the business environment in gulf co-operation council countries

An Economist Intelligence Unit report

IN GULF CO-OPERATION COUNCIL COUNTRIES

1 © The Economist Intelligence Unit Limited 2014

The Business environment in Gulf Co-operation Council countries

Contents

About this research 2

Executive summary 3

Introduction: Two contrasting trends 5

Part I: Institutions: Short-term success, longer-term questions 8

Box: Settling cases in DIFC’s courts: A reform experiment 10

Part II: Balancing openness with local needs 12

Part III: What diversifi cation might mean to business 14

Conclusion 16



The business environment in Gulf Co-operation Council countries is an Economist Intelligence Unit report, sponsored by Merck Serono. The report looks at the ease of doing business in the six states of the Gulf Co-operation Council (GCC; Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates). The fi ndings of this briefi ng paper are based on extensive desk research–including a review of the fi ndings of the major international indices of business conditions—and ten interviews with government offi cials, private-sector economists and academic experts.

The Economist Intelligence Unit would like to thank the following individuals for their time and insights during this research:

Amin Al Amiri, assistant undersecretary for medical practices and licensing, Ministry of Health, UAE

Simon Bell, Middle East and North Africa sector manager, World Bank

Azzan Al Busaidi, director general for research, The Public Authority for Investment Promotion & Export Development, Oman

David William Harris, director, FDI Dubai

Jarmo Kotilaine, chief economist, Bahrain Economic Development Board

Mohamad Moabi, assistant general manager, Qatar National Bank

Reyadh Faras, professor of economics, Kuwait University

James Reeve, deputy chief economist, Samba Financial Group, Saudi Arabia

Said Al Shaikh, chief economist, National Commercial Bank, Saudi Arabia

Farouk Soussa, chief economist for the Middle East, Citi Group

The Economist Intelligence Unit bears sole responsibility for the content of this report. The fi ndings and views expressed in this report do not necessarily refl ect the views of the sponsor. The report was written by Paul Kielstra and Trevor McFarlane, and edited by Aviva Freudmann.

About this research



Executive summary

The Gulf Co-operation Council countries (GCC; Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates) are increasingly attracting the attention of investors, as growth in many other regions remains uncertain. Dubai’s successful bid to host the World Expo 2020 and Qatar the FIFA World Cup 2022 are adding to that attention. A further incentive has been the substantial regulatory reform effort of GCC countries over the last decade, which has improved perceptions of the region’s business environment. Nonetheless, the region still presents risks to investors, particularly since its shift from oil-based to more balanced growth has proved uneven. This Economist Intelligence Unit study, sponsored by Merck Serono, looks at the region’s current environment and the factors affecting its future as an operating environment for inward investors. Here are the key fi ndings of the report:

The region’s business environment has improved in recent years, but substantial risks remain. The region’s high-growth economies, low tax burden, and improved procedures for obtaining construction permits and registering property are clear signs of progress. Several international surveys—including the World Bank’s Ease of Doing Business Survey and the World Economic Forum’s Global Competitiveness

Report —recognise these trends with high rankings for most GCC states. Yet many challenges remain, including poor investor protections and punitive bankruptcy laws.

While the region is increasingly open to foreign ownership, lingering restrictions slow the pace of inward investment. In all GCC states, 100% foreign control of companies is permitted in at least some circumstances. But continued ownership restrictions protecting certain sectors for local interests have proven hard to eradicate.

Most GCC countries protected their stability through the fi nancial crisis and the Arab Spring through heavy spending, a strategy with long-term economic consequences. The fi nancial crisis that began in 2008 delivered a short, sharp shock to the region, from which it has largely recovered. Similarly the Arab Spring, which brought unrest to Bahrain and to a lesser extent to Oman and parts of Saudi Arabia, has had only a minor impact in the GCC. In large part this is due to heavy spending by GCC states to ensure stability. This raises questions about the economic viability of this strategy, and increases pressures to create more diverse, self-sustaining economies.

Genuine efforts to localise labour forces will continue. The Arab Spring focused the



attention of GCC policymakers on high youth unemployment and the social and political unrest these might cause. All GCC states now encourage or mandate specifi ed levels of local employment, but some nuance is being introduced to these programmes. An example is the Nitaqat programme in Saudi Arabia, which attempts to replace blunt quotas with more nuanced rules sensitive to specifi c industries and skills availability.

