Japan’s need for energy security has long driven relations with the Gulf states, but, under the banner of economic diplomacy, Gulf-Japan ties are diversifying.
The new year is likely to bring some serious economic pain to parts of the Gulf, especially Saudi Arabia. As in most economic reforms, there are negative impacts of austerity, especially to the low- and middle-income population. Bracing for the impacts of higher electricity and fuel costs, new taxes and fees, along with mounting pressure on private sector labor markets, governments are trying to mitigate some of these effects by boosting spending where they can, and targeting relief in the form of cash transfers to those most in need. Saudi Arabia began distribution of its Citizen’s Account fund on December 21; Oman will initiate an income-based fuel support scheme in the new year.
Saudi Arabia’s 2018 budget is full of stimulus efforts in which increased state spending is intended to push the economy into positive growth (where it currently has been stalled or shrinking). Notably, the government intends to boost support to small businesses, with a 19 billion Saudi riyal (about $5 billion) stimulus package to provide access to loans and grants, and credits for government fees, notably expat labor fees, which are increasing. In an effort to boost productivity, the government will target support for technology use in communications and building materials. Housing remains a major obstacle for young people’s financial independence, so the 2018 stimulus package once again doles out support to home buyers. Outside of the official 2018 budget are plans for capital injection and investment support from the Public Investment Fund and the National Development Fund totaling 133 billion Saudi riyals (nearly $35.5 billion). These are sovereign wealth funds that will use their existing resources to target the domestic economy. The Citizen’s Account program has 30 billion Saudi riyals ($8 billion) earmarked in the 2018 budget.
While Saudi Arabia’s budget is the largest in the region, it is not the only expansionary budget. Dubai’s 2018 budget is the largest in its history, and Kuwait, Qatar, and Oman are anticipating large wage bills and capital expenditure. The United Arab Emirates’ federal budget, announced in October, at $54.7 billion relaxed some cost cutting from the previous year. Dubai’s budget is full of new infrastructure spending, representing a 47 percent increase from the 2017 budget, in Dubai’s tradition of state construction-led growth in preparation for Expo 2020. Qatar’s 2018 budget, approved by Emir Tamim bin Hamad al-Thani in December, includes a rising public sector wage bill (at close to 8 percent of gross domestic product) and increases for land development for nationals, along with steady spending on major projects, many of them related to World Cup construction projects. Conversely, Kuwait’s budget will be submitted by the end of January, and is expected to include a public spending cap.
New spending across the Gulf Cooperation Council states will be fueled by more debt, the expectation of slightly higher oil revenue, and where possible, increases to government revenue through taxes and fees. In effect, the stimulus is a short-term remedy that is part of a much longer process in which reforms are meant to recondition the economy to grow in new, less state-funded, ways. This is the tension of an economic reform movement: how to cushion and limit the duration of the pain of reforms that tend to increase inequality, while securing the reform agenda.
In democracies, these trade-offs have been described by scholars, notably Adam Przeworski known for his work on post-socialist transitions, as a J-curve. Growth is expected to diminish in the short term as institutional changes take hold, but later growth rates accelerate. Joel Hellman’s work on the same topic in post-socialist societies notes that reform agendas have distributional consequences and sometimes elites may stall reforms in order to preserve their economic interests. This process results in an “early-winners” scenario in which the recovery and growth period (or the upswing of the J-curve) never takes off because privatization processes are captured by elites and distributional efforts to share and spread wealth never take hold.
These scholars were working at the beginning of the post-socialist transitions, and notably, they closely considered transitions to democracy. They were less inclined to draw hard conclusions on the effectiveness of authoritarian governments, not just to implement reforms, but to promote long-term economic growth. Moreover, with 30 years of case experience, it may become apparent that the destabilizing nature of economic reforms, particularly in democracies, is a diminishing effect over time. That is, incipient democracies can become more resilient to reforms over time, as their institutions mature and are tested.
The objective to create growth can be achieved in many ways. Gulf states have clearly demonstrated they can achieve state-led growth; but can they support private-sector growth? Another objective is to create growth that alleviates inequality and provides social mobility, which proves more difficult across regime types. Some recent scholarship suggests that democracies can enable factors that reduce inequality and create inclusive growth over the long term, like encouraging political competition, enforcing labor laws and minimum wage, and petitioning governments to spend more on long-term investments in education. The argument is that inequality diminishes, and is curbed, through rule-based liberal economies.
In the Gulf states, these experiences are useful comparisons, but they have their conceptual limits. A practical limitation is that the institutional reform process, transforming a political economy to one that is both open and rule-based, is not really underway. The state continues to take the lead, which may produce results in the short term, but could have diminishing returns on boosting inclusive growth in the long term. The short-term risks are heightened by the distributional effects of the current reforms. The underpinning of the economic reforms in bankruptcy law, equality of foreign investors under law, access to all sectors as full owners without local partners, and access to financial markets, all require lasting institutional reforms for private sector growth to happen, especially in the Saudi case. Threats to the lawful support structure these reforms need can include well-intended corruption purges that appear capricious or vindictive, simply because of their lack of due process.
Meanwhile, predatory or self-dealing investment by the state in the new opportunities it creates for citizens and foreign investors undermines trust and crowds out investment. Examples in Saudi Arabia are plenty: The regulatory environment has lagged behind invitations to foreign investors, and the state has not demonstrated it is going to back off from crowding out private investment and opportunities for competitive firms in fields the state has dominated, like contracting. Where there have been opportunities for new firms to take the lead and disrupt the old economy, the Public Investment Fund has promptly invested in them with large stakes, creating ownership and free market dilemmas, from technology firms to movie theaters. In new partnerships with foreign investors, including a massive $45 billion investment in the Softbank fund, aimed at technology investments globally, Saudi Arabia is using its old, circular and connected-lending strategies. In exchange for its $45 billion injection to the $100 billion Softbank fund, the fund has promised to invest $25 billion inside of Saudi Arabia.
Austerity is also not an adequate description of the structural economic reforms underway in the Gulf states. Governments are spending, as they traditionally have, to support public sector wages, build infrastructure, and provide social services. What has changed is a reduction in the amount of available employment in the public sector, sharp increases in cost of living with increased energy and fuel prices, and the imposition of new taxes and fees on both consumption and labor markets, especially imported labor. Private investment is also in competition with the state and subject to impromptu accusations of corruption as informal practices of contracting and negotiations are uprooted. Capital flight is a significant risk. These changes are deeply disruptive and will have consequences, especially on low- and middle-income citizens and residents.
One of the key challenges in the reform process is that there is not good government information on who exactly is most in need, and how best to support resilience to reforms. As the Citizen’s Account released its first payments in Saudis’ bank accounts, many may have been disappointed as only half of those receiving the benefit were given the maximum of 938 riyals (about $250); many received much less. Without effective tax collection on personal income and individual assets, there is some skepticism that targeted cash support will be wasted on those who need it least. The most difficult of these efforts, taxes, will start in 2018. January will mark the implementation of the value-added tax in Saudi Arabia and the UAE, with other GCC states set to follow. How society, including businesses, citizens, and expatriates, react to these new patterns of state intervention in the economy will take time to unfold, but there is sure to be some pain in the short term.
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Through its careful examination of the forces shaping the evolution of Gulf societies and the new generation of emerging leaders, AGSIW facilitates a richer understanding of the role the countries in this key geostrategic region can be expected to play in the 21st century.Learn More