NEAR EAST AND SOUTH ASIA REVIEW

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP05S02029R000300940002-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 44
• Document Creation Date: December 27, 2016
• Document Release Date: May 24, 2012
• Sequence Number: 2
• Publication Date: July 17, 1987
• Content Type: REPORT

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Directorate of c
Intelligence
Near East and
South Asia Review
NESA NESAR 87-017
17 July 1987
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Near East and
South Asia Review
Articles The Soviet Union and the Libyan Succession: Limited Influence) 1 25X1
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Over the past 10 to 15 years Libya has become increasingly
dependent on the Soviet Union, particularly in the sphere of military
assistance. Although this may give Moscow some influence over
domestic political events in Libya, it is insufficient to ensure the
installation of apro-Soviet regime there.
Moroccan Arms Buyers Get a Green Light
In 1985, King Hassan pledged to spend $1 billion in five years on
military modernization to sustain the Moroccan armed forces'
mobility and firepower in Western Sahara and avoid increased
combat casualties. In the past year Morocco has signed agreements
for arms deliveries for nearly half this amount, doing much to meet
the military's needs.
In response to an unexpected political backlash the Israeli Cabinet
recently overturned aLikud-backed plan to impose atwo-tier
university tuition fee structure that discriminated against Israeli
Arab students. Despite the reversal, Israeli Arab discontent has
been aroused, and Labor will seek to exploit this in the next election
campaign.
Secret
NESA NESAR 87-017
/7 July 1987
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North Africa-Middle East: Battling the Soft World 19
Phosphate Market
Slack demand and low international prices have forced the region's
phosphate industries to implement austerity measures to reduce
production costs. Despite efforts to expand capacity and pursue
aggressive marketing strategies, governments in the region will be
hard pressed to maintain sales because demand is unlikely to
increase soon.
The Gulf states have failed in their effort to develop their economies
on the Western model largely because of cultural and political
values that conflict with Western standards. The Gulf states'
inability to build a vigorous economic base beyond oil prevents them
from becoming important long-term players in the global economy.
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The UAE Armed Forces: Building Cooperation, But Still No 33
Integration
The historically separate armed forces of the United Arab Emirates
are beginning to cooperate in some areas, but the smaller emirates
will continue to resist pressure from Abu Dhabi for full integration.
Pakistan: A Qualified Success in Absorbing F-16s
Islamabad's F-16s have scored several combat kills, but the
Pakistani Air Force has experienced its share of problems in
assimilating this advanced and complex fighter aircraft. The F-16s
have also proven unable to deter violations of Pakistan's airspace
from Afghanistan.
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India: Growing Trade With Western Europe
Trade between India and Western Europe has increased
dramatically over the last decade in part as a result of Prime
Minister Gandhi's economic liberalization program. The recent
trade expansion probably will strengthen India's productive base,
but the widening trade gap could prompt Gandhi to reinstitute
import restrictions.
Some articles in the Near East and South Asia Review are preliminary views oj'a
subject or speculative, but the contents normally will be coordinated as
appropriate with other o.~ces within CIA. Occasionally an article will represent
the view oja single analyst; an item like this will be designated as a
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Near East and
South Asia Review
The Soviet Union and the Libyan
Succession: Limited Influence
Ove;r the past 10 to 15 years Libya has become
increasingly dependent on the Soviet Union. This is
particularly true in the sphere of military assistance.
Although this dependence may give Moscow some
influence over domestic political events in Libya or a
succession, we do not believe it is sufficient to ensure
the installation of apro-Soviet regime there.
In our judgment, Qadhafi's removal by assassination
or coup would result in an intense-and possibly
bloody-power struggle among several competing
factions. These include:
? Qadhafi's relatives and tribesmen, who hold most
kf;y military and security posts but represent a small
tribe requiring allies to retain power.
? Nationalists in the armed forces, who have domestic
prestige and popularity but have so far been checked
by Qadhafa control of the instruments of power.
? Exiled dissidents, who have been unable to establish
much of a following in Libya, but whose long
opposition to the regime and ties to the middle class
may allow them to influence the succession.
? Radicals in the revolutionary committees, who are
most committed to Qadhafi's ideology but are riven
wiith tribal and personal rivalries and despised by
most of the population-including the Army-for
their abuse of power.
Libyya's dependence on the Soviet Union makes it
unlikely that a successor government dominated by
any of these groups-or, more likely, a coalition of
two or more-would try to break ties to Moscow in
the near term. If apost-Qadhafi regime hostile to the
Soviets should emerge in Libya, we do not believe the
Soviet investment there is so great that Moscow would
try to remain by force, nor is the Soviet presence so
pervasive that they could easily do so. The
longstanding Soviet ties to Libya, however, especially
with the military, may provide Moscow with avenues
to influence a succession struggle or to attempt to
subvert a hostile successor.
Soviet Relations With Libya
The US Embassy in Moscow reports that the Kremlin
views Qadha~i as erratic and unpredictable. It has
resisted signing a friendship treaty with Libya and
rebuffed Qadhafi's requests to join the Warsaw Pact.
Perhaps indicative of the Soviet attitude is the remark
of a Soviet official in 1981 who was reported by the
press to have said "one should not forget that Colonel
Qadhafi is a Muslim fanatic, with all that implies."
It is not clear how seriously the Soviets take Libya's
geostrategic position. They have avoided investing
much political or economic capital in Libya compared
to South Yemen or Syria. We believe, however, that
Moscow harbors a desire for secure access to
Mediterranean ports-the US Embassy in Moscow
reports that the Soviets value the Libyan port calls
made by their ships-and Libya could offer more
extensive access to the Soviets. When under US
pressure, Qadhafi has publicly threatened to offer
such access, but he has failed to follow through.~~FX~
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At the same time, the Soviet Union has sought
economic links to Libya that may also provide
Moscow some influence.
nonmilitary economic links between Libya and the
Secret
NESA NESAR 87-017
17 July /987
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Secret
Soviet Union and its allies increased during Qadhafi's
second decade in
in world oil prices.
have periodically deployed on a temporary basis to
Libya to collect against the US Sixth Fleet. The
Soviets probably share some of this intelligence with
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economic an
trade ties between Libya and the Soviet Union were
growing closer. In addition, Libya is a profitable
source of oil and hard currency for the Soviets,
according to the US Embassy.
The Soviet Presence
We estimate that about 1,500 to 2,000 Soviet advisers
and technicians provide essential instructional,
planning, and maintenance assistance to Libya's
military establishment. They are found in the Army
and Air Defense Force down to the battalion level, in
Libya's military schools, with many Navy and Air
The Soviets have had a profound influence on Libya's
military planning. For example,
~he Libyan Army has reorganized along Soviet
lines, with battalions and brigades similar in size and
composition to their Soviet counterparts. A Libyan
contingency plan to attack US AWACS aircraft over
Egypt, appeared
similar to Soviet contingency plans to deal with
AWACS over Europe.
In 1986 the Soviets were especially active in the
Libyan Air Defense Force. Early in the year
the Soviets built Libya's
first SA-5 surface-to-air missile complex to defend the
Gulf of Sidra. Following the US airstrikes on Tripoli
and Banghazi in April 1986, Soviet technicians
repaired the missile defenses that had been damaged
in the raids. Since then we believe the Soviets have
assisted the Libyans in improving their control of
their present air defenses, but they have not provided
Tripoli with new weapon systems.
