Faisal Al Nasser / Reuters A Saudi man poses with Saudi riyal banknotes at a money exchange shop, in Riyadh, Saudi Arabia January 20, 2016.

The Gulf Also Rises

The Next Economic Center of Gravity

Speaking on live television during a visit to Cairo earlier this year, Saudi Arabia’s King Salman announced plans to build a bridge between his kingdom and Sharm el-Sheikh, on the tip of Egypt’s Sinai Peninsula. This ambitious construction and engineering project, dubbed the King Salman Causeway, represented a “historic step to connect Africa and Asia,”  as Salman explained. He didn’t elaborate, but if he had, he also could have mentioned that it was one of the most significant demonstrations of the Gulf Cooperation Council’s drive to turn the region into a twenty-first century hub between East and West.

Outside the region, this endeavor receives much less attention than do ongoing attempts to diversify and to move away from oil. Yet becoming a globally competitive hub is a vital component of those ambitions. It is also the driver of much of the Arab Gulf’s recent success in the travel and logistics sectors, which propel global connectivity. It may even be the key to determining whether the Gulf States can continue to consolidate and expand their stability at home and influence abroad, as they have done successfully over the last four decades.

Two factors have fueled the aspiration of becoming a global hub, a new “silk road” tailored to the needs of the twenty first century. The first is geography. At least one-third of the world’s population lives within a four-hour plane journey of the Gulf, and half of the world’s seven billion people are within an eight-hour flight.

The second factor is the unprecedented oil revenues that flowed into Gulf coffers between 2003 and 2008. A Council on Foreign Relations study estimated that in 2008, as much of the world rushed toward economic crisis, the oil producers of the Arab Gulf pocketed a total of $300 billion in oil revenues. Estimates from other sources were even higher, placing their oil revenues in that same year at a staggering $575 billion, which was $400 billion over 2003 revenues.  The wealth allowed the Gulf states to speed up and expand their already massive infrastructural development programs at home and to invest in developed and emerging markets throughout the world.

The investments contributed to the region’s reputation as a global hub, something on which ambitious leaders were quick to capitalize with extravagant marketing, advertising, and sponsorship campaigns. Add to the mix major international sporting events and the opening of dozens of world-class museums and galleries—branches of the Louvre and the Guggenheim are scheduled to launch soon in Abu Dhabi—and you have unprecedented interest in the region as a prime global player.

FLYING HIGH

Cross-border travel is one of the international economy’s fastest growing sectors. In 2012, the number of world travelers topped one billion for the first time. As home to the most sacred shrines in Islam, Saudi Arabia’s priority remains meeting the needs of the millions of visitors who undertake the annual Hajj. All the other Gulf States have used their location and their vast financial resources to capture as much of the ever-expanding travel market as they can. Qatar and its two United Arab Emirates neighbors, Abu Dhabi and Dubai, have relied on their national airlines to lead the way.

Dubai’s flagship carrier, Emirates, was established in the mid-1980s precisely to accelerate the transition of Dubai International Airport from a regional into a global travel player. Since then, the airline has targeted markets in Asia, Africa, and even Latin America, which have been poorly served by other international carriers that focused on easier, more established and profitable routes. Its ambitious approach to connecting the world via Dubai has paid off. Between 2000 and 2015, Dubai, along with Turkey and China, accounted for nearly 30 percent of emerging market air travel growth. In a public poll this year, Emirates was voted the world’s number one airline. It is also one of the world’s top airlines when measured by other more scientific, indicators—revenue, passenger miles, the number of international passengers carried, and fleet size. The rise of the airline is clearly linked to the rise of Dubai. A survey conducted last year by MasterCard ranked the city fourth behind London, Bangkok, and Paris out of the world’s 132 most visited in terms of annual international overnight visitor arrivals (14.26 million) and cross-border spending ($11.68 billion).  

