Al Shindagah Magazine

Khalaf Al Habtoor Chairman's Message

The recent release of the UAE government's consolidated accounts for 1998 by the Central Bank has again highlighted the underlying economic problems facing not only the UAE but all the states of the GCC. The countries of the GCC are struggling to balance their budgets and reduce government expenditure and at the same time meet increasing demands on their public services by growing populations.

What the Central Bank's report shows, as does the latest (1998) edition of the annual Unified Arab Economic Report (UAER), is that the continued reliance on oil revenues can have a dramatic effect on government expenditure throughout the region. While the UAE is not as dependent on oil revenues as some countries in the region, it can clearly be seen from the figures published by the Central Bank that the decline in the world price of oil in 1998 reduced the government's revenues by 24 per cent (US$3.7 billion) and this along with a substantial jump in government expenditure caused the budget deficit to rise from US$2.2 billion in 1997 to US$7.9 billion in 1998, a rise of 359 per cent.

These are dramatic figures and as other GCC governments publish their accounts for 1998 we will see similar budget deficits.

What I wish to point out is that unlike the diversified Western free market economic model, the Arab economic model stands in need of major structural reform. Among its weakness is its very narrow economic base. Our reliance on a single sector and a single product, oil, to generate national income (oil makes up 50 per cent of GDP of the region) makes us vulnerable to global market forces as demonstrated by the decline in the world demand for oil due to the Asian financial crisis which has led to a sharp decline in oil prices.

Another major structural weakness is that the public sector dominates domestic output. State finances are the main determinant of domestic liquidity and aggregate demand. State owned public sector enterprises throughout the GCC are noted for weak financial performance; because they have been largely immune from free market competition, have suffered from organisational and managerial short comings, inappropriate pricing policies and over employment. This is a drain on a country's resources as public sector enterprises are reliant on government transfers and subsidies and place a major burden on the economy.

Finally the GCC has participated less in the globalisation and integration of international capital markets, so unlike most other regions of the world capital flow into the region has been small. Countries in the region have had almost no direct access to capital markets of industrial countries, not withstanding the growing number of joint ventures following the liberalisation of some financial sectors in certain Arab countries. Foreign direct investment into the region has been much lower than to other developing regions and capital markets are still in the development stage. This inability to raise capital on international capital markets has hindered the development of non-oil sectors such as manufacturing.

Contrast our economic development with the development of the free market economy in the United States. In 1998 the US produced a budget surplus of US$69.2 billion and is set to achieve a surplus of US$98.8 billion this year. Analysts predict that the US economy will produce a budget surplus for the next fifteen years.

This has been an astonishing turn around as last year's surplus was the first America has enjoyed since 1969. Public debt in America soared through the 1980's and early 1990's from less than one trillion dollars before Ronald Regan took office, to over US$5.5 trillion currently. Of which, US$3.6 trillion is held in public hands. Assuming there are no recessions in the next fifteen years and government spending curbs are kept in place, the US government plans to totally eliminate all its public debt by 2015.

What the above figures reflect is the remarkable flexibility of the American economy to sustain itself enabling successive US administrations to fulfil budget commitments such as military spending, social welfare and education, and overseas aid.

It is the diversity of its economy that allows it to do this. It does not depend on one commodity or mineral resource to keep its economic engines running. it relies instead on a broad spectrum of commercial activity, has a flexible mobile labour force and the ability to quickly adapt to changing world markets.

It can clearly be seen from the above comparison that the economic model deemed suitable for developing Arab economies in the 1970's and 80's will not be able to exploit fully the considerable potential of our region in the decades to come.

On the positive side, GDP has grown within the GCC and governments are trying to reduce budget deficits while in some countries the financial sector is being reformed. Nevertheless, with a rapidly growing population, the most recent estimate for the UAE put the figure at a little under 3 million, up from 2.3 million in 1994, the region's per capita income has stagnated. The region as a whole saw population growth of 60 per cent but GDP over the same period has grown by only 37 per cent, which means that it is 13 per cent less now than it was in 1980. If inflation is taken into account the decline has been even greater.

Disguised unemployment and underemployment have not really been tackled, nor has the need to train and create employment for the 40 per cent of the GCC population under 15 who will be entering the job market in the next five years.

It is obvious to me that policy changes are needed if we are going to keep pace with growth and change in the world economy. We must not be left behind, forced to accept economic conditions set by other nations and trading blocks, or be buffeted by the ebbs and flows in the global trading system with no means to influence the economic currents that flow around us.

We should implement policies that will align our economies with those of the industrialised countries. We need to privatise and deregulate economic activity, reform public finances, improve the function of the labour markets and strengthen our human resources by providing the young with the education and skills that will enable them to take their place in the economy.

We also need to create our own capital markets to enhance domestic and foreign investment and put in place transparent reporting systems to allow accurate assessment of our economic indicators by potential investors and the global financial system.

If we are able to formulate forceful domestic policies that enable us to develop a fully integrated free market economy that took away the uncertainties associated with world demand for oil and gas, we would be better placed to benefit from globalisation and the integration of the world economy.

Failure to carry out these reforms will leave our region isolated with growing population pressures on our resources. It will certainly mean that there will be a reduction in the living standards of our people which will worsen over time as income from the regions only asset, oil, diminishes. If we are to maintain our cultural identity and viability as nation states over the long term it is time to think about how we can adapt to meet the challenges ahead in the next millennium.

Khalaf Al Habtoor