Global Opportunity Index 2020 Focus on the GCC Countries CLAUDE LOPEZ, PHD, AND JOSEPH BENDIX ABOUT THE MILKEN INSTITUTE The Milken Institute is a nonprofit, nonpartisan think tank. For the past three decades, the Milken Institute has served as a catalyst for practical, scalable solutions to global challenges by connecting human, financial, and educational resources to those who need them. Guided by a conviction that the best ideas, under-resourced, cannot succeed, we conduct research and analysis and convene top experts, innovators, and influencers from different backgrounds and competing viewpoints. We leverage this expertise and insight to construct programs and policy initiatives. These activities help people build meaningful lives, in which they experience health and well-being, pursue effective education and gainful employment, and access the resources to create ever-expanding opportunities for themselves and their broader communities. ©2020 Milken Institute This work is made available under the terms of the Creative Commons AttributionNonCommercialNoDerivs 3.0 Unported License, available at creativecommons.org/licenses/by-nc-nd/3.0/. MILKEN INSTITUTE GLOBAL OPPORTUNITY INDEX 20 20: GCC COUNTRIES 2 GLOBAL OPPORTUNITY INDEX 2020 Focus on the GCC Countries ABSTRACT Saudi Arabia’s presidency of the 2020 G20 and the Expo 2020 in Dubai offer a unique opportunity to showcase the region’s ongoing efforts to attract international investments. This report uses the Global Opportunity Index and its different categories to assess the region’s improvements in 2019. More specifically, it compares the Gulf Cooperation Council (GCC) countries' performances to those of a reference group, the upper-middle-income countries. The analysis provides a better understanding of the countries' economic development and readiness to welcome a more diversified pool of international investors. The GCC countries align with the upper-middle-income group performance in the cost of starting a business, the burden of labor regulation and taxes, the age and health of the working population, the efficiency of the legal system, and access to financial services and financial depth of the economy. However, their performance lags in four categories that affect foreign investors' potential interest in the region: • Protection of the investor, including the recovery and resolution process and investors’ rights • Transparency regarding the quality and quantity of information that can be easily collected from the public and private sectors • Workforce talent, including the qualifications of the labor force and its diversity • EconoMic openness, including trade agreements and tariffs All of these categories are important. Yet, prioritizing the first two points would reassure investors as they relate directly to the rule of law—to their ability to recover part of their investment and to assess the quality of their investment. It would help diversify the pool of investors away from the local ones. Ultimately, it could also help diversify the economy away from oil. MILKEN INSTITUTE GLOBAL OPPORTUNITY INDEX 20 20: GCC COUNTRIES 3 INTRODUCTION: WHY FOCUS ON THE GCC COUNTRIES? The year 2020 will be a big year for the GCC region, as it will host two major global events for the first time: the Expo in Dubai and the G20 Summit in Saudi Arabia. Both events are unique opportunities to showcase the region’s efforts to attract international investments.1 In the past decade or so, the GCC countries have produced economic plans addressing the barriers to future development (see Table 1). The region agrees that the rapid depletion and technical obsolescence of hydrocarbon reserves, as well as oil price fluctuations, make its current economic model unsustainable. The over-arching goal of these national plans is to diversify the economy away from oil by modernizing the legislative framework and enhancing the business environment of the region. Ultimately, the plans will spur a transition to a set of economies with a vibrant private sector that will generate economic growth and job creation. Table 1: GCC National Visions Year Country Legislation 1995 Oman Oman 2020: Visions for Oman’s Economy 2008 Bahrain Economic Vision 2030 2008 Qatar Qatar National Vision 2030 2010 Kuwait Kuwait Vision 2035 2010 UAE Vision 2021 2016 Saudi Arabia Saudi Vision 2030 2017 Kuwait New Vision 2035 Source: Coates Ulrichsen (2017) 1. The GCC countries include Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, and the United Arab Emirates (UAE). MILKEN INSTITUTE GLOBAL OPPORTUNITY INDEX 20 20: GCC COUNTRIES 4 The countries’ oil and gas reserves strongly influence the tone of these plans: Oman and Bahrain, the two smallest economies in Table 2, are looking to diversify quickly, while Kuwait, Qatar, and