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Oil in the Gulf
Obstacles to Democracy and Development
Edited by
DANIEL HERADSTVEIT Norwegian Institute of International Affairs, Norway
HELGE HVEEM University of Oslo, Norway
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© Daniel Heradstveit and Helge Hveem 2004
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher.
Daniel Heradstveit and Helge Hveem have asserted their right under the Copyright, Designs and Patents Act, 1988, to be identified as the editors of this work.
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British Library Cataloguing in Publication Data
Oil in the Gulf: obstacles to democracy and development
1. Petroleum industry and trade - Persian Gulf Region
2. Democratization - Persian Gulf Region 3. Persian Gulf Region - Politics and government 4. Persian Gulf Region Economic conditions
I. Heradstveit, Daniel, 1940- II. Hveem, Helge

320.9’53
Library of Congress Cataloging-in-Publication Data
Oil in the Gulf: obstacles to democracy and development / edited by Daniel Heradstveit and Helge Hveem.
p. cm.
Includes bibliographical references and index. ISBN 0-7546-3968-1 x-
-1. Persian Gulf Region-Parities and government-20th century. 2. Persian Gulf Region-Economic policy. 3. Democracy-Persian Gulf Region. I. Heradstveit, Daniel,

1940-II. Hveem, Helge.
DS236.O352003
, 320.953~dc22
ISBN 07546 39681
2003058289
Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire
tf£0
Contents
List of Figures and Tables vi
List of Contributors vii
Introduction 1
Daniel Heradstveit and Helge Hveem
1 The Predicament of the Gulf Rentier State 9
0ystein Noreng
2 The Future of the Saudi Arabian Economy: Possible Effects
on the World Oil Market 41
Adne Cappelen and Robin Choudhury
3 The Reformist Movement in Iran 63 Mehrzad Boroujerdi
4 The Psychology of Corruption in Azerbaijan and Iran 72 Daniel Heradstveit and G. Matthew Bonham
5 Energy Supply as Terrorist Targets? Patterns of ”Petroleum Terrorism”

1968-99 100 Brynjar Lia and Ashild Kj0k
6 Shi’i Perspectives on a Federal Iraq: Territory, Community and
Ideology in Conceptions of a New Polity 125
Reidar Visser
1 Understanding the Complexities of the Gulf: Concluding Remarks 167
Helge Hveem
Index 177

List of Figures and Tables
Figures
Figure 2.1 Figure 2.2 Figure 2.3 Figure 2.4 Figure 2.5
Figure 5.1 Figure 5.2 Figure 5.3
Government budget balance and revenues 45
Employment of Saudis and non-Saudis. 1,000 persons 48
GDP and total consumption per capita. 1,000 SR. Baseline 51 Government debt and net foreign assets. Per cent of GDP. Baseline 51 Government debt (left axis) and net foreign assets (right axis).
Baseline and policy reform. Per cent of GDP 54
Distribution of physical targets 104
Domestic and foreign group involvement in petroleum terrorism 113
Distribution of groups responsible for terrorist attacks 114
Tables
Table 1.1 Population and oil output 1970, 1985 and 2000 21 Table 2.1 Main effects of the policy reform scenarios. Deviation from
baseline scenario 55
Table 2.2 The world oil market. Baseline scenario 57 Table 2.3 The market grab scenario. Absolute changes compared to baseline 59
Table 4.1 Causal explanations of corrupt behavior in Azerbaijan 79
Table 4.2 Causal explanations of corrupt behavior in Iran 83 Table 5.1 Political regime and the occurrence of petroleum
terrorism 1972-99 119
List of Contributors
Dr. G. Matthew Bonham is Professor of Political Science and Chair of me international Relations Program in the Maxwell School of Syracuse University. He has held academic positions at the University of California, Berkeley, andthe School of International Service of the American University. He has published three monographs, 14 referred journal articles and 10 chapters in anthologieSi including ”Attribution Theory and Arab Images of the Gulf War” (with Daniel Heradstveit), Political Psychology, 17 (1996) and ”The Limited Test-Ban Agreement Emergence of New Knowledge Structures in International Negotiation” (with Victor Sergeev and Pavel Parshin), International Studies Quarterly, 41 (1997).
Mehrzad Boroujerdi is Associate Professor and Director of Graduate Studies in the Department of Political Science at Syracuse University’s Maxwell School of Citizenship and Public Affairs. Most recently, he has been a scholar-ij-residence at the Middle East Institute in Washington, DC. Boroujerdi is the author of Iranian Intellectuals and the West: The Tormented Triumph of Nativism (Syracuse University Press, 1996), general editor of the series Modern Intellectual md Political History of the Middle East at Syracuse University Press and the book review editor of the International Journal of Middle East Studies.
Adne Cappelen is Head of the Research Department at Sta%jcs Norway. An economist by profession, he has researched and published exterisiveiy on macroeconomic issues. In his research for Petropol, he has applied his expertise to the case of Saudi Arabia, using data not usually accessed by researchers. Among his recent publications are several chapters in books on economic jnd social issues: The Economic Challenge for Europe (Elgar, 1999) and Evolutionary Economics and Income Inequality (Elgar, 2001).
Robin Choudhury is an adviser at the Research Department of Statistics Norway, where he has been working on the development of macroeconometric models. Since 2001 he has held a 20 per cent position, spending the re^ ofhis working hours at EDB Fellesdata developing software for the banking sector. He is an economist from the University of Oslo, Norway. More recently he j^s also done work for the Ministry of Planning in Riyadh, Saudi Arabia.
Daniel Heradstveit is Professor and Senior Research Associate at the Norwegian Institute of International Affairs. He has been Ford Foundation Fellow at Stanford and Harvard Universities and held positions as Professor of International Relations at Johns Hopkins University, Bologna, and Professor of Comparative Politics at the

