Gulf Region Economies and Arab Spring

Introduction

The GCC region is important in the world economy because of its oil and gas reserves and output. Most of the economies of the states are dependent on oil and gas, although some, like the UAE, Qatar, and Saudi Arabia, have diversified their economies. The member states comprise a large economic union, with a unified GDP reaching $1.4 trillion in 2011, a per capita income of $12,000, and an agreed commodity and service system among the members.

The GCC is geographically located in the MENA (Middle East and North Africa) region which holds approximately 30 percent of the world’s oil reserve (World Bank as cited in Devlin, 2010). Saudi Arabia has the world’s largest oil reserve and approximately 3.5 percent of the world’s natural gas reserve. In addition to being an oil producer, the MENA region is also one of the world’s largest oil consumers (Devlin, 2010).

The GCC countries have abundant natural resources, but the abundance of natural wealth has slowed down economic growth and led to unemployment. The GCC experience of natural resource abundance but slow growth resulted when the government withdrew incentives to draw human capital because of a growing non-wage income. Government dividends, social expenditures and reduced taxes had to be withdrawn due to an unexpected economic downturn in 2008 and 2009, exacerbated by lower oil prices (Al-Qudsi, 2006).

The main thesis argument for this paper is that the economic progress of the GCC members has been limited by factors that can be linked to natural resource abundance and economic downturn which led to unemployment and slow economic growth. The GCC economy has to be analyzed, to include the political and economic factors, particularly in the problems of labor and capital which led to the turn of events.

First, I will discuss the GCC economy, including the significant factors leading to economic integration, economic convergence, the financial system and the single currency issues, and other economic problems. The GCC adopted a unified currency in 2010 and a monetary policy based on the economic developments within the region. I will provide an analysis of the factors surrounding my thesis and my conclusion is based on the premises.

Historical Background

The idea of economic cooperation predates when the Gulf countries gained British independence. The first threat was Nasserism which opposed the states’ system of government, where sheiks ruled by inheritance. Sir William Luce, the British Political Resident in the 1960s, suggested a common cooperation among the nine states as British departure would leave them unprotected. The proposal could not take off due to constant border disputes (Legrenzi, 2011).

Finally, in 1981 six Gulf States comprised of Saudi Arabia, Kuwait, Bahrain, Oman, Qatar, and United Arab Emirates, formally established the Gulf Cooperation Council (GCC). The primary aim for such integration was security concerns, but the states’ rulers were thinking of the advice of Sir William who envisaged economic and monetary integration (Legrenzi, 2011).

The GCC states established the Unified Economic Agreement (UEA) to provide a common market for the member states, which successfully became a full economic integration in December 1982. One of the GCC Charter’s provisions was to provide a common customs tariff within a five-year period, and the implementation of “a common economic, social and defence policies” (Art. 4), along with “a common currency” (Art. 22 as cited in Legrenzi, 2011).

Significant Factors

The GCC countries experienced economic growth because of rich natural resources and the discovery of oil, which boomed in the 1970s and brought unprecedented growth for the GCC countries. This remarkable growth was suddenly interrupted when oil prices fluctuated and an economic crisis occurred. The GCC locals became unemployed and underemployed. The increased unemployment was due to slow economic growth and the emergence of three regional wars (Nickell as cited in Al-Qudsi, 2006).

Al-Qudsi’s (2006) article focused on voluntary and involuntary unemployment issues. The author defined voluntary unemployment as being in an unemployed state as a matter of individual choice and the unemployed does not look for lower-paying job. He stressed the voluntariness of the GCC unemployment and its link with output gaps. Unemployment may not be long lasting but if it partially persists, then there may come a time that it will be permanent. And if this persistence is prolonged, the economy has to adjust for a longer period.

Al-Qudsi’s (2006) paper aimed for: the evolution of unemployment and how the unemployed are associated with each other in terms of geographic consideration and other demographic factors; the characteristics of unemployment at the lower level, or whether the unemployed choose to stay idle instead of look for lower-paying jobs; the presence of unemployment for a period of time and how it relates to output gaps. This context of output gaps relates to Okun’s Law, which is about “cyclical variations in output,” as it relates to unemployment and its impact on the GCC countries (Al-Qudsi, 2006).

It was further emphasized that unemployment was significant to economic and fiscal policies, but the author also argued the lack of valuable data on unemployment in the GCC. This is true with respect to all the six countries of the GCC. One method of finding unemployment data is to ask respondents regarding their job status, but the result could give a vague estimate. Information on job search strategies and period of unemployment, including expectations of the unemployed, are also unavailable in the GCC. Al-Qudsi (2006) stresses the relevance of these factors in future unemployment involvement.

Furthermore, lack of unemployment data could be linked to confidentiality issues of firms which stimulated statistical institutes not to reveal this sort of data (Mercy & King as cited in Al-Qudsi, 2006). Analyzing aggregate data may not permit policy makers an appropriate interpretation of the real happening in the economy, but micro-data allow an accurate view of the economy. Moreover, the thorough job of data gathering needs expert personnel in statistics collection and analysis, which the GCC countries did not have at that time. Finally, the apparent affluence of the GCC countries due to the oil boom may have nurtured the belief that economic development could lead to employment and thus unemployment data was not anymore relevant (Al-Qudsi, 2006).

