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2012 | Book

The GCC Economies

Stepping Up To Future Challenges


About this book

The ‘Arab Spring’ of 2011 has affected the countries of the region to varying degrees, including the Gulf Cooperation Council (GCC) members, comprising Saudi Arabia, Kuwait, Qatar, the United Arab Emirates, Oman and Bahrain. The GCC has become a significant regional bloc playing a vital economic and political role far beyond its shores, given its geopolitical strategic location, a preponderance of global energy reserves and a major international player through the use of accumulated financial reserves.

A new Gulf is rising, one that is more self assertive, looking to expand its membership to other Arab countries such as Jordan and Morocco, while at the same time strengthening the bloc’s relationship with current and emerging trading and strategic partners in Europe, USA and Asia.

Regional and international realities, especially the uncertainties unleashed by the ‘Arab Spring’, are forcing Gulf leadership to initiate new policies involving closer cooperation amongst GCC countries to address emerging challenges.

This volume brings together thirty renowned academics and specialists to examine a range of multifaceted social, political and economic issues facing the GCC in key areas such as:

· Diversification from a high dependency on a narrow hydrocarbon base

· Social transformation, youth employment and effective gender participation

· Outward and inward foreign direct investment flows

· Prospects for education reforms and e-learning.

· Sustainable security in oil, renewable energy (including nuclear) and food

· Corporate governance, transparency and enhancing the private sector's operating environment

· The role and governance of Gulf Sovereign Wealth Funds in investing their surpluses.

The volume also offers insights for challenges facing the GCC in monetary union, expanding the regional debt market and Sukuk issuance, GCC intellectual property rights application, detailed assessments of individual GCC country risk analysis, as well as the sustainability of long term government fiscal stimulus programs at the expense of private sector involvement.

Table of Contents


Regional Structural Reforms and Engines of Change

Chapter 1. Working for a Sustainable GCC Future: Reflections on Policies and Practices
During the last decade, the GCC countries embarked (and continue to do so) on massive infrastructural programs aimed at diversifying their economies and creating job opportunities for their citizens. Many of the GCC countries were beginning to realize, however, that the state alone can no longer guarantee or provide jobs for the increasing number of unemployed and graduate nationals. On that basis, many of these diversification programs sought to involve the private sector. But the creation of a competitive economic environment that can compete globally requires bold decisions. Enacting and implementing labor nationalization laws and/or policies alone as a means of encouraging (or forcing) businesses to increase the proportion of national citizens in their workforces may run counter to the “noble” aims of those diversification programs that seek to establish a sustainable economic and competitive business environment.
Nabil Sultan
Chapter 2. Deepening the GCC Debt Markets: The Saudi Arabian Experience
Financial markets are a vital and integral part of the modern economic system. The financial system essentially provides the grease upon which the wheels of commerce and industry operate efficiently. A well-functioning financial market is therefore critical to the health and well-being of the economy. Disruptions in these markets can have dire consequences for the real sectors of the economy, as was vividly evidenced during the financial meltdown of 2008, triggering global recessionary trends, the effects of which are still being painfully felt. While financial markets can be classified in numerous ways, one useful way to view the overall market is in terms of equity versus debt markets. The global fixed income or debt market is a vibrant and vital part of the overall financial system, accounting for over two thirds of the total value of outstanding securities. Much of the financial engineering and innovations in recent years have taken place in this segment of the market. Floating rate bonds, inverse floaters, inflation-indexed bonds, multicurrency bonds, pay-in-kind bonds, catastrophe bonds, Islamic bonds, etc., are just a few examples of innovations that have caught the interest of investors. Entities that issue debt securities essentially are economic units that are deficient in funds and enter the markets to obtain funding at terms that suit their current and future needs. An exception to this is Central Banks that issue debt securities in their role as regulators of money supply and liquidity. While private corporations can raise funds through the issue of equity (shares), governments, municipalities, and semigovernment agencies may have no other recourse but to issue debt. Nevertheless, there are compelling reasons why corporate entities may wish to issue debt. These include tax management strategies, market signaling of their future prospects, and altering management incentives. Buyers of debt securities are either institutional or individual investors whose objectives include receipt of periodic income, lower risk exposure, and the diversification of their investment portfolios. In addition to buyers and sellers, the efficient working of the market requires an institutional infrastructure within which the system can operate. This is provided by financial intermediaries and institutional arrangements, which include primary and secondary dealers, exchanges, investment banks, credit-enhancing agencies, and credit rating agencies. Figure 2.1 shows a schematic representation of the structure of debt markets. The market consisting of the institutions and players is governed by the economic, business, legal, and regulatory structure of the economy.
Abraham Abraham, Fazal J. Seyyed
Chapter 3. GCC Economic Integration: Statistical Harmonization for an Effective Monetary Union
The 1970 Werner Report on economic and monetary union in the European community states “a monetary union implies inside its boundaries the total and irreversible convertibility of currencies, the elimination of margins of fluctuation in exchange rates, the irrevocable fixing of parity rates and the complete liberation of movements of capital” (The Werner Report of 1970). Alternatively stated, three aspects should characterize a monetary union or a currency union. These are (1) a single currency or several currencies that are fully convertible at an irrevocably fixed exchange rate, (2) union-wide monetary policy that is determined by a single central bank or a system of central banks, and (3) a sole external exchange rate policy (Masson and Pattillo 2001). This chapter follows the line of thought that uses the single currency and a monetary union interchangeably, given that exchange rates are irrevocably fixed.
Ikhlaas Gurrib
Chapter 4. E-Learning in the Arab Gulf: Responding to the Changing World of Education
E-learning is an umbrella concept for self-paced or instructor-led online learning in and outside schools worldwide. E-learning refers to computer-enabled transfer of skills and knowledge. It concerns a variety of electronically supported learning and teaching activities. The information and communications technology (ICT) and the Internet serve as mediums and provider for the e-learning process. In the last two decades, the e-learning domain is rapidly growing, since the Internet was made widely available to the public and industry in the 1990s. Nowadays, e-learning activities such as content transfer, training exercises, and communication may be enabled via the Internet or the intranet of a school or university. Electronic means like audio, CD ROMS, video, TV, or the latest mobile (phone) devices may further facilitate the e-learning environment and create connectivity almost everywhere you go.
Nabil Sultan, Sylvia van de Bunt-Kokhuis, Christopher Davidson, Alain Sentini, David Weir