Soviet naval units were also present in Tripoli before
and after the US raids in a limited show of support for
Libya. At the same time other Soviet naval units were
involved in intelligence collection on the US and
NATO fleets in the Mediterranean. Soviet IL-38
antisubmarine warfare and reconnaissance aircraft
the Libyans.
Despite the significant impact the Soviets have had on
Libya's military readiness, strategy, and tactics, we
believe they do not have a significant role in Tripoli's
decisions regarding when and where to employ its
forces. In our view, Colonel Qadhafi tries to protect
his independence of action from Moscow and takes
care not to be seen as a Soviet puppet. Early in 1986
the Soviets recommended that the Libyans not engage
US aircraft in the Gulf of Sidra with the new SA-
SS-advice that was ignored two months later.
Moreover, the Libyan intervention in Chad almost
certainly was mounted without heeding Moscow's
preferences
We believe the nonmilitary Soviet presence in Libya
is too small and restricted to play an important role in
influencing a Libyan succession struggle.
and civilian advisers in Libya is only 2,500, which
suggests Soviet nonmilitary advisers amount to about
500. the civilian
Soviet presence is not concentrated in key areas.
ost Soviets and East European
civilian personnel in Libya are working in medical
Soviet Capabilities
Soviet capability to influence a Libyan succession
would depend on which groups came to the fore in the
struggle to replace Qadhafi. In our judgment, a
successor regime dominated by radicals from the
revolutionary committees might prove resistent to
Soviet influence. Qadhafi's ideological canon, the
"Green Book," is openly hostile to Communism, and
we believe many members of the revolutionary
committees share this hostility. For example, senior
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revolutionary Musa Kusa has privately criticized the
Soviiets for their lack of militancy. Some of the more
radical members of the Qadhafa tribe, such as
Miliitary Revolutionary Committee chief Muhammad
Majidhub, may harbor similar contempt toward the
Soviiets.
Similarly, most of the Libyan exiles are conservative
nationalists or Islamic activists and would be unlikely
to turn to Moscow for support. Their lack of serious
support in Libya probably would make them
unattractive to the Soviets in any event.
Moscow's extensive and longstanding training of
Libyan military personnel and its military advisory
contingent in Libya suggest it may have some
influence among regular armed forces officers and
some Qadhafa tribesmen. Although the Libyan Army
is likely to play an important, if not decisive role in a
succession struggle, we believe Soviet advisers are too
few and scattered to take control of the Libyan
military and swing it into action. In addition, some
Libyan soldiers may well resent the Soviet presence in
Libya for political or cultural reasons. The execution
in February 1987 of several Libyan soldiers for,
among other offenses, plotting to attack Soviet
personnel underscores the extent to which some
Libyans are motivated by antipathy to the Russians.
Nonetheless, the Soviets at a minimum probably have
used their military contacts to identify Libyan officers
likel'.y to assume key political positions in a post-
Qad.hafi regime. Moscow probably also has acquired
potentially valuable information on these officers'
views, leadership skills, and lifestyles to use in
deve;loping apro-Soviet faction in the military. Such
information, combined with intelligence obtained
from agents the Soviets almost certainly have in place,
could help them exploit the uncertainties resulting
from Qadhafi's removal. Moscow could also use its
access to Libyan military personnel to warn the
regime of a coup if the Soviets believed a change in
regime was against their interests. The apparent
inability of the Soviets to detect preparations for the
coup in South Yemen in 1986, however, underscores
the limits of Soviet intelligence capabilities, and it is
quite possible the Soviets could be similarly surprised
in Libya.
Possible Soviet Actions
Moscow's willingness to use its assets in Libya is a key
unknown. The Soviets might adopt await-and-see
approach, believing their interests would be preserved
by continued Libyan dependence on Soviet military
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reduced enthusiasm for more arms purchases or
greater opportunity to obtain weapons from Western
suppliers, thus forcing the Soviets to choose between a
more active effort to court the successor regime or
accepting diminished influence.
We cannot rule out a more active Soviet response to
Qadhafi's ouster, particularly if Moscow believed a
pro-Western regime was about to take power. In that
case, Soviet advisers could signal their interest in
supporting pro-Soviet elements within the Libyan
military, hoping to improve the position of their
friends in the political infighting that almost certainly
would follow Qadhafi's removal. Libyan
revolutionaries, despite their ideological dislike of
Communism, also might turn to Moscow for
protection against less radical elements.
In the event a new regime, for whatever reason,
decides to order out the Soviet advisers, it is unlikely
that the Soviets would choose to stay by force. The
Soviet Union's cautious military response to the US
airstrikes on Libya and the collapse of the Libyan 25X1
campaign in Chad suggest that Moscow is unwilling
to commit its own combat forces to defend Libya. We
doubt that Soviet willingness would increase
significantly in the case of an internal coup.
Nonetheless, as noted above, the Soviets could seek to
call on their allies and agents in the Libyan
Government to prevent a new regime ousting them or
to subvert it if it did order them out
Almost any regime that succeeds Qadhafi is not likely
to order a Soviet withdrawal from Libya. We cannot
identify any important elements within the Libyan
armed forces, the Qadhafa tribe, or the revolutionary
committees that are more friendly to the West than
they are to Moscow. The growing Libyan dependence
on the Soviet Union, particularly in the area of
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military assistance, probably would ensure that any
successor would maintain good relations with
Moscow, at least until it could broaden its sources of
supply for military equipment and training. Moreover,
because the initial post-Qadhafi period in Libya is
likely to be marked by political infighting and
instability, a new regime probably would not be
inclined to create problems with the Soviet Union at
the same time that it is trying to assert political
control in Libya.
Implications for the United States
Clearly, the absence of a large US official or
nonofficial presence in Libya diminishes US
capabilities to affect a Libyan succession struggle,
especially in comparison to the assets available to
Moscow. Nonetheless, the limits of Soviet influence in
Libya should provide Washington at least some room
for maneuver in the event Qadhafi dies or is ousted. In
particular the dearth of effective Soviet economic
assistance to Libya-particularly in the petroleum
sector-may provide avenues by which Washington
could establish a relationship with a new Libyan
regime. In our judgment, almost any successor
government in Tripoli will be eager to garner popular
support by reversing Qadhafi's austerity policy and
providing more consumer goods.
At the same time, Qadhafi's removal is not likely to
lead to a sudden reversal of Soviet fortunes in Libya.
A successor regime could reverse the trend of growing
Libyan dependence on the Soviet Union, but it would
be unlikely to end the military dependence in the near
term. Although the worst-case scenario-the
emergence of apro-Soviet Marxist regime in Libya-
is unlikely, we believe Moscow will retain
considerable influence in Libya even in a post-
Qadhafi period.
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Moroccan Arms Buyers
Get a Green Light
In 1985, Morocco's King Hassan publicly pledged to
spend $1 billion in five years on military
modernization. The need for modernization is real.
Morocco's forces in Western Sahara must be
substantially refurbished to sustain their mobility and
firepower and avoid a substantial increase in
Moroccan combat casualties. When he made his
prornise, the King did not appear to have the funds to
carry out the program. Since June 1986, however,
Morocco has signed about $400 million dollars worth
of agreements for arms and military equipment.
