Market Forces Versus Smart Policy: How Much Credit to Sultan Qaboos for Oman’S Oil-Derived Development?

Working Paper Market Forces versus Smart Policy: How Much Credit to Sultan Qaboos for Oman’s Oil-Derived Development? Jim Krane, Ph.D. Wallace S. Wilson Fellow for Energy Studies © 2021 by Rice University’s Baker Institute for Public Policy. This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and the Baker Institute. Wherever feasible, papers are reviewed by outside experts before they are released. However, the research and views expressed in this paper are those of the individual researcher(s) and do not necessarily represent the views of the Baker Institute for Public Policy. INTRODUCTION1 Oman was among the world’s least-developed countries when it began exporting oil in 1967, under the rule of Sultan Said bin Taimur al Bu Said. For three years, the fiscally conservative ruler received a new and plentiful flow of revenue. The next year, Said announced the first development plan since coming to power in 1932. He would build a port, hospitals, roads, a girls’ school and utilities.2 Before Sultan Said’s plans could be completed, the 59-year-old monarch was overthrown. In July 1970, a British-led coup brought Said’s 29-year-old son Qaboos to power. The projects launched by Sultan Said would be completed by Sultan Qaboos, a more profligate spender who leveraged the oil industry established under his father to fund a major increase in development spending. The change in income and leadership shifted Oman onto a trajectory of rapid modernization. The sultanate entered a renaissance period that propelled it from medieval isolation into the ranks of advanced countries, with indicators documenting enormous advances in life expectancy, education, and infrastructure. Oman has since become known as the Switzerland of the Middle East, as much for its aesthetically pleasing urban evolution as for its political neutrality. This paper seeks to determine the key events and decisions that contributed to this outcome. How much credit should be given to Sultan Qaboos and his increased willingness to spend, and how much to factors outside his control, particularly the discovery and export of oil shepherded by his father? How much should be attributed to factors under British influence? Further, Oman’s positive experience is often cited as evidence of an oil “blessing” rather than the “curse” documented in other oil exporters. Is this assessment realistic? Has Oman suffered effects of the so-called “oil curse?” Among its findings, this paper argues: 1) Oman's development depended on British diplomatic and military assistance in centralizing Sultan Said’s control over geographically dispersed oil gas fields. These fields were outside the area governed by the sultans of Muscat before 1955. 2) The successful development of an oil sector in Oman also owes itself to decades of perseverance and strategic policymaking by Sultan Said, along with foreign investors willing to accept substantial political and geological risk. 3) Major changes in the terms of trade in global oil markets were a crucial factor. Earnings from Oman’s oil exports more than sextupled within four years of the 1970 coup, providing the incoming sultan with an unexpected windfall that supercharged an already willing expansion of fiscal policy. 1 This paper was written for inclusion in the forthcoming book Sultan Qaboos and Modern Oman, 1970–2020 edited by Allen James Fromherz and Abdulrahman al-Salimi (Publishing with Edinburgh University Press, 2022) 2 The Word of the Sultan, cited by J.E. Peterson, Oman After 1970: A House of Cards Transcended (IB Tauris, 2022); Ch. 4, 9-10. 1 4) The improved rent flows provided cover for Sultan Qaboos’ early missteps in oil sector administration that saw declines in Omani production. 5) Qaboos’ early commitment to development spending synergized perfectly with the increase in oil rents, ensuring rapid economic expansion and improved quality of life. Timing of the 1970 coup was also important. Oman’s oil income rose nearly 20-fold during Sultan Qaboos’ first decade in power. Historical documentation of Sultan Said’s fiscal and social conservatism suggests that, presented with a similar opportunity, he would have been less willing to spend so freely. By 1986, as international oil prices and revenues declined with the onset of a nearly two-decade bust, Qaboos had sufficiently institutionalized new governance and spending practices and defeated a virulent insurgency in the Dhofar region. Just fifteen years after the coup, Oman was already a very different country. AN OMANI RESOURCE CURSE? While this paper is mainly concerned with recognizing and attributing the institutional milestones of Oman’s oil development, it bears mentioning that the Omani oil “blessing” makes