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Accomplishing wider economic development not self-evident for Gulf States

Accomplishing wider economic development not self-evident for Gulf States

By Johann Weick، Contributor Editor

EU – GCC, Economic Affairs

Conventional wisdom tells us that countries not equal in climate, natural resources and workforce should concentrate on what each can do best and trade the results of their specialisations with one another via import and export.

A modern version of industrial policy points out that policy-planners should steer the production of goods and the rendering of services to probable or foreseeable future trends.

But strategically combining comparative advantages, e.g. an advantageous geographic hub location and low cost jet fuel, with some good ideas on trade and logistics infrastructures, the three fast-growing and wholly government-owned Gulf carriers, Qatar Airways, Emirates Airlines and Etihad Airways, have become subject to subsidy allegations from their main competitors in the United States (US).

Although all should abide by international rules, the development of a business supportive environment in order to accomplish wider economic development is not an easy task for members of the Gulf Cooperation Council (GCC).

Besides hydrocarbon, energy-intensive petrochemical, oil-reliant aluminium, and in some cases (e.g. the United Arab Emirates (UAE)), dry-dock ship repair, a multiple sector industrial base is still somewhat missing. But in an attempt to attract non-oil industries in the light import-substitution/export-oriented manufacturing sector, the varying degrees of hydrocarbon-rich GCC states are in the process of developing industrial cities.

Introduced in order to develop their economic bases by creating economic opportunities and jobs for their fast-growing populations, the concept of local sponsorship encourages the transfer of know-how and technology from foreign to local companies.

But government authorities providing superb infrastructures with pro-business free zone regulation and administrative support in order to attract the latest technology, create meaningful jobs and diversify a relatively young economy into a multi-sector knowledge-based economy capable of generating self-sustainable long-term economic growth is not an easy assignment in a world where trade barriers fall and companies can decide to produce goods/render services at various cost-efficient locations around the globe.

All GCC states having acquired membership to the World Trade Organization (WTO) since 2005, means opening markets, breaking-up monopolies and less room for subsidization of the economy by either financial, or other forms of government support.

Dual energy-pricing, or applying a differentiated ratio per domestic barrel versus a much higher upward price-rate per global barrel, has proven to be useful. Hydrocarbon-fired aluminium smelters in Bahrain and the UAE are globally credited as competitive, technologically advanced and among the largest downstream facilities in the sector.

In a similar way, the allocation of domestically produced jet fuel has contributed to the growth and global competitiveness of the three major Gulf carriers in passenger and cargo flights.

WTO rules and sector-specific market access agreements like the Open Skies agreements in civil aviation is potentially able to reduce or eliminate practices like dumping and subsidisation, means it has become harder for signatory governments to support industrial development, reduce exposure of manufacturers against the vagaries of the world market and maintain global competitiveness of existing industries.

Although foreign producers of like or similar goods might have a legitimate or an unjustified interest to keep competition at bay by claiming that their overseas rivals gain an unfair, material injury-causing advantage via government support, the harsh desert sand located GCC states have only limited natural resources other than vast, yet at some point depleted, hydrocarbon-reserves and few comparative advantages for developing viable non-oil activities.

Thus, bestowing subsidies in money, or otherwise, entails a risk to become locked in bilateral trade deals or challenged by foreign producers of like or similar goods under multilateral trade rules.

A world where companies engage with one another without government support is not likely to materialise. The reality is that governments often have no other option than to afford their newly created companies a degree of protection until they are mature enough to battle for market share with established companies in established markets under normal competitive pressures.

Government support via allocating feedstock below market prices to energy-intensive domestic industries, operating artificially low airport service charges or interest-free loans with no repayment obligations to domestic airlines can make life hard for foreign competitors. But the cited elements are often put forward by protectionist, anti-competitive forces when newcomers are making an inroad into an established business which often appears to be equally supported.

Technological leadership, innovative capability and product competitiveness are no longer the exclusive domains of the Western industrialised world and the Southeast Asian tiger economies.

Successes achieved via a modern industrial policy involve a mix of a pro-business home market, visionary planning, taking risks, a quality product or service at a competitive price, distinctive brand marketing, sound management, skilled workers, continuous-performance-improvement capabilities, innovative strategies, excellent after sales/customer services, and luck.

Johann Weick studied economic and international trade law at Tilburg and Maastricht University, The Netherlands. He obtained a post-graduate diploma in EU Institutional Relations and Public Affairs Management from Templeton College, Oxford, United Kingdom, in addition to a Master degree in European Studies from KU Leuven, Belgium. Holding a record in teaching international trade policy and European integration in Brussels, Belgium and Dubai, UAE, Johann Weick analyses relations between the EU and the Gulf GCC.

He can be reached at johann.weick@gmail.com

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