to compete in the market and be attractive assets for buyers-then  companies will no longer be able to provide the social goods that the governments have distributed through them. The most important of those social goods is jobs. The state sector has absorbed the vast majority of citizens in the work forces of the GCC states. Privatized companies would, presumably, look to improve efficiency and boost profits by reducing their payrolls. Thus privatization could lead very directly to increased unemployment, a new and dangerous sociopolitical phenomenon that has reached noticeable proportions in both Bahrain and Saudi Arabia, and could become an issue in Oman and Kuwait.

     Privatization also means upward pressures on the prices of the goods and services provided by the companies. Privatization as a fiscal strategy makes sense only if the states can reduce or eliminate the subsidized inputs they provide the companies. But if the newly privatized companies have to pay market prices for their inputs, then they will have to raise prices to make a profit. If regional electric companies are privatized, as has been discussed in Saudi Arabia, consumers can expect electric bills much higher than now, even with the recent price increase. If Saudi, the national airline, is privatized, cheap domestic flights will go the way of the caravans.

     While privatization certainly has some things to recommend it, the context in which it occurs will be extremely important for the economies, and thus for the politics, of the GCC states. The “private” sector in these states, particularly the large trading and manufacturing concerns, has lived for years within a protected economic space-protected from foreign and even local competition by the government, reliant on government contracts and state spending, and benefiting from state-granted monopolies, licenses and subsidized inputs. It is questionable whether the creation of a real and competitive private sector is in the interest of much of the Gulf business elite, which has benefited enormously from the status quo over the last two decades. Real privatization would require a wrenching transformation in the Gulf business environment-the creation of a real private sector . That would entail: (1) a more limited regulatory environment, decreasing the importance of contacts inside the government in avoiding legal problems; (2) a clear and enforceable commercial code with a judiciary able to adjudicate commercial disputes and an executive willing to enforce judicial decisions; (3) the reduction if not elimination of subsidies; and (4) a more open and competitive system of bidding on government contracts and licenses. Without these kinds of changes, “privatization” could turn into a process in which the state continues to bear much of the financial burden of supporting these companies while the profits that accrue end up in the pockets of the privileged business and political elite.31

     If there is a real move to privatize, as was mentioned above, one of the inevitable consequences will be increased unemployment among Gulf citizens

for whom the state sector has been the last, and frequently the first, resort in job-seeking. Combined with the demographic pressures discussed earlier, privatization could heighten what is already a serious problem in Saudi Arabia and Bahrain and what promises to be a more serious problem elsewhere.32 It is It is difficult for outsiders to believe that there could be citizen unemployment in the GCC states, which are host to millions of foreign workers. The natural solution to the unemployment problem would appear to be replacing foreign labor with local labor. Some Gulf officials have indicated that their states are thinking along those lines, also.33 The UAE in 1996 conducted a very public campaign to deport undocumented foreign workers, for example.34 However, such moves run up against the desire of the GCC states to encourage greater private sector activity in their economies.

     Gulf businessmen are unanimous (or nearly so) in their belief that their productivity and profitability depend to some extent on foreign labor. The wage levels of foreign laborers are much lower than that of locals. The ability of employers to maintain discipline over foreign laborers, who have no political

connections and tenuous legal standings in the countries, is much greater than would be the case with citizens workers. Many Saudi businessmen in particular complain that graduates of the Saudi school system, particularly the religious track in that system, do not have the skills necessary to do clerical and middle-management jobs. In 1996, when Saudi Arabia attempted to place an income tax on foreign workers in the kingdom, the outcry from the business community was so great that the king quickly withdrew the proposal.35

     So the GCC states face a dilemma in dealing with the unemployment issue. On one hand, citizens without jobs are an implicit rebuke to regimes that have taken great pride in providing lucrative and stable employment to their citizens. They form a potential audience for opposition political movements. The riots in Bahrain that started in December 1994-January 1995 were not caused by unemployment per se, but it seems clear that high unemployment is a factor among other motivating discontent in that country. On the other hand, adopting legislation (e.g. taxes, much larger fees for visas and work permits) that would equalize the costs to employers of hiring local as opposed to foreign labor would be opposed by a private sector upon which the governments are relying to help them through their fiscal problems. Such steps would also hit at the economic interests of those who earn handsome sums from their ability to grant visas and work permits. To some extent there is no choice in the longer term for the government but to replace foreign labor with local labor, but the steps necessary to get there will be difficult to take.

