US - GCC Security Relations, II: Growing Domestic Economic and Political Problems

Abstract

Economic Difficulties Will Persist The Arab monarchies of the Persian Gulf--Kuwait, Saudi Arabia, Bahrain, Qatar, United Arab Emirates (UAE), and Oman--grouped in the Gulf Cooperation Council (GCC) face economic problems. Adjusted for inflation, their oil income is less today than 15 years ago, while their populations are 50 percent larger. During the oil boom years from 1973 through 1984, the false impression was created that the GCC countries were world-class economic powers. For the moment, they were important in world financial markets, when the oil revenues were flooding in faster than could be spent. The image of this period remains in the minds of many, even though the reality has long since changed. The only GCC state with significant foreign assets, above the normal needs of a central bank for smoothing out fluctuations, is Kuwait. And those assets are endangered by the large deficits in Kuwait's budget. Nor are the GCC countries fabulously wealthy any longer. At the height of the oil boom fifteen years ago, they were the world's richest countries: per capita income in the GCC states exceeded that in the United States then. The situation is entirely different now. In 1995, the six GCC states have a collective GDP of about $210 billion, and a total population of 24 million, giving them a GDP per capita of $8,700. That is one-third of the U.S. level and two-thirds of the Israeli level. To be sure, the GCC figures are distorted by the large numbers of low income foreign workers. Comparing the GDP to only the citizen population of 13 million, the GDP per citizen works out at $16,000, or two-thirds of the U.S. level and the same as for Israel's Jewish population. In other words, the GCC states are economically at the cusp between developing nations and industrial states--they are not at the economic level of the major industrial powers. The prospects for the GCC economies remain dependent on the world oil outlook. The International Energy Agency forecasts that the demand for oil will increase briskly over the next fifteen years, resulting in higher prices and in a sharp increase in GCC output, even factoring in Iraq's eventual return to oil markets. But similar forecasts of a recovery in GCC oil income have been made steadily for ten years and have been consistently wrong. The forecasts have consistently underestimated the steady expansion of oil output from non-OPEC sources other than the CIS, which looks set to continue. Indeed, because of advancing technology that reduces production costs and makes possible production from previously uneconomical fields (primarily in the Gulf of Mexico), U.S. oil output may increase in the next decade. Given the history of overly optimistic projections, the GCC states would be well advised to base their plans on cautious forecasts about future income. It is entirely possible that the current era of constrained resources will persist for the indefinite future. Even under the most optimistic forecasts from government or industry sources, oil income per capita will not return to the levels of 1973-84. Governments will have to continue economizing, spending less on services and subsidies than what the population has come to expect. While economists can readily point out inefficiencies and areas for economizing, the need to win acceptance of constraining changes will delay efforts to balance the budget. Following the experiences of other countries, GCC deficits are likely to shrink no more than two percent of GDPs per annum. That means Kuwait, with a deficit about 20 percent of GDP (the largest in the GCC), is not likely to have a balanced budget in this decade. Most of the GCC countries will have to borrow significant sums abroad by the end of the decade. Domestic Politics Will Become More Lively During the last twenty years, the domestic politics of the Gulf states were remarkably quiet for countries undergoing profound socio-economic changes. …