Despite being flush with petrodollars and riding high given soaring energy prices, leaders from the Arab Gulf States—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—are rushing to diversify into industries unrelated to energy, according to recent reports by McKinsey Quarterly, the publishing arm of consulting firm McKinsey & Co.
"The clock is ticking" because of dwindling oil reserves in Bahrain, Dubai, and Qatar, according to McKinsey. This situation exerts pressure to develop non-energy sectors to create jobs for a growing population.
Experts estimate that Bahrain will be the first Arab Gulf nation to run out of oil, in approximately 10 or 11 years, closely followed by Dubai in a little more than 11 years. Qatar is estimated to have 15–20 years of oil reserves.
The question is, will the Gulf States be able to overcome the limitations and constraints imposed by religious tensions, distrust of the West, dislike of multinational corporations, and an aversion to reforms needed to "break away from the boom-and-bust cycles that volatile energy prices create?"
"How they [the Gulf Arab nations] manage that opportunity has far-reaching implications not only for their own populations but also for the entire global economy," suggest Kito de Boer and John Turner, director and consultant at McKinsey's Dubai office in the article "Beyond oil: Reappraising the Gulf States."
A Bloated Workforce
The greatest threat facing the Gulf States is soaring unemployment. De Boer and Turner suggest that the biggest destabilizing factor is high unemployment among the youth. Gulf States' The average unemployment rate is around 11 percent for the Gulf States, but unemployment for young men in their early to mid-twenties is around 28 percent. Statistics are even more discouraging in Saudi Arabia, Bahrain, and Oman: the average unemployment rate is 15 percent, while 35 percent of young men are unemployed.
In the past, government agencies absorbed around 90 percent of all new labor market entrants in the Arab Gulf States. Today, these governments have become a bureaucratic nightmare and their workforces have swelled to unmanageable proportions. There are too many employees, making for inefficient government. There is no room for more employees and when a portion retires or resigns, the position is often left unfilled.
According to statistics from McKinsey, 42 percent of the population in the Gulf States is in their teens. These people will enter the labor market in the near future—a labor market unprepared to create more jobs, and time is running out. With the government saturated with employees and unable to create more jobs, the private sector should step in. But, currently there are not enough private companies to absorb these workers.
Those jobs that are currently available in the area often pay poorly. Immigrants from India, Egypt, China, and the Philippines are taking over these lower-paying jobs.
Foreign workers hold almost 99 percent of all low-paying jobs in the UAE, 97 percent in Qatar, and Kuwait and 70 percent in Bahrain.
The foreign workforce saps government resources. Governments subsidize health care for all foreign workers in the Gulf States, yet income for foreign workers is usually tax-free, so the governments cannot recoup the cost they incur for social benefits. At the same time, these workers don't spend much of their earnings, instead sending an estimated $35 million annually to their home countries.
Forward-Thinking Leaders
Bahrain's Crown Prince Salma bin Hamad Al-Khalifa and UAE's Minister of Economy Lubna Al Qasimi are two of the region's most prominent leaders. McKinsey experts see Al-Khalifa and Al Qasimi as probably the most capable individuals to solve the many problems of their respective countries with the least disruption.
Al-Khalifa is aiming to push reforms to bring in private companies to resolve Bahrain's unemployment problem. He is proposing programs to make Bahrain less dependent on oil and at the same time wean the population away from the welfare state mentality.
To bring Bahrain out of today's dependence on the petrodollar, Al-Khalifa focuses on three different initiatives. The first calls for eliminating government control that prevents Bahrain from forming a viable and healthy private-sector industry. He plans to emphasize cutting red tape, develop greater ability to borrow capital, and establish special hubs where industry can develop freely without encumbrances. All initiatives are built on the idea that the government should shift from being the engine that drives the economy to more of a "supportive" role.
Bahrain has begun privatizing companies under government ownership. The Al Hidd Power Plant, a power production and seawater desalination plant, was sold in January of last year to the Hidd Power Company, a consortium of British, Japanese, and Belgian companies.
Bahrain is the first Gulf country to sign a free trade agreement with the U.S.. It came into effect in August of last year.
"The great challenge we will have in the future is defining the role of the state in this region—whether we will remain a welfare sate or a state more similar to that of a modern economy," Al-Khalifa told McKinsey.
UAE's Al Qasimi proudly described the country's "manufacturing, real estate, and tourism" industries that are booming, during her recent interview with McKinsey.
Establishing family-owned businesses is one of the main objectives of the UAE government. Towards this end—and to help young entrepreneurs—the Mohammed bin Rashid Establishment for Young Business Leaders was established. Al Qasimi was proud that almost 50 percent of the young entrepreneurs in the UAE are women.
The UAE is presently negotiating multilateral trade agreements with Australia, Japan, Singapore, Pakistan, China, and Turkey. At the same time, it is working on an agreement with the U.S.
Al Qasimi bemoaned the "stereotyping" of Arabs by the U.S. movie industry and hopes that this can be changed. "Unless we work collectively to change these stereotypes on both sides, mistrust and lack of communication will result in sub-optimal trade and investment flows in both directions and a lose-lose situation."
Today, Dubai is quickly becoming the economic hub of the Middle East, as evidenced by the countless skyscrapers sprouting up throughout the city. The Burj Dubai—a skyscraper currently under construction and set for completion in the summer of 2009—will become the tallest building in the world.
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