Low oil prices roil the Gulf. The region’s rulers are facing an epoch of paucity, following an era of plenty. Bank deposits are falling, government-related entities are disposing of assets and major infrastructure projects are being put on hold.
So what should the region’s governments do?
There is a growing consensus that the Gulf should adopt what The Economist, in a recent interview with Mohammed bin Salman, Saudi Arabia’s deputy crown prince, called a Thatcher Revolution – radical public sector reforms, privatisations and liberalisation of the economy.
Even if this label is wide of the mark – the Gulf’s parastatals aren’t going anywhere – the liberalising spirit that animated The Iron Lady would not go amiss in stolid bureaucracies of the Gulf.
The Gulf has its own, distinctive economic model: sovereign wealth-fund backed dirigisme, in which monolithic parastatals recycle state funds through state banks and into state-backed infrastructure projects while earning economic rents by charging high prices to residents.
This is not without advantages. The country’s parastatals have a useful role to play in acting as a conduit for economic development efforts. Dubai’s skyline would look very different without Emaar, for example.
The continuing sagas over Heathrow’s third runway, or night flights at Frankfurt, contrast unfavourably with the close ties between airport construction and airline development plans in Qatar and the UAE.
Greater consumer choice, and liberalisation of key industries, would do much to keep the benefits of parastatals while reducing their social cost. Local utilities benefit from legal and financial barriers to entry, which keep prices high, especially in the telecoms sector. Opening up utilities to foreign investment could do much to lower prices.
The most significant reform, and the most controversial, would involve a further loosening of the single biggest impediment to business activity in the Gulf: foreign ownership restrictions.
Of course, free zones allow companies to access the markets of Dubai or Abu Dhabi, for example, without having to take on a rent-seeking “sleeping partner”.
But for smaller companies looking to set up in the region, regulatory burdens remain onerous.
Restrictions on owning land and companies onshore discourage investment – preventing the growth of the private sector.
If the Gulf states want to stimulate private sector growth during this period of low oil prices, then the legal and economic advantages of free zones should be extended to entire countries.
The result would be faster private sector growth and greater inward investment.
Legal reform could also improve the onshore business climate.
The vagaries of onshore law courts were decided to offer too many difficulties for financial firms for example, which led to the Dubai International Financial Centre establishing its own legal system, governed by English common law.
Predictable corporate jurisprudence is not an optional extra for a productive business environment.
Insolvency procedures, too, are almost non-existent.
Silicon Valley proselytisers will tell you that failure is an important part of entrepreneurship. Samuel Beckett’s maxim “Fail again. Fail better” is now plastered on inspirational posters across Palo Alto.
But in this region, which longs to foster innovation and a knowledge economy, failure means unlimited personal liability for a venture’s collapse and the risk of imprisonment after default.
The Gulf must also hold its nerve on investment spending.
In fiscal policy, the current international consensus is that the Gulf must trim budgets. The IMF has praised Saudi Arabia and the UAE for cutting government spending while warning both that they face “a multiyear adjustment process” – more cuts, for longer.
There is plenty of scope for cuts to the public sector, where salaries grew by an inflation-busting 37 per cent, year-on-year as of mid-2015, from the most recent available data show.
But, as the former Lebanese minister of economy Nasser Saidi has said, this is exactly the wrong time to be cutting infrastructure projects.
Saudi Arabia, in particular, has not made use of its decade of expensive oil prices to diversify its economy away from oil-dependent industries, instead moving into downstream petrochemicals and minerals. The country cut its 2016 infrastructure budget by two-thirds.
In the UAE there are also signs of project slowdowns. The IMF believes that UAE spending cuts will trim 1 per cent off growth each year over the next five years. Meanwhile, Abu Dhabi is experiencing high housing price inflation and there are shortages of school places across the country.
The UAE and Saudi Arabia have made tentative noises about foreign debt issuance. With tiny net debt piles and sovereign wealth fund assets equivalent to more than 100 per cent of GDP in Saudi Arabia, and more than 200 per cent of GDP in the UAE, both countries have ample scope to tap international markets. Doing so to fund investment projects with high economic returns would be much more sensible than cutting capital expenditure.
The states’ buffers, and their capacity for debt, allow Gulf governments to insulate their residents from the impact of low oil prices. But instead austerity has been applied to the wrong line of items: salaries rather than infrastructure.
Commitment to infrastructure spending, liberalisation of land and business ownership, greater competition in public utilities and a legal system that incorporates the lessons learnt in the DIFC and abroad – that is the recipe for a Gulf that can adjust to the era of low oil.
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