Between the summer of 2008 and the beginning of 2009, oil prices plummeted from a high of $147 per barrel to a low of $33. This extraordinary reversal of fortune announced the end of the second oil boom for the countries of the Gulf Cooperation Council (GCC) — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates — precipitated, of course, by the broader global financial crisis. How these oil-exporting countries will weather this dual economic challenge is a live question. From the time that the Gulf economies took off in 2003, there were growing worries that their rapid rise was a massive investment bubble built on high oil prices and cheap credit. This speculation centered on the UAE city-state of Dubai, due to the pace of its expansion and the magnitude of its debt. Region-wide news of delays in construction mega-projects, private bank failures and merchant family business collapses, however, have raised concerns that Dubai is not an anomaly, and that all the GCC members are headed for an economic bust.

Undoubtedly the Gulf is undergoing the aftermath of the regional investment boom and financial sector expansion. Moreover, since imports of capital by local businesses and foreign investors helped spur growth rates to new heights, especially after 2005, the global contraction has exacerbated regional problems. With less money sloshing around in the West, there is less to invest in the Gulf. As is typical of commodity price and credit-based binges, this hangover will take a number of years to wear off. The Gulf is thus likely to face a number of years of slower growth, with the throngs of Arab, South Asian and other foreign workers who perform the bulk of the manual labor and service jobs paying the highest price.

Nonetheless the predictions of doom and gloom, holding that the Gulf will suffer a “lost decade” as it did after the oil price collapse in 1986, ignore the altered trajectory of the region. Structural changes on the economic and political fronts have expanded the options available to these states and have increased their capacity to deal with present challenges, even though a more globalized Gulf could be more exposed to contagion from the rest of the world.

In 1986, the oil price decline exposed the fragility of the political economy of the region on four levels: the inability of the states to control the global oil price; the weakness of the public sectors in regulating and stimulating growth; the unwillingness of the private sectors to commit funds to the local economies; and the tepid support of the populations for the respective ruling families. Since that time, global oil market dynamics have turned in favor of the GCC states and their partners in the Organization of the Petroleum Exporting Countries (OPEC). Meanwhile, Gulf regimes have worked hard to regain the advantage on the domestic front by reorganizing economies and political systems in ways that give the families more control but also often seek greater engagement from citizens. Central to these changes has been the altered relationship between state capital (in both its technocratic and royal forms) and private (local and foreign) capital—an alliance with potentially profound consequences for future Gulf development.

The GCC states face the current crisis with a new oil paradigm, a new model for economic growth and a new politics of engagement, all of which will shape the ability of the regimes to manage the downturn.

Firmly in OPEC’s Hands

Oil is the lifeblood of the world economy, and the hemoglobin of the Gulf. The price of oil is easier to control today than it was in the 1980s or mid-1990s, especially for Saudi Arabia, the swing producer that possesses the hugest hydrocarbon treasures in the world. Two fundamentals have changed: There are no “hawks” or “doves” in OPEC any longer, as members are now aligned on prices, and the threat posed by non-OPEC oil producers, such as the North Sea countries, has disappeared.

In the 1980s, OPEC was beset with division over the conduct of oil markets and oil price objectives. The more populous hawks, Nigeria, Algeria, Iran and Indonesia, wanted higher oil prices. The smaller doves, particularly the states of the GCC, were content with lower prices. The economies of the latter had a low “absorptive capacity” and thus generated surpluses at lower prices. For Saudi Arabia, this price objective was underpinned by long-term strategic and geopolitical considerations. Before the 1979 Islamic Revolution in Iran, Saudi oil minister Sheikh Zaki Yamani wanted lower prices so that the world would remain comfortably addicted to oil, with the kingdom its primary supplier. After the revolution, the Saudis under King Fahd grew closer to the United States and felt obliged, in return for shelter under the US security umbrella, to provide the world’s largest consumer with lower-priced oil. Saudi Arabia’s role within OPEC was one of price modifier, and since it held so much of the organization’s excess capacity, the kingdom could adjust its production to dampen prices.

