Insecure Gulf

The subtitle is The End of Certainty and the Transition to the Post-Oil Era. The author is Kristian Coates Ulrichsen, deputy director of the Kuwait Research Program on Development, Governance, and Globalization in the Gulf States, based at the London School of Economics and Political Science.

Ulrichson takes the present day oil-rich conditions, and imagines what they may mean sometime in the future when the oil resources are depleted and the world is making a transition to a non-oil based economy.

See what you think. You can get a Google preview of the book here.

Abstracts of note

For years, studies of state formation in early and medieval Europe have argued that the modern, representative state emerged as the result of negotiations between autocratic governments in need of tax revenues and citizens who were only willing to consent to taxation in exchange for greater government accountability. This paper presents evidence that similar dynamics shaped the formation of Somaliland’s democratic government. In particular, it shows that government dependency on local tax revenues -- which resulted from its ineligibility for foreign assistance -- provided those outside the government with the leverage needed to force the development of inclusive, representative and accountable political institutions.

That's Nicholas Eubank.

The UAE has a very large income for its size. The rulers own the country's vast oil wealth and spread enough of it around to the UAE citizens that none of them is indigent. The lesson from Somaliland would suggest there's no threat that the rulers will find themselves compelled to adopt major democratic reforms. So why the crackdown on the few activists who have spoken out?

The UAE's vulnerability is external -- it's a plum ripe for the picking by its neighbor, Iran.

Oil and democracy

Click on image for larger version. Credit: Bloomberg

Bloomberg:

So does oil inhibit democracy? This is perhaps the central question of our discussion this week about the historical lessons the Arab Spring nations should pay attention to.

Michael L. Ross, a professor of political science at the University of California, Los Angeles, has been researching this issue for a decade. In a 2001 paper, and in updated research in 2009,Ross argues that oil wealth deeply impedes democratic transitions from authoritarian states.

He also found that the undemocratic effects of oil vary by region and have fluctuated between 1960 and 2002. The one causal mechanism for the "oil-autocracy link," Ross wrote in 2009, was the "rentier effect," in which oil states use low taxes and high spending to quell democratic pressures.

To reverse these undemocratic effects, oil states need revenue transparency and institutions accountable to the public -- as we discussed May 23.

Don't cry for Abu Dhabi

Brad Setser has a piece on year on year changes in oil revenue for Saudi Arabia which - refering to the recent dip in prices - he titles Don't Cry for Saudi Arabia. He goes on to discuss Abu Dhabi's revenues and what they're doing with them.

The pitfalls of ethnic selection

The UAE has a long way to go correct its "demographic imbalance" -- 50 percent of those living in the country are from India and Pakistan, more than 90 percent of the private sector workforce is foreign, more than 80 percent of the population is foreign, there is about one foreign household servant for every local living in the country, a disproportionate percentage of the foreign workforce is male. The demographic imbalance has bemoaned by locals, but most also are conscious that (1) the oil-fueled building boom in country would not be possible without the foreign workers, (2) few locals are willing to work menial jobs that predominate in the economy nor prepared for many of the few positions requiring specialized skills.

Gulf News today:

Advanced construction techniques that will call for a significantly fewer number of labourers and a scheme under which expatriate students are allowed to take up part-time jobs are among initiatives expected to better shape the demographic structure of the country, a top official said on Monday.

“His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, approved a number of policies submitted by the National Authority for Demographic Structure,” said Lieutenant General Shaikh Saif Bin Zayed Al Nahyan, Minister of Interior.

Under the new policies, expatriate students will be allowed to take up part-time jobs and a committee will be formed to moot new construction techniques to replace traditional, labour-intensive systems, Shaikh Saif said in a statement issued yesterday.

Shaikh Saif said the government is making serious efforts to address demographic issues and to strike a balance between requirements of development and the national interest and "our right to a safe and promising future which embodies the vision of our leadership and ambitions of the Cabinet."

The Economist is on target in its analysis:

Governments in the booming Gulf Arab states are becoming increasingly anxious at the erosion of their national cultures, as their growing economies suck in ever-larger numbers of expatriate workers. They are now devising a range of measures to limit the growth of segments of the expatriate population—in particular those at the less skilled end of the spectrum—while not impinging on the continued expansion of their economies. The concerns call into question the entire basis of the Gulf development model, entailing ambitious targets for economic growth and diversification, which cannot feasibly be achieved without a substantial increase in the expatriate population.

