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Introduction
The oil crisis in 1998 and 1999 and the related financial problems encountered by the GCC states motivated the authorities to institute reform strategies to control deficits. These programs were implemented at different levels in accordance with specific platforms in every state of the GCC. But in all the states, there were increased consolidations which improved their conditions and reduced respective budgets weaknesses to pressures by trade shocks or oil prices sudden fall. Some GCC states made improvements by segregating public expenditure from immediate financial concerns to programmes in oil revenues and creating savings and stabilization measures. Public expenditure programmes were difficult to execute, such as reducing employment and range of budgetary subsidies to local governments. Welfare systems had to be limited.1
The reforms in the financial sector by the different GCC states as a result of the 1998-1999 oil crises were made in line with respective government platforms. For example, Bahrain formulated the Islamic government bills to correspond with the function of the Islamic monetary programmes; provided measures in improving discreet banking regulations; reformed anti-money laundering laws in 2001 in accordance with FATF guidelines; and enforced the Stock Exchange laws.2
Kuwait also made reforms by adopting the foreign investment legislation granting aliens the right to own and conduct trading with companies registered with the Kuwait Stock Exchange, but with some guidelines. Kuwait has focused on population growth since it has low level of population which accounts for a lower labor force growth. The concern with its labor force growth motivated Kuwait to pour some budgeting on this problem to increase the percentage of Kuwaiti nationals infused into the labor force. By 1993, this constituted 20.4% of the entire labor force. By increasing, it also meant to add spending for manpower development and training. Kuwaiti authorities were determined to increase the quality of its labor force through education and training. Male and female employees enhanced their knowledge through distance education and lifelong learning.3
Government also focused on reducing infant mortality which was then reduced to about 15 per 1,000 babies born in 1989. This continued until the liberation of Kuwait. The government was determined to support population growth by increasing child allowance to KD 50, or US $170. Other allowances for education, health, and housing for children were also increased.4
The Oman government made reforms in the banking sector and enhanced laws on securities by expanding the power of the Muscat Securities Market. It also reformed banking laws and reduced borrowing.5 Saudi Arabia allowed foreigners to conduct business in the stocks exchange and formulated laws on capital markets. It also followed the guidelines set by the FATF by providing stiffer measures against money laundering.
During the early years of the United Arab Emirates, President Shaykh Zayid made every move to build a strong federation. He visited places in the UAE to supervise every project in the remote areas of the country, to see their progress, and to converse or personally communicate with the population and the so-called grassroots.6 During these modern times, the United Arab Emirates has become financially active by establishing the stock markets with a corresponding regulatory body. Along with this, the UAE activated a Securities Law to lower down volatility and violations in the security markets. The government had to ensure that money laundering was not a problem as it strengthened laws on laundering in line with FATF guidelines. The central bank provided measures to reduce risks.7
On the other hand, Qatar spent more for services for its people from the revenues provided by the natural gas.8 Qatar got rid of interest limits on deposits; improved bank management and limite nonperforming assets; and provided new programs to improve liquidity supervision. Transactions between commercial banks and the central bank were simplified and made easy.9
Recent policy initiatives were more focused on upgrading educational institutions and systems to pave the way for more high-tech, high-skilled industries. So-called first generation policy initiatives have been refined and made systematic, like in the countries of Qatar and Abu Dhabi. Education can provide more quality employment for nationals and diversification can also pave the way for high-salaried employment. The problem is with the young nationals who have not opted to work with the private sector.10 Young nationals have been pampered by the government policy of providing special privileges and high salaries if they are employed in public institutions.
Across the GCC states, education is the main thrust, with the big part of the national budget across different states allocated for education and training. Saudi Arabias budget for education in 2010 amounted to $36.7 billion; for the UAE education had a bite of $2.7 billion (equivalent to 22.5 percent of the national budget); and Qatar gave 20.5 percent for education. It was emphasized that the primary aim of the education budget was content of the curriculum.11
Qatar introduced a program known as Education City, attracting six popular U.S. universities to provide satellite campuses in Doha. The Qatar government was successful on this by meeting the requirements and shouldering the operational costs of the satellite campuses for 10 years. On the other hand, the UAE convinced the Sorbonne and New York University to set up satellite campuses in Abu Dhabi by answering the costs for their popular institutions. In Saudi Arabia, King Abdullah donated $10 billion from his personal funds for the establishment of the graduate-level King Abdullah University of Science & Technology (KAUST). Expenses in establishing the university reached $2.6 billion. Nevertheless, young nationals are not too attracted to these new universities.12
All of these programs seemed to be successful for the GCC states, but, as many commentators would say, the GCC has still a long way to go. Whether it is on the right track remains to be seen. Development is seen in many areas, but the smaller states are lagging behind. Wealthier states should help by using oil revenues to provide sustainable development to these states.