Today, after the economic ravages of the 1980s and 1990s, even richer countries like Saudi Arabia and the UAE need higher oil prices. The core divide over how much each country needs to balance its books still exists — Venezuela is estimated to need a price of around $100 per barrel, while Qatar needs $10 and the Saudis $50. But the memory of uncontrollably low prices has created unprecedented unity in OPEC. The countries with a lower price threshold are content with higher prices and are more than happy to bank the surpluses. In balancing the needs of various producers, King ‘Abdallah of Saudi Arabia stated that OPEC should strive for $75 per barrel. This price would meet most producers’ revenue needs without scuttling the economies of the consuming countries. The question then comes down to whether OPEC can achieve influence over crude oil markets and maintain the price it wants.

Most oil market analysts believe that this target is entirely feasible over the medium term and that, in fact, $75 per barrel may be the low end of the long-term oil price range. This belief is based on what is happening in the non-OPEC countries. The price spike of the 1970s and 1980s, the first oil price shock, led to a sharp increase in supply from the North Sea, the Soviet Union, Mexico and even smaller producers in Asia. These non-OPEC producers pumped more oil and seized market share from OPEC at precisely the time that consuming countries — even the oil-thirsty US — mounted efficiency and conservation drives. Squeezed by higher production from elsewhere and lower demand, OPEC was forced to cut output. This double whammy was repeated as recently as the late 1990s, during the Asian crisis, when Asian demand collapsed while North Sea output continued to climb.

But non-OPEC producers’ salad days are numbered. Around the world, most oil basins’ production is either hitting a plateau or is in terminal decline. Select non-OPEC producers, notably Brazil, may buck this trend, but the flat or decreasing overall non-OPEC production leaves OPEC to pick up the slack of any incremental increases in demand. In 2008 and 2009, global demand has shrunk due to the recession, but those areas that continue to grow, notably Asia, are firmly in the hands of OPEC. With members aligned on a price of $75 or higher per barrel and with Saudi Arabia loath to depress prices, the price target could be sustainable for up to five years. One can envisage a number of risks for this forecast — another efficiency campaign due to public policies and private cost cutting, collapsing demand due to weaker economies or alternative fuel sources — but prices can remain in this range with fairly minor adjustments of Saudi production.

There are fewer rivalries spilling over into intra-OPEC diplomatic relations and decision making. In the 1980s, Iran and Iraq were at war and the GCC was arrayed against Iran. The US was a growing force in the region and OPEC doves were willing to listen to its dictates in the face of the revolutionary Islamic Republic. Today, member states are in no position to attack one another and, due to the 2003 invasion of Iraq, US hegemony has eroded. Saudi Arabia is unwilling simply to toe Washington’s line on oil prices, though it may from time to time temper prices to be seen as a responsible member of the global economic community. With Chinese demand rising steadily, this Saudi attitude has as much to do with Saudi-Chinese relations as with the alliance with the West. In the meantime, Gulf regimes have been working hard to gain more control over domestic spending and to find new sources of capital and economic growth.

The Asian Recipe

By the mid-1990s, after a decade of low oil prices, enormous budget deficits, debt accumulation, falling real incomes, rising unemployment (exacerbated by population growth) and economic policy paralysis, the poorer Gulf regimes were haunted by the specter of political revolt. In Bahrain, 1994 saw widespread demonstrations, riots and attacks on public institutions. The Saudi monarchy faced demonstrations in its ancestral heartland and petitions for political reform led by persons upon whom it had lavished money during the “religious awakening” of the 1980s. Qatar went through yet another contentious succession in the emir’s palace, followed by (Saudi-backed) attempts at a coup and even a mini-war with its neighbors. Hundreds were arrested in ordinarily quiescent Oman for anti-government activities, while in Kuwait the royal family progressively lost power as popular support shifted to Islamist parties and other opposition groups in Parliament. The regimes scrambled to find a new economic model that might save their rule.

The Asian miracle seemed to have potential. Since the early 1980s, the ruling families of Bahrain and Dubai had wanted to emulate Singapore. The rapid growth of other Southeast Asian economies, notably in Malaysia, Indonesia and Thailand, in the late 1980s showed that the Singapore model could be applied elsewhere. Malaysian Prime Minister Mohammad Mahathir’s dictum, “Growth is like a river in flood; it obscures the rocks below,” resonated in the politically volatile Gulf. Saudi Arabia’s Foreign Minister Sa‘ud al-Faisal and the new emir in Qatar started to talk admiringly of Asia, and Oman came out with “Vision 2020,” modeled after a similar strategy in Malaysia. The Asian model held the promise of preserving the politics of authoritarianism through the dynamism of market capitalism and globalization.

