• The Dubai model  - Afshin Molavi
A look beyond the Dubai buzz reveals a city-state with an ambitious long-term vision.

• Winners and losers in MENA  - Yusuf Mansur
The recent rise in oil prices is not a bonanza for all. In the medium-term, urgently needed reforms in MENA are hampered.

• GCC: learning from the past  - Riad Kahwaji
This oil is not seen by the international community as the Gulf's oil, but rather the world's oil

• Kuwait: will oil devastate traditional thinking or strengthen it?  - Mohammed Abdel Qader Jasem
The biggest problem in Kuwait is how to spend the budget surplus.

The Dubai model
 Afshin Molavi

From afar, it's easy to scoff at Dubai, the glitzy commercial entrepot at the mouth of the Persian Gulf. A city with more shopping malls per capita than anywhere else in the world is hardly a distinction of international pride. Then there are the man-made islands in the shape of palm trees and world continents, the building boom that includes miles of new skyscrapers and an amusement park ten times the size of Monaco, and a Hollywood-style penchant for celebrity worship. As a result, Dubai elicits as much private scorn as public praise.

But a look beyond the Dubai buzz--David Beckham buying up villas, Andre Agassi playing a round of tennis on a hotel helipad or the recent inauguration of an indoor ski slope inside a shopping mall--reveals a city-state with a sophisticated, ambitious, long-term vision to create a post-oil, high tech services hub for a dynamic and growing region of some two billion people. It also offers lessons for other Gulf states seeking to diversify their income away from oil.

The story of how Dubai emerged as a dynamic regional business hub, a high-tech center that has attracted the likes of Microsoft and Oracle and even start-ups hoping to become the next Microsoft, a world-class leisure destination that attracts more tourists than India or Egypt, a shopping paradise that attracts consumers from around the world, a global media hub, a major conference site that hosted the 2003 World Bank/IMF annual meetings and a global, cosmopolitan city in the making where people from more than 180 nationalities live and work, revolves around several simple lessons.

The keys to Dubai's success include a world-class infrastructure, a business-friendly environment that abhors red tape, a sound regulatory environment, a willingness to take risks, an environment of relative social freedom, a meritocratic business culture of innovation and change, and a CEO-like de facto ruler, Sheikh Mohammad bin Rashid al-Maktoum, who has won plaudits from world CEOs and leaders for his visionary leadership. As one Dubai critic told me recently: "I don't like the place, but I do indeed admire Sheikh Mohammad's leadership."

All across the Arab world and beyond, countries are adopting aspects of the "Dubai model", from the use of free trade zones to attract businesses to the creation of grandiose leisure and tourist developments. Even the famous Dubai airport duty-free weekly car raffle has caught on, with imitators in Jordan, Bahrain, Oman, and Qatar.

But Dubai is more than just mega real estate projects, shopping mall raffles and free trade zones. Its regional location--at the nexus of East Africa, Asia, the Indian sub-continent, Europe, and the Middle East--situates it ideally as a business hub. Others are even better positioned, like, say, Muscat, but no other Gulf state possesses the mix of financial, transport, and business infrastructure that Dubai has.

Ali Shihaibi, a western-educated Saudi investment banker based in Dubai, told me last week. "Dubai is successful because of the soft things they do: the regulatory environment, the incentives for foreign businesses, the infrastructure, high corporate standards, and the pleasant living environment they have created. As a result, they suck in the best minds and seduce and entice foreign investors. They understand the pace of global business and the needs of investors. No other place in the region does it as well as they do."

Dubai has clearly avoided the "oil curse" through forward-thinking strategies. Today, Dubai earns less than 10 percent of its GDP from oil income, owing to a diversification plan that began in earnest in the late 1950s under the leadership of Sheikh Rashid al-Maktoum, the then ruler of Dubai. In that pre-oil era, he realized that his city-state could not grow as a trade center unless he expanded local infrastructure for shipping. Raising money through a bond offering to local trading families and a loan from the Kuwaiti government, Dubai dredged the creek that ran through the city, allowing for larger ships to make it a port of call. The plan--though widely panned at the time--proved to be a success, making Dubai an important new regional transshipment center.

