Economic Research Forum (ERF)

What small states can learn from the Gulf – and vice versa

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How the Gulf’s historically small states – Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates – grew economically offers insights and warnings for small states grappling with development challenges today. This column presents two lessons that small states can learn from the Gulf – as well as two lessons that the Gulf states can learn from small states.

In a nutshell

Sparse populations deprive small states of the manpower to fuel industrialisation and economic diversification; brain drain robs small states of the human capital to lead private sector growth and staff high-performing public sectors.

The Gulf’s population growth teaches that small states’ population constraints are not immutable: migration policies can help to overcome demographic obstacles to growth, though the Gulf states’ policies may be neither desirable nor feasible elsewhere.

Understanding how small states like Mauritius or Estonia overcame their resource and demographic challenges to diversify their economies can provide valuable guidance to Gulf states eager to lighten their dependency on oil and gas.

Five years ago, a heated public debate erupted from the commanding heights of Singapore’s foreign policy establishment. Splashed across op-eds, blogs and interviews, Singapore’s foreign policy elite argued whether small states should ‘act like small states’ and defer to larger powers. The catalyst of this debate? The blockade of Qatar.

Leaders of small states from across the world are paying close attention to Gulf states like Qatar and the United Arab Emirates (UAE). And for good reason. These Gulf states’ economic and political influence has grown exponentially over the past two decades. At the same time, Gulf states are expanding their commercial ties with small states like Singapore, Mauritius and the Maldives.

Small is a relative and contested term. I follow the World Bank and define state size by population. Today, all of the Gulf states exceed the World Bank’s small state population threshold of 1.5 million residents. Fifty years ago, however, only Saudi Arabia constituted a ‘large’ state (Maddison Project Database, 2020).

How the Gulf’s historically small states – Bahrain, Kuwait, Oman, Qatar and the UAE – grew economically can offer important insights and warnings for small states grappling with development challenges today.

 

What the Gulf can teach small states

The first lesson is how to manage resource wealth. This is especially important for small states, which can’t rely on a large labour force to catalyse economic development. Undeniably, the Gulf’s small states have harnessed their immense oil and gas reserves to better their citizens’ standards of living.

The small Gulf states’ average real GDP per capita has almost tripled since 1975 (Maddison Project Database, 2020). All of the Gulf’s small states obtained ‘high levels of human development’ in the UNHDR 2020 human development index, an index that measures development in terms of educational, health and economic outcomes.

This is not to deny the economic hurdles confronting the Gulf (Kabbani, 2020). The region’s economies remain largely dependent on oil and gas (Kabbani and Ben Minmoune, 2021). The Gulf’s private sector is still heavily reliant on the state (Hertog, 2013).

But when compared with other resource-rich small states, the Gulf’s economic success is a reminder that resource wealth alone is insufficient for economic development. Not all oil abundant small states are prosperous.

For example, although Equatorial Guinea has the tenth highest oil production per capita in the world, three-quarters of its population live in poverty. Suriname’s oil rents (oil revenue minus oil production costs) as a percentage of GDP were more than twice as high as Bahrain’s in 2019, yet its citizens’ average life expectancy was six years lower (World Bank, 2022). Resource-rich small states like East Timor and Guyana can learn from Gulf states how to manage and distribute their resource abundance.

Labour migration is another policy domain where small states can learn from the Gulf. Population constraints are a bane for small states’ economic development. Sparse populations deprive small states of the manpower to fuel industrialisation and economic diversification. Brain drain robs small states of the human capital to lead private sector growth and staff high-performing public sectors (Beine et al, 2008, Jugl, 2019).

The Gulf’s small states tackled their population constraints with unfettered labour migration. Their populations have collectively grown almost 700% since 1975 (Maddison Project Database, 2020). Indeed, the Gulf has experienced the largest population growth in Asia over the past decade, with Oman and Qatar growing by more than 60% (International Organization for Migration, 2020).

Labour migration underpins the Gulf’s torrential population growth. In 2010, almost two-thirds of the residents of the Gulf’s small states were born outside the Gulf (World Bank, 2022). Migrants make up 88% of the UAE’s population (International Organization for Migration 2020). High wages and political stability attract skilled and unskilled labour to the Gulf, especially from South Asia (International Organization for Migration, 2020). Unlike many small states, the Gulf does not suffer from labour shortages.

Highly exclusive citizenship policies have buttressed the Gulf’s high labour migration. Foreign workers’ exclusion from Gulf states’ generous social safety nets (Kinninmont, 2013), and their virtually impossible path to citizenship, dampen domestic opposition to foreign labour. Large public sectors further shelter Gulf citizens from competing against foreign workers.

Lastly, many of the region’s migrant workers labour under notoriously precarious and abusive conditions. The kafala sponsorship system, which grants employers’ large control over migrant workers’ employment and immigration status, epitomises the precarity of foreign labour in the Gulf.

The Gulf states’ labour migration policies may be neither desirable nor feasible in other small states. Nevertheless, the Gulf’s population growth teaches that small states’ population constraints are not immutable. Migration policies can help small states to overcome demographic obstacles to growth.

 

What small states can teach the Gulf

The Gulf’s small states can learn two lessons from other small states. The first is how to diversify their economies. Singapore, Slovenia and Estonia have some of the most diverse economies in the world, as measured by the complexity and diversity of their exports.