There was one big problem. The Gulf states did not have the ingredients for the Asian recipe: state-of-the-art infrastructure, a skilled populace, internationally competitive wages and an efficient, flexible and far-sighted bureaucracy. While the Gulf countries had invested in infrastructure during the first oil boom, by the mid-1990s it was decaying. Cheap labor from the poorer Arab world, South Asia and elsewhere spared Gulf citizens a great deal of work, but it also left them without marketable skills. Added to poor public education, unearned government largesse and skewed expectations of high salaries, the deskilling made Gulf citizens uncompetitive. The local bureaucracies, so integral to the system of public patronage, were too often slothful, venal, unskilled and suspicious of the private sector.

Moreover, and critically, the Asian model required foreign investment to spur growth. A combination of circumstances hindered foreign investment in the GCC countries, despite the pretense that these economies were open for business. Local merchants sought protection from foreign competition through the agencies law, which established their exclusive jurisdiction over the importation of certain registered goods. Governments restricted investment in a slew of domains beyond the nationalized hydrocarbon sector. State companies compartmentalized the economies. Ruling family members built up private monopolies in certain areas, to which they would not admit local businessmen, let alone foreigners. As a consequence, global companies did not see the Gulf as a place to invest, even though it was a middle- to high-income market.

Despite these obstacles, pressured by falling real incomes and rising unemployment, by the late 1990s the Gulf regimes had tentatively begun to gather ingredients for the Asian recipe. Dubai was the leader of the pack, transforming itself from a smuggling entrepôt servicing Iran and South Asia into a globally competitive business and tourism center. New commercially oriented government companies built up the infrastructure, public services, airlines and telecommunications networks, and launched an ambitious publicity campaign. By 2000, Dubai became the embodiment of Singapore in the Gulf, and local promoters of the Asian model took heart.

Dubai’s poorer cousin, Bahrain, began building on its strengths as well. It had spawned an offshore banking sector in the late 1970s, which stagnated in the ensuing two decades because of a liquidity squeeze. The sector could not channel money out of the region because, after the 1986 oil price bust, the Gulf countries no longer had large surpluses, and it could not facilitate lending due to local financial problems and anti-creditor regulations, particularly in Saudi Arabia. The idea was hatched to nurture the nascent Islamic banking market, which had emerged as a parallel banking system in Bahrain, as well as in Dubai, Kuwait and, surreptitiously, in Saudi Arabia. Bahraini economic strategists saw Islamic banking as a sector over which they could exert a cultural comparative advantage, and preserve their position as the regional financial center despite the withdrawal of many international banks. Thus they used their reputation abroad as the most seasoned regulators in the Gulf to champion the creation of a new accounting system and ratings practices more suited to the industry and, eventually, new investment products for the Islamic market. Through these regulatory and product innovations, Bahrain was able to foster an industry rapidly. It could be argued that this was the only truly homegrown economic innovation in the Gulf.

When Saudi Arabia initiated the process for accession to the World Trade Organization (WTO) in the late 1990s, the kingdom sent a clear signal that it would open itself up to investment from around the globe. WTO membership served several political and economic purposes. It protected the kingdom from discriminatory trade practices, particularly tariffs and restrictions on the Saudis’ burgeoning petrochemical industry. It provided a formal means of settling international disputes and, in general, Saudi Arabian exports would be given most favored nation status. Local proponents, particularly the more progressive technocrats, saw the WTO as a way to rein in corrupt, monopolizing royals and reinvigorate the parasitic private sector through competition from abroad. Moreover, those technocrats who were committed to making more politically difficult reforms could blame them on the WTO negotiations. WTO accession, concluded in 2005, led to a new foreign investment law, the creation of the Saudi Arabia General Investment Authority, a new insurance law and early attempts to privatize, if partially, a number of large government institutions. When ‘Abdallah, then crown prince, called for the opening of the Saudi Arabian gas sector to foreign investment, it was clear the ruling family was serious about economic restructuring.