That model would stick. Dubai leaders, over the years, would make heavy bets on large infrastructure projects aimed at attracting business. In 1975, when Dubai announced the massive Jebel Ali port, the project was scorned as a white elephant. Today, Jebel Ali is one of the largest and most successful free trade zones and ports in the world and the Dubai Ports Authority runs and manages ports from Britain to Beirut.

Sheikh Rashid and later the triumvirate of his sons who today rule Dubai, Sheikhs Maktoum, Hamdan, and Mohammad (the "visionary" who manages day-to-day operations) would go on to airports, free trade zones, telecommunications lines, internet bandwidth, and roads that today form the backbone of the emirate's infrastructure. Another member of the ruling family, Sheikh Saeed bin Rashid al-Maktoum, has guided Emirates Airlines from a small cargo carrier with a handful of planes in 1985 to one of the world's most celebrated and profitable airlines, flying to more than 200 destinations.

In the region, Qatar and Bahrain have come closest to competing with Dubai for tourism and trade and conference exhibition revenue. Only in banking does Dubai lag behind Bahrain, the traditional offshore financial center, but Dubai is closing in on Manama with the creation of the Dubai International Financial Center. Several of the major investment banks have announced offices in the new DIFC.

Of course, with royals running businesses, the division between the public and the private in the world of Dubai Inc. is thin, but that is the normal course of business in the Gulf states. Dubai has made it work because, according to London Business School professor Saeb Aigner, Dubai emulates the Singapore model of state-directed infrastructure projects and corporatized development involving state actors. But like Silicon Valley, it also encourages the bottom-up process of private companies competing fairly to utilize that infrastructure once it is in place.

Historic merchant families continue to benefit from their economies of scale and access to royals, but smaller entrepreneurs face little of the bureaucratic bottlenecks seen in other parts of the region. As a result, the seeds of future business dynasties are being sown every day.

Dubai's greatest strength, however, might also be its biggest weakness: Sheikh Mohammad bin Rashid al-Maktoum. So much of Dubai's current rise relates to the CEO sheikh that if something were to happen to him, the danger remains that Dubai's steady march could slow. Still, critical mass seems to have been achieved and it would require a severe reactionary leader to turn Dubai backward. In the meantime, Dubai is slowly knitting together a web of institutions, infrastructure and regulations backed by a long-term vision and political stability.

Dubai, however, did not materialize overnight to what it is today. As most of the Arab world was erecting protectionist barriers in the 1950s and 1960s, Dubai was urging the world to invest and trade in their port city. This required vision. "Big picture thinking," as the author Dan Pink said in a recent lecture in Dubai, "is difficult to outsource offshore and difficult to automate." In the end, that might be Dubai's greatest strength, and one that won't be easy for other Gulf states to emulate--especially at a time of bumper oil prices.- Published 8/12/2005 © bitterlemons-international.org

Afshin Molavi, a journalist and fellow at the Washington DC-based New America Foundation, was a Dubai-based correspondent with Reuters.

As micro data becomes more readily available for the countries of the Middle East and North Africa (MENA), analysts are realizing the need to depart from blanket generalizations to country specific observations and analysis. The recent rise in oil prices is not a bonanza for all; where some countries (oil exporters) will clearly be feeble winners in the short run, with some better off than others, the non-oil producers of the region are emerging, to varying degrees, as losers. In the medium-term, urgently needed reforms in MENA are hampered.

The average world price for crude oil reached US$ 25.74 per bbl by the end of January 2000; it fluctuated slightly for the next two years and dipped to US$17.24 per bbl in Nov 2001, to rise in the aftermath of the Second Gulf War to a peak on September 2, 2005, to US$ 60.75. The price was even higher for US crude, which hit a record US$70.85 per bbl in early September 2005. While the US oil price has slipped since then, it is expected to remain around US$60 per bbl. According to the International Energy Agency (IEA), global supply will have to rise from around 82 million bbls per day last year to meet an expected global demand of 115 million bbls per day in 2030. The bulk of the increase in supply is expected to come from the MENA oil producers.