The GCC is taking a hard look at its sources of comparative advantage. The drive for economic diversifi cation in some GCC states is complicated

by the fact that strong incumbent industries–including fi nancial services fi rms in Dubai and Bahrain, and airlines in the UAE and Qatar–are well entrenched in neighbouring states. Experts predict divergent reactions in the region, with some states pursuing a more laissez-faire approach to diversifi cation, while others opt for state-driven capitalism to create new industries. This suggests a possible future split in economic policies within the region, presenting distinct challenges for investors.



Introduction: Two

contrasting trends

Two contrasting trends

For inward investors, the GCC presents a decidedly mixed picture, with positive and negative trends intertwined and no clear indication of how these trends will shape the future of the region as a whole. The good news from the region is clear: Its rise in recent years in the business-environment league tables created by respected global institutions has been striking. For example, Saudi Arabia reached the

top ten in 2011 in the World Bank’s Ease of Doing Business Survey, although it fell back to 26th place in 2014. Moreover—with the exception of Kuwait, which ranked 104 in 2014—the GCC has led the Middle East and North Africa region in the Ease of Doing Business Survey throughout its existence. (See Table, World Bank Ease of Doing Business Rankings 2014, page 7.)

The World Bank’s Distance to the Frontier measurement–showing how each country compares with a composite of the best

Source: World Bank.

Ease of doing business distance to the frontier(% real change, year on year)

Chart 1

United Arab EmiratesSaudi ArabiaQatarOmanKuwait GCCBahrain

50

60

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50

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70

80

2007 2008 2009 2010 2011 2012 2013 2014



performances across the activities covered–tells a similar story. Since 2008 each country in the region has made progress vis-à-vis its global peers—except for Bahrain, which was already one of the GCC’s best performers. (See Chart 1)

A ranking does not offer a full picture of a country’s attractiveness to investors. Indeed, four of the GCC countries fell in their comparative position in the 2014 Ease of Doing Business Survey. But the World Bank is not alone in seeing long-term improvement in the region. The Global Competitiveness Report of the World Economic Forum (WEF), the Heritage Foundation’s Index of Economic Freedom and the Economist Intelligence Unit’s Business Environment Rankings all show progress in the business environments of much of the region.

Nonetheless, foreign investors are moving cautiously, perceiving lingering operating and other risks in the region. Some governments pulled back on mega-projects in response to the global fi nancial crisis and the unrest of the Arab Spring. Investors expressed doubts about the region’s policymakers’ commitment to further

Source: Economist Intelligence Unit.

Inward FDI as a percentage of GDP(% real change, year on year)

Chart 2

United Arab EmiratesSaudi ArabiaQatarOmanKuwaitGCCBahrain

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

reforms of their economies, and about how quickly they may be willing and able to diversify away from reliance on hydrocarbons for GDP growth.

Accordingly, the 2008 global fi nancial crisis brought in its wake a fall in foreign direct investment (FDI) into most GCC states, both in absolute terms and as a percentage of GDP. (See Chart 2). A slight exception has been Kuwait, where FDI was never a major factor and where it remains minor. While FDI levels declined worldwide during this period, the GCC countries have fared worse than many others. The Inward FDI Attraction Index of the UN Conference on Trade and Development (UNCTAD) shows a decline in the attractiveness to investors of most of the region since 2008, with only Saudi Arabia and Qatar avoiding a major decline.

At the same time, however, intra-GCC investment grew in importance. According to the IMF, in the latest years for which data is available, over 75% of FDI into Bahrain (2010) came from other GCC states, as did over 90% of that going into Kuwait (2011).



Ease of Doing Business Rankings 2014Overall Starting a

business

Dealing with

construction

permits

Getting

electricity

Registering

property

Getting

credit

Protecting

investors

Paying

taxes

Trading across

borders

Enforcing

contracts

Resolving

insolvency

Saudi Arabia 26 84 17 15 14 55 22 3 69 127 106

UAE 23 35 5 4 4 86 98 1 4 100 101

Qatar 48 112 23 27 43 130 128 2 67 93 36

Bahrain 46 99 4 52 32 130 115 7 81 122 27

Oman 47 77 69 58 21 86 98 9 47 107 72

Kuwait 104 152 133 59 90 130 80 11 112 119 94



The regional impact of the fi nancial crisis and the Arab Spring Compared to other parts of the Middle East and North Africa, the GCC countries have weathered recent economic and political storms without suffering major damage. For example, although local real estate prices collapsed in the year following the global fi nancial crisis of 2008, they were subsequently restored. In general, the global crisis gave the region a short, sharp shock, from which it has since recovered.

