Post-rentier Economic Challenges

Section I

Revenues from the export of oil transformed the socio-economic structures and development patterns in the Gulf States. At first, the rudimentary traditional patterns of administration that held sway across large parts of the Arabian Peninsula until the 1930s and 1940s were incapable of managing the integration of the young new states into the global oil market. Thus, the challenges involved in absorbing and utilising enormous sums of money led to the rapid creation of institutional frameworks that often coexisted uneasily alongside the traditional measurements of power and authority, particularly in the early years (Yizraeli, 1997, p. 184). Oil began to be exported in commercial quantities in the late 1940s and production rose rapidly in the 1950s and 1960s. This coincided with the formative passage to independence of Kuwait (1961) and the UAE, Bahrain and Qatar (1971), and the early processes of modern state formation in Oman and Saudi Arabia.

Particularly after the first oil-price shock of 1973, the resulting surge in government revenues provided the growing state structures with the financial wherewithal to reformulate traditional tribal structures into modern forms of governance. Pete Moore has noted that, as a region, the Middle East and North Africa outperformed all other regions in the developing world with regard to income growth and redistribution in the period between 1960 and 1985 (Moore, 2004, p. 85). In the specific context of the Gulf States, the redistributive mechanisms of socio-political control that emerged did so within a highly stratified economic framework encompassing nests of rentiers flowing downward from the state at its apex (Luciani, 1990, p. 69). Thus, the impact of oil rents became intertwined from the start with emerging state structures and decisions on how to absorb and utilise the revenues, thereby giving rise to pronounced regional socio-economic peculiarities (Bromley, 1994, p. 120).

As oil prices soared following the 1973 Arab–Israeli war and the subsequent Arab oil embargo, so the revenues pouring into Gulf treasuries multiplied. Across the region, oil rents were used to create an all-encompassing welfare state, as the government became a distributor to, rather than an extractor of wealth from, citizenry. The average price of crude oil surged from US$2.04 a barrel in 1971 to a high of US$32.50 in 1981 as the 1973 rise in prices was followed by a second spike in 1979–1980 in the wake of the Iranian revolution and the outbreak of the Iran–Iraq war. Simultaneously, the six Gulf States’ combined crude oil production rose by 77 per cent between 1970 and 1980, resulting in a massive inflow of oil revenues, which increased from US$5.2 billion to US$158 billion during the period (Shochat, 2008, pp. 7–8). They entered into a society, however, still characterised by poverty and underdevelopment, with low absorptive and human capacity to manage the sudden wealth, and ruling elites prone to commissioning extravagant and wasteful ‘white elephant’ prestige projects. Indeed, during the ‘freewheeling’ decade of the 1970s, almost all the additional income generated by the oil price increases was spent immediately, rather than being saved for future generations, heightening Gulf States’ subsequent vulnerability to the slump in prices to a low of just US$10 a barrel in 1986 (Hertog, 2009).

With the massive influx of incoming revenues into Gulf economies in the 1970s, the flows of oil rents provided the emerging state structures with the financial wherewithal to create redistributive or ‘rentier’ states. Here, the ‘no taxation without representation’ paradigm was seemingly reversed as regimes sought to co-opt socio-political support through the spread of wealth, and exhibited varying degrees of autonomy from societal demands or pressures. Classical rentier state theory developed in the 1970s and 1980s to examine the impact of external rents such as oil on the nature of states such as Saudi Arabia and their interaction with society. Hazem Beblawi argued that a rentier economy developed when the creation of wealth was centred on a small fraction of society, while in a rentier state the government is the principal recipient of the external rent, and plays the central role in redistributing this wealth to its citizenry (Beblawi, 1990). Giacomo Luciani extended this analysis of rentierism by distinguishing between allocative and productive states, in which the external origin of income derived from the export of oil frees allocation states from their productive economic base (Luciani, 1990). State autonomy from domestic taxation and societal extraction was expected to change the political ‘rules of the game’, as the absence of the taxation/representation linkage, it was postulated, lessened the incentive for mobilisation around programmes designed to change political institutions or policy (ibid., p. 76). With its petroleum sector accounting for 89.29 per cent of budget revenue and 41.5 per cent of GDP at the end of the first oil price boom in 1981 yet a mere 1.5 per cent of civilian employment (in 1980), Saudi Arabia came to represent an example of an oil state par excellence (Niblock & Malik, 2007, pp. 56, 75, 91).