The six member countries of the Gulf Cooperation Council (GCC)--Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and UAE--will generate over US$ 220 bn in oil revenues in 2005, a 25 percent increase over 2004 and a record high. Furthermore, since oil revenues account for approximately 90 percent of GCC government revenues, the resulting budget surplus is likely to be greater than US$ 60 bn or 15 percent of the combined GDP of 2004. This increase in revenues will help provide government services and subsidies to a rising population (3.5 percent annual population growth in the GCC countries) and cushion medium term falls in budget revenues.

The oil revenue windfall will most likely dampen the urgency to implement badly needed reforms in Saudi Arabia and slow the privatization drive, leaving the public sector as the primary source of employment for the fastest growing population in the Middle East, with a persistent unemployment rate of 13 percent, exceeding even the rate (12.7 percent) of Jordan, a non-oil producer. Kuwait, whose revenues are generated mainly from oil (90 percent of budget), will most likely relax its diversification drive as economic growth, which resulted in the last three years primarily from growth in services, accelerates with an oil bias.

Of small- and medium-scale producers, the outlook is mixed. Syria, producing less than half a million barrels per day with little new investment in oil technology, faces increasing demands on revenues due to external factors, including the withdrawal from Lebanon, the consequences of the occupation of Iraq, and internal upheavals as reformists are pitted against the old guard. Egypt, an oil producer whose output has decreased significantly over the past decade, will face its own pressures as Husni Mubarak grapples with rising unemployment and reform issues and remittances from the sizable Egyptian workforce in the Gulf continue to favor real estate and shun mainstay sectors such as industry. Libya, a socialist economy with 75 percent of government revenues raised from oil exports and a bureaucracy that suffers from excessive waste and corruption, will probably witness more gigantic projects with little trickle-down effects or sustainable growth.

On the other hand countries like Morocco and Jordan, with insignificant levels of oil production, will bear the brunt of rapidly increasing energy prices, especially this winter since people and factories will have little to no time to adjust to increasing fuel costs. With crude oil needs amounting to 4.7 million tons this year, Jordan, a recipient of generous oil grants from Iraq in the past, is fast shifting the economic burden to the consumer and industry as oil subsidies become unsustainable in view of the rising oil prices. The oil bill over the first nine months of 2005 has reached JD 1.1billion compared to JD 718 million over the same period last year. Consequently, the previous cabinet announced a six step, two-year plan to fully liberalize oil prices by removing all oil subsidies. Prices of oil derivatives were increased twice last year and will continue to rise until 2007. However, the outlook as far as Jordan is concerned is not all bleak. Jordanians employed in the Gulf, petrodollars, and Iraqi expatriates have been pouring their savings into the real estate market, causing a 100 percent rise in real estate prices in 2005. Furthermore, stock prices fueled by Gulf money increased by 112.5 percent on the Amman Stock Exchange since the beginning of 2005. Industrial production, however, which faltered with the rising fuel bill, and a fast approaching cold winter, further complicate the economic outlook and constitute added pressure on the government to implement effective reforms.

The countries of MENA are all adjusting differently to the recent oil price increase. Depending upon the stage of development and external and internal pressures, the speed of reform will vary. Evidently an apparent short-term boon may be viewed in the medium term as a curse.- Published 8/12/2005 © bitterlemons-international.org

Yusuf Mansur is the managing partner of the Envision Consulting Group (EnConsult) and former CEO of the Jordan Agency for Enterprise and Investment Development.

