KAREN YOUNG — Gulf Arab states are funding development outside their borders, reshaping aid patterns and opening new arenas for competition with actors like China.
Editor’s Note: For additional discussion of Gulf Arab states’ defense strategies in the Horn of Africa, read the P-WW’s interview with Alex Mello regarding UAE security projection.
In recent decades, Gulf Arab states have sought new international business partners, most crucially by fostering lucrative banking, infrastructure, and investment ties with China. How can scholars understand the origins of China’s engagement with the Gulf region; how have Gulf Cooperation Council (GCC) member states – including the United Arab Emirates, Saudi Arabia, and Kuwait – understood and managed the growth of Chinese economic activity within Gulf markets?
China’s emergence as a key commercial and trading partner for the Gulf Arab states is a relatively new development and has been expressed through several key post-Cold War economic trends. Crucially, the opening of diplomatic relations between Gulf Arab states, China, and Russia after 1989-1991 provided the spark for this process of economic rapprochement regionally. Ties between China and Arab states – particularly Saudi Arabia and the UAE – grew within the bounds of this broad global trend toward greater international exchange with communist-bloc states. Since 1990, the rapid opening of the Chinese market to foreign investors and exports – most importantly within the energy sector – has transformed the Sino-Gulf economic relationship, particularly in terms of natural resource flows. Today, Gulf oil and gas has increasingly moves less to the West and more to the East. This trend accelerated rapidly during the 2000-2014 period, in which oil prices remained steadily high, generating significant wealth for Gulf Arab states and cementing China (alongside several other Asian states like South Korea and Japan) as the top consumers of Gulf oil. Meanwhile, Qatar’s relationship with China as a natural gas provider followed much the same trajectory, although its ties developed more recently than did those of its neighbors in Saudi Arabia or the UAE.
From the Chinese perspective, Beijing’s activities in the Middle East have revolved around the exigencies of the Belt and Road Initiative (BRI) announced in 2013 – although in the case of the Arabian Peninsula and Gulf region, China’s approach may be better described as linking together a “string of pearls.” China appears primarily focused on building logistics hubs and boosting its ability to use existing port facilities within the region to support economic and hard power projection. It is perhaps easy to assume, especially if one does not study Chinese politics closely, that Beijing’s efforts in the Middle East represent a powerful state-led project – that its infrastructure development, commercial, and diplomatic activities are governed by some central entity within the Chinese Communist Party. However, this depiction does not capture the realities of China’s activities in the Arabian Peninsula or the history of Chinese presence in the Gulf region.
China’s entrance into the Gulf region originated with the first Chinese investors who settled in Dubai in the late 1980s and early 1990s, where they started essentially what became a “Chinatown” in Bur Dubai. Yuting Wang, a professor of sociology at the American University of Sharjah in the UAE, is currently undertaking an ethnographic study of these first Chinese investors in Dubai. Her research has indicated that these individuals were not emigrating as part of any state-directed initiative from Beijing. Instead, they were private Chinese entrepreneurs who hailed from very specific regions – primarily western China’s Muslim-dominant areas – and brought with them equally specific industries. The Chinese community that first came to Dubai, for example, was known for glassmaking, and these emigres established manufacturing activity that built on this background. This immigrant story in the Gulf formed the foundation for subsequent Chinese engagement with Arab states there. Fascinatingly, the Chinese government and planners of the BRI today rely on the immigrant community linkages, which pre-date the flourishing of China-Gulf economic ties, to build investment opportunities and diplomatic initiatives. This linking of organic diaspora communities to current economic objectives has been particularly successful in the UAE.
