Coronavirus in the Persian Gulf. A catalyst for change?

Contrary to media headlines, the fight against the pandemic and the drastic decline of oil prices will not become a turning point for the economies and societies in the Gulf Cooperation Council. Instead, it will be another signal indicating the need for the monarchies in the Gulf to break their addiction to energy resources. The key to this goal, however, lies not in ambitious projects announced in these countries, but in modifying the social contract there.

When the coronavirus pandemic reached the Arab world, it came as no surprise that the Gulf monarchies received the most applause for „flattening the curve” successfully. After all, there was a lot of money involved, access to advanced technology, and the best-developed health care in the region. The state media featured articles praising the government’s use of artificial intelligence and making it easier for schools and state institutions to switch to online work. In their opinion, the coronavirus was supposed to accelerate the inevitable – the diversification of resource-dependent economies, development of non-oil sectors and turning the region into the most important technology hub in the Middle East. The pandemic was to be a stimulus for the faster implementation of the ambitious and wide-ranging projects announced several years ago, such as Vision 2030 (Saudi Vision 2030) in Saudi Arabia and the Centenary of the United Arab Emirates.

Double crisis

After all, as Robert Beschel of the Brookings Doha Centre said, paraphrasing Machiavelli, it would be a shame if Arab politicians let a „good” crisis go to waste. The fact that the first crisis resulted in a second is worse. When the pandemic has taken over most of the world for good, and governments have been introducing more and more radical restrictions to stop it, transport and industry have become one of the main victims of these activities.

This, in turn, resulted in a drastic drop in oil prices (from $ 64 a barrel at the beginning of this year to around $ 20 in April), further fuelled by a price war between Russia and Saudi Arabia and hitting the already weakened economies of the Persian Gulf. And while transformation efforts in the Gulf have spanned decades, oil and gas remain key sources of funding for ambitious monarchs’ pet projects, accounting for 80% of Saudi Arabia’s export earnings alone.

The April oil price slump is not the first time, however, when Gulf regimes have felt the breath of the inevitable changes on the back of their necks. In 2011, the wave of the Arab Spring reached the countries of the Gulf Cooperation Council (GCC). Moreover, three years later, when the so-called Islamic State was gaining ground in the Middle East, the fact that the USA obtained the status of the largest oil producer was also reflected in the prices of raw material. Then, from June to December 2014, the prices of American WTI (West Texas Intermediate) crude oil fell by 44%.

Soon after, rulers in the region began announcing projects designed to make Gulf economies diverse, innovative and knowledge-based. In 2015, Oman announced its new energy strategy, and a year later Saudi Arabia presented its Vision 2030.

Similar changes and investments were planned by the rulers of the UAE, Kuwait and Bahrain. However, ambitious goals meant not only economic changes, but also the transformation of the social contract functioning in the Gulf states, which, although it has guaranteed internal stability and the satisfaction of their citizens since the creation of these monarchies, is also one of the primary causes of their current problems.

A social contract written in oil

In the context of the Persian Gulf, the social contract is described as a contract between the monarchs and their subjects, in which the former exercise complete power, without interference from the latter, in exchange for lack of direct taxes, guaranteeing access to well-paid (and also prestigious in the Gulf) work in the public sector and other subsidized goods.

This specific contract provides not only a comfortable life for the people of the Gulf, but also makes many of those unemployed more willing to wait until there is an opening in the state sector rather than look for private employment. The latter, in turn, works primarily thanks to foreign workers, who do not have access to the same benefits and employment stability as citizens.

The degree of this phenomenon, as well as the percentage of immigrants, varies depending on how the profit on raw materials is distributed per capita. The largest number of foreigners live in the United Arab Emirates and Qatar (approx. 88% of the population), followed by Kuwait (70%), Bahrain (48%) and Oman (45%). The exception to this rule is Saudi Arabia, where immigrants account for 38% of the population, but its per capita oil income is higher than that of Bahrain and Oman.

The 1990s – a period of decreasing oil prices and the entry into the labour market of those born in the 1970s, when its value was rising – defined the need to reformulate the social contract in the Gulf. The absorption of all new and native market players by the public sectors would lead to severe budget deficits in many countries. To this day, states subsidise companies in selected sectors (financial, technological, medical) to pay their citizens.

In 2005, another increase in raw material prices resulted in an increase in wages in both the public and private sectors (however, the wages of native workers increased proportionally more). The move has only widened the gap between sectors and has further discouraged young citizens from looking for jobs in private companies. From 2005 to 2010, the wage ratio in the private and public sectors changed from 2.7:1 to 3.2:1. Today, although the situation has improved, citizens of the GCC countries account for only 34.4% of employees in the private sector.

During the pandemic, we could witness the first Arab mission to Mars taking off thanks to the Emirati Space Programme. However, apart from its symbolic meaning (a satellite called Hope will arrive in Mars orbit as part of the celebration of the 50th anniversary of the UAE), the development of the space industry is a pragmatic activity, presented in attractive packaging.

Prestigious programmes in the region – related to space exploration in the UAE or research and development industries in Bahrain and Kuwait – are to attract foreign investments along with technology transfer and encourage young people to explore the innovation sector.