     Thus the “private sector” is no panacea for the economic problems facing the Gulf regimes. Giving it a greater role in national economic life is in many

ways inevitable, but how it is done will have enormous political consequences. There is no easy way to shift the economic responsibility that the states took on in the 1970’s-to provide citizens with comfortable jobs and subsidized services-onto the private sector.

     Another issue that arises when considering the role of the private sector in economic reform in the Gulf is the place of the ruling families in that sector. The families literally are a category of their own-public, in that they ultimately control the state and draw on its revenue, but also private, in that the state is now distinguishable from the family, not all family members are officials of the state, and some family members are pursuing careers outside the state. They inhabit a unique space in between the public and private sectors. Without a doubt the families provide political services in these states-continuity, stability, tradition, staffing of many state offices. But any efforts to address the demands on the state budget will have, eventually, to address that portion of state revenues reserved for the families. The political implications of enforcing hardships on the rest of society while the families maintain, or increase, their share of state revenues could lead to enormous resentments. Likewise the roles of the families in the private sector must be defined, particularly if increasing amounts of these economies are privatized. If family members are given an automatic advantage in the business world (e.g., preferential treatment by state authories, an immunity from judicial proceeding), some of the benefits of privatization could be lost, and members of the business community could become alienated from the political system.

     Defining future relationship of the family to the state and to the private sector presents a real contradiction to the rulers. On the one hand, the family is their ultimate constituency and base of support. Moves that are seen as decreasing its wealth and its privileges could have very immediate and negative consequences for Gulf rulers. On the other hand, in the new atmosphere of economic austerity, for the family to be seen by the rest of society as immune from the hardships and burdens shouldered by others could create a political backlash that is harmful to the long-term political stability of the state, and the family’s role in it.

CONTRADICTION NUMBER 4;

ECONOMIC REFORM VERSUS POLITICAL REFORM

     It is common place for Western observers of the Gulf to argue that the difficult economic choices facing the GCC states require a much broader base of popular involvement in decision making. Enforcing hardship is a trickier political task than distributing benefits. It requires the active solicitation of support from at least the most important and politically aware stratum of the population if it is going to work, if it is going to be accepted and implemented without causing instability and violent political opposition, or so the argument goes. As was mentioned above, the regimes themselves seem to appreciate this fact. Economic belt-tightening has been accompanied by the restoration of the elected Kuwaiti parliament and the appointment of majalis al-shura in Saudi Arabia, Oman and Bahrain.

     While there are a number of reasons why institutionalizing avenues for citizen participation in the politics of the GCC states would be a good thing, facing difficult economic choices might not be one of them. There are plenty of cases around the world in which painful economic transitions, that left the country in the longer term better off, were carried out by authoritarian and even brutal dictatorships. The Chilean, South Korean and Taiwanese governments that brought their countries to their current prosperity were hardly democratic. At some point when prosperity was achieved all moved to liberalize politically, but during the transition phase of economic restructuring (e.g., replacing import-substitution industrialization policies with export-led growth policies and reducing the political and economic clout of labor unions) these regimes moved to limit, not to increase, popular participation in politics. China, with the fastest growing economy in the world and profoundly dislocating market reforms, is maintaining a tight lid on political freedoms. This is not to say that brutal authoritarianism is either necessary or sufficient for economic reform. Democracies have taken steps to restructure their economies (e.g., Poland, India); authoritarian regimes have driven their countries into bankruptcy (e.g., the Philippines of Marcos, the FLN in Algeria). But these examples are enough to call into question the idea that greater popular participation would make the economic task of the Gulf states any easier.