Deliveries already made based on these new contracts
will? in our view, do much to relieve Morocco's most
urge;nt needs in the Western Sahara war.
Rabat has long
pursued a contract for two squadrons of modern jet
fighters-US-built F-16s or French-built Mirage
2000s. Such an acquisition could go far to redress the
imbalance between Morocco's and Algeria's air forces
as well as enhance Morocco's prestige as a potent
regional power. Rather than choosing this $550
million item, however, Rabat has signed more than a
doze;n smaller contracts for trucks, light artillery,
armored vehicles, and the like, totaling about $400
million.
Rabat's decision to buy more mundane force
sust,ainment items before the glamorous fighter
aircraft stems from several factors:
? It was easier to finance several smaller purchases
than a single massive fighter contract, even though
the total price tags were similar. Indeed, we believe
a 1'ew of the agreements, such as the Spanish
upgrading of the Casablanca naval base, were
signed because financing was available.
? TI~e efficiency of operations in Western Sahara
would be at risk, in our view, if Morocco did not
replace or repair many of the vehicles there that are
nearing the end of their useful lives. Operations to
defend the berm-the 1,300 kilometer earthen wall
that Morocco uses to control four-fifths of Western
Sahara-depend upon the Army's use of trucks,
land rovers, and armored personnel carriers to
rapidly reinforce points being attacked by the
Polisario Front. Should such tactics falter because
of equipment unavailability, the Polisario could
score successes that would embarrass Rabat and
hurt Moroccan military morale.
? It was probably easy for Rabat to put aside its plans
to acquire fighter aircraft for a short time in the
absence of an immediate Algerian threat. Rabat
probably also calculated that, even if a conflict with 25X1
Algeria were to break out tomorrow, F-16s or
Mirage 2000s would not be sufficient, by
themselves, to turn the fight in Morocco's favor. 25X1
Furthermore, as much as two years will be required
between contract signature and operational
employment of these aircraft in the Moroccan Air
Force.
Why Is the Military So Blessed?
The magnitude of Morocco's arms purchases over the
last year almost certainly makes it the largest element
of Rabat's capital expenditures for 1987.' That the
King would put such a high priority on the military at
a time of general cuts in other budget areas reflects
his sensitivity to the potential threat from a
dissatisfied military as well as his interest in using the
military to relieve some of his country's most pressing
economic and foreign policy concerns.
Modernizing and refurbishing Morocco's armed
forces are ways to avoid significant disaffection of his
officers, which we believe is among King Hassan's
highest priorities. The military was the source of the
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NESA NESAR 87-0/7
17 July 1987
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two most serious coup attempts of his 26-year reign
(in 1971 and 1972) and remains the organization most
able to dethrone him. Since 1972 the King has
prevented a repetition of these attempts by combining
effective security measures with a program to co-opt
the military. He has striven to satisfy military leaders
that he has earnestly prosecuted the 11-year-old
Western Sahara war and faithfully tended to the
country's defense needs in the face of the perceived
long-term Algerian threat.
Many of the new military contracts Rabat has signed,
including those for vehicles, night vision devices,
artillery, ordnance, and surveillance gear, are
intended to help avoid tactical setbacks in Western
Sahara. Rabat has publicly claimed victory,
dismissing the Polisario Front as little more than a
nuisance. Any large Polisario victory on the
battlefield would humiliate Rabat and gain the
guerrillas adherents as they demonstrate their
military viability, even though the guerrillas have
little chance of shaking Morocco's military grip on the
disputed territory. The materiel acquisitions also are
intended indirectly to bolster morale among
Moroccan troops by helping to keep down their
casualties at the front.
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Rabat also has needed to make military purchases to
support the expansion of the Moroccan armed forces,
over 3,000 Moroccan soldiers, according to the US
Embassy in Morocco. Fresh contributions from the
Saudis and the UAE appear to have been agreed to in
June 1986, although the amounts involved remain
unclear. We believe that it is no coincidence that the
first large contracts under Morocco's new military
modernization program were signed less than two
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ordered by the King in November 1985.
the military is being
bolstered by 30,000 men. The expansion probably is
intended in part to man the 450 kilometer extension of
the berm in Western Sahara, completed last April.
We believe it also is intended to reduce Morocco's
bur?;eoning unemployment, getting 30,000 men off
the streets.
A fe:w of the new agreements almost certainly are
viewed in Rabat as economic investments. Morocco's
purchase of Spanish and probably Danish patrol
boats-in the absence of a real maritime threat-
probably is intended to police Morocco's fertile
fishing grounds more effectively. This, in turn, could
increase revenue for Rabat by compelling more
foreign fleets to buy licenses to fish the waters and
more violators to pay fines. In another example, a
$1.4 million contract for US aircraft arresting gear
may be intended to attract use of two northern
airfields b US or other NATO forces, according to
the Morocco's own
airc:ra t lan t sere without arresting gear. Rabat's
likely intent is to offer occasional foreign use of the
fields in return for foreign funding for their
maintenance and improvement.
Financing for most of the agreements
has been provided by European and Arab banks and
consortiums, according to Moroccan and Spanish
publlications, but we lack details on how Morocco
plans to repay these firms. There are two strong
possibilities, in our view-Gulf donations (from Saudi
Arabia, the United Arab Emirates, or both) or the
shifi:ing of funds within Morocco's already tight
budget. These sources are not mutually exclusive.
GuU~Donations. Saudi Arabia and the United Arab
Emirates have been sources of significant revenue for
Rabat over the years. Riyadh, for example, funded
Rabat's purchase of F-5 jet fighters and OV-10
reconnaissance aircraft in 1980. The UAE has paid
weeks after visits to Rabat by the Saudi Crown Prince
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King Hassan agreed in the summer of 1986 to train
UAE airmen and technicians on Mirage F-ls in the
United Arab Emirates and Morocco,
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certainly involved a sizable financial commitment to
Rabat, although it is not clear whether rumors are
true that Morocco will receive some two dozen
Mirage 2000s for the service. An indication of the
importance of the relationship to Rabat was received
last May, when a
pilot trainees are
getting F-1 flights in Morocco ahead of some
Moroccan trainees because of a severe shortage of
operational aircraft.
New funding from the Saudis almost certainly also
has been received, although its magnitude again is
unclear.
orocco has agreed in principle
to form a strategic reserve force for Saudi Arabia,
probably in response to Riyadh's fear of the Iranian
threat. The Saudis in turn agreed to provide economic
development assistance, oil, and funding for
Moroccan military modernization (excluding F-16s
and Mirage 2000s),
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Although the tap may have been opened on Gulf
donations to Morocco's military modernization
program, there are indications that the amounts are
either much lower than Rabat received in the salad
days of the late 1970s or are earmarked for contracts
that remain unsigned. Between 1977 and 1982 the
Saudis gave the Moroccan military as much as $350
million per year. Were the influx of funds to Rabat
even close to that now, we would anticipate that it
would have already signed an F-16 contract.
