Economic Strategies in the Middle

Economic Strategies in the Middle East: What Emerging Strategy Is Winning?

This paper analyzes the drivers of economic growth in five Middle Eastern countries: Israel, Qatar, Dubai, Saudi Arabia and Kuwait. Despite the disparate nature of their economic and political strategies, all five countries are enjoying significant growth.

The strategies for growth are analyzed according to a set of indicators which indicate the future trajectory of these countries' growth rates, and the sources for this economic growth.

The paper concludes that four of the five countries will continue to enjoy significant growth rates. Saudi Arabia, however, will continue to struggle despite high demand and high prices for its primary extractive resources.

As knowledge-based industries and political stability grow in the other four countries, they should enjoy significant growth in their chosen strategies.

Introduction

Although they inhabit the same region, the six countries covered in this paper differ substantially in most key sources and uses of capital, economic drivers, and sources of future growth. This paper will analyze the various economic systems developed within the following countries: Israel, Qatar, Kuwait, Dubai and Saudi Arabia.

Each of these countries has vastly different natural resources, business cultures and human capital resources. All countries were united under the Turkish Empire, and later belonged to a British protectorate. For that reason, some commonalities exist in English fluency, connections to Europe, some aspects of governance, and attitude towards property and capital.

The differences are more compelling: Saudi Arabia is by far the largest producer of oil in the world, while Qatar has the third-highest gas reserves in the world behind Iran and Russia. Kuwait is the fourth-largest oil producer in the world. Kuwait and Qatar are small city-states with high per-capita income per resident. Saudi Arabia, Qatar and Kuwait heavily depend of immigrant labor for everything from menial tasks to top management and technical staff. Dubai and Israel have very few extractive resources, and depend on human capital, free markets and the wealth of other regions to bolster their economies.

This paper will argue that disparities in income between these countries, and future prospects for growth, depend more on human capital development, protection of private property and individual rights, and development of appropriate infrastructure than the amount of natural wealth they have developed.

Part of the exposition will include a score along certain measures of how each country is doing in important measures of economic development, and predict where each of the countries will be heading in the "race" for the best emerging strategy.

Review of Literature

There is a good deal more literature about war and peace in the Middle East than there is about their economic underpinnings. The governments of Dubai and Israel have a fairly sophisticated government statistical service, which reports a good deal of financial information. This is not as true in the other three countries, perhaps as an offshoot of their focus on extractive industries, and partially due to the small size of those countries.

A good place to start is with the fundamental economic and demographic statistics for each country. The Economist and the World Bank publish yearly updates on key measurements in these countries. Of particular interest are three measures today: literacy levels for men and women, and GDP per head (CIA, 2007).

Country

Literacy Men

Literacy Women

GDP/capita $ PPP

Unemployment%

Investment

Israel

Saudi Arabia

Dubai

Kuwait

Qatar

USA

By this measure, Dubai is winning the race. This is despite Dubai being relatively poor in extractive wealth, but being well-positioned in culture, location and the good fortune of its oil- and gas-rich neighbors. Other than a small oilfield that it shares with Saudi Arabia, nearly all (94%) of Dubai's GDP is generated by non-extractive industries. This next section will explore how each of these factors contributes to the success of each economy, and predict its direction for the future.

Literacy Men and Women

Two elements are important to analyze here: the absolute literacy of the country, and the difference in literacy rates between men and women. Of the countries listed, Saudi Arabia has by far the lowest literacy rate, and the biggest difference between men and women. With 25 million residents (and 5 million non-citizens working and living in the country), Saudi Arabia's poor literacy rate augurs poorly for the development of a local consumer economy and for its moves beyond pure extractive industries, such as oil and gas.

What higher education exists is generally poor, and does not prepare young Saudis for the workforce (Henry C., 2003). The high disparity between men and women also augurs poorly for the economic development of the country; Saudi Arabia is alone among these countries in having a substantial disparity between men and women of working age, with 1.3 men for every 1.0 women between 15 and 64 years of age. Those women who are in that age bracket tend far less to be employed than men, and men encounter a high unemployment rate which has not been reduced over the decades (CIA, 2007).

Kuwait, Israel and Qatar share high literacy rates, but are similar for different reasons. Israel has had a significant inflow of Russian Jews in the past decade, which may have artificially pushed down literacy for a time (Sharaby, 2002); the same in-migration has also benefited Israel's high-tech-led growth (which will be covered later in this paper). Kuwait and Qatar benefit from two items: relative equality between men and women (women have the right to vote in Qatar), greater job participation by locals, and free public higher education, including education abroad.

