Iran, Iraq and the Persian Gulf

Christopher Hurtado —  December 15, 2008
Iran, Iraq and the Persian Gulf | Christopher Hurtado

The politics of war and revolution in the Persian Gulf

Conflicts of the late 1970s through the Gulf War of the 1990s have demonstrated the significance and fragility of the Persian Gulf, an area that contains over 60 percent of the world’s reserves of oil. Because of the importance of these oil reserves, every conflict in this region becomes an international event. While the collapse of the Soviet Union has reduced U.S.-Soviet tensions it has created new problems for the world and the Gulf region.

Political, economic, and religious interests of the region overlap oil interests to create complex regional issues.  Basic problems such as the problem of national identity and political legitimacy have remained unresolved and have taken a back seat to oil interests. For the most part, the Arab states have resisted the forces of democratization that have been sweeping the world and have remained monarchies.  They use their oil wealth to maintain their power, reinforce tradition, and crush or dominate their political rivals.  The relative stability of these states is attested by the fact that of eight Persian Gulf states, only Iran and Iraq have experienced revolutions during this period.

There are two main factors that account for the stability of these monarchies in an era in which democracy seems to be sweeping the world.  Reason number one is that through oil revenues, they have had sufficient wealth to meet the economic needs of their people.  The second factor creating stability in these monarchies is that the leaders of these nations have been very savvy politicians, particularly attuned to the needs and demands of their people.   They personally listen to the problems and requests of their people through an informal assembly known as the majlis.

These monarchies are facing major problems going forward in spite of their leader’s political astuteness and ability to quickly respond to the demands of their people. Problems such as a shortage of laborers, deep social, ethnic, and religious divisions, the rapid growth of a professional middle class, the resurgence of Islam, rampant corruption, growing intimacy between Gulf Elites and Western governments, a huge gap between economic modernization and political liberalization, and the issue of future succession will in the near future present difficult challenges for these monarchies.

Petroleum, Politics, and Development 

The West set a historical precedent linking state building to economic development. Thus, state formation in the Middle East should have been enabled and accelerated by the great oil boom beginning in 1973 and ending in 1985. Oil-producing states benefited from rising prices and growing exports of oil, while those that produced little or no oil benefited indirectly through workers remittances, tariffs for oil transportation across their dominion, and investment by oil-rich states. Oil revenue had a deep impact on living standards. Education also grew rapidly due to the oil boom. In fact, the oil boom notably improved the standard of living of most Middle Easterners. The oil boom enhanced Middle Eastern incomes, diet, healthcare, education, and living conditions at a much quicker pace than was seen in the rest of the Third World. Nevertheless, however important raising the standard of living may be, it does not necessarily lead to successful state creation.

Oil dependency leads to uneven growth within and between each of the three main sectors of a state’s economy: industry, agriculture, and services. The oil subsector of the industrial subsector of most Middle Eastern countries tends to do well, while most other industrial subsectors fail to adequately grow. With production growth rates lagging behind rapid increases in demand, the Middle East “food gap” increased at a worrisome rate during the oil boom. And while its growth has slowed significantly, it remains large and may continue to grow. In contrast to their industrial and agricultural sectors, the service sectors in most Middle Eastern countries have witnessed rapid growth since the beginning of the oil boom. The government renders most services in Middle Eastern countries. Thus, government employment has grown in lockstep with the expansion of the service sector. Government and private sector jobs in industry and agriculture remain inadequate. The near 15% average unemployment rate of the region is now the highest in the world compared to 5% or less in Latin America, East and South Asia and less than 10% in OECD countries.

The oil boom and bust have greatly impacted the political systems of the region. Specifically, the rise and fall in oil prices starting in the early 1970s has led to two distinctive incongruities. The first is that in the years of plenty between 1974 and 1983, most governments were stable, but the states did not become stronger and more established. The bonanza did not expedite the state formation process. The second incongruity is that in the lean years, starting in the mid-1980s, many governments have faced greater threats to their stability and existence. Nevertheless, they have set out to institute political and economic change that may ultimately result in stronger states.

European states formed during a prolonged, broad-based period of economic growth, typically supported by the private sectors. In contrast, the Middle East oil boom was temporary. During the oil boom, the service sector grew rapidly, but growth in industry and agriculture were inadequate. Furthermore, the oil industry was under direct governmental control. The government collected oil revenue as rent. In addition to profits from the oil industry, the government had immediately available to it foreign aid, loans, and oil transport fees. As a result, the government did not have to collect as much revenue in taxes from its citizenry.

Political elites opted to buy off the people while continuing to restrict their political participation rather than to impose austerity in exchange for more political freedom. This prevented true economic liberalization. States had to continue in their domination of the economy in order to get the needed resources to continue to allocate according to the social contract and to support the political elite. The partial opening was inadequate in terms of stimulating productive entrepreneurship rather than exploitive, parasitical activities. This further compromised the government’s ability to effectively manage the economy. As a result, ten years after the oil boom, the combined GDP of all the MENA states is much less than half that of France.