Chart 3 shows the path that different countries in the region have taken to restore economic stability. The region’s GDP growth currently is over 4%. Infl ation is tolerable, albeit rising. Qatar, Kuwait and the UAE all experienced dramatic growth rates in the middle of the last decade–the fi rst two reaching double-digits in some years–which are now likely to come closer to the GCC norm. David Harris, the director of Dubai’s foreign investment offi ce, sees this convergence as a positive development. During the boom, he says, the costs attendant on rapid expansion were too great. “If you have controlled growth, the cost becomes a lot more bearable and manageable.”

The Arab Spring presented another type of challenge to governments across the Middle East and North Africa. Again, though, GCC

governments, not least in the UAE and Qatar, experienced less upheaval than many of their neighbours. The partial exception is Bahrain. That said, political tensions in GCC states have certainly been more pronounced than normal, with unusually vocal unrest in Oman, Kuwait and the Eastern Province of Saudi Arabia. Protests have not reached anything approaching the scale of the revolutions and civil wars in North Africa or Syria. Even in Bahrain, notes Jarmo Kotilaine, the chief economist of the country’s Economic Development Board, ongoing political diffi culties did not prevent economic growth from returning to roughly 2010 levels.

Disturbances inevitably affect the risk environment for companies, and that, in turn, has impacted inward investment. “The Arab Spring has scared people,” says Simon Bell, the MENA sector manager at the World Bank. Farouk Soussa, chief economist for the Middle East at Citi Group, agrees: “The Arab Spring has had a negative impact on perceived stability. Even where you haven’t had a major event, political risk is more on investors’ minds than before, with plenty of recent examples of how an apparently stable situation can go pear-shaped very quickly.”

That impact has been uneven across the region. Indeed, relative stability has proved to be a

Part I: Institutions: Short-term

success, longer-term

questions



competitive advantage for some GCC states. As Mr Harris notes: “Dubai is defi nitely seen as a safe haven in the region.” Mr Soussa adds that there has been a “move of capital away from the wider Middle East and towards the GCC. Not everyone has benefi ted equally, though: Abu Dhabi, Qatar, and especially Dubai are seen as relative safe havens.” Said Al-Shaikh, chief economist at National Commercial Bank in Saudi Arabia, would add the Kingdom to that list. He believes that its continued ability to attract inward FDI shows that there is a “growing understanding that [unrest and instability in other states] won’t be contagious”.

The lessons for business about state institutions and continuing reform While GCC governments may be enjoying an image of comparative stability, this advantage could prove short-lived. In the longer term, they face challenges in shaping and supporting a positive business environment. Indeed, the way that these states managed to keep trouble at bay helps to illuminate the types of hurdles they face.

As Mr Soussa puts it, in GCC countries “people are often happier with their leaders than are

citizens in a number of western democracies.” Governments control massive revenue from fossil fuel production and disperse this revenue to citizens using various channels, including subsidised goods and services, high salaries to public-sector workers, and in some cases direct payments. Nor are citizens the only benefi ciaries. Total tax as a percentage of profi ts in all the GCC countries except Oman is below 15%, making these fi ve states among the seven lowest tax jurisdictions globally. Even Oman’s 22% total tax rate leaves it well placed globally. This explains why the GCC states lead the world in the Ease of Doing Business’s “Paying Taxes” category; indeed, the UAE ranks number one in the world.

The response of the region’s governments to the recent fi nancial and political challenges has been, as far as possible, to spend their way out of trouble rather than rely on underlying institutional and economic strengths. Since 2010 every GCC country has seen substantial public-sector wage increases. Oman, where over half of all employees are in the private sector, has seen several increases in the minimum wage. Kuwait and Saudi Arabia have handed out substantial cash grants directly to citizens. Meanwhile, most GCC states, and in particular Saudi Arabia, have

Source: The Economist Intelligence Unit.

GDP, 2004-17(% real change, year on year)

Chart 3

United Arab EmiratesSaudi ArabiaQatarOmanKuwaitGCCBahrain

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20172016201520142013201220112010200920082007200620052004



also seen signifi cant increases in infrastructure spending.

