Diversified but marginal: the GCC
private sector as an economic and
political force
Steffen Hertog
London School of Economics
The GCC private sector at first glance
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Employs 80% of workers in the region
Provides the majority of local capital formation
Has deep overseas capital resources
Is at the center of all GCC governments’
diversification strategies
• Has diversified into new sectors
– Telecoms, heavy industry, utilities, aviation…
• Is a leading regional investor in MENA
• Has matured technologically and managerially
BUT
• Business activities remain dependent on the state
in a variety of ways
• It remains economically decoupled from the
national population
• As a result, it has become marginal in economic
policy-making and national politics more broadly
The roots of its political marginalization are
based on its structural position in the economy
It can only regain a more central political role if it
establishes organic economic links with the
national population
Share of state spending in non-oil GDP
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State remains a large, if not dominant driver of
demand
Boom in 2000s was state-driven
Ratio of government to private consumption
in GCC and select international cases
Drivers of growth
• Growth patterns in the
private sector at large still
broadly follow state
spending
• No taxes  no feedback
loop from business
growth to state spending
growth
• Relationship is one-sided:
state spending drives
business growth, not the
other way around
Some shifts in the channels of dependence: ratio of
capital to current spending in government budgets
• Business nowadays profits more from consumer demand (through
salaries of state employees) than directly from government
contracts
• More competitive markets, smoother growth patterns
• But still underlying structural dependence on the state: very low
private wage ratios (7% in Saudi Arabia e.g.)
Contribution to national employment:
the state dominates
GCC employment structures
• Nationals predominantly employed in public
sector, with better wages and work conditions
Growth of business mostly benefits
foreign labor
• “Jobless growth” for nationals in the 2000s
– Huge imports of foreign workers
• Local companies often perceive employment of
nationals as a burden and, when obligatory, a tax.
• Much popular disenchantment with business
class
• Best, most productive jobs for nationals are
usually in SOEs, not private sector
• Foreign workers remit most of their income
abroad, further reducing the contribution of
business to national demand generation/growth
Business dependence on non-fiscal
state support
• Cheap capital, energy and infrastructure
• Incentivizing resource-intensive, low-tech development
• Increasing consumption rivalry with residential
consumers as gas become scarce
Low contributions to knowledge
economies and innovation
• Factor-intensive
growth:
– Cheap, low-skilled
labor
– Cheap energy inputs
limited incentives to
acquire technology
Stagnant or declining
productivity
Few jobs that pay
living wages for
nationals
Share of hi-tech exports in total
manufacturing exports (%, 2009)
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Practically no R&D in the private sector
Technology development driven, if at all, by
SOEs (Mubadala, SABIC, Aramco etc.)
Corporate governance and the public’s
exclusion from private sector wealth
• Patrimonial, family-based nature of most
private wealth tends to lead to
– Corporate governance deficits
• Saad and Gosaibi
• Companies with strongest corporate governance are
usually SOEs
– Exclusion of the public from investment
opportunities in the private sector
• Most large groups are privately held, most “blue chips”
on local stock markets are former SOEs
 Another factor decoupling citizens and business
The role of business in economic
policy-making
• In line with the private sector’s dependent
economic position, lobbying tends to be reactive
and piecemeal
– Defense of privileges (subsidies, agencies, fighting
taxes, fees and labor nationalization rules etc.) rather
than proactive policy initiatives
• Chambers of Commerce dominated by big
families
– limited policy research capacity
– Limited activation of broader business community
The structural position of GCC
business:
• isolated from the citizenry at large, for which it
provides
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–
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Little employment,
No taxes,
Limited investment opportunities,
and with which it competes for increasingly scarce
low-price goods and services provided by the
distributive state
 How is this decoupling/rivalry in the political
realm?
The decline of merchant elites as a
political players
• Used to lead nationalist and parliamentary
movements in 1920s to 1960s
– Especially in pre-oil era, when they provided taxes,
infrastructure, local employment
• Now marginalized in parliaments all over the GCC
– Present as government clients, if at all
• Also marginalized as social, “notable” elites
– Partially the natural result of the emergence of mass
politics and society as in rest of MENA
– But also due to the absence of shared economic
interests with citizens at large
• No scope for a historical “class compromise” as e.g. in
Europe
Fiscal sociology of a tax state
Fiscal sociology of an authoritarian
rentier state – government as arbiter
Dubai as example (cf. Michael Herb)
Fiscal sociology of a participatory
rentier state – one-sided pressure
Kuwait as example (cf. Michael Herb)
The future
• The majority of nationals all across the GCC continues
to have no significant stake in private sector growth.
• In the long run, a zero-sum distributional conflict is set
to grow
– demands on state resources will become ever larger due to
growth of both business and the national population.
• In a fiscal crisis, popular interests will likely be
privileged over business interests, even in authoritarian
rentiers
– Business provides little that is essential for regimes’
survival
– Precedent of 1980s and 1990s
Can business do anything about it?
• Yes, but it could be costly:
– Accept taxation at least in principle
– Reform corporate governance and give up exclusive
control of assets
– Most of all: step up employment of nationals
• focus on technological upgrading, build local human resources
• requires policy changes beyond the control of business, e.g. a
reduction in public sector over-employment
• Stronger local employment & taxation would reduce
business profits in the short run,
• But it could give business a much safer and more
autonomous political position in the long run
– It could become a true bourgeoisie capable of negotiating
with state and other social forces
– The best weapon against parliamentary populism?