Wides read critical arts shortages
or example, that 16 0 21
tr orce gusta e 6 helicopters are unflyable
for want of parts-almost certainly would have been
resolved if foreign funds were so extensive
Juggling the Moroccan Budget. If Gulf donors have
not been generous, Rabat's new military purchases
could have been made by shifting funds from other
parts of the Moroccan budget. This would have been
made palatable in part by attractive financing
provided for the purchases from Spain, which account
for over three-fourths of the contracts signed since
June 1986.2 The King may have been willing to move
forward with modernization if his agents could
negotiate repayments of $100 million or so per year
for the contracts signed so far. We believe he would
regard that sum as justifiable in view of his interest in
satisfying his military leaders and preventing tactical
setbacks in Western Sahara. Indeed, even $200
million per year may not seem excessively
burdensome next to Rabat's existing $15 billion debt.
' As part of a 1983 deal giving Spain fishing rights off Morocco,
Rabat received afive-year loan of $550 million
More Purchases in the Cards
We believe the trend of the last year will continue,
with Rabat making careful use of increased-but still
limited-funds for military modernization. Satisfying
the military's most basic equipment needs will remain
a prime concern for the King, impelling him to spend
another $550 million to meet his $1 billion target by
1990. Rabat can ease the pace set in the last year and
still meet the goal. If, as appears likely, Saudi Arabia
and the United Arab Emirates contribute $100-200
million annually to this effort, purchases almost
certainly will include a new generation fighter
aircraft.
Army. Although the Moroccan Army has received the
lion's share of the purchases made in the last year-
$286 million out of $432 million-it is not likely to
match this rate over the next three years unless it
comes under serious pressure in the Western Sahara
war. Another $200 million in purchases through 1990
would be adequate, in our view, to ensure the Army's
transport and firepower needs for sustaining its
dominance of Western Sahara without increasing the
Moroccan casualty rate.'
Officials of the US Embassy in Rabat note that some
Moroccans have already expressed dissatisfaction
with the quality of the Army's new Spanish trucks. It
appears that they may not be up to the rigors of
service in Western Sahara and may have to be
replaced by 1990. Whether or not an expensive truck
replacement is needed, it does not appear likely that
Rabat will have the funds to meet the Army's desire
for two battalions of new US-built M60A3 tanks-
total cost $345 million-under this five-year plan.
They probably can afford, however, a much cheaper
acquisition of older M48A5 tanks-a request for 100
was made to the Pentagon recently.
Air Force. Major Air Force purchases are likely. The
Air Force accounted for only 7 percent of the
purchases since June 1986, a rate that General
' This sum is for military modernization only and does not include
such expenses as upkeep, military pay, ammunition replacement,
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Secret
Kabbaj, the influential Air Force chief, will not long
tolerate. Kabbaj may have implemented strict
austerity in Air Force purchases to amass the backing
for an F-16 purchase, realizing that, once that
package is signed, there will be little funds left for
anything else.? Of all Morocco's military leaders, we
beliE;ve only Kabbaj has enough influence with King
Hassan to obtain such abig-ticket item as F-16s and
then. ask for supplemental funding to cover more
munidane Air Force requirements. Among the latter
are spares for Mirage F-1 and F-5 aircraft and for the
Agusta Bell helicopters, at least a few new C-130
transports, and stand-off radar surveillance planes,
f there is
no breakthrough on the purchase of F-16s or Mirage
2000s, the list of these second-echelon items almost
certainly will be expanded and approved, and they are
likely to account for at least $300 million in purchases
through 1990.
Mirage 2000, although he has publicly claimed that the Moroccan
Navy. We anticipate few additional purchases by the
Moroccan Navy in the next few years. The contracts
signed in the last year address Rabat's interest in
better control of its fishing grounds for economic
reasons. Before Rabat signs contracts for many more
patrol boats, it probably will want to see a return on
its investment. In addition, King Hassan is not likely
to approve contracts for larger warships when
Morocco faces only a slight naval threat. Most new
contracts for the Navy probably will relate to ship
upkeep and additional improvements of the
infrastructure ashore, perhaps totaling less than $100
million by the end of 1990.
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Secret
Israel: Jewish-Arab
Relations Flounder
Thc; Israeli Cabinet recently overturned its highly
controversial decision to impose discriminatory
university tuition fees in response to public and Labor
Party pressures. The original decision, enacted to ease
severe financial problems at Israel's universities,
imposed a tuition fee of $1,050 per year for students
who have served in the armed forces, who are almost
exclusively Jewish, and $1,550 per year for students
who have not served, predominantly Arabs. The two-
tier policy generated a political backlash probably
unexpected by its Likud initiators and ultimately led
the Cabinet to rescind its decision. Instead one fee of
$1,200 for all students was set for the 1987-88 school
year. In the wake of the controversy, Israeli Arab
disc;ontent with the Israeli Government has been
aroused, the financial outlook for Israel's universities
is clouded, and Likud's image may have been
damaged.
to set their own tuition fees, but in recent years their
growing dependence on state aid has given the
government a leading role in this area. Education
Ministry and university officials declared that the
two-tier structure would not produce sufficient
income to allow universities to continue operating
and, without additional funds from the education
budget, would undermine the higher education
system.
The government's ruling setting fees at $1,200 for
every student seems to have appeased university
concerns about discrimination, but the amount may
not be enough to ease the universities' financial
problems. The Cabinet's reversal does not address
how the system will survive with student fees that are
$480 per student less than the university
recommendation and $180 per student below last
year's level.
ThE; two-tier policy outraged Israeli Arabs, Labor
Party officials, and Labor-affiliated Jewish student
leaders, who attacked it for discriminating against
Israel's Arab citizens. Arabs are barred by
government policy laid down in the early 1950s from
serving in the Israel Defense Forces because of
security reasons and humanitarian regard for Arabs
who might have to serve against Arab brethren.
About 3,700 Israeli Arab students would have been
affected by the unequal fee structure-4 percent of
Israel's 75,000 university students. Government
officials expressed surprise when both Israeli Arab
andl Jewish students protested in mid-May against the
disc;riminatory policy on the campuses of Ben Gurion,
Haifa, Hebrew, and Tel Aviv universities.
Israeli university administrators supported the Israeli
Arab students when the Committee of University
Heads threatened to defy government attempts to
impose atwo-tier fee structure. Rather than impose
higher fees for Arab students, the Committee
declared it would increase fees to $1,680 for all
students unless the government increased its higher
education subsidies. Israeli universities have the right
Hebrew University Ferment Over Tuition Fees
On several occasions in March, April, and May,
Hebrew University students in Jerusalem protested,
at times in violent confrontations with police, any
attempt by the government to increase tuition fees.
The demonstrators, who at times totaled 4,000 Arab
and Jewish students, contended that the 10-15 percent
of the university budget they must contribute through
tuition fees was caused by the university's financial
mismanagement and government cutbacks, and they
called for a reduction in fees to $800 per year. The
revised program setting fees at $1,200 seems to have
mollified student fears about tuition increases,
although, with universities out of session for the
summer, reactions are difficult to monitor.
The widespread campus disapproval of the Israeli
Government's unfair treatment of Israeli Arab
students suggests surprisingly evenhanded attitudes
among large numbers of Jewish students. Many of the
Secret
NESA NESAR 87-0/7
17 July 1987
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Secret
Jewish students who had decried proposals to increase
tuition in March and April came out again in late
May to protest the unequal treatment of fellow Arab
students even though Jewish student fees would have
been reduced by $230.
