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AEI.org: Sudan’s windfall from the Gulf and the perils of new development finance

Posted by: Berhane.Habtemariam59@web.de

Date: Thursday, 30 May 2019

Saudi Arabia and the United Arab Emirates announced on Sunday $3 billion of financial support in the form of $500 million in central bank deposits and a promised $2.5 billion in humanitarian support, including oil and gas transfers. In the delicate context of transition from 30 years of dictatorship under Omar al Bashir, some of those protesting for a full transfer of authority to a civilian government did not respond with gratitude to the announcement, reportedly chanting “Keep your money.” Their fear is that the influence of Saudi Arabia and the United Arab Emirates will entrench support for the military, at a moment that democratic politics are opening. But there are few countries in the developing world (or elsewhere) that can turn away such a substantial offer of direct support, with so few strings attached.

Protesters holding national flags shout slogans during a demonstration in front of the Defence Ministry in Khartoum, Sudan April 22, 2019. REUTERS/Umit Bektas

The phenomenon of Gulf Arab state support to a widening sphere of influence in the Horn of Africa, Middle East, and Pakistan is only growing in intensity. And since 2011, the exercise of economic statecraft, whether through direct commitments of financial support, promises of foreign direct investment, or in-kind oil and gas transfers, have been plentiful and from sources on both sides of the GCC political divide.

In the last 12 months, Saudi Arabia and the United Arab Emirates have committed $6 billion (each) to Pakistan, $3 billion to Ethiopia, $10 billion to Bahrain, $2.5 billion to Jordan, $830 million to Tunisia, $1 billion to Iraq. While the focus here is on the UAE and Saudi Arabia, Kuwait is a frequent donor and provider of cash deposits, and Qatar provided ample support to Egypt between 2011 and 2013, made inroads to financially support Sudan and Somalia, and has made commitments to buy Lebanese debt just this year.

Sometimes, these promises remain just that — words. The leverage that commitments create can be as useful as actual delivery of support. But what is certain is that there is a shift in sources of direct financial support to emerging markets, as balance of payments support or cash deposits to central banks to shore up currency value, favorable loans, or extensions of credit through debt purchases. The shift is away from international financial institutions like the IMF and World Bank, and from aid from the United States and the European Union. As I argued here, the new masters of development finance are China and the Gulf Arab states. In the Middle East, Horn of Africa, and South Asia, these two forces are often working in synergy.

And as I have written, this trifecta of aid, investment, and direct financial intervention is a form of economic statecraft. Its rationale is the security and prosperity of the donor/investor. Because the Gulf Arab states have recognized a vital nexus between development and security in their surrounding geography, the logic of supporting friendly neighboring governments to secure political allies combined with investing for their own food security, real estate ventures, and state-linked energy projects is strategic. Their methods are often highly personalistic, and can create ripple effects and instability in domestic politics of the recipient state, especially in states in the midst of political transition. It can also be wasteful. When one relationship fails, or the recipient leader/interlocutor is out of power, the process begins again.

Why is the delivery and source of development assistance shifting now?

The logic of development assistance after World War II has been based on a consensus that open markets are best able to deliver growth, and that leverage from international financial institutions to encourage liberalization and rule of law can nudge (or force) governments to make better economic choices. That advice has been largely successful, as the World Bank reports, at creating “remarkable and unprecedented progress in reducing extreme poverty over the past quarter century. In 2015, more than a billion fewer people were living in extreme poverty than in 1990. The progress has been driven by strong global growth and the rising wealth of many developing countries, particularly in the world’s most populous regions of East Asia and Pacific and South Asia.” The opening of China and the ignition of economies in South Asia, driven by a global consensus on the power of liberalization and access to finance, has changed the world. In fact, China’s access to World Bank loans, and more broadly, the advice of institutions of a global liberal economic order, have facilitated its growth.

Via The World Bank (2018) Piecing Together the Poverty Puzzle.

That advice has served the United States well over the last 70 years. American financial institutions have been providers of capital, facilitated foreign direct investment, and created new markets for their own products and culture. And now that consensus is experiencing a profound disruption, most visible in the Middle East and Africa.