Private enterprises related to the latest technological solutions have the opportunity to pay for their earnings and match the benefits of employment in the public sector with their attractiveness. Those who take up employment in them are to be a driving force for the domestic private sector and help relieve the state’s payroll while becoming part of the multi-faceted transformation in the Gulf.

Work for citizens, citizens for work

The nationalisation of the labour market is necessary to maintain the socio-economic status quo of the GCC states. Their economies are not as strong as in 2011, when the government provided citizens with additional social packages to ease the protests, which increased their spending by an average of 20%.

But what about those who fall victim to the changes? There are over 28 million immigrants living in the Gulf monarchies. Most of them are workers in the construction and industrial sectors, as well as housekeepers. Their stay is usually regulated by the kafala system, which, together with their living and working conditions, has been controversial for years.

Kafala obliges immigrants (with low qualifications) to have a so-called sponsor, who is most often their employer. Such sponsor is responsible for the legal status of the foreign worker they „sponsor” and is the only person authorised to approve the „sponsored” to change or even leave their job. The only GCC countries that have decided to introduce employee-friendly changes to the system are Bahrain (in 2006) and Qatar (in September this year). Despite the changes, immigrants remain the most affected by the effects of the pandemic among the inhabitants of the Gulf monarchies. Approx. 3.5 million may lose their jobs in the UAE alone, also because aid programmes to save local economies have not covered them as much as the native workers.

In March, the Bahraini government suspended the obligation to pay rents and bills for private companies for three months, postponed the payment of loan instalments for six months, and granted a grace period for immigrants until the end of 2020. At the same time, a month later it allocated $570 million to cover the salaries of private sector workers, but only those from Bahrain. In Oman, the support programmes also favoured its citizens. In March, the obligation to pay bills for small and medium-sized enterprises and Oman citizens was postponed for six months. At the end of the month, the government introduced a ban on the dismissal of citizens employed by private companies. The National Development Fund in Saudi Arabia, in turn, allocated USD 5.9 billion to support business and citizens, and the Human Resource Development Fund has expended $ 1.4 billion for training and employment opportunities for Saudis.

In the end, it will not be immigrants with lower qualifications who will fall victim to private-market nationalisation programmes (Gulf citizens will not be willing to take their place), but those employed in sectors that are mainly served by foreign workers – financial, services (including tourism), or medical professions. However, to replace them with Gulf natives, the GCC countries must ensure that their citizens receive adequate education.

According to a 2009 survey of Arab company executives from twelve different industries in the GCC countries, only 37% were satisfied with the qualifications of employed native Gulf university graduates, and 55% expressed satisfaction with the work of citizens working as middle managers. Therefore, together with the strategies for the transformation of state economies, educational reforms began, for example, under the Vision 2021 announced in 2010. Their goal was to increase students’ skills linked to critical thinking and innovativeness, with a particular focus on developing their mathematical and IT competencies.

The City of Education has been operating in Qatar since 2003, where apart from local institutions, there are 6 American, British and French universities. Although the original assumption was that the Qatar people would constitute 75% of students there, in 2015 that percentage was only 40%. The UAE’s actions also seem to be failing to bring the expected results. Only 5% of Emirati students are educated in basic research (i.e. scientific work aimed at acquiring new knowledge without focusing on commercialisation), medical studies or continuing their education at the doctoral level. Nevertheless, the percentage of UAE GDP that is spent on research and development increased from 0.5% in 2011 to 1.3% in 2018, and the number of scientific papers published annually is the highest among the countries in the sub-region.

Comfortable stability or difficult transformation?

The question is whether diminishing the importance of states as bodies redistributing resource wealth in the form of stable and well-paid labour will also affect the other part of the social contract in the Gulf monarchies. Loosening the relationship between citizens and their rulers could mean that the Emirati, Qatari and Saudis would demand more decision-making and influence on the situation in the country.

In order to answer that, it is worth expanding the perspective and examining the political situation across the entire Middle East. In a region swept by massive waves of social unrest, where paramilitary organisations often compete with state institutions and some states are on the verge of economic collapse, the GCC enjoys relative stability and security. In a conflict-torn region, monarchs advertise themselves to their citizens as the ones protecting them from the tragedy that befell Syrians or Yemenis.

And where is the pandemic in all of this? Since its outbreak, transformation has become a key word, both in debates on health protection and global value chains, but also in education, the form of work or relations between the ruling elite and society. And the rulers in the Gulf region eagerly reached for it, referring to their use of artificial intelligence and other innovative methods to fight the pandemic or in general medicine. At the same time, however, Dr Esam Alwagait, director of the National Information Centre of Saudi Arabia, emphasised at the AI for the Good of Mankind conference in Riyadh this month how important decisions at the very top of power are for an effective fight against the virus.

Contrary to some headlines, the pandemic and the economic problems it brought with it will not hasten the transformation of the Gulf. However, it definitely strengthened the sense of the need for change, while also – along with low raw material prices and less enthusiastic investors – leaving the rulers of the GCC countries less room for manoeuvre. They will, therefore, continue to take advantage of the cyclical nature of the raw materials market, pursue a more cautious policy in times of decline in the value of raw materials, and give generously to citizens when it rises again. This tactic and the image of the rulers who protect citizens from outside threats and successfully fight the virus will help them leave the common form of social contract unchanged in the Gulf for a long time to come.

Polish version is available here.