Gulf Economies: Resurgent Dubai , Somnolent Saudia, Mediocre Kuwait, Iraq (again)

Middle East News Analysis

Stock markets in the Gulf region declined further during the first two days of this week, as shares corrected for the large oil-price-inspired jump of the past year. There may have been some influence of a potential Iran crisis, but perhaps that was used as an excuse by some investors to take profits. As usual, the smart big money was taken off the table early, while the smaller investors, and some of the not-so-smart big money, were caught trying to cash in late on the market boom. Still, some shares represent monopolized protected industries where enrty is restricted (telecom, major industries, some banking), and these should rebound at some point.

Dubai in the UAE seems to be leaving other GCC and other Arab countries way behind as it evolves into an attractive world-class commercial, financial, and entertainment center for the Middle East. The process seems to have a huge momentum of its own, perhaps because the Emirate may have in place the best economic leadership team in the Middle East. The United Arab Emirates might be developing into a major cultural center as well, although it can never supplant old and bursting-at-the-seams Cairo, always the real cultural center of the Arab World.

Saudi Arabia, the largest Arab country on the Gulf, has no real ambitions to develop into any kind of international or regional center. The trade-off in terms of opening the country and allowing certain practices is clearly deemed unacceptable.

Kuwait's real position on this issue is probably much more like Saudi Arabia than it cares to admit. It now has a project that is called, well, Project Kuwait. It considers re-allowing foreign participation in the oil industry. There has also been much talk again about transforming the country into a regional and international center- this talk has been going on for at least twenty years- with frequent statements by high officials to the press. Unfortunately, the relationship between frequent public statements by officials and reality on the ground is similar to the Phillips Curve relationship between Inflation and Unemployment in economics (does the inverse relationship still exist in the age of globalization and outsourcing?).
Kuwait has the financial resources to compete with Dubai, but it does not have much else. The country, the earliest of the proverbial rich Arab oil states, has been mired for years in an atmosphere that does not encourage it to evolve beyond its status an oil producer and exporter, and a voracious importer of consumer goods. The immense bureaucratic structure of the country, built and nurtured by inept governance over several decades, is a major obstacle. Moreover, the economic leadership teams of Kuwait have always been mediocre at best.
Add to that the strong influence that Islamic Fundamentalists of both the Salafi and Moslem Brotherhood stripes seem to hold over the decision-making process. Almost certainly they will scuttle any serious attempts at reform and at enacting measures that would encourage opening the country and developing a vibrant non-oil economy that can stand on its own feet.
On the positive side, there have been no major financial scandals of the kind that proliferated during the 1980s and early 1990s, when perhaps several billion dollars (certainly more than one billion) were embezzled and salted away by various high finance and oil officials.

Bahrain, the smallest GCC state, once and perhaps in some ways still the most cosmopolitan of the Gulf states, actually once had a head start in trying to be a regional and international center. It developed an offshore banking center as early as the 1970s. But Bahrain does not have the freedom of movement of Dubai, nor does it have the financial standing of the oil-rich UAE to develop into a multi-pronged world-class center of commerce, finance and tourism.


Iraq again- there is no avoiding Iraq, Iran and the US Navy if we're talking Persian Gulf. The three dominate the region from the Strait of Hormuz to the Shatt al-Arab. In Iraq, it looks like the center of gravity, in terms of political tension, is firmly set to move north. The two main points of contention: the status of oil-rich Kirkuk, and the Kurdish militias, the Pesh Marga (Those who defy death), who refuse to be merged into the national military forces. The Kurds want special status for their militias, because they preceded the US invasion and the overthrow of the Ba'ath. My prediction is that the existing sectarian and ethnic militias will remain under the fig-leaf of regional auxiliaries to the armed forces- sort of like the National Guard in the United States. That issue will probably be resolved in a political way, but Kirkuk is a much thornier issue.

There are some complaints in the media and in the blogosphere about US intervention in Iraqi politics, again. Some relate to Secretary Rice's recent public statement that the new PM should steer away from 'sectarianism', a not-too-subtle Gulf Arab euphemism for Shi'a political preferences. Several commentators wrote al-Arabiya TV to complain that the US administration has urged Iraqis to form a strong government but that it almost immediately tries to weaken that government by making demands on it and telling it how to 'put itself together'.

Cheers
Mohammed