Middle East Academics Policy Makers and Other Term Paper

Excerpt from Term Paper :

Middle East

Academics, policy makers, and other specialists, let alone the general public, have a tendency to perceive the Middle East as a monolith. The truth, however, shows that it is a region filled with contrasts, extremes, and diversities. This is depicted in the extreme differences in neighboring countries with same religion, culture, dress and language, yet lifestyles, radically different. This paper addresses one such difference between two kingdoms, both belonging to the Middle East but at polar extremes in a number of areas. The two countries under study are thus, Saudi Arabia and the United Arab Emirates and the area under study is privatization or liberalization of the economy.

Saudi Arabia is a kingdom with one of the largest oil deposits which, to date remain the focus of the Saudian economy, taking away a major percentage of the Gross Domestic Product. Saudi Arabia's economy is thus dependent on oil and oil derivatives, which account for 90-95% of Saudi export earnings, 75% of the budget, and about 35-40% of GDP. To reduce this dependency, the Saudi Arabian government is studying non-oil revenue generating sources.

Saudi per capita GDP which was highest in 1981, when both the U.S. And Saudi Arabia had a per capita GDP, in current dollars, of about U.S. $28,600, is approximately $7,000.

Public sector debt (almost all central government domestic debt) has been hovering between 90 to 100% of the GDP for the past few years. The accumulating interest payments due on this debt form a major portion of the capital expenditures in the budget. Though, it is interesting to note that overseas Saudi private capital amounts to $600-700 billion, or four to five times the Saudi GDP. Moreover, foreign worker remittances, about U.S. $16 billion annually, continue to be a burden on the current account. Thus the Saudi economy, as a result of oil dependency and state-controlled enterprises is heavily burdened (Saudi Arabia Country Analysis Brief, 2003)

As compared to Saudi Arabia, the UAE has the highest per capita income in the Middle East, partly due to possession of world's third largest oil deposits. However it cannot be ignored that in the past few years, UAE has developed non-oil sources such as the industrial, trading and services sector so much so that in 1998, oil-based industry accounted for only one-third of the UAE's GDP (Privatization and Economic Strengths, 2003).

PRIVATIZATION PROCESS

United Arab Emirates

United Arab Emirates is a success story of privatization of state-controlled enterprises and liberalization of the overall economy. The process of privatization began as a means to reduce government expenditures and to turn around unprofitable state-owned enterprises. A special committee, which was assigned the task of planning and implementing the privatization process, was established in 1997. As part of the UAE's privatization process, in 1996 Abu Dhabi sold shares by public subscription in Food Co., a food products retailer and floated majority stake in the joint-stock company Abu Dhabi Shipbuilding Company. This was followed by selling away shares of al-Kanza Insurance Company and Oasis International Leasing Company. The General Industrial Corporation, an outfit with diverse business lines was also put up for sale for private ownership. Furthermore, in order to meet current needs Abu Dhabi Government has begun to privatize its water and electricity sector, a process, which is projected to get completed within the next 10 years. The privatization process began with the formation of 11 companies under the Abu Dhabi Water and Electricity Authority (ADWEA). This brought an end to the existence of the Water and Electricity Department (WED). All of these companies operate on a commercial basis with separate budgets and objectives. The Government owned the companies initially, allowing private owners to own the generating and distributing companies. Four of the 11 companies generate power; the Al Mirfa Power Company, Umm al-Nar Power Company, Bainounah Power Company and Al Taweelah Power Company. The two new distribution companies are the Abu Dhabi Distribution Company and Al Ain Distribution Company. Other new firms are the Abu Dhabi Company for Servicing Remote Areas, Abu Dhabi Transmission and Dispatch Company (Transco), Abu Dhabi Water and Electricity Corporation, Al Wathba Central Services and Emirates CMS Power Company. Transco has been given the job of scheduling and dispatching, handling the transmission of water and electricity and administering the settlement system. All of the firms are subsidiaries of ADWEA under the supervision of the Regulation and Supervision Bureau for Water and Electricity. One goal behind privatizing water and power was generation of revenue through investment in infrastructure. Other objective is to make optimum use of resources through efficient allocation. Furthermore, the government also planned to let water and power be allocated through market mechanism where the price would be reflective of costs. Moreover with competition, the prices would remain low and the supply would remain perennial. Privatization also provides incentives for producers to produce at an optimum level while keeping costs low and hence the price. Privatization of electricity projects also eliminates government subsidies. For instance, electricity produce consumption was by up to 75 per cent of the cost for locals and up to 50 per cent for foreigners and business. Lastly, the government aims to reduce public expenditure on the provision, maintenance and expansion of power projects through privatization. This not only reduces the government's burden of carrying the economy, it also frees up, otherwise tied up funds for development required elsewhere in the economy (Privatization and Economic Strengths, 2003).