Dubai is somewhat of an anomaly in these statistics: its literacy rate is lower than every other country in this analysis except Saudi Arabia, but culture plays a role. in-desert Bedouins inhabit a part of Dubai, and they tend to have a lower literacy rate. Of greater interest in Dubai is the higher literacy rate for women than for men; this is an indication of the relative equality of men and women in the workforce.

Israel is the standout in education in the Middle East. A few statistics point to this dominance in education levels:

Israel has more PhD's per capita than any other country

Israel is 4th in the world in patents issued per-capita (ILSI, 2005)

High tech contributed one-third of Israel's GDP growth from 1990 to 2005 (Trajtenberg, 2005).

The USA is included in these statistics in order to provide a comparison with a country that, by all measures, continues to pursue a successful strategy for economic growth.

Unemployment Rate

Again, the standout for poor performance is Saudi Arabia. The actual number of un- and underemployed workers in Saudi Arabia may never be known. What is known is that many Saudis depend on their government for what amounts to welfare payments to keep peace in the Kingdom. With poor preparation for a career, most of the middle management positions are held by foreigners (except in those cases where Saudi Aramco and others require a percentage of Saudi employees and managers). The rate of under- and unemployment for women is not reported, but may be a key indicator of winning or losing economic strategy; as a comparison, the U.S. has a 77% participation rate by women in the workforce; this may be a key indicator of a 'winning' economic strategy.

Dubai, Kuwait and Qatar are clearly at and beyond full employment. The reasons for this are both demand- and supply-driven. On the demand side, the fast growth of each economy has created a need for well-trained middle managers. On the supply side, well-educated residents of each country are available to be hired, and therefore have their pick of positions within the economy. The greater participation of women in the workforce attests to both the supply (being higher) and demand (also higher) than neighboring Saudi Arabia.

Dubai, Kuwait and Qatar also share a high percentage of foreign workers in their economy, but in a different sense than in Saudi Arabia. All three countries' demand for foreign employees is driven by their high growth rates in "knowledge" industries. Dubai's growth in employment will be studied later in this paper, but it's primarily in the trading and banking areas. Kuwait and Qatar are growing primarily in the extractive industries, but their growth is partially shaped by the nature of their industrial expansion: both vertical integration into petrochemical products, and expansion of their LNG facilities, which require a great deal more engineering, capital deployment and expertise than Saudi Arabia's oil extractive industry. The nature of this industrial growth will be covered later.

Israel's unemployment rate is both helped and hurt by immigration and the make-up of its population. If one includes the West Bank, Jewish Israelis are in the minority within their own country (Sharaby, 2002). This means that a large, relatively uneducated Arab population exists alongside a large, first-world and highly-educated population which is driving employment and growth. In addition, Israel's in-migration of highly-educated Russians in the past 10 years has temporarily depressed the employment rate, but powered overall GDP growth as high-tech industries have flourished. One can therefore expect that Israel will benefit from an increase in knowledge-based industry that will continue to power employment and GDP growth.

Investment

Investment is a triple indicator: relative attractiveness of the country, the type of investment being attracted, and political stability or instability. In comparison to the U.S., all countries save Saudi Arabia are attracting more investment. One would expect that the U.S., as a relatively mature first-world economy, would be at a relatively lower level. The surprise in this analysis exists in both extremes: Saudi Arabia on the low side, and Qatar, Kuwait and Dubai on the high side. Israel's relatively low investment can be explained by the type of knowledge-intensive industrial development it is experiencing now.

Qatar and Kuwait are experiencing resource-extraction investment at record levels. The primary driver is natural gas expansion. Unlike oil, natural gas must be processed extensively by capital-intensive facilities before it can be exported. Kuwait and Qatar sit on enormous gas reserves which, to this point, have not been exploited to a great degree. This is changing, now that high demand in the Far East is propelling the search for new and reasonably-priced energy sources. Although Japan has had a LNG capacity for a long time (primarily importing LNG from Indonesia), China is by far the biggest growth factor in LNG for the future. A couple of indicators demonstrate the tremendous growth expectations for LNG exports:

The first is the relative price advantage of gas in China, as compared to coal:

Relative Price Today of Energy in China (Oil and Energy Trends, 2005)

