Assessing The Enabling Environment For The Private Sector In Arab Gulf Economies

By - Mehdi M Ali*

On joining the World Bank in 1972 my first assignment was as an “economist” dealing with Bahrain. I later added the other five GCC countries to my beat. The World Bank’s then advice to GCC governments was to diversify away from oil and gas, and to nurture a robust private sector to enable this. This remains the bank’s advice to this day.

In assessing the enabling environment for the private sector in GCC economies’ diversification efforts we will analyze the data contained in the World Bank’s ‘Ease of Doing Business’ rankings. These rank economies from 1 (best) to 189 – both on overall ‘Ease of Doing Business’ and on 10 sub-categories (see table 1). Having considered each GCC country in turn we will then offer some overall conclusions.

THE UAE

At 22nd overall the UAE is the top-ranked GCC country. This is largely thanks to the tremendous efforts of Dubai over the past forty years to open up its economy with incentives, including simplifying the legal and administrative procedures to attract private business.

The UAE ranks first worldwide (alongside Qatar) in ease of ‘Paying Taxes.’ Indeed, this is the GCC’s strongest category: Saudi Arabia comes third, with even Oman and Kuwait, the most lowly-placed GCC countries, at #10 and #11 respectively. The UAE has four further ‘top-10’ ranks: Dealing with Construction Permits, Getting Electricity, Registering Property and ‘Trading Across Borders.’

In terms of ‘Starting a Business’ the UAE ranks somewhat lower (#58), rather surprising given the enormous efforts by the UAE, particularly by Dubai, to attract the private foreign investors. But the other six emirates do not facilitate business start-ups with the same speed as Dubai.

Not only the UAE, but all six GCC countries rank badly in terms of ‘Getting Credit;’ indeed the UAE (#89) and Saudi Arabia (#71) are the only other GCC countries in the top 100. Though well-endowed with financial resources, one explanation is that the UAE’s banking system is highly risk averse, leading it to avoid lending to the private sector and entrepreneurs.

The UAE’s worst rank (#121) is for ‘Enforcing Contracts.’ This rank places the UAE economy behind Qatar (#104) and Saudi Arabia (#108), but well ahead of Oman (#130) and Kuwait (#131). The UAE is behind such economies as Eritrea, Uganda and Iran.

The ability of a country to enforce contracts is at the heart of attracting private investment and for facilitating private sector activity: a weak legal framework for contract enforcement leads to an atmosphere of uncertainty and distrust making it difficult for the private sector to conduct business and attract private investment from both within and beyond the country. Thus the UAE should look to improve contract enforcement to enhance its ability to attract private capital.

SAUDI ARABIA

Saudi Arabia ranks well behind the UAE overall, at #49, but comes first regionally in two important categories: ‘Getting Credit’ (#71, compared to #89 for the UAE), and ‘Enforcing Contracts’ (#108 versus #121).

Contract enforcement is critical for attracting private investment into the country. Without a strong legal framework to enforce contractual arrangements, many investors will not venture into doing business in a country and those already investing may leave to seek a clearer legal framework elsewhere.

On ‘Getting Credit,’ Saudi Arabia (#71) is the top GCC performer with a banking sector that is relatively responsive to the credit needs of the private sector as well as strong financial support from the government for private business. But globally, it is behind many countries that have meager financial resources such as Nigeria and Zambia. Given the country’s strong finances there is ample room for improvement.

Likewise, in terms of ‘Protecting Minority Investors,’ Saudi Arabia’s mid-range ranking (#62, ahead of some OECD countries such as Finland and Switzerland), leaves room for improvement. This category is critical for raising capital by the private sector as well as for attracting capital from a wide range of investors. Without clear laws and regulations to protect their investment, many potential minority investors in a project will not participate in investing their funds in that project.

Resolving Insolvency: Under this category, Saudi Arabia comes 163rd worldwide, putting it last among GCC states.

Overall, given the relatively large size of the Saudi economy and its ample financial resources, Riyadh has the ability to improve the enabling environment for the conduct of private business and the ease of doing business in the country.

QATAR

Overall, Qatar ranks 50th worldwide and third among GCC states but well behind all the OECD economies and numerous middle income and lower income developing economies such as Bulgaria, Peru, Mauritius and Rwanda.

For ‘Paying Taxes’ Qatar ranks joint first worldwide level with the UAE. Together with Saudi Arabia (#3), they are ahead of all OECD economies, with all six GCC states among the top 11 worldwide, an impressive achievement.

Another relatively-strong ranking is in ‘Dealing with Construction Permits’ (#23): given its strong and rapidly-growing construction sector, Qatar will look to improve this ranking further.

Qatar achieves the top GCC ranking (#47 worldwide) for ‘Resolving Insolvency’ thanks to its high level of financial maturity in its dealing with the private companies operating on its soil. However, there is room for improvement, with Qatar behind not only all OECD economies but also the likes of Thailand, Colombia and Bulgaria. Given the growing sophistication of Qatar’s financial sector, Qatar can easily improve this ranking.

Qatar’s worst rankings are for ‘Protecting Minority Investors’ (#122) and ‘Getting Credit’ (#131). For the latter, it lags all five other GCC states. Given its ample capital and a well-developed banking system coupled with a strong support by the government for the private sector, Qatar has the means to rapidly improve these rankings.

BAHRAIN

Bahrain ranks 53rd overall, a ranking that puts it in the middle of the GCC economies but behind not only OECD economies, but also many middle income and developing countries such as South Africa, Thailand, Malaysia, Bulgaria, Peru and Rwanda.

