Gulf countries' success in achieving sustainable economic development will benefit most countries in the region
Mona Eing
A series of seemingly endless crises gripping most Arab countries outside the Gulf have widened an already considerable economic gap between the two regions.
Finding a reasonably priced hotel room in Riyadh during autumn and winter months (when the weather is pleasant) is akin to trying to buy tickets for the football World Cup final or a Taylor Swift concert 24 hours before the event. In addition to the army of foreign consultants who flood the Saudi capital seeking opportunities to work with the government and local companies, you’re also competing for the limited space with Saudi and foreign tourists and hundreds of international CEOs who come to attend conferences in search of lucrative business opportunities.
"We have 20 suites and over 100 VIP guests, all of whom request upgrades, but we can't meet all these requests," a reception staff member says with a shy smile, trying to explain sky-high prices during the week of the World Economic Forum special meeting in late April. For context, a room at a four-star hotel could fetch around $1,000 during peak conference and entertainment festival season, which usually stretches from September for about six or seven months.
Widening gap
The busy conference season in Riyadh and other Gulf cities like Dubai and Doha is not the only sign of the economic boom in the Gulf region. Since 2022, the region has emerged as a haven for opportunities in a world struggling with inflation and slow growth. Qatar hosted one of the best World Cup editions ever, Dubai organised an impressive Expo, and Saudi Arabia in 2023 celebrated reaching its Vision 2030 goal of receiving 100 million tourists seven years ahead of schedule. The kingdom’s unemployment rate dropped to a record low, driven by a remarkable increase in female workforce participation.
On the other hand, a series of seemingly endless crises gripping most Arab countries outside the Gulf have widened an already considerable economic gap between the two regions. In 2023, war-torn Libya suffered from devastating floods that killed tens of thousands, a new war broke out in Sudan, and economic crises intensified in Tunisia, Egypt, and Lebanon, with inflation in the latter reaching over 200%. The year ended with a new war in Gaza, with grave repercussions in Lebanon and the Red Sea.
"The gap between the (economically) strong and weak in the region is as big as it’s ever been in my experience,’’ Amer Bisat, head of emerging markets at BlackRock, the world's largest asset manager, told a panel during the IMF and World Bank meetings in Marrakesh last October. "The strong is doing the right thing. Their trend growth is rising, not just growth cyclically, trend growth...This is an exciting story."
Yet any excessive celebration of what one can describe as the ‘’Gulf Era” risks assuming that the region can be immune from the spillovers of regional turmoil or abandon its traditional role as a key backer of stability in the Middle East. Perhaps more importantly, it underestimates the bumps that Gulf Cooperation Council (GCC) countries must overcome on their journey toward more diversified and less oil-dependent economies.
The biggest challenge facing Arab countries, rich and poor alike, is achieving the kind of stability that can attract and mobilise investments. This would help rich governments gradually move from the role of the investor of the first (and last) resort to becoming a catalyst for growth while maintaining the ability to set national priorities. For the rest, it would put an end to a vicious cycle of crises and set the stage to create enough jobs for young people, who make up the largest demographic segment in the region.
The biggest challenge facing Arab countries is achieving the kind of stability that can attract and mobilise investments
The GCC countries appear much closer to the target now than ever, more so than any other country or region in the Middle East and North Africa. Anecdotal evidence is overwhelming, but the numbers also don't lie. Economic data shows a steady rise in the share of Gulf countries in the Arab economy. Between 2000 and 2022, the average gross domestic product of the GCC bloc (at current prices) was about $1.2tn, according to International Monetary Fund figures, or about 57% of the entire Arab world. The IMF expects that share to reach 63% in 2024.
Look at country-level data and you'll reach the same conclusion. This time, comparing Saudi Arabia (the biggest Arab economy) with Egypt (the most populous Arab nation). In 1990, the gap in per capita GDP was less than $7,000. It has now increased to nearly $30,000.
Three reasons
There are three key reasons for this: the first is the steady rise in oil prices at the turn of the century. The second reason is the political and economic turmoil that has spread through the rest of the region, such as the US invasion of Iraq in 2003 and the chaos that accompanied the Arab Spring revolutions starting in 2011, leading to civil wars and internal fragmentation (Syria, Libya, Sudan), severe economic crises, and rampant inflation (Egypt and Tunisia), and gradual but destructive political and economic deterioration (Lebanon).
While up-to-date figures on issues such as poverty in the region are scarce, available data—along with ample anecdotal evidence—is enough to paint a grim picture. In Egypt, poverty surged from about 17% at the beginning of the century to about 30% in 2020, even before the COVID-19 pandemic and dollar crunch that hit the country between 2022 and 2024, which sent inflation to more than 35%. Lebanon has suffered a much deeper shock, with the collapse of essential government services and worsening poverty rates affecting more than half of the population. Cross the Lebanese borders into Syria, and the situation seems out of control, with the United Nations last year that the war has pushed over 90% of the population below the poverty line.