Oman also sought to kick-start economic growth through globalized services, mainly tourism, and to use natural gas to fuel energy-intensive industries. Vision 2020 articulated these policies and directed government agencies and private-sector players toward this end. In the late 1990s, Emir Hamad’s dream that Qatar would become the world’s largest exporter of liquefied natural gas was well on its way to being realized, in partnership with ExxonMobil. As the revenues from these exports were spent on infrastructure, transportation and public services such as Education City — the pet project of Sheikha Moza, wife of the emir — Hamad began to see Doha as another Dubai. Only two emirates remained relatively quiet in the late 1990s: Kuwait and Abu Dhabi. Both enjoyed gigantic surpluses, even with oil at $10 per barrel.

Yet despite these unprecedented policy moves, and with the possible exception of Dubai, in 2000 the Gulf was still mired in the problems of the previous two decades. Oil prices remained low, though the March 1999 OPEC meeting had put a floor in place. The resulting rebound provided some relief to government budgets, but for the most part the Gulf states had reconciled themselves to lower spending and balanced budgets. Fiscal probity, however, did nothing for growth. Worse, the new regulations were not putting the region on the world’s list of investment destinations. Again, Dubai was the exception, but, constrained as well by the regional malaise, it was a shadow of its later self.

Flight Path

Several factors came together to put the Gulf on the flight path of 2001-2008. First, oil prices started to climb after 2001, driven by stronger demand from China and, later, by production problems in Venezuela, the destruction of the Iraqi oil sector after the US invasion and the lack of new non-OPEC supply. Initially, Gulf governments did not believe in the permanence of higher prices and remained conservative on the spending front, preferring to pay off debt and build up foreign assets. As oil revenues continued to mount, the wealthier Gulf governments began to accumulate huge foreign reserves: Kuwait, Qatar and the UAE held close to $1 trillion in foreign assets in late 2007. The substantial windfall persuaded these countries to diversify their investment holdings by seeking higher returns through sovereign wealth funds, fueling Western anxieties about their rising influence in the global economy.

While Gulf governments increased their holdings abroad, they yearned for Western capital at home. In following the Asian model, the Gulf regimes had hoped that foreign investors would line up to take advantage of the more hospitable climate. Instead, something strange happened. The local private sector began repatriating capital and kicked off a boom in investment. In fact, the local private sector is key to the new political economy that emerged in the Gulf during the 2001-2008 economic expansion. In the oil spike-led growth of the 1970s, most local capital was invested abroad. As oil prices skyrocketed after 1999, however, Gulf businessmen regained confidence — and pecuniary interest — in the economies at home. The prodigal private sector was pushed hard to return after the September 11, 2001 attacks, as wealthy individuals and large companies feared scrutiny of their investments in the West and decided it was safer to repatriate the funds. Indeed, the flood of investment by the private sector preceded the increase of government spending, which began to rise significantly only after 2003.
Still, with markets throughout the Middle East and further afield in East Asia enticing Gulf investors, Gulf governments had to take action to attract and keep this new capital. They did so through two innovations. First, the attempts at the reorganization of the public sector began to centralize decision making and empower technocrats. New regulations opened up new industries. In Saudi Arabia, for example, the new insurance law promulgated for WTO accession led to the creation of an insurance industry. New Islamic banking regulations spurred growth in this sector. Second, and more significantly, the Gulf states founded government companies managed and partly financed by the private sector. There were three variations on this theme.

Previously stagnant national oil companies entered into partnerships with predominantly foreign companies, as per Saudi Aramco’s massive deals with Sumitomo Chemicals and Dow Chemicals, to use oil and gas to create new industries, not just revenues for the state. This practice was not new — the Saudis had done it in the 1980s — but it was taken to new heights.