This history provides important context for understanding the competition between economic models – Chinese and Gulf Arab – that inform visions of development for the wider Middle East and North Africa region, as well as the Horn of Africa. Much of the capacity that Gulf Arab states have developed over the past decade – for example, expertise in port operations or power-plant construction – closely match current Chinese capabilities. Beijing has thus made inroads into the Gulf, initially through the establishment of Chinese bank branches in the Dubai financial center. The Chinese government, through these banks, subsequently started to bid on large infrastructure projects in the Gulf, particularly road construction initiatives – and won major contracts due to its ability to undercut competitors. As this economic activity intensified, Gulf Arab states initially tolerated Chinese competition within their borders. More recently, however, this competition has extended to regions where both China and Gulf Arab governments are pursuing lucrative development projects, such as in the Horn of Africa. Gulf Arab states (particularly the UAE, and to a lesser extent, Saudi Arabia and Kuwait) certainly do not want a confrontational relationship with China in these environments. They view China as a critical market. As a result, leaders in the Gulf have pursued Memoranda of Understanding (MOUs) and “commitments of shared investment” with Beijing; in return, Chinese policymakers have articulated an interest in the Gulf and wider Middle East premised on deeper ties that extend beyond the development or trading spheres, an approach illustrated clearly in their 2016 Arab Policy Paper. Thus, while Gulf-China relations remain competitive, they are at least on paper based on mutual interests rather than an adversarial spirit.
Within the Gulf itself, the UAE was the first Gulf Arab state to sign multiple high-value commitments of investment with China. Kuwait and Saudi Arabia subsequently followed suit. In this sense, Chinese investment has become trendy for Gulf leaders. However, this process does not indicate any real direct competition between Gulf Arab states; rather, it appears as a symptom of broader governance inclinations within the region, as activities in one state prompt similar efforts elsewhere.
Gulf Arab states – most importantly Saudi Arabia and the UAE – have struggled recently to look beyond state-manipulated economies as part of large-scale reform efforts. Part of this trend has been an emphasis on privatizing historically state-owned enterprises while boosting foreign investment outside the oil and gas sectors. How have Gulf Arab leaders understood Chinese interest in the region within the context of their long-term economic reform – how do economic policymakers in the Gulf understand the Chinese funding model?
The economic reform agendas pursued by Saudi Arabia and other Gulf Arab states since 2014-2015 has essentially become a search for alternate sources of revenue (due to declining oil prices). This search has revolved around the implementation of new taxes and fees on commodities like electricity, fuel, and water. However, most Gulf Arab states have not meaningfully reduced their fiscal spending – Saudi Arabia, for example, is today spending more than it ever has on public sector services, but it is changing the nature of its spending. Initiatives exist to privatize state assets, but this process has proceeded very slowly. Within this changing economic environment, the idea of a Chinese buyer has not presented any problems for Gulf leaders looking to boost revenue. Yet, China is not necessarily the most important actor within this privatization context. For example, South Korea has produced more firms that stand to become owner-operators of Saudi or Emirati public utilities than has China. In these countries, it is common to see large-scale water treatment facility or power-plant projects wholly or partially managed by South Korean firms like the Korea Electric Power Corporation (KEPCO).
Within the Gulf banking sector, as well, Chinese entities have not emerged as primary actors, nor have they been seen as presenting any kind of economic threat to existing banking institutions. To this end, most Saudi, Emirati, and Kuwaiti banks currently maintain either direct state ownership or ruling family ownership. China is not looking to take control of Gulf Arab economies on a large scale. The true sites of competition have emerged in lower income economies – most importantly in the Horn of Africa – where both Gulf Arab and Chinese interests are at odds with one another. For example, the UAE’s major port operator DP World has come into direct competition with Chinese counterparts in bidding for contracts at the Port of Djibouti.