Sustainable Security: Oil, Renewable Energy and Food

Chapter 5. Energy Security in the EU from GCC Perspective
EU is a political and an economic bloc consisting of 27 member states and subject to further enlargement in the future. It generates more than 30% of the world’s nominal gross domestic product with a population of half a billion and more than $32,000 per capita income (Alsahlawi 2009). Energy policy of the EU reflects recent concerns about the security of energy supply because of increasing dependence on imported fossil fuels. Lately, energy security received a great deal of attention but not as much as climate change.
Mohammed Al-Sahlawi
Chapter 6. Going Nuclear in the GCC Countries: Rationale, Challenges, and Politics
In the past few years, the GCC countries have treated this issue of alternative sources of power with some urgency and have created various programs to address this issue. Since 2006, some of the GCC countries began to focus on the potential of nuclear energy as a viable solution (World Nuclear Association 2011a). The peaceful usage of nuclear energy is being promoted by the Emirates Nuclear Energy Corporation (ENEC 2011a) as an extremely beneficial source of power for the UAE region. The significant benefits include provision for climate change and progression toward a knowledge-based economy and self-sustainability. Nuclear power is an extremely clean and uninterrupted source of power. However, the process of obtaining nuclear fuel and its misuse remains a large concern for other countries of the world (EPA 2010).
Ashutosh Sharma, Nabil Sultan, David Weir
Chapter 7. Meeting the Renewable Energy and Sustainability Challenges in GCC Economies: Masdar Initiative Case Study
In considering the common future challenges confronting the GCC countries, renewable energy development and energy security concerns are likely to be reviewed one of the most critical issues. These two issues are critical for GCC countries because of the interplay between growing climate change and sustainable development concerns in the wider GCC region and need to promote entrepreneurship and new market development that is consistent with triple bottom line (social, environmental, and economic) value creation. Moreover, what makes climate change and the related energy management issues so important beyond its obvious environmental importance is that the Middle East and the North Africa region has the potential to become an economic power in terms of renewable energy development and technologies (El-Husseini et al. 2010). This chapter highlights the interplay of these two business and policy priorities by exploring the following three issues and questions. First, what are the key social, environmental, and economic/business factors that underlie the renewable energy and sustainability challenges in the GCC countries? Second, how and in what manner does the Masdar Initiative provide a useful case study in addressing the wider GCC renewable energy and sustainability challenges? Third, what are some critical next steps that GCC region needs to focus on in terms of the renewable and sustainability policy dilemmas?
Toufic Mezher, Jacob Park
Chapter 8. Food Security in the GCC Economies
The changing political situation in the twenty-first century Gulf and the scale of socioeconomic problems are presenting new challenges to the modern oil monarchies. The performance of traditional patron–client networks and wealth redistribution is increasingly vulnerable not only to the inherent uncertainty implied by dependence on oil revenues but also to population dynamics enhanced by structural deficiencies, environmental degradation, and future climate uncertainties. Projections indicate that Middle Eastern localities will be exceedingly vulnerable to aggregate impacts and risk of large-scale discontinuities, which will exacerbate the current situation of the already progressively degraded land and is likely to intensify the already severe water stress (Evans 2009). Consequently, the region is facing a number of converging trends that threaten the future well-being of Gulf nationals and will have a disproportionate impact on the low-income social strata. It should be noted that the comprehensive definition of food security elaborated in Section “Food Security: A Misunderstood Concept in the GCC” includes “all residents” and, therefore, it can be determined with certainty that large segments of those currently living in the Gulf, especially lower-income expatriates, are severely food insecure. However, the plight of these millions of foreign workers has been sufficiently covered in the academic literature and hence will not be part of this analysis.
Andy Spiess

