Saudi Arabia, Kuwait, and the other oil monarchies face unpleasant economic realities that have potentially serious political implications. Having built up consumption machines in the 1970s that they can no longer fund, these states must make large budget cuts and start raising revenues. Whereas in the past all needs could be met, growing domestic tensions will increasingly surround difficult allocative decisions.
The oil monarchies face unpleasant economic realities that have potentially serious political implications.
This move from abundant wealth to scarce resources will affect both the style and substance of politics in the Persian Gulf states, and particularly in Saudi Arabia. The Saudi regime has a choice of strategies to manage these tensions: greater consultation, greater repression, or a mixture of the two. Early signs suggest that King Fahd is moving in the first direction without foregoing the second.
These facts somehow don’t register with Westerners, who continue to perceive Saudi Arabia as wealthy beyond belief. Anecdotes about the fabulously spendthrift oil-rich Arabs are still exchanged, even if often two decades old. This perception is beginning to create great problems for the Gulf Cooperation Council (GCC) countries (Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates, and Oman). The West ought to be assisting the GCC states in the transition to a sustainable fiscal regime rather than bullying them into greater indebtedness. After all, the survival of the current governments and their domestic stability is the West’s overriding strategic interest, as well as the key to a healthy and sustainable commercial relationship. The survival of the current governments and their domestic stability is the West’s overriding strategic interest.
The Predicament
The boom of 1974-81 unleashed a period of rampant consumption. Private spending skyrocketed as oil income was circulated. The government rapidly built up a free welfare system, apparently without considering whether it could be financed in the future. Oil revenues have been declining since 1982, and the future has now arrived. The new reality in the oil-exporting countries consists of massive budget deficits, swingeing spending cuts, and rapidly increasing indebtedness.
To be sure, the GCC holds an estimated 46 percent of the world’s proven oil reserves, but the notion that abundant oil equals abundant riches no longer holds. Oil reserves do not quickly or easily translate into large incomes for producer countries: a slack market, low prices, and the massive investment cost of expanding production, together with the lead times involved in bringing new wells on stream, all get in the way. To make matters worse, the GCC states have one-crop economies, with oil the main input for downstream industries, the main foreign currency earner, and the main source of government revenues. In brief, the Gulf oil producers are resource rich but cash poor.
It has proven difficult to bring down consumption. Simply to reduce state spending on contracts, services, and subsidies would whittle away much of the cement that keeps these societies stable. Governments in the Gulf face the unpalatable dilemma of spending too much or cutting back. The first path leads to bankruptcy, the second to potential political problems. Actually, these are not the true choices. Short of a miracle that would return oil prices to their pre-1982 levels, the dilemma has been whether to make the difficult spending decisions now or delay them to some future date; between introducing reforms incrementally or imposing them suddenly. So far, the GCC states have adopted the “Micawber Doctrine” of putting off difficult decisions in the hope that something will turn up.
A strong financial position made this lack of strategy possible to carry off in the past, and particularly in 1985-86, when the price of oil tumbled. At that time, the oil monarchies had large financial reserves overseas and were unencumbered by debt, so they could run down their capital reserves abroad, thereby maintaining expenditures no longer justified by a contracting revenue base. It was not that the consequences of the 1986 oil price collapse were faced and managed; they were simply postponed. That the GCC states coped with the 1985-86 oil price dip with relative ease had another consequence: it made many in the West complacent with regard to the status of GCC finances.
Circumstances have now changed. The foreign reserves of the GCC states have steadily eroded since 1983, and the Iraqi invasion of Kuwait in August 1990 seriously depleted them further. Saudi Arabia and Kuwait effectively financed the coalition war effort to expel Iraq from Kuwait. The Saudi contribution alone has been estimated at $55 to $60 billion. While Kuwait held just under $100 billion before the crisis, it is widely estimated that war and reconstruction lowered total state reserves abroad to something in the $35 to $40 billion range, although $40 to $50 billion is more likely.
Shorn virtually overnight of their large financial cushions, Saudi Arabia and Kuwait have used their remaining reserves as collateral for commercial loans, both domestic and international. Saudi Arabia borrowed $4.5 billion in 1991, its first foray into the international financial markets. Kuwait took out a “big jumbo” sovereign loan for $5.5 billion in the same year.
