1. Diversified but marginal: the GCC private sector as an economic and political force Steffen Hertog London School of Economics

2. The GCC private sector at first glance 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

3. 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

4. Share of state spending in non-oil GDP State remains a large, if not dominant driver of demand Boom in 2000s was state-driven

5. Ratio of government to private consumption in GCC and select international cases

6. 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

7. 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.)

8. Contribution to national employment: the state dominates GCC employment structures Nationals predominantly employed in public sector, with better wages and work conditions

9. 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

10. 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

11. 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

12. Share of hi-tech exports in total manufacturing exports (%, 2009) Practically no R&D in the private sector Technology development driven, if at all, by SOEs (Mubadala, SABIC, Aramco etc.)

13. 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

14. 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

15. The structural position of GCC business: isolated from the citizenry at large, for which it provides – 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?

16. 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

17. Fiscal sociology of a tax state

18. Fiscal sociology of an authoritarian rentier state – government as arbiter Dubai as example (cf. Michael Herb)

19. Fiscal sociology of a participatory rentier state – one-sided pressure Kuwait as example (cf. Michael Herb)

20. 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

21. 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?