Regional Risk, Global Competitiveness and Economic Diversification

Chapter 9. GCC Country Risk Analysis
Given the increasingly global nature of investment portfolios, understanding country risk is very important for investors. Country risk analysis (CRA) has received extensive interest from researchers, international institutions, individual investors, and policymakers. This growing body of literature did not show enough attention to study country risk for the Gulf Cooperation Council (GCC) countries. As a result, and for a long period of time, international players have dealt with GCC countries as one-type economy (oil and gas) with the same economic, financial, and even political trends. Often GCC country risk was analyzed through the Kingdom of Saudi Arabia as representative for GCC. This neglected efforts to explore the source of GCC country composite risk (CR) and its subcomponents of economic risk (ER), financial risk (FR), and political risk (PR) discouraged international capital to be allocated in GCC. Moreover, the unclear indications of GCC country risk stimulate domestic capital to be allocated outside GCC.
Hassan Mounir El Sady, Hassan Mounir El Sady
Chapter 10. Macroeconomic Competitiveness of the GCC Economies
The Arab Gulf countries, states of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates, are an integral part of the wider Arab regional system, and they are the most important regions in the Islamic culture, where they have huge natural resources of oil, gas, land, and different kinds of minerals. They are deeply rooted in Arabic culture and history. They are an integral part of the Muslim world as well. Yet these six Arab Gulf states decided to form their own “Gulf Cooperation Council,” GCC hereafter, in May of 1981 and were planning to get full economic integration including the monetary union by 2010. However, some obstacles arose in establishing a common currency in 2010. It is well known that the GCC countries are oil-based economies, for which oil proceeds make up a large percentage of government revenues which are the drivers of economic growth. According to the most recent data, oil output represents 48% of the GDP in Saudi Arabia, 35% in UAE, 50% in Qatar, more than 40% in Oman, and more than 50% in Kuwait. However, in Bahrain, the share of oil output decreased to be around 11% of GDP. These high ratios suggest that a change in the oil price volatility is highly pertinent to the volatility of all GCC countries and consequently their competitiveness performance.
Ahmed A. A. Khalifa
Chapter 11. The GCC Intellectual Property Regimes: Global Harmonization or Regional Integration?
This chapter examines the endeavors of the Gulf Cooperation Council (GCC) member states in establishing national intellectual property protection regimes which both meet their international treaty obligations and are congruent with their domestic policy objectives and needs. The starting point for this examination is the benchmark represented by the World Trade Organization’s (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), and the states’ response to their obligations to meet TRIPS requirements. Although Yemen is not yet a member of the GCC or the WTO, the current status of its intellectual property regime receives some attention.
David Price
Chapter 12. Economic Diversification in Saudi Arabia: The Need for Improving Competitiveness for Sustainable Development
Since the discovery of oil in 1938 and the creation of the petroleum industry, oil has continued to make a profound impression on the economy of Saudi Arabia. Structural changes in the economy were, however, underway even before the oil discovery since 1930 when the founder of the modern state of Saudi Arabia, King Abdul Aziz Al-Saud, set about to transform the traditional economy of Saudi Arabia into a modern state (Booz 2008; Abdelrahman 2001). The economic philosophies of successive rulers have not changed since the reign of King Abdul Aziz Al-Saud, although the economic role of the government has been increasing enormously.
M. Sadiq Sohail
Chapter 13. Successful Outward Foreign Direct Investment: Saudi Lessons and Recommendations
The internationalization activity of firms has received increasing research attention among scholars during the last decade due to the significant contribution of this movement to the economic and social development in both home and host countries (Akbar and McBride 2004; Jansen and Stockman 2004).
Marwan N. Al Qur’an
Chapter 14. Foreign Direct Investment in Saudi Arabia: A Competitiveness Analysis
Global flows of foreign direct investment (FDI) have increased significantly over the last few decades. Major factors behind this phenomenon are the increasing numbers of cross-border mergers and acquisitions (M&As), trends toward privatization, and growing competition among the host countries to attract FDI. As a source of external finance, foreign direct investment (FDI) has emerged to play an important role in promoting economic growth, strengthening the local economies, and improving competitiveness of countries in the global economy. Countries like China, India, Malaysia, Korea, and Thailand are classic examples in this regard. The strength of an economy in attracting the FDI depends upon various factors ranging from sociocultural to politico-economic ones. A greater stimulus also comes from factors that shape up the policy environment in the economy.
Mohammad Hanif Akhtar

