Gulf states—especially Kuwait, Qatar, Saudi Arabia, and the UAE—have long been the rich uncles of a MENA region in which hydrocarbon reserves are distributed unevenly. As employers, their oil-and-gas-driven economies have absorbed millions of workers from Arab and other countries, and these workers have in turn sent home remittances that have kept local economies afloat. As donors and investors, the Gulf states have been a major presence in the MENA region for decades but significantly ramped up their involvement after the 2011 Arab uprisings. Sometimes cooperating with each other and sometimes competing, Gulf states have given billions of dollars in grants, loans, and investments to less wealthy Arab states, as well as financed costly military interventions in Libya and Yemen (and to a lesser extent Syria).
The Gulf states’ ability to play the rich uncle role, however, might now be waning. Shortly before the coronavirus pandemic hit the region, the International Monetary Fund (IMF) had issued a startling report on the GCC. Rising supplies of fossil fuels from diverse sources plus a global push to substitute renewable sources had created an “era of oil abundance,” which meant that the oil exporters “may need to be ready for a post-oil future sooner rather than later.” The IMF warned that Gulf states were far behind the curve in diversifying their economies and government revenue sources away from hydrocarbons, requiring government downsizing and private sector development. Spending by Gulf states had risen in the last decade, the report said, “with a notable acceleration in the wake of the Arab Spring in 2011,” although the oil price shock of 2014 prompted some recalibration. The IMF report made the stunning prediction that if the Gulf states did not make major changes soon, “the region’s financial wealth could be depleted by 2034.”
Then came the pandemic. While so far the public health aspects have not hit the Gulf states nearly as hard as Iran or European countries, the economic ramifications have hit the Gulf with what the IMF has called a “double whammy” of a health crisis and a collapse in oil prices. The crisis has also gutted some of the other sectors on which the limited diversification of Gulf economies has relied: tourism, business travel, logistics, and services. While these sectors will eventually recover, they might do so slowly and in ways that necessitate changes in Gulf states’ plans, if, for example, Chinese energy needs and/or trade patterns between the United States and China change significantly. Whatever happens in the post-pandemic global economy, the Gulf states will need to redouble efforts to focus on what the IMF has urged: “To meet pressing challenges from the expected peak in global oil demand” and from “demographic trends, including the ongoing rise in working age population.”
The economic predicament facing the Gulf states varies from country to country. On one side of the spectrum are the relatively hydrocarbon-poor states, such as Bahrain and Oman, who often receive priority assistance from their rich neighbors. These two countries reportedly received $20 billion in March 2011 from other Gulf states, who also mounted a military intervention to crush a popular uprising in Bahrain. On the other end are the relatively wealthy Gulf states with small numbers of citizens (although they boast many migrant workers) and large financial reserves, such as Kuwait, Qatar, and the United Arab Emirates. And right in the middle is all-important Saudi Arabia, with large hydrocarbon and fiscal reserves but also a sizable, diverse population accustomed to generous government benefits.
To take Saudi Arabia as an example of the changes underway in Gulf states, the kingdom has recently taken significant domestic austerity steps: tripling its value-added tax to 15 percent, cutting a cost-of-living allowance for government employees, and reducing spending on Crown Prince Mohammed bin Salman’s pet megaprojects. Even before the crisis, the kingdom had begun looking for ways to end its costly and unsuccessful military intervention in Yemen. Questions are now being raised about whether Saudi Arabia can afford to continue buying arms at the level it has in recent years.
The crown prince’s ambitious plans for a domestic economic transition had already gone off track well before the pandemic, due partly to reckless and brutal steps that depressed needed foreign investment. But according to Gulf-watcher Karen Young, the pandemic crisis is accelerating one aspect of his plans: “What does survive . . . is the restructuring of the labor market, as many foreign workers will lose their jobs and leave the kingdom, making room for more nationals to enter by necessity.” Indeed, while data are still scarce, reports of foreign workers and contractors leaving in droves—and tensions between those who remain and Gulf citizens—are increasing.
Gulf states are now facing painful choices. While their revenues from oil and gas become less reliable and generally decline, they must concentrate more of their efforts on keeping peace at home—helping their populations cope with the dislocations of massive economic change—and in the immediate neighborhood, especially Bahrain, Oman, and Yemen. Yet the active, even outsized, role they have played in the MENA region and in world affairs has been built on massive foreign aid and investment, and they will thus be loath to give up that role.
As the MENA region continues the long, difficult journey away from dependence on oil—which almost certainly will entail more episodes of turmoil beyond the 2011 and 2019 uprisings—the Gulf states might well have a diminished ability to influence affairs outside their immediate neighborhood. Other Arab states have already started looking elsewhere (to international financial institutions, China, and the United States) for the external financing and foreign investment that most of them still need. And those donors will attach significantly different economic and political strings than the Gulf donors have done.
This compendium of short essays by Carnegie scholars explores how the oil-exporting Gulf states’ priorities regarding engagement with the MENA region are changing, as well as how those changes are affecting the fortunes of several countries that have long relied on Gulf generosity.