CHAPTER 1
Introduction: The States of the Gulf Cooperation Council – The Paradox of Wealthy Less-Developed Economies
For several decades now, the states of the Cooperation Council for the Arab States (GCC) have defied many preconceived ideas of modernity and development. Half a century ago, these countries could hardly be called anything but undeveloped. Illiteracy, subsistence economies and no electricity in large parts of the countries were no exceptions. Oman, to give just one example, was almost cut off from the rest of the world until 1970.
Today, all six states of the GCC are among the first sixty countries of the Human Development Index. (UNDP 2011) Even though they have remained developing countries, they have made tremendous progress.
The term developing country usually evokes a picture of states where a few elites have benefitted from growth while the rest of the society bears the burden of industrialization: exploitative and unhealthy working conditions and low wages, while infrastructure and social welfare are only slowly improving, if at all. The situation in the states of the Gulf Cooperation Council is different. The wealth seems to have reached all layers of local societies. There are not just a few wealthy oligarchs; all citizens seem to have expensive cars, the latest cell phones, access to free health care and other welfare while paying virtually no taxes.
To many Western observers it is puzzling to find these well-known features of our own technological era combined with what could be perceived as traditional and Islamic features: a large percentage of local women can only be seen veiled and the idea persists that women can only leave the house or country with their husband, father, or brother. In Saudi Arabia, for instance, women are not allowed to drive a car and many public spheres are divided into female and male zones. International media keep repeating these phenomena as major signs of discrimination against women, although these rules are often not effective. Equally complicating matters might be the planning of a shopping trip or visits to the authorities according to the daily prayer times during which clients in Saudi Arabia often have to leave a shop, mall or offices.
What might be more puzzling than the seemingly traditional habits of the locals, however, is the fact that one hardly meets and communicates with them. Knowledge of Urdu or Hindi is often of greater value in daily life than Arabic as most services are provided by the huge amount of expatriates in the region. Blue collar work is done by workers from poorer countries such as Pakistan, India, or other countries in South-East Asia, who often send their money back to their families. Due to labor migration, development in the GCC states has an important international outreach that has shaped the economies of labor exporting countries too. In the smaller Gulf States, these workers are more numerous than the local population and "the Gulf economy and lifestyle, as it is now, would simply not be sustainable without its migrants." (Osella 2011: 8) Nevertheless, these workers have to struggle for the recognition of the essential work they do and their working conditions are often precarious. Returning empty-handed to their home countries, however, is not an option either.
The "locals" prefer to work in white collar jobs, but also here, many high-skilled posts are held by foreigners from industrialized countries or other Arab countries: the latter work as engineers, teachers, doctors, professors or advisers. Gulf citizens – and this is not only a prejudice – mostly work as civil servants in the inflated public administrations. (Davidson 2009: 149-153)
Although these impressions from the region are not unjustified and are supported by a vast amount of data, they are not always 100% clear. Modern vs. traditional, male vs. female, foreign vs. expatriate are helpful, but often deceptive categorizations.
Many of the traditional features, especially where women are concerned, are the result of a multi-layered interplay between traditional and Islamic institutions and the rapid modernization in the aftermath of the oil windfalls. They are far from being mere remnants of old traditions, and some of them, such as women who stay at home instead of work for pay, have only been made possible by the revenue from oil. Women are now better educated than their male peers in the GCC, and staying at home or wearing the abaya, hijab and niqab is sometimes a very modern choice, and not a traditional or Islamic custom. The same holds true for business habits which have become a mixture of foreign influences and traditional habits. Businessmen may wear the traditional dishdasha or thobe and conversations and negotiation styles may differ substantially from Western habits (Cole 1992; Badran 1995; Hecht-El Minshawi 2007; Rothlauf 2006; Berger et al. 2014) but nonetheless, Western influences, often imported via consultants and expatriates, are strong and often cause confusion, not only between foreigners and locals, but also between the younger and older generations, or local and foreign-educated nationals. It is not unusual that young Gulf nationals become demotivated in inefficient, highly hierarchical business structures, and one has to ask whether the oft-quoted rentier mentality has become more structural than mental.