Corporate Governance, Transparency and Private Sector Operating Environment

Chapter 15. Corporate Disclosure and Reporting Practices in the Gulf Cooperation Council (GCC) Countries
The objective of this chapter is to report on the results of a study that empirically assessed the degree of compliance with annual mandatory statutory disclosure requirements in the Gulf Cooperation Council (GCC) countries.
Haider Madani
Chapter 16. Corporate Governance Regulation: The Experience of Saudi Arabia
Corporate governance used to be a nascent subject in the MENA region including Saudi Arabia until the last decade. In 2005, the Organization for Economic Cooperation and Development (“OECD”) established a Working Group on Improving Corporate Governance in the Middle East and North Africa within the framework of the MENA-OECD Initiative on Governance and Investment for Development. The involvement of the OECD is not a coincidence since it is recognized as the international standards-setter best practices in corporate governance. The Working Group is comprised of representatives of 18 countries of the MENA region including Saudi Arabia and serves as a platform for the exchange of views among the participants and their OECD counterparts. A trend of regulating corporate governance began in Oman 2002 by establishing institutions spreading awareness and training on the importance of corporate governance and most significantly the Hawkamah Institute for Corporate Governance in Dubai (Koldertsova 2010). The six GCC member states signed the Dubai Declaration on Corporate Governance in 2006 which confirmed their conviction of the importance of corporate governance for their economic development and financial stability and their pledge to strengthen the underlying regulatory framework. Countries in the region also embarked on regulating corporate governance including Saudi Arabia, which issued for the first time its corporate governance regulation also in 2006.
Nadia Anani
Chapter 17. An Analysis of Entrepreneurship Characteristics in Saudi Arabia
Small and medium enterprises (SMEs), and entrepreneurship in general, are a critical component of growth in any society. Entrepreneurs create jobs, bring new products and services to the market, and, by starting of new businesses, positively impact on the level of productivity in a sector or the economy. Using data from the Global Entrepreneurship Monitor (GEM) Report for the Kingdom of Saudi Arabia 2009 and 2010 (Skoko et al. 2009, 2010), the fundamental aim of this chapter is to provide a snapshot of the state of entrepreneurship in the Kingdom of Saudi Arabia and describes its key characteristics which can be considered as a strong foundation for an informed policy debate about the relationship between entrepreneurship and economic growth and help governments identify what needs to be done to enhance the level and quality of entrepreneurship in their countries. To gather data, the GEM research utilized two types of surveys: the Adult Population Survey (APS) and the National Experts Survey (NES). The APS was administered to 2,000 Saudis in the summer of 2009, selected from a nationally representative sample of the adult population and yielding 1,881 usable results. The 36 national experts participating in the NES were selected on the basis of their knowledge and experience related to the set of entrepreneurial framework conditions known to have an impact on entrepreneurial activity levels at the country level.
Hazbo Skoko
Chapter 18. The Dynamics of Entrepreneurial Motivation Among Women: A Comparative Study of Businesswomen in Saudi Arabia and Bahrain
The global outlook for female entrepreneurs has never been more encouraging (Riebe 2003). Globally, one in ten women is self-employed, and it is estimated that women own and manage up to one third of all businesses in developed countries. Nelton (1998) regarded this growth of female entrepreneurship since the 1970s from 5% to 38% in 30 years (Hisrich et al. 1997) as one of the most significant, yet quietest, revolutions of our time.
Muhammad A. Sadi, Basheer M. Al-Ghazali
Chapter 19. Influencing Factors Model of Information and Communication Technology (ICT) in Saudi Arabian Small and Medium Enterprises (SMEs)
There is no doubt that information communication technologies are shaping industries all over the world, restructuring economies, and creating jobs, shaping the way how we work, learn, and spend free times. The impact of ICT in development is well documented in the literature and supported by many empirical studies. The increased global attention on the positive impact of ICTs on the development can be illustrated by the US Department of Commerce Report ‘Digital Economy 2000’, which credits the ICT industry for approximately 8% of output in the US economy in the year 2000 and approximately 30% of growth over the past 8 years.
Hazbo Skoko