Abu Dhabi’s Etihad Airlines and Qatar’s Qatar Airways are younger and smaller than Emirates is, but they are no less ambitious. Both have embarked on global growth strategies that are not simply designed to boost passenger numbers and revenues but are explicitly linked to their visions for Abu Dhabi and Doha as top travel and transit hubs. To achieve this, Qatar Airways, voted the world’s number one airline in 2015 and number two this year, has aggressively added new international routes on an almost monthly basis. It now offers direct flights from Doha to the 10 largest metropolitan areas in the United States. Over the next year, the airline plans to add another 17 routes on five continents. Meanwhile, Etihad has bought stakes in, and entered into alliances with, strategic partners across the world. Thanks to its partnership with Jet Airways, Etihad is now the fastest growing airline in India, making Abu Dhabi a crucial link between the vast Indian market and the rest of the world.  

Taken together, these airlines’ innovative and ambitious policies have changed the way the world thinks about international travel—and about the Gulf. For now at least, beyond commercial air travel, Dubai is the only truly global location in the Gulf. According to a recent study by the consultancy firm McKinsey, Dubai is one of the world’s top six global hubs in terms of goods, services, finance, people and data, and communications. The others are London, Singapore, Hong Kong, New York, and Tokyo.  In 1980, Dubai’s Jebel Ali port was not even among of the world’s top 25 container ports. Now it is one of the busiest anywhere. Dubai also ranks sixth globally in terms of volume of air cargo traffic. Nor is there any sign of slowdown in this crucial sector. On completion, Dubai World Central, a logistics base near the new airport, will be twice as large as Hong Kong Island.     

Dubai’s leading position has not deterred other Gulf States from seeking to make the most of their geographic advantage and resources. The Qatari capital of Doha is focused on building its already strong position in finance and communications. Kuwait has committed billions to Silk City, a massive economic area in the north of the country, intended to serve as a free-trade zone linking Asia and Europe.

Similar aspirations drive King Abdullah Economic City, which is located on Saudi Arabia’s Red Sea coast. From its conception in 2010, it has been presented as an international rather than Saudi city. When it is completed in 2030 (at an estimated cost of $100 billion), it is intended to serve as a global logistics and manufacturing hub and a major East–West maritime transshipment point connecting Asia to Europe and the Mediterranean through the Suez Canal. Jeddah, currently the kingdom’s biggest port, has its own ambitious plans to expand its capacity to match that of Jebel Ali in Dubai.

Meanwhile, the Sultanate of Oman, which has long focused its diversification plans on luxury and activity tourism, commerce, and shipping, has built a giant container port and free-trade zone at Salalah. It is one of the fastest growing in West Asia and an increasingly important competitor in the Indian Ocean transshipment business.

OIL FUTURES

Oil is an unpredictable commodity subject to extreme swings in price over relatively short periods. Currently, low oil prices due to the exploitation of unconventional sources of oil and gas, including shale, and competition from other oil and gas producers, such as the United States and Australia, have caused petro-dollar revenues to shrink across the Gulf. Some have argued that declining revenue will lead to the economic collapse of Saudi Arabia and its Gulf neighbors.  But since the 1970s, the Gulf States have demonstrated great resilience and adaptability. They have withstood regional war and invasion, low oil prices, economic stagnation, population booms, and the societal ills that come with rapid and uneven modernization.

Nor should we forget that, despite the recent turmoil in the energy markets, Saudi Arabia remains the world’s single most important oil power, and Qatar is still the world’s number one exporter of natural gas. Moreover, the wider Gulf region remains home to more than half of the world’s oil reserves and over a third of its natural gas. This alone ensures that the Gulf States will remain important global players and some of the wealthiest nations anywhere. The World Bank, the IMF, and the CIA all rank Qatar in the top 2 or 3 in the world in terms of per capita income. Kuwait and the UAE are in the top 10, Bahrain and Saudi Arabia are in the top 15, and Oman is in the top 25.  

