At a recent breakfast event in our Paris office, BSR had the privilege of hearing from Hugo Micheron, a Paris-based economist who specializes in the Middle East. I caught up with Micheron after the event to get his take on where the Middle East is going, and what solutions exist to deal with what he has dubbed “the latent crisis in the Gulf.”

You lived in the Middle East for a number of years and have studied the Gulf economies extensively. Why do you say there is a “latent crisis” brewing?

There are three interlinked components to my response—overconsumption trends, high (and rising) unemployment rates among youth, and unsustainable subsidies.

Firstly, let’s take the prevailing consumption trends in the Gulf countries. Over the past decade, the region has become the biggest consumer of energy per capita, and hence, it is the largest emitter per capita of carbon dioxide. Domestic oil consumption in Qatar, for example, increased by 205 percent, while the average in OECD countries during the same period was 11 percent. If the rest of the world were to live like the Qataris, we would need five planets. Energy consumption in the Gulf has increased at a much faster rate than both population growth and GDP.

Secondly, there is a lack of job creation in the Gulf: Currently only 25 percent of the jobs needed to satisfy the demand from new entrants into the job market each year are created. Unemployment rates among those under the age of 25 are at an all-time high, and growing. Added to this is the sharp disequilibrium between salaries in the public and private sectors—those employed in the public sector are paid much higher wages than those in the private sector, driving demand from qualified students to seek public-sector versus private-sector jobs, and resulting in a less competitive private sector.

Finally, the governments of the Gulf countries rely heavily on subsidies to offset social tensions, quell simmering discontent, and compensate for a lack of economic growth. Energy subsidies have constantly increased during the 2000s, both during periods of economic boom and bust. In Saudi Arabia, for example, the government spends four times what it was spending in the 1990s. As long as the price of oil increases, the fiscal balance can be maintained, with a surplus. However, with the shale gas boom in the United States and the steady rise in domestic consumption (by 2027, Saudi Arabia will consume more oil than it exports today), the revenue from oil will not be sufficient to keep the public purse intact, which will likely have a huge destabilizing effect.

What are some solutions to what sounds like a perfect storm of issues?

There are no easy solutions here. There is a massive urgency to [create] more productive economies that are not just reliant on energy and capital-intensive industries like petroleum, petrochemicals, aluminum, and so on. These economies need to create an industrial base that is more labor intensive and that creates jobs for locals, not just expatriate workers.

These states [also] need to set up a stronger private sector. Currently, 90 percent of private enterprise in the Gulf is composed of small- and medium-sized companies operating in niche markets and overwhelmingly reliant on cheap blue collar workers coming mainly from the Indian subcontinent.

Many observers have countered my arguments by saying there is a dynamic private sector, that non-oil GDP is growing. I’d agree that in absolute terms there are services developing. But in relative terms, the prevailing economic structures of these markets haven’t changed much over the past 10 years and are still being propped up by money generated from the old petroleum sector.

Take the real estate sector: In 2008, this sector grew by 25 percent in the Emirates. Prices were pushed higher both by the arrival of foreign workers, and by speculation practices in place as people bought and sold apartments in short order, and banks lent freely. Once the global financial crisis hit, banks stopped lending money, people stopped investing, and the speculative real estate bubble burst. Dubai almost went bankrupt.

We also see economic activity supposedly disconnected from the oil sector in the various free trade zones. Sure, there are manufacturing activities taking place in these zones, but in relative terms, this activity is being undertaken by foreign companies paying no or very low taxes, using foreign workers, fulfilling business orders taken from and then shipped abroad. The spillover effects to the rest of the economy are minimal. For me, the entire non-oil economy in the Gulf is a rent system—it’s propped up by government subsidy.

Given this scenario, what does the future hold for the Gulf?

You cannot create a modern or even post-modern society without crossing the Industrial Age first. These Gulf states are the most enigmatic economies to study given the latent crisis, which is just around the corner. They are unsustainable economically, socially, and environmentally for the reasons I already cited, and the ability for their current way of life to be maintained over the long run is in serious jeopardy.

The prospects here are quite poor, and I think it is important to acknowledge this fact, because we’re going to see the negative effects manifest themselves over the next few years—this isn’t something that’s going to happen in 2050.