The United States has failed to provide a leadership role advocating in defense of liberal economic institutions and rule of law as a basis for economic development and political order since the beginning of the Arab uprisings in 2011 and in the eight years since. Not only is the perception of American disengagement becoming a reality on the ground in the Gulf, there is a real vacuum of financial resources and the ideals to stand behind them in transitions across the Arab world. Multilateral lenders and aid providers are simply outclassed and out-bargained. Whereas international financial institutions have used their leverage in providing access to finance to encourage prudent fiscal policy, transparency, and rule of law to support a liberal economic order, Gulf Arab aid, investment, and financial support has only one string attached: access (and not even loyalty).

Development aid and finance as we have known it since the Bretton Woods system formed is now in danger. In a panel discussion I participated in last week at the Brookings Institution, Alex Rondos, the EU special representative to the Horn of Africa gave an interesting analogy — “we provide nutrition; they give cocaine” — to describe how Gulf states offer a quick and easy fix to financial vulnerability. This is compared to official development assistance by traditional donors like the EU and United States. The problem is that the Bretton Woods institutions, the United States, and the European Union are in no position to compete with the amount of financial support or the speed of its delivery that the Gulf Arab states can offer. The best scenario is partnership and engagement, and a strong advocacy for institutional support, rather than head of state relationships.

What has enabled the Gulf Arab states to project this financial power and influence?

Four key changes in the regional political economy have allowed this policy shift:

  1. The enormous growth of resources in a “magic decade” of high oil prices from 2003 to 2014, and accumulated savings and sovereign wealth which can now be deployed;
  2. A new generation of leadership in the UAE under Mohammed bin Zayed that is security and expansion-minded, with a vision for UAE leadership in the region — and which has been accompanied by a stronger security state and consolidation of federal power at the center of the government; Saudi Arabia’s generational shift came in 2015 with King Salman’s rocket empowerment of Mohamed bin Salman; and even in Qatar, with the 2013 shift from Emir Hamad to Emir Tamim, consolidated the Qatari penchant for regional foreign policy aid and interventionism;
  3. Post-2011 politics, which have justified this interventionist and expansionist vision as a counter to the Arab Spring’s direct threat to regime stability, paired with a sense of shifting geopolitical alliances in which America is less present, less reliable, and less understanding of the demands of Gulf leaders;
  4. The war in Yemen, which began in late 2014, with the UAE and Saudi Arabia engaging in March 2015, changed the calculus of independent defensive and offensive behavior. The war has only exacerbated a Saudi and Emirati perception of US disengagement from the region, heightened the threat from Iran, and justified shifts in both domestic and foreign security posture.

What do Gulf Arab states expect in return?

There is absolutely an expectation of return on investment from state projects in energy, infrastructure (including massive investment in ports development), and real estate. But there are also less expectations of policy shifts in recipient states. Because patterns of delivery tend to be rapid, negotiated on behalf of heads of state, and without institutional follow-up, there is a vulnerability in the sustainability of financial support. There is also a willingness on the part of Gulf Arab states to take a loss. Take for example, in April 2018 when the UAE abruptly canceled a training agreement with the Somali military and closed a humanitarian operation in the country, removing staff and shutting a hospital with little notice. The decision was based on a dispute over aid delivery at the Mogadishu airport and the treatment of Emirati military personnel. The sensitivity to slights, and the general lack of bureaucratic integration between donor and recipient is a vulnerability for this new style of development and humanitarian assistance.

Why does it matter?

Developing countries from Africa to the Middle East to Asia now have some interesting choices in development finance partners. Where the money comes from matters. First, sources of development finance create institutional consequences in the recipient state. Second, the deal-making of development finance creates political alliances that transcend the development transaction, and in many cases, can reinforce patronage networks and personalistic politics. Third, the efficacy of project delivery and its long-term viability, whether infrastructure investment in utilities or social infrastructure in health and education, depends on governance, competition, and the mutual benefits of rule-based markets.

Sudan’s windfall today will be tomorrow’s institutional challenge, to build open and rule-based markets that create jobs and provide food for its citizens.

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