     If American politics is any indication, the people’s elected representatives are just as likely to oppose “rational” economic policies that would impose immediate hardships on their constituents as they are to use their positions to convince their constituents to sacrifice for the greater good. In GCC countries where austerity measures have been taken-like the increase in consumer prices in Saudi Arabia-there is no evidence that consultative councils had a role in formulating the decisions. Bahrain’s budget deficit was slated to increase in 1995 and 1996 over 1994 levels, despite the new presence of an appointed majlis.”36

     Having an elected parliament has not helped Kuwait face its difficult financial situation. The Kuwaiti government floated a proposal in October 1994 for a 10 percent income tax on civil servants and workers in the state sector, to pay for the American military mobilization of that month. It quickly became clear that parliamentary opposition to the proposal was so great. that the government dropped it.37 Despite the recognition by its speaker Ahmad al-Sa’dun that “Kuwait is on the verge of bankruptcy,” the parliament instructed the government to restore a number of subsidies it had proposed to cut and to postpone fee increases it had proposed in the 1995-96 budget. The parliament then approved, with only one dissenting vote, a 1995-96 budget that had a deficit of $5.3 billion, slightly larger than the previous year’s deficit.38 Just before the adoption of that budget in August 1995, the parliament also succumbed to government pressure and approved a plan to extend repayment times and lessen interest payments for Kuwaitis, whose debts had been assumed by the government after liberation, despite criticism that the measure benefited a small number of wealthy Kuwaitis who had the ability to pay the loans back.

     Efforts to expand real participatory opportunities thus might make it more difficult to implement difficult economic decisions that hit people in the wallet. Citizens might oppose policies that threaten their jobs and increase the prices of goods and services. Organized groups like the business communities might use their influence to maintain special privileges, protection from competition, subsidized inputs and guaranteed prices. Steps that might be in the long-term political interest of stability in the GCC states could therefore impede the necessary short-term sacrifices necessary to put their fiscal houses in order. But clearly the most dangerous course for the regimes to pursue would be to limit political participation and to avoid the hard economic choices they face. Such a strategy would leave them politically isolated when the economic problems of today become the crises of tomorrow.

     One interesting factor about the relationship between economic policy and political participation about which little note has been taken is the strategies that the Gulf regimes have used to cover their budget deficits, once their reserves had been depleted. Kuwait has sold assets abroad and borrowed on the international market. Oman and Qatar have also relied mostly on international borrowing to meet their deficits. Saudi Arabia and, to a lesser extent, Bahrain, have relied more on domestic borrowing, by issuing treasury bills and government bonds, the purchase of which are reserved to local institutions and citizens.

     International lenders care little about the domestic political arrangements of their debtors. They simply want the payments made. However, domestic debt holders are not just investors; they are also citizens. Holding government debt, and the willingness to buy more government debt, could give citizens and local financial institutions in Saudi Arabia and Bahrain a new kind of power in dealing with their governments. The cry of the American Revolution was “no taxation without representation.” None of the Gulf governments seems willing to take the political risk that direct taxation entails. But if they do not tax, and cannot drastically cut spending, debt increases are inevitable. Perhaps domestic debt, not taxes, will be the economic leverage through which demands for a larger say in political decision making are placed more forcefully on the agenda in the Gulf states.

CONCLUSIONS

    

It is much easier to point out problems than it is to suggest solutions; this paper has done much more of the former than the latter. Clearly the extent to which each GCC country faces these common problems differs. Bahrain, the first “Post-oil” state in the Gulf, experiences the dilemmas of defense, demographics and the welfare state much more immediately than its oil rich partners. It is the country in which the unemployment problem is the most serious, and it experienced more sustained social unrest than its GCC neighbors in the mid-1990s. Bahrain’s economic difficulties, which are greater in degree but not that different in kind from the other GCC states, are exacerbated by a particular sectarian problem-a large Shi’i majority population governed by a Sunni ruling family-that is unique in the area. It is unlikely that the other states will experience the same kind of political problems in the same way that Bahrain has recently, but events in Bahrain provide a cautionary tale to other GCC leaders.

 

     There are specific social and political circumstances in each state that add complicating factors to the issues set Out above: sectarian tensions, though less serious than Bahrain’s, in Kuwait and Saudi Arabia; the size and unique role of the religious establishment and its institutions in Saudi Arabia; the continuing effects of the Iraqi invasion on Kuwait; the Bahrain Qatar, Saudi-Qatar and UAE-Iran border disputes. While the context is common, the particulars in each state are different, and the choices they make will be different.