The same is true for other ideas about the "local". While it is true that one would hardly find a Gulf citizen working at a building site, there is poverty, unemployment and underemployment among nationals of the more populous GCC states. Even employed, well-educated young men often find that their skills cannot develop within the local business structures, whereas others face an unbridgeable gap between fulfilling the traditional role of a son in an extended Gulf family with the demands of a modern labor market, such as spending time working or studying abroad. Young males especially have been the subject of a lot of concern in the fast-growing Gulf societies.
Nonetheless, the puzzle of seeing wealth and industrialization grafted upon traditional societies remains. In the industrialized countries of the West the relative wealth today is the result of a long development process whereas in the GCC states it stems mostly from oil exports. There is nothing in the GCC states that has not been affected by the discovery and production of oil and gas. Natural resources are not only the origin of all wealth and luxury, but several decades ago they played a major role in the consolidation of the young and fragile states and the drawing of their borders. Today, these resources are the basis of power of the ruling dynasties and therefore crucial for the maintenance of the status quo.
However, Gulf States may sooner or later run out of oil and gas, as they are depletable resources. When and if this occurs is unclear. New oil and gas wells keep being discovered and production techniques continue to be better developed. There are experts of the oil sector who forecast an economic rather than "real" depletion: at a certain point, oil might be replaced by other sources of energy because its production (and its negative externalities) might become too expensive. Others warn that peak oil has already been reached or will be reached soon. (Heinberg 2003; Deffeyes 2010; Simmons 2005; Legett 2006; Legett 2013) While oil prices may rise tremendously before final depletion, most scenarios point to the possibility that oil and gas exporters will eventually have to adapt to less income from their natural resources - be it due to lower prices or depletion. Recently, the massive expansion of shale gas extraction, mainly in the US but also in Europe, has caused immense uncertainty as to how demand for fossil fuels would develop. However, even in absence of such a scenario, the dependence on natural resource exports has downsides as it makes these states vulnerable to exterior influences that become manifest in oil price fluctuations. The decline of oil prices in the 1980s resulted in serious difficulties as well as budget deficits for oil exporters such as Saudi Arabia or Kuwait and this scenario seems to repeat itself in 2015 with an oil price well below US $60. After the oil price boom in the 1970s, tremendous sums poured into the construction sector and the welfare system. Free education and health care and jobs in the public sector have diverted people from participating in politics. Gulf citizens have come to expect their share of oil windfalls, making it harder for governments to cut back on spending. (Beblawi 1987: 86) The latter have therefore tried to prevent a decrease of revenues by following two main strategies: the first consists in rent diversification and maintenance. This strategy includes policies to guarantee a reasonably high oil price, with an accumulation of alternative sources of rentier income, such as foreign assets.
The second strategy is what one may call "non-oil growth" or "non-depletable growth", corresponding to the growth of the non-resource sectors of their economies. This is part of the diversification strategy that mostly consists of downstream projects, such as processing oil and gas further, although upstream projects could also be part of such a strategy. The question of whether this can be considered "diversification away from oil" is disputed. Most of these projects still rely on oil, gas and other natural resources, but so do most industries all over the world. Leaving the natural resources in the soil is not a real alterative either. As Luciani put it (2012: 184), "the sensible approach to economic diversification is not away from oil but leveraging the availability of oil and gas."
Rent diversification and rent maintenance have been quite successful so far: the revenue from capital investments abroad has provided substantial income. The sovereign wealth funds of the GCC states have so far operated very successfully, partly due to the support from the world's best investment experts. They also have a reputation of being interested in long-term investments rather than in short-term speculation. Recently, the financial crisis (2008) has probably decreased these assets but also opened up more possibilities for international investments. (El-Kharouf; Al-Qudsi; Obeid 2010)
As for rent maintenance, where OPEC succeeded in keeping the oil price high in the 1970s, prices plummeted in the 1980s. OPEC's production agreements proved rather ineffective in the aftermath. (Ramady 2015) The recent oil price rises suggest that factors other than OPEC have far more impact on oil prices. Today, oil prices seem to be largely out of the producer's control and more heavily influenced by international political events and financial speculation.
Diversifying economies away from the oil and gas sectors, however, has turned out to be very difficult despite huge investment capacities. And even if some countries have made more progress than others, the economies of the GCC states still rely heavily on oil revenues for subsidies. The quest for "non-depletable growth", therefore, has to continue.