The decision to borrow domestically and on the international markets resulted from the same Micawber thinking that led to the policy of running down reserves in 1985-86: delay difficult decisions in the hope that something might turn up. This time, however, it is proving to be a much shorter-term and more costly palliative. Saudi Arabia’s domestic debt has risen from zero in 1987 to an estimated $72 billion today, precipitating great strains in the domestic banking sector. In 1994, the Saudi external debt stands at $29.9 billion, with the burden of servicing this debt to grow in the mid-1990s. In Kuwait, public deficits since liberation amounted (in early 1994) to about $22 billion. In fiscal 1993-94 alone, the public deficit came to $5.2 billion, far beyond the deficit target of $4 billion. Kuwait’s peak year for debt servicing will likely be 1996, with repayments due to the tune of $3.2 billion.
Spending Cuts and Revenue Increases
With the GCC states’ reserves down and their debts up, the governments are now beginning to confront the spending cuts and revenue increases they have put off for a decade.
With the GCC states’ reserves down and their debts up, the governments now confront the spending cuts they have put off for a decade.
Spending cuts. The Saudis and Kuwaitis announced stringent budget cuts at the beginning of 1994 in the hope of balancing expenditures with projected income for the first time since 1982. (Saudi Arabian budget deficits came to an estimated $10.5 billion in 1992 and $8 billion in 1993.) A royal decree reduced the Saudi budget for 1994 by a draconian 20 percent, to $42.7 billion. For 1994-95, the projected Kuwaiti budget has been cut by 2.8 percent. In Bahrain, the poor cousin of the GCC, a reduction in budget spending of 15 percent has been announced.
These large cuts will affect virtually every public sector activity. The projects and maintenance account in Saudi Arabia is slated to fall by nearly 19 percent. Specialized government agencies, including the seven universities, are scheduled to lose 7 percent of income. Municipal councils and the water department are to receive the same amounts as in the 1993 budget projections. In Kuwait, many of the easier cuts have already been made, so new reductions cut into bone. Capital spending has already been squeezed, as have development projects, land purchases, transportation, and equipment. In Bahrain, opposition figures talk resentfully of all ministries having been subject to cuts except the Ministry of Interior.
Will these avowed budget cuts actually be implemented? Earlier attempts at austerity had only limited success. The Saudis set out to reduce spending by 28 percent in 1992, only to end up with the expenditure account $11 billion over target. Nevertheless, this intention to cut back appears serious. Visitors to Saudi Arabia note a real determination this time. The problem with this effort is that it is without substance. Money is being saved simply by not paying bills, which are, in turn, accumulating to exacerbate domestic debt.
Revenue increases. GCC governments are also looking to raise income from their residents, both through increased fees (which both raise income and reduce usage) and privatization. In Kuwait, fees for general services are under review, and reductions in subsidies for electricity, water, and communications are expected. Government circles increasingly support indirect taxation, with a multiband sales tax (which applies different rates for different goods) likely to be phased in gradually. Bahrainis are already subject to a range of charges aimed at bolstering state revenues; many services previously offered gratis now come at a price, including education and health services. In addition, a 5 percent municipal tax on rented accommodations was recently introduced.
But an income tax remains not in consideration, at least for now. Governments fear that such a move would increase discontent and might well create more demands for greater political participation. Still, even in Saudi Arabia, the introduction of direct taxes is no longer the outlandish notion it was in years past.
Persian Gulf authorities are also examining measures to reduce the public sector through privatization, which has the dual advantage of gaining the state large capital windfalls and divesting it of costly financial obligations. The process is arguably most advanced in Bahrain, where privatizing began before the Kuwait war (with the aluminium company Balexco), is now underway in the food processing sector, and will probably be extended to agriculture, fishing, trading, and industry. At the prompting of the World Bank, the Kuwaiti authorities announced a five-year, $12 billion privatization plan at the end of July 1994. The telephone company appears likely to be the first on the block, with the Telecommunications Ministry set to float 51 percent of its equity by the end of 1994. In Saudi Arabia, King Fahd has publicly thrown his weight behind the idea of selling off state assets, specifically mentioning as candidates for privatization Saudia (the national airline), posts and telecommunications, and some downstream oil ventures. Other concerns--public utilities, ports, and service activities linked to the hydrocarbons industry--are also known to be under consideration.