A more novel variation was the use of state-supplied fallow land for sprawling “economic cities” where the private sector financed the infrastructure and created the playground for future productive investment. And third, the ruling families (as opposed to the state) bankrolled wholly new entities in partnership with the local and foreign private sectors. Some of the wealthier states redirected part of their ever growing surpluses back home as sovereign wealth funds, now disguised as new companies focusing on real estate, port facilities, petrochemicals, oil pumping, oil shipping and investment. Funds such as Mubadala in Abu Dhabi, Istithmar in Dubai and the Qatar Investment Authority were used more as government-owned investment firms than as sovereign savings accounts, with a mandate to diversify and develop domestic economies through creating new companies that had direct equity stakes in firms that offer capital, technology or expertise needed in certain strategic industries.

The most innovative of the public-private partnerships came in the form of the “hybrids” — companies outside the formal state. These are companies funded by government money (Dubai Ports World, for example), controlled by ruling family members and operated as commercial entities. They have official status since their principals are members of the ruling family. From a political economy viewpoint, these entities helped the ruling families on a number of strategic fronts. They gave economic space to ambitious and financially oriented royals without exacerbating political rivalries at the top. Such rivalries have multiplied over time given the rulers’ large numbers of progeny. These contests might have engendered competition for government funds, threatening to impair the proper functioning of the state and, ultimately, bringing undue charges of corruption. Under a patina of formality, these hybrids now provide an income stream outside the state to ruling family members but also appear as instruments of development.

Another problem these hybrid entities helped to alleviate was the frequent complaint heard in the 1980s and 1990s that the ruling family was crowding out members of the traditional merchant class. Now the old merchants and, increasingly, entrepreneurs have reaped the profits from the hybrids — spreading a perception, until recently, that the fruits of the high-flying 2000s have been shared. Moreover, the ruling family has blunted the tendency of the private sector to be independent-minded. It was a masterful turn: In the 1990s, some royals faced the prospect of borrowing through the public exchequer from the private sector, which undoubtedly would have extracted political concessions. In the new ventures, key regime figures were in charge and once again able to dispense largesse only to the loyal.

While this new capital alliance had clear advantages, it did aggravate income disparities in countries where the gaps were already yawning. The growing distinction between the luxuriating private sector and the fading classes still dependent on the state was already drawing notice at the height of the boom, and it emerged as a key political issue after the global financial crisis struck in 2008.

A New Politics

The engagement of Gulf citizens was not limited to business. In the last decade, all of the ruling families of the Gulf — even the Saudis — fashioned political institutions to channel popular agitation and to address the noises emanating from the US about authoritarianism and extremism. These new institutions, some of which were dormant ones revived for the post-September 11 era, were primarily meant to strengthen the grip of the ruling families, but they did result in greater political participation for and accountability to the populace (excluding, of course, foreign workers).

One aspect of these reforms was simply better governance. Since the mid-1990s, the Al Sa‘ud have striven to improve the quality of the men who serve as ministers. The appointments of ‘Ali al-Nu‘aymi, Ibrahim al-‘Assaf, Ghazi al-Ghusaybi and Muhammad al-Jasir to the Ministries of Oil, Finance and Labor and the Saudi Arabian Monetary Agency, respectively, clearly indicated a preference for competence over favoritism. King ‘Abdallah has also attempted to cap some of the corrupt practices of ruling family members and demand that they pay for public services they use.

Similar moves were apparent in other Gulf countries, though in Kuwait and Bahrain the appointment of ministers was complicated by the rise of parliamentary politics. Under the tutelage of the crown prince, economic policymaking was given greater prominence in Bahrain. Divisions in the ruling family necessitated the creation of institutions like the Economic Development Board and the National Oil and Gas Authority, which were designed to bypass patronage networks embedded in the old ministries and are controlled by the prime minister. In Qatar, where the talent pool is shallow, the emir has relied on the competence of his oil minister, the finance minister and his wife to implement huge and complicated projects. He has also called upon his uncle not only to maintain domestic peace but also to help on the foreign policy front. The Al Maktoum of Dubai and the Al Nahayan of Abu Dhabi have created technocratic structures to show their citizens and foreign businesses that their city-states are run efficiently and transparently; in Dubai, several technocrats were prosecuted for alleged corruption. The sultan of Oman tasked a collection of trusted aides and technocrats with economic development after the release of Vision 2020. Certainly, nepotism and waste remain endemic, but these moves demonstrated that Gulf rulers knew reform was necessary to curb the worst excesses and move closer to the Asian paradigm.