With oil having become central to the post-war world economy in the 1950s and 1960s, the oil revenues that cascaded into Gulf treasuries following the 1970s price shocks were magnified by the nationalisation of the national oil companies during the decade. In Kuwait, the state took control of the Kuwait Oil Company (KOC) in 1975 and five years later created the Kuwait Petroleum Corporation (KPC) as an umbrella organisation integrating the various upstream and downstream operations under government control. The newly independent government in Qatar established Qatar Petroleum in 1974 and nationalised all oil companies in 1977, while QatarGas was created in 1984 to produce liquefied natural gas for export to Japan. In Saudi Arabia, the nationalisation of Aramco took place in stages between 1973, when the government first acquired a 25 per cent share of the company, and 1980, when it took full control (and formally changed its name to Saudi Aramco in 1988 when it also took over all remaining operational functions in the Kingdom’s oil and gas fields). The staggered process was notable for taking place in relative harmony with the four American concessionaires that made up Aramco, three of which (the now merged Exxon/Mobil and Chevron) continue to operate in Saudi Arabia today, albeit in a different capacity as providers of technical services (Hanieh, 2011, p. 69). A similar harmony was apparent in Abu Dhabi, where Sheikh Zayed resisted full nationalisation of the oil sector and maintained good relations with international oil companies as part of the broader modernisation of the fledgling infrastructure of the UAE (Marcel, 2006, p. 28).

Against this backdrop, a distinctive form of ‘Gulf capitalism’ emerged as incoming oil revenues intersected with the rapid expansion of infrastructure and urban development. This grew out of the traditional ‘merchant family’ business elites that predated the discovery of oil. Cut out by the ruling family/government from direct participation in the development of oil and gas resources, ‘Gulf capitalists’ pursued business opportunities in other industries that were either derivative to the oil sector or were initiated with state assistance from accrued oil revenues. The most important of these opportunities initially were service and construction contracts granted to local companies by governments and foreign multinationals, either in the oil sector directly or for the infrastructural and industrial projects that formed the backbone of economic diversification programmes. Many of these groups today are characterised by their continued involvement in these types of service and basic contracting activities, which remain the core of their business even as they have diversified and developed extensive interests in other sectors, such as retail and finance (Hanieh, 2011, p. 69).

The most prominent merchant families developed cross-border ties that spanned and far surpassed the Gulf States. Examples included business groups such as the Kanoo, al-Fardan, al-Zamil and al-Qusaybi that drew together the Eastern Province of Saudi Arabia, Bahrain and Qatar. International exposure initially was concentrated in the ‘agency’ or franchising process, whereby brands needed a local partner to be able to set up shop within the Gulf, as well as in the formation of joint ventures, particularly in the construction industry (Peterson, 2007). Remittances from migrant labourers working in the Gulf also tied the economic fortunes of resource-poor states across the region to the oil-producing states. Countries in this ‘secondary-rentier’ category included Egypt, Syria, Palestine, Jordan and Yemen, where the impact on the local economies of North and South Yemen from the remittance flows from the 1.2 million Yemenis working in Saudi Arabia alone was most pronounced (Okruhlik & Conge, 1997, p. 556).

