DEMOCRACY AROUND THE WORLD | Giving citizens a voice
11 June 2008
Market Economy Without Democracy in the Gulf
Jean-Francois Seznec
The Gulf states have mostly free markets but not free elections, according to Jean-Francois Seznec. The rulers share the benefits of economic expansion but not political power, he says. Seznec is visiting associate professor at Georgetown University’s Center for Contemporary Arab Studies in Washington.
Market economies seem to thrive in certain nondemocratic states and yet do not seem to move these countries towards democracy. Consider the six countries that form the Gulf Cooperation Council (GCC): Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
On the Freedom House scale from 1 to 7 of freedom in the world, with one being the freest, the Gulf countries score poorly. Saudi Arabia gets 6.5 because of its limited civil and political rights. Highest scoring is Kuwait with only 4.0. Kuwait does have freely contested elections to parliament and freedom of expression, but the primacy of the royal family is not questioned.
By some measures, however, the Gulf states are among the freest markets in the world.
All Gulf countries are market economies. Saudi Arabia ranks a relatively high 23rd on the World Bank’s list of countries for ease of doing business. All GCC countries are members of the World Trade Organization (WTO). Oman and Bahrain have free trade agreements with the United States. Tariffs are low.
None of the countries has income taxes. Corruption for day-to-day transactions is minimal. GCC country banks and financial institutions are sophisticated lenders. Restrictions on the sale of goods are limited, except for religiously forbidden products such as pork and alcohol.
The Gulf states also are modernizing their economic structures and laws to attract private investments, both local and foreign. Today a foreign company can own 100 percent of all its ventures in most GCC countries. It can repatriate its profits freely, sell assets as it wishes, and pay relatively low corporate taxes.
The Gulf countries’ economies are booming. Moving to become less dependent on oil or gas, they are seeking to maximize their advantages of low-cost energy, plentiful capital, and strategic location. They already produce about 12 percent of all the world’s chemicals and fertilizers. They are increasingly producing more advanced chemicals such as ethylene-based plastics. With access to cheap electricity, they are already large producers of aluminum, and, with future access to bauxite in Saudi Arabia, they may achieve 20 percent of world production before 2020.
Limits on Free Markets
Adherence to free markets has limits, of course. Contracts are not easy to enforce because of different legal traditions and few judges with knowledge of international legal practice.
In order to achieve economic development, the Gulf countries are investing hundreds of billions of dollars in infrastructure projects, building industrial cities, railroads, harbors, and airports.
Most of the very large chemical and metals companies operating in the GCC today are state owned, although managed like large Western companies with minimal interference from government. SABIC, for example, is the most profitable and fastest-growing chemical company in the world with access to raw materials at lowest cost. It is also becoming a research and development powerhouse and, like its petroleum counterpart, Saudi Aramco, trains and uses Saudis to create knowledge-based industries in the kingdom.
The success of state-owned companies has drawbacks. Managers insist they should not have to share their low-cost raw materials with local competitors. Thus, while very large state enterprises create work for the private-market economy, they also restrict private-sector competitors from getting too large.
Of course, some interests in the GCC resist free markets, including traditional manufacturers and merchants. The religiously conservative Salafis also lobby against free markets, fearing that an open economy invites widespread Western-style education and practices.
Sharing Wealth, Not Power
To achieve their ambitious economic goals, the governments of the Gulf have sought to share wealth, but not political power, with their people.
Saudi authorities have used the stock market to share the wealth. Many of the 115 companies listed are controlled by the state and are usually very profitable; these companies will sell perhaps 30 percent of their capital as stock market shares. Saudis who invest in these state-owned companies get good dividends and capital appreciation on safe investments. Furthermore, the Capital Markets Authority ensures that all the companies listed are bona fide and that small investors get a chance to buy shares. Today 50 percent of all Saudis own shares and hence have a stake in the development of the kingdom.
Gulf governments fear, however, that sharing political power with their people could bring development to a screeching halt. The few freely held elections in the Gulf have given absolute majorities to the Salafis. To balance Salafi gains, GCC kings and emirs have appointed consultative councils, comprising technocrats who give a stamp of participatory approval to economic policy and uncontroversial laws.
Lack of judicial independence demonstrates another divide in the Gulf states between sharing wealth and political power. Government-appointed judges rule in cases of Islamic family and criminal law but lack competence in commercial law. The Saudis have established a parallel legal system called the Board of Grievances to handle commercial cases.
Yet the powerful remain beyond the reach of the courts. The Saudi Board of Grievances does not consider disputes involving princes and government officials; rarely are such cases adjudicated on merit.
Growth of free markets, both promoted and hampered by autocracy, has done little to effect political reform in the Gulf states. The free-market economies are sustained by the unquestioned political control of their leaders. Even in Dubai, the entrepreneurial center of the region, the word of the ruler is the rule of the land.
The Gulf governments are not of the people, by the people, for the people. They are governments of the few for the benefits of the many. This is a far cry from what Western democracies have achieved, but it is home grown.
Democracy cannot be imposed from the outside. Ongoing economic changes in the Gulf may be indicating that, over time, the rulers there will allow not only market freedom but also political freedoms such as political parties, free speech, and independence of an educated judiciary. Ultimately, promoting economic participation and reform may still promote democracy.
The opinions expressed in this article do not necessarily reflect the views or policies of the U.S. government.