In addition, Hebrew University students voted in
record numbers in late May to elect Labor-affiliated
student union leaders. With a voter turnout of 48
percent-up 25 percent from 1986-the Ofek list
backed by Labor and allied parties won 60 percent of
the vote, while the Gilead list backed by Likud gained
17 percent. According to the US Embassy, the
massive Labor victory at Israel's most hawkish
university-after a 10 percent drop in Labor votes
there in the 1986 student union election-underlined
the students' emotionally charged repudiation of the
Likud-sponsored two-tier fee structure.
Labor Party leaders were quick to point out that the
results signaled a continuing drift of Sephardic Jewish
students from Likud to Labor. Likud-affiliated
students had maintained control of student councils
throughout the country until about two years ago
when Labor-backed lists began to win university
student union elections. Although the student
population does not always reflect the national
electorate and roughly half did not vote, we believe
the outcome this year suggests broader political
trends. This year's high turnout and Labor's clear
victory appear to confirm increasing support for
Labor among young, university-educated Israeli
voters.
Labor Maneuvering
By exploiting student criticism of Likud's ethnic bias,
Labor may have gained new leverage nationally. With
Likud forced to back down on this issue, Labor's
position could increase its support within the Israeli
Arab community-a sector of the electorate Labor
has courted assiduously in recent years.
Labor, moreover, has seized high moral ground by
posing as a defender of human rights and higher
education-a position likely to appeal to both
moderate and left-of-center Jewish voters. Labor
leaders may try to exploit Likud's record on
minorities-particularly, the Israeli Arab
community-as part of their campaign for the next
national election, now scheduled for November 1988.
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North Africa-Middle East:
Battling the Soft World Phosphate
Market t
Slack demand and low international prices have
forced the phosphate industries of North Africa and
the Middle East to implement austerity measures to
reduce production costs. The phosphate industries in
the region, however, are also expanding mining
capacity, upgrading equipment and processing
facilities, and pursuing aggressive marketing
strategies to survive in an increasingly competitive
world market, earn foreign exchange, and maintain
domestic employment. Despite these measures,
governments in the region will be hard pressed to
maintain sales because world phosphate demand is
unlikely to increase in the near future.
Background
Morocco, Jordan, Tunisia, Israel, and Syria are the
largest producers of phosphates in North Africa and
the Middle East and also rank high among world
phosphate producers. Algeria, Egypt, and Iraq also
produce small quantities of low-grade phosphates-
about 1 million metric tons per year each-mostly for
domestic use.
High phosphate prices in the mid-1970s led many
Western countries to reduce their demand. As
demand continued to fall in the early 1980s,
phosphate prices fell from $42 per metric ton in 1982
to $34 in 1986. Prices probably will remain depressed,
declining by about $1.50 per metric ton this year,
according to phosphate experts. The relatively lower
prices, however, have done little to stimulate demand.
World demand for phosphate rock fell to about 87
million metric tons in 1986-about 3 percent lower
than in 1985 and almost 7 percent lower than in 1984.
The: downturn has been steepest in Western Europe
and the United States-key markets that have a long
history of phosphate fertilizer application but have
'The phrase "phosphate market" refers largely to the market for
phosphate rock. Phosphate rock describes minerals occurring
naturally with high concentrations of calcium phosphate, usually
mixc;d with other compounds such as calcium carbonate. The
phosphate market also includes the products made from phosphate
rock.
built up large reserves of phosphates in their soil,
according to experts on the phosphate market. Some
Western agricultural experts believe that the
phosphate level in the soil is high enough to permit
phosphate fertilization to be reduced. Western
consumers also appear to be increasingly conscious of
the negative impact of phosphate products on the
environment and are substituting other chemicals for
them.
Phosphate rock and derivatives represent over 40
percent of merchandise exports in Morocco and
Jordan, according to US Embassy reporting. We
estimate that about 80 percent of Middle Eastern
phosphate sales currently go toward manufacturing
fertilizers. The balance is used to make animal feed
additives, detergents, and a range of phosphate
compounds with industrial applications.
Regional Trends
Retrenchment. The weak demand for phosphate rock
has forced Middle Eastern and North African
producers to address problems in their phosphate
industries, including mismanagement and large debts.
Phosphate companies in the region are beginning to
introduce new methods to increase productivity and
reduce operating costs. Strategies include:
? Replacing conventional, expensive equipment with
more efficient excavating machines.
? Closing mines and delaying some new projects.
? Introducing washing equipment to remove
contaminants-such as calcium carbonate-to
produce high-grade phosphate concentrate.
? Switching from expensive underground mining
methods to open pit mining, which is significantly
less labor-intensive.
Overstaffing and high labor costs are problems in the
phosphate industry. As many as half of the workers in
the industry throughout the region are unnecessary or
underqualified, according to diplomatic reporting.
Secret
NESA NESAR 87-0/7
17 July 1987
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PHOSPHATE RESERVES
World Total = 36,000,000,000
Jordan
Tunisia
Israel
Syria
USSR
Other
Countries
US
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Cornpanies keep employees on, however, because of
strong union pressure and government policies to
reduce unemployment. For example, workers at a
closed mine in Jordan remain on the payroll, and most
have refused to transfer to other mines, according to
the US Embassy in Amman. To reduce costs, Tunisia
will try to cut employment over the next two years at
the Gafsa mine by offering 2,500 workers pensions
and disability payments.
Modest Expansion oJMining and Downstream
Actiivities.Z Despite depressed world prices and
demand, phosphate producers in North Africa and the
Middle East continue to expand their operations-in
conltrast to the United States, where many phosphate
projects have been postponed. They are increasing
mining capacity and pursuing downstream activities
to itnprove market share and to achieve self-
suffi~ciency in domestic phosphate supply. We believe
downstream activities will be particularly important
for ;producers in the region to remain competitive in
the world market. Some producers are expanding
production capacity because they assume that the
phosphate market has bottomed out and that prices
will soon rise. If the market for phosphates remains
weak, however, producers will be faced with large
debts and idle equipment.
The investment in downstream activities is risky. For
instance, the manufacture of phosphoric acid requires
significant quantities of sulfur, the cost of which
varies widely and can represent over half of
phosphoric acid production costs. In addition, the
price of certain end products, such as Jordan's
diarnmonium phosphate, has dropped by nearly 50
percent in the past five years.
Morocco, the world's largest exporter of raw
phosphate rock and the third largest producer of
pho:>phate products after the United States and the
Soviiet Union, has invested heavily in downstream
activities. According to trade journals, Morocco's
long;-term strategy is to convert 35 percent of its total
phosphate rock output into higher value finished
Z Up?;rading raw phosphate rock into intermediate and finished
products, which have a higher market value than phosphate rock.
Products include phosphoric acid, monoammonium phosphate,
super triple phosphate, and fertilizers.
products by 1990 and to capture about one-third of
the world's total phosphate exports. Morocco's state
phosphate company-which mines, processes, and
markets Morocco's high-grade phosphate rock and
derivatives~pened a $1 billion phosphoric acid and
fertilizer complex in Jorf Lasfar during 1986. The
facility doubled the company's capacity to produce
phosphate products. Morocco probably will be able to
supply most commonly traded phosphate derivatives
by the end of 1987. Morocco also is developing new
mines in Khouribga, Youssoufia, and Western
Sahara.
