He’ll do it his way With much of the Arab world rattled by the global economic turmoil and stuck in moribund politics, tiny Qatar and its punchy emir are bucking the trend May 27th 2010. The IMF reckons the country’s GDP per head rose last year to nearly $84,000 at purchasing-power parity, the world’s highest figure, far above the United States’ $46,000 and Britain’s $35,000 and easily topping the rich-list of the 22-country Arab League, with Kuwait trailing on $38,000 and Saudi Arabia well behind on $23,000. Congo and Zimbabwe, by contrast, come bottom of the IMF’s table, at $332 and $355 per head.
Behind these figures the government of this little promontory that sticks into the Gulf off the east coast of Saudi Arabia is being careful not to let the bonanza go to its head—as happened down the coast in the overreaching emirate of Dubai. With fewer than 300,000 Qatari citizens among its 1. 7m inhabitants, Qatar is unarguably a success. In almost every respect it is managing, as the diplomatic jargon goes, to punch far above its bantam weight. The reason for this happy state of affairs is fourfold.
First, it is the largest producer and exporter of liquefied natural gas in the world, yet is dramatically expanding output. Second, its emir, Hamad bin Khalifa al-Thani, may be the most dynamic of the Arab world’s leaders, and in Sheikha Mozah has the feistiest of wives. Third, it has an unusually independent foreign policy, which has turned the emirate into a diplomatic hub. And fourth, it is the home of Al Jazeera, the Arab world’s most influential television channel (see article). The emir, now 58, ousted his father in 1995 in a coup.
Since then he has consolidated his rule, spread his country’s vast wealth across the realm, and made his influence felt far afield, in Washington, London and beyond. This year it is reported that the country’s sovereign-wealth fund, under the aegis of the Qatar Investment Authority, may invest some $30 billion abroad. It is set to increase its 17% share in Volkswagen, Europe’s biggest carmaker. Areva, the French nuclear group, is another candidate for investment. The authority already owns 7% of Barclays, a British bank, a quarter of J Sainsbury,
Britain’s third-biggest supermarket chain, and a chunk of London’s Canary Wharf. This month it bought Harrods, London’s most famous shop. No less spectacularly, Sheikha Mozah’s Qatar Foundation, which is bent on bringing world-class education and culture to the state, has spent billions of dollars to lure a bunch of the best American universities to Qatar, including Carnegie Mellon, Cornell, Georgetown, Northwestern and Texas A & M. Sheikha Mozah has been the driving spirit behind such spectacular schemes as the Museum of Islamic Art, designed by a Chinese-American architect,
M. Pei. Every cultural project is emphatically cosmopolitan. The emir, a keen sports fan, has also brought an array of big-prize competitions to his state, including football, golf and tennis, that tempt the world’s top players. Now Qatar is bidding to host the football World Cup in 2022. With temperatures above 40? Celsius when the tournament would be held, the bid’s chief promoter says the latest technology would be harnessed to blow cool air into the stadiums to reduce the heat to the mid-20s. Forget the expense. But the emir’s most striking achievement is diplomatic.
The Americans are still his closest ally, shoving the slower-moving British, the Gulf’s former imperial power, into second place. A huge American base is a forward headquarters of America’s Central Command, which oversees Iraq and Afghanistan. Yet the emir keeps on good terms with Iran, exchanging cordial visits with President Mahmoud Ahmadinejad. Earlier this year the two signed a defence pact, whose detail remains vague. And the emir has managed to turn Qatar into a peacemaking hub, albeit that he has not always settled the conflicts at hand.
His biggest recent success was in persuading—some say paying—Lebanon’s rival parties to come together in November to form a unity government after months of deadlock: the emir is said to have virtually locked the Lebanese leaders in a room and told them to come out only after they had done a deal. Sudan’s government and rebels have made headway towards peace under the emir’s aegis, with President Omar al-Bashir several times visiting Qatar, despite requests by the International Criminal Court that he be arrested and sent to The Hague to face war-crimes charges. No way, said the ever-emollient emir.
