SHARM EL SHEIK, Egypt, (AP) – Gulf countries swimming in oil wealth are using the money to build huge industrial cities and gleaming financial centers to sustain them when the wells run dry.
They learned valuable lessons from wrongheaded investments in the 1970s oil boom, but economists worry the countries still aren’t making the education and labor reforms crucial to long-term stability
President Bush urged Gulf countries Sunday at the opening of the World Economic Forum on the Middle East “to build more diverse and more dynamic economies” to prepare for a day without oil.
With record oil prices near $130 per barrel, Gulf nations certainly have ample revenue now.
The six nations of the Gulf Cooperation Council, which includes energy powerhouse Saudi Arabia, earned $381 billion from oil exports in 2007 and an additional $26 billion from gas, according to the Washington-based Institute of International Finance. Oil prices hit $99.29 a barrel in on Nov. 21, 2007.
Saudi Arabia, the most populous Gulf country, has been one of the most aggressive in pushing industry development that can help diversify the kingdom’s revenue away from natural resources and provide jobs for a large youth population that the government worries could be pushed toward radicalization.
Saudi King Abdullah has championed a plan to build six new cities around the country that the government hopes will add $150 billion to its economy by 2020 and create over a million new jobs.
“It is Saudi Arabia’s attempt at moving to the 21st century in terms of economic and social development and growth,” said Fahd al-Rasheed, the man in charge of building King Abdullah Economic City on the country’s west coast, 60 miles north of Jeddah.
Al-Rasheed said the city has a price tag of $100 billion and will be the same size as Washington, DC. It will have six different zones, including ones for shipping, industry, finance, tourism, education and housing.
McKinsey Global Institute estimates that the Gulf economies need to create 280,000 jobs per year to employ its young citizens graduating from schools and universities.
Creating jobs is less of an issue for smaller Gulf countries, like the United Arab Emirates, Qatar and Bahrain, but is of prime concern for Saudi Arabia.
The Saudis have tried mega-projects before. The government invested money from the first oil boom into water desalinization plants to grow crops to boost the country’s agricultural industry. The project never really succeeded.
The difference now is that the government is allowing the private sector to play a much larger role in the process. The six new cities in Saudi Arabia are being constructed using private funds, with the government acting as a facilitator, according to al-Rasheed, who works for Emaar, one of Dubai’s biggest developers.
But the region still has one of the world’s largest public sectors, and some business people say Gulf governments need to accelerate the process of privatization.
“Governments are the lousiest people in the world to make an investment decision or an economic decision,” said Saad al-Barrak, head of the mobile phone company Zain, adding that more needed to be done.
“We have evolved our infrastructure — the roads, the telecommunications, and health care — and yet we have not yet expanded the rule of law, transparency, governance and the power of the ballot,” he said.
Yasser el-Mallawany, head of Cairo-based consultancy, EFG-Hermes Holding, said Gulf governments also had a lot of work to do to reform their education systems to produce qualified graduates.
“I think that the threat is that we do not want most of the investment coming from the oil wealth to be again real estate driven or just building cities,” said el-Mallawany. “The Arab world has to go up the value-added chain.”
Vahan Zanoyan, head of PFC Energy International, agreed, saying “the system does not generate employable graduates, period.”
Experts also say Gulf nations, which rely on migrant workers from elsewhere in the Middle East and Asia, have not yet tackled the difficult problem of labor reform.
Tarik Yousef, dean of the Dubai School of Government, said labor reform was especially important for Saudi Arabia because semiskilled migrant workers accept much lower wages. Without reform, it is possible that many of the jobs in the country’s new industrial cities would simply be filled from the outside.
“You are always going to find people in subcontinents who can do it, so migration policy should be on the table as well,” said Yousef.
Despite all the problems, Zanoyan said the current development process was still markedly better than the one during the first oil boom.
“I don’t think you have that 70s-style nouveau riche waste anymore because they are no longer nouveau riche,” said Zanoyan. “They are just rich.”