Jordan-the world's third largest exporter of
phosphate rock-also is pursuing downstream
activities to increase its profit margin. The state
mining company acquired adebt-ridden fertilizer
plant in Aqaba during 1986. Government officials,
however, believe the world market will improve
dramatically and have recently completed two
technical feasibility studies with India and the Soviet
Union for expanding phosphoric acid capacity at
Aqaba. In addition, Jordan is negotiating a $31
million World Bank loan to help finance the first
phase of a $71 million mining project in Shidaya,
according to press reporting. Mining of up to 800,000
metric tons of phosphate per year could start by late
1988.
Israel increased downstream capabilities when it
installed a second crushing station and acoal-fired
purification kiln at the Nahal Zin and Oran mines in
1985 and plans to mine deposits in Bikaal to increase
phosphate rock production. Furthermore, aggressive
marketing strategies have enabled Israel to increase
fertilizer sales to $57 million in 1985 compared with
$49 million in 1984.
Seeking New Markets. Competition for phosphate
sales is fierce, with second-rank exporters such as
Jordan and Israel trying to enter, expand, or regain
markets, largely at the expense of the leading
exporters-Morocco and the United States:
? Jordan has offered generous credit terms to East
European countries. It recently offered Yugoslavia
six-month credit even though Yugoslavia is
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REAL PHOSPHATE ROCK PRICES FOR MOROCCO
19~ ~ 198 19~ 6 19~~ 19~~ 1g~9 19$~
1981 198 198 198 1988 ,98619$
chronically behind on its payments. Jordan's state
phosphate company also has offered Albanian
officials gold jewelry, clothes, liquor, and Western
consumer goods to facilitate contract negotiations,
according to the US Embassy in Amman.
? Israel's sales of phosphate rock increased steadily
over the last decade, largely as a result of breaking
into markets that once were the preserve of Morocco
and the United States.
Countries in the region are attempting to gain a share
of the Soviet market. The Soviet Union probably will
become a large importer of all kinds of phosphates
during the next decade, according to phosphate
market experts. The USSR is only slowly developing
its large reserves of phosphate rock, and Soviet
authorities predict a significant increase in demand
for phosphate fertilizers:
? Morocco shipped a small quantity of phosphate rock
to the Soviet Union in 1985, the first shipment of its
kind. The Soviet Union is the largest purchaser of
Moroccan phosphate fertilizer, according to the US
Consulate in Casablanca.
? Under an agreement signed late last year, Syria's
phosphate exports to the Soviet Union would reach
6 million metric tons by the year 2000, according to
Syrian press. In return, the Soviet Union would give
Syria equipment to boost phosphate production and
assistance to improve the railroad between inland
production sites and the harbor at Tartus.
41.81 38.26
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PHOSPHATE ROCK PRODUCTION
('000 Metric Ton)
55,000 ~
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5000
Jordan
....
~..ti ..............~.. J -Tunisia
- - - - - - - - - :-..-..-..-..~..,...~`:~..~r- f~~_ Israel
1977 1978 1979 1980 1981 1982 1983 1984 1985 1986
~ Consists of crude ore production (includes some substances
other than phosphate rock for all countries except the
US, whose production consists of "marketable production"
(contaminants taken out).
Includes the disputed territory of the Western Sahara
US
USSR
__~-
Morocco
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Phosphate Rock Sales,
1979-86 Thousand metric tons
1979 1981
1983 1985 1986
Israel NA N
A NA 4,029 3,785
Domestic
1,717 1,298
Exports
2,312 2,487
Jordan 2,730 3,5
20 4,319 5,451 6,140
Domestic
631 841 940
Exports 2,730 3,5
20 3,688 4,610 5,200
Morocco a 20,100 19,1
40 19,981 20,351 21,101
Domestic 2,233 3,5
04 5,328 5,561 7,405
Exports 17,867 15,6
36 14,653 14,790 13,696
Syria 1,261 1,0
70 1,189 1,164 1,649
Domestic 1
33 178 270 347
Exports 1,261 9
37 1,011 894 1,302
Tunisia 3,737 4,2
05 5,151 4,776 5,670
Domestic 2,220 3,1
59 3,943 3,648 4,477
Exports 1,517 1,0
46 1,208 1,128 1,193
Countries in the region have invested in private
fertilizer companies overseas to secure export
markets. For example:
? Jordan has agreed to purchase up to 10 percent of
the Thai National Fertilizer Company in return for
an equal percentage of the company's net profits
and guaranteed phosphate sales to Thailand of as
much as 750,000 tons per year for 10 years,
according to the US Embassy in Amman.
? Israel has invested in phosphate conversion facilities
abroad, such as the Amsterdam Fertilizers plant in
Holland.
countertrade. Some phosphate producers in the
region have used counterpurchase agreements to
obtain mining equipment, chemicals used in
downstream phosphate activities, military hardware,
consumer goods, and agricultural products. We
believe many potential traders, however, are wary of
countertrade deals involving phosphates because of
recent failures and the risk of financial loss because of
fluctuating prices for the bartered commodities. For
example, a Japanese trading company arranged and
financed athree-way deal in 1985 among itself,
Jordan's phosphate company, and a US firm. The
Japanese company has sold significant quantities of
phosphates at a loss, according to the US Embassy in
Amman.
Outlook
We believe that producers in the region will become
more aggressive in the phosphate market. Morocco, in
particular, probably will match price cuts by
competitors such as Jordan and Israel. Morocco may
try to negotiate countertrade agreements to increase
phosphate rock exports, especially to Eastern Europe
and the Soviet Union. Morocco almost certainly will
remain a major competitor of the United States in the
phosphate industry because of its extensive
infrastructure, its marketing experience, and its
substantial reserve base that is relatively easy to
exploit.
Jordan and Tunisia probably will continue using
aggressive marketing strategies-including
countertrade agreements-to boost phosphate rock
exports. It will be difficult, however, for them to
maintain sales. Stiffer competition from Morocco
probably will force Jordan and Tunisia to offer more
generous credit terms or even reduce the price of
phosphates to maintain their market shares.
Israel and Syria almost certainly will remain the
weakest in the group of major Middle Eastern and
North African phosphate producers. A high
proportion of their phosphate rock is low-grade and
has only marginal commercial value. Some countries
probably will be reluctant to purchase Israeli or
Syrian phosphates as the quality of their phosphate
rock continues to decline. Syria probably will rely
heavily on barter deals involving phosphates despite
its attempts to diversify exports, according to the US
Embassy in Damascus.
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We believe phosphate rock prices will continue to
decline this year and that countries in the region will
tire of the competition in pricing and marketing
strategies. As a result, they could turn to cartel
agreements to try to maintain or expand their roles in
the phosphate industry. Jordan's Deputy Prime
Minister Abd al-Wahhab al-Majali recently visited
Tunisia and Morocco to discuss coordination of
phosphate marketing by the three countries, which
togel:her supply roughly half of total world phosphate
exports. Successful coordination is unlikely, however,
because of mistrust between the parties, the lack of
opportunities for significantly raising profits in a slack
market, and the potential for price cutting. Past
attempts at bilateral coordination between Tunisia
and Morocco have failed. Even if countries in the
Middle East and North Africa did succeed in
coordinating their phosphate policies, we believe that
contiinued slack demand for phosphates would limit
their ability to significantly strengthen the world
market for phosphates.