The third reason for the widening gap is that most Gulf countries have embarked on plans to diversify their revenue away from hydrocarbons. A decade ago, Dubai was the region's only shining example of that. Look at the data now, and you will see progress elsewhere. Overall, IMF data show a decline in the non-oil budget deficit from an average of 44% between 2000 and 2022 to about 30% currently due to initiatives in countries like Saudi Arabia, the UAE, and Oman.
Tim Callen, an expert in Gulf economics, sees the growth of non-oil exports in Saudi Arabia specifically as evidence that diversification is indeed taking place. In a recent article, he showed how non-oil dollar income rose to 33% of total exports, compared to 22% in 2018, driven by steady growth in tourism revenues, a sector that wasn't even on the Saudi economic map a few years ago.
Hot Air Balloon Festival over Mada'in Saleh (Hegra) ancient site, AlUla, Saudi Arabia. was taken in 2020 Mar 18
Yet any analysis of GCC's boom must also recognise the challenges that lie ahead. The first, economists agree, is the need for oil prices to remain high to support the ambitious plans for the non-hydrocarbon economy, in addition to taking bold decisions that may not be widely popular initially.
One could view how the recent decision by the Emir of Kuwait to dissolve parliament and suspend the constitution for no more than four years seems in this context. Political convictions aside, analysts hope that the decision will put an end to Kuwait's political deadlock that has stymied any economic reform initiative for decades.
Another challenge, highlighted by Ziad Daoud, Bloomberg's chief emerging markets economist, in a LinkedIn post, is the striking similarity between diversification initiatives across several Gulf countries. He used Qatar as an example, noting that its non-oil strategy, relying on petrochemicals, logistics, tourism, and artificial intelligence, is also included in the plans of the UAE, Saudi Arabia, and Oman.
The comparison underscores the importance of "diversifying the diversification policies" themselves, which is why adding different sectors (such as mining in Saudi Arabia) can give certain countries key advantages.
Other challenges are more controversial, including the role of the state as the main local investor. Jihad Azour, Director of the Middle East at the IMF, told an event in Riyadh in April that successes in the diversification story in the Gulf have so far been driven mainly by "structural" reforms rather than mega spending, an apparent reference to the outsized role of sovereign wealth funds in the domestic economies.
However, Saudi Deputy Minister of Economy Rakan Alsheikh had a different view, telling the same event organised by SRMG THINK that the kingdom sees its sovereign fund as an enabler rather than a competitor to the private sector.
Red Bull's Dutch driver Max Verstappen raises his 1st-place trophy on the podium after the 2022 Saudi Arabia Formula One Grand Prix at the Jeddah Corniche Circuit on March 27, 2022.
But what about the impact of the Gulf's focus on its journey toward a 21st-century economic model on the region's role as a key backer of economic stability in the broader Middle East? Statements by Gulf officials over the past few years indicated a serious attempt to end an era of providing bottomless financial support with no strings attached. However, the Gaza war and its repercussions have shown how breaking free would never be easy.
In addition to the tens of thousands of civilian casualties among Palestinians, the conflict also prompted Iran to enlist Yemen's Houthi militias to attack commercial shipping in the Red Sea and the Bab-el-Mandeb Strait. Commercial shipping through the Suez Canal has since plummeted, costing Egypt billions of dollars. The activity at regional ports such as Jeddah in Saudi Arabia and Aqaba in Jordan has also been severely affected.
A recent IMF study showed that countries in the Red Sea could lose, on average, about 1% of their economic output and 10% of their exports if Houthi attacks continue to disrupt maritime trade until the end of the year. It is in this context of spillover risks that we can understand the UAE's surprising announcement in February of a $35bn investment package in Egypt, which most observers saw as the Gulf rescuing Egypt from a severe economic crisis before it led to a political collapse that could set the entire ablaze.
Similarly, it is difficult not to link (at least partially) Saudi Arabia's focus on economic development to its attempts to resolve the Israeli-Palestinian conflict or reach a political solution in Yemen or its famous Chinese-brokered deal with Iran.
Blank cheques?
Does this mean that Gulf countries are likely to return to a policy of giving out "blank cheques" with no strings attached? To answer this question, we can look at Lebanon, which is mired in a severe economic depression. Despite the crisis, Lebanese divisions over policies deemed necessary by donor countries caused an already catastrophic crisis to deepen. In 2019, I asked an international official privately why politicians refuse to implement reforms. His answer was: "No one is objecting. Every official we talk to completely agrees with us but then blames the others."
Ultimately, the success of GCC countries in their quest to achieve sustainable economic development will undoubtedly benefit the rest of the region. However, overcoming any "bumps" on this long road requires significant effort and flexible policies within the Gulf. As for the rest, well, they must also learn how to walk on their own.
