Prospects of sustainable finance in times of global decarbonization in GULF countries

2016–2019 Federal Sustainable Development Strategy (FSDS), Canada, Toronto

Global decarbonization process constitutes a paramount challenge for GULF countries, which need to move from business-as-usual to sustainable finance, thus having to counter attitudes embedded in the ways the Arab political economy is organized. International decarbonization policies put into question the established social contracts in the region.

Questions regarding future prosperity of GULF countries could therefore be framed as part of an in-depth discussion about the relationship between rents and sustainable development.

Middle East’s development experience

Libya, Kuwait, Iraq, Oman and Saudi Arabia derive more than 40 percent of their GDP from oil and government activities that are heavily funded from oil revenues.  In Qatar, Algeria, UAE and Bahrain this share varies between 40 percent and 20 percent (Figure 1). Non-oil and non-government sectors in all these countries are often linked to oil and government activities.

GULF countries, GDP composition                                          IMF, World Economic Outlook database, accessed in September 2017

At the moment, the economies of GULF oil and gas exporting countries (such as Algeria, Bahrain, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia and the United Arab Emirates) are still largely based on oil and gas industries, or government activities that are funded mainly with oil and gas revenues. In these countries, oil and gas are both the primary source of fiscal revenues and make up the predominant share of exports. Indeed, they make up more than 50 percent of total exports from GULF oil and gas exporting countries (Figure 2).GULF countries, oil exports, non-oil exports

                                                      IMF, World Economic Outlook database, accessed in September 2017

However, oil and gas dependence has wider macroeconomic implications for exporting countries. It also impacts areas such as employment and labour productivity (Figure 3). In oil and gas exporting countries such as Kuwait, Saudi Arabia and Qatar, more than 60% of domestic citizens are employed in the public sector.

Public sector employment, GULF countries                                  International Labour Organization, ILOSTAT database, accessed in February 2017 

Connecting the dots between oil, economics and politics in GULF

Unemployment, a bloated state, a weak private sector and limited political evolution are some of the region’s pathologies, ultimately rooted in an economic structure heavily reliant on external rents (whether derived from oil, aid or remittances) which have little to do with the production processes in their domestic economies (Rentier State Theory).

While remittances can improve financial intermediation, they can also depress growth in the long term. By providing the necessary foreign exchange cushion, remittances can shield countries from economic crises, thereby weakening incentives for economic reform. In GULF countries, a key feature of both aid and remittances is their high correlation with oil prices. The oil price is, therefore, a fundamental driver of these cross-border financial flows (Figure 4).

remittances, oil prices

                                                                                                          Source: Ahmed, F. (2012)

All across GULF countries the financial sector has suffered from a weak pace of reform. With the exception of Africa, most regions have made more significant progress on financial development than has the Middle East. Even within GULF countries, the Arab oil exporters have been extremely slow reformers.

Such resilience to reform is explained by the links and disjunction between economy and society, in rentier states. The fundamental principle of democracy, ‘No taxation without representation’, finds in rentier states its mirror image. Untaxed citizens are less likely to demand political participation. Alongside that, according to rentier mentality, income is not related to work and risk bearing, but to chance or situation. Rentier states tend to give rise to real estate, construction and financial speculation, as the preferred avenues for diversification.

State of play

This global energy architecture is currently undergoing a structural transformation, prompted by international decarbonization policies and technological advancements. Over-reliance of GULF countries on the oil rent, the lack of economic diversification and the incompatibility of current GULF macroeconomic models with a global decarbonization pathway consistent with the Paris Agreement (UNFCCC 2015) function as catalysts for new thinking throughout the GULF countries about sustainable finance and future prosperity.

It is thus important for sustainability professionals to assess the potential impact of international policies on GULF countries to understand their future outlook. Moving from traditional to sustainable finance means having to counter attitudes that are embedded in the ways their economic systems are organized. Shifting away from them requires new ways of operating effectively.

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References

Abulof, U. (2015) ‘“Can’t buy me legitimacy”: the elusive stability of Mideast rentier regimes’, Journal of International Relations and Development, February: 1-25

Ahmed, F. (2012) ‘The Perils of Unearned Foreign Income: Aid, Remittances, and Government Survival’, American Political Science Review, 106(1), 146-165.

Al-Khatteeb, L. (2015) Gulf oil economies must wake up or face decades of decline, Brookings Doha Center, Doha

Barajas, A., R. Chami, , C. Fullenkamp, , P. Montiel and M. T. Gapen,  (2009). Do Workers’ Remittances Promote Economic Growth?, Working Papers 09/153, (Washington D.C: International Monetary Fund)

Beblawi, H and G. Luciani (1987) The Rentier State (London: Croom Helm).

Creane, S., R. Goyal, A. Mobarak, and R. Sab (2003) Financial Development in the Middle East and North Africa (Washington D.C.: IMF)

Mahdavy, H. (1970) ‘Patterns and Problems of Economic Development in Rentier States: The Case of Iran’, in Cook, M. A. (ed), Studies in Economic History of the Middle East, Oxford University Press, Oxford

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