A highly pronounced economic structure has therefore come to dominate the economic landscape and state–business relations in all GCC states. Although private sector entities have become more prominent in driving forward economic growth, the sector remains reliant on state contracts for business. This dependence has become visibly apparent in Saudi Arabia and other Gulf States during the post-2014 economic slowdown caused by low oil prices as a slew of private sector businesses have gone into economic difficulties as public sector spending has been scaled back. A further factor that has constrained the autonomy of the private sector has been the overlapping ownership structures of many ostensibly privately run businesses. In reality, public and private sectors (and ruling families and business elites) are linked through ownership and often by marriage, and lines of responsibility and ownership are opaque at best. Other difficulties surround uncertainty over the separation of ruling family wealth from state assets as members of ruling families in all six states have developed a reputation for getting involved in business decisions, often through their role on boards of directors, where the distinction between ruling family and private citizen is extremely vague and blurred. A case in point is the extensive business interests held by Saudi Arabia’s powerful Minister of Defence and Deputy Crown Prince, Mohammed bin Salman Al Saud that are believed to extend to more than 20 companies spread across general investment to manufacturing, real estate and telecommunications (Gulf States News, 2016).

Section II

The speed with which budget surpluses have turned into deficits since 2014 illustrates the scale of the economic volatility in GCC economies and their continued vulnerability to oil price swings. The International Monetary Fund (IMF) projected that lower oil prices cost Arab oil exporters some US$360 billion in lost revenues in 2015 and predicted that the six GCC states will face a cumulative fiscal deficit of as much as US$1 trillion over the next five years (Kerr, 2015). The situation is most acute in comparatively resource poorer Bahrain, which was stripped of its investment grade credit rating by S&P in February 2016, and Oman, where GDP is estimated to have contracted by between 14 and 17 per cent in 2015 (Narayanan, 2016; Oman Times, 2016). However, even in wealthier Abu Dhabi, nominal GDP is set to be 24 per cent lower in 2016 than the peak year of 2014, while Saudi Arabia ran a budget deficit of US$98 billion and burned through more than US$100 billion in reserves in 2015 (Gulf States News, 2016; Nereim & Carey, 2015).

Although all six of the Gulf States have made significant attempts to diversify their economies over the past two decades with varying degrees of success, they remain heavily reliant, both directly and indirectly, upon revenues from oil and, in Qatar’s case, gas. In most GCC states, oil revenues account for between 80 and 90 per cent of total government revenues, and from 24 per cent of total GDP in Bahrain and the UAE to 36 and 38 per cent in Qatar and Oman, 46 per cent in Saudi Arabia and 56.6 per cent in Kuwait in 2014 (The Economist, 2016; The World Bank, n.d.). In the one exception, Dubai, where oil accounts for about 5 per cent of GDP, the emirate suffered the indignity of being ‘bailed out’ by its oil-rich neighbouring emirate, Abu Dhabi, with US$20 billion in 2009 after the bursting of the speculative real estate bubble and the drying up of easy credit precipitated a short but very sharp debt crisis (Davidson, 2009).

As a result, total government revenues still correlate closely with oil revenues, leaving GCC economies highly vulnerable to external shocks and sources of volatility in international oil markets over which they have little control. Government revenues in Oman thus fell by 35.9 per cent in the first nine months of 2015 on the back of a 45.5 per cent decline in oil revenues (although spending itself only contracted by 1.8 per cent; Al Mukrashi, 2015), while in Qatar, the value of hydrocarbon exports plunged 40.5 per cent year-on-year between July 2014 and July 2015 (Townsend, 2015). Kuwait, meanwhile, recorded a 45.2 per cent year-on-year fall in government revenues for the first eight months of the 2015–2016 fiscal year and a near-identical 46.1 per cent drop in oil revenues over the same period (Kuwait Times, 2016). Saudi oil income fell by 23 per cent in 2015 just as government spending rose at the start of the year after King Salman took the throne and major combat operations commenced in Yemen, contributing to the record US$98 billion budget deficit for the year (BBC News, 2016).