This economic model tends to crowd out entrepreneurship and keep a focus on the source of the revenues—oil extraction and production—which is a comparatively low-employment sector. In addition, much of the working population–over 80% in Qatar and Kuwait and 70% in Saudi Arabia–work in highly paid but often unproductive civil service jobs. When a large proportion of the population earns far higher salaries in government jobs than they could in the private sector, social discontent is low, but so is entrepreneurship. Moreover, even private companies tend to depend on generous state contracts. Such a model raises questions about the strength of the institutional and policy framework in which commerce operates.

So, for example, all GCC states rank markedly lower in Transparency International’s 2013 Corruption Perception Index than in the WEF’s measure of corruption. Similarly, the Economist Intelligence Unit’s Business Environment Rankings place Kuwait, Qatar, Saudi Arabia and the UAE in the bottom half in its global measurement of “Policy towards public enterprise and competition”. Some commentators believe that at least part of the recent apparent progress of certain GCC states in such assessments—Saudi Arabia is most often mentioned—refl ect regulatory changes designed to meet index criteria rather than showing the true extent of reform.

That said, GCC states have made measurable strides in reforming their economic institutions in the past decade. Azzan Al Busaidi, the director general for research at Oman’s Public Authority for Investment Promotion and Export Development points to some examples: “The Sultanate’s legal framework, tax systems and stock market regulation are some of the best in the world.” In the 2013-14 World Economic Forum competitiveness report, all GCC countries except Kuwait and Bahrain fi nished in the top 20 out of 148 countries in the “Institutions” section of the index, and Qatar was ranked fourth worldwide. Similarly, again apart from Kuwait, all the GCC states score well in the Ease of Doing Business Survey’s rankings for two measures of administrative effi ciency–registering property and dealing with construction permits.

These disparate trends show above all the uneven pace of institutional reform in the region. On the one hand, Mr Bell notes that “the Omanis and the UAE stand out as the most consistent reformers among GCC states on the Ease of Doing Business indicators”. On the other hand, the problems in Kuwait, generally considered to have the worst business environment in the GCC, refl ect institutional weakness despite being arguably the most democratic of the GCC states.

Reyadh Faras, a professor of economics at Kuwait University, explains that excessive bureaucracy, short-lived governments and frequent disagreements between parliament and the royal

One interesting experiment with reform is taking place in Dubai. Since 2005 companies active in the Dubai International Financial Centre (DIFC), an onshore fi nancial hub, have had recourse in commercial law to special, common law-based DIFC courts presided over by international legal experts. Moreover, since October 2011, if both parties agree, any commercial case in Dubai can be settled in DIFC courts, and any judgement will be enforced by local Dubai

magistrates. David William Harris, Dubai’s FDI director, describes this as “a signifi cant change. Nowhere else in the region has anything like it.” Although its ultimate impact depends on the willingness of local companies to use DIFC courts, this development improves predictability, an essential factor for many investors.

Settling cases in DIFC’s courts: A reform experiment



family combine to inhibit almost any change. The result is an ongoing inability to modernise the business environment: “We have been lacking reforms in Kuwait,” he says, “especially economic reforms. The regulations governing the business sector are from the 1960s. The public tender law, for example, is from 1964, and we need a modern law to regulate telecommunications.”

Across the rest of the GCC, certain areas of law are being reassessed. For example, policy makers are looking to ease some restrictions on foreign ownership. And, as Mr Soussa says, for a number of countries the “lack of bankruptcy protection presents a major challenge to doing business. In many areas, bouncing a cheque is still a jailable offence regardless of the circumstances. All these things are moving in the right direction, but slowly.”

One of the biggest challenges facing companies operating in the GCC is diffi culty in enforcing commercial laws. In the Ease of Doing Business Survey, none of the GCC countries ranks higher than 93rd globally in enforcing contracts. Mr Soussa explains: “Commercial law hasn’t had time to evolve in the context of a strong legal tradition. The region has inadequate court systems. It is not a question of legislating, it is one of enforcement.” James Reeve, deputy chief economist at Samba Financial Group, agrees. In several countries, he says, the “legal system is fairly unresponsive and slow moving. That gets to the root of all the problems associated with the business sector.”



Foreign ownershipGradually increasing openness to foreign ownership has long been a feature of economic liberalisation in the region. Every country now allows 100% foreign ownership of at least some large businesses. All also maintain restrictions, however, which vary widely. In Bahrain, one of the most open environments, the issue is often control of information and regulating public morals. As a result, journalistic and entertainment companies must be owned entirely by locals. Other countries are more restrictive. Qatar and Kuwait, for example, allow foreign participation only in specifi c industries, and Kuwait bans all private ownership in the oil sector. Others still, such as the UAE, allow full foreign ownership in free-trade zones but not in the rest of the country, where a domestic partner with majority ownership is required.