The ruling families of the Gulf have also moved to lessen mid-level influence peddling by engaging the populations directly. The Kuwaiti parliament is the only elected body in the region with real legislative power or the ability (however limited) to sanction the executive. But the nominally proto-democratic institutions in other countries were an acknowledgement, nonetheless, that the ruling families had lost their customary absolute power and needed to at least listen to the ruled. These institutions also reinforced the measures taken to improve governance. In some cases, ironically, the ruling family used a parliament to bolster its own power. In Qatar, for instance, the emir wanted a direct tie to the population partly to ensure that he, and not some usurper from the perennially disputatious Al Thani, remains their ruler. It remains to be seen if his will be an adequate insurance policy. In another example, the ruler of Bahrain, an emir until 2002, gave the populace parliamentary rule in return for bestowing upon him the title of king. The Kuwaiti parliament also ratified the rule of the branch of the Al Sabah currently in the palace after the brief succession crisis of 2006. Other ad hoc moves by the ruling families have lessened social cleavages. In Saudi Arabia, King ‘Abdallah initiated a “national dialogue” aimed at improving relations with the Shi‘i community; Bahrain’s Economic Development Board was also set up to address — albeit indirectly — the economic disenfranchisement of the Shi‘a, although other moves by the ruling family cast doubt on their commitment to bridging the sectarian divide.

While these moves helped to soothe tensions, the regimes also stepped up efforts to divide and conquer organized political challengers. Terrorist attacks in Saudi Arabia played into the hands of the ruling family, which had long yearned for a way to discredit the more radical elements of the “religious awakening.” With the “national dialogue,” King ‘Abdallah showed who was boss in the kingdom, since none of the various regional and religious groups dealt with each other directly. In Kuwait, tribal disenchantment with — and liberal fears of — the urban Islamists have put the ruling family back in the driver’s seat, especially as the old nationalist and leftist opposition would rather deal with the ruling family than with the Islamists or tribal MPs (see sidebar). Bahrain’s principal opposition group, al-Wifaq, boycotted the first parliamentary elections in 2002 and essentially recused themselves from politics for four years. After returning to the electoral field in 2006, al-Wifaq’s inability to achieve much through a parliament designed to contain them has allowed a more confrontational Shi‘i opposition movement, al-Haqq, to siphon off younger cadres.

While dividing the domestic opposition, Gulf regimes were awarded from abroad with a surprising source of national unity. Until the 2006 victory of Hamas in Palestinian legislative elections, the administration of George W. Bush held forth about democracy in the Middle East, seeking to shake up the cozy ruling arrangements that it perceived as fostering discontent and extremism. Ironically, the Bush administration wound up stabilizing the Gulf regimes. First, it raised the specter of external threat from a country that was perceived in the region to be doing Israel’s bidding. After the September 11, 2001 attacks ended the US-Saudi special relationship and US troops withdrew from the kingdom, the Al Sa‘ud were better positioned politically at home. They appeared to the opposition as the best answer to the Pax Americana that the invasion of Iraq seemed to augur. The Al Sa‘ud were able to recruit some of their most vociferous critics to their cause against domestic radicals and terrorists. Second, from mid-2003 onward, the regimes were able to point to the chaos in Iraq as an example of what the US meant by democracy. Most opposition movements became more than willing to countenance the restricted politics of the pacific southern Gulf, if the tumult in Iraq (and now Iran) was the alternative.

Nonetheless the interactive dynamics of the new economy and participatory institutions have brought to the fore new social cleavages and generated new political forces that will tax the proven political prowess of the regimes. The resistance of state-dependent civil servants to these changes is particularly noteworthy. While these privileged workers saw their incomes rise during the boom, they did not rise as quickly as those of the private-sector elite. State spending increased, but at a slower rate, and salaried workers had to contend with the rising inflation that accompanied the boom. And while the new economy turned against these white-collar workers, the new politics empowered them. As they make up a majority of Gulf citizens, though not a majority of the population of most Gulf countries, they were well placed to capitalize on the new or reformed participatory institutions. Their influence is most apparent in Kuwait, where the parliament has been instrumental in blocking big state-private partnerships, such as Project Kuwait in the oil sector, while similar projects have advanced in neighboring states. Yet the tensions between the public-private alliance and the public sector are evident in other states as well, as with the rare public protest of employees of the privatizing Qatar General Electricity and Water Corporation in April.