One method of tracking (even if inexactly) the relationship between government revenue and spending and oil and gas ‘rents’ is the calculation of the fiscal break-even price of oil needed to balance the budget of oil-producing states. Estimations of fiscal break-even prices vary widely across different organisations and according to the precise variables being measured. In 2015, the fiscal break-even estimates for the Gulf States ranged between US$49.40 and US$78.40 for Kuwait; US$60 and US$76.80 for Qatar; US$73.80 and US$80.80 for the UAE; US$87.20 and US$104.40 for Saudi Arabia; US$102.60 and US$110 for Oman; and US$127.10 and US$138.10 for Bahrain (Raghu, 2015).

Yet, regardless of the exact figure, fiscal break-even prices have consistently—and, with the exception of Kuwait, significantly—outpaced actual oil prices since early 2015. Furthermore, fiscal break-even levels rose rapidly during the prolonged oil-price boom of 2002–2014 as current spending on items such as wages and subsidies tracked the windfalls entering Gulf economies during the long years of budget surplus. In Saudi Arabia, the break-even price was US$20 in 2002 while in the UAE the break-even price has soared from US$23 as recently as 2008 (Arab News, 2014; IMF Survey Online, 2012). Furthermore, these trends look set to continue and even to accelerate if policymakers are unable to bring spending under control; even before the post-2014 oil price slump, warnings abounded over the fiscal future of Gulf economies. Kuwait’s acting finance minister in March 2012 claimed that if the then current spending patterns were to continue unchanged, by 2030, Kuwait would need an oil price of US$213.50 to meet fiscal requirements (Kuwait Times, 2012). Even more pessimistically, Jadwa, a Riyadh-based investment bank created by Prince Faisal bin Salman Al Saud, an older half-brother of Prince Mohammed bin Salman, drew up a worst-case scenario during 2011 that warned the Saudi government that it would face an especially difficult future if spending and oil trends did not change. The Jadwa report raised the prospect of substantial budget deficits by the 2020s and predicted that by 2030, Saudi Arabia would be facing a reduction in foreign assets to minimal levels, rapidly rising debt, and a break-even price of more than US$320 per barrel (Gulf States Newsletter, 2011, p. 12).

The steady rise in public spending and fiscal break-even prices during the ‘years of plenty’ leave the Gulf States acutely vulnerable to any prolonged period of lower oil prices and government revenues. As early as 2012, the IMF warned Kuwait that if spending rates continued unchanged, ‘government expenditures will exhaust oil revenues by 2017, which means that the government will not be able to save any portion of these revenues for future generations’ (Arnold, 2012). In Saudi Arabia, during the Bloomberg account in April 2016 of a lengthy meeting with Prince Mohammed bin Salman, the prince’s financial advisor, Mohammed al-Sheikh, estimated that during the final years of the oil price boom (2010–2014), ‘there was roughly between 80 to 100 billion dollars of inefficient spending’ each year. This occurred as ‘prior requirements that the king approve all contracts over 100 million riyals (US$26.7 million) got looser and looser—first to 200 million, then to 300 million, then to 500 million, and then, al-Sheikh says, the government suspended the rule altogether’ (Waldman, 2016).

The challenge for Gulf officials is how to reformulate a ruling ‘bargain’ that has broadly underpinned socio-political stability for decades but no longer appears economically sustainable. Until 2014, the prevailing hope in the region was that this ‘moment of truth’ was more of a medium-range issue rather than an urgent short-term one, and that politically sensitive reductions in current spending could be avoided or minimised by cutbacks in capital expenditures instead. Moreover, the regional political upheaval of the past five years illustrated how the instinctive response of many GCC governments was to intensify populist short-term measures intended to blunt or pre-empt the social and economic roots of potential or actual political tension. Total state spending in the six GCC states rose by 20 per cent in 2011 as governments responded to the outbreak of the Arab Spring with welfare packages and other benefits (Dokoupil, 2012). In Saudi Arabia, the additional US$130 billion in two packages announced in 2011 exceeded all national budgets up until 2007 and added an estimated US$16 onto the country’s fiscal break-even oil price (Hertog, 2011).

