From here to where?

by Tina Isanti

published on bqdoha ( http://www.bqdoha.com/ )

1ST April 2015

Declining oil revenues, high expectations of its young populations and unsustainable economic relationships between the states and their people could cause Gulf States a growing headache, says report by Chatham House.

In terms of political science, the Gulf States fall into the category of ‘rentier states’, defined as states which derive all or a substantial portion of their national revenues from the rent of indigenous resources to external clients, i.e. selling oil to the rest of the world.  The relationship between rentier states and their people involves money flowing from the government to the people in the form of entitlements – unlike in most political systems, where it flows in the opposite direction in the form of taxes.

It was often argued that because income is distributed, rather than earned, individuals develop a ‘rentier mentality’, in which income and wealth are not related to work, but rather to a simple fact of being a citizen of a certain state.  A rentier is thus a member of that special group who receives a share of the economy’s yields, despite not actively participating in economic production.  In practice, the current wealth of natural resources often deceives the rentier into an expectation that revenues will ever-increase.

It is to this economic bargain the recent Chatham report ‘Future Trends in the Gulf’, refers in its opening: “The current economic bargain between state and citizen in the Gulf states is unsustainable as they all prepare for a post-oil era… Generational change is placing strain on traditional political structures and the revenues from energy resources are not sufficient to sustain the current political-economic bargain in the medium to long term.  Current and future shifts in the structure of the political economy, demographics, education and the availability of information will all affect power relations between states and citizens, citizens and expatriates, and different social groups.”

The Gulf States’ constitutions reflect the oil-boom era in which they were written in the sense that certain economic expectations are built into them, states the Chatham report.  “They typically declare that countries should balance a free economy with ‘social justice’; that natural resources are under the control of the state, while private property should be protected from expropriation; and that the state will pursue a better standard of living for its citizens.”

The notion of the state having a role in providing employment is enshrined in several Gulf constitutions.  Kuwait was the first to develop its constitution, which postulates work as both a right and a duty, and states that “the state shall endeavour to make it available to citizens and to make its terms equitable”.  According to the constitution of Bahrain, “the state guarantees the provision of job opportunities for its citizens”.  The UAE constitution states that the “community [or ‘society’] shall provide citizens with jobs, qualifications for those jobs, and suitable legal conditions”.

Such constitutional obligation of the state to take care of its population’s employment needs, combined with the prerogatives Gulf nationals have grown accustomed to – such as energy  and water subsidies, free healthcare and education and tax exemptions, has led to citizens who expect a lot.  Too much even, in a scenario where oil is cheap or – in longer term – not flowing at all anymore.

A generation of (too) great expectations

The Chatham report warns of ‘inflation of citizens’ economic expectations’, which may prove to be the hardest hurdle to jump on the road to diversification.  “The younger, oil-boom generation has grown up with expectations of immense wealth.  In contrast to the previous generation, its members have little memory of the region’s poorer past, and little appreciation of the extent of the change,” the report says.

But enormous wealth and bountiful government spending do not necessarily translate into economic satisfaction, not even in Qatar, the world’s richest country as a survey by Qatar University proved.  The researchers asked respondents to rate the economic situation of a hypothetical Qatari family, with three children and income of USD 100,000 per year, who own a Land cruiser and holiday in Europe, but do not own a house there.  One-third of respondents rated this as moderate, weak or very weak.

The large numbers of graduates in the Gulf typically expect either public-sector jobs or well-paid, high-status private-sector jobs.  Such expectations are – at least for now – more easily met in the wealthiest countries with the smallest populations – Qatar and the UAE – but in Saudi Arabia, Oman and Bahrain, salary expectations and unemployment are already causing problems, says the report.

Concerns about the youth becoming ‘spoiled’ and lacking discipline surfaces a lot in local media and it is partly for this reason that Qatar and the UAE have recently introduced programmes of national military service, says the report.  But the Gulf’s young are not just ambitious, they are worried, too. A 2014 Arab Youth Survey by Asda’a BursonMarsteller found that 63 percent of the young people it surveyed in GCC countries said they were ‘very concerned’ about the rising cost of living – on a par with youth surveyed in the poorer Arab countries.  Such concerns are most pressing in Bahrain, Oman and Saudi Arabia, where incomes are lower.