While certainly more liberalised than they were in the past, these restrictions remain substantial. The OECD’s FDI Regulatory Restrictiveness Index of 56 developed and developing countries ranks Saudi Arabia–the only GCC state included–second from the bottom for regulation. Moreover, regulations continue to dampen investment. An OECD-MENA Investment report in 20111 found that “the private sector perceives the restrictions to foreign ownership and approval requirements as key obstacles” to FDI. Nor will further change

Part II: Balancing openness with local

needs

be easy. For example, in the UAE–where the Economist Intelligence Unit sees the best prospects for improvement in policy towards foreign investment–efforts to allow 100% foreign ownership beyond free-trade zones is still being considered. While there is no sign of backtracking in this area, progress is likely to be slow.

Foreign labour The last year has seen a considerable crackdown on foreign labour in Saudi Arabia. Kuwait, too, has announced plans to reduce the number of expatriates in the country, while Oman is also mulling similar plans. Such measures are aimed at opening more positions for locals in the private sector. But because GCC states infl ate the wages of government employees, private-sector employment–with longer hours, fewer holidays and lower salaries–is less attractive for nationals. Moreover, inadequate education systems can make qualifi ed local nationals hard to fi nd, and expensive to hire if they are identifi ed. Kuwait went so far as to pay companies subsidies to hire nationals willing to work in the private sector.

At the same time, GCC governments are looking for ways to foster job creation, particularly for young people, since, as Mr Soussa puts it, unemployment and underemployment result in political instability.” With youth unemployment

1 “Stocktaking analysis on assessing investment policies of the member countries of the Gulf Co-operation Council,” MENA-OECD Investment Programme, April 2011



at over 20% throughout the GCC except Kuwait, the public sector alone cannot deliver these jobs. Partly in response Bahrain has fl oated the idea of abandoning foreign-worker quotas to encourage business investment.

Another prominent initiative is the Nitaqat programme in Saudi Arabia, which modernises the approach to Saudi-isation by creating a wide range of quota requirements based on the industry, company size and the pool of available Saudi talent for the jobs required. It then assigns companies to one of four categories of compliance: those in the top two benefi t from easier regulations on foreign employees, and those in the bottom two face punitive measures. The Saudi Labour Ministry said in December 2013 that the Nitaqat programme had caused unemployment to fall from 12.4% to 11.7% in the third quarter . In January 2014, though, the Saudi press quoted Saudi Arabia’s Shoura Council members criticising the programme, with one member saying that “companies manipulate the system to give the impression that they have helped Saudis get employed.”

Whatever the immediate impact of specifi c initiatives, Mr Soussa believes that greater localisation of the workforce is the way of the future. The practice of hiring externally “will have to change and the push to reduce dependence on cheap foreign labour is unavoidable, despite the potential negative impact on doing business over the next fi ve or so years,” largely owing to increased training and employment costs.

In the long term, however, benefi ts of localisation may well accrue. As Said Al Shaikh, chief economist of National Commercial Bank in Saudi Arabia notes, “It is in the interests of companies to hire qualifi ed Saudis [in Saudi Arabia]. One always needs local talent because of the knowledge of the country they have and because it provides greater sustainability.” Ultimately, though, the solution to this issue across the GCC will require either greatly increased wage costs, or changing policies to make the private sector comparatively more attractive to employees.



Easing regulation of business, building institutions and changing labour policies are all facets of addressing a larger question: What will be the nature of the economy in future, and in particular what role will the private sector play in it?

Policymakers are uncomfortable about the long-term prospect of relying on hydrocarbons, a non-renewable resource with a high fl uctuation in its price, whose extraction and processing offers comparatively little employment. Every GCC state therefore has a policy to promote economic diversifi cation. This policy includes both vertical diversifi cation–developing energy-dependent industries such as refi ning or aluminium smelting–and horizontal diversifi cation, involving establishing industries unrelated to energy. The goals include creating more resilient economies and generating jobs. Mr Al-Shaikh describes this as “one of the most challenging issues facing GCC economies. It will be an ongoing one for many years to come.”