Public Nervousness
The public reacts nervously to these measures, and with good reason. Reduced services, higher prices, frozen state salaries, and reduced subsidies all lie ahead. Bahrainis worry that a price increase in utilities will further erode living standards. In Saudi Arabia, some quarters worry that selling off the telecommunication companies will weaken the state’s control of information. Some Kuwaitis worry about the erosion of national sovereignty that the potential loss of state control would herald, while others are more concerned about job losses at the newly privatized industries. Nationalists, not Islamists, seem to be emerging as the major opponents of privatization, with ownership of the Shwaiba power station an early test case.
Indeed, unemployment is likely to be a major issue in the GCC states. The Saudi austerity measures announced at the start of 1994 will rapidly exacerbate that country’s unemployment problem. In Bahrain, where the government lacks financial reserves to shield citizens from the damaging effects of lowered oil prices, unemployment is already a big problem. Opposition sources put the jobless figure as high as twenty thousand on the island, or 22 percent of the citizen labor force. This, in turn, has contributed to more crime.
Extremely high population growth throughout the GCC states increases the labor pool and exacerbates worries about unemployment. Annual average rates of population growth for Saudi Arabia, Oman, Bahrain, and the United Arab Emirates during 1985-92 were, respectively, 3.5, 3.8, 3.2, and 3.1 percent. Nor is this a recent phenomenon, for population growth in the GCC states averaged approximately 3.5 percent in the 1975-85 period. These growth rates are leading to a 34 percent increase in the Saudi population in eight years, and a doubling of the population in 19 years. Such stunning growth means that some 50 percent of the population of the GCC states is under the age of fifteen. Before long, this segment of the population will enter the labor market and add to the ranks of the unemployed. (This population profile has another implication: significant cuts are about to be made in such services as education and health at a time when the public call on them is greater than ever.)
Further, the combination of a rapid rise in population with flat or falling revenues spells a real decline in per capita GDP. Recent revisions in the overall population estimates of Saudi Arabia make comparisons problematic. Comparing Saudi figures before and after the oil price collapse of 1985-86 reveals a precipitous decline: per capita GDP stood at 32,477 Saudi riyals (SR) ($9,216 at current aggregated exchange rates) in 1984, and just SR23,858 ($6,371) in 1988, a reduction of more than 25 percent in just four years. In 1993, per capita GDP income stood at SR26,046 ($6,995), a deceptively high figure that results principally from higher oil production.
The Return of Politics
Karl Marx envisaged an ideal society that, through socialism, would attain such abundance that public tensions would be neutralized and politics would disappear; he called this the withering away of the state. But the oil boom showed how much he misunderstood human nature. During the years of abundance, when income far outstripped the ability of the local economy to absorb capital, politics never disappeared from even the richest of the oil exporters, and no state showed signs of withering. Rather, politics softened and its nature changed. This transformation was most apparent in the Kingdom of Saudi Arabia. The oil boom showed how much Karl Marx misunderstood human nature.
The Politics of Abundance. Oil revenues profoundly bolstered the position of the ruler. King `Abd al-`Aziz ibn Sa`ud, the kingdom’s founder (r. 1902-53), had not been an absolute ruler. Quite the contrary, though the monarch, his position within the Saudi polity was that of a primus inter pares. He had to create coalitions, listen closely to grievances of subjects, and form tribal alliances through marriage.
The situation changed profoundly during the boom of the 1970s, when oil bounty provided an independent base of wealth to Ibn Sa`ud’s successors, and to the Saud dynasty as a whole. Now, the king and senior princes increasingly mediated access to wealth. The ruling family made decisions, appointees carried out their wishes. This change had great political consequences. Only by acknowledging the monarch, and thereby entrenching his power, could others (tribal sheikhs, merchants) prosper within Saudi Arabia. The old system of consensual, coalition politics collapsed, replaced by a centralization of power. As checks and balances disappeared, no one could effectively scrutinize the content or challenge the style of government. This lack of accountability, along with a massive growth of the bureaucracy, bred inertia and inefficiency. Policy became inconsistent to the point of caprice. Short-term benefit eclipsed all concern with vision or strategy. Decision making turned into a self-serving exercise to the benefit of the ruling family, often leading to corruption.