     While recognizing the differences among the GCC states, I have argued that they face a common agenda of problems in the area of the political economy of security. If serious financial crises are to be avoided, state spending must be brought into closer alignment with state revenues. There seems to be no prospect for a substantial and sustained increase in oil prices, so difficult choices of resource allocation must be made. There are no drastic changes that they can make in their defense strategies. They are committed to a relatively expensive strategy of acquiring high-technology weaponry both to offset manpower deficiencies and to tie the security interests of the United States and other great powers to their defense. At best they can trim defense spending at the margins and stretch out payments for major new weapons systems.

     The two areas that no GCC state can avoid addressing involve the size of the welfare state and the role of the state in managing the economy. The demographic numbers have a stern inevitability about them. The question GCC state leaders must face is how to convince their citizens that belt tightening is in the long-term interests of everyone in the country, as well as of their children and grandchildren. A first step in that direction is to make sure, and to be seen to make sure, that hardships fall on every group, including the ruling families themselves. As of yet none of the ruling elite’s have been willing to impose fiscal discipline on their families in a public way. A second step is to involve a greater range of the citizenry in decision making, though perhaps after the initial difficult economic decisions are made. Whether appointed consultative councils will fit that bill is one of the major questions in the political future of the Gulf states. Clearly where the population has had the experience of elected legislatures (Kuwait and Bahrain), appointed consultative bodies are not seen as a step forward in terms of popular participation in politics. In the other states, it is more difficult to tell both how the consultative councils will develop, and how the citizenry will view them.

     While the political sensitivity of shrinking the welfare state is well understood by the GCC, it appears that the political consequences of privatization are, as of yet, not. The enthusiasm with which governing elites in the Gulf have adopted the rhetoric of privatization (if not yet the reality) indicates that many see it as a cost-free way of dealing with fiscal problems. Nothing could be further from the truth. Real privatization would require two extremely difficult political choices by the GCC governments: (1) a willingness to tolerate, at least temporarily, substantial increases in citizen unemployment, or to radically restructure the economic incentives that now lead employers in these states to hire foreign labor; and (2) a willingness to construct legal systems based on clear, impartial and enforceable commercial laws that treat all citizens-employers, investors and workers-equally. A real and competitive private sector, not based on insider contacts, sweetheart deals and protected monopolies, would be a new thing in Gulf economies, and a politically difficult thing to build.

     I reiterate the point I made at the beginning: The fact that the GCC regimes face difficult choices in the realms of security and economics does not mean that they cannot meet these challenges and maintain domestic and regional stability. There are many paths open to the regimes in dealing with these issues, but they must be faced sooner or later. The choices they make concerning them in the next few years will determine the character of politics in the GCC states into the next millennium.

NOTES

1 Much of the recent literature on security in the Third World has emphasized the central analytical role of regime security in understanding the foreign and defense politics of these states. See for example Steven David, “Explaining Third World Alignment,” World Politics 43, no. 2, (January 1991); Mohammed Ayoob, The Third World Security Predicament (Boulder, Colorado: Lynne Rienner, 1995); Edward Azar and Chung-In Moon, “Legitimacy, Integration and Policy Capacity: The ;Software’ Side of Third World National Security,” in Azar and Moon, eds., National Security in the Third World (London: Edward

, 1998); and Brian L. Job, “The Insecurity Dilemma: National, Regime and State Securities in the Third World,” in Job, ed., The Insecurity Dilemma: National Security of Third World States (Boulder, Colorado: Lynne Reinne, 1992).

2 Current security threats in the Gulf are discussed at greater length by the author in his book Oil Monarchies, Domestic and Security Challenges in the Arab Gulf States(New York: Council on Foreign Relations Press, 1994) A number of the themes developed in the paper are treated in more detail in the book.

3 Andrew Rathmell, “Oman: Server cuts in Sultan’s defense,” Jane’s Intelligence Review 3, mo. 7 (July 1, 1996), p. 6.

4 The author obtained copies of the Memorandum of Advice (muzakkaray al-nasiha) in Saudi Arabia. “The Army” was one  of the sections of the Memorandum, and included the call for a citizen force of 500,000 men.