Such policies succeeded in preserving political structures and domestic stability (for the most part) in 2011, but had the unintended consequence of, as political economist Steffen Hertog has noted, creating ‘a ratchet effect that demands ever larger outlays during every political crisis’ because ‘expectations are easy to raise but difficult to curb’ (ibid.). The measures taken in 2011 to blunt the impact of the wider political unrest were overwhelmingly short-term in nature and encompassed cash handouts (Bahrain and Kuwait), creating thousands of additional new jobs in already saturated public sectors (Bahrain, Saudi Arabia and Oman), and raising workers’ wages and benefits (Oman, Qatar, Saudi Arabia and the UAE). And yet, the packages also created a contagious expectation from many citizens in GCC states of additional government largesse, as demonstrated in January 2011 when, shortly after Kuwait’s emir announced the Gulf’s first hand-out worth US$4 billion, Qatari nationals demanded that their own government follow suit. Despite the fact that Qatar has the highest per capita GDP in the world, a local English-language newspaper in Doha, The Peninsula, reported that the announcement ‘has led to huge excitement in the Qatari community’, with many Qataris suggesting publicly that their government ‘should announce a similar or even more attractive “gift package” for its people’ (The Peninsula, 2011).

However, the policy responses to the Arab Spring in 2011 delivered damaging blows to the attempts in the strategic visions and long-term development plans drawn up in the 2000s to scale back the role of the state in the economy and boost the role of the private sector. Instead of strengthening the private sector and weaning citizens off public sector employment, the new packages expanded government spending and widened the already large discrepancy between the public and private sectors. Furthermore, they created hostages to fortune by locking in government spending at very high levels that depend on the price of oil remaining high, as it is much easier to give handouts than to take them away in nondemocratic, redistributive political economy settings. These are the issues that officials in GCC states have had to grapple with over the past two years after oil prices halved between June and December 2014 and remained at comparatively low levels throughout 2015. Saudi Arabia, for example, succeeded in slashing government spending by 14 per cent through the various austerity measures imposed in the second half of 2015, but these savings represented the ‘low-hanging fruit’ of trimming excess spending rather than making potentially sensitive alterations to the welfare state itself (Ladislow, Verrastro, & Cuyler, 2016).

With the above in mind, it is unsurprising that officials in GCC states initially responded to the drops in oil prices and government revenues (which are closely linked) with measures that avoided politically sensitive actions that would target or hit the citizen population. Policymakers in Saudi Arabia turned to a combination of drawing down foreign reserves and tapping capital markets through sovereign bond issues. Net foreign assets held by the Saudi Arabian Monetary Agency (SAMA, effectively the country’s central bank) fell by more than 9 per cent from an August 2014 peak of US$737 billion to US$664 billion in June 2015. The rate of drawdown prompted alarm in government circles and led to a policy shift in July 2015 when the government returned to the bond markets for the first time since 2007. In mid-July, the kingdom raised US$4 billion from 7-to 10-year conventional bond issues that were purchased by ‘quasi-sovereign’ state-owned entities, while a second bond issue in August 2015 that raised a further US$5.3 billion was opened up to local cash-rich commercial banks, which easily absorbed the issue (Rashad & McDowall, 2015; Saadi, 2015).

