Paranoia and Control in the Gulf Economy
The escalation of rhetoric between the GCC and Iran has seen it become increasingly viewed as a source of an existential threat, rather than just a troublesome neighbour. However, I’m concerned that this may transform Gulf governments into war cabinets that will rally their citizens against a collective enemy and delay addressing urgent challenges at home.
The recent financial grants announced by Gulf states mainly aim to:
1) Address shortages in housing due to the increase in national populations;
2) Counter the increase in the cost of living due to the last decade’s inflationary pressures; and
3) Upgrade urban infrastructure services e.g. electricity, water, sanitation and road works.
These grants aim to address the immediate sources of public discontent in their respective states. Most of the criticism such measures have received is based on the view that those grants are not part of a larger economic reform plan. Hence, they only deal with the symptoms of inequitable and unsustainable economic development, but do not cure the ailment.
At the heart of this ailment is the question of the government’s role in the economy. Should the public sector regulate and control economic activity, and should government companies be allowed to compete in industries or dominate them? In my opinion, this is an issue on which no government in the GCC has clarified its position.
There is a correlation between the significance of oil as a contributor to the GDP and its funding of public finances and the role government tends to play in the economy. Nowhere is this more evident than in Bahrain, Oman and Dubai.
The rationale behind the governments’ tight grip on the economy has more to do with historical contexts than current market realities. Evident in other areas as well, governments believe that playing a smaller role in driving the economy will lead to loss of control, mismanagement, foreign manipulation and the undermining of their authority.
I find this view extremely counterproductive, and one that harms the economy and prevents the Gulf states from potentially unlocking various competencies.
In many instances we have seen governments get involved in sectors where they shouldn’t be, where they are no longer able to innovate or are simply competing with the private sector.
As long as the governments continue to attempt to drive the private and the public sector, their performance in both will not meet their own expectations, let alone their countries’ stakeholders. To address the paranoia of loss of control one needs only to look at the American experience. Today, the federal government’s notable assets are the US Postal Service and the army.
It’s worth noting that both are loss-making entities, which perhaps explains why the former hasn’t been privatised yet. But everything else’s long been sold off, from interstate highways to utilities.
So how has the US not lost complete control of the economy without owning it? The answer is strong, credible and efficient judicial and regulatory bodies combined with an effective monetary policy.
In a recent interview with Charlie Rose, Lee Kuan Yew, the architect of modern Singapore, talked about the need to transform Singapore’s economic model from state capitalism to market capitalism.
Some of the most notable success stories of state capitalism in the Gulf are Saudi Basic Industries Corporation, Kuwaiti EQUATE, the UAE’s Dubai Aluminium and Aluminium Bahrain. However, their respective governments still maintain major, and in some cases absolute, shares in them. A more innovative strategy would be to exit, or significantly reduce their holding in, those mature businesses. This would allow the private sector to take those companies into new directions and allow the governments to incubate
This incubation process is the most innovative role governments can play in the economy today. They would establish new industries whose high start up costs serve as a barrier of entry to the private sector and truly achieve governments’ goal of diversification of their economies.
We have seen how the failure of the public sector in some countries to exit the real estate sector after incubating it, has turned the government into the developer of last resort; which has proved to be an expensive, tangled and conflicted affair.
Reforming and improving the competency of existing regulatory entities and establishing new ones where there is a vacuum of regulation, will create an environment attractive to both the private and public sectors. That, combined with the overdue overhaul of the judicial branch of governments in the Gulf will stimulate a strong private sector, which the public sector can
ensure is working towards diversifying and growing the economy without posing systematic risks.
Until long-term growth concerns are addressed, the financial grants being announced will continue to be viewed as painkillers with no permanent cure in sight.
This column first appeared in UAE daily, Gulf News.