While rent maintenance and diversification may be as important and as valid as non-oil growth, this study will only deal with the latter. The following three questions will be asked:
1. Have the GCC states made significant progress in developing their non-oil economies?
2. What factors and which combination of factors account for the success or failure of non-depletable growth in the GCC states?
3. What role does the degree of resource abundance or dependence play in this process?
The first question may be more difficult to answer than expected. Official data and growth rates more than ever hide the real economic development of oil exporters. (Beutel 2012) It is necessary to go beyond ordinary macroeconomic statistics in order to judge whether the GCC states are on a path toward becoming less resource dependent economies or not. In the end, success depends on more than the revealed data. It is impossible to predict whether the entire process of diversification is sound and would shield the GCC states from trouble were income from oil and gas to run out. There are cases of rich natural resource exporters such as Nauru that have seen their sovereign wealth funds depreciated and their resources depleted, leaving them with just spoilt administrations and environmental problems. As Piketty (2014: 7) wrote in his famous Capital in the Twenty-First Century, it "is much too soon to warn readers that by 2050 they may be paying rent to the emir of Qatar". This study, therefore, will only focus on one aspect of this strategy. It is important to note that this question is focused on the very aspect of the non-oil economy of and in the Gulf states. I do not analyze the overall development process or diversification, partly because I doubt that it is possible. Several projects depend on international developments which are hard to forecast, and several development strategies — such as debt-financing in Dubai — are heavily debated, and judging them as good or bad is an ideological question. Therefore I will judge the economic performance by the local development of the non-oil economy. This choice was necessary because reliable information on foreign assets is hard to obtain. While some funds operate transparently, others are rather opaque. Sovereign wealth funds (SWFs) in some GCC countries are only a comparatively recent phenomenon. Often they are meant to be a fund for future generations but it is unclear if and how such redistribution would work.
The answer to my first question is also essential to my second question: what factors and what combinations of factors account for the success or failure of non-depletable growth in the GCC states? Why do some countries perform better than others? As I will show in my theoretical overview, these are very common questions in growth theory and development studies, but it seems that large-scale oil exporters are exceptions.
As a third consequential question, this study also adds to the resource curse debate. Do very resource-rich countries really grow more slowly than less resource-rich countries? And if so, is there a threshold between resource-poor and resource-rich countries that marks the beginning of a resource curse? This question will be answered with regard to the six countries in question. Economists have frequently investigated economic growth in developing countries and no single remedy for bad performance has been found so far. Lessons learned in industrialized countries have often been applied to less developed countries, and failed. (Onyemelukwe 2005: xi-xv; Easterly 2001). Instead of applying growth theories of industrialized countries to the GCC states, I would like to investigate the specific patterns of growth in this very homogeneous region. Such a focus also allows and even calls for a more thorough discussion of their economic, social, cultural, and political conditions.
The various conditions, in turn, raise the need for a sound theoretical background of the variables. The choice of a theoretical framework has to take into account one important paradox: the GCC states are wealthy countries, but nevertheless their economies are underdeveloped. This makes it difficult to decide whether we must deal with economic growth or development. Usually, studies of economic growth deal with growth in developed countries whereas development economists try to find out how less developed economies could grow and become developed. Moreover, development should also contain the aspect of a qualitative improvement. Herman N. Daly, for instance, contrasts growth and development as follows:
'To grow' means to increase the size by the accretion or assimilation of material. 'Growth' therefore means a quantitative increase in the scale of the physical dimensions of the economy. 'To develop' means to expand or realize the potentialities of; to bring gradually to a fuller, greater or better state. 'Development' therefore means the qualitative improvement in the structure, design and composition of the physical stocks of wealth that results from greater knowledge, both of technique and of purpose. (Daly 1990: 113)
This qualitative aspect is also interesting to the Gulf States, not because growth in general is needed, but non-oil growth is required. Thus, development theories seem to be more likely to explain this process. However, development theories suffer from a huge disadvantage compared to growth theory: in developed countries growth has already taken place and can be analyzed in hindsight. On the other hand, where development and therefore stable and significant growth has yet to take place, advice on development is rather difficult. Such advice could only come from other countries' experiences, and these are likely to have a different outset. What about the GCC states in this context? In some, per capita GDPs are higher than in the USA. If their growth rates are computed with GDPs that include oil exports, one cannot deny that growth has taken place. In many instances therefore, the GCC states do not share the lot of many underdeveloped countries.