There was also the perception that GCC locals could provide the necessary expertise the economy demanded, and labor provided by foreign workers was only temporary. The big problem came when the economic boom was interrupted and foreign labor was still as important as before and the local citizens could not fill in the gap and expertise of the foreign workers. Al-Qudsi (2006) further argues that all these factors collectively contributed to the lack of valuable data on unemployment in the GCC countries.

What we can look and scrutinize only come from population statistics, surveys on local and foreign labor and firms’ surveys and expenditure data. Al-Qudsi (2006) then used government journals and newspapers and public websites, including secondary data and formulated hypotheses so that he could create unemployment data for the GCC countries. He also used the United Nations database and reliable GDP data in determining the GCC countries’ output.

A conclusion by Al-Qudsi (2006) based on his collected data states that the GCC countries, having experienced oil wealth abundance and the oil boom in 1970s and 1980s, created welfare systems and invested in infrastructure and industries as a way of diversification.

The governments encouraged their citizens to join the public sector by way of high salaries and benefits. Because of public employment and the way the local workers were paid, they became underemployed when the economic boom came to a halt (Al-Qudsi, 2006). The challenges now stemmed from the reality that oil revenue could be depleted and uncertain. The uncertainties of the oil market and the economic downturn in the 1980s and 1990s, exacerbated by the three regional wars greatly affected the GCC region’s economic growth (Al-Qudsi, 2006).

The Arab Spring

The Arab Spring occurred around 2011 and its very nature was uprising, but Kamrava (2012) theorized that it was about the political economy of the MENA countries, most particularly the GCC region. This historic event could be the beginning of another democratization process and might change some methods of state-society interactions in this part of the globe. The rebellions that engulfed most of the GCC countries have some political and economic basis (Kamrava, 2012).

According to Kamrava, the political economy of the Gulf States has also developed. First, these Gulf countries were involved in rapid economic growth and infrastructural expansion. Fred Lawson (as cited in Kamrava, 2012) records the remarkable growth of the GCC economies and their growing importance to the international economy. In 2011, international institutions projected a growth rate of 7.8 percent for the GCC economies, with their external current accounts surplus growing from $136 billion to $304 billion amid rising oil prices. In 2009, exports rose to a staggering $473.2 billion, and imports were recorded at $300.4 billion (Kamrava, 2012). Oil and gas was the primary export, rising in value of up to 203 percent (Gulf Cooperation Council Secretariat General as cited in Kamrava, 2012).

The GCC region’s enormous development efforts were exacerbated by globalization and integration into the international economy, especially when this was associated with other countries in the Middle East. The GCC leaders were also amenable to globalization and they had framed their economic environments to the context of globalization. They also offered global economic arrangement as a part of the national agenda. The leaders did not try to show ownership of the process of production and marketing of their natural wealth, which is carbon, but they maintained ownership of the results of marketing their natural resources (Kamrava, 2012).

Kamrava (2012) further explains that the framing of nationalism by the leaders of the GCC was in sharp contrast to the nationalism of the past, like Nasserism, or revolutionaries like Khomeini, who fostered the idea that opening the economy to the outside world was like opening doors to neocolonial powers. This resulted in economic globalization in the GCC region when investors were attracted to the Persian Gulf, a region rich in oil and natural resources, and an open “business-friendly domestic and policy environment” (Ehteshami as cited in Kamrava, 2012, p. 3).

The Economies

Bahrain and Oman became forerunners of the 2011 Arab Spring, but other GCC countries enjoyed relative calm. Despite the social unrest, the GCC countries continued their economic development and diversification efforts (Ramady, 2012).

Oman is on the southeast part of the Arabian Peninsula, and is just opposite Iran in the Strait of Hormuz. Oman maintains good relations with Iran and the United States, which secures the passageway of the Strait of Hormuz (Jones & Ridout, 2012). Oman is quite silent in this place in the Middle East and usually it shuns media focus for, in the words of Jones and Ridout (2012), politeness is a part of the Omani culture. Politeness is also synonymous with avoiding self-promotion.

The Omanis later came out from their shelf when the government started advertising privatization efforts. Still, advertising is not in accordance with the culture of being polite. Oman ranks the 41st in an index of most peaceful countries in the world. Conflict in the Strait of Hormuz has destructed the Omanis’ normal lives. Joining the GCC and having stability were a necessity for the Omanis (Jones & Ridout, 2012).

Oman’s industrial diversification policy focuses on establishing small- to medium-sized import-substituting industries. Gas resources were used only for domestic consumption. In the early years of the twenty-first century Oman began establishing gas export projects that includes Liquefied Natural Gas (LNG) plants. An Omani refinery, costing about $1.7 billion, was built in India with a capacity of 120 thousand barrels per day. Oman joins the other states in formulating economic policies aimed for regional and local development.

