The New Post-Oil Arab Gulf: Managing People and Wealth

By Nabil Sultan, David Weir and Zeinab Karake-Shalhoub

The sharp increase in oil revenues since 2002 has left the Arab Gulf States with billions of petro-dollars. But how will these countries fare in the post-oil era? The rulers of these states are taking serious measures to ensure the survival of their economies, and indeed their regimes, in a world with scarce mineral resources. This volume explores the extent to which these countries have been and will be able to prepare for the future by transforming themselves into serious international destinations for tourism, finance, healthcare and education. It also considers the implications of failure for the future survival of their regimes. This study will provide food for thought for academi, policy makers and general readers. 'An incisive enquiry into an exciting region, the authors leave no stones unturned. It is bold in its examination of both the history and the crucial changes being wrought throughout the Gulf. The book, which has been fashioned with both detailed knowledge and academic rigour, will be of huge advantage to anyone seeking a practical chart to the region. The contributors have not been restrained in drawing examples of the Gulf States over-reaching themselves to danger points in the economic downturn. The severe lessons learned have been studiously researched. The fresh opportunities, political, economic, social and technological, are concisely considered. No matter where your interests lie, this is a solid foundation from which to build a 'Way Ahead' policy for the region.' -- Charles Wilson, Director of The Consultancy, an international human resources business with Gulf experience

• Language: English
• Publisher: Saqi Books
• Release date: Jan 16, 2012
• ISBN: 9780863568404

Book preview

Introduction

NABIL A. SULTAN

The Gulf Cooperation Council (GCC) countries are waking up to the challenges of the future in a manner that has attracted a great deal of attention from many researchers and media observers. Many of these countries were largely desert lands five decades ago but (thanks to oil) managed to build an impressive infrastructure capable of meeting the essential needs of a modern society in terms of schools, hospitals, police, army, utilities and so forth. The thinly populated region imported millions of low-paid workers, both skilled and unskilled, from many parts of the world, often poor and labour-surplus countries such as Pakistan and India, to help in the construction of its infrastructure. This development has created a situation where the nationals of the labour-receiving countries have become minorities in their own countries. This demographic legacy continues to persist today despite efforts by most of the GCC countries to minimise its impact, through policies aimed at hiring nationals for government-controlled enterprises and bureaucracies and privately held businesses. Nevertheless, this huge infrastructural transformation has also created tremendous employment opportunities for the nationals of those countries who were often paid very high salaries through a conscious decision by their rulers to share their countries’ wealth.

However, the challenges of the future are different from the challenges of the past. Oil is a finite commodity and the world is driving forward for a much cleaner and greener alternative source of energy. In addition, the needs, technologies and the skills of the future are hugely different from the needs, technologies and the skills of the past. Add to this the importance of having to survive in a world that is being increasingly governed by structures imposed by regional and global trade and economic blocks and one can begin to understand further how essential it is for these countries to prepare for a more challenging future.

In order to meet these challenges, the GCC countries have embarked on ambitious programmes designed to reduce their future reliance on oil and gas. Many of those programmes are of a ‘service’ nature. The region is endowed with all-year sunshine, abundant beaches, and crime-free cities, thus making it an ideal holiday destination. On that basis, some countries in this region began a series of large-scale projects to build luxury hotels and houses, man-made islands, futuristic and thematic cities and parks, shopping centres, roads, airports and fleets of aircraft to boost their national airline services. These developments were accompanied with world-wide advertising campaigns portraying the region as the ultimate holiday destination. The United Arab Emirates (UAE), and especially Dubai, was the epitome in terms of innovation and creativity in this regard.

The authors of the chapter Building the Foundation for a Post-Oil Era: The Case of the GCC Countries provide an introduction to some aspects of those developments. In doing so, they also question the long-term sustainability of such an investment environment. Some GCC countries have demonstrated their willingness to accept cultural diversity by tolerating some aspects of Western culture. However, this is not the case in other countries in this region. The region has massive financial resources at its disposal to achieve its ambitious goals. But the autocratic nature of its regimes means that decisions are often taken without due regard to their consequences on business and the economy. The authors highlight this point and provide examples of such situations.

Despite their enormous resources and their good future prospects, the GCC countries could potentially face many threats that could impact on their current development plans. The authors here cite low oil prices and terrorism as two potentially damaging factors. Another threat is failure. Failure to deliver in a post-oil future could be a major threat to the ‘good living – no democracy’ understanding between the GCC regimes and their citizens which seems, so far, to have guaranteed stability in a region historically famous for its tribal feuds and political struggles.

