The UAE government last month announced ambitious plans to rewrite its long-standing regulations on commercial agencies. Across the Gulf region, international companies have for decades worked with local agents who have effectively controlled the sale of a range of imported goods. In many cases, these coveted agencies have given rise to immense fortunes. The UAE plan, while not yet fully finalized, proposes to abolish the long-standing practice of automatically renewing these agencies which would in principle allow foreign businesses to find new partners or even sell directly.

The proposal is part of a broader program of using proactive regulatory reform to encourage investment. It follows a

succession of recent steps liberalizing foreign ownership of companies as well as immigration regulations. All of this reflects a growing recognition of the need to ignite new growth drivers to stimulate investment and productivity.

While the UAE move appears radical, the ideas underpinning it have been shaping policy discussions across the Gulf region for some time. For instance, the Saudi Vision 2030 strongly emphasized the need to empower private enterprise. To this end, it proposed to “open up new investment opportunities, facilitate investment, encourage innovation and competition and remove all obstacles preventing the private sector from playing a larger role in development.” Similar aspirations are reflected by economic strategies in all the GCC economies.

An important aspect of putting the private sector at the forefront of growth drivers is the creation of a conducive business climate. Important strides continue to be made in upgrading corporate laws, easing access to finance, and facilitating insolvency procedures. In general regulations, administrative processes, and dispute resolution are all attracting unprecedented attention.

All of this is needed to encourage investment in new ideas, but for these ideas to flourish, they need a level playing field, a competitive environment that is free

and fair. The most compelling case for fostering competition goes back to the strategic necessity of making productivity the key driver of growth in the Gulf. In the old environment of oil-fuelled growth, competition was seldom a real concern as rising income levels benefited most people. But as the relative contribution of the old extensive growth drivers weakens, productivity is needed to fill the gap.

Economics textbooks still sing the praises of free markets and “perfect” competition as the most efficient economic systems. Problematically, this supposed efficiency is achieved through the assumption of full access to information which, even in the age of the Internet, is unlikely to be true for any length of time. Instead, it is more helpful to think of competition as the most dynamic economic system, as suggested by Friedrich Hayek in his 1968 essay “Competition as a Discovery Procedure.” Hayek argued that competition was a driver of innovation in a constantly changing world as “entrepreneurs constantly search for unexploited opportunities.”

The potency of competition comes from the inherent diversity of companies, products, information and ideas. As an engine of economic change, competition allows us to achieve things we could not achieve in its absence. Competition is indeed a powerful driver of economic progress.

The International Monetary Fund concluded in 2018 that a competitive business environment globally provides more than 40 percent of all productivity gains. The only other factor that comes close is human capital at somewhat less than 40 percent. The IMF estimated that matching international standards in the three main reform areas of competition, human capital and financial market development could add around one and half percentage points to potential GDP growth in the GCC, almost comparable to the rate of population growth. Adding this factor to other drivers would almost certainly ensure steady growth in living standards.

Like so many things in life, competition sounds simpler in theory than it does in practice. Three important issues will inevitably attract growing attention as the Gulf countries continue to overhaul their economic regulations. Firstly, by shaking up established business practises, competition will inevitably deliver winners and losers. Regulation must also seek to manage the socio-economic costs of such disruptions. Secondly, many regional markets are very small, which has always complicated efforts to create a truly level playing field. Competition law and effectively applying it will have to play a greater role going forward. Thirdly, while obstacles to competition require attention in the national context, they do so also regionally and beyond. Reducing non-tariff barriers and standardizing regulations are effective ways of enabling businesses to compete beyond their home turf. While none of this is simple, the pay-offs as estimated by the IMF are definitely a prize worth winning.

• Jarmo Kotilaine is an economist and strategist focusing on the Gulf region. He writes on issues ranging from economic development to changes within the corporate sector.