United Arab Emirates (UAE)

The UAE was formally established in 1971 and its founding was seen as a novel experiment of integration, which was largely influenced or orchestrated by foreign diplomats concerned in the security of the Gulf region (Legrenzi, 2011). The seven emirates also largely depend on oil and gas and its major producer is Abu Dhabi, with contributions from Dubai, Sharjah and Rass al-Khaimah. Dubai has been successful in diversification efforts, with multinational corporations now having their headquarters in the city. The UAE has an estimated oil reserve of more than 700 billion barrels (BP as cited in Devlin, 2010).

The UAE’s economic growth can be seen as outstanding. Its dependence on foreign labor is highest in the GCC states. Currently, the country has programs of “Emiratization,” or bringing back the labor force to Emiratis. Importation of foreign labor has been reduced, but due to the lack of skills of most of its nationals, dependence on foreign labor cannot be avoided. UAE’s oil reserves were estimated at about 10 percent of the world’s total reserves, only next to Saudi Arabia and Iraq. Oil revenues contribute largely to GDP, but export earnings also reinforce government spending. Natural gas reserves were estimated at 5.8 trillion cubic meters in early 2000.

The Monetary Union

The prospect of introducing a single currency by 2010 was criticized as ambitious and seemingly impossible as this did not attain the full cooperation of all the members. Oman decided not to participate in the monetary union while Kuwait abandoned to peg its currency to the US dollar. These factors made the monetary union project more difficult to achieve. Rutledge (2008) argues that there is a need for institutional reform and fiscal convergence in the process of the monetary union. Rutledge further indicated that the GCC could follow the European model which successfully introduced a price transparency system. Local nationals within the GCC could gain much in their local travel (Rutledge, 2008).

Conclusion

The GCC economies have diversified their hydrocarbon resources into petrochemical products. Petrochemical plants can be seen in Saudi Arabia, Qatar and the UAE. Ramady (2012) indicates that a new Gulf is born, battling globalization, economic limitations and many barriers along the way. This can be called a spectacular transformation as we see the rising islands and buildings in Dubai and Qatar, and the social transformation in Saudi Arabia and Oman. While globalization in its early stage of “attack” against the GCC countries created some negative outcomes, now this force, along with the new technology, like the Internet, has transformed the GCC locals and even its governments (Ramady, 2012).

Each of the GCC countries has challenges and barriers in pursuing economic development. Economic independence may be slow for some, but others like Saudi Arabia and the UAE have been successful in their diversification efforts and their respective economies are considered a success. No one can be really sure of what lies ahead, but the aims and objectives of the GCC are to ensure a bright future for all of its members.

Bahrain and Oman have seen their struggles to be a simple test, but they are now on their way to full economic growth due to the cooperation among the member states. There are still many challenges the GCC states will experience. First, there is the problem of providing the young generation the necessary skills and expertise in the age of high technology and knowledge based economy. The collective behavior of the GCC nationals is also behavior, particularly in their regard and respect for women (Ramady, 2012).

As discussed by Rutledge (2008), the GCC should follow the European model to attain a successful monetary union and economic convergence. It is still a long way for the GCC to have a successful monetary union where all the GCC states use this single currency.

I have proved the argument that there are limiting factors and barriers to the GCC’s economic progress. First, the GCC had to fight globalization, but the fight turned out to be in the side of the GCC countries. Globalization and technology can provide the needed impetus for the next economic boom.

In the context of economic convergence that affects monetary policy, I have established that the countries have to co-move in an almost one direction, and they have to control a high inflation rate. However, not all countries cooperated as can be seen from the actions of Kuwait and Oman.

The members’ respective economies are seen to be steadily growing, albeit in a slow pace but the percentage of growth is maintained. It can be concluded here that despite this slow pace, there are others like Saudi Arabia and the UAE that are moving rather fast, economically speaking, and are helping their respective neighbors cope with the economic challenges. This makes the GCC economic integrity a model for other countries in the Middle East and the aims of the GCC integration truly remarkable.

References

Al-Qudsi, S. (2006). Unemployment evolution in the GCC economies: Its nature and relationship to output gaps. CLMRI.

Devlin, J. (2010). Challenges of economic development in the Middle East and North Africa Region. New Jersey: World Scientific Publishing Co. Ltd.

Jones, J., & Ridout, N. (2012). Oman, culture and diplomacy. Edinburgh: Edinburgh University Press.

Kamrava, M. (2012). The political economy of the Persian Gulf. New York, NY: Columbia University Press.

Legrenzi, M. (2011). GCC and the international relations of the Gulf: Diplomacy, security and economic coordination in a changing Middle East (Vol. 44). New York: IB Tauris & Co. Ltd.

Ramady, M. (2012). The GCC economies: Stepping up to future challenges. New York: Springer Science+Business Media.

Rutledge, E. (2008). Monetary union in the Gulf: Prospects for a single currency in the Arabian Peninsula. New York: Routledge.