The problem is most clearly evident in the United Arab Emirates, where expatriates account for more than 90% of the private-sector labour force, and where the population is thought to have grown by almost one-third over the past three-four years. According to the most recent census, whose results were published in 2005, the UAE's population was 4.3m; it is now generally estimated to be about 6m. The UAE government announced in early September that it is setting up a national demographic agency that will be tasked with finding ways to slow down the growth of expatriate labour imports. Among the initial measures that have been proposed is a scheme to allow students who are enrolled in UAE universities and who are the children of foreign residents to take up part-time jobs. This measure appears to be targeted at children of long-term residents from other Arab countries, who have more cultural affinities with Emiratis than do Asian and European residents, who predominate in the expatriate community. The students would be expected to gravitate towards semi-skilled jobs in the services sector that tend to be performed by Asians.

The government is also considering the establishment of ethnic and cultural diversity quotas within companies, so as to prevent certain national groups predominating. Other ideas include changing building codes so as to reduce reliance on foreign construction workers and introducing much more automation into the services sector, for example at petrol filling stations.

However, these measures will have only a marginal impact on the overall size and make-up of the expatriate population. There is no sign of any let-up in the construction activity associated with investment in infrastructure, real estate, tourism, financial services and industry, which suggests that the current total of some 1.5m expatriate building workers is only likely to increase. Once this wave of construction is completed, there will be growing demand for imported services and factory workers to operate and maintain the new hotels, offices, apartment buildings, leisure and cultural centres, transport facilities and industrial plants. The businesses importing the labour are likely to continue to insist on their freedom to recruit from whatever market suits their needs best.

Elsewhere in the Gulf, Bahrain and Kuwait provide examples of the pitfalls of trying to impose ethnic selection in structuring the labour force.

Thanks to The EclectEcon for the pointer to The Economist.

Is there such thing as an all encompassing Law of Petro-(or some other commodity)-politics?

No. So say Stanford's Stephen Haber and Victor Menaldo.

Unemployment amongst Gulf nationals persists

Khaleej Times ran this AFP report:

Governments in the oil-rich Gulf Arab states have so far failed to tackle unemployment among their own citizens despite impressive economic growth fed by record oil revenues. Despite most Gulf Cooperation Council (GCC) members having programmes to train their nationals to join the workforce, the region’s private sector still relies on imported labour.

Faced with an inability — or unwillingness — among their own people to work in the private sector, governments remain the main employer of native workers in the GCC, which comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Saudi economist Ihsan Bu Hulaiga believes that the GCC labour market has been deformed because of its openness to foreign workers and because the public sector functions as a convenient employer for citizens.
...
despite its wealth, unemployment among Saudis themselves was 11 percent in 2007, according to official figures, just one percent down from the previous year.

Traditionally, the public sector in GCC states has employed as many nationals as possible under conditions considered very relaxed compared with the private sector.

“The public sector attracts young people for its job security and fewer working hours,” Bu Hulaiga lamented.

But because the private sector generates greater job opportunities, most GCC countries have quota systems for nationals in private business.

This policy “contradicts all economic concepts,” said Bu Hulaiga.

The solution is to make “national manpower, which is unqualified and more costly (than foreigners), more appealing to employers,” he said.

“We have a great chance to qualify our young people amid the current economic growth.”

Bu Hulaiga believes GCC governments should make the private sector more attractive to Gulf nationals by providing training and subsidising salaries so they are on par with those of the public sector.

Kuwait already does so. Private companies pay their employees the set basic salary and the government chips in with allowances.
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Half of the employees in the public sector represent what Kuwaiti economist Jassem Saadun called "masked unemployment."

Paying to create such posts "is a way to distribute oil dividends," he told a seminar last month, but warned that such a policy will not work in the long term.
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Bahrain and Oman are less well-off as their oil reserves are dwindling.

Unemployment in Bahrain dropped dramatically to around four percent in 2007 according to official figures, after it was reported to have soared to 15 percent of a 120,000-strong workforce in 2005.

Bahrain also established a programme to aid job seekers, with a governmental body trying to place them in the most suitable posts.

Because it comparatively poorer, Bahrain has had to adopt a sounder approach. For more, check out the links here.

OIL will make them the richest per capita in the world.

A closer look at the Citigroup deal with Abu Dhabi

The New York Times takes an extensive look at the Citigroup-Abu Dhabi deal:

Despite its size, Abu Dhabi’s royal family has been largely content to pour money into low-return, low-profile investments — until now.

But Abu Dhabi, the largest oil producer of the seven city-states that compose the United Arab Emirates, is worried enough about the eroding value of its pile of petrodollars that it appears ready to pursue more big-ticket deals.
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While Abu Dhabi contains about 94 percent of the oil reserves in the U.A.E. and includes about 87 percent of the country’s land mass, the city-state’s international profile has paled in recent years in contrast to that of its neighbor, Dubai.

