Coronavirus and the Arab Gulf States: Modernization Delayed?

David Des Roches, NESA Center, 29 March 2020

In a pandemic, there are three sources of societal damage. The first is damage from the disease; the second is damage from any panic which may accompany the disease, the third is economic damage due to the disease and the measures taken to contain it.

Government action can mitigate all three areas of possible damage:  competent authoritarian states are better equipped to mitigate pandemic damage than are democracies or incompetent states.

The Gulf Arab states find themselves at particular risk during this pandemic season.  First, their proximity to an incompetent authoritarian state (Iran) and their position either as global transportation hubs (Dubai, Abu Dhabi, Doha) or as destinations for pilgrimage (Saudi Arabia, Iraq) puts them at extreme risk for transmission of any infectious disease.

The potential damage for disease-related panic, which can be as low-level as the runs on toilet tissue in America or can be as extreme as sectarian violence directed against groups seen as responsible for the disease, is generally not strong in the Gulf States, with the possible exception of the weak state of Iraq.  Even there, pre-existing confessional divisions minimizes the prospects for the worst kind of panic.  The strong role of the state in the economies of GCC countries has helped to mitigate any panic buying of supplies or runs on banks.

It is the third area – long-term economic damage in the wake of a pandemic – which is the most dangerous for the Gulf Arab states.  All of these states have sought to move away from a hydrocarbon-based economy: all of their plans for economic diversification are outward-looking and require outside investment.  In all of these countries, the government plays a much bigger role in the economy than is the case in the West.  Unhappily, pandemic-induced economic stress is coming at the same times as historic low oil prices, further limiting the options for state support of the economy.

If the government handling of the pandemic is seen as less than efficient, or if government information is suspect, this would be a long-term negative effect upon investors.  Tourism dependent development – such as Neom in Saudi Arabia or vacationing in the three air transit hubs – will be the first to suffer as vacationers take their discretionary dollars elsewhere.  Foreign investment will look at the government pandemic mitigation efforts, and transpose government action (or inaction) into economic risk models.  If Gulf government health policies are seen as ineffective or providing an advantage to one group over another, then foreign capital will either flee the Gulf or demand a higher return for investment.

The three regional long-haul airlines are particularly at risk. Their operating model was under stress prior to the pandemic:  it is questionable if any of the three (Emirates, Etihad, Qatar) will survive the expected decline in global travel absent major state intervention.

Capital is a coward:  a pandemic is scary enough.  Enticing foreign investment to the region will require a flawless government response and sustained engagement in the wake of the crisis.

The views presented in this article are those of the speaker or author and do not necessarily represent the views of DoD or its components.