Investing Surplus Wealth: GCC Sovereign Wealth Funds (SWF’s)

Chapter 20. GCC Sovereign Wealth Funds: Challenges, Opportunities, and Issues Arising from Their Growing Presence on the Global Landscape
GCC SWFs are very active global financial actors, investing primarily in foreign assets; these include equities, bonds, property, precious metals, and other financial instruments (IWG 2008). Unlike private equity and hedge funds, Arab SWFs have a long-term investment vision. GCC SWFs have invested in large companies and have concentrated in a limited number of industries, among them are the financial sector, heavy industry, and logistics. Although these investments have been welcome by host countries, GCC SWFs have garnered the concerns of policymakers and market players. Two main reasons account for such concerns: the dominant role of national governments in the management of these colossal funds. The second concern is related to the issue of transparency and accountability. The lack of transparency of these gigantic funds has propelled a debate about the challenges and opportunities for host nations. Parallel to this debate, strong feelings of protectionism in some Western countries had emerged fuelled by concerns around national sovereignty.
Ruth Rios-Morales, Mohamed A. Ramady, Louis Brennan
Chapter 21. The Misconceptions Regarding the GCC Sovereign Wealth Funds
The term sovereign wealth fund was first used in 2005 by Andrew Rozanov in an article entitled Who holds the wealth of nations? in Central Banking Journal, 2005. The previous edition of the journal described the shift from traditional reserve management to sovereign wealth management; subsequently, the term gained widespread use as the spending power of global officialdom has rocketed upward.
Behzad Shahandeh
Chapter 22. The Governance of Sovereign Wealth Funds from the GCC in an International Perspective
The rise of sovereign wealth funds (SWFs) as an increasingly important institutional investor class indicates some profound trends in the global political economy. It is indicative for the movement of emerging economies from the periphery to the center, not only of the real economy, but also the international financial system. It is indicative for the secular trend of long-term upward pressure on commodity prices and associated incomes which SWFs are mandated to manage on behalf of countries endowed with natural resources. It is also indicative for the capacity, but also political will of governments predominantly from emerging economies to more prudently manage financial wealth. It is finally indicative for the growing role of government in economics, not limiting itself to providing the institutional framework within which market participants interact, but assuming more active roles in markets themselves.
Sven Behrendt
Chapter 23. Putting Sovereign Wealth Funds to Good Use: Strategic Options for SWFs in the GCC Region
There are currently over 40 sovereign wealth funds (SWFs) globally, with total assets of around US$5 trillion. Nearly half of the total assets of the top ten SWFs are accounted for by the Gulf Cooperation Council (GCC) countries. The leading SWFs in the region are Abu Dhabi Investment Authority (ADIA), Saudi Arabia Investment Funds, consisting of SAMA Foreign Holdings and Public Investment Fund, and Kuwait Investment Authority – altogether, they account for over 90 percent of the value of SWFs in the GCC region.
Mohammed Salisu, Nahed Taher
The GCC Economies
Mohamed A. Ramady
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Springer New York
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