The region was also successful in attracting substantial foreign investments lured by tax-free concessions and an abundance of cheap imported labour and a union-free working environment. This issue is highlighted in this chapter and the extent to which some countries were prepared to change local legislations in order to allow total ownership of investment projects and real estate and also tolerate other Western cultural practices.

Mindful of the importance of finance for local and international enterprises and its significance for a region determined to secure its future and maintain a leading economic role on the international stage, a number of countries in this region began a series of initiatives in order to become global financial centres, with Bahrain and the UAE (especially Dubai) vying to be the region’s leaders in this field. They have also capitalised on a global interest in Islamic finance and countries such as Bahrain, UAE and Qatar have invested heavily in this area in order to cater for the rising demand for Islamic finance and banking.

Many of the Arab Gulf regimes were accused in the past of squandering their national wealth through concentrating on infrastructural and real estate projects that made no economic sense. But such criticisms, however, did not go unnoticed. During the last three decades or so, the GCC countries managed to build massive reserves in what became known as Sovereign Wealth Funds (SWFs). They also established many investment bodies as strategic tools aimed at investing their national surplus income in international companies and ventures in order to secure future returns to offset any future decline of returns from oil and gas, as fossil-based energy reserves get depleted and the world moves to much greener and cleaner sources of fuel.

This issue is discussed at length by Zeinab Karake-Shalhoub, author of GCC Sovereign Wealth Funds and Islamic Finance: Financial Foundations for the Post-Oil Gulf?. Zeinab argues that these two financial instruments (i.e., SWFs and Islamic Banking) represent important evolutionary developments that need to be watched in the next few years as the GCC region continues its drive towards economic diversification and an oil-free future. She demonstrates how the GCC countries have managed to build powerful cash-rich SWFs as a guarantee against capricious oil prices and also as a method of guaranteeing a steady future income that is not related to oil or gas. According to the author, in order to ensure the continuity and success of those SWFs, more transparency is required in how those funds operate, their true value and their governance. The author also argues that in order to enhance their efficiency and effectiveness in dynamic, jittery environments, those SWFs need to revisit their managerial and administrative structures, human capital policies and procedures, information gathering and data mining, intelligence systems, and processes and procedures of risk management. The subject of Islamic finance is also discussed at length in this chapter and the important role it is playing in assisting the GCC countries in their diversification programmes.

There is no doubt that this region is facing a future that is fundamentally different from anything experienced so far. It is likely to be a ‘smarter’ future where knowledge, education and enterprise will be expected to play leading roles. On that basis, many initiatives have emerged in this region with the aim of laying the foundations for a knowledge economy that is underpinned by a world-class educational system that values research and innovation. Many billions of US dollars were spent to build science and technology parks and cities and campuses for local and reputable international universities. This is a radical shift for a society which, for decades, relied on the state for generous handouts and excessive salaries and is now being called upon to face up to a much smarter and less predictable future than before.

David Weir and his co-authors in their chapter The GCC Countries as Knowledge-Based Economies: Future Aspirations and Challenges provide a critical examination of the current efforts to establish the foundations for such Knowledge Management (KM) societies as part of their post-oil future objective. In doing so, the authors raise some concerns on the chances of success of those endeavours by arguing that there are still many endemic problems that need to be overcome before such an objective can be achieved. They posit that the new technologies of communication that are visible in the consumer-oriented city-states of Dubai and Bahrain, for example, have not yet translated into the business practices required by the knowledge economy. Furthermore, innovation in those societies is sometimes resisted because it calls into question existing arrangements. Organisational decision-making may be highly consultative but is nonetheless highly centralised and organisational structures may be highly resistant to change. None of these factors enhance the possibility of widespread support for KM as it is understood, according to those authors. The chapter also raises a number of concerns relating to the educational sector of those countries by arguing that it effectively hinders the development of the ‘learning economy’.

