It’s no exaggeration to say that the oil-rich states of the Gulf Cooperation Council (GCC)—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates—are enjoying a transformational moment, one that could deeply affect the region if not the world. Buoyed by unprecedented oil prices, these states are awash with cash. In the past five years, they have earned a staggering $1.5 trillion for their petroleum, according to the Institute of International Finance (IIF). And there’s no end in sight: by the close of 2007, the IIF says, the GCC will have picked up an additional $540 billion, more than the combined exports of Brazil, India, Poland and Turkey
All that green has turned the once backward region into the world’s 16th largest economy, according to IIF. And if present trends continue, the GCC zone could become the world’s sixth largest by 2030. What’s most remarkable, however, is how the new money is being spent. The gulf has experienced oil booms before, but rarely managed to capitalize on them; three decades ago an oil windfall helped states modernize infrastructure and health services, but many leaders blew much of the money on defense or vanity projects, or simply hid profits in Western banks.
Today, by contrast, the gulf’s farsighted, business-minded political leaders are joining with their more mature and innovative private sectors to ensure the money is wisely spent. Led by Dubai, which is fast becoming a modern banking and financial-services hub, cities in the region are embracing reform and charting an ambitious agenda for the future. “A new gulf is dawning,” says Edmund O’Sullivan, the Dubai-based editorial director of the Middle East Economic Digest (MEED). “And it’s moving much faster and smarter than it did in the 1970s.”
The revival, says Fareed Mohamedi of PFC Energy in Washington, D.C., is due to “excellent macroeconomic policies, strong technocratic capacity, a vastly improved regulatory environment, a private sector willing to both invest and innovate, and strong global links in services.” As he notes, “All of these ingredients have come together to support sustainable growth.”
Consider: the IIF estimates that $1 trillion of the $1.5 trillion windfall has stayed in GCC states, being spent on imports or development. That’s a big improvement on the past, when much money was stashed in Swiss banks or squandered on weapons. True, some of today’s spending, especially on the red-hot real-estate market and extravagant tourist projects, has raised concerns. But industrial investments, which are critical to helping the region diversify its economy beyond oil, are rising.
This is especially so in Saudi Arabia, which, according to Georgetown’s Jean-François Seznec, is on target to become the world’s top petrochemicals producer by 2015. New steel, aluminum and plastics plants are also on the way.
In fact, a new breed of company is now emerging in the region, one that is highly efficient, ambitious and globalized. These new gulf firms are creating jobs, feeding the growth cycle and helping economies diversify. And they are starting to affect other economies around the world. Leading the pack is Emirates Airline, an award- winning company that in the next decade is expected to become the planet’s largest air-travel operator. (At a Paris air show in June, Airbus booked an astounding $32 billion in orders from gulf-based businesses.) Meanwhile, the Dubai-based Emaar real-estate firm is now building projects from Casablanca to Karachi, and the U.A.E.’s Etisalat is winning telecom contracts from West Africa to Pakistan.
Some of these businesses may be government-owned or -controlled, but they are a far cry from the inefficient state-sponsored enterprises of the past. These are not sinecures for tea-sipping bureaucrats; they attract top talent, compete globally and win international awards. They’re also supporting the growth of related but truly independent gulf-based companies, such as Aramex, a regional transport company based in Dubai. Fadi Ghandour, the company’s founder, directly credits his success to the “astonishing growth of Dubai as a business hub,” saying that his company simply could never have grown so rapidly in his native Jordan.
On the government level, a lot of money is still being invested in safe havens like the United States (about $300 billion this time) and Europe (about $100 billion). But in the past five years, Gulf states have also invested $60 billion in the needy regions of the Middle East and North Africa and have put another $60 billion in Asia. This has led to the creation of gulf-driven boom pockets in Egypt, Morocco and Jordan. It has also led to the creation of a New Silk Road, as trade between the GCC and Asia has quadrupled in the past decade. Gulf investors are now lining up to buy Asian assets; when the Industrial and Commercial Bank of China held an IPO last year, for example, the biggest buyers hailed from Kuwait, Qatar, the United Arab Emirates, and Saudi Arabia.
Taken together, these trends have given the gulf a higher global profile than it has ever enjoyed. For example, the vast debts of countries like the United States are now being financed with cash from three areas of the world: China, Japan and the gulf. This means that the GCC states have become a major force in growing concern over global imbalances. It also means that they have a clear stake in stoking global growth led by the United States, lest their own fortunes fall.
Of course, for the trend to continue, the Gulf states must keep pushing reform. By enacting business-friendly laws, Dubai has already become the Hong Kong of the Middle East: a free trade hub that fuels the larger economies. The regional heavyweight, Saudi Arabia, has also taken positive steps, dramatically trimming its debt, enacting pro-business laws and joining the World Trade Organization last year. The Saudi private sector has started pulling its weight; in the 1970s it accounted for less than 10 percent of the country’s GDP, whereas today the figure is more like 60 percent. And King Abdullah has launched a $600 billion infrastructure development plan, aiming to create several new multi-billion-dollar industrial, financial and manufacturing “cluster” cities. These include the $27 billion King Abdullah Economic City that could, on its completion, house 2 million people and create 1 million jobs in an area the size of Paris.
But laggards remain. Saudi Arabia’s education system needs to start producing more high-tech graduates and fewer experts in Islamic studies. Kuwait seems content to follow its old model, growing fat off oil profits and investing in blue-chip companies. And Oman, though ruled by a modernizing sultan, has been slow to embrace the new turbocharged business climate. Throughout the region, says Alex Theocarides, a Geneva-based private banker, “the rule of law and transparency remain weak” and crony capitalism still holds sway: business is dominated by a closed circle of princes and merchants who prevent the development of a truly independent entrepreneurial culture.
Still, what’s impressive is how even the quality of those cronies has improved, says O’Sullivan of MEED. “The majority of [the gulf’s] ruling princes are modernizers with their eyes on business,” he notes. Unlike the military-minded autocrats of other Arab states, these merchant princes are adding “shareholder value” even as they grow fat off insider deals. Thus, according to the World Bank and World Economic Forum, the GCC now offers a far better business climate than the rest of the Arab world.
Of course, the other Middle East could still interfere with the gulf’s progress. Conflict in Lebanon or the Palestinian territories would be unlikely to have much effect, but Iraq’s unraveling has probably already limited foreign investment. And a U.S. conflict with Iran, which sits right across the Persian Gulf from the GCC, would slow business and threaten tanker traffic in the vital Strait of Hormuz, through which 90 percent of gulf oil passes. That said, even conflict could have its upside: Iranian capital is already fleeing to Dubai (at last count, Dubai had 9,000 Iranian-owned businesses), and the exodus could increase in the event of war.
Absent these gloomy scenarios, the gulf boom seems likely to continue. As Sheik Mohammed, the ruler of Dubai, likes to say about his ambitious city-state, what we see today is just a slice of his master plan. It’s exciting to ponder what the rest of it will bring, and the effect it will have on the gulf—and the world.