5 See The New York Times, October 13, 1991, pp. 1, 18; October 25, 1991, p. A9, for references to the Saudi proposal. Since that time there have been no moves to expand the size of the Saudi military.

6 In 991 leaders of the Saudi Shi’I community sent a petition to King Fahd in which they raised four specific issues which they were “absolutely sure…would be taken care of by your Excellency.” One of the four was a request that the “quarantine” against the entrance of Saudi Shi’I into the armed forces be removed, because many in the community wished to “discharge our duty of defending the soil of this country.” Practically identical English-language translations of this petition appeared in “Makka News” no.7 (April 6, 1991) and in “Arabia Monitor” 1, no. 6 (July 1992). “Makka News” was published by the Organization of the Islamic Revolution in the Arabian Peninsula, an Iranian-supported exile group with an American post office box address in Bowling-Green, Kentucky. “Arabia Monitor” was the monthly newsletter of the International Committee for Human Rights in the Gulf and Arabian Peninsula, published in Washington, D. C.

7 Ashraf Fouad, “Saudi may buy $7.5 billion airlines in phases,” Reuters (on-line), September 17, 1995.

8 United Nations, Demographic Yearbook-1991, (New York: United Nations, 1992), Table 1, p. 103; Table 3, pp. 106-11.

9 Population Reference Bureau, 1995 World Population Data Sheet (Washington DC: Population Reference Bureau, Inc., 1995)

10 It is extremely difficult to find accurate and official figures on the liquid reserves of the Saudi government. Middle East Economic Survey, January 25, 1993, p. B3, puts usable Saudi government reserves at $7.1 billion at the end of October 1992, though other analysts involved in Gulf financial matters put the figure much higher, closer to $20 billion. The New York Times published a two-part series on the Saudi financial situation (August 22, 1993, pp. 1, 12; August 23, 1993, pp.1 A^) in which they quoted an unnamed Saudi official as estimating the country’s liquid reserves at $7 billion. In a response to these articles, then Saudi Finance Minster, Muhammad Aba al-Khayl, wrote that the Kingdom had a $20 billion hard currency assets in excess of $15 billion. Part of Aba al-Khayl’s response was published as a letter to the editor in The New York Times, August 26, 1993, p. A18. The full text of the letter can be found in Middle East Mirror, September 2, 1993, pp. 20-22.

11 See al-Shall reports reprinted in al-Hayat, January 28, 1995, p. 9; and February 25, 1995, p.9.

12 al-Hayat, January 3, 1995, pp. 1, 4; The New York Times, January 3, 1995, p. A3; “Saudi wants to quickly balance budget-minister,” Reuters (on-line), January 9, 1995.

13 Christine Hauser, “Saudi Arabia cuts back desert wheat farms,” Reuters (on-line), July 2, 1995.

14 Steven Swindells, “Saudi oil price strategy may cut budget deficit,” Reuters (on-line), August 31, 1995.

15 Ashraf Fouad, “Saudi 1995 budget deficit slightly above target’, Reuters  (on-line), January 15, 1996.

16 Diana Abdallah, “Saudi economy healthier, but more challenges ahead,” Reuters (on-line), June 11, 1995; Diana Abdallah, “Saudi may pay all contractor’s debt by end of year”, Reuters (on-line), May 20, 1996.

17 Diana Abdallah, “Saudi 97 budget projects higher spending, revenue,” Reuters (on-line), December 30, 1996.

18 “UAE approves ’95 budget with 25 pct deficit cut,” Reuters (on-line), January 30, 1995; al-Hayat, October 3, 1996, p.9.

19 Youssef Azmeh, “Qatar confident after loan deal for huge gas field,” Reuters (on-line), June 19, 1995; “Qatar aims to slash budget deficit,” United Press International (on-line), April 4, 1996; Reuters (on-line), November 18, 1996.

20 Hilary Gush, “Qatar bourse seen soon, privatization later,” Reuters (on-line), July 12, 1995.

21 “Oman narrows budget deficit,” Associated Press, (on-line), January 15, 1996; “Oil prices push Oman growth in 1995”, United Press International (on-line), August 20, 1996.