In April 2016, Saudi officials launched their first international debt issuance since 1991—when the country raised US$1 billion from international banks in the immediate aftermath of the Kuwait Crisis—acquiring a five-year, US$10 billion loan from a consortium of global banks that attracted particularly strong interest from Asian lenders. The significance of this move was noted by the chief investment manager at BlackRock, the world’s largest asset manager, who stated that ‘The loan is a way for Saudi Arabia to test the waters and set up an international borrowing profile’ and that ‘This is paving the way for the kingdom to transform from a creditor nation to a debtor nation’ (Kerr & Moore, 2016). Other Gulf governments followed suit with new debt issues to finance budget deficits and take the strain off Saudi-style drawdowns in foreign reserves and politically unpalatable austerity measures. Bahrain issued two bonds worth US$1.5 billion in November 2015 and US$600 million in February 2016, but it may struggle to issue further debt after the country was stripped of its investment grade rating by Moody’s Investors Service in March 2016 (Torchia, 2016). Qatar raised a US$5.5 billion syndicated loan in January 2016, the same month that Oman issued a US$1 billion loan, while Abu Dhabi returned to the debt market in April 2016 for the first time since 2008 with a US$5 billion loan split into 5-and 10-year maturities (Kassem, 2016).

All GCC states have come to rely upon debt financing to cover budget deficits to a greater or lesser extent. Gulf States News, an industry newsletter, has predicted that the entirety of Bahrain’s deficit will be covered by debt. Debt is estimated to cover between 80 and 90 per cent of the deficits in Qatar and Kuwait, between 60 and 65 per cent in Oman, and about 50 per cent of deficits in Saudi Arabia and the UAE. As a result, total government debt issued by GCC states is expected to rise significantly, although debt-to-GDP ratios will remain at relatively low and manageable levels, at least in the short term (Gulf States News, 2016, pp. 7–8). Yet, while issuing debt is more sustainable than the rapid drawdown of foreign reserves—which, in Saudi Arabia’s case, was set to be exhausted within five years if the 2014–2015 withdrawal rate continued—the successive rounds of downgrades of most Gulf economies by international rating agencies has increased the costs of borrowing and made it harder for the most badly affected states such as Bahrain to tap bond markets in the future. Continuing fiscal pressures risk creating a negative cycle if they lead to an accelerated rate of borrowing and cause international rating agencies to further call into question the long-term sustainability of GCC economies. Typical in this regard was a statement from Moody’s justifying a fresh downgrade of Saudi Arabia’s credit rating in May 2016:

‘Lower oil prices have led to a material deterioration in Saudi Arabia’s credit profile. A combination of lower growth, higher debt levels, and smaller domestic and external buffers leave the kingdom less well positioned to weather future shocks’ (Cho, 2016).

The scale and severity of the budgetary shortfalls caused by the continuing low price of oil throughout 2015 eventually left Gulf officials with little choice but to introduce various forms of austerity measures intended to bring spending down from surplus-fuelled highs. Once again, the subsequent cuts were aimed primarily at capital expenditures and expatriate communities in a bid to minimise their sensitivity and impact upon nationals. Two major petrochemical joint ventures planned by Qatar Petroleum with Royal Dutch Shell and Qatar Petrochemical Company respectively, were scrapped in 2014 due to escalating cost concerns, while plans to roll out a countrywide health care scheme in Qatar were put on hold indefinitely in December 2015 (Ulrichsen, 2016). By early 2016, the value of new construction contracts awarded in Qatar during the first quarter (January–March) was down 92 per cent year-on-year from the same period in 2015 (Walker, 2016).

In Saudi Arabia, the government delayed payments to construction firms in late 2015 in a bid to reduce the country’s deficit for the year, a move that caused a rare political intervention by Saudi business leaders in February 2016 (Arab News, 2016). The Saudi Binladin Group was among the worst affected as a combination of delayed payments and government sanctions placed on the company following the collapse of one of its cranes in Mecca in September 2015 led it to lay off 50,000 foreign employees in May 2016, but others were also (though less badly) hit (Parasie, 2016). Other high profile casualties of the reassessment of spending priorities in the Gulf included the closure of the Al Jazeera America television network and the delay of a long-planned GCC Rail network that had been slated to open in 2018 (Kamel, 2016).