This graph demonstrates that, while Sakhalin gas prices are relatively low, international prices are high. Given that the cost of natural gas is very low in the Middle East, there is an attraction to developing liquefaction facilities for export. This is a highly knowledge- and capital-intensive effort. The other element that needs to be developed is adequate LNG shipping capability. A look at recent trends in that area demonstrates the growth of shipping capacity, particularly under the control of China:

LNG Tankers on Order and Delivered (Collins, 2007)

Qatar has the third-highest reserves of gas in the world, behind Russia and Iran (Oil and Energy Trends, 2005). Qatar does not have significant oil reserves, so its emphasis on gas is logical, given the opportunity for exports. Kuwait also holds significant gas reserves, which it has not exploited until recently; Kuwait and Saudi Arabia used to burn off substantial amounts of natural gas into the atmosphere in order to increase oil production; this is still true in Saudi Arabia, but no longer the case in Kuwait.

The biggest concern in investing in LNG facilities is political stability. Many of the world's energy importers remember the disastrous experience of trying to export LNG in tankers from Algeria in the 1970's. Algeria's civil war and graft-driven economy essentially scuttled LNG plant investment in the country, and mothballed the LNG tankers that had been built at great expense to transport the non-existent LNG to Europe.

The second global concern is the total supply of energy available for growth. Quite unrelated to specific developments in the Middle East, the growth of the U.S., China and India mean that overall energy demand is not only growing faster, but is expected to continue its growth for decades to come. A predictable growth in the price of natural gas makes the multi-tens of billions of dollar investments in LNG facilities in three areas: (1) at the port of debarkation, (2) for transport ships, which are expensive and highly-specialized, and (3) at the port of entry of the country.

Although political stability was a concern up until 1991 (when Saddam Hussein took Kuwait as Iraq's "13th Province"), the U.S. And 29 other allies -- including a large contingent of Gulf States -- demonstrated that Kuwait's sovereignty would be protected by local and international armed intervention. Kuwait's subsequent moves to grant universal suffrage and free its economy have demonstrated a political will to demonstrate stability and become a safe place for investment.

GDP per Capita (PPP)

It is particularly important to compare PPP GDP per capita, rather than nominal GDP in dollars per person. That's because the local prices for consumer goods can vary significantly depending on local tariffs, government interference, and local demand. Many Middle Eastern countries have erected high tariff barriers, which makes it difficult to import goods at reasonable prices (Rivlin, 2001). Much of the cost of imports of basic foodstuffs in Saudi Arabia was artificially elevated due to Saudi support for local farmers, where Saudi wheat was supported at a price level four times higher than that of the world market (Henry C. a., 2001). Saudi Arabia's poor performance in GDP per capita is therefore partially due to the relatively high cost of living for a market basket of consumer items.

Saudi Arabia's tariff barriers are a holdover from previous decades when the Kingdom earned a good deal of its government revenue through tariffs. Many of Saudi Arabia's resource-poor nations depend on tariffs as a significant source of government revenue, which makes it difficult to support economic growth (Henry C., 2003).

The opposite is true in Kuwait, Qatar and Dubai. The countries do not try to support local manufacture of goods, nor do they have a local agricultural infrastructure. One of the attractions for knowledge workers of moving to these countries is their relatively low cost of living as compared to their relatively high wages. All three countries also have low or nonexistent tax rates, which increases the amount of spending cash available to workers in the economy (GulfNews.com, 2007).

Dubai's tax and tariff policies are particularly important to its growth. France, with its marginal tax rates higher than 50%, has lost investment bankers to London, with its 40% marginal rates. Those in the investment banking and service areas willing to move to Dubai enjoy a 0% marginal income tax rate, no VAT, and no inheritance or gift taxes. This favorable tax and tariff policy is a significant in attracting the knowledge workers needed for their growth (Remarks by HH Sheikha Lubna Al Qassimi, Minister of Economy and Planning, Dubai, n.d.).

Israel's relatively high income tax and tariff structure acts as a brake on employment and growth. Unlike Dubai and other Gulf States, Israel can count on a well-educated workforce and significant in-migration of workers who are willing to put up with military insecurity, high taxes and a relatively poor economy (as compared to their alternatives in Western Europe and the United States) for reasons other than economic reward. Israel's cost of living, therefore, is relatively high as compared to the Gulf States. Its income in PPP terms is therefore somewhat reduced by this high cost of living and taxation (Economist, 2007).