Beyond spending power and geography, the Gulf states can point to several other factors that could help them take their plans for a global hub to the next level. The first is the unparalleled ambition of local leaders. This was demonstrated most recently in the Saudi plan, put forward by Crown Prince Mohammed bin Salman, to end his kingdom’s oil dependency and raise non-oil revenues by more than 500 percent within a decade. Other examples abound. Dubai’s entrepreneurial ruler, Sheikh Mohammed bin Rashid Al-Maktoum, has championed a globalization strategy unmatched anywhere else in the world. It includes making his emirate home to the world’s tallest building (an even taller one is on the way) along with the world’s largest shopping malls, indoor parks, and holiday resorts. Then there is the success of Qatar’s former emir, Hamad bin Khalifa Al-Thani, in turning his tiny kingdom into the world’s number one gas exporter and the first country to sell gas to Europe, Asia, and North America at the same time in little more than a decade—something he achieved ahead of schedule. It is this drive, as much as oil wealth and perhaps even geography, which has provided the main impetus for the region’s push to become a world-leading hub.

The Gulf states can also claim a long history of engagement with the outside world. By the middle of the nineteenth century, the area was brimming over with Persians, Indians, Europeans, and Africans, all buying and selling goods and sampling the local customs and culture. In more recent times, the Gulf states have been vital members of the global energy system. And most of their technology (a very important source of economic growth) along with their professional expertise, unskilled labor, and food have come from abroad. The overreliance on foreign workers—they make up on average 80 to 90 percent of local workforces in some places—is economically unsustainable, has raised significant human rights issues, and has reduced the opportunities for indigenous development. But it has also turned the region into a vibrant and incomparable multicultural business network. Dubai’s population of just over 2.5 million is composed of people from more than 200 nations. The seven million Indians living and working in the Gulf are also an important reason the region is a leading player across all sectors of the emerging Indian economy. Since the start of the 2000s, the Gulf states have also been among the most open economies anywhere in the developed or the developing world, as measured by exports and imports as a percentage of GDP.

The Gulf states are also enthusiastic supporters of the multilateral trading system. In November 2001, the most important meeting on global free trade since the founding of the World Trade Organization (WTO) in the mid-1990s was held in Doha. The many years of negotiations that followed were known as the Doha Round, and although the talks were suspended in 2008, they were a constant reminder of Qatar’s (and the wider region’s) commitment to the liberal international trade system. That point was underscored in 2005 when Saudi Arabia became the last Arab Gulf state to join the WTO, 12 years after first applying for membership.

Yet the near collapse of Dubai during the recent global financial crisis demonstrated just how interconnected, and thus vulnerable, the Gulf was to the crises affecting the world’s major stock markets, trading blocs, and lenders. At the same time, the global financial meltdown also allowed the Gulf states to take advantage of the massive reserves of cash the states had accumulated in the previous six years of high oil prices—estimated at more than $1 trillion —to consolidate their positions as crucial players at the heart of the international financial system and as some of the world’s top overseas investors.

With the exception of Oman, the Arab Gulf states have also established themselves at the forefront of the rapidly growing Islamic banking and finance sector. Bahrain’s capital city of Manama is home to the International Islamic Financial Market (IIFM), an organization that promotes common trading standards across the Islamic finance industry. In 2013, Dubai launched the first ever Global Islamic Economy Summit. Under the personal sponsorship of the emirate’s ruler, the summit’s objective since its launch has been to introduce the world to the possibilities of a global Islamic ecosystem with Dubai as its capital  . This project is progressing rapidly on a variety of fronts. Earlier this month, the UAE government announced plans for Dubai to launch the world’s first Sharia-compliant trade bank specializing in international trade and commodity finance.

All this has sped up the region’s integration into the global economy. When measured as one single market instead of six distinct ones, the Arab Gulf is the ninth largest economy in the world, similar in size to Canada and Russia and not far off the size of India. If it can keep growing at an annual average of around 3 percent over the next 15 years, a feat that is achievable under the right circumstances, the Arab Gulf could challenge Japan for a spot in the world’s top five economies by 2030.
 