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Economic Growth v. Economic Development
Per capita income is often used as an
indicator of a country's welfare. Some
economists criticize this measure.
however, because they believe it
quantifies economic growth rather than
economic development. The Physical
Duality of Life Index (P(iLI). was
designed to measure the level of economic
development achieved and averages the
infant mortality rate, literacy rate.
and life expectancy. In general there
tends to be a high correlation between
the two indices. In the Gulf, however.
per capita income is amongg the highest
in the world while the POLI is relatively
low. This discrepancy highlights tha1tt
~h~ Guff stat s ave ~~~umul~his wealth
u no yet ~u 1 ~'y ut i ize
to make widespread improvements in
public welfare.
Thousand US = POLI Index
90
80
70
60
50
40
30
20
10
0
PQLI
.C ~ C C- ~ W N
~ ; O e{''o ~ _
~ Y O Q
~
~ O
~ Y
~
C D!
~1 C
O
rl
L;
m Y
E ~ ~ Q =
O v Q=
O G
~ Y
O
C C
~
N
_
~
!~ _
~
7
l0
10
N
N
Per Capita Income 100
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Paradise Squandered
During the 1970s oil boom, the Gulf states' set out to
develop their economies on the Western model-
diversified, industrialized, market economies with
active private sectors. Against this standard they have
failed. Although several Third World countries with
fewer resources-both natural and financial-have
been. able to use their comparative advantage to
compete successfully in the world market and
catalyze economic development, the economies of the
Gulf' states have idled.
Dependence on Vitamin W. 2 In our view, the most
profound obstacle to the Westernization of the Gulf
economies is the importance that is placed on
maintaining a national patronage system, even at the
expense of efforts to maximize national wealth.
Nepotism, influence peddling, conflict of interest, and
bribery-factors viewed as debilitating to free-market
economies in the West-are all central and
sanctioned aspects of economic life in the Gulf.
Efficiency and objectivity in business and economic
practices are, as a result, subordinated, particularly
because a patronage system is geared to ensuring
Many features of the cultures and political systems of
the (sulf states are incompatible with the type of
economic model they seek to impose. The motivating
force in Western economies is profit maximization,
while the driving force in the Gulf states is
maintenance of a national patronage system that
distributes the available wealth. As a result, we
believe that they will remain unable to build a
vigorous economic base beyond oil and create the
independent internal dynamic that would allow them
to dictate their own prosperity or become important
long-term players in the global economy. Moreover,
the one-dimensional and inherently unstable nature of
these economies will limit the ability of the Gulf
state;s to enhance their value to the West.
Obstacles to Development
Duriing the past decade the Gulf states have used their
oil wealth to build aWestern-style infrastructure.
They probably believed that by importing the goods
and services necessary for economic growth and
development they could telescope the process while
controlling its pace. Instead, these efforts have
produced the shell of a developed economy without
the :>ubstance. They have been unable to add depth to
theirs economies and largely continue to ignore the
underlying problems that have led to their failure.
political control, not economic growth.
Gulf businessmen often see their governments
paternalistically, expecting them to develop a healthy
economy and guarantee their welfare. Indeed, Gulf
governments continue to serve as the engine of growth
in these states and cover or assume all risks.
Businessmen expect the government to bail them out
of their economic troubles, and, rather than
shouldering more of the burden as opportunities arise,
businessmen are increasingly reluctant to take
initiatives that do not have government backing.
Although this responsibility allows the Gulf
governments to act more independently and
dictatorially than Western governments can, they also
must accept the blame for economic failure, implying
more catastrophic political implications than a similar
failure in Western democracies.
The Labor Pool and Work Ethic. The relatively small
population of the Gulf states has hindered their
economic development. Small domestic labor forces
have forced them to rely on imported workers for both
highly skilled jobs that Gulf workers cannot do and
' The chances of success are small for any endeavor, public or
private, that does not have a healthy dose of what in the Gulf is
called "Vitamin W"-for the Arabic "wasitah" meaning
Secret
NESA NESAR 87-017
17 July /987
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Saudi Arabia and Kuwait:
Strategies for Exploiting Oil Wealth
Hisham Nazir, longtime Saudi Planning Minister
and current Oil Minister, used to start speeches to
Western audiences by saying, "We Saudis are not a
wealthy people. All we have is money." With this
comment he sought to capture the fragility of the
Saudi economy and the danger of relying on the
proceeds of a single asset, oil, as the basis of the
national economy. He would explain that the Saudis
had a "window of opportunity" to utilize their
windfall oil revenues to diversify and create the
broader economic base needed for economic security.
Successive.five-year plans have reRected Nazir's
thinking and have been aimed at developing, largely
from scratch, agricultural and industrial sectors that
would provide such stability and breadth to the
economy. During the boom years the Saudis built not
only the ir~lrastructure of a modern country but two
large industrial cities, automobile assembly plants, a
number of basic industries factories, and self-
sufficiency in wheat production.
The question remains whether there was development
or just growth. Would Hisham Nazir, in an honest
assessment ojthe past decade, conclude that Saudi
unskilled jobs they will not do. In addition, foreigners
do not contribute to domestic consumption in
proportion to their numbers because many of them
remit a high percentage of the earnings to their
families living abroad, slowing the natural growth of
domestic markets. The Gulf states hope to reduce
their dependence on expatriate labor, but we do not
believe that they can do so in the foreseeable future.
Within this restricted labor pool there is a weak work
ethic, particularly for blue collar, industrial jobs. The
US Consulate in Dhahran says of the Saudi work
ethic, "The idea of working as long as it takes to
complete a job before collapsing in exhausted
Arabia successfully exploited its opportunity? In our
judgment, too much artificiality remains in the
nonoil sectors to conclude that they have more than a
remote chance of independent viability, let alone
vitality.
Kuwaitis, on the other hand, might well have said,
`All we have is money, but that is all we want."
Perhaps more willing to acknowledge their
weaknesses, the Kuwaitis never set out during the
boom years to create an artificial diversification into
sectors that could not naturally evolve or survive in
Kuwait. They neither built industrial cities nor tried
to farm the desert. They sought instead through
investment overseas to tie their fate to the
performance of the strong Western economies.
Despite the same obstacles to economic development
as in the other Gulf states, the Kuwaitis have ridden
out the recession of the 1980s with less disruption
than any of the other Gul1'states.
cities of Jubayl and Yanbu' in Saudi Arabia.
euphoria ... is foreign to many Saudis." As a result,
no social stigma is attached to being unemployed.
Indeed, unemployment is preferred to work if one can
afford it, as many Gulf Arabs can. Hard times have
forced many locals to accept jobs one or two notches
below the optimum-to go from unemployed to idle
office worker, for example. But Gulf Arabs are
unlikely to accept menial jobs in sufficient numbers to
staff such newly created enterprises as the industrial
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Identity Factors
The author asked about 50 Saudis and
50 Americans to rank a set of identity
factors in answer to the question.
'Who am I? Am I first a Muslim? First a
member of X family? First an individual?
soldier? etc.' The results were generally
as follows:
IRalipion
Ethnic Group
n~~onaY~~y
Oional Affiliatio
~ofeesion
tionality
1i01on
Noteworthy from an economic development
standpoint is that 'professional' and
'individual' are ranked low in the Gulf,
implying that there is relatively little
societal value attached to individual
or professional achievement.
