Gulf countries face obstacles to economic reform

Economic reform seems necessary in Gulf countries in light of their heavy reliance on oil revenues, yet there are a number of obstacles making such reform difficult.

al-monitor Investors are seen at the Dubai Financial Market, April 27, 2014.  Photo by REUTERS/Mounir Saidi.

Topics covered

oil revenue, oil, gulf, economy, development, arab world

May 30, 2014

There is frequent talk about economic reforms in the Gulf countries, and the realistic possibilities to achieve them. Is it possible to achieve reform in a harmonious way and without any pitfalls, after the state and its funded expenses are heavily dependent on oil? Is it possible to bring about reforms in certain Gulf countries while they are obstructed in others? Despite the similarities shared by these countries, there are different levels of economic imbalance and difficulties that might hinder reform attempts.

Not all Gulf countries have reached the same level of urban, educational and human development, as well growth in terms of income, though some were able to do so thanks to the oil wells, oil exports and generated sovereign revenues. The GDP of the six Gulf countries exceeded $1.2 trillion last year, while oil revenues reached over $450 billion. The bulk of this revenue was generated by Saudi Arabia, the United Arab Emirates, Kuwait and Qatar. On the other hand, Oman and Bahrain have limited income, as their oil production capacity has declined, compelling them to export important commercial quantities. Nevertheless, the support provided by the rich Gulf countries for both Oman and Bahrain may help them meet their economic and social obligations.

Apart from the warnings of a probable future decline in oil prices and demand, Gulf countries should reconsider their current economic patterns, and address the distortions resulting from their reliance on public-spending mechanisms. Such demands for reform have been raised for a long time, yet there is no genuine will to enact them since the reliance on public spending has been strengthened and oil prices have increased, which generated significant oil revenues to meet public spending requirements.

In recent years, many politicians suspected that the repercussions of the Arab Spring represented a threat to the social and political system in these countries. Therefore, programs were designed to expand public spending, including increased salaries and wages, social campaigns and subsidies, in addition to the allocation of huge funds for capital spending on basic infrastructure, education and healthcare projects.

Many of these projects may be necessary. Yet the attempt to buy political friendliness by raising wages and salaries, without expecting in return an improvement of productivity and of the role of citizens — mostly foreign workers — in the workplace, requires systematic reviews aimed at promoting economic reform. Still, the impact of economic reform based on employment is limited.

Since the start of the oil age in the 1940s, the Gulf countries reaped oil revenues that enabled them to develop their economies, and have achieved oil surpluses over the past decades, especially after the first oil boom in the mid-1970s. During the second half of the 1980s, Gulf countries witnessed a decline in revenues, which caused deficits in their budgets. Thus, they had to offer treasury bonds and bills to cover this deficit. Therefore, talk of reform and privatization arose during these relatively difficult years, but the matter was quickly resolved when the prices were back on the rise. However, economic reform was implemented at varying degrees.

Saudi Arabia prompted the private sector to adopt a strategy of national recruitment through the Saudization programs, while the Saudi government made private companies responsible for numerous basic activities, such as electricity generation or water distillation, and encouraged partnerships between local and international investors. Thus, huge amounts of money poured in thanks to foreign direct investment mechanisms, which in a few years hovered around a rate of $30 billion per year. There is no doubt that the large population base and the growth of youth in Saudi Arabia required seeking realistic economic alternatives to meet the future variables, although the kingdom is able to reap the huge oil revenues.

Do the officials in the rest of the Gulf countries feel the same social pressures felt by officials in Saudi Arabia, which prompted them to adopt a well-justified reform movement? The officials in Oman and Bahrain must be seeking to provide their people with better living conditions despite the limited financial capabilities. What about the officials in Kuwait, the United Arab Emirates and Qatar? The revenues realized by these three countries exceed their spending commitments, which are characterized by a small national population compared to the total population.

However, the economic distortions represented above are clear, as the public sector contribution to GDP exceeds 70% and the proportion of local citizens to the total population ranges between 15% and 31%. Moreover, national employment does not constitute a significant share in the labor market and often registers accumulated rates in the public sector. Therefore, the incentives for reform, even if essential, remain subject to capabilities and wills.

According to development economists, the implementation of reform mechanisms requires societal consensus, a political will and pressing economic motives. Perhaps a number of Gulf countries are implementing privatization programs and labor market modifications, but it is worth mentioning that these programs will keep varying according to the country and the nature of the political administration. Whatever the case, the Gulf countries must be aware that reliance on existing economic patterns will not enable them to make a quantum leap toward sustainable development.

More from  Amer Thiab al-Tamimi

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