GCC looks to boost private sector

While the private sector kicked off the Arab Gulf’s rapid development, the region’s governments are looking to boost this role in a more sustainable way.

al-monitor Heads of state of the Gulf Cooperation Council sit at a round table in Bayan Palace for the opening session of the 34th GCC Summit hosted by Kuwait, Dec. 10, 2013. Photo by REUTERS.

Topics covered

state institutions, private sector, gulf countries, gulf cooperation council, gcc, economic and political models, economic privatization, economic policy

Dec 13, 2013

The Federation of the Gulf Cooperation Council Chambers of Industry and Trade announced that a study is being conducted with the Gulf Investment Corp. (GIC) on the private sector’s development role and on how to launch new, self-sustaining economies. However, the study has not yet been implemented due to the reluctant decision-making process in the transfer of ownership of key industries such as oil, utilities and health care to the private sector. This is in addition to the political administrations' belief that the availability of funds from oil revenues enables the government to continue to bear these burdens without the need for a partnership with the private sector.

Yet, these administrations missed the fact that the issue does not only have to do with financial capabilities. There are many other issues involved, most important of which are how to transform these activities into economically profitable and feasible businesses and, at the same time, how to employ private sector funds in various activities and strengthen its role in creating job opportunities

The private sector played a central role in the early development stages of the GCC countries. It excelled under difficult circumstances in creating a business environment and in generating wealth. Traders and businessmen in Kuwait, Bahrain and Saudi Arabia actively strived to develop extensive relationships with countries near and far, such as Iraq, Iran, India and parts of East Africa. Moreover, it was well known that activities, such as the trade in pearl, timber, dates and spices were some of the tasks taken up by traders and businessmen in the Gulf region before the discovery of oil and its domination over economic life. This contributed to the creation of job opportunities, back in the days when citizens were relied upon to fill jobs and occupations.

The private sector developed the crafts and small industrial occupations in which many were involved, such as shipbuilding, carpentry, blacksmithing and house-building and construction, not to mention several service activities. Moreover, contemporary history refutes the argument that the private sector does not pump money into the state treasury, since it is confirmed that traders and other business owners across Gulf countries have paid various types of taxes and fees. These taxes were used to bear the burdens of administration, security and other governmental activities. This means that the changes that took place over the past 70 years were due to government policies and trends that put an end to all previous economic traditions and values and adopted instead the tradition of relying on public spending, increasing the number of expatriate workers and persuading citizens not to work in production occupations and crafts.

There is no doubt that the Gulf governments realized that maintaining a rentier state approach is not conducive to sustainable development. Thus, they are attempting to find economic alternatives and new mechanisms of action. How can governments activate the private sector to play a pivotal role in economic development? Any study in this respect must indicate that improving administrative laws and regulations governing economic work is the most important element in making more active use of the private sector’s role. There is a package of applicable laws that must be reviewed and amended to create an attractive and modern environment and modify governmental activities that disrupt business, hamper the completion of projects and discourage investors.

The private sector in the various Gulf countries was able to amass important resources employed in activities and projects within the Gulf countries. Moreover, the banking system was able to lure these resources in the form of deposits and accounts, and a part of the funds was invested outside the borders of the region. Given the private sector’s limited scope of work, its significant funds increased the inflation rate of real estate asset values. However, the important question is how to benefit from these funds to promote the activities of the private sector and its contribution to development without adopting broad privatization programs.

This is an important challenge in the Gulf. Will the governments work on amendments allowing the private sector to use funds in vital sectors such as oil, utilities, services and infrastructure, which will lead to reliance on bank financing instead of the use of public funds?

It is important to improve the environment of competition in the various sectors and to develop foreign investment laws, which increases the possibilities for partnership between businessmen in the region and foreign companies and investors enjoying technical, financial and administrative capacities. Moreover, labor and employment laws must be amended to encourage citizens to work in private institutions and under favorable conditions. As for the banking system, it requires a comprehensive and extensive review in order to be more aligned with the requirements that must be met to increase reliance on the private sector. Some may wonder about the benefits to the society of privatization or increased reliance on the private sector, and whether this sector will have the same role as in advanced industrialized countries.

The Gulf countries must draft suitable tax regulations that do not discourage activity in the private sector. It is worth mentioning that tax regulations in developed and emerging countries aim to encourage business activities in difficult sectors and regions by offering exemptions and other forms of incentives.

On a different note, the GCC governments should also provide the lands on which private enterprises will be constructed under encouraging conditions. The development role of the private sector, on the other hand, must be based on balanced economic and social principles.

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