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University of Bergen. Heradstveit has also served as a consultant and political analyst for the Norwegian oil company Statoil. He is the author or co-author of 11 books on the Middle East, semiotics and political psychology. His most recent book is Democracy and Oil: The Case of Azerbaijan (Reichert Verlag, 2001).
Helge Hveem is Professor of Political Science at the University of Oslo. He served as Chairman of the Board of the Petropol program at the Norwegian Research Council from 1996 to 2001. Hveem has published extensively on the geopolitics of natural resources, including The Political Economy of Third World Producer Associations (1978), and on the political economy of globalization and regionalization processes. He is represented in a wide range of anthologies during the last few years. He has been Visiting Professor at the European University Institute in Florence and the University of Bordeaux.
Ashild Kj0k is a Researcher at the Norwegian Defence Research Establishment, where she works for the Terrorism and Asymmetric Warfare Project. She has an M.I.A. in Middle Eastern and Security Studies from Columbia University. Kj0k is the editor of Terrorism & Human Rights After September 11 - Towards a Universal Approach for Combating Terrorism and Protecting Human Rights (Cairo Institute for Human Rights Studies, 2002).
Brynjar Lia is a Research Fellow at the Norwegian Defence Research Establishment, where he heads the Terrorism and Asymmetric Warfare Project. He was a Visiting Fulbright Scholar at the Center for Middle Eastern Studies at Harvard University 2001-02. Lia has published works on political Islamic movements as well as contemporary terrorism. He is the author of The Society of the Muslim Brothers in Egypt 1928^2: The Rise of an Islamic Mass Movement (Ithaca Press,

1998) and co-author of the forthcoming book Globalisation and the Future of Terrorism: Patterns and Predictions (Frank Cass, 2003).
0ystein Noreng is TotalFinaElf Professor of petroleum economics and management at the Norwegian School of Management. He is also a consultant to the IMF, the World Bank and numerous governments and oil companies. Noreng has researched and published extensively on petroleum markets and resource policies, national oil companies and other aspects of industry organization. His book Oil and Islam (Wiley, 1997) is today an authoritative book on the subject. Noreng has just completed a new book, Crude Power, published by I.B.Tauris & Co. (2002).
Reidar Visser is a Research Fellow at the Norwegian Institute of International Affairs. He recently completed his doctorate at the Faculty of Oriental Studies, University of Oxford.
Introduction
Daniel Heradstveit and Helge Hveem
Why this Book?
The world has grown accustomed to hearing politicians talk about promoting democratic values outside their own territory. Today we are witness to radical changes in the United States, where even neo-conservatives have enthusiastically adopted what used to be the terminology of the Left - civil society, rule of law and democracy - and now propose to apply this discourse to Iraq.
Some argue that the real reasons for the war in Iraq are to be found elsewhere, primarily in the establishment of a new regional power-base for the United States. They contend that Washington’s new desire to introduce democracy in Iraq is merely a rhetorical device to maintain and strengthen the legitimacy of US policy in the Gulf - a kind of psychological warfare ultimately as transparent as the codename for the war, ”Operation Liberate Iraq”.
Unlike those critics, we are willing to take US decision-makers at their word and give them the benefit of the doubt. The task of nation-building and promoting stability in the region will not be easy, however, and the United States has an obligation to make a sincere effort. Will this create a ”window of opportunity” for democratic forces in the Gulf? It seems too early to say. This is a region where the rule of law and democratic norms are particularly weak. The building of civil societies in the Gulf is a daring venture, and many people are justifiably skeptical.
We hope that this book can inject into the debate new knowledge about political and economic forces, including the complex relations between oil, politics and economic development, the role of religion, cultural factors, and, above all, the mentality of the people themselves. The oil-producing countries of the Gulf need modernity and its values, to help them deal with the problems their oil economies are creating. And yet, any political system that can manage its oil wealth for the common good - as opposed to enriching a small elite - is likely to find itself on a collision course with local traditions. The result may well be frustration, alienation. .. and a backlash that benefits anti-democratic forces.
The main purpose of this volume, which consists of seven chapters written by contributors from a range of disciplines, is to offer an original analysis, based on new research, of the relationship between domestic political forces, religion, culture and identity, the role of the petroleum industry, economic development, and geopolitics in the core region of the global oil industry. In today’s world, many of the old rules no longer apply. Once, the great powers might have fancied that they could contain and control domestic politics in the Gulf, as elsewhere - but this is no