it something of an outlier. That experience is not shared by many other oil exporting states, including some of Oman’s neighbors, which endured “resource curse” effects such as reduced economic growth, currency appreciation and Dutch Disease effects on employment and exports, institutional deficiency, reduced opportunities for women, oppression of minorities, militarization and war. In some ways, Oman did fall victim to the oil curse. The sultanate has not transitioned to democracy. Sultan Qaboos diverted substantial shares of resource revenues to finance weapons purchases and procure himself a lavish palaces and a private jet. Five decades after the 1970 coup, Oman’s economy remains volatile, due to dependence on oil and gas exports and their swinging valuations. Women are still underrepresented in the workplace and governance, while Omani society retains rent-seeking expectations toward state subsidies and employment. But Omanis might not see the “curse” in Qaboos’ tenure. Oman, the most extreme and persistent case of pre-oil underdevelopment in the Gulf, leveraged oil in transformative ways not associated with the resource curse. So, while oil rents financed a proportionally large defense budget, oil did not make Oman more warlike. Rather, Sultan Qaboos leveraged oil rents to end a civil war and, later, to mediate between other warring parties in the region. Oil rents improved national infrastructure and institutions in public health and education. Oil wealth helped create a national identity and add more than 16 years to average life expectancy. Resource booms can provide temporary cover for mistakes in policymaking, as demonstrated in Venezuela under Hugo Chavez. But these mistakes are often exposed when oil market prices fall. Oman’s oil-financed development model showcases a more durable path, that of a leader who leveraged a boom to make spending choices that prevailed over the long run, and converted Oman into a developed country. INITIAL DATA AND BENCHMARKS Although pre-1970 data on Oman is inadequate, the available indicators show that Oman was a development laggard in comparison with the oil-producing countries around it. Oman had much lower 2 life expectancy in 1960 and 1970 (42.7 years and 50.3 years, respectively), versus that in the United Arab Emirates (51.5 and 61.2), Kuwait (59.3 and 65.7) and Qatar (61.1 and 68.1).3 School enrollment was also far lower in 1971, with just 2.8% of school-age Omanis attending in 1971 versus 80% in the UAE, 89% in Kuwait and more than 100% in Qatar, where older Qataris were also enrolled. By 1980, Oman had jumped to 49% while the UAE increased more modestly, to 91%. Enrollment in Kuwait and Qatar that year was again above 100% due to older students seeking formal education.4 Oman’s late start is an important part of the story. Where oil discoveries started in 1930s in Bahrain, Kuwait, Qatar and Saudi Arabia, and the 1950s in Abu Dhabi, oil in Oman did not come on stream until the 1960s. The late start meant that Oman’s early oil production occurred on far more generous fiscal terms than that of the neighbors. In this sense, Oman contrasts sharply with Bahrain, another state with a small endowment. Bahrain saw its oil largely depleted over more than 40 years of production by western IOCs, before the sector was nationalized in 1975-78. Oman’s partial nationalization occurred just seven years after exports began. From the very beginning Omanis enjoyed higher oil prices and a larger share of the profit. The charts below depict energy indicators dating to the period before and after the 1970 coup. Oman’s energy consumption, oil production, and oil exports all trailed those of the neighbors, which provides an alternate view of the late start to national development. Importantly, Omani oil production lagged during the crucial boom period of 1973-85.5 3 World Bank, World Development Indicators, March 2021; Life Expectancy at Birth (total years); https://data.worldbank.org/?locations=OM-AE-QA-KW 4 World Bank, World Development Indicators, March 2021; School Enrollment, primary (% gross); https://data.worldbank.org/?locations=OM-AE-QA-KW 5 Global oil prices rose from $3/barrel to $12 in 1974 and averaged nearly $37 in 1980, before falling below $20 in 1985 and remaining low until 2004. BP, “BP Statistical Review of World Energy 2020,” statistical report (London: BP, June 2020), https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world- energy/downloads.html. 3 Figure 1: Primary energy consumption in Oman remained at very low levels througH 1980; Source: BP 2020 As Fig. 1 shows, overall Omani energy consumption remained extremely low under Sultan Said’s rule, rising only modestly after the coup. Omani energy demand remained relatively flat through 1980

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