the UAE are reforming at a more moderate pace. Saudi Arabia is the only exception: Its population of 34.2 million people makes job creation a priority and a challenge, explaining its ambitious timeline. Table 2: GCC Countries' Population and IncoMe per Capita Population in 2019 Gross National IncoMe Per Capita (in Country (in Millions) USD) BaHrain 1.6 44,620 Kuwait 4.2 83,390 Qatar 2.8 124,130 Oman 5.0 41,230 Saudi Arabia 34.2 55,650 UAE 9.7 75,300 Source: World Bank (2019a) The credibility of these economic roadmaps, especially in the eyes of international investors, lies in their implementation. This report will assess such implementations by focusing on the GCC performance in the Global Opportunity Index and highlighting reforms that would help reassure international investors and strengthen interest in the region. The analysis shows that when assessing economic development, the GCC countries compare well with the upper-middle-income countries group. That is MILKEN INSTITUTE GLOBAL OPPORTUNITY INDEX 20 20: GCC COUNTRIES 5 especially in the cost of opening a business, the burden of labor regulation and taxes, the age and health of the working population, and the efficiency of the legal systems. By contrast, investor protections, including the recovery and resolution process and investors' rights, the access to information regarding the public and private sectors, the skill levels and qualifications of the labor force, and economic openness, including trade agreements and tariffs, align more with lower-middle-income countries. We recommend prioritizing the first two, as they would have an immediate impact on the investment climate by reassuring investors regarding the rule of law, enabling them to assess the quality of their investments. These priorities would help address two major concerns for the region: its strong regional exposure when it comes to investors (see the merger and acquisition analysis in the report) and, ultimately, the lack of horizontal diversification of the economies outside of oil. MILKEN INSTITUTE GLOBAL OPPORTUNITY INDEX 20 20: GCC COUNTRIES 6 SECTION 1: THE GOI FOR GCC COUNTRIES As oil producers, the GCC countries are among the world’s wealthiest, with a per-capita income ranging from $41,230 for Oman to $124,130 for Qatar. Yet, their income levels provide little information on their economic development and their readiness to deal with international investors. The Global Opportunity Index (GOI) considers economic and financial factors that influence foreign investment activities as well as key business, legal, and regulatory policies that governments can modify to support and often drive investments. Overall, it tracks countries’ performances using five categories (see Appendix 1 for more details): • Business Perception measures explicit and implicit costs associated with business operations such as tax burden, transparency, etc. • Financial Services measures the size and access to financial services in a country by looking at the country’s financial infrastructure and access to credit. • Institutional Framework measures the extent to which an individual country’s institutions provide a supportive framework for businesses. • EconoMic Fundamentals indicates the current economic strength of a country vis-à-vis the global economic outlook. The assessment focuses on the country’s macroeconomic performance, trade openness, quality and structure of the labor force, and modern infrastructure. • International Standards and Policy reflects the extent to which a country’s institutions, policies, and legal system facilitate international integration by following international standards. Beyond ranking the GCC countries, the GOI provides several insights about these countries when comparing their performance to other groups of countries with different incomes. Identifying the peer group for each category gives international investors interested in emerging countries some perspective about the strengths and challenges of the region. The GOI rankings, global and subcategories reported in Table 3, underscore the heterogeneity of the GCC countries. Their performances are particularly spread out for the Business Perception and the Institutional Framework categories, with rankings ranging from 38 (Bahrain) to 106 (Saudi Arabia) for the former, and from 15 (UAE) to 75 (Kuwait) for the latter. MILKEN INSTITUTE GLOBAL OPPORTUNITY INDEX 20 20: GCC COUNTRIES 7 Table 3: GOI CoMponent Ranking for the GCC Countries International Business Economic Financial Institutional Standards and Ranking 2020 Perception FundaMentals Services FraMework Policy BaHrain 38 29 45 55 48 42 Kuwait 74 77 36 75 62 58 Oman 49 85 49 66 53 53 Qatar 56 31 32 40 41 38 Saudi Arabia 106 80 59 44 56 66 United Arab 44 50 34 15 29 26 Emirates