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Director of the Center for Middle Eastern Studies at Harvard University and A.J. Meyer Professor of Middle Eastern History
Thank you for inviting me. What I want to do in a relatively short period of time is to talk about one of the most extraordinary situations in the modern world: the peace and the enormous prosperity of the countries of the Gulf, surrounded by countries in a situation of war or those anticipating war: Iran, Iraq and then Lebanon and Palestine are not so far away.
There are two sorts of risk one is talking about. One is political and one is economic, the bursting of the prosperity bubble. I really do not have an idea how to think about that systematically. I will set out some ideas, both as far as the recent history is concerned and some thoughts about how we might think about it.
So, we have two types of risk:
There are reminders of this everyday. You need only look on TV at the talk of the Iranian nuclear reactor, and the talk about what might happen if troops withdraw from Iraq. I saw on Al Jazeera the other day the head of the Turkish armed forces having a press conference about getting permission to invade Northern Iraq, if necessary, in the pursuit of the PKK Kurdish guerrillas.
You hear of both things, some people hurrying off to the Gulf in search of opportunity and others being very disturbed about the future of the whole region. You have, for example, the good news of the CEO of Haliburton relocating to Dubai, anticipating enormous profits, in the efforts of the various countries to upgrade their oil facilities, having been prevented from doing that in various kinds of ways, partly by low prices in the 1990s, and the sanctions on Iraq and Iran. You have Morgan Stanley creating Morgan Stanley Saudi Arabia, and people trying to crack the Saudi market. You have investment firms flocking to Dubai as a new commercial centre and so on. I’m sure you are familiar with that.
Plus, as I say, there is a huge amount of hype. Yesterday, I got a newsletter on the Internet from a Kuwaiti law firm, called the ‘GCC Goldrush’. We are meant to pick up our ears and say ‘there is gold in the Gulf and we must find some way of doing something about it.’ There was also an article in the Financial Times yesterday about a Dubai property company talking of a huge investment that they plan - a new Bali or resort town, saying that there was no real estate bubble in Dubai, although average property prices have gone up 35% in the past year. “I’m not worried about a bubble” he said, “we have a global city under construction.” These are the magic words, “Global cities” and this is what we are supposed to respond to. There is a huge Dubai hype. (Just in parenthesis I don’t think port cities matter. They are no competition for airports, and industrial parks, which is what you need to be in business. There is no reason why other “Dubai’s” can’t appear elsewhere in Asia and in safer places, if there is some confusion or collapse in the Gulf.)
So, how long will it last? This is the question that risk analysis seeks to answer. The number of variables is impossible to quantify. I hope we will discuss this. How does one begin to think about and try to quantify political risk in this highly volatile and unusual situation, with everyone still imagining that the boom has some years to go?
I will do what an historian does and say something about the background. We don’t need to go further back than 9/11. I think that is the father of all of this. 9/11 is the war on terror and the decision to invade Afghanistan and Iraq, which brought the war to the Gulf’s doorstep, and then the controversy over Iran. This triggered the belief in the Iranian elite that they needed a nuclear weapon in order to defend themselves. It also had huge economic consequences as well. It led to an enormous withdrawal of Arab funds from the U.S., and a desire to invest locally in the Middle East. They were worried that the Treasury would come knocking and claim their funds were funding terrorism. Initially this happened so arbitrarily that no one knew how to protect themselves, so it led to a withdrawal of funds. Saudi funds are now coming back.
It also causes a great Islamic revival. This translated itself into an enormous array of Islamic finance, banking and Sharia-compliant funds. There is an enormous energy among the young Muslims at Harvard Business School and other universities, who want to make Islamic banking work, and want to make it as western, but with a Sharia function, as they can. And they are trying to crack how to do Islamic banking when you are not allowed to do insurance, hedge funds, when you don’t have a secondary market and so on. But the ones you talk to are confident they are on the way to producing something that is pretty similar to western banking practice. Muslims are as concerned to make profits as everyone else, so there is a desire to be profitable. There is also recognition of Islamic funds by Paul O’Neill, Secretary of the Treasury, who initially saw it as a danger but then called for it to be a part of the U.S. financial thinking.
Then there is the revival of oil prices from 2003 and onwards, which coincided with what we all know: the 5 years expansion of the world economy, led by trade and due to continue till 2008. So, the gulf is being carried along by this expansion of trade. This has affected all parts of the Middle East, and countries like Turkey are doing reasonably well from this. In the case of Egypt, Turkey and Israel, they had got their IMF act together in the 1990s, and they were caught up in this expansion with their financial institutions in a very good shape. Turkey and Egypt have IMF policies; they don’t have independent policies of economic development.
So let me say something now about the ramifications of the events since 9/11 and its implications for the Gulf, an oasis of quiet. There was a piece in the Financial Times some weeks ago, which was first to suggest something that I have long imagined, that the Gulf is effectively paying protection money to gentlemen with beards who live in caves somewhere to the east. This is hotly debated. But there is an unusual quiet in the Gulf. The security is minimal. I don’t see the capacity to protect themselves from anyone who wanted to come and blow up tourists or whatever. So something’s going on.