Thanks to a series of big-name deals and an audacious growth strategy, Dubai is becoming a tourism destination, a regional financial center and a favored buyer of marquee assets. On Monday, Dubai International Capital said it had bought a substantial stake in the Sony Corporation.

“They are different animals,” said David Butter, the Middle East regional head at the Economist Intelligence Unit, comparing Dubai’s growth strategy with Abu Dhabi’s. “The purpose of A.D.I.A. is to invest surplus cash in assets that would provide steady gain and returns over time,” he said, while Dubai, with less oil reserves, has had to create its own sources of wealth.
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Like other sovereign wealth funds, the Abu Dhabi fund is looking for investments to help diversify foreign currency reserves earned from exporting oil.

Its shift in investment strategy is not immediately being accompanied by an increase in public transparency. Several calls to the company’s headquarters in Abu Dhabi went unreturned.

70% pay raise for UAE federal employees

It was announced the other day that employees of the federal government would receive a 70% pay increase.

There's a problem. Pay increases this large, out of line with private sector wage increases, run entirely contrary to the government's expressed desire to see more Emiratis in the private sector. Very few are, and with good reason. Their time would be better spent hounding someone for a job in government. That's a waste from the social perspective. It's a waste because it's effort that just moves money from one pocket to another and produces nothing. It discourages Emiratis from becoming engaged with the private sector and the virtue of merit-based reward. And not least of all the country develops no institutions of its own to foster economic growth.

In short, the country is suffering the curse of resource abundance.

There are better ways to share the plenty of high oil prices with its citizens. Write them a check; unhitch payment from employment in the government sector. Make them owners of the oil that is currently owned by the government. Make it difficult to reverse course -- as happened in Saudi Arabia where so much of the oil revenue now goes to maintaining a large royal family.

Could Weak Oil Cost Venezuela, Iran Clout? :: Wall Street Journal

Link($):

Softening oil prices over the past few months have spurred hope in Washington that less revenue for oil-rich states could weaken the hand of governments the U.S. considers worrisome -- particularly those in Iran, Venezuela and Russia.

The three nations are potentially vulnerable: Oil-and-gas revenue accounts for between two-thirds and three-quarters of government income in both Venezuela and Iran, and only slightly less in Russia. So, a big drop in oil prices would slow economic growth and hit government finances, forcing them to cut back spending increases that have boosted the popularity of all three governments at home and emboldened them abroad.

But it is far too early to expect the changing economics of oil to have big political effects. For one thing, although the price of oil has fallen 28% since hitting an all-time high of $77.03 in July, it is still high by historical standards. The three nations, having weathered crises before, have all built up substantial currency reserves to cushion against a further fall in prices.

"Fifty-dollar oil doesn't put any of them in any grave danger," says Michelle Billig, director of political risk at PIRA Energy Group, a New York-based consultancy. "After all, it was only a few years ago that we were talking about an oil windfall for these places at $30 a barrel."
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Unlike Russia, and to a lesser extent Iran, Venezuela has been much more reckless in spending its oil windfall. Last year alone, public spending grew 43%, widening the gap between total government income and outlays to about 1.5% of the total economy, according to estimates by Morgan Stanley.

So far, falling oil prices haven't dented Mr. Chávez's spending habits. Just last week, he announced a program to send 100,000 poor Venezuelans each year to vacation in Cuba. He also recently offered the army's services to build a road in Nicaragua at a projected cost of $350 million.

While economists agree that Mr. Chávez's free-spending policies may eventually shipwreck the Venezuelan economy, they say that won't happen -- if it happens at all -- for at least another year. The main reason: Venezuela has accumulated more than $36 billion of reserves.

But there are signs Mr. Chávez could be headed for trouble, even without a much bigger drop in oil prices. He recently ordered an increase in gasoline prices -- which the government has long subsidized -- to raise federal revenue.
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As revenue has soared with oil prices, Iran's public-sector spending has expanded almost as fast. To pay for massive subsidies for most daily goods -- including gasoline, bread and heating fuel -- the government has borrowed in each of the past two years from a special rainy-day fund set up to retain some oil revenue for when prices fall again. But that spending has ignited inflation, now running around 15%.

Iranian President Mahmoud Ahmadinejad introduced a budget early last week that included a 20% increase in spending for the Iranian fiscal year that begins in March. He said the government, whose ultimate authority is held by a council of Islamic mullahs, would be able to add to its rainy-day fund if oil prices remain above $33 per barrel, the level the budget assumes for Iranian oil. But some private economists doubt the budget calculations and predict Tehran would again fall back on those surplus funds to finance spending.