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Aerial view of Dubai downtown at nightfall
Almost two decades ago, I made my first trip to the Persian Gulf. It was a starkly different place than it is now. Dubai International Airport was a single terminal. My Dubai hotel cost $25 a night, and old, traditional buildings still existed among high rises which are mere shadows of those which would come in the last decade. Doha was a quaint, dull town. Unpaved alleys and mud buildings still lined parts of Riyadh, and Bahrain—where I was working as an economic intern at the U.S. embassy—remained unmarred by Western fast food chains like McDonalds and Kentucky Fried Chicken.
Today, of course, the Gulf Cooperation Council (GCC) states are far different. They are banking and commercial hubs. The service industry thrives. Western universities and art museums rush to open branches. How did the GCC states transform themselves into international economic hubs with per capita incomes among the world’s highest?
The answer is not simply oil. After all, while Abu Dhabi has great oil resources, Dubai does not: Dubai produces now only between 50,000 and 70,000 barrels per day, less than one-fifth of what it produced 20 years ago. Today, Dubai accounts for only 2 percent of the United Arab Emirates’ total gas revenue. While Dubai’s wealth is obvious despite the global economic downturn, less than six percent of Dubai’s revenues come from oil and gas. Bahrain’s reserves are also slight, and shrinking. Today, Bahraini production is just 40,000 barrels per day. In contrast, the Kurdistan Regional Government reported oil exports in recent months of 160,000 barrels per day, and Barham Salih, the regional prime minister, said last month that exports might increase to 175,000 barrels per day. Both Dubai and Bahrain may easily exhaust their oil resources by the time babies born today enter college.
“The secret to Dubai and Bahrain’s success has less to do with the oil boom, and far more to do with their own battles with corruption two decades ago.”–Michael Rubin
The secret to Dubai and Bahrain’s success has less to do with the oil boom, and far more to do with their own battles with corruption two decades ago. Take McDonalds: Few enjoying a Big Mac or large fries think about profit margins, but no investor would put down the millions of dollars necessary unless they believed they would make a profit. At the same time, like Coca Cola and Starbucks, McDonalds is a marquee brand which promises not only financial reward but also prestige. Naturally, then, just as in Kurdistan, ruling family members wanted to be involved.
The problem was that while kickbacks to silent partners or “licensing fees” might normally be ten percent or so, royal family members expected twice that, a figure above the profit margin yet still only half that which regional leader Masud Barzani’s sons have demanded. Under such circumstances, the only way for foreign investors to break even was not to invest. While Bahrain, Dubai or, for that matter, Iraqi Kurdistan, might look like an impressive market to those living there, the fact is that there are dozens of markets emerging anywhere in the world at any time, and foreign investors will favor those which are least corrupt and most stable.
Change came to Bahrain, Dubai, and Qatar when leadership changed. The new leaders did not eliminate corruption, but they did not tolerate lawlessness or dysfunctional levels. As investor confidence grew, economies took off. In 2000, annual per capita income in Bahrain was just $12,000 in current dollars. By 2005, it was $18,000; and in 2007, it exceeded $27,000. Between 1995 and 2005, Dubai per capita income increased 94 percent, to $31,000. In the short-term, constraining corruption may have cost the leaders’ brothers and nephews some money, but in the long-term, they reaped far greater reward and, more importantly, ordinary people also grew wealthy, amplifying investment and bettering quality of life.
While Kurdish leaders liken themselves to Dubai, a better analogy might be to Turkmenistan. Turkmenistan may not be landlocked, but with its only coast on the Caspian Sea, it might as well be. Kurdistan might be more democratic, but in both it and Turkmenistan corruption has hampered economic development. Two decades ago, investors believed that Turkmen gas could be the future. The ultimate irony is that Kurdistan has attracted some of the same officials, a former American ambassador to Iraq among them, who once trumpeted Turkmenistan’s potential.
New travelers to Kurdistan may marvel at recent construction and shiny skyscrapers. They do not realize that the vacancy rate in these new properties hovers around 80 percent. The few tenants are government enterprises, not private companies. The Turkmen capital of Ashgabat, meanwhile, is famous for putting shiny glass or mirror veneers on decrepit old buildings. The effect is the same. Neither is able to hide fundamental economic and political problems for long.
If Kurdistan is to thrive, the leadership must get serious about tackling corruption. At present, investment is difficult without a Kurdistan Democratic Party (KDP) partner. Barzani’s sons demand extortionate amounts, and use the security service to punish those who do not make their payments. Foreign investors will not gain necessary permanents unless they pay signing bonuses up to $50,000, and acquiesce to a KDP appointee as their accountant. The biggest difference between Kurdish officials is not whether they are corrupt or not, but the degree to which they physically hurt people who get in their way. When I speak to Kurds, the only figure whom they consistently say is corruption-free is Najmaldin Karim, the governor of Kirkuk. While I do not care for Dr. Najmaldin—he was the one, after all, who spread the lie that I was a “Turkish agent” to blunt my criticism both of corruption and Kurdistan Workers Party (PKK) tactics—it is nonetheless to his credit that he has resisted the temptation to cash in on his position, even if he found political integrity more difficult.
The future may look bright in Kurdistan, but, oil alone will not grease Kurdistan’s transformation. If Kurdistan is truly going to become a new Dubai or Bahrain and bolster its wealth and living standards to first world levels, it must rein in corruption or change the leadership which refuses to do so.
Michael Rubin is a resident scholar at AEI
If Kurdistan is truly going to become a new Dubai or Bahrain and bolster its wealth and living standards to first world levels, it must rein in corruption or change the leadership which refuses to do so.
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© 2014 American Enterprise Institute for Public Policy Research