The Arabian Gulf Countries’ Economic Resilience
The current Israel-US-Iran war is testing the resilience of the Gulf Cooperation Council (GCC) economies, but this is far from being the first crisis the six countries have faced. Their successful navigation of previous wars and disasters rests on four reinforcing pillars: financial buffers, strong state capacity, flexible economic structures, and a favorable external security environment.
The Gulf Cooperation Council (GCC) was established in 1981 partially in response to the threats posed by the Iran-Iraq War and the Iranian Revolution. That conflict had serious economic consequences for the bloc, as oil tankers were denied the right to navigate freely through the region’s waters and as global commodity prices coincidentally contracted. The 1990 invasion of Kuwait was a direct threat to a member state’s sovereignty, while the 2003 US-led invasion of Iraq presented a different suite of problems to the GCC as it spawned an acute increase in extremism. Additional crises experienced since the turn of the millennium include the 2008 global financial crisis, the 2011 political chaos, the oil price crash of 2014-2016, the COVID-19 pandemic, and the current US-Israel-Iran conflict that started slowly but has now metastasized into a full-blown regional war.
Notably, the GCC economies have weathered these storms, and were in good health on the eve of the current one. This persistent success is due to a complex constellation of factors, but it is worth highlighting some of the most important contributors.
The most salient is prudent macroeconomic management. The GCC countries have historically maintained large fiscal buffers in the form of both sovereign wealth funds and foreign exchange reserves, combined with low levels of public debt. A critical enabling role is played by the disciplined decision to operate fixed exchange rate regimes vis-à-vis the US dollar, as this supports investor confidence as well as liquidity. Following the 2008 global financial crisis, monetary authorities have ensured that the banking systems of the six states are well-capitalized and maintain a conservative balance sheet. As a result, when crises inevitably arise, the GCC countries are well-positioned to absorb the shock and to recover rapidly upon transiting to the post-crisis phase, as occurred when oil prices contracted sharply during the period 2014-16 without inducing a financial collapse.
Beyond macroeconomic policy, high levels of state capacity combined with effective governance structures have played an important role in the GCC’s economic resilience. During a crisis, rapid decision-making is essential, and the GCC countries’ political systems are optimized for that by having a centralized and coordinated public sector. This was most clearly seen during the COVID-19 pandemic, when several Arabian Gulf countries – most notably the Kingdom of Bahrain – occupied the upper echelons of the global rankings in vaccine rollout, laying the foundation for rapidly adapting to the crisis and an accelerated recovery. A central role is played by the high levels of social cohesion within the GCC states, as this spawns trust in government decisions – a valuable asset when confronting an unforeseen disaster.
Long-sighted investments in infrastructure also contribute to the GCC economies’ adaptability. The region’s sea- and airports are among the best in the world and can handle capacity that far exceeds domestic needs. The value of this redundancy materializes during crises when selected supply chains are disrupted leading to unexpected stress on other ones. For example, during the pandemic, while civil aviation collapsed in the passenger domain, it spiked in cargo as e-commerce boomed and demand for critical medical supplies surged. The functional flexibility and high capacity of the GCC countries’ airports allowed for a much more seamless transition than that witnessed in countries with lower quality infrastructure, as exemplified by the operations of Bahrain’s award-winning international airport. It also meant that when passenger travel resumed, airlines such as Emirates and Qatar Airways were well-positioned to increase global market share while extra-regional competitors vacillated.
While the current crisis is characterized by a multiplicity of regional security threats, historically, the Arabian Gulf countries have been economically resilient because their foreign policies are designed to promote and secure peace. They have steered clear of the aggressive militarism exhibited by numerous countries in the region, and they have also denounced maximalist posturing during regional conflicts, preferring to play the role of regional facilitator and mediator, with Oman being especially effective in this regard. Even in outside crises, soft power efforts contribute to deescalation, such as Bahrain’s support for tolerance and peaceful coexistence, and the large humanitarian foreign aid delivered by Kuwait, Saudi Arabia, and the United Arab Emirates.
At the heart of these factors is a fundamental far-sightedness engendered by the Gulf countries’ monarchical political systems. Republican states within the region have suffered hugely due to uncertainty regarding leadership transitions, resulting in rash decisions such as the expropriation of foreign investors that undermine economic development. In contrast, the Gulf countries have always prioritized the sanctity of property rights, fostering an attractive and secure commercial climate. This also explains why the six states have resisted the temptation to operate a myopic monetary policy built on damaging seigniorage, in contrast to many other Middle Eastern nations.
History shows that for the GCC, crisis is often a catalyst for further refinement of the state apparatus. While neighbors may falter under the weight of reactive policies and political turnover, the Gulf monarchies’ commitment to economic predictability remains their greatest competitive advantage. In a region currently defined by volatility, this “constellation of factors” ensures that the GCC remains the exception to the rule: a zone of managed stability in a landscape of uncertainty.
Omar Al-Ubaydli, Director of Studies and Research