Apart from privatization of water and power sectors, economy has been liberalized through establishment of free trade zones throughout the UAE. These zones attract private ownership and facilitate free trade. High quality infrastructure and ports serve the free trade zones. As a result, the UAE serves as area headquarters and distribution centers for private owners doing business in this region. The governments have established ports in almost all of the Emirates in order to facilitate free trade. This is depicted in the ranking of Port Rashid in Dubai, inaugurated in 1979 where the twin terminals of Jebel Ali and Port Rashid have ranked among the world's ten busiest ports for a number of years.

At present, there are a total of ten free trade zones in the UAE, at different levels of development. Each free trade zone is designed to attract private ownership in form of foreign investors by offering incentives such as permission of full foreign ownership, subsidy in energy rates, tax exemption for a 15-year period, levy of low personal income tax and exemption from import duties and tariffs. One such successful free trade zone is the Jebel Ali Free Zone (JAFZ) in Dubai, which was established in 1985. The success of such establishments can be judged by the phenomenal growth in the number of companies in JAFZ, which for example, increased by 300 within two years. This zone permits full foreign ownership and full repatriation of capital. Similarly the airport at Dubai also houses a free trade zone, the Dubai Airport Free Zone (DAFZ), where firms specializing in various fields, including manufacturing, services, high technology, and export-import businesses have their outlets.

One factor behind UAE's interest in privatization is its ambition to be a member of WTO or World Trade Organization. Secondly the government planned to decrease the economic dependence of the country over oil or oil-related industry so that there is a diversification and versatility in the economy. As a result, the UAE is in the midst of a 20-year economic diversification plan where the government has apportioned $13.4 billion for the development of the non-oil economy. Dubai has thus become a center for regional trade and finance, accounting for about 70% of the emirates' non-oil trade in 1998.

Apart from privatization, the economy has been liberalized and diversified through investing overseas. UAE has been investing overseas since the 1970s when it began acquiring foreign stocks through investment of its excess oil revenue so as to develop new sources of income. Another factor behind privatization is also the encouragement of diverse economic growth. Though the growth is slow, it is steady and effective because of the phased privatization of the utility industries.

As a part of the privatization process and obligation towards the World Trade Organization, the UAE is all set to open up its transportation sector followed by the financial services sector to foreign investments. However according to government officials, UAE plans to seek protection for infant industries and some manufacturing categories where only UAE citizens would be allowed the majority 51% holding (UAE to Open up Transport and Financial Sectors, 2003).

Saudi Arabia

In August 1999, the Saudi Arabian Government established a Supreme Economic Council to initiate liberalization and privatization of the economy. However the process has remained stagnant. The Saudi economy is centered on state-owned enterprises. These enterprises include the oil firm Saudi ARAMCO, the Saudi Basic Industries Corporation (SABIC), the Saudi Telephone Company (STC), the Saudi Electricity Company (SEC), and the Saline Water Conversion Corporation (SWCC). As a result, the private sector accounts for only one third…

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