Few Saudis protested this evolution, for access to abundant resources made the situation acceptable. The old political elites of the kingdom in effect passively accepted the centralization of power by the ruling family and its supporters. In return for accepting the political dominance of the king and the Saud family, all Saudis insisted on benefiting through the distribution of public sector resources as contracts, subsidies, handouts, and jobs.
The Politics of Scarcity. The advent of financial crisis in the early 1990s and the need radically to curb state spending has again changed politics in Saudi Arabia. The authorities in Riyadh are unlikely ever again to supply benefits as they did in the 1970s, and so the old contract between ruler and ruled is defunct. Saudi Arabia is on the edge of a new internal political transformation, one that is bringing politics back in with a vengeance. Its rulers will have to contend with a more sophisticated political process and will face many more challenges than in the past two decades. The country will again face the stresses and tensions that accompany difficult allocative decisions. Constituencies will organize and lobby for state benefits. Those who lose out will be disgruntled.
The first signs of such changes are already apparent. Two groups submitted memoranda directly to King Fahd in 1991--one Islamist and one liberal--suggesting that influential Saudi figures are openly dissatisfied with the kingdom’s political leadership. While the petitions took up many subjects, both dealt with the Saudi political economy. The Islamist memo, with four hundred signatures, and its subsequent “amplification” provided the most forthright scrutiny of Saudi policy, so we examine their contents in some detail.
The petition recurrently deals with the abuse of state authority. Calling for government “without favoritism” and an end to “the abuse of authority,” it demands the removal of those guilty of “corruption.” With regard to economic policy, the petition calls for “justice in the distribution of public funds amongst all classes of society,” the cancellation of taxes, and the reduction of fees “which burden people.” It also seeks to “protect the country’s resources against loss or abuse.”
The “amplification” draws attention to the great disparity in wealth in the kingdom and the hard material conditions still prevailing. It frowns on the existence of monopolies, specifically mentioning in this connection express mail service, the airline, and the importation of livestock. The document attacks the exacting of commissions on project awards, a further source of “unfair resource allocation.”
The petitioners cleverly took up populist demands, knowing that charging fees for government services provokes nearly universal hostility among Saudi citizens. Pointing out disparities in income implies that Saudi Arabia has become an unjust society. By 1991, in other words, economic issues and their social impact had become politically potent. Islamism is by now well established as the most effective vehicle for expressing political opposition within the kingdom, so there is every reason to expect that these issues will be a recurring theme in future Islamic-based criticism of the Saudi regime.
Emulate Jordan or Iraq?
In dealing with the problems ahead, the Saudi regime has a choice of two main approaches, the Jordanian and the Iraqi.
The Jordanians tried a deficit-financing strategy not dissimilar to the one that has prevailed until recently in Saudi Arabia. Then, faced with unrest, spiralling debt, and the need for radical economic restructuring, Amman in April 1989 recognized its failure and changed course. It adopted a program of modest political liberalization involving parliamentary elections, the end to martial law, and the legalization of political parties. Saddam Husayn, of course, chose quite a different set of policies. Faced with a major contraction in income since 1990, he rewarded his hard core base of support at the expense of everyone else. To keep his regime in power, he tolerated no political dissension. Repression, in other words, has been the Iraqi mechanism to cope with economic crisis.
Jordan and Iraq offer not entirely appropriate analogies for the GCC states but they sketch out ideal types for analytical purposes; Saudi Arabia will almost certainly choose between the two in its own way. Initial signs point to the Saudi rulers’ introducing aspects of the Jordanian model and keeping in reserve the possibility of adopting Iraqi-style practices.
The Majlis ash-Shura (Consultative Council), formally inaugurated on December 29, 1993, stands out as the most important move in the former direction. Many commentators, especially Westerners but also Saudis, have pointed out the shortcomings of this institution (Muhammad al-Masari, spokesman of the Committee for the Defense of Legitimate Rights, called it “a joke”). They note, for example, that the council’s powers are purely advisory, sessions are held in camera, and council members may speak for no longer than ten minutes without special dispensation.