Demographic Factors

Demographic pressures work in two ways on economic growth. In a country where there is a need for educated workers, the increase in population can mean a greater employment rate and faster economic growth overall. In countries where there is a great deal of internal population growth, but the population is not well-suited to the needs of the growing economy, the demographic trends act as a drag on future economic growth.

The conventional wisdom in the Middle East is that a huge bulge of working-age people are entering the workforce at a time when there are few jobs available (Laipson, 2003). This is certainly true in Jordan, Syria, Lebanon and Saudi Arabia. The poor local educational facilities, relatively low literacy rate and disconnect between work and the populace have led to high unemployment rates just at the time when the number of working-age people is growing at its fastest. Due to its oil wealth and need for expertise, Saudi Arabia imports experienced workers and doesn't employ its own population. High population growth, therefore, assures that GDP per head remains relatively low.

The demographic factors play well for Qatar, Kuwait and Dubai, however. With relatively high birthrates, low unemployment and significant educational opportunities, the citizens of these countries can compete for abundant jobs. In their cases, population growth means higher overall economic growth.

Israel stands on its own, as a low Jewish birthrate (and high Israeli Arab birthrate) holds down economic growth. Israel's relatively high immigration rate of well-educated high-tech workers over the past ten years has been a major contributor to its high-tech growth. Future immigration may be contained, however, by political risk and the lack of highly-skilled immigrants from other countries (such as the ex-Soviet Union) which provide a windfall of talent (Trajtenberg, 2005).

Economic Policies: Measuring the Factors for Growth

Measuring where the countries are is one part of the puzzle. Dubai is the clear winner up to the present. The key question for this paper is: what are the key winning strategies for the future? This paper posits several factors needed for growth. Some of these factors have different importance for different countries, depending on the future source of their growth, but there is a good deal of commonality amongst the factors for each of the countries studied.

Saudi Arabia: Cautionary Example

Saudi Arabia should serve as a cautionary example. Despite having the highest oil output and the highest oil reserves in the world, even today's high prices cannot address Saudi Arabia's inherent problems of a relatively low GDP per capita, high unemployment and low literacy rate. When oil prices dipped in the 1990's (in real terms), the Saudi government had to pull back significantly on its foreign aid and internal welfare payments, and suffered increased political instability as a result (Henry C., 2003). Thus it is not enough, in economic policy terms, for a resource-rich country to plan on high energy prices saving the economy and benefiting its citizens.

A historical example can provide a case study for these countries. When Spain started bringing back gold and silver from the New World colonies, the effect on its economy was disastrous. Local tradesmen lost their livelihoods as imports gutted Spanish industry. The encrusted royal power structure remained in place as a damper on further economic development. And the corrupt and bloated bureaucracy held back development. After Spain lost its gold and silver sources (due to depletion and independence of the colonies), it had few resources to fall back on for future growth (Hamilton, 1935).

The parallels with modern-day Saudi Arabia are telling. Like Spain, Saudi Arabia's ability to extract resources is second to none in the world. It is alone amongst OPEC members in being able to make significant changes to oil output in order to influence pricing in world oil markets. Despite its oil strength, though, Saudi Arabia is an economic pygmy. Oil wealth has entrenched the ruling Saudi family and repressed the growth of economic and political freedom, much like it did in Spain in the 16th and 17th centuries. Although one can predict that Saudi Arabia will continue to export significant amounts of high-priced oil for decades, it is difficult to imagine how its citizens will benefit.

Measurements of Growth

The following factors can be used in analyzing the chances for future growth in the Middle Eastern countries studied here:

Banks owned publicly or privately.

Stock markets

Freedom of movement for personnel

Ownership of property and corporations (socialism, cronyism, private enterprise)

Accountability and transparency

Distributive rather than productive states.

Trader vs. extractor vs. manufacturer/agriculture

Predominantly private vs. public sector

Source of government revenues (e.g. duties, extraction revenues vs. income tax) further division can be made to assess the primary sources of expected future growth.

For the purposes of this analysis, this paper analyzes two types of expected future economic growth:

Knowledge-driven economies: Dubai, Israel

Extraction-driven economies: Saudi Arabia, Qatar, Kuwait

In both cases, these measures of future economic strategic success can be employed. The cautionary example of Saudi Arabia, and Spain before it, demonstrates the need to use these measures even in an economy where some measure of economic success is assured due to substantial extractive resources.

One can analyze each country according to (1) its ability to deliver on these items, and (2) the relevance of each item to the country's future economic growth, depending on its knowledge-driven or extraction-driven goals: