international analysis and commentary

Social changes and economic reforms in the Gulf region

1,845

Social transformations and deep demographic changes in local societies are altering the features of many countries in the world, including the wealthy Gulf States (Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and the United Arab Emirates). Over the next decade, in fact, population dynamics will be a crucial factor raising significant questions related to labor and immigration policies, inclusive economic growth, market liberalization, the role of women and youth and their inclusion, and, finally, the political structures of each state. The emergence of these issues in Gulf societies will be priorities that can no longer be postponed.

In particular, migration phenomena and demography will play a key role in determining population size and composition, as well as the economic growth and future of the Gulf countries. The reason is simple: land degradation, water stress, climate change, urbanization trends, the generation gap and, more generally, demography are interlinked. It is here that Gulf governments face their greatest challenge, as policymakers will need to effectively capture the multifaceted dynamics of these contexts and propose sustainable political changes.

According to Kristian Coates Ulrichsen – in the paper “The politics of economic reform in Arab Gulf States” (2016), these shifts are the results of the structural transitions of the Arab Gulf States from traditional economies and societies to states of modern development. The Gulf countries are all located in arid regions of the Arabian Peninsula, with over 70% of the population living in urban areas. The total population is over 40 million, of whom nearly 67% reside in Saudi Arabia. Moreover, 60% of the population is under the age of 30. With the exception of Oman and Kuwait, the political and economic systems of these countries are dominated by oil and gas production and revenues. The discovery of oil in the 1960s increased wealth and generated an economic system that depends on hydrocarbons for about 75% of the total treasury revenues. This wealth has been used to build the peculiar “Gulf social contract”, a system based on a wealthy society without rights. Basically, wealth was used to buy stability at home, ignoring the populations’ growing social grievances.

At the same time, social changes cause transformations also in demographic trends: the region’s total population grew from 860,000 in 1965 to 2,100,000 in 1975 to 3,600,000 in 2008. The growth rate has been the result of very high levels of immigration as well as natural increases due to oil revenues being invested in health, welfare and educational facilities that have reduced mortality rates. Significant development and economic expansion transformed the urban Gulf areas into business capitals deeply integrated into the global economy. Doha, Abu Dhabi, Dubai and Riyadh are futuristic cities and some of the most luxurious in the world.

This fast population growth, and the relative pressure on a rather unique  productive system, creates a problem with the employment ratio between native young people and the millions of people who migrated to the region. In fact, in public and private sectors large numbers of expatriates, originating especially from South and Southeast Asia (particularly Indonesia, India, Bangladesh, the Philippines and Pakistan), are largely employed instead of young Gulf people. There are several reasons for this, but one of the most important motivations is the lack of a skilled native labor force. Moreover, the expat workforce is cheaper than the local one. These conditions aggravate the Gulf countries’ dependence on foreign labor (for example, Kuwait and Qatar featured a remarkable 80% immigrant population in 2010), although in Saudi Arabia this situation is less acute. In this regard, the proportion of foreigners in the GCC countries reached 42.7% in 2010, compared to 9.7% in 1975.

It is very clear that demographic pressures and immigration only add to the challenges, as more of the young people enter the job market seeking opportunities that meet their career and financial remuneration expectations. In 2011, unemployment among young people was the main trigger for the socio-political upheavals in Bahrain and Oman and nowadays it is a big cause of concern in Saudi Arabia (the last IMF report notes that the average unemployment rate in the Gulf States is estimated as 12%). Although immigration plays a key role in population growth, it has been used at the same time as an effective tool to offset the impact of ageing and unemployment. As noted by Paul Wetterwald, Chief Economist at Indosuez Wealth Management, in the report “Macro Comment — MENA Update” (2016), “GCC countries have already used the immigration tool in a major way. For instance, Saudi Arabia has a population of around 28 million, of which more than 30% are immigrants. With 47% of residents under the age of 25, the Kingdom’s demographics are characterized by a young and fast-growing population.”

Saudi women are allowed to drive since June 24th, 2018

 

But in an era of low oil prices, energy revenues are not sufficient to sustain the political-economic model and, more generally, current and future changes in the Gulf social contract will affect power relations between élites and citizens. In some respects you can see this playing out today in the Gulf States. They are undergoing a process of change in their social, economic and political structures, whereas the GCC countries are unable to delay reforms. Since 2015, when the price of crude oil began to fall, Saudi Arabia’s revenues fell from $302 billion in 2013 to just $147 billion in 2016, and its foreign reserves have dropped by roughly $200 billion since mid-2014.

For the first time, different changes across the region probably need more policy responses. Economic diversification is a way to respond to the repeated call for modernization, and ambitious government programs, like the “Saudi Arabia Vision 2030” or “Bahrain 2030” and “Oman 2020: Vision for Oman’s Economy”, represent another attempt to reshape the Gulf social bargain. Nevertheless, especially in these last cases, it is not clear whether these plans are an attempt to reform political structures or a vehicle for the personal political ambitions and interests. While these measures are aimed, in the short term, to lessen the Gulf populations’ pressing economic problems, in the long term GCC governance needs to go beyond this “bargain”, proposing an alternative and sustainable policy vision based on a post-oil model. A coherent policy response should not include the traditional tactics based on exacerbating sectarianism that produced a growing risk of instability and conflict in the region (the Bahrain case in 2011 is emblematic, with a series of escalated protests and violence led by the Shia-dominant opposition party, al-Wafeq, against the Sunni-Bahraini government). Instead it should encourage inclusiveness, participation and establish socio-economic measures in terms of justice, good governance and transparency.

A reform process also includes costs and benefits in terms of consensus power. Starting with the cuts to social spending, it is also likely that it will have a deep social and political impact and will undoubtedly meet with public resistance. At the same time, an effective renegotiation of the social bargain could undermine the stability and legitimacy of local national governments, with a direct impact on the regional order. In fact, profound socio-economic uncertainty in the Gulf area could give Iran an opportunity to increase its influence in the region – confirming one of the worst fears of many Arab countries.

In any event, a new course will require time and flexibility, because each Gulf country faces a different set of long-term structural obstacles. And it has become hard to formulate a common approach to managing such challenges, because significantly different domestic contexts exist in these countries.

In conclusion, while radical changes have been perceived as a dangerous gamble by Gulf countries, they could transform into big opportunities to modernize their power, combining liberal reform momentum with moderate small-scale democratic elements. Social changes provide an opportunity for the Gulf States to improve their domestic governance and interact more constructively with their citizens, as well as to encourage stronger democratic participation. Nevertheless, caught between support and discord, it is very likely that the Gulf countries will seek to pursue their strategy of pacing social change, hoping that it does not turn into a wasted opportunity.