To the extent that these efforts reshape the region’s economies, they could completely redefi ne the business environment. But progress toward that goal has been slow and uneven. GCC states have been talking about diversifi cation since the 1970s. As a recent London School of Economics study by Professor Martin Hvidt2

Part III: What diversifi cation might mean to

business

points out, though, while some growth in energy dependent industries has occurred, the overall results have been meagre.

Of local economies pursuing this policy, says Mr Soussa, “Dubai stands out. It has made a consistent effort to diversify since the beginning.” Mr Harris agrees: “The primary advantage in Dubai,” he says, “is that investment in infrastructure and business processes started earlier than in other countries in the region”. Probably because they have fewer fossil fuel reserves, Bahrain and Oman have also had signifi cant success in diversifi cation. Kuwait, on the other hand, says Mr Faras, is even more dependent on oil than it was a decade ago.

Building on this progress–such as it is–will be far from straightforward, even with substantial wealth backing such policies. The diffi culty, says Mr Soussa, is fi nding comparative advantage. “The GCC states don’t have large untapped markets or skilled populations. The only advantage that comes close to oil and gas is location, but everybody wants to be the trade hub, the fi nancial centre, the tourism centre.” Competition in those areas is therefore substantial. When Qatar set up a fi nancial centre in 2005, for example, Dubai and Bahrain had already been in that market for many years. Accordingly, as Mr Al-Shaikh notes, so far

2 Martin Hvidt, “Economic diversification in GCC countries: Past record and future trends,” London School of Economics, Kuwait Programme on Develiopment, Governance and Globalisation in the Gulf States, Research paper 27, January 2013



diversifi cation efforts “are largely concentrated in vertical diversifi cation in oil and gas and related industries. This applies across the GCC with the exception of Oman and Bahrain, because the oil sector in those countries is not huge.”

Business opportunities in much of the GCC will probably continue to be focused on involvement in, and the servicing of, energy and energy-dependent industries, with some pockets of strength in areas such as fi nancial services or transport. Aspirations of an Abu Dhabi aerospace industry or Saudi car manufacturing sector certainly exist, but they will face stiff competition from existing global players. Even substantial state support for such developments might not matter: a recent academic study found a negative correlation between economic diversifi cation in GCC states and government spending.3 Dramatic change in that respect is therefore unlikely.

3 Tarek Coury and Chetan Dave, “Oil, Labor Markets, and Economic Diversification in the GCC: An Empirical Assessment”, Harvard Kennedy School of Government Dubai Initiative, Working paper, November 2009

How would such slowness to diversify affect the private sector? Experts say this will vary among countries. Professor Hvidt believes that Bahrain and Oman are the most ready to encourage private sector-led growth. Indeed, Oman is the only state in the region to talk about privatising state owned companies, and the fact that it expects a budget defi cit in 2014 may expedite that process. Qatar and Abu Dhabi, on the other hand, while welcoming private investment, seem to expect state-owned enterprises to take the lead in any attempt to diversify the economy. Region-wide, the GCC may see a schism developing between countries liberalising to encourage inward investment into diversifi ed economies, and those relying more on state-driven economic development.



Conclusion

distributing wealth from the usual sources to please their citizens and thus maintain political stability.

As always, high oil prices will reduce the pressure on governments to reform their institutions and economies. As Mr Bell says of Omanis, who have some of the smallest oil reserves: “They are very pragmatic and see an end-game in terms of hydrocarbon resources. If you look at their regulatory rankings, they have been the most consistent of the reformers.” Bahrain and Dubai are also already more diversifi ed economically than most others in the region because they have less oil. As Mr Kotilaine of Bahrain’s Economic Development Board notes, “It can be tempting to hide behind short-term fi xes, rather than making the tough decisions to address long-term challenges.” In the coming years the business environment of GCC countries will depend greatly on the extent to which states are willing to do the latter.

The business environment in the GCC is far from monolithic: a world of difference exists between the diverse, global hub that is Dubai and the bureaucratically challenged economy of Kuwait. Yet as a whole, these states have seen a substantial improvement in their business environments in recent years. Regulations have been liberalised and institutions solidifi ed. Much remains to be done—notably reforming bankruptcy law and improving enforcement of commercial laws—but the direction of change is positive.

