Some of these measures may seem to court volatility — investments in financial institutions, for instance, could be perceived as dangerous in the market environment of 2009. But in fact, these steps are calculated risks that will generate stability in the long term. The GCC governments are using the returns from their investments to develop a more diversified regional economy. They are also funding the sort of socioeconomic development, including education reform, that will prepare the region and its labor force for a strong economic future.
Since the late 1990s, the GCC countries have been steadily deregulating the telecommunications, media, financial-services, airline, and real estate industries. As a result, companies that are based in these countries (and often partly owned by their governments) have reaped the benefits of competing in more open markets. For example, the Emirates Telecommunications Corporation, known as Etisalat (the primary telecommunications provider for the UAE), the Zain Group (a Kuwait-based mobile services company), and Saudi Telecom Company (STC, the primary telecom provider for Saudi Arabia) all have the potential to join the ranks of the world’s 10 largest telecom service operators. The Saudi Basic Industries Corporation, which once held a monopoly position as Saudi Arabia’s primary manufacturing company, is now the world’s second-largest petrochemical company and the world’s largest producer of polymers; in 2007 it acquired General Electric Company’s plastics unit.
Yet as governments relax their regulatory approach, they must pay greater attention to the effectiveness of their regulation. And the appropriate balance between restraint and laissez-faire — between the government roles of deregulator and regulator — is not always obvious. Successful deregulation needs to be intricately paced, with a constant mindfulness of its impact.
In the financial-services sector, the global crisis — and particularly the failure of oversight that led to it — dramatically illustrated the importance of good governance to leaders in the region. Even before then, GCC governments had recognized that a measured approach to regulation was important. For example, Saudi Arabia has slowly but steadily opened its financial markets to foreign competitors, at the same time that it has introduced formal exchanges that are independently, and more rigorously, regulated. Saudi Arabia’s careful deregulation of telecommunications has also benefited both the country and the players in the market. When STC sold 30 percent of its shares in a public offering in 2002, new licenses were granted to other players for the first time, and STC’s monopoly as a service provider ended. STC continues to employ more than 20,000 people — more than its international competitors, on average — because eliminating these jobs would result in sizable unemployment, especially among low-skilled workers. The government made a point of going slowly, introducing limited competition, and offering skills training to nationals to help ensure a smoother transition.
Another example comes from the much-touted real estate markets of the United Arab Emirates. In March 2009, after its local governments had begun to introduce new real estate laws, the UAE established a federal authority to coordinate existing regulatory bodies. Additionally, it arranged a merger of leading mortgage finance companies into a new Emirates Development Bank, which will receive government funding and equity capital and will be tasked with energizing the mortgage sector. Measures like this send a clear signal that the government of the UAE recognizes that some regulatory constraints and a deliberate evolutionary path, even in a sector known for hyper-rapid construction and freewheeling creativity, are crucial to sustained growth.
New companies continue to rapidly emerge from old government agencies in the Gulf. The Saudi Arabian government has divested about 30 percent of its ownership of SABIC; GCC governments have also partially privatized STC, Etisalat, and Oman’s state-run power plant, Al Rusail. By so doing they have set up these institutions to behave like private companies; to focus on operational efficiencies, cost optimization, and increasing returns rather than merely providing services to citizens. This type of energetic, commercially focused privatization is a cornerstone of the Gulf’s evolving economic policy.