Frequent visitors to the Middle East region have in the past five years noticed the considerable growth of many cities of the Arab Gulf states. High rise towers, huge fancy shopping malls and man-made fantasy islands have appeared in almost all member states of the Gulf Cooperation Council (GCC): Kuwait, Bahrain, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). Dubai, in particular, could today easily be described as the fastest growing city in the region, and perhaps the world. Forests of cranes that stretch as far as the eye can see are scattered in many parts of Dubai, as it tries to cope with rapid growth in population and vehicles. Similar scenes of construction and expansion are beginning to appear in other Gulf cities like Abu Dhabi, Doha, Manama and Muscat. Many analysts attribute this growth phenomenon to the new "oil-boom": oil prices have skyrocketed in the past few years, generating huge returns to oil producers and more hardship to consumers, especially in third world countries.

Unlike the oil boom during the Cold War era, this time around the rulers and the elite in the GCC states seem to have prepared and planned better. While in the past most oil revenues left the region, this time most have gone to local projects. Tough restrictions imposed by the United States and other western governments on financial transactions, and measures to uncover and freeze accounts of individuals suspected of aiding al-Qaeda or donating to charity institutions allegedly linked to terrorist groups, have prompted a large majority of GCC nationals to move their accounts to local banks and to invest mainly in projects within the region.

But Arab Gulf experts and officials have learned in recent decades that oil will not last for ever and that the scarcer it gets, the bigger the potential foreign threat to the GCC. As one Kuwaiti parliamentarian told me, "this oil is not seen by the international community as the Gulf's oil, but rather the world's oil." So the best course for some GCC states has been to get the big powers in the East and the West to invest in the region in areas other than the petrochemical field, in order to ensure their future in the post-oil era. Attracting foreign direct investment has become a primary goal.

But to achieve it, the GCC states are working on creating the proper environment: increasing security, laying down a high-tech infrastructure and transportation links, amending labor laws and property laws and creating free zones with transparent and liberalized free-economy rules. As one UAE official said: "the strategy for bringing in foreign investment is based on the principle of build it and they will come." Thus, the oil money has mostly gone into infrastructure, creating free market zones and establishing stock and currency exchange markets. The strategy seems to be working, despite warnings by skeptics of an economic bubble.

As oil wells pump at full scale, reducing reserves, the demand for energy has been increasing from industrial Asian powers like China, India and Japan. These powers are expected to become increasingly dependent on Gulf oil as their economic machines grow in size and strength. Both China and India have embarked on plans to build blue water navies with power projection capabilities. Current conflicts between India and Pakistan and between Iran and the West could drag on for years and might have spill-over effects on the GCC.

The Arab Gulf states appear to have been using a two-track approach to deal with potential future conflicts in the region: first, to remain neutral and establish good business and political ties with all parties; and second, to improve security and military capabilities by procuring the best high-tech arms, maintaining good levels of training and signing defense pacts with western powers. Talking to many regional officials, however, it becomes clear that they are counting more on strong business relations with western and eastern powers to safeguard the region against future conflicts.

Most of the investments are going into prosperous long-term projects in the areas of tourism, internet technology, communications, real-estate and stock exchanges. The GCC states hope these new businesses will generate enough income to replace oil as their main source of income. Dubai, where oil amounts to around 12 percent of total income, has particularly succeeded in achieving this goal. This is harder to achieve in Saudi Arabia, where the population is much larger and the internal security situation not as stable as in the other countries. Social and cultural barriers have prevented the Saudi government from adopting systems like those applied in Dubai. Nevertheless, Riyadh has embarked on a number of projects to encourage domestic tourism, nationalize the labor force and boost local industry and real-estate markets in order to keep as much as possible of the country's cash inside its border and thereby be ready for any hard days in the future.

One consequence of the current oil boom that ought to be of concern to GCC states as well as the international community is the increased socio-economic hardship generated in neighboring states like Yemen, Iraq, Jordan, Syria and Egypt. High oil prices have raised salaries and the cost of living, thereby bankrupting businesses and increasing unemployment. This will ultimately make these states less stable and more vulnerable to terrorist groups that thrive on impoverished and socially frustrated societies and target prosperous neighboring states that have good ties with the West, namely the GCC.

