There is little doubt that 2005 was one of the best years on record for the economies of the Gulf Cooperation Council (GCC) countries, and although it is rather early, 2006 already looks set to be a promising year. So far this year, oil prices have been around $65 per barrel, stock markets appear resilient and there are no signs of a significant slowdown in the region’s real estate sector. Added to this, Qatar will be hosting the 2006 Asian Games.
The current economic boom provides the GCC governments with the opportunity to address some of the region’s long-standing structural reforms — diversification away from oil, economic integration and job creation. These reforms remain imperative and must not be ignored or delayed. For longer-term sustainable economic growth, the GCC countries must diversify its income streams and ensure that adequate levels of appropriate employment opportunities are created for the many new entrants to the national workforce. Many of the reforms so often talked about ultimately have similar objectives: Generating jobs for the rapidly expanding national workforce without compromising the region’s liberal and relaxed business environment. Job substitution or draconian quota systems — although well intentioned — may actually be counterproductive and deter foreign direct investment.
The region’s economies grew 5.3 percent collectively in 2005, overall trade surplus was $253 billion, even though imports of manufactured goods and service increased by 20 percent. The region’s stock markets grew by 74 percent and aggregate market capitalization now stands at $1.1 trillion. Dubai’s GDP growth is predicted to be about 16 percent this year — almost double that of China’s — and most of the region’s governments find themselves with substantial current account surpluses.
Increase in government spending, combined with abundant liquidity in the financial system, has generated an investment and consumption boom that has stimulated growth in the non-oil sector. Recent economic growth has lifted per capita income in all the GCC countries, which now stands at an average $ 19,652.
Saudi Arabia became the 149th member of the World Trade Organization and has reduced its public debt to 49 percent of its GDP, down from 93 percent in 2002. The Kingdom ended 2005 with the YANSAB IPO (initial public offering), to which half of its population subscribed for shares. It would be hard to imagine the region’s stock and asset prices growing as strongly in 2006. It is also hard to envisage many more multi-billon dollar projects being launched in 2006, since so many of them announced in 2005 are yet to progress from the drawing board. Nevertheless, so long as oil prices remain high — and there is no indication that they will be otherwise — the GCC asset market growth in 2006 is likely to remain strong.
The question now is how do the GCC countries best utilize this unprecedented period of economic growth and allocate their windfall revenues? If too much is spent too soon it could exacerbate inflationary pressures, make the economies less competitive and deter foreign investment. Is it serving the best interest of the citizens if it is simply deposited in savings accounts? Would future generations not be better served if today’s surplus is productively invested in employment generating investments?
To date, windfall revenues have been allocated in a variety of ways. Kuwaitis were provided with a handout of $680 last year, while public sector workers in Saudi Arabia and the United Arab Emirates were given salary increases of 15 and 25 percent respectively. Dubai has ordered billions of dollars worth of airplanes and has made a series of high-profile overseas acquisitions, while Qatar is investing tens of billions into its LNG industry.
In terms of overseas investments, the GCC countries are ideally placed to explore opportunities in the emerging markets of China and India, and to a certain extent, it is already doing so. One of the best domestic allocations of current surplus liquidity would be to increase the amount of money being spent on education. This should in particular be channeled to vocational institutions that can provide levels of training and skill that are required by the private sector. For example, Saudi Arabia is taking education seriously — in the government’s 2006 budget, new funds were earmarked for constructing 2,673 new schools, three new technical colleges and 15 vocational training centers.
Perhaps the best allocation of current funds would be in the downstream petrochemicals sector, and in heavy industry that is dependant on a large energy input. The GCC countries have a considerable natural comparative advantage in these fields and its fast developing ports services should facilitate efficient exports of such products. The region can and should attempt to retain more of the ‘value added’ profit from its hydrocarbon resources.
The main challenge, however, is economic diversification. This does not simply mean moving away from dependence on oil, but also creating productive employment opportunities. The population is currently growing at more than three percent on average and is estimated to grow by at least two percent annually for the next 15 years. In order to maintain current living standards, real GDP growth will need to be consistently sustained at a minimum of two percent over this period. Such a growth target seems easy in the current favorable economic climate, but during times of low oil prices in the past, real growth rates have been much weaker.
In Saudi Arabia for example, it has been estimated that around 160,000 jobs have to be created every year in order to meet the demand. As a consequence, the Saudi government has sought to ban employing expatriates in over 40 separate job categories.
The oil industry — upstream at least — is inherently capital intensive. The public sectors cannot productively provide employment for all new entrants to the labor market. Job substitution, replacing nationals with expatriates, may seem to be the answer, but the danger particularly for the private sector is that it will make business less competitive, forcing them to consider relocating to countries with more liberal employment policies.
The other key challenges are economic reform and economic integration. The more a given economy opens itself to the outside world, the more foreign direct investment it is likely to attract. Not only should this create jobs, but it will also facilitate transfer of knowledge and skills. Dubai, with its myriad of free trade zones is a case in point. On the other hand, economic integration will create economies of scale, lead to greater levels of intra-regional non-oil trade and give the region, as a unified economic bloc, more bargaining power when negotiating free trade agreements.
(Emilie Rutledge is an economic researcher at the Gulf Research Center, Dubai.)