2. Uil in me Uulj: Obstacles to Uemocracy and Uevelopmenl
longer the case, unless they also change their views of the region. The mentalities that are shaping international affairs today, especially in the West, project a world view that has failed to take adequate account of the Iranian revolution of 1979, the Palestinian intifadahs, and recent revelations that the al-Qaida network has been largely recruited from a growing opposition in Saudi Arabia.
Prospects for Democracy
What are the main obstacles to democratic development? Where do we find the best prospects? These issues can be observed in the cases of Iran and Iraq.
Generational conflicts characterize the region, not least in these two countries. There are the uneducated but rich old people, the frustrated middle-aged people, and the educated ”but impoverished and largely disenfranchised young people. The three groups have been molded by very different formative political experiences: for the first group, it was independence from the colonial powers, for the second the 1967 Arab defeat in the Six-day war with Israel, and for the third, the Gulf War. In particular the last is taken by the younger generation as proof that the West is bent on keeping them down.
In contrast to Iran, the question is whether post-war Iraq can move from dictatorial secularism to a renewal of Islamist rule. A key determinant for the future of Iraqi politics will be developments within the country’s majority Shi’i community. This is also the field of Iraqi politics where the gap between US policies and the wishes of the population seems greatest, thus adding to the potential for instability in the future.
Writing on the Shi’i Islamist parties and their attitudes to the territorial integrity of the modern state of Iraq, Reidar Visser points out that historically separatist options or schemes for a merger with Iran have been of only marginal importance for the Shi’is. In fact, their reluctance to challenge the territorial integrity of the country has been such that many Shi’i Islamist parties have been unenthusiastic even about the various schemes for a future Iraqi federation which materialized during the 1990s. However, a new and more radical current within Shi’i politics emerged in Iraq during the final years of the former regime, and this political movement was considerably strengthened by the security vacuum that followed in the months after the fall of Saddam Hussein. Largely based in the urban areas where it enjoys substantial support among the urban poor, and with close links to hardliners in Iranian and Lebanese politics, this new tendency in Iraqi politics looks set to become one of the less predictable forces in the years to come, with a potential for challenging traditional Shi’i approaches even to the Iraqi state as such.
In his chapter on Iran, Mehrzad Boroujerdi notes that, although the outcome of the series of Iranian elections since 1997 has given the world hope that a modified democracy was right around the corner, the continued factional deadlock has forced us to think again. Boroujerdi’s depressing conclusion is that the battle is still undecided. Both Khatami’s power and the popular mandate are being marginalized by a
Introduction 3
clergy that claims a monopoly on knowing the will of God. And what are the people and their elected president compared with Him? Boroujerdi brings to the surface the eclectic qualities of Iranian politics that are often lost on Western analysts unfamiliar with its nuances and complexities, and explains why Iranian politics should not be reduced to a case of a power struggle between two men, President Khatami and Supreme Leader Khamenei. He maintains that the revolutionary slogan, ”Islam is the solution”, has now been emptied of meaning and lacks the power to mobilize the younger generation. Nevertheless, Boroujerdi offers us a glimpse of hope by pointing out that Iranian society is undergoing a rapid and fundamental transformation, from a traditional-authoritarian to a modern-democratic society. If neighboring Iraq goes democratic, this will probably strengthen democratic forces in Iran - and this could be the straw that breaks the back of the ”theocratic camel”.
Daniel Heradstveit and Matt Bonham focus on the new strategy pursued by foreign oil companies in the field of human rights and corporate social responsibility. Western companies have come under pressure from activists at home to become forces for good in the corrupt and autocratic states where they pump oil. However, an oil company is not a political reform association - it is a corporation formed for the purpose of finding, extracting and distributing petroleum; it is staffed by engineers and financial officers, who do not necessarily understand the local culture and the policy instruments necessary to promote the political and moral values of Western countries.
Western oil companies can become a positive influence, but they must first make up their minds to do so. Up to now their motto seems to be, ”We take care never to be mixed up in corruption, we can do no more than that”. Or: ”We are not corrupt, corruption is part of the local culture, we’re against it but we’re not responsible”. Measured against the ethical codes now being formulated by the most progressive multinationals, such thinking is obsolete. Heradstveit and Bonham point out that Western oil companies have moral responsibility to become more transparent if, as respondents in Azerbaijan and Iran assert, their activities have led to increased corruption. There is much to suggest that the Western oil industry is perhaps unknowingly and inadvertently - indirectly helping to maintain this culture of corruption, and as a consequence, supporting forces that work against secularization and democratization in both Azerbaijan and Iran.
The oil companies, however, should not have to take all of the blame for the culture of corruption found in most oil-producing companies. The political leadership is directly responsible for the pervasive corruption that enslaves its inhabitants, impedes economic growth, erodes respect for law, destroys social cohesion and prevents the development of democratic institutions. The political leadership of Azerbaijan and Iran should look to other countries that can serve as models, such as Slovakia and Latvia, where the top leadership has displayed the willingness to eliminate corruption. They have appointed anti-corruption committees and commissioners to enhance the effectiveness of investigation procedures and to amend the tax, labor and penal laws. Honest officials are rewarded. In Azerbaijan and Iran, such a step would represent a radical break with