Its best rank (#7) is for ‘Dealing with Construction Permits’ where it beats most OECD economies including Germany, South Korea, Switzerland and the USA. This is a commendable achievement which can be attributed to the enormous efforts by the government to simplify its administrative procedures and speed up their approval for granting construction permits. For ‘Registering Property’ Bahrain (#17) is second only to the UAE (#4) among GCC states. In common with other GCC states, Bahrain also gets a top-10 rank (#8) for ‘Paying Taxes.’

Bahrain relatively lowly rank (#73) for ‘Getting Electricity’ can be explained by the length of the approvals process for connections to the power grid.

On ‘Getting Credit,’ Bahrain’s ranking (#104) is surprisingly inadequate given the fact that Bahrain has highly developed financial markets, making it a hub for offshore banking. This notwithstanding, the country’s banking sector has remained largely focused on commercial lending which yields a quick return and thus avoids financing other riskier private sector activities, such as industries and entrepreneurial activities. Also surprising given Bahrain’s well developed and sophisticated financial sector is the ‘Protecting Minority Investors’ ranking (also #104).

Bahrain’s poor ‘Starting a Business’ rank (#131) is ahead of only Kuwait (#150) among GCC states and close to the bottom worldwide. This is surprising given the government’s serious efforts to encourage local businesses and attract foreign ones. Therefore, efforts must be made by the government to find and address the reasons behind the economy’s serious lag under this category.

In our view the Bahraini authorities should give their highest attention to improving the country’s ‘Enforcing Contracts’ rank (#123) as this is crucial to the overall ‘Ease of Doing Business’ of a country.

Given the dynamic nature of the government in its management of the economy and its strong commitment to the private business, improving the ranking of the other categories can be achieved within a relatively short period of time.

OMAN

Oman’s overall ranking (#66) puts it behind all Arab Gulf states except Kuwait (#86). Oman is behind all OECD economies, as well as a large number of middle and lower income economies such as Malaysia, Russia, Belarus, Jamaica, Tunisia and Rwanda.

Oman’s strongest ranks are ‘Paying Taxes’ (#10 worldwide, though only fifth in the GCC) and ‘Registering Property (#19 worldwide and third among GCC countries). Another relatively strong performance (#60 worldwide, and second only to the UAE among GCC countries) is for ‘Trading Across Borders.’ This relative strength is not surprising given the country’s trading heritage.

But on three categories that are key to the overall business climate: ‘Getting Credit’ (#116), ‘Protecting Minority Investors’ (#122 and equal last with Qatar among GCC economies) and ‘Enforcing Contracts’ (#130), Oman is a laggard.

KUWAIT-THE LAGGARD

As is already clear Kuwait’s economy ranks far behind all other Arab Gulf states in the overall ‘Ease of Doing Business” (#86). Moreover, in seven of the 10 sub-categories Kuwait also comes last: ‘Starting a Business’(#150), ‘Dealing with Construction Permits’ (#98), ‘Getting Electricity’(#93), ‘Registering Property’(#69), ‘Enforcing Contracts’(#131), ‘Paying Taxes’(#11), and ‘Trading Across Borders’(#117).

Kuwait’s economy did well in one category, namely ‘Protecting Minority Investors,’ (#43, equal to the UAE and ahead of all the other Arab Gulf economies).

Kuwait has a long way to go to catch up with the other Arab Gulf states’ economies. Any serious effort to bring about improvement is a daunting task as it requires actions on all of 10 sub-categories. Embarking on this task requires strong political commitment at the highest level, coupled with the setting up of a team with decision making authority mandated for carrying out this task within a defined period, and able to effectively guide a multitude of legal and technical sub-teams to do the work to create a business friendly environment in the country.

SUMMARY AND CONCLUSIONS

In their efforts to diversify their economies, the Arab Gulf states have made considerable progress. But most researchers and international institutions such as the IMF and the World Bank agree that they still need to do more, to achieve balanced and diversified economies that are not overwhelmingly reliant on oil and gas.

The six GCC countries have also made impressive efforts to provide an enabling environment for private business to thrive and thus play an increasing role in their economic diversification. They have strived to improve the business and investment climate both for local and foreign investors.

Though the above comparison with OECD economies shows the GCC companies in a somewhat poor light, if instead a comparison is made with other countries in the MENA region, then the Arab Gulf states do much better. Between them the six GCC countries claim the top rank among the 20 MENA economies in eight of the 10 ‘Ease of Doing Business’ categories (see table 2).

While making impressive progress toward developing a good enabling environment for private business, it is surprising to observe that all Arab Gulf economies remain at a sub-optimal level in their ‘Ease of Doing Business.’ If we define ‘Significantly Poor’ as a ranking outside the top 50, we find that every GCC economy recorded ‘Significantly poor’ in at least four out of the 10 categories.Even the top regional performer, the UAE, scored ‘Significantly Poor’ in four categories; Kuwait scores ‘Significantly Poor’ in eight of the 10. In addition, in three crucial categories for building trust between the private business and the government and for attracting private investment, and as such essential for building a robust private sector – ‘Starting a Business’, ‘Enforcing Contracts’ and ‘Resolving Insolvency’ – all six GCC countries scored ‘Significantly Poor’. All six lagged behind Morocco in ‘Starting a Business’ and behind Iran in ‘Enforcing Contracts.’