Economic Development in The GCC States - Term Paper Example

26 March Economic Development in GCC Countries Topic proposal In conditions of continuous economic decline, the topic of economic development acquires new meaning. First, financial crisis changes the pace and direction of economic development. Second, in the midst of the financial turmoil, the success of the major economic initiatives predetermines each country’s ability to cope with the emerging economic complexities. The beginning of the 21st century for the six GCC countries has been marked with the rates of economic growth unseen since the 1970s: the construction boom, the growing oil prices, market openness and financial stability altogether contributed to the development of the new, more successful and more effective economic trends in the GCC region. However, the new financial crisis calls for the need to redirect the existing development policies to help countries adjust to the new conditions of economic performance. This paper will cover the basic elements of economic development in all six GCC countries – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. The paper will trace the development of their economic opportunities since the middle of the 20th century until present, to assess their stability against the current financial turmoil. OUTLINE THESIS. Although all six GCC countries display remarkable economic growth and possess extensive economic and financial resources, they cannot but perceive the impact of the global financial crisis on their economies and thus must adjust their policies and economic development goals to meet the demands of economic stability and sustainable economic expansion. I. Economic development in the GCC countries: the role of Islam. II. Bahrain: economic development and the role of the financial sector III. Kuwait: too rich or too fast? IV. Oman: oil dependence and the shrinking oil sector V. Qatar: the shift toward gas and petrochemicals as the determining feature of the country’s economic development VI. Saudi Arabia and UAE VII. Economic development in GCC: commonalities, differences, and challenges VIII. Conclusion. Economic Development in GCC Countries Introduction The beginning of the 21st century for GCC countries has been marked with the pace of economic growth unseen since the middle of the 1970s – all six countries of the GCC region displayed remarkable economic growth patterns and were far ahead of their western economic partners. The construction boom, the growing oil prices, increased market liberalization, further supplemented with the knowledge and benefits of Islamic economy altogether contributed to the development of new economy in the GCC. The new financial crisis has become a good test to the stability and efficiency of economic initiatives in the Middle East, and under the pressure of the new financial complexities, all GCC countries had to reconsider their principles and approaches to economic development. Although all six GCC countries display remarkable economic growth and possess extensive economic and financial resources, they cannot but perceive the impact of the global financial crisis on their economies and thus must adjust their policies and economic development goals to meet the demands of economic stability and sustainable economic expansion Economic development in the GCC countries: the role of Islam. The beginning of the 21st century in GCC signified dramatic progress toward better economic development opportunities in the Middle East. High oil prices, the construction boom, political stability, market liberalization, and the growing number of foreign firms in the Gulf region gave GCC countries a kind of competitive advantage over their western partners. A unique combination of numerous business opportunities and openness to foreign capital produced remarkably positive effects on the state of the Gulf economy in general and the economy of each Gulf country, in particular (Saab 54). Islamic economic principles played not the last role in how the Gulf States coped with their economic difficulties and built their economic strategies. In many instances, it was due to the Islamic principles of economy and western openness and liberalization of markets that allowed GCC to make a huge leap forward in the implementation of successful economic initiatives. The philosophy of Islamic economics is actually a combination of capitalism and self-interest; in other words, Islamic economics promotes competition, private property, and economic gains through self-interest as the basic tool of economic and financial motivation (Askari 28). The principles of capitalism in Islamic economy and in the Gulf States are used and adopted to the extent, which makes them compatible with the principal goals of the Islamic society – they should reinforce social justice and maintain the stability of the Islamic social order (Askari 28). As a result, Gulf States operate in the atmosphere of the so-called “honest capitalism”, which aims to eradicate poverty and to provide everyone with equal or almost equal business and economic opportunities. Moreover, Islamic economics denies the relevance of absolute ownership, which has critical implications for the sale of land and mineral resources, because work and investment are the only two methods by which Islamic