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tradition. As long as the top political leadership remains hopelessly corrupt, honesty may seem a lost cause, but it is worthwhile to take the offensive.
The research of Heradstveit and Bonham also suggests that the local mentality needs to be changed, especially in Azerbaijan. Here, Iran can serve as a model. Instead of blaming corruption on ”the system” - an attribution that makes any effort to change seem impossible - people in Azerbaijan should shift the focus of their understanding to dispositional factors, which are easier to control and manipulate. In Iran, for example, elites tend to see corruption as being caused by individuals, rather than by the culture or the system. Armed with this dispositional perspective, they feel more empowered to make changes, by simply exposing and removing the corrupt individuals. Such an attributional pattern is exactly the type of understanding that is associated with modern secular democracies.
The Prospects of Economic Development
Paradoxically, one major obstacle to economic development and to establishing some degree of a true market economy in the Gulf could be the predominance of oil. As gold may have been destructive to Spain some centuries earlier, and diamonds still plague parts of Africa, so may oil be a curse and not a blessing to the people of the Gulf region. In general, a monocultural export economy is not the best basis on which to base long-term economic development or a functioning market economy. According to 0ystein Noreng, the economies of the oil-producing states are a ”predicament”, because oil first brought prosperity and then unmade it. The combination of an economic monoculture, a rising population and political rigidity is presenting the countries of the Gulf with the difficult choice between painful reform and ultimate collapse.
A Gulf country is typically a rentier state - a protected concessionary and distributive economy directed by the elite or the clan through control of the state apparatus. In such an economy, citizens expect to receive gifts rather than earn their income through exchange in the market. Although these countries differ greatly, the course of the ”rentier cycle” is similar: first the rentier state is established, creating a new class, then the technocracy is consolidated, third the ruling class hangs on in the teeth of mounting opposition, and finally (seen so far only in Iran) the new class is overthrown. In the 1970s, the oil states appeared to outsiders well managed and economically promising. But then two big price hikes brought revenues that led to conspicuous consumption but bypassed the groups that were already underprivileged, while rapid population growth meant that per capita oil revenues actually fell sharply.
The paradox is perhaps most visible in the case of Saudi Arabia. Adne Cappelen and Robin Choudhury present three alternative economic and political scenarios for that country. The first scenario is. one of no change at all: this is unsustainable and therefore unlikely. The second is a measure of reform, not least in connection with entry into the World Trade Organization (WTO), including
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privatization or at least deregulation of, for example, transport and telecommunications, measures to diversify the economy and the introduction of tax. However, there will be no solution to the problem of falling per capita GDP without female emancipation, which still seems unlikely.
The third scenario they identify is an ”oil market grab” following a failure of liberal reform. Such an outcome has been considered for OPEC as a whole, meaning a huge production increase. However Cappelen and Choudhury find that a market grab on the part of Saudi Arabia alone would be more feasible, as the kingdom has a capacity for a huge increase at little cost - but such a strategy would mean the end of OPEC and Arab unity. After the war in Iraq, some representatives of the occupation power have indicated that Iraq could be taken out of OPEC in order to finance a speed-up of reconstruction. Such a move would probably be even more politically controversial in the Gulf and could cause devastating harm to OPEC.