In reality, Gulf Arab banking systems more closely mirror Chinese systems than they do western ones. The other similarity between Gulf and Chinese finance is that both models are closely tied to state-directed lending. In the Gulf, this system is based on the rentier model: Essentially, when oil and gas prices are high, the state earns more revenue, which it then deposits into the local state-owned banking sector. This cycle shapes the character of Gulf Arab lending and project spending. While the gears of China’s financial system are not necessarily fueled by natural resource revenue, the Chinese government does similarly push banks to continue lending at a high rate in order to drive economic growth. Therefore, Gulf Arab and Chinese financial systems present similar kinds of vulnerabilities. This relationship presents a crucial danger for leaders in the GCC and Beijing: If oil prices drop and Chinese demand for natural resources diminishes, both economic systems suffer – as essentially occurred in 2014. Despite these challenges Gulf leaders remain optimistic regarding the potential for Chinese economic engagement regionally. Nobody wishes to see China’s economy fail. Rather, the Gulf states ultimately wish to maintain a consistent Chinese demand for their export products, as well as continued revenue from sources like Chinese tourism (particularly in Dubai) or real-estate investment.
Gulf Arab states have emerged as global development actors, providing large-scale capital states across the Red Sea basin (Yemen, Sudan, and Jordan), North Africa (Egypt and Tunisia), and the Horn of Africa (Ethiopia, Djibouti, and Somalia). How have Gulf leaders understood and structured new investment and development models within areas like the Horn of Africa – how might such Gulf Arab economic penetration re-shape regional development efforts and investment initiatives?
This is a critical question that has received insufficient attention. Essentially, neither the Gulf Arab states nor China appear to have developed any coherent vision for economic development. The investment strategies pursued by these actors have instead proven site-specific and designed to feed cycles of continued growth within domestic economies. This situation has proven problematic for recipient states. Unlike the western model – which is premised on multilateral institutions (such as the World Bank) and a focus on long-term local institutional growth to build inclusive societies – Gulf Arab states lack such a coherent strategy for the export of their economic development model.
The leading economic actors within the GCC remain very comfortable – as does China – with the familiar kind of state-centric approach to development that worked in the Gulf itself. Yet, this model is not as easy to export outside the Gulf region as leaders there might have hoped. For example, in Egypt, Saudi and Emirati investors sought to mimic the kind of luxury housing and real-estate projects that proved successful in their own countries, in an effort to address Egypt’s housing shortage. However, the Egyptian context demanded low-income and highly-scalable solutions – not an influx of expensive housing projects that did not meet the country’s pressing needs. This failure provided a bitter lesson for Gulf investors and development policymakers regarding the need to find locally-tailored solutions that meet recipient-state goals, rather than attempting to shoehorn the Gulf economic system into foreign environments. In the future, Yemen will prove a critical case study in Saudi and Emirati post-conflict reconstruction – as will Somalia and Ethiopia.
Gulf Arab success in these environments will depend on two factors. First, Gulf leaders will need to better incorporate conditionality into their lending and development policies. For example, Saudi Arabia and the UAE recently pledged to provide nearly $20 billion in economic and development support for Pakistan – far-surpassing the kind of funding that multilateral institutions like the International Monetary Fund (IMF) could provide. Crucially, neither Riyadh nor Abu Dhabi has developed a robust project pipeline or evaluation process by which to monitor whether the recipient state has achieved funding goals. This lack of conditionality in the terms of Saudi and Emirati aid thus puts an overwhelming onus on the recipient state to manage and assess project spending, as well as to ensure that Riyadh and Abu Dhabi deliver the pledged amount. Such massive injections of funding into environments like Pakistan can prove incredibly destabilizing to the recipient state if not properly managed. Gulf Arab economic statecraft in development regions has hitherto been conducted at an extremely personal level – essentially over the phone, leader-to-leader – without any complementary on-the-ground management of spending. Crucially, none of the Gulf Arab states possess an independent development agency, like USAID or Britain’s DFID, that can plan and assess big-dollar commitments abroad.