Most controversially, and sometimes to the irritation of fellow Arab leaders of beefier places such as Egypt and Saudi Arabia, the emir has sought to make peace between the Palestinians and Israel, which, along with Hong Kong and Singapore, he is said to admire as the perkiest of mini-states. Israel enjoyed the rare Gulf privilege of having a permanent trade mission in Qatar until its closure during the Gaza war a year-and-a-half ago. The emir has offered to reopen it, provided that Israel lets building materials back into Gaza but the Jewish state’s prime minister has so far rejected the idea.
At the same time, the emir has made a point of hosting the leaders of Hamas, the Islamist movement that controls Gaza and whose senior figures are often in Qatar. Down the golden street Still, discomfiting spectres lurk. One is a glum sense among many indigenous Qataris, despite all those shiny new foreign education establishments, that they are being swamped by incomers and done out of serious jobs. Most of the glamorous new projects are run, at the executive level, by outsiders, with Qataris sometimes tokens at the top. Moreover, the dizzy pace of modernisation has led some Qataris to worry that their identity is being eroded.
Another spectre is democracy. The emir does not pretend he is anything but a benevolent modernising autocrat. He and some of his fellow Qatari sheikhs, often tribal leaders in their own right, hold the traditional majlis where citizens can present petitions and air their problems. But Qatar is essentially a family show. The emir’s prime minister, Hamad bin Jassem al-Thani, is a cousin. Of the 19 key ministers reckoned to run the place, seven are al-Thanis, as is the central bank’s governor. Two belong to the emir’s mother’s family, the al-Attiyahs, who also provide the army chief of staff.
Sheikha Mozah’s clan, the al-Missneds, are big in the security service and elsewhere. A new constitution has promised to let two-thirds of a toothless advisory council be elected. But the poll has been put off. One day, perhaps, an educated middle class may emerge to call for more accountability and a bigger slice of the wealth. Jealousies could yet rumble within the ruling family. The 1. 4m-plus foreigners, most of them from India and Sri Lanka and many still paid a pittance amid such riches, may one day demand better working conditions and rights.
But there is no sign yet that the oil-and-gas money is running out or that the emir cannot continue to please his people by treating them generously and giving them the pride that has come with Qatar’s bumptious appearance on the world map. Qataris, at least indigenous ones, have plainly never had it so good. Correction: The original version of this article said Hamas’s prime minister, Ismail Haniyeh, is often in Qatar. This is not the case, though, and the text was amended on May 28th 2010. Budget cuts in the euro area Nip and tuck Europe’s plans for fiscal austerity are not quite the threat to recovery they seem Jun 10th 2010
Investors who may once have doubted that euro-zone countries could right their public finances seem now to fear that crisis has spurred too much austerity. A handful of countries, notably Greece but also Spain, Portugal and Ireland, have been forced to take drastic action by nervy bond markets. To avoid a similar fate, Italy pledged in May to cut its budget deficit by €24 billion ($30 billion) by 2012. Now even the most creditworthy are joining in. On June 8th Germany’s government announced a package of measures that will save it around €80 billion by 2014.
Its chancellor, Angela Merkel, said Germany should set an example of budgetary discipline to other euro-zone countries. France has also said it will act to trim its deficit by abolishing tax exemptions and freezing most spending programmes from next year. This rush to don the hair-shirt raises a fresh concern: if budget cuts are too severe, might they push the economy back into recession, defeating their purpose? Judged by the claims of those who welcome the new fiscal austerity, as well as those who fear it, a gigantic fiscal blow is about to land.
The true picture is not quite so dramatic. Take Germany’s measures, for instance. The €80 billion of cuts claimed by the government will be made over four years. Most of the savings are coming in 2013 and 2014. The effect on next year’s budget will be just €11. 2 billion, less than 0. 5% of GDP. With all the talk of cuts, it is easy to forget that Germany’s budget deficit will widen this year by 1. 5-2% of GDP as the delayed effect of earlier stimulus measures comes through. The smaller countries at the edges of the euro block are pulling back harder.