In the longer term, however, the business environment will depend on a decade-old question which the fi nancial crisis and the Arab Spring have again brought to the fore: What lies beyond today’s natural resource-funded state? The divergent responses to this issue across the GCC will affect the chances that private enterprise will lead growth—as opposed to having governments continue to rely on



Appendix

Gulf Co-operation Council country scorecards

BahrainNominal GDP 2013 (US$) 31.1bn (Source: EIU)

Population 2013 1.3m (Source: EIU)

Non-nationals in population 2010 54% (2010 census)

GDP growth 2013 4.1% (Source: EIU)

Infl ation rate 2013 3.2% (Source: EIU)

Total business tax as % of profi ts 2013 13.5% (Source: World Bank)

Index ScoresYear Global rank GCC rank Strengths Weaknesses

EIU Business Environment

Ranking*

2012-16 33 (of 82) 3 (of 5) Taxes, fi nancing Political stability, market

opportunities

Heritage Foundation Index

of Economic Freedom

2013 12 (of 177) 1 Fiscal freedom, labour

freedom

Corruption, property rights

TI Corruption Perception

Index

2013 57 (of 177) 3 n/a

WEF Competitiveness Index 2013-14 43 (of 144) 5 Goods market effi ciency,

fi nancial market

development

Political instability,

ineffi cient government

bureaucracy

World Bank Ease of Doing

Business

2014 46 (of 189) 4 Taxes, dealing with

construction permits

Enforcing contracts,

obtaining credit

*Does not include Oman



KuwaitNominal GDP 2013 (US$) 179.5bn (Source: EIU)

Population 2013 3.8m (Kuwaiti government estimate)

Non-nationals in population 2013 60% (Kuwaiti government estimate)




Index scoresYear Global rank GCC rank Strengths Weaknesses


Ranking*

2012-16 39 (of 82) 4 (of 5) Macroeconomic

environment, taxes

Policy toward private

enterprise, political stability


of Economic Freedom

2013 66 (of 177) 5 Fiscal freedom, trade

freedom

Corruption, fi nancial

freedom


Index

2013 69 (of 177) 5 n/a

WEF Competitiveness Index 2013-14 36 (of 144) 6 Macroeconomic

environment, institutions

Ineffi cient government

bureaucracy, restrictive

labour regulations


Business

2014 104 (of 189) 6 Paying taxes, protecting

investors

Starting a business, dealing

with construction permits


OmanNominal GDP 2013 (US$) 81.7bn (Source: EIU)








Ranking*

2012-16 n/a 3 (of 5)


of Economic Freedom

2013 45 (of 177) 4 Fiscal freedom, labour

freedom

Corruption, property rights


Index

2013 61 (of 177) 4 n/a



Restrictive labour

regulations, education of

workforce


Business

2014 47 (of 189) 5 Paying taxes, registering

property


protecting investors




QatarNominal GDP 2013 (US$) 213.5bn (Source: EIU)


Non-nationals in population 2010 89% (2010 census, fi gure for those only 10 years or older)






Ranking*


environment, taxes

Policy towards private

enterprise, infrastructure


of Economic Freedom


freedom

Investment freedom,

fi nancial freedom


Index

2013 28 (of 177) 1 n/a



Access to fi nancing, infl ation


Business

2014 48 (of 189) 3 Paying taxes, dealing with

construction permits

Starting a business,

obtaining credit


Saudi ArabiaNominal GDP 2013 (US$) 753.7bn (Source: EIU)








Ranking*


environment, taxes

Labour market, policy

towards foreign investment


of Economic Freedom


freedom

Investment freedom,

property rights


Index

2013 63 (of 177) 5 n/a


environment, goods market

effi ciency

Restrictive labour

regulations, education of

workforce


Business

2014 26 (of 189) 1 Paying taxes, access to

electricity, registering

property


resolving insolvency




Index ScoresYear Global rank GCC rank Strengths Weaknesses


Ranking*

2012-16 25 (of 82) 2 (of 5) Taxes, macroeconomic

environment

Policy towards private

enterprise, political stability


of Economic Freedom

2013 28 (of 177) 3 Fiscal freedom, government

spending

Investment freedom,

fi nancial freedom


Index

2013 26 (of 177) 1 n/a

WEF Competitiveness Index 2013-14 19 (of 144) 3 Goods market effi ciency,

labour market effi ciency

Restrictive labour

regulations, access to

fi nancing


Business

2014 23 (of 189) 2 Paying taxes, trading across

borders

Protecting investors,

enforcing contracts


United Arab EmiratesNominal GDP 2013 (US$) 405bn (Source: EIU)


Non-nationals in population 2010 89% (2010 UAE government estimate)




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