While the demographic imbalance in Gulf labour markets, where up to 80 per cent of the workforce consists of migrant labourers, has long been a topic of controversy in public and political discussion within GCC societies, it nevertheless has enabled firms to lay off considerable numbers of foreigners in initial rounds of cost-cutting, as the Saudi Binladin example illustrated. In Qatar, significant cutbacks were made at state-owned entities, including Qatar Petroleum, which laid off about 1,000 employees in 2015 and folded its international investment branch, Qatar Petroleum International, back into the parent organisation, while the Qatar Foundation’s budget was slashed by up to 40 per cent as all of the Western (primarily American) universities based in Education City faced significant cuts of their own (Walker, 2016). Expatriates also constituted the majority of the 1,500 jobs lost in the financial sector in the UAE during the winter of 2015–2016, as the country’s similar demographic profile to Qatar ensured the pain of spending cuts fell on non-nationals; expatriates accounted for all of the 250 jobs cut at RAK Bank in January 2016, for example (Bianchi, 2016; The National, 2016).

One of the few direct and, therefore, the most contentious policy responses to target all Gulf residents, whether national or expatriate, has been the launching of long overdue reform of subsidy programmes that—in energy alone—were estimated to have cost Saudi Arabia US$107 billion in 2015 (Kerr, 2015). At the time of writing, all GCC states bar Kuwait have taken action to scale back fuel subsidies, with the UAE being the first to do so in August 2015. Prices for gasoline have risen by as much as 100 per cent in Saudi Arabia, 57 per cent in Bahrain, 33 per cent in Qatar and 20 per cent in Oman since 2015 while those for diesel have gone up by 200 per cent in Saudi Arabia, 106 per cent in Kuwait, 52 per cent in Qatar and 31 per cent in Bahrain, albeit from very low starting points (Krane & Hung, 2016, p. 1). Bahrain also removed subsidies on meat prices, expressed its intent to phase out power and water subsidies, and raised industrial gas use prices, as has Oman (Boersma & Griffiths, 2016, p. 6). Elsewhere, water bills in Saudi Arabia surged by up to 2,000 per cent in some cases following the introduction of new rates in December 2015, prompting a parallel surge in complaints to the country’s consultative Shura Council and the sacking of the minister of electricity and water in April 2016 for the ‘unsatisfactory’ implementation of the tariffs (Al-Hamdan, 2016; Carey & Sabah, 2016).

However, Moody’s forecasts that the recent rises in fuel prices will only result in savings equal to about 1 percent of GDP, and thus make only a small dent in the overall size of the fiscal deficits facing the GCC states (Gulf States News, 2016). The broader political sensitivity of tampering with one of the key mechanisms of wealth redistribution from the state to its citizenry has been evident most strongly in Kuwait and Bahrain, the two Gulf States with the most vocal and activist parliamentary bodies. Bahrain softened the blow of the meat price increases by compensating citizens for the additional costs, while in Kuwait, lawmakers amended a government proposal that would have included Kuwaiti citizens in planned increases to water and electricity charges so that it would apply only to residents of apartment buildings (which are overwhelmingly populated by expatriates) as well as corporate users (Fattah, 2016; Khaleej Times, 2015).

It will not be easy for officials to make further and deeper cuts that really begin to impact on Gulf nationals rather than expatriates or corporations, but sooner or later, nationals will inevitably start to feel the pain if governments are to make credible inroads into economic reform. The sacking of the Saudi minister of electricity and water was thus a warning of the political pitfalls that lie ahead for the policymakers entrusted with pushing through unpopular decisions. What evidence that does exist suggests that subsidy reform remains a highly sensitive issue that could rapidly become politicised if it is mishandled or if it is seen to progress too far too fast. In its annual survey of youth opinion across the Arab world, Dubai-based ASDA’A Burson-Marsteller found that 93 per cent of respondents in Bahrain, 92 per cent in Oman and Qatar and 86 per cent in Saudi Arabia were in favour of continuing subsidies (Nereim, 2016). That same month (April 2016), a survey in Kuwait illustrated the strength of attachment to the notion of the government as provider of both welfare and employment for its citizenry, as government statistics showed that fully 58 per cent of unemployed Kuwaitis preferred to remain jobless and wait for a government position to open up rather than take a job in the private sector (Jabr, 2016).