businesses can acquire property rights (Askari 29). Islamic economies impose social responsibilities on every land owner and imply that those who enjoy the benefits of the raw land cannot sell it for a price, until improvement or investment has been made (Askari 29). Finally, Islam sets strict guidelines and imposes severe laws on everything that pertains to the economic growth and development, and these guidelines and requirements set the stage for the successful and sustainable economic growth in all Gulf States. Bahrain: economic development and the role of the financial sector Bahrain was the first oil producer in the Gulf region and it was also the first to experience the decline in oil production (Oxford Business Group 27). That is why the history of economic development in the country is much longer compared to other GCC countries. Energy surpluses have never been central to the economy of Bahrain, but they significantly contributed to growing economic opportunities in the region and maintained steadily high rates of GDP growth in the Kingdom (Oxford Business Group 31). Bahrain’s economic trajectory was and is determined by the so-called Vision 2030 plan, which lays the foundation for the sustainable economic growth for years ahead and emphasizes the central role of the financial sector in the economic and market diversification (Oxford Business Group 32). The Kingdom of Bahrain has always been the financial center of the Gulf Region. In Bahrain, the financial sector accounts for 22% of the national GDP, and the Kingdom tries its best to retain its leadership position in the highly competitive economic environment (Oxford Business Group 33). The $3bn financial project in Manama exemplifies the Kingdom’s striving to expand its financial role in the Gulf economy and reflects the benefits of the steady growth of diversified economy (Oxford Business Group 33). The success of Bahrain’s economic growth is rooted in the stability of its financial sector and the national labor force. In its current state, 70% of financial sector employees are of Bahrain origin and national workers are fairly regarded as one of the keys to sustainable economic development in the Kingdom (Oxford Business Group 33). In 2007 alone, the rates of GDP growth in Bahrain equaled 7%, with the slight decline caused by reduced oil production, the falling oil prices, and the international financial crisis (Oxford Business Group 35). Oil production decline has been the determining feature of Bahrain’s economic picture since the middle of the 1970s, but petroleum production and refining still account for 60% of the national exports (Oxford Business Group 36). That is why the Kingdom had to redirect its growth opportunities and to turn to natural gas, in order to support its economic growth endeavors in the long run. Bahrain’s Economic Development Board is the one responsible for economic development in the country, which actively works to attract foreign direct investments and to expand gas industry (Oxford Business Group 40). Bahrain maintains low inflation levels, but even with the strong budget surplus and the growing gas exports, the coming years are likely to become a real economic challenge. Bahrain must be able to address and adjust its economic needs to the demands and requirements of the new financial crisis, and will have to reconsider its basic economic policies to address the emerging economic controversies, including the oil production decline. Kuwait: too rich or too fast? Kuwait is considered the leader of the oil industry in the Gulf region. Its oil discovered in 1938, Kuwait has significantly benefited of the closure of the Iranian oilfields and the discovery of the new oil resources at Mina-al-Ahmadi (O’Shea 43). Between 1953 and 1965, Kuwait was the largest oil producer among GCC countries and concentrated its efforts on extracting, refining and retailing oil as a part of its economic growth (O’Shea 43). With its own tanker fleet to export the oil, Kuwait obviously has a competitive advantage over other Gulf countries and uses oil by-products to invest in and expand its petrochemical industry (O’Shea 43). However, while other countries of the Gulf region seek to diversify their economies to secure themselves from the lack of oil profits, Kuwait is probably the only one currently restraining itself from any diversification attempts: instead, the success of its economic development is based on the development and perfection of various refining and exploration techniques (O’Shea 44). More importantly, Kuwait operates in the legal environment which obligates the government to invest 10% of its oil profits in foreign long-term projects – as a result, not spending but continuous reinvestment is the key to Kuwait’s economic success (O’Shea 44). Kuwait is the basic owner of numerous international enterprises and companies, has substantial holdings in the NYSE leading corporations and thus has an opportunity to restrain from borrowing (O’Shea 45). For this reason, economic development in Kuwait is often called “rentier development”, because the sources of the basic economic profits for Kuwait lay far beyond its borders and have little contact with the local economy (O’Shea 46). Unfortunately, it is Kuwait’s dependency on external resources that is likely to play an economic trick with