Twin peaks

In a repeat of the 1970s boom, oil revenue is swelling Gulf treasuries. F Gregory Gause argues there's still time to engineer a happy ending.

Boomtown: One barrel of Caltex oil, Jumeirah Beach Road , taken in 1975 by Anita Van der Krol.

The price of oil has quintupled in less than a decade. The Gulf economies are booming. Governments are piling up huge cash surpluses and looking for places around the world to invest. Despite regional political tensions and a global economic downturn, the Gulf states are riding high. It sounds very much like the Gulf today - but it is also a picture of the Gulf in 1980. Regional observers have seen this movie before, and last time it did not have a happy ending: oil prices collapsed in the mid-1980s, and the Gulf economies suffered a serious contraction. However, there are substantial differences between these booms. If this one comes to an end, the Gulf economies could have a softer landing, but situated in a more contentious political and social atmosphere.

The current boom is driven by oil, just like the first one was. But the private sectors in the Gulf states are now more mature and more globalised than they were during the first boom, and there is good reason to believe that economic growth will be more self-sustaining in the wake of the second boom than it was at the close of the first. Private sector growth in Saudi Arabia has more than kept pace with oil growth during this boom. In the 1970s, government spending accounted for nearly two-thirds of the Saudi GDP; in the 2000s it is closer to one-third. In the 1970s, much of the Gulf's banking was done in Beirut or London. Now there are sophisticated financial institutions throughout the region. Then, the "Dubai model" was an idea in its infancy. Now Dubai is a world centre in trade and services. "Foreign investment" in the Gulf during the 1970s meant service contracts for international energy companies (whose local assets were being nationalized) and international construction companies. Now, every Gulf government is trying to lure international investors into its economy. The petrochemical and natural gas industries are being built by collaborations between state actors, local investors and multinational companies.

Not every Gulf state has gone down this economic road at the same speed. Kuwait lags while the Emirates lead the way. But it is undeniable that the ethos of the 1970s, which was socialist and statist in practice even while the official rhetoric was capitalist, has changed markedly. In the boom of the 2000s, the private sector is a partner, not an appendage. The consequences of this remain to be seen. Will a stronger private sector demand more political rights? There is no indication of that yet. Will a stronger private sector lead the Gulf states into diversified, non-oil based economies? That may be too much to hope for. But a stronger private sector could cushion the transition if oil prices fall.

While economic changes might make the end of the second boom less disruptive, political changes will make it more contentious. The political stability of the Gulf regimes is itself remarkable. Consider that this neighbourhood has witnessed a social revolution (Iran), three major international wars, the overthrow of a regime followed by foreign occupation and civil war (Iraq), the rise of violent Islamist opposition groups and enormous social changes. The Gulf rulers have weathered all of these storms. Oil has given governments the wherewithal to build bureaucratic states, develop their security services, pacify important constituencies (including within the ruling families themselves) and provide services to their populations. Oil is no guarantee of political stability, as the Shah of Iran discovered, but, in large amounts and properly used, it can provide the basis for regime longevity.

This political continuity at the top, however, has not meant stasis. There is now a greater recognition that representative institutions, no matter how symbolic or marginal, are a necessary part of a stable political system. In the first boom, rulers were able to use oil wealth to restrict political participation. Bahrain's parliament was shut down, and Kuwait's saw its power decrease. The other states made no moves on reform. During the present boom, Bahrain has seen a return of parliamentary life (with attendant difficulties and conflicts) and the Kuwaiti parliament has been a thorn in the side of the government, even forcing changes in the electoral system. All of the Gulf states now have representative institutions of one form or another. Even the most conservative have experimented with elections, however limited those experiments have been. The second boom has seen an expansion of participatory politics, and the trend will not be easily reversed, even if the boom comes to an end.

Both booms were built on foreign labour. It doesn't take a rocket scientist, or even a political scientist, to see this. One just has to walk through the streets of any Gulf city to know that boom economies and foreign labour are inextricably linked. In 1970s, more of the foreign labour was Arab: Palestinians in Kuwait, Yemenis in Saudi Arabia, Egyptians and Jordanians and Palestinians in other Gulf states. While numerous expatriate Arabs still work in the Gulf, much larger numbers and much larger percentages of the foreign labour force are now from South and Southeast Asia. Historically, non-Arab labour was seen as less politically troublesome than Arab labour. (Palestinians lost their base in Kuwait and Yemenis were expelled from Saudi Arabia as a result of the Gulf War.) Plus it could be had for smaller wages.

But as South and Southeast Asian economies improve, the wage differential will shrink. As these non-Arab labourers see better opportunities at home, they will be less likely to accept substandard conditions in the Gulf states. The number of strikes and disturbances in the Gulf states over the last few years, most recently in Kuwait last week, signal that Asian labour might not be as docile in the future as it has been in the past. Moreover, as Gulf states and firms integrate more fully into the global economy, labour standards will become a more serious issue for their international partners.

While the second boom is as dependent on foreign labour as the first boom, the social consequences of that dependence are very different. With Gulf populations growing and the youth bulge in those populations pushing more and more school-leavers into the local economies, the problem of citizen unemployment is much more serious now than it was in the 1970s. Gulf leaders have looked to the energised private sector to provide jobs to their citizens, but it is the private sector which relies most heavily on imported labour. Efforts to "citizenise" ("Saudi-ize" "Omani-ize") various sectors of the workforce have been, at best, incomplete successes and at worst complete failures. The biggest socio-political challenge for the Gulf states now, one which they did not face in the 1970s, is ensuring the boom trickles down to young citizens. The political effects of this issue have been exaggerated in some quarters; youth unemployment is not going to bring down regimes. However, the issue has proven almost impervious to substantial improvement, despite the second boom. The first boom ended without an unemployment problem, buffering the negative effects of the downturn that followed. If the second boom ends with high unemployment, the social consequences will be much more serious.

There is no sign that the second boom is anywhere close to finished. The short-sighted might take that as license to ignore the certitude that someday it will end. But the far-sighted will foster real private sector growth, vigorously tackle the youth unemployment problem and develop the customs of dealing with representative political institutions in this period of plenty so that co-operation is well-entrenched for periods of stress in the future. If so, the legacy of the second boom will not just be new buildings, but long term economic, political and social stability.

F Gregory Gause is a professor of political science at the University of Vermont and director of the University's Middle East studies programme.