According to the most recent Global Connectedness Index, the six Arab Gulf States are also among the top 45 connected countries in the world.  Saudi Arabia alone boasts around 20 million Internet users, more than two-thirds of the total population and up from less than 500,000 in 2000.  The kingdom also has more Facebook users than do all other Arab countries except Egypt, which has a population almost three times as large. Saudi Arabia also has the highest number of YouTube views in the world per Internet user  along with the highest penetration of Twitter users in the world.  Along with Saudi Arabia, the UAE also has more smartphones per capita than any other country in the Middle East or North Africa  does and the highest penetration in the world of fiber broadband. The UAE ranks third in the world in terms of the number of connected devices owned by citizens.  
The region’s impressive progress in all these areas has undoubtedly increased the international standing and prestige of local states. It is also an increasingly important reason, alongside the region’s strategic location, that major powers all consider these states to be important partners for the future despite the profound changes in the energy markets that many predict. The United States, for example, attaches great importance to the role of the Gulf states since the global financial crisis in using their ‘liquidity pools,’  as former U.S. Treasury Secretary John W. Snow termed them, to stabilize many economies across the developing world where the Gulf states have extensive business interests.

At the same time, the future success of the Arab Gulf states in building the region into a global hub will depend on their capacity to navigate the turmoil in Iraq, Syria, and Yemen along with the danger posed by Iran and its Shia proxies and Sunni non-state actors such as Islamic State (ISIS). Recent events in Yemen are instructive. In the early days of October, an old, battered naval vessel owned by the UAE’s National Marine Dredging Company was badly damaged by an anti-ship missile in the Bab al-Mandab Strait, a strategic point between the Horn of Africa and the Middle East. Houthi fighters associated with the Ansar Allah group in Yemen immediately claimed responsibility.  

The United Arab Emirates is a senior partner in the Saudi-led coalition against the Houthis in the war that has raged since March 2015, and its ship was reportedly en route to the southern Yemeni port of Aden to deliver aid and pick up casualties from the fighting. Over the next week, further missiles were fired into Saudi territory and at an American warship off the country’s coast. Washington, which has backed the Saudi-led coalition in the war and provided it with logistical and intelligence support and diplomatic cover, hit back at targets in Houthi-held territory inside Yemen.  

Random and indiscriminate rocket attacks on Saudi territory do not in and of themselves pose a significant threat to the massive Saudi kingdom, which is more than four times the size of France. Nor do sporadic attacks on international shipping in the waterways of the Gulf constitute a major military escalation of the conflict or a threat to the global economy. During the Iran-Iraq war of the 1980s, hundreds of oil tankers were struck by missiles without any adverse affect on either the supply or cost of oil on the world markets. That said, if such attacks become more common, or worse still, commonplace, or if the crisis in Yemen spirals out of control, spreads rapidly, and embroils more parties in the fighting, it could start to take its toll on the Arab Gulf’s image as a stable oasis in a turbulent but vital region. This could deal a major blow to the plans of Gulf leaders to turn the region into a global hub.

Gulf states have always preferred to think about security in national rather than regional terms and, fearful of a loss of sovereignty, have been reluctant to cooperate on security and defense. It is possible that growing fears over the threats to their shared vision posed by Yemen will serve to motivate local leaders to improve security cooperation to protect critical infrastructure, vital transport and transit hubs, and strategic waterways.

As much as external forces are reshaping the entire Middle East, domestic socioeconomic challenges rather than external security threats pose the greatest danger to the Arab Gulf. It is possible that in the present climate, the preoccupation with domestic reform could sideline the plans to develop the region into a global hub. However, these plans can make an important contribution to the current attempts to overhaul government spending, the patronage system, and bloated public sectors across the region. They also can contribute to the creation of a more productive private sector and will empower increasingly vocal young and female populations through offering greater economic opportunities and a stake in the future.

Since the 1970s, the Arab Gulf States have all been net exporters of capital, as huge amounts of money have flowed out of the region. Shrinking oil revenues and costly diversification programs now make it increasingly essential that local states attract more foreign direct investment than they have in the past. There is no better way to do that than to continue developing the region into a dynamic hub for travel, trade, tourism, and communications. In fact, the daunting socioeconomic challenges the Arab Gulf states now face at home have turned what was previously an aspiration into a necessity. They now have little choice but to continue their quest to turn the region into a global hub. Whether they will succeed is unclear. Dreams don’t always become reality, not even in the Gulf.

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