22 Christine Hauer, “Saudi aid will ease Bahrain budget squeeze,” Rueters (on-line), April 15, 1996.

23 Reuters (on-line), September 22, 1996.

24 al-Hayat, November 11, 1994, p.9

25 Inal Ersan, “Oil prices cut Kuwaiti deficit, but reform needed,” Reuters (on-line), December 8, 1996.

26 al-Hayat, May 30, 1996.p.9.

27 Diana Abdallah, “Gulf coffers fill, economic reforms slow,” Reuters (on-line), December 19, 1996.

28 “Kuwait auctions share of industrial concern,” Reuters (on-line), June 22, 1995; “Kuwait outlines petrol station privatization,” Rueters (on-line), September 11, 1995; “Kuwait to sell 90 million gulf Bank shares,” Rueters (on-line), December 19, 1996.

29 al-Hayat, June 23, 1995, pp. 1, 6; Randall Palmer, “Oman may be overdoing expansion, economists say,” Reuters (on-line), January 19, 1995; Steven Swindles, “Oman attracts interest of foreign oil explores,” Reuters (on-line), June 20, 1996.

30 “Qatar to sell off shares in two firms,” United Press International (on-line), September 15, 1996.

31 For an excellent theoretical discussion of the problem faced by states looking to privatization and liberalization as solutions for their economic crisis, see Kiren Aziz Chaudhry, “The Myths of the Market and the Common History of Late Developers,” Politics & Society 21, no. 3 (September 1993), pp. 245-74. It is increasing to note that Chaudhry did extensive fieldwork in the Arabian Peninsula and Iraq for other projects. A similar argument about the obstacles to privatization in the gulf states has been made by Vahan Zanoyan of the Petroleum Finance Company. See his “After the Oil Boom,” Foreign Affairs 74, no. 6 (November/December 1995).

32 The problems presented by unemployment for the GCC states were highlighted in a recent address to a conference in Dubai on economic development in the region by Kuwaiti economist Jasim al-Sadoun. He said that current demographic trends indicate that by the year 2010 there will be 8 million new entrants into the labor market in the GCC states. “Planners and decision makers must then attempt to create enough jobs for the newcomers or face the alternative-severe unemployment with possibilities of social and political extremism. All available signs point to the latter happening.... People think thatbecause of the large number of expatriates it will not be difficult to replace them with national manpower. The reality is otherwise,” he said. Quoted by Reuters (on-line), February 5, 1995, citing an article in Arab Times.

33 Oman has had an official policy of “Organization” of the work force for years, though until recently it

has remained little more than rhetoric. Particularly after the departure of most of the

Palestinian community from Kuwait after liberation, there were serious plans mooted to reduce Kuwaiti

dependence upon foreign labor, but recent figures show that foreigners still make up more than 75 percent

of the Kuwaiti work force. Sharon Stanton Russell and Muhammad Ali alRamadhan, “Kuwait’s

Migration Policy Since the Gulf Crisis,” International Journal of Middle East Studies 26, no. 4 (November

1994), pp. 569-87. Bahrain officials are considering doubling the cost of work permits and renewals of

such permits forforeign workers, in the wake of serious social unrest on the island at the end of 1994 and

the beginning of 1995. “Bahrain might raise work permit fees for foreigners,” Reuters (online), September

23, 1995. Saudi Interior Minister Prince Na’if ibn Abd alAziz, whose country increased the cost of

foreigners’ work permits at the beginning of 1995, told the Saudi Press Agency that “replacing the

expatriate work force by Saudi nationals is a strategic goal of the state” (“Saudi to replace expatriates by

Saudis, Minister says,” Reuters (on-line), July 20, 1995).

34al-Hayat, October 3, 1996, p. 9.

35 See the account of that incident in Kiren Aziz Chaudhry, “The Price of Wealth : Business and State in Labor Remittance and Oil Economies,” International Organization 43, no. 1 (Winter 1998), pp. 101-45

36 Reuters (on-line), November 30, 1994.

 

37 See al-Hayat, October 18, 1994, p. 4; October 24, 1994, pp. 1, 4; October 29, 1994, p. 10 for reporting on this issue.

38 al-Hayat, June 28, 1995, pp. 1, 6; July 9, 1995, p. 5; August 23, 1995, pp. 1, 6.