The Future

Any assessment of the ability of the Gulf to weather the global financial crisis must take into account the changes in oil markets as well as the significant reforms of political systems and economies undertaken by Gulf leaders. Taken together, these changes form a different political economy than what obtained during the oil bust of the 1980s. The Gulf countries are more stable than they were then. But as they try to pull out of the downturn, much depends on the effectiveness and sustainability, both fiscal and political, of the new partnership between state and private capital. The crisis inaugurated by the Wall Street credit crunch has been a trial by fire — and all is not well.

The growing importance of private-sector capital, for one thing, has exposed Gulf economies to some of the weaknesses of their corporate governance and still rudimentary regulatory systems. If private capital becomes too big, ruling families could still use state funds to support their hybrids, while sacrificing truly private-sector companies. The spectacular collapse of the al-Ghusaybi family, Bahraini pearl merchants who funded ‘Abd al-‘Aziz Ibn Sa‘ud at a critical point in his ascent to power and profited greatly from betting on the right horse, was clearly due to internal fraud and double crossing but it brought out some of the flaws of the regulatory system. In the downturn, many hybrids and government companies have been protected by the use of state resources. Balance sheets of the banks lending to hybrids have been shored up with cash injections and rescheduled loans. The states have also prevented private-sector companies from competing against the hybrids — for example, in real estate, several purely private development plans have been nixed so that the public-private partnerships can unload their inventories undisturbed. The governments have not been generous when private-sector companies, some of them with well-known brand names, go under due to financial irregularities and lack of adequate supervision. The private sector is embittered, and the public sector is disinclined to magnanimity.

Much also depends on the distribution of income and opportunity. The Gulf regimes have found the means of generating income, but they have not shared the wealth equitably, not even with regard to jobs at the new companies. Many of their companies still primarily hire foreigners. Lacking a big stake in these public-private partnerships, Gulf citizens have not always been well disposed toward them. Open battles in the Kuwaiti parliament between the private-sector elite and the less affluent have emerged over the response to the global credit crunch. Speaking of “whales” and “minnows,” populist parties drawing support from salaried state workers have made the case that the financial stabilization package backed by the private sector is simply a bailout of Kuwait’s well-connected merchant class. They have pressed for equity in the form of extremely generous debt forgiveness laws for consumers. The conflict over the distribution of Kuwait’s much reduced state coffers in the wake of the global financial crash played a central role in the spring 2009 dissolution of the parliament, and it is also a prime mover in the growing rift between urbanites and “tribes” in the emirate. Other Gulf countries have seen populist backlash against the runaway growth of the boom years, which was perceived — especially in the rapidly globalizing UAE and Qatar — as undermining the standing of the average citizen and eroding “national” character. The huge losses sustained by sovereign wealth funds invested in the US and Europe — ostensibly the national patrimony — have further riled the public and prompted indignant calls for greater oversight.

The perception of worsening income distribution and malfeasance will have political consequences if the recession persists for longer than a few years. Yet at the same time, opposition political movements appear less and less able to capitalize on the festering resentments. The economic cooptation of the Islamist agenda — notably, through the institutions of Islamic finance — has left the Islamist parties standing on both sides of the private capitalist-populist divide. Thus far they have been unable to square the circle, and they appear to be suffering politically as a consequence. Again, Kuwait offers a case in point; the Islamists saw their parliamentary representation drastically reduced in the May 2009 elections.

Perhaps the best solution for the Gulf regimes would be to deepen the experiment of business and citizen engagement while pressing ahead with public-sector reforms so as to improve infrastructure and services used by the general population. Gulf states may have strengthened their ability to manage the cycle of oil boom and bust, but managing the coming demographic explosion in a way that increases growth and equity is a challenge that will need the commitment and ingenuity of all the Gulf’s citizens.

How to cite this article:

Fareed Mohamedi, Kristen Smith Diwan "The Gulf Comes Down to Earth," Middle East Report Online, November 12, 2009.

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