US Challenges and Choices in the Gulf: Economic Liberalization

Policy Brief #5 The Atlantic Council of the United States, The Middle East Institute, The Middle East Policy Council, and The Stanley Foundation

U.S. Challenges and Choices in the Gulf: Economic Liberalization

This policy brief is based on the discussion at the sixth in a jointly sponsored series of congressional staff briefings on “U.S. Challenges and Choices in the Gulf.” To receive information on future briefings, contact Jennifer Davies at [email protected].

The Gulf Cooperation Council (GCC) members and other Middle Eastern countries believe that liberalizing their economies – promoting greater financial openness to the rest of the world and encouraging privatization – will stimulate economic growth locally and address the growing demands of their populations. However, liberalization also carries risks of social and economic disruption.

Leaders in the Gulf are pursuing economic reforms (liberalization) because population growth in Gulf countries has outstripped economic growth. During the past 20 years, the GDP of the Gulf countries (including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates, and Yemen) has risen from $440 billion to $770 billion, although the population has more than doubled. This results in a negative GDP growth rate per capita in the region. Furthermore, fifty percent of the Gulf’s population is under 25 years of age. There are therefore rapidly growing numbers young adults unsuccessfully searching for gainful employment. Those who are relatively well educated often seek opportunities elsewhere, creating a dangerous “brain drain” in the Gulf. Some analysts believe that the Gulf’s per capita growth rate has been impeded by structural factors.

WHAT ARE THE BARRIERS TO ECONOMIC GROWTH?

1. State-run economies: Traditionally, governments in the region act as the primary employer under a highly centralized national economic plan. Governments distribute national wealth for political reasons through the use of a system of quotas and agencies. Taxes are low or non-existent in most Gulf states, making governments dependent on income from national industries, which they are therefore hesitant to privatize. This centralized system also works to discourage, and sometimes outright forbids, foreign investors from owning more than 50% of companies or property. In recent years the system has not performed well, which has led to rising unemployment and disappointed expectations. Since September 11th, Western leaders have focused more attention on the Gulf states’ economic woes, considering them to be a source of popular resentment and, consequently of support for Islamic extremists such as Osama Bin Laden. Beyond state-run patronage, other problems with the Gulf economies include corruption, educational systems that are not training skilled workers, and barriers to foreign investment.

2. Expatriate labor and the Economic Disenfranchisement of Women: GCC countries have used oil revenues to build economies that were much larger than the combined contributions of their populations. This means that they rely heavily on expatriate labor, which has in turn created gender issues that need to be resolved. In Oman, for example, men now outnumber women by a ratio of 2:1; in Saudi Arabia there are 123 men for every 100 women. Futhermore, the GCC states are characterized by mostly all-male workplaces. As a result, they have largely written off female productivity. At the same time,

The Atlantic Council of the United States, www.acus.org • The Middle East Institute, www.TheMiddleEastInstitute.org The Middle East Policy Council, www.mepc.org • The Stanley Foundation, www.emergingfromconflict.org/iran there is also little incentive for these countries to invest in improving the productivity of the expatriate labor force, as it is often cheaper to hire more workers from abroad than to invest in the training and tools that stimulate greater worker productivity. To address these problems, GCC economies need to reduce their dependence on expatriate labor and build the skills of local workers, irrespective of gender.

3. Global Economic Uncertainty: Privatization carries serious risks for Gulf states. There are heightened concerns about privatization in light of the Asian financial crisis and the recent corporate financial scandals in the United States. In addition, Saudis are especially concerned about whether the role of new financial agencies will be in accord with their religious laws. Nevertheless, more transparency and accountability will be needed to better integrate these states into the world economy.

WHAT PROGRESS HAS BEEN MADE TOWARD PRIVATIZATION?

Privatization of industries has increased from roughly 25% to 50% in Gulf countries. In early June, Saudi Arabia (which has by far the largest economy in the Gulf) initiated privatization of the health care industry by announcing its plans to sell-off state-owned hospitals and the medical system. The Saudi Arabian economy could grow 5% by 2005 if plans for privatization continue to move forward.

Multilateral trading regimes are set to play an increasingly important role in promoting economic restructuring in the Gulf. The Saudi decision to join the World Trade Organization (WTO) means that they will have to undertake serious financial reforms. The WTO can act as a stimulus for political change as well.

Privatization is an important step toward broader economic liberalization. It enables average citizens to feel a personal connection to, and investment in, the economy, rather than relying on the state to promote economic growth opportunities. Yet Gulf monarchs are reluctant to change their systems because this would reduce their ability to control access to money, thus undermining their power and influence.

WHAT ARE THE IMPLICATIONS FOR U.S. POLICY?

Education is a key factor in economic reform and the United States can play a positive role by promoting expanded access to progressive higher education for Gulf students. However, since September 11th, fewer students from the GCC are coming to attend colleges and universities in the United States, as they are now treated with great suspicion. U.S. immigration laws and the high cost of American education have also contributed to the decline in the number of Middle Eastern students who apply to higher educational institutions in America. The United States should support the expansion of education exchange efforts between the Middle East and the West and should support and build on existing American universities in the Middle East, such as the American University of Beirut and the American University of Cairo.

Several experts argue that the United States should not shy away from addressing economic and governance issues more publicly, in addition to pressing these issues in bilateral diplomacy. These experts believe that Arab publics would welcome greater US attention to their governments’ actions on political and economic reform. However, increasing public rhetoric on political reform can also be expected to increase tensions with some Gulf states, so it needs to be carefully timed, targeted, and presented in an appropriate context. Lastly, the Israeli-Palestinian conflict has been used as a pretext for governments to justify poor governance by deflecting attention away from internal political and economic problems onto this regional crisis. Thus, many experts contend that more active U.S. engagement on this issue would also further the cause of regional economic and political reform.