the country: as the whole world is fighting with the economic crisis, it is very probable that Kuwait will have to reconsider its approaches to economic growth and to prepare itself to the serious economic decline. In this sense, Kuwait should consider diversification as the best approach to sustainable long-term growth in the country. Oman: oil dependence and the shrinking oil sector Like other GCC countries, Oman has already realized the value of diversification and its role in supporting sustainable economic development in the long run. The last three quarters of 2007 in Oman saw a steady 8.3% increase in GDP, with non oil sectors considered the engines of the national growth (Sultanate of Oman). The four basic elements of economic development in Oman include Wholesale and Retail trade, Financial intermediation, Public administration and defense, and Transport/ Storage/ Communication (Sultanate of Oman). Oman actually supports an assumption that Gulf countries, on the one hand, should reconsider their oil approaches to economic development and, on the other hand, should prepare themselves to the complexities of the international financial crisis. Still, Oman was and remains an oil-based economy and uses economic diversification as an effective means to moderate its dependence on oil (Anonymous). In its current state, the macroeconomic environment in Oman is characterized by low inflation, strong financial system, stable exchange rate, and comfortable reserves (Anonymous). The economic development policy is highlighted in the Oman 2020 plan, which discusses a series of five-year plans that set the goals and objectives for all government sectors (Anonymous). The principles of economic planning in Oman imply consultations from both government and non-government entities, and the Oman 2020 vision of economic development is based on the profound technological and structural changes, including information technology and the global system of production (Anonymous). The National Information Technology Committee, The Tender Board, Oman Centre for Investment Promotion and Exports Development, and WTO Membership altogether position Oman as an oil-based economy that grounds its economic development opportunities on the openness to the foreign capital and experience, and close cooperation with international economic institutions (Anonymous). However, while Oman tries to expand its international presence and to use its economic ties to support its economic development policies, it should also become more sensitive to recent the changes in the global economic environment, to be able to timely react to the emerging financial and economic problems. Qatar: the shift toward gas and petrochemicals as the determining feature of the country’s economic development Qatar used to hold the third largest deposits of gas resources in the world, after Russia and Iran, with the substantial amount of this gas found in its North Field (Dew & Wallace 12). Until present, Qatar has always recognized “that its national economic future lies in the maximum exploitation of its gas resources and, to this end, two major companies were formed to produce and export LNG – namely, Qatar Liquefied Gas Company and RasGas Company” (Dew & Wallace 12). The major export targets for Qatar gas include Japan, Korea, and the Far East (Dew & Wallace 12), and these export profits lay the foundation for the subsequent continuous economic development in the country. In its striving toward economic stability, Qatar uses the benefits of the extensive feedstock supply to produce an array of petrochemicals, which significantly contribute to the national rates of economic development (Dew & Wallace 12). The three basic principles of economic development in Qatar include “sound economic management, responsible exploitation of natural resources, and suitable economic diversification” (General Secretariat for Development Planning). Qatar strives to maintain reasonable rates of economic growth necessary to secure a high standard of living for the current and future generations (General Secretariat for Development Planning). Responsible exploitation of natural resources is further supplemented with gradual diversification of the economy to mediate the country’s dependence on oil and gas (General Secretariat for Development Planning). In economic development, Qatar pursues knowledge-based principles and transparent government activity which exemplify a novel approach to managing Gulf economies in the region. Saudi Arabia and UAE Before the UAE discovered oil, its economic development patterns heavily depended on agriculture, pearl industry, fishing, and seafaring (Shihab 249). Since the middle of the 1970s, the UAE has entered the new phase of the rapid economic development, based on oil exports. Economic development in the UAE was always rooted in economic and social stability, the use of vast mineral resources, the use of available agricultural resources and effective labor force (Shihab 249). Economic development in the UAE exemplifies and results in profound structural changes which reflect in industrialization, structural transformation, urbanization, foreign trade, and better employment. In the UAE, the growing industrialization is one of the basic patterns of economic development, followed by increased agricultural