Officials in the Gulf additionally remain mindful that previous attempts in other regional states to scale back subsidies and raise prices of basic utilities and foodstuffs have provoked violent backlashes in numerous instances. In July 2005, dozens were killed and hundreds injured in disturbances across Yemen that mobilised more than 100,000 people against government plans to reduce fuel subsidies and increase the price of benzene by 86 per cent and diesel by 165 per cent (Al-Sakkaf, 2014). Seven years later, an increase in gasoline prices in Jordan sparked days of rioting and labour strikes throughout the country, notwithstanding even the addition of a compensation package that would have provided poorer households with a US$100 credit per person per year (Rudoren & Kadri, 2012). Going farther back in time, reductions in food subsidies caused widespread unrest in Egypt in 1977 (when protestors mocked President Anwar Sadat with slogans such as ‘Wain al-futur, ya batal al-’ubur?’ [‘Hero of the crossing, where’s our breakfast?’]), Morocco in 1981, Tunisia in 1984 and Algeria in 1988 (Tripp, 2013, p. 134). ¹

Section III

The core issue at stake therefore is the updating of the ruling bargain to bring it into line with sustainable and long-term patterns of consumption and production. Yet the danger that faces Gulf policymakers is that their failure to roll back subsidies and patterns of wasteful consumption in times of comparative plenty increasingly means that reforms will instead occur during periods of relative hardship. This raises the question of ‘stability versus sustainability’ as identified by Jim Krane (2012). Put simply, officials increasingly must confront the reality that traditional methods of redistributing wealth are no longer fit for purpose; furthermore, their continuation actively damages medium-and long-term economic prospects. Present economic models of development, and the current high-intensity consumption of energy, place at risk the viability of the political model that has maintained stability for the past four decades.

Thus far, the evidence from the Gulf States’ responses to the Arab Spring and its messy aftermath is not encouraging. At first glance, the GCC states, Bahrain apart, appear to largely have weathered the storm of protest, thereby confirming the monarchies as the great survivors of the Middle East. Moreover, Qatar, Saudi Arabia and the UAE have, in very different ways, emerged as regional powers with truly international reach, engineering the Arab response to the crisis in Libya in 2011 and leading regional initiatives to resolve the conflicts in Syria and Yemen (Ulrichsen, 2012, p. 2). Their interventions demonstrate a newly proactive stance in attempting to control and contain the unrest generated by the Arab Spring, and gathered pace after the toppling of the Muslim Brotherhood government and the restoration of military rule in Egypt in July 2013.

And yet, the combination of medium-and long-term challenges outlined in this article present profoundly difficult questions for ruling elites in the Gulf. Addressing them would involve reformulating the political and economic structures that constitute the pillars of regime stability in redistributive states. Rather than tackling the problems head-on, the policy responses to the Arab Spring instead suggest that GCC governments lack both the capability and the intent to undertake the sensitive—and momentous—reforms needed to guide the Gulf States into the inevitable post-oil era. This transition will inevitably take place, and it may be sooner rather than later, as rising break-even prices of oil and surging domestic consumption eat into export sales and government revenues. Sustained and transformative outcomes of reform processes will, however, have to unfold in a period of accelerated change and heightened regional uncertainty, but they are necessary if economies are to become less vulnerable to external sources of volatility. If successful, they would be consistent with Gulf leaders’ long record as the great ‘survivors’ of Middle East politics, defying periodic forecasts of their seemingly inevitable demise and pursuing pragmatic strategies not only of regime survival but also of renewal.