Greece’s budget cuts amount to 7% of GDP this year and 4% next year (see table), according to Laurence Boone at Barclays Capital. Spain, Portugal and Ireland are set to cut their budgets by 2-3% of GDP in 2010 and 2011. Yet they are a fairly small part of the region’s economy. Greece is just 2. 6% of euro-zone output. Portugal and Ireland are smaller still. With Spain these countries account for less than a fifth of euro-area GDP. Their planned austerity will have a correspondingly small effect on the euro-zone economy.
Ms Boone reckons that measures aimed at cutting budget deficits in the euro area will come to around 1% of GDP next year, when weighted by the size of each country’s economy. That is big but not excessive for a block that is forecast by the European Commission to have an average budget deficit of 6. 6% of GDP in 2010. There is much uncertainty about the economic impact of fiscal tightening, not least because some temporary measures will also have run their course by next year. Budget cuts weaken GDP growth by shrinking aggregate demand.
The simplest gauges of such “Keynesian” effects suggest that each euro of lost public spending reduces GDP by around the same amount. But in some circumstances budget cuts can help growth—or cause less harm to it than Keynesian models suggest. Firm action to tackle budget deficits may induce anxious consumers to save less (and firms to invest more) by lowering uncertainty about future tax changes. Such anxiety is likely to be bigger when public debts are worryingly high because taxpayers judge that the need to reduce the deficit will soon hurt their finances.
Research by Christiane Nickel and Isabel Vansteenkiste of the European Central Bank found that rising budget deficits in high-debt countries are associated with higher private savings. A lot also depends on how budgets are cut. A much-cited study by Alberto Alesina of Harvard University and Roberto Perotti, now of Milan’s Bocconi University, found that budget adjustments that rely on cuts in welfare payments or the government’s wage bill are more likely to produce lasting benefits—lower public debt and faster GDP growth—than those based on tax increases or cuts in public investment.
The least harmful taxes were on firms’ profits or on consumer spending. Examples of such “expansionary fiscal contractions” are much harder to replicate now. Countries that managed to grow strongly in the past while cutting budget deficits were often aided by a falling exchange rate or were rewarded by a big drop in borrowing costs. Most rich countries today already enjoy low bond yields. And not everyone can devalue their currencies. It is clear, nonetheless, that certain kinds of austerity are less harmful to growth. The packages announced by euro-area countries seem fairly well designed.
Most countries plan to slim the government wage bill and reduce entitlements—the sorts of cuts that are least damaging to economic recovery. Big cuts in public-sector pay and allowances have been pushed through in Ireland, Spain and Greece. Italy plans a three-year wage freeze and, like Germany and Greece, will replace only a fraction of retiring workers with new hires. Welfare payments have been slashed in Ireland and will be reduced in Germany from 2011. Pension costs will be cut in Greece and shaved in Spain and Italy. No country has relied too much on cuts in public investment, which often cannot be sustained.
Spain and Ireland have made large cuts in their capital budgets but have lowered current spending by more. Portugal’s austerity relies too heavily on higher taxes, though it has reduced unemployment benefits. Greece has had to raise revenue as well as cut spending but is at least looking to the “right” sorts of levies, such as value-added tax (VAT) and “sin” taxes on cigarettes, alcohol and petrol. Given the seriousness of its fiscal troubles Greece had little choice but to attack its deficit on all fronts. Germany is not under the same sort of bond-market pressure.
It might have delayed its cuts a little longer. Officials are now more willing, in private at least, to admit that weak domestic demand in Germany is a problem. But running deficits for longer is perhaps not the best way to tackle it. In a small way, the measures to cut German welfare benefits may help if they encourage more non-workers into the labour force and boost consumers’ spending power. At least the government kept tax rises to a minimum. Budget cuts are rarely good news for the economy. But Europe’s austerity drive could have been a lot worse.