Ultimately, the Gulf Arab states will likely be forced to reconfigure their development apparatuses as they continue to expand foreign aid and assistance programs both regionally and globally. In doing so, they will likely face significant challenges that might slow or derail efforts to build institutional capacity – not least of which is a cultural hesitancy to seek credit and recognition for any generosity that stems from the region’s Islamic governance structures. While Gulf Arab states have spent heavily in developing and disaster-impacted regions, they often fail to track or publish figures regarding amounts given. Today, Gulf leaders must decide whether they want to formalize and institutionalize aid programs. In Yemen, for example, it appears that Saudi and Emirati officials have chosen not to pursue such a policy. Saudi Arabia has tightly-controlled the flow of international assistance into the country, much to the detriment of Yemenis who have not received assistance. Such failures are ultimately not due to insufficient spending, but rather to a lack of institutional capacity to direct aid where it is most required.
Sino-Gulf economic visions will focus on state-centric growth and maintenance of domestic political stability. How will the injection of capital into Gulf Arab economies from partners like China reconfigure regional political or diplomatic relationships between Arab states?
It is useful to note that the world’s most important financial poles are shifting. High-value deals are no longer exclusively struck in New York City or London. From the perspective of Gulf Arab economic policymakers, it is increasingly possible to find financial success by looking East as it is by looking West. Entry into the United States market is less of a priority for Middle East entrepreneurs and investors as it might have been a decade ago. Today, regional observers are witnessing the widening of a market that is perfectly content to expand without integration into US or western systems. This trend challenges traditional conceptions of economic growth best-practices.
Within the Gulf, these transformations have important implications for how regional policymakers seek and spend foreign investment funds. Consider, for example, basic contract law: In an economically multipolar environment, where might compliance or enforcement disputes be settled? The answers point to potential challenges in the future to established corporate governance practices, transparency, and regulatory mechanisms. Among Gulf Arab states to-date, there has not yet been a significant case of a spoiled deal that would allow observers to assess these regional transformations. Chinese-funded projects such as Oman’s Duqm port development, however, may soon present Gulf leaders with such a dilemma.
As Gulf Arab states expand foreign assistance and investment programs, they have entered regions – particularly the Horn of Africa – where Beijing has sought to build its own robust international development presence. Do Gulf leaders envision competing against Chinese investment projects in these arenas – what are the implications of this diversification in funding sources for recipient states?
The Gulf Arab states and China do not yet appear to consider each other as competitors in the international development environment. Rather, these states have increasingly taken advantage of a general opening of the development assistance space that has occurred over the past decade. The international system fostered by the 1944 Bretton-Woods Agreement – which, among other institutions, established the IMF and World Bank – is increasingly frayed as the financial capacities of alternative states and economic models grow. These alternatives are not yet well-articulated, but they nevertheless offer recipient states options with regards to development assistance that did not exist historically. On one hand, these trends will present serious challenges for both recipient governments and international monitors in terms of ensuring transparency and accountability of development funds. On the other hand, increased competition for development contracts between multiple, differing models may offer recipient states greater agency over budgets and implementation – but this interpretation may ultimately prove too optimistic.
While western aid agencies such as USAID or DFID traditionally leverage foreign assistance in part to pursue national security-oriented strategies – promoting democratic governance and institutions that are amenable to donor-state interests, for example – Gulf Arab development assistance has not yet been politically linked in this regard. Crucially, the Gulf tendency to pursue highly-personalized diplomacy may backfire in countries with high government turnover. To-date, Gulf Arab states have been disappointed on several occasions after an investment or development deal they thought to be solid ultimately spoiled – as occurred, for example, in Somalia. These experiences have taught regional leaders that they cannot not rely on deals reached with a single foreign representative. Rather, it is important to negotiate with foreign institutions in order to protect overseas investments. This learning process is still in its nascent stages and it will be critical to watch how Gulf Arab states manage it moving forward.
KAREN YOUNG is a Resident Scholar at the American Enterprise Institute, focusing on the political economy of the Middle East and Arabian Peninsula. She is the author of The Political Economy of Energy, Finance and Security in the United Arab Emirates: Between the Majlis and the Market.