The issue of education is also touched upon by Christopher M. Davidson in his chapter Higher Education in the Gulf States: From Traditional to Modern, where he provides an excellent historical background of the education system in the UAE. In doing so, the author also highlights the many problems and challenges that this educational system had to go through and focuses, in particular, on higher education as a sector that is expected to play an important role in the GCC countries’ aspired knowledge-based post-oil economy. Some of the wealthier GCC states have attempted to circumvent these problems by hosting campuses of reputable international institutions. However, while these attempts seem to have, ostensibly, raised the profile of higher education in the GCC, a number of issues are raised in this chapter concerning this model such as the possibility of not being able to maintain the standards of home institutions, pressure from the home students of those institutions who regard the region as autocratic and hostile to Israel and other issues relating to curricula. Despite these problems, the author acknowledges that the GCC rulers are taking their education very seriously and are determined to put their education system on the right path. Abu Dhabi is introduced as an example of the serious efforts that are currently being exerted in this direction.

Alain Senteni and his co-authors provide another perspective relating to education that is empowered by technology and analyse the current efforts in this regard by Dubai and reflect on their experiences as distant learning experts in this tiny emirate. In their chapter A ‘Smart’ Technology-Enhanced Learning for the Post-Oil Arab Gulf, they argue that technology-enhanced learning (TEL) represents an efficient and effective way for overcoming the structural and qualitative challenges faced by educational organisations at individual, cultural and organisational levels, especially when confronted by accelerated development pressure such as that which is currently being experienced by many countries in that part of the world. The success of TEL, as a capacity-building process, will depend on the ability of the GCC educators and decision-makers to ensure a paradigm shift in the way they perceive learners. The authors, therefore, stress the importance of empowering learners, and placing them at the centre of the development process. They also praise the progress made so far by the UAE in introducing Information Communication Technologies (ICTs) in its educational systems and the substantial resources it invested in this area. The government of the UAE and the corporate sector have exerted significant efforts in order to tackle the learning problem at different levels, from a systemic perspective taking into consideration not only technological factors, but also, structural, cultural and human ones. These structured and sustained efforts are likely to produce the evidence that ICTs can actually play a major role as entities that make people think and learn in a more effective way (a requirement for a smart knowledge-supported post-oil future). The authors further argue that TEL has the potential to transform the educational systems of the Arab Gulf region to make them accessible to a greater number of learners.

No discussion of development in any country or society can have any meaningful value without reference to the role of women who represent a significant labour force in many developed and developing countries. It is inconceivable to think that societies can initiate progress and development without taking into consideration the contribution of this labour force. A number of the GCC countries have become mindful of the importance of this matter and have taken practical steps to address some of the serious gender issues that afflicted this region. Beverly Dawn Metcalfe and her co-authors in their chapter The Role of Women in a Post-Oil Arab Gulf Future provide a narrative of the experiences of women in the Arab Gulf. They argue that the difficulties that many Arab Gulf women face are similar to those of other women in many parts of the world. However, there are opportunities and constraints for women attributed to gender within their culture which advocates the interface between the Islamic and universal construction of human rights and which stresses the family as a foundation of an Islamic state. The priorities of Western women such as day care, abortion rights, higher pay and economic equality with men are of less significance to Arab women who are struggling for elementary rights to vote, to have access to education programmes, to obtain work of any kind, and to put an end to sexual discrimination. The authors advocate a women’s development model in this region that should follow a different equality strategy that acknowledges the importance of the family, and within that framework should develop women’s leadership capabilities, targeting institutional mechanisms as well as women’s individual agency. The analysis presented in this chapter suggests that one cannot understand the complexity of women, development and globalisation processes in this part of the world without connecting them to the broader social and economic changes relating to the rights of women in Islamic nations. According to the authors, any investment in women’s development and commitment to social and political transformation by the GCC countries will be an essential requirement for establishing any sustainable future economic growth and development in this society.

To sum up, the six chapters touch on some of the most important issues that concern the very ambitious development and diversification programmes that are being implemented in many of the GCC countries. The authors provide an interpretation and analysis of those efforts from various perspectives and, in doing so, add a valuable contribution to the debate on the future prospects of this interesting region.