The Gulf, on the other hand, maintains a mostly monoculture hydrocarbon economy. Oil and gas production made up more than 40% of Oman, Kuwait and Qatar’s share of GDP in 2018 (Kabbani and Ben Minmoune, 2021). Even in the UAE, the region’s most diversified economy, oil constitutes more than half of its total exports (Kabbani and Ben Minmoune, 2021).

Heads of small Gulf states have long tried to diversify their economies. Small states, especially formerly resource-dependent ones, can show them how.

Mauritius is a case in point. Once a monocrop sugar economy in the mid-20th century, by 2010, agriculture made up less than 4% of the Indian Ocean island state’s GDP (Ali, 2010). Pairing trade-led development with sound governance, the Mauritian economy pivoted from agriculture in the 1970s to manufacturing in the 1980s, and then to services (McIntyre el al, 2018), which represent two-thirds of Mauritius’ GDP today (World Bank, 2022).

The Pacific island state of Nauru is a warning to Gulf leaders who expect economic diversification inevitably to follow the depletion of their oil and natural gas resources. The island’s vast phosphate reserves made Nauruans some of the wealthiest people in the world in the 1970s (The Economist, 2001).

But after Australian, New Zealand and UK firms drained Nauru of its phosphate deposits, successive Nauruan governments failed to invest the royalties from phosphate production into new avenues of growth. Today, the island is one of the poorest in the Pacific: Australian foreign aid has made-up almost two-thirds of Nauru’s GDP since 2013 (Davies and Doherty, 2018).

This isn’t a call for Gulf states to transform themselves into Mauritius or Estonia. Instead, understanding how these small states overcame their resource and demographic challenges to diversify their economies can provide valuable guidance to Gulf states eager to lighten their dependence on oil and gas.

Finally, small states can teach Gulf states how to balance the United States and China’s great power rivalry. China’s growing presence in the Gulf has made headlines lately. But small states like Singapore and Brunei have been navigating these geopolitical straits for decades. And they’ve succeeded. Far from joining a band-wagon on either side of the hegemonic divide, Southeast Asia’s small states have got the best from both powers: security from the United States and economic exchange with China (Tang, 2018).

Gulf leaders should take note. A strong regional organisation – the Association of Southeast Asian Nations (ASEAN) – has been crucial for this balancing act. That said, the conflict in Ukraine has shown that small Gulf states are already quite adept at playing large states off each other. Although the UAE is under the United States’ security umbrella, the country has thus far resisted pressures from the Biden administration to increase oil production and sanction Russian oligarchs – many of whom have assets in Dubai.

Thankfully, there are venues for small states and Gulf states to learn from each other. The Forum of Small States, of which Bahrain was a founding core group member and to which all small Gulf states belong (Chew, 2015), is an informal platform for small states to organise, share information and advance their interests. Trade agreements – like the free trade agreement between Singapore and the Gulf Cooperation Council (GCC) – facilitate learning as well.

Expect these interactions to strengthen and multiply in the coming years. Heightening tensions between the United States, China and Russia, and global challenges like the Covid-19 pandemic and climate change, are bound to deepen engagement between the Gulf and small states.

 

Further reading

Beine, Michel AR, Frederic Docquier, and Maurice Schiff (2008) ‘Brain Drain and its Determinants: A Major Issue for small states’, IZA Discussion Papers No. 3398.

Chew, Tai Soo (2015) ‘A History of the Forum of Small States’, in 50 Years of Singapore and the United Nations, 35-38.

Davies, Anne, and Ben Doherty (2018) ‘Corruption, incompetence and a musical: Nauru’s cursed history’, The Guardian, 18 September.

Hertog, Steffen (2013) ‘State and Private Sector in the GCC after the Arab Uprisings’, Journal of Arabian Studies 3(2): 174-95.

International Organization for Migration (2020) World Migration Report 2020.

Jugl, Marlene (2019) ‘Finding the golden mean: Country size and the performance of national bureaucracies’, Journal of Public Administration Research and Theory 29(1): 118-32.

Kabbani, Nader (2020) How GCC countries can address looming fiscal challenges, Brookings Institution.

Kabbani, Nader, and Nejla Ben Minmoune (2021) ‘Economic Diversification in the Gulf: Time to Redouble Efforts’, Policy Briefing, Brookings Doha Center.

Kinninmont, Jane (2013) ‘Citizenship in the Gulf’, The Gulf states and the Arab uprisings, 47-57.

Maddison Project Database (2020) – Bolt, Jutta and Jan Luiten van Zanden ‘Maddison style estimates of the evolution of the world economy. A new 2020 update’.

McIntyre, Arnold, Mike Xin Li, Ke Wang and Hanlei Yun (2018) ‘Economic Benefits of Export Diversification in Small States’, International Monetary Fund Working Paper Series WP/18/86.

Tang, Chih-Mao (2018) Small states and hegemonic competition in Southeast Asia: Pursuing autonomy, security and development amid great power politics, Routledge.

The Economist (2001) ‘Paradise Well and Truly Lost – Nauru’, December: 361(8253): 39-41.

World Bank (2022) World Development Indicators.

Zafar, Ali (2011) ‘Mauritius: An Economic Success Story’, Yes Africa can: Success Stories from a dynamic continent: 91-106.

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