But such skepticism seems to be overstated. The sixty members appear to have been chosen with great care, for they are highly respected individuals of independent standing and wide experience, drawn from across the kingdom, who are well qualified to advise the government. The council has a heavy workload reviewing and commenting on all proposed new legislation, together with international treaties that the government is contemplating signing. Already, during the first eight-and-a-half months of its existence, the council held fourteen ordinary sessions and issued eighteen resolutions. Though the council meets only fortnightly, its committees convene between sessions. Written reports are prepared of proceedings. Experts assist the council in its deliberations. There is talk of expanding the council’s size to allow the committees to work more effectively, and opening its meetings to the public. Some senior businessmen hope that the Consultative Council will one day become a primary source of legislation, leaving the Council of Ministers to function as an executive arm of government. Together with a structure of thirteen provincial councils, membership of which was announced in early September 1993, and other minor reforms, the council has the possibility of becoming a real contribution to more open and responsive government but in a way that is seen to fit in with Saudi concepts of government and consultation. At the very least, it will be extremely difficult for the monarch to end the council experiment without provoking a backlash and having to depend more heavily on his security services.
Not that the Saudi regime would be at all reluctant to make use of the security services. Events in September 1994 showed that force remains an option to be used at will. In the middle of that month, the Saudi authorities undertook their biggest drive thus far against the radical Sunni Islamists, who have come to a wider prominence since the Kuwait crisis. Leading preachers, such as Salman al-`Awda and Safir al-Huwali, were arrested, together with their supporters. The largest crackdown came in Qasim governorate, centered on the city of Burayda, where up to one thousand Islamists may have been arrested. The security forces were very visibly deployed in Burayda and parts of Riyadh as a deterrent to open hostility against the regime. This open show of force appears to have faced down the Islamists for the moment, though their ideas find wide support among the population aged under forty, so the movement will not easily be expunged.
Other, less public use of coercive practices may also be found in Saudi Arabia, including the withdrawal of passports, short-term arrests, longer-term incarceration, torture, and even disappearances. With Saudi Arabia experiencing a growth in domestic tensions born of economic strain and an increasing demand for political change, the Iraqi model will remain an option.
The West’s Role
Mistaken expectations. Westerners continue to see the GCC states as a small herd of cash cows, and view them ahistorically; having once dripped money, the oil exporters must still do so. Businessmen in the United States and Western Europe continue to see Saudi Arabia as a huge potential market. Occasional attempts to draw attention to the new economic realities in the GCC states seem to have little impact. Westerners tend to miss seeing the acute problems outlined above. For example, the U.S. government holds that since 1982, “the Saudi economy adjusted to sharply lower oil revenues.”
This widespread perception that the GCC states remain fabulously rich leads to three faulty assumptions, each of which has great consequence. First, Westerners expect not to find the usual stresses and strains in the Persian Gulf oil countries, thinking that near-limitless capital still ameliorates the tensions that accompany the allocation of scarce resources. They ignore the destabilizing impact of decreased income and blithely expect that the GCC states will stay politically stable. The strategic implications of instability in the Gulf could in turn have dire implications for the West, for all six regimes are pro-Western; their weakening could jeopardize Western strategic and economic interests.
Secondly, Westerners continue to make the recycling of petrodollars a top priority, not their efficient use. Transferring the capital resources of oil producers back to the productive economies of the leading Western countries remains the key; the objective is to supply goods and services in exchange for capital, regardless of whether such goods and services are required or even can be absorbed, much less whether the capital base exists to fund such imports. The Pentagon reports that the Saudis paid $28.4 billion to the United States for military equipment during the 1980s; the usefulness of all this equipment was clearly exposed in the immediate aftermath of the Iraqi invasion of Kuwait. Still, Riyadh has since August 1990 promised to spend a further $26 billion on U.S. weapons. In this and other ways, the West has routinely emphasized short-term economic gain at the expense of longer-term considerations.
Thirdly, ascribing limitless resources results in the GCC states’ being burdened with a special international role--bankers for the West’s favored projects. When large amounts of aid are required to underpin political solutions to conflicts, the West turns to the fabled oil wealth of the Gulf states. Most notably, this was the case in the Kuwait crisis and following the Israeli-Palestinian Declaration of Principles. On a lesser scale, Washington turned to the Gulf states to help fund the Nicaraguan contras, the UNITA movement in Angola, and ex-president Siad Barre of Somalia.
These expectations of the GCC states could have pernicious results. The assumption of political stability breeds complacency. The recycling strategy is exacerbating the fiscal strains, making instability more likely. Demands for foreign aid help place an unsustainable load on Saudi Arabia and Kuwait, as well as indirectly encouraging avaricious neighbors (most notably the Iraqis) to covet their resources.
Sensible policies. The West can do much to assist a smoother transition to fiscal rectitude, especially in view of the very close American, British, and French ties with the GCC states. The West already has a strategic relationship with the GCC states with respect to security. This relationship should be extended to the financial and economic domains, with the guiding principle being mutual benefit.
To start, Western elites must change their attitude toward the GCC states and appreciate their financial problems. This means presidents, premiers, and other politicians should desist from browbeating the GCC members into awarding contracts they cannot afford and perhaps do not even require. To achieve such self-restraint probably requires greater coordination among Western capitals to ensure that one country does not exploit another’s forbearance. Such dialogue could be regularized by establishing a permanent contact group, perhaps building on coordination that already exists in the security field.
Western elites must change their attitude toward the GCC states.
The Western governments should offer practical help to the Saudis to develop an integrated plan for fiscal reform. The recent interest on the part of King Fahd in financial and economic reform gives an opportunity to marry fiscal reform proposals with political will. Such expertise should therefore be placed in the palace rather than lodged several steps away from power in planning ministries and finance ministries. The Saudis could also use technical assistance in the areas of privatization, the development of financial markets, and steps to encourage the return of private savings.
Prospects
Future prospects for the GCC states should not necessarily be viewed with trepidation. A generation ago, these polities were widely seen as fossils ready to be swept aside by modern ways. But however fragile in appearance, Arabian Peninsula societies are in fact of hardy stock. They coped extremely well with the radical leftist ideologies of the 1950s and 1960s and the explosion of wealth in the 1970s (though ideological challenges in the name of Islam may be more difficult to cope with). This record gives reason to be optimistic about their continued survival, for, if anything, the situation today is much easier than in the 1950s. Then, the powerful ideas and charismatic leadership of Gamal Abdel Nasser threatened Saudi Arabia. Today, the kingdom enjoys a close but discreet alliance with Washington, supported by London and Paris, and this should prove sufficient to deter Iraqi or Iranian adventurism. Moreover, levels of education and training today are far superior than in the 1950s.
Also, while the GCC governments may have frittered away their reserves, their citizens possess huge savings, which should have an important role in helping them through this painful process of transition. Such figures are difficult to estimate with any accuracy. One authoritative source has put a figure of $250 billion on the Saudi private sector’s off-shore wealth.
The future course depends in large part on the regimes, and specifically how they manage their resources and their power. Will the ruling families and their supporters let the population suffer alone, or will they also bear the consequences of retrenchment? Early signs suggest that King Fahd is insisting on retrenchment within the Saudi family itself. But such discipline will be hard to maintain, especially when a decline in contracts means that the royal family already faces a reduction in income from commissions.
Will leaders who used the oil bonanza to centralize power now decentralize enough to satisfy a broad yearning for greater accountability? Here there is less cause for optimism. With the notable exception of Sultan Qabus in Oman, the GCC leaders are elderly and sickly men who lack energy and who grew complacent during the era of softened politics. Poorly suited to lead or to command respect, they are not the ones to push through reforms. Moreover, the immediate line of succession has little to offer by way of dynamism or administrative rigor, especially in Saudi Arabia and Kuwait, making new arrangements for succession, such as an early move in Saudi Arabia to the grandsons of Ibn Sa`ud, increasingly likely. In theory, economic readjustment and political transformation can take place without jeopardizing stability in the oil monarchies, but the leaders’ lives and their recent political experiences make one hesitate to say that they are up to the challenge.
Philip Robins is the head of the Middle East Programme at the Royal Institute of International Affairs, Chatham House. He has traveled widely in the Persian Gulf region and comments frequently on its affairs. He will take up a new position at St. Anthony’s College, Oxford in April 1995.