production and changed employment opportunities, as well as balanced human development policies and reasonable use of extensive natural resources (Shihab 250). In this sense, the UAE closely resembles Saudi Arabia, which relies on private sector growth, relatively low inflation, stable currency exchange, spending vs. saving, and steady share price gains (SUSRIS). In Saudi Arabia, “the fundamental dynamics supporting the strong outlook for the economy have been set in motion by reforms that have already been enacted and an investment boom that can not be stopped in its tracks” (SUSRIS). The economic development prospects for the UAE and Saudi Arabia have somewhat weakened against the current financial crisis, but it is obvious that their economic growth will continue until at least 2010, driven by the growing domestic demand and oil revenues. That does not mean that the UAE and Saudi Arabia should not prepare to the oil price declines and the subsequent decline in demand for oil products. These changes will, most probably, influence the rates of GDP growth, employment rates, and will result in profound structural shifts. As a result, the success of the future economic endeavors in the Gulf region will largely depend on how well GCC countries respond to external financial and economic pressures. Economic development in the GCC: commonalities, differences, and challenges All countries of the Gulf region display similar economic development patterns and ground their policies on economic diversification, financial and market openness, international cooperation, reinvestment and saving. Kuwait seems an unreasonable exception with its persistent reliance on oil production. Simultaneously, countries in the Gulf region have insignificant differences in how they approach their economic development policies: these can favor saving or reinvestment, on spending or foreign cooperation with European companies. What all Gulf States must realize is that the current financial crisis for their economies will not go unnoticed. Abdelbaki is correct, saying that “the effect of the financial crisis on the economies of GCC countries is multifaceted and include: (1) decreased oil prices and its effect on the status of the public budgets, and consequently on investment and development programs; (2) decreased international demand for GCC exports as a result of the economic recession; and (3) increased unemployment as a result of productive institutions decreasing the size of their work force and decreased demand affecting gulf financial markets” (140). Available oil resources are a good start for any economic development, and well-balanced development policies add their value to the current state of economy in the Gulf region. Yet, oil resources are not infinite, and financial crisis changes external and internal economic conditions for all GCC countries. The success of the future economic growth for all GCC countries will depend on how well they balance their diversification initiatives with the changing global economic conditions and requirements. In its current state, the Gulf region is facing the need to reconsider its traditional approaches to economic development, to match its economic goals and Islamic principles with the needs and objectives of the global economic environment. Conclusion GCC is fairly regarded as one of the most prominent and economically successful regions in the global economic environment. The patterns of economic development in all Gulf States are based on economic diversification, the relevance of the financial sector, liberalization, trade, economic openness, and finally, oil and gas exports. However, the current financial crisis requires that all GCC states adjust their economic development policies to the changing demands of global economy. To address the emerging economic complexities, GCC states must reconsider traditional approaches to economic development, to make sure that their Islamic economic principles fit into the system of the global economic relationships. Works Cited Abdelbaki, H.H. “Assessing The Impact of Global Financial Crisis on GCC Countries.” Journal of Business & Economics Research, 8.2(2010): 139-151. Print. Anonymous. “Oman 2003-2004. Economic Development.” Omanet. Omanet.com, 2005. Web. 26 March 2010. Askari, H. Middle East Oil Exporters: What Happened to Economic Development? Edward Elgar Publishing, 2006. Dew, P. & Wallace, J. Doing Business with Qatar. GMB Publishing Lrd, 2002. General Secretariat for Development Planning. “Qatar National Vision 2030. Economic Development”, General Secretariat for Development Planning. General Secretariat for Development Planning, 2007. Web. 26 March 2010. O’Shea, M. Kuwait. Marshall Cavendish, 1999. Oxford Business Group. Annual Business Economic and Political Review: Bahrain. Oxford Business Group, 2009. Saab, G. “A Study of Financial Development, FDI and Growth in the GCC Area.” Competition Forum, 5.1 (2007): 53-57. Shihab, M. “Economic Development in the UAE.” UAE Interact. UAE Interact, n.d. Web. 26 March 2010. Sultanate of Oman. “Economic Review.” Sultanate of Oman, Ministry of National Economy. Sultanate of Oman, Ministry of National Economy, 2007. Web. 26 March 2010. SUSRIS. “The Saudi Economy’s Golden Era”, Saudi-US Relations Information Service. SUSRIS, 2007. Web. 26 March 2010. Read More