Race to reform in the Gulf

Ahmed Mostafa , Tuesday 11 Jan 2022

Ahmed Mostafa reports on the race between the Arab Gulf monarchies to implement economic reforms

Race  to reform  in the Gulf
Palm Jumeirah in the Gulf emirate of Dubai (photo: AFP)

Proposed changes to the rules of the “mercantile agency” agreements held by large local family businesses in the UAE are the latest step among the changes that have been taking place in the Gulf with regard to economic reform.

While no official announcement has been made, media reports say that the government has informed some of the UAE’s biggest business families that it intends to remove monopolies on the sale of imported goods as the state deepens economic reforms in an effort to attract more investment.

According to the UK Financial Times (FT), the proposed reforms would tear up the longstanding social contract between the government and influential merchant families in the UAE, including storied names such as the Al-Futtaim, Al-Rostamani and Juma Al-Majid families.

Signs of this policy shift were introduced earlier, with the UAE changing laws that allowed large foreign companies like Apple and Tesla to sell their products in the country directly without the need for local partners or agents.

Large family businesses in the country have been accepting requests from foreign companies to change the provisions of agency contracts in favour of foreign firms and dilute traditional monopolies.

The changes are a major step towards the economic restructuring that is now the focus of government efforts in all the Arab Gulf countries. The UAE has been leading a drive to attract more investment by competitive legal and social changes, such as long-term residency programmes and changing labour and other laws.

The pace of change has now accelerated after Saudi Arabia, the biggest economy in the region, launched an ambitious economic and social-reform programme. Oman and Qatar are also reforming their economies to keep up with the pace of change and render their economies more compatible with global standards.

All this reinforces the view of many observers that most Gulf states will soon be more focused on the home front rather than on foreign policies.

Oxford University historian and political analyst Andrew Hammond argues that US disengagement with the region is a main factor behind the shift from a foreign policy to a domestic focus.

“The trend over the next year is likely to be further region-wide policy-making independently of the United States,” he said. Former US president Donald Trump’s decision not to attack Iran after its assault on Saudi Aramco oil installations and ships in UAE waters in 2019 was a watershed moment that caused Riyadh and Abu Dhabi to make sharp turns, Hammond told Al-Ahram Weekly.

The trend of reform and diversification of Gulf economies to steer them away from dependence on the energy sector has been the norm for years.

The UAE began such changes a while back and has achieved significant results, with the non-oil sector now being the main component of its GDP. Saudi Arabia is now on a fast track for reform, which some observers see as a reason for others in the Gulf to speed up their domestic overhaul programmes.

As part of its own plans to diversify away from hydrocarbons, Saudi Arabia has imposed tariffs on Gulf imports and is pressuring multinationals to relocate regional headquarters to Riyadh, the FT reported last week.

For this reason, some Emirati businesspeople think the proposed liberalisation of mercantile agency rules in the UAE will benefit other Gulf businesses from other countries rather than bring in more foreign companies and investments.

A businessman from an Emirati family business group told the FT that “the government thinks that all of a sudden international brands will flood the country, but actually GCC agencies will dominate.”

Trade and tourism are among the few sectors the Gulf countries compete in to diversify their economies away from the energy sector. With the inward focus of governments in the region, political and foreign policy issues will probably come second in priority.

“All the countries in the region are now focusing on attracting investments and pushing economic reforms. All differences and previous grudges are being sidelined, as everyone is trying to bring in capital and carry out major projects. As a result, we are going to witness more economic competition rather than political rivalry in the coming years,” Saudi commentator Abdel-Aziz Alkhames told the Weekly.

That shift in policy and the emphasis on reform and widespread change could have socio-economic ramifications. But it seems the ground has been prepared for the impact to be minimal.

“There is now a far more serious drive among the Gulf states to end the nanny state. When the oil price collapsed in 2014, it was clear that governments would have to move in that direction,” Hammond said.

“The pandemic in 2020 then forced the hands of many of them, notably Saudi Arabia and Oman. The rally in oil prices over the past year has given all the governments some breathing space.”

Competition between the Gulf states to attract foreign investment and diversify their economies has shifted up a gear, Hammond added. The UAE has gone further than others, and cooperation with Chinese companies is ahead of its Gulf neighbours. Citizenship is being offered to foreigners seen as helping to advance the economy.

Riyadh has become more aggressive in pushing companies to locate their main regional offices in Saudi Arabia. “There is an air of new territory being broached on all fronts,” Hammond concluded.

The domestic scene in the Gulf countries might be well-prepared to absorb the impact of rapid change, but it has yet to be seen what the regional consequences of this new internal direction will have on the region.

Many analysts agree that the basic principles of Gulf foreign policy, regionally and internationally, are not going to witness much change.

*A version of this article appears in print in the 13 January, 2022 edition of Al-Ahram Weekly.

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