Further to that argument, I heard from a radical Islamic point of view that the UAE is not as closely associated with the U.S. as other parts of the Gulf. I mean Saudi Arabia is clearly an ally, Qatar has U.S. bases, Bahrain has bases. UAE has nothing. That may be part of the equation; that it doesn’t have obviously American targets that you would wish to attack in order to attack the U.S.
The Gulf States are trying to protect themselves. Saudi Arabia is spending $60bn on arms, mainly aircraft, but there is not much they can do, so their main defence is from the U.S., the U.K. and France to a lesser extent. Meanwhile, Saudi Arabia is trying to help matters by calming down the situation elsewhere, by talking to Iran, talking about Lebanon and Palestine. There is a Gulf attempt to bring peace to the neighbourhood, although there are limited ways in which they can do this. They have a financial and political capacity to bring Arab states together, but it is extremely difficult.
Let me say something about the economic side. I find the sums staggering. Middle Eastern oil producers received $400bn dollars in the last 3 to 4 years. Saudi oil revenues are up from $82bn in 2003 to $216bn in 2006, an increase of two and a half times. Central Bank’s official assets in Saudi Arabia are up from $60bn to $225bn, up four times. These are very large sums of money.
When I was in Abu Dhabi, the AD investment authority was meeting next-door, with $500bn dollars of investment - highly secretive.
Then we have the private sector investment exploding, mainly Sharia compliant, established by such banks as Citibank, which has been doing Islamic banking for 10 years, and Barclays, HSBC and then secondary Islamic banking markets in London and other cities. There is a lot of activity not just in the Gulf.
And we have Government expenditures: governments having learnt from experience in previous booms. Saudis in particular are showing remarkable fiscal discipline, but using extra funds to build up external reserves and pay off debt. They got their domestic debt to 20% of GDP, down from a very high rate before. There is a sensible spending on infrastructure, including a return to doing something about the oil industry. The facilities got very degraded in the 1990s as prices were low and no one was investing, and domestic opinion was against bringing in foreign firms to upgrade facilities.
How to squeeze more oil from Saudi’s maturing fields is the big problem at the moment, and they seem to be attending to that. They are very concerned with their ability to produce oil for a world in need of oil. I heard the head of Saudi Aramco, who came to speak at Harvard. It was all about oil. He is not concerned with green energy at all, and has picked up this idea of energy poverty. He feels it is Saudi Aramco’s responsibility to provide all the peasants of Africa with enough kerosene so they can cook or drive electricity turbines. They are definitely oil oriented and not worried about Africa or global warming.
Then there is the private sector - huge sums in private hands, investing in stocks, looking for joint ventures, for assets to buy. Like the Kingdom Hotel in India, Dubai World is creating private resorts in India. So, looking for assets to buy or create in Asia and there are some signs of over-heating. It is not clear to me how long this can go on, or funds can create the kinds of profits that will satisfy them. There is enormous competition to find ways and means to maintain profits for naïve local investors who have come into lots of money for the first time.
One good example was the Saudi stock exchange collapse in 2006 - a major world event. It wiped out about $500bn in market capitalisation, and they are still suffering the effects. The market was up to about 20,000 points and it’s still down to 7,000. This has shaken the investor confidence in Saudi Arabia, and reduced spending, and there are still aftershocks for economy.
The other thing you will hear about is the Dubai housing market, where prices rose by 35% last year. There is a shortage of land and it is not at all clear what the future will be. There is a huge over-construction of apartments, based on the assumption that the economy will continue to grow.
So just a bit about the problems:
Then there are long-term considerations. The Gulf, in general, rather than diversifying is becoming more and more dependent on oil. There are also problems of competition with other Asian and emerging global cities. There are problems also with the Iranian nuclear activities, which are leading others wanting to have their own nuclear sites to be able to stand up to Iran. There are many reasons for not sleeping well in the Gulf at night.
One thought at the end. It seems to me that rather than thinking hypothetically about the risks, producing a list of the top 10 risks and trying to quantify them, it might be better to develop scenarios that follow through particular combinations of risks. Something that combines political terrorist attacks with the collapse of the Dubai real estate market. The joker in this is that anything that happens in the Gulf must raise the price of oil. So you have the chance that the price of oil goes up with the collapse of the real estate market. There is no security that people will stay in Dubai if there is trouble. This would cause high unemployment, and the foreign workers would go home. Also, there would be a reduction in the number of tourists, and a loss of confidence in the future. What weight do we put on that? But that seems to me the most useful thing to do, to combine scenarios of political and economic risks, and then work out what to do.
There followed Q&A
Dr. Roger Owen is Director of the Center for Middle Eastern Studies at Harvard University and A.J. Meyer Professor of Middle Eastern History