The oil boom tended to keep regimes in power while at the same time weakening the state’s power and effectiveness. It also resulted in contradictions in the political economy of the region. Greater regional integration has been occurring at the same time national economies have further consolidated. The Arab states in the region have resisted the economic forces driving them into a regional economy in favor of economic autonomy and political sovereignty.

Regional response to the oil bust was as uniform as it was to the oil boom. In the late 1980s, political elites began curbing government spending while carefully expanding political freedoms in hopes that this political liberalization would pacify a citizenry unaccustomed to economic hardship. Thus, the state and its society grew closer together through the recession. Governments were faced with the demands of their citizenry as they were forced to extract higher taxes from them to supplement their diminishing rents. Thus, scarcity produced greater political development than did plenty.

While the MENA region’s increase in per capita income from 1965 to 1985 was second only to that of East Asia’s, it has fallen more sharply since 1985 than any  other area’s but Africa. Middle East revenues from oil exports began to drop in 1982 as a result of falling prices and smaller shares in a smaller world market. By 1983, consumption levels dropped to pre-oil boom levels due to worldwide recession and increased energy savings. Arab oil output halved between 1979 and 1983.  By 1995, OPEC was selling half of what it had in 1980 and at significantly reduced prices.

Although oil prices did begin trending upward in 1989 and were boosted by the Gulf Crisis in 1990, bringing OPEC to their highest level in a decade, even Saudi Arabia still faced its tenth budget deficit in a row in 1992. Some MENA states face reduced financial surpluses while Iran and Iraq find themselves in dire circumstances.

By the early 1990’s, falling oil revenues and lack of private funds and public foreign aid led to increased government debt and the realization that the region was in need of economic reform. States in the region started to turn to the IMF and the World Bank for advice and assistance. They then strove to implement the changes necessary to stimulate long-term development. Faced with the need to renegotiate their social contracts with their citizenry, the poorest countries had to increase political participation.

The end of Egypt’s oil boom countermined Mubarak’s consolidation of power following Sadat’s assassination. Mubarak was forced to change Sadat’s economic infitah (opening) for three reasons. First, it stimulated imports and consumption rather than production and exports. Secondly, it was untenable due to lack of resources. Thirdly, it produced inequality, which lead to its unpopularity, and was seen as creating further dependence on the West, especially the United States. Mubarak managed to retain the ideal of economic liberalization while doing away with the excesses of the infitah by changing its emphasis from consumption to production.

Economic reforms and easing of restrictions on political expression and behavior in general were needed to gain political support for economic austerity and were stimulated by democratizations occurring in Eastern Europe and in the former Soviet Union.  By the late 1990s, political liberalization began to fade. There were likely two reasons for this. First, reforms did not stimulate enough economic growth to curb unemployment or significantly increase per capita income, but instead led to further concentration of wealth. Secondly, regional tensions caused by the Arab-Israeli conflict were heightened as the peace process began to falter in 1994 and all but dead ended with Israel’s election of Netanyahu as prime minister in 1996.

Prospects for further liberalization

During the 1980s, liberalization and increased political freedom invariably led to opposition movements, which in turn led to repression and a decrease in political freedoms. In Muslim countries of the MENA region political liberalization was offered to reduce counteraction to economic austerity measures. However, they were quickly ended when they conflicted with the interests of the rulers. Wealthy oil exporting states were less likely to implement comprehensive reforms in the late 1980s and early 1990s. As these countries did not require as many economic sacrifices of their citizenry, they were not compelled to allow as much political participation.

A basic lack of trust exists between the rulers and the ruled. The ruling elite suspect that the goal of the opposition is subversion. On the other hand, the ruled suspect that their leaders are just waiting to impose autocratic rule over them. In order for trust to develop between rulers and the ruled, major compromises will be required. The ruling elite will have to give up authoritarian rule and guarantee both political and human rights for their citizens. The people, on the other hand, would have to agree to abide by the laws derived from a democratically elected body.

These fundamental changes would also require economic reforms. Most of the governments in this region are not strong enough to impose the kind of reforms that could make it possible for Middle Eastern nations to compete effectively in the global marketplace.

There are two possible paths that could strengthen the governments so that they would be able to create effective economic reforms. One would be to open the doors to democratic political participation to create a broad base of support for the reforms. The second route would be to stimulate popular support for the government programs through ideological support such as that of Islam. Since neither of these solutions appears to be viable in the near future, the prognosis for effective Middle Eastern economic and political reform remains bleak.

Christopher Hurtado

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Christopher Hurtado is President and CEO of Linguistic Solutions and Adjunct Instructor of Philosophy and Political Science at Utah Valley University. He holds a BA in Middle East Studies/Arabic and Philosophy and an MA in Nonproliferation and Terrorism Studies. He coauthored Vacation Spanish: A Survival Guide for Mexico, the Caribbean, Central & South America. He is married to children's book author and homeschool mom, Alysia Gonzalez. Together they have nine children. They are active in their church and in their community.