Organizational Skills. Gulf Arabs are widely known
to be intensely capitalistic, entrepreneurial, and
mercantile, but the big stories are of individual, rather
than corporate, success. Organizational and
managerial skills are not the natural strengths of Gulf
businessmen. Even now, after the phenomenal wealth
of the 1970s, there are few Gulf companies of
international stature, and those few that exist largely
reflect the personal wealth of their owners. Only a
handful of companies have successfully crossed the
threshhold from small family-owned business to
multimillion dollar corporation. Partly responsible are
an extreme reluctance to delegate authority and an
aversion to Western business practices, such as
borrowing to expand. The tendencies to remain
centralized, inflexible, and small work against
successful privatization and industrialization on a
meaningful scale.
Tecl4no[ogy But No Science. The Gulf states will
settle for nothing less than state-of-the-art
technology, but they reject the science that
accompanies it. This reflects their ambivalent
Following the Japanese example, many C/S.firms
have tried to become more competitive by analyzing
the strengths, preferences, and needs of their
employees and adapting these criteria to their
corporate structures. Most GuU'companies have given
little consideration to this approach and continue to
operate as small family ventures rather than big
corporations. The business community has some
influence within these states, but most of this
influence derives from the relationship between a
rulingjamily member and a merchant rather than
broader and less personal economic interests.
Although many GuU.firms have been successful in
using this sole proprietor style ojoperation, they will
have to adapt Arab ways to a more Western
organizational structure to become more competitive
in the global market particularly in interests
outside ojoil. Factors to consider in designing such a
business culture in the GuU'states would include:
? Job security. Gulf Arabs may see the firm-as it
does the state paternalistically and, in return for 25X1
their loyalty, will expect tenure, job security, and
.financial compensation.
? Profit sharing. Gulf Arabs have the seemingly
contradictory traits of being entrepreneurial and
averse to risk. Profit sharing would allow them to
assume a degree ojresponsibility while sharing the
risk.
? Clear chain of command. Although Gulf Arabs
prefer a consultative to an authoritarian approach,
they are more co?zfortable when the chain of
command is well defined, allowing them to locate
themselves within the organizational structure.
? Small project centers. Large, impersonal companies
are foreign to Arab culture. Encouraging small
project centers within larger firms would allow a
company to grow without the accompanying
depersonalization.
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attitudes toward economic development. They want to
be recognized as full members of the club of
industrialized nations" but have grave doubts about
the effects of such industrialization and development
on their conservative societies. The leaders of these
states almost certainly fear losing control over the
pace of change that development will bring and how
this will affect the stability of their regimes.
Moreover, Arab academic programs foster learning
by rote with no emphasis on innovation or creativity,
reducing the ability of most Gulf workers to absorb
the theoretical underpinnings of imported technology.
Capital Generation. The Gulf states have lent much
support recently to the idea of developing their
economies by building a partnership between the
public and private sectors, but they have given few
financial incentives to the private sector to encourage
greater responsibility. Capital markets are practically
nonexistent, and commercial codes are antiquated or
underdeveloped, slowing the spontaneous growth of
new business ventures. Monopolies, which are often
given to individuals by these governments, hinder
competition. These governments worry more about
self-sufficiency than about efficiency and have
encouraged the private sector to develop import
substitution enterprises, with little success. Despite
the surplus of capital in these states, the cost of entry
into Gulf markets is high. Indeed, economic
development literature refers to this problem as the
"Kuwaiti disease"mil dominates the market at a
particular exchange rate, and at that rate other
products cannot be efficiently produced. Some of the
states have resorted to subsidies or tariffs to develop
or protect infant industries, but these remedies have
created other problems. Most Gulf citizens avoid
these risks altogether and invest their capital outside
the region.
Shame and Fatalism. Extensive cultural and religious
factors affect economic thinking in the Gulf. Two
features are particularly prominent: shame and
fatalism. The Gulf emphasis on shame (how one is
viewed by his peers) rather than guilt (how one views
himself) permeates all of society, including business
and economics. The effects of this cultural trait in the
business realm are that:
? Looking successful is more important than being
successful, as maintaining a facade of prosperity
overrides the need for objective problem solving in
hard times. In the Gulf, constructive criticism" is a
contradiction in terms.
the high cost of public admission of failure.
? Action to correct economic or business problems is
taken late in the game, as it must counterbalance
Fatalism is an Arab quality strongly reinforced in the
Gulf by Islamic dogma. The fatalist element in
economic or business deliberations is the unstated
premise that man is the victim, rather than controller,
of events. Having a "can-do" attitude, taking the
initiative, being innovative, or trying to force change
are largely viewed negatively in the Gulf as tempting
fate. Much of the lethargic quality of the Gulf
business environment is attributable to Arab fatalism.
Conversely, it can cushion the impact of failure and
encourage individual speculative ventures.
Outlook and Implications for the United States
We believe that the Gulf states will be unable to
develop stronger, more diversified economies and will
never meet the Western standard that they have set
for themselves. Although they were quick to see that
their comparative advantage lay in exploiting their oil
and have made considerable progress in building the
framework of a modern economy, we believe they will
remain bewildered about how to use the returns from
oil development to jump ahead to the next stage of
economic development. They are likely to refuse to
acknowledge their failure and, as long as oil revenues
continue, will maintain the charade of development.
Moreover, they will cite false victories-such as the
Saudi achievement of self- sufficiency in wheat-as
true progress.'
' Riyadh has achieved self-sufficiency in wheat production but at a
high cost. Its subsidies to farmers make the effective cost of Saudi
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Without a recognition of their shortfalls, the
economies of the Gulf states will gradually weaken
because the burden of maintaining their facades of
development will grow as their ability to do so shrinks.
Large showpiece industrial projects such as the
Mercedes assembly plant in Jiddah-which produces
trucks but at a small and costly fraction of plant
capacity-will serve as testaments to failed economic
policies.
Unable to create self-sustaining economies, these
states will continue to be almost totally dependent on
oil revenues. As such, they will continue to rely on
government prodding, and progress will occur only in
fits and starts. Once oil resources are depleted, these
states will become largely dependent on foreign aid.
For Bahrain, Oman, and several of the emirates of the
UAE, this prospect is less than 20 years away.
Economic failure and oil market vagaries will leave
many of these regimes vulnerable, especially because
of the close link in the Gulf between economic
perlFormance and political fortune. The recent coup
attempt in Sharjah, as well as the deposition of Saudi
King Saud in 1963, were both the result of the
perceived ineptitude of leaders in guiding their
economies. The Gulf monarchies are likely to be
scrutinized more closely for how equitably they fulfill
the top economic priority-distributing the national
wealth.
The Gulf states will remain important to the United
States because of their oil resources and geographic
position-both of which are accidents of fate. The
relationship between the United States and the Gulf
states will remain limited, however, and is unlikely to
exceed or even match the heyday of the 1970s. These
states will remain de facto protectorates of the United
States or other Western powers because of their
enduring fragility. US interests would have been
better served, in our judgment, had the Gulf states
developed stronger, more stable economies,
particularly given their Western orientation and
consequent overlapping interests with the United
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