Slippery Choices for the Gulf States

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The Gulf Arab States have a dilemma. One reason that they have been able to avoid upheaval over the last tumultuous year in the Middle East is because they have made their already generous public subsidies even more generous. But within the short-term fix is a set of longer-term problems that could profoundly affect regional stability.

In the most basic sense, wealthy Arab governments increased their spending last year in order to improve internal security. Saudi Arabia, for example, announced plans to spend an additional $130 billion, representing approximately 30 percent of GDP. Much of the money is targeted at housing, salaries, and unemployment benefits-all essentially public subsidies. Qatar, with probably fewer than 250,000 citizens, passed an $8 billion pay raise for public sector employees, representing a hike of between 50 and 120 percent. The Gulf Cooperation Council (GCC) gave $10 billion each to member states Oman and Bahrain to improve housing and infrastructure, spreading the wealth, and stemming the protests. The governments are using plentiful oil money to buy internal peace.

However, that strategy brings with it a high cost, which influences regional as well as domestic politics. When oil prices have been low, the government of Iran has sought regional stability through less aggressive regional policies. When they have been high, the government of Iran has sought to enhance its regional influence. When oil prices dipped in the mid-1990s, for example, President Mohammed Khatami initiated a rapprochement with Iran's Arab neighbors, strengthening ties and lowering the rhetoric that had reached a fever pitch in the years immediately after the 1979 Iranian revolution. Under Khatami, almost two decades of Iranian-Arab hostility gave way to diplomacy. Tehran hosted a summit of the Organization of the Islamic Conference-an organization that traditionally has strong Saudi influence-and President Khatami's "Dialogue of Civilizations" effort held out the prospect of coexistence with the GCC states. Iranian ships in the Gulf were more cooperative with the U.S. Fifth Fleet, and Iran toned down its anti-American rhetoric.

As oil prices crept up after the U.S.-led war on Saddam Hussein in 2003, Iranian-Arab hostility increased again. Iran's apparent nuclear ambitions loomed largest on the agenda, but Iranian actions in Iraq and the increasing aggressiveness of the Iranian Revolutionary Guard Navy-which is now the principal Iranian naval force in the Gulf-also played a role.

Here, then, is the dilemma. The GCC states need increasingly high oil prices to promote domestic security. Yet, those higher prices tend to abet Iranian misbehavior, which threatens their external security. Markedly lower oil prices would threaten domestic stability in Iran and intensify pressure on the current Iranian government. If the past is a guide, lower prices would also nudge the Iranian government toward moderating its behavior. Yet, at the same time, low oil prices would threaten the domestic stability that the GCC states have sought to foster. There is no obvious "sweet spot" for oil prices that curb Iranian malfeasance and still allow healthy GCC subsidies at home. Indeed, whereas several years ago Iran required markedly higher oil prices to balance its budget than its Gulf Arab neighbors, extraordinary Arab spending in the last year has brought the prices required to cover spending closer.

Further, ever-increasing oil prices pose their own challenges for the Gulf Arab states. First of all, oil prices have historically had strong boom and bust cycles, and they are unlikely to stay high indefinitely. While alternative energies such as nuclear, wind and solar power are unlikely suddenly to unseat the primacy of hydrocarbons, new technologies are quickly bringing massive new supplies of natural gas to market and making accessible previously inaccessible oil deposits. Combined with a potentially sluggish global economic recovery, global oil demand could soften-or the rate of growth could slow. Despite the recent uptick in crude prices, many economists foresee a softening of prices in the medium term, potentially endangering the additional spending that the governments have embarked upon.

If pressure on spending coincided with a generational change in leadership, as may happen in Saudi Arabia and Kuwait, among other states, the internal politics could become trickier. Robust deposits of foreign cash will allow these governments to coast for some time, but a sustained drop in prices, combined with a growing restiveness brought on by ongoing political change in the Levant and an increasingly agitated young population that feels out of touch with their leaders, could represent a perfect storm for many of these governments.

None of this is to suggest that it is time to bet against the GCC governments. Upwards of 90 percent of many national workforces work for their governments, and governments possess powerful tools with which they can co-opt and coerce their populations. Still, governments' short-term responses to unrest in the Levant and North Africa deepen many of their longer-term problems with training and motivating young populations, boosting workforce productivity, and escaping from deepening patterns of entitlement. Democracy is not an easy fix here; in Kuwait, for example, the parliament has become a powerful voice for boosting pay and increasing subsidies, and it has slowed development projects because of concerns over official corruption. Authoritarianism is no fix either, as protesters increasingly demonstrate fearlessness throughout the region.

In point of fact, serious domestic reform has come in the Gulf when oil prices were low and there were few alternatives to it. Scant dollars (and by extension, dinars, dirhams and riyals) forced hard choices about government spending and hard choices about governance.

Adjusting expectations about government responsibilities-and creating a workforce that can create value-will take time. Regional governments are starting now. The challenge is not only to reach their goals; but also to reach them in time. And no one knows how much time they will have.

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