Middle East Economic Development: Oil, Dubai, and Beyond

Introduction to the Middle East Region

There is no hard and fast rule that defines what constitutes the Middle East. It traditionally includes countries or regions in Southwest Asia and parts of North Africa. The Persian Gulf is considered the main centre around which the area generally referred to as the Middle East lies. Bahrain, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, Turkey, the United Arab Emirates, Yemen, and the Palestinian Territories are collectively known as the Middle East. The region rose to prominence because of its vast reserves of oil, and the economies of most of these countries received a significant boost based on that resource. However, with the passage of time the region has established its own distinct identity in the world. The Gulf region, with the UAE as a model of success, is now recognized globally.

Oil-Based Economies and Saudi Arabia's Rise

The Middle East is the region with the greatest oil reserves in the world. The reserves present in Saudi Arabia, Iran, Iraq, and Kuwait exceed those found in most other parts of the world. World oil supply is therefore mainly provided by large companies operating in countries with large reserves. Price is generally a market factor, but in the case of oil, prices are significantly controlled by the group of oil-rich countries that formed a cartel known as OPEC (Organization of Petroleum Exporting Countries). OPEC can greatly influence world oil prices. The first major oil crisis was faced in 1973 when an OPEC oil export embargo was imposed by many of the major Arab oil-producing states in response to Western support of Israel. The year 1979 brought the Iranian Revolution and another oil crisis. Similarly, the Gulf War also affected oil prices. This region has always been considered strategically important mainly because of oil. Some Gulf States within the UAE have gone beyond oil and created diverse economies. Initially Saudi Arabia was cited as an example, but its economy largely remained dependent on oil. Dubai, and to some extent Israel, adopted different approaches and now stand apart in the community of nations.

Saudi Arabia was initially considered a leading example of growth and development before other Gulf States emerged as clear winners. Saudi Arabia used its oil resources and the resulting revenues for the development of the country's infrastructure. However, the fall in crude oil export volumes as well as prices created cause for concern. The Saudi government responded by launching major expansion projects to add value to oil exports, helping to secure international markets. Petrochemical companies in Saudi Arabia even formed joint ventures with foreign partners in the sector. The Kingdom holds clear advantages in the form of low costs of producing oil and gas; therefore, when world demand falls its feedstocks can still compete for sales. Saudi Arabia continues to benefit from its oil resources, but it has also recognized that, like other states in the region, it must open its doors to the world economy and globalization.

"The Saudi government has also taken steps to encourage more private investment in the economy. Although progress has often been slow, the need to curb spending given the rising budget deficit, together with a growing conviction among a new generation of Saudi officials that subsidies — especially for utilities such as power and water — cannot be continued forever, is giving rise to moves to open up investment channels. The Al Zamil flotation, for example, was made possible by new regulations issued by the Ministry of Commerce that encouraged the merger and share offering. Privatization of the Saudi telecommunications sector is also a case in point" (Smith, 1998).

Changes in policy and business outlook are seen as necessary if Saudi Arabia is to maintain a competitive edge in the world market. No country can afford an inward-looking and closed approach. Today the country's integration into the global economy is marked by private businessmen and investors, initial public offerings (IPOs), mergers of public companies with smaller private companies, privatization of state shareholdings, and the involvement of private investment in utilities and infrastructure projects. These changes are essential to enhance the competitive edge regionally and globally, which could also open up more opportunities for Saudi investors in capital markets. Sustainable development and progress are clearly the goals of present-day Saudi Arabia, but it has to recognize that oil alone is not sufficient for the years ahead.