2014-Arab-youth-survey-social-worries

2014 Arab Youth Survey by Asda´s BursonMarsteller

 

It would seem that the $150 billion spending commitments (some 12.8 percent of the region’s combined GDP) the GCC countries made in 2011, did not alleviate these concerns.  The GCC created tens of thousands of new public-sector jobs, Qatar hiked public sector pay by 60 percent, and the UAE by 35 percent; Saudi Arabia gave public-sector workers a bonus of two months’ salary, while Kuwait raised public-sector salaries by 25 percent in 2012 in response to strikes.  Moreover, Gulf governments have poured significant resources into expansion of higher education over the past decade.  However, high numbers of graduates have not translated into the skills demanded by the private-sector.

Such injections of cash into the economy tend to worsen the problem of inflated expectations, argues the report and adds that expectations are not being adjusted to the likely future squeeze on fiscal spending, thereby storing up later political problems.

Unsustainable relationships

“Across the region, a combination of population growth and dwindling resources will place pressure on the implicit economic bargain between rulers and societies,” the report warns.  “Expenditure commitments are growing sharply but revenues are capped by oil production and prices, while the capacity to raise taxes is weak, with political consequences.”  The report gives Bahrain, with its limited reserves, as a warning of what is yet to come: escalating political pressure and heavy borrowing to finance social spending. “Over the coming decades, the economic role of the state will have to change.  The governments concerned all acknowledge this.  However, they are not fully preparing themselves or their societies for the political implications.”

Life-expextancy-and-oil-R-P-ratios

Life expectancy and oil R-P ratios

 

While the authors admit the timescale varies from country to country, they argue that the current political-economic system in the Gulf is not sustainable due to several reasons, the diminishing resources being the most prominent one.  Kuwait and Qatar are the only Gulf countries whose oil and gas reserves are expected to last longer than the lifespan of a citizen born today; in all the others, the generation born in 2015 should expect these resources to run out within their lifetimes.  But in the more immediate term, the sustained surge in fiscal spending seen across the Gulf since 2003 has made the states’ provisions of economic benefits unsustainable within the next decade, says Chatham House and adds: “SWFs and diversification strategies are not advanced enough to compensate; while the capital in SWFs could cover several years of public spending in all the Gulf countries except Bahrain, the income from them could not.”

For instance, Qatar’s SWF has an estimated value of some USD 250 billion.  As a last resort, this could cover just over four years of public spending at current rates.  The KIA’s estimated total value (USD 548 billion) would cover 8.5 years of public spending at current rates (USD 64 billion in the 2013–14 fiscal year).  The estimated total value of Abu Dhabi’s SWF (USD 773 billion), one of the largest in the world, is equivalent to approximately nine years of Abu Dhabi’s government spending.  Such funds will help substitute for oil income, but would only be part of the picture, states the report.  Other forms of revenue raising, from taxation to borrowing, will have to be considered.

Diversification efforts have had mixed results. Much of the diversification is geared towards sectors dependent on cheap energy and cheap labour, reinforcing the existing dependencies.  Financial services and property markets largely serve regional demand, which is again dependent on oil.  Businesses continue to depend on government contracts and goodwill to obtain land or permits.  The most successful diversification is into trade, tourism, and the related airlines and ports businesses, says the report.  Internal debates continue over whether to maximize growth and profits, capitalizing on cheap energy and cheap labour, or to create jobs for nationals, which is likely to mean developing new sectors and moving towards higher-paid jobs.  But this should not be seen as an inevitable clash of interests, stresses the report and adds that the private sector could be developed in a more open and equitable way.

Above all, the report concludes, the issues should be addressed now – long before hydrocarbon resources are depleted and before the expectations of Gulf peoples are too entrenched to be seen as benefits as they are and not as a birth right.

*Chatham House, the Royal Institute of International Affairs ( http://www.chathamhouse.org/ ) is an independent policy institute based in London. The report is based on three years of research, which included a series of workshops in partnership with local research centres in Kuwait, Qatar and Saudi Arabia. Many Gulf nationals and scholars of Gulf studies have participated since 2011 in research workshops, roundtables and interviews for the project as well.