Chapter 1

Building the Foundation for a Post-Oil Era: The Case of the GCC Countries

NABIL A. SULTAN

BEVERLY DAWN METCALFE

DAVID WEIR

INTRODUCTION

The Arab Gulf countries are embarking on massive real estate, educational and alternative energy programmes designed to meet the challenges of the post-oil era. Those countries have become increasingly aware of the need to diversify their economies given the finite nature of oil and gas as commodities and the need to react to global efforts aimed at reducing reliance on fossil-based sources of energy for environmental and economic reasons. The ambitions of the leaders of the Arab Gulf countries in this direction were fuelled by massive returns from the sale of oil whose price in the last few years witnessed dramatic increases not seen even during the oil shocks of 1973–4 and 1979–80. But the drive for economic diversification has also a political dimension to it. During the last five decades, the autocratic regimes of the Gulf Cooperation Council (GCC) ensured that their national citizens shared some of the wealth of their countries through an income distribution drive that provided well-paid public sector jobs, free access to health and education, interest-free loans and many other benefits. Failure to maintain this level living standard in a post-oil future could have implications for the sustainability of those regimes. This chapter will explore some of those development programmes and relating issues and provide some thoughts on the potential success of those initiatives.

RADICAL CHANGES

The discovery of oil during the 1930s and 1940s in the Arabian Gulf countries (Saudi Arabia, Oman, UAE, Kuwait, Qatar and Bahrain), now collectively known as the Gulf Cooperation Council (GCC), has transformed those countries from large tracts of desert lands populated by small bedouin tribes into states with highly developed urban cities that have all the modern infrastructural facilities that can be found in most developed countries. The total population of the GCC countries in 1950 numbered just over 4 million inhabitants.¹ The level of education was basic, largely traditional, and localised. Economic activity in most of those countries was largely based on pearls, dates, fish and the slave trade.² Up until the 1960s, the Indian rupee was the main currency used in most of these countries. The GCC countries used the proceeds from oil to modernise their countries. They built well-equipped hospitals, schools and universities, modern airports, large government bureaucracies, roads and so forth. As a result, life expectancy in the GCC area increased by almost ten years to seventy-four years between 1980 and 2000, and literacy rates increased by 20 percentage points to about 80 percent over the same period. Average GDP per capita in the GCC countries was estimated at $50,000 in 2009, with an estimated combined nominal GDP of $897.6 billion for the same year.³ The population of the GCC countries (excluding expatriates) was estimated at 26.4 million for 2010.⁴

Without those massive revenues from oil, according to Barger,⁵ countries like Kuwait would still be a small fishing and smuggling centre at the head of the Gulf; Saudi Arabia would still be largely dependent on its foreign exchange on the annual pilgrim; Bahrain, along with Qatar and Abu Dhabi, would be a sleepy island mourning the destruction of their pearling fleets by the development of Japan’s cultured pearls which effectively killed their pearling industries.

FACING UP TO THE FUTURE

With the inflow of substantial revenues, particularly following the great oil shock of 1973–4, the GCC countries embarked on a massive programme of infrastructure building which included: large infrastructure projects (housing, roads, airports, seaports, telecommunications, sewage and power plants), public services (basic health and education), heavy and medium industries (cement, iron and steel, fertilisers, chemicals, petrochemicals, textiles) and agriculture and land reclamation projects.⁶ Initially, there was too much emphasis by these countries on the need to industrialise.⁷ However, industrialisation, outside oil processing, remained shallow due to the narrowness of the local markets in those countries and the shortage of their national labour.⁸

The GCC countries seem to have learnt from the lessons of the past. During the last three decades, the GCC countries have adopted investment and development plans different from those seen during the previous oil booms of the 1970s and 1980s. Wary of boom-bust cycles, the GCC countries have built up reserves, cleared their public debt and accumulated surpluses that have been transferred to oil stabilisation funds,⁹ sovereign wealth funds (SWFs)¹⁰ and other state-controlled investment vehicles. Most interestingly, economic management in the region has substantially improved, asset deployment has become more sophisticated and there is a clear shift from the public to the private sector as the main engine of growth.¹¹

THE BUILDING OF THE 21ST-CENTURY CITIES

After decades of extravagant spending on their infrastructures, there is an increasing awareness among the rulers of the GCC countries that the prospects of relying on oil as a stable source of income for the future of their countries are uncertain. In an effort to address this issue, a number of the GCC countries, particularly the UAE, Kuwait, Qatar, Bahrain and Saudi Arabia, are preparing for what might be termed ‘the post-oil era’ through embarking on mega projects (financed by private and public capital) designed to make these countries new tourist, financial, educational, technological and manufacturing destinations. In doing so, many of the GCC countries invested hundreds of billions of their petrodollars building ‘instant cities’ or ‘cities within cities’¹² in one of the most remarkable real estate developments in history.

The global financial crisis of 2008 (which saw the price of oil tumbling to $34 a barrel in December