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Growing Cities in the Arabian Desert

Author: Lee Hudson Teslik
June 4, 2008

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Saudi Arabia recently announced plans to build a tower one mile high (Times of London), more than twice the planned height of the Dubai Tower, which is still under construction but is already the world's tallest building. The Saudi proposal comes as part of an audacious series of projects aiming to overhaul the economic order on the Arabian Peninsula. The region contains three of the world's biggest oil producers in Saudi Arabia, the United Arab Emirates, and Kuwait. Qatar, Saudi Arabia, the U.A.E., and Oman also rank as important natural gas producers. All these states are undertaking steps to make their economies more flexible and sustainable, yet experts say the transition period comes laden with risk.

Growth in non-oil sectors is already well underway among the region's oil industry heavyweights. Factor out Saudi Arabia's oil revenues and you still find strong and accelerating growth. The trend holds across the peninsula. Non-oil sectors in the six states of the Gulf Cooperation Council (GCC), the regional trade bloc, averaged around 7 percent annual growth in the past half decade, more than double the growth rate of the U.S. economy during the same period. The spectacle of commercial expansion shines most brightly in Dubai, the U.A.E. trade hub and financial center. Saudi Arabia now seeks to duplicate Dubai's success. The country is in the process of constructing six new economic cities, which it says will contribute $150 billion to the country's GDP, increasing it by nearly 50 percent. Kuwait, Qatar, and other GCC states are also planning commercial expansion, though on a smaller scale.

Although this growth comes outside the oil industry, it would not be possible without oil revenues. The more than ten-fold increase in the price of crude over the past decade has left Gulf economies flush with cash. They invest some of this money abroad, through vehicles like sovereign wealth funds. The lion's share, however, is still held in reserves. A recent paper by CFR's Brad W. Setser says these reserves continue to rise despite an increase in outgoing investment and are enough to make the region a "new financial superpower."

The drive for domestic economic development comes from necessity, however. A briefing from McKinsey Quarterly notes that in some GCC states, including Saudi Arabia, population growth is outpacing oil production, suggesting standards of living will fall if Riyadh doesn't develop new means of employment. Concerns about labor market stability are exacerbated by the large number of migrant workers in the region. These workers are often granted short-term visas and are forced to leave once they finish a specific project—but analysts still wonder whether an economic blip might bring labor unrest (CNN). Youssef Ibrahim, a risk analyst and former correspondent for the New York Times, notes in an interview that only about 1.5 million of the U.A.E.'s 5.5 million people are citizens. The rest are migrant workers.

More broadly, countries like Saudi Arabia are keenly aware of the possibility that rising crude prices might boomerang and hurt them. The Economist notes that a run-up in oil prices in the 1970s in fact brought harm to Gulf nations by throwing the West into a period of stagflation and inducing a twenty-year slump in oil prices. An editorial in the Middle East Times notes that periodic price collapses aren't actually all that bad for Gulf economies, in that they wipe out competition in alternative energies. Yet experts say rising global energy demand, spurred by emerging China and India, mitigates the likelihood of another price dip on that level. Given this dynamic, the greater fear for GCC states may be the long-term limitations of oil supplies. PostGlobal notes Abu Dhabi is already funding solar energy development. Regional sovereign wealth funds have made notable investments in wind power as well, perhaps envisioning a future where oil, while still dominating global energy markets, must increasingly share the economic stage.

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