Gulf Arab states need to reform to benefit from oil boom

Sep 27, 2005 02:00 AM

Gulf Arab states which are poised to earn record oil revenues this year need to carry out painful reforms to secure long-term economic prosperity, experts said.
With state coffers overflowing with petrodollars, and housing and stock markets booming, Gulf states should avoid repeating the mistakes of the oil boom in the 1970s and early 1980s when they squandered a golden opportunity to diversify and reform their economies.

"States in the region have no choice but to embark on the painful changes," said Tareq Yousef, a professor of economics at Washington's Georgetown University.
At a conference on "Gulf oil and gas: ensuring economic security" in Abu Dhabi, Yousef warned that "in the next 10 to 15 years, oil (revenue) is unlikely to achieve what it achieves now."
"We are starting to see a repetition of the past," he said, citing a lack of strategies to deal with chronic economic ills across the Gulf.

Yousef said future economic security in the Gulf does not depend only on the ability of the region's member states to manage oil resources effectively and to engage in successful regional integration. He said Gulf states must tackle pressing development challenges facing their economies, including job creation, sustainable growth and reducing the role of the state in the economy.
"This region needs to make three realignments in its economy: from public to private sector, from closed to open economies and from oil-oriented to more diversified economies," he said.

The Gulf Cooperation Council (GCC) states, which are pumping about 20 % of total world oil output, are forecast to earn a record $ 300 bn in oil income this year. Although this windfall is seen as a blessing by some, others insist that it poses new challenges as Gulf economies and state budgets remain too dependent on energy.
"One of their main challenges is to create new industries and develop a services sector which will be able to absorb their growing populations," said Herman Franssen, president of InternationalEnergy Associates in the United States.

The GCC -- which groups Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) -- has a total population of about 35 mm, one-third of them foreigners. With an annual population growth as high as 3.5 %, the number of nationals entering the labour market continues to soar each year and the ability of states to provide jobs to their citizens has been diminishing.
"Even though the private sector has expanded and become a big player, labour markets continue to be dominated by public sector employment, reinforcing the role of the state as a dominant force in the economy," Yousef said.

In countries like Kuwait, Qatar and UAE, more than 90 % of the national work force is employed in the government, thus inflating the public sector and rendering it highly inefficient. While the short-term prospects look promising for GCC states due to tight oil markets ensuring high prices and abundant cashflow through the end of 2006, experts said the medium- and long-term were not guaranteed.
"Oil is a cyclical commodity, and it is wise to take steps ahead of time to ensure economic security for decades to come," said Edward Morse, executive advisor of Hess Energy Trading, another US firm. "GCC reforms in general were partial, slow and incomplete... Over the course of the next 15 years, it is unlikely that oil will buy these countries out of the mounting pressures that they will be forced to face," Yousef said.

Source: AFP
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