Hence the oil-rich Gulf states must expand their investments to include neighboring states, and to bolster these states' efforts to clamp down on terrorism. A safe neighborhood policy, similar to the EU's European neighborhood policy, would enable the GCC to live peacefully and prepare effectively for the days of scarce oil supplies.- Published 8/12/2005 © bitterlemons-international.org

Riad Kahwaji is CEO of the Institute for Near East and Gulf Military Analysis - INEGMA, in Dubai.

In wealthy Kuwait, whose population is 2.2 million (only 88,000 of whom are actual citizens), there is a real problem that threatens to cause a political crisis and could even bring about the demise of the parliament (which, according to the constitution, the prince may dissolve). This problem is how to use the budget surplus. The surplus in the budget, the year ended on March 31, 2005, came in at two billion and 65 million dinars compared to last year's 41 million dinars. The increase is due to the rise in oil prices.

The problem, however, seems to have less to do with the budget surplus, and lies more between parliament and government. The reality is the government now controls parliament in a way never before witnessed in Kuwait's political history. In addition, financial and political corruption is at its peak. Taking into consideration the slump in the political performance of the parliament and the inability of its pro-government members to convince voters of their political positions, such parliamentarians usually resort to legislating laws to improve citizens' living conditions by raising salaries or offering grants (at the start of 2005, each Kuwaiti citizen was granted a sum of 200 dinars, and 2,000 dinars were canceled from every electricity bill). Other social loans were canceled or special privileges granted to the retired.

Parliamentarians who hold opposing viewpoints to those of the government, meanwhile, find it difficult to stand up to the government because they are a minority in parliament. However, they also support such grants. They see the spread of corruption and their inability to confront it as a justification for their support for granting citizens financial privileges so as to create a balance between the corruption of the minority and alleviating the burdens of the majority.

I attended a general symposium convened by a number of members of parliament from various political trends (the Muslim Brotherhood, the Salaf, independents and pro-government members) on the same night that the parliament ratified a law canceling interest payments for the retired. The subject of the symposium was how to deal with the budget surplus. There were many recommendations from the participating members. One pro-government parliamentarian proposed the development of a main commercial street in the country by turning it into the Gulf's answer to the Champs-Elysees. He said a company with a 500 million dinar capital should be established to be funded by the government. In exchange, the government would receive 20 percent of the company's stock while the remaining 80 percent would be distributed among the Kuwaiti people whereby each citizen would get 3,000-4,000 shares paid by the government.

Another parliamentarian suggested establishing a company that would invest in an uninhabited Kuwaiti island. Again, stocks would be distributed among citizens in the same fashion as the above recommendation.

One Salafi member of parliament said he supported any proposal that would benefit the people on condition that the budget surplus was not used in ways that would anger God. He said if it angered God, the earth would swallow up the oil.

What also caught my attention were some citizens who had come to the symposium from relatively remote areas and who belonged to the tribal community. After they had listened to the parliamentarians' recommendations, one stood up before leaving the room and addressed the parliamentarians. "All we want is for our utility loans to be canceled."

In light of this situation, Kuwait is now publicly discussing two extremely important issues. The first is the possibility that the crown prince will step down from power because of illness and the second is the oil field development project in the north of the country. Some consider this project a symbol of corruption, exploitation and power. These two issues have, in one way or another, an influence on the need for the government to appease public opinion.

The nature of the Kuwaiti political system in particular and those of the Gulf countries in general generates an inevitable continuation of patriarchal rule of the state over its citizens. In Bahrain, for example, the king decided to grant the members of the football team a house and cash reward of 20,000 Bahraini dinars each even though the team failed to qualify for the World Cup finals.

Therefore, in Kuwait, no one knows what the final outcome of the "game" between the government and the parliament will be on the use of budget surpluses. In similar cases, the solution was a compromise on the sum granted to the citizens even though the government threatened to dissolve parliament.

As for the production of oil, the effect of current prices on the increase in production and the effect of this increase on oil reserves, this is an issue no one is discussing in Kuwait at present.- Published 8/12/2005 © bitterlemons-international.org

Mohammed Abdel Qader Jasem is a Kuwaiti lawyer and writer.