Objectives
The objective of this dissertation is to examine and investigate GCC public expenditures after its establishment in May 1981. The six GCC countries are composed of one economic giant, Saudi Arabia, and the rest are smaller ones. The UAE consists of a federation of smaller states in the Gulf.
Another objective is to find out how public economics and public finance have worked out in this region amid the turmoil and the ravages of war in the Middle East. This region is one of the most troubled places in the world, the reason why smaller states have to find ways to be secured and safe, while some depend on global powers for security and economic independence.
In discussing the subject on public economics and finance, some other factors and discipline may emerge and find their way in the discussion. For example, the GCCs roots and formation and their subsequent projects and plans for the future were provided in the literature. One subject led to another. This is because the subject of public expenditures, including public economics and finance, are broad. Nevertheless, this Researcher focused on the GCC and the facts and circumstances surrounding the subject of public expenditures.
Methodology
The methodology provided in this paper is review of the literature. The literature was sourced from journals and articles found in physical and on-line library or digital repository. The journals and articles are peer-reviewed; they provided a great source for an interesting discussion on the subject of public economics and finance in the GCC.
Literature review as a methodology provided an analytical study of the information and data found in the literature. The main purpose was to help readers in understanding what was being researched, making known to the readers the strengths and loopholes of studies conducted in that subject.13
This Researcher could not have another way of research other than the chosen methodology since it is impossible to be physically present in the geographical areas mentioned in this study. The articles and past researches by authors and commentators provided a comprehensive background for the subject matter. The job of this Researcher was to research from the databases and books about public finance and economics and the public expenditures made by the GCC countries.
Literature search was a challenging job. I had to find words from my creative imagination to feed and draw from search engines articles and journals for this study. It was an enormous job because the subject on GCC and public finance and public economies are broad. It took me days to find a specific topic and inputted the words in the databases. Right search words were used to find the appropriate articles and journals from the databases.
The databases used were Academic Search Complete and Academic Search Premier of the EBSCOHost where a vast amount of scholarly journals, ebooks, and articles could be found. This multitude of journals were retrieved through a paid account and organized in the literature review which became a research methodology.
Articles included in the study were about the strategies used by the member states of the GCC. These articles were rich with information about the GCC and public expenditures, public finance and policies instituted by the GCC authorities in the course of recovering from the turmoil of war, in seeking economic independence and security, in diversifying and freeing themselves from dependence on oil.
After the gathering of information, the next move was to analyze the literature and provide a critical analysis of the literature. But first, there was an activity known as critical thinking to motivate my inner desire in skilful research and prepare myself for the systematic analysis. Literature review was not applied as a narrative way of telling the stories; the job required a critical analysis.
Literature Review
Background
In the period before the formation of the GCC, there were joint efforts for trade and security issues among the Gulf countries. This was a period characterized of separate initiatives by two or several countries making moves. For example, a move by the Kuwaiti authorities initiated the formation of the General Board of the South and Arab Gulf which provided for several benefits in the form of cultural, scientific, and health-related services to Arab Gulf states. The United Arab Shipping Company was also established for countries like the UAE, Bahrain, Saudi Arabia, Iraq, Qatar, and Kuwait as members. The Gulf Ports Union was also formed for Gulf countries. The Gulf Petrochemical Industries Company was a corporation of firms coming from Bahrain, Kuwait and Saudi Arabia. Other activities that led to the establishment of the GCC included shipbuilding companies, petroleum corporations, shipbuilding and dry dock ports, and petroleum related businesses. Large amounts of money were poured in by the Gulf States to make their efforts work and for the job of providing security and economic cooperation.14 Other reasons why the GCC was formed were the unique relation existing between these countries, the similar political orientation grounded on Islamic principles, a common destiny and common goals.15
The Gulf Cooperation Council is a regional grouping of six member states16 in the Gulf Region with a common objective to counter security threats posed by communism, pan-Arab Nasserists, the PLO, and other dictatorial powers of the Gulf countries. In 1967, leftist groups were expanding their territories and powers over the smaller Gulf States. During this period up to 1975, forces from dictatorial regimes were aligning their powers. Aden became communist-ruled and renamed Peoples Democratic Republic of Yemen, which supported a group known as the Popular Front for the Liberation of the Occupied Arab Gulf (PFLOAG). This group also endorsed a rebellion in Omans southern province known as Dhofar. But this was later dealt with by a formidable force of British, Jordanian and Irans military under the then Shah of Iran. PFLOAG was also supporting another liberation front in Bahrain.17 Because of the efforts of the GCC governments, stability in the Gulf and availability of oil for western countries are ensured.18 In short, the GCC was formed amid a very tense political positioning by big countries and superpowers during Irans Islamic Revolution followed by the unsettled war between Iran and Iraq.19
The primary aim in the formation of the GCC was for defence, but the initial motive was to preserve the monarchies. This was followed by a military cooperation with western countries, then, it was triggered by the Iranian revolution and the Iran-Iraq war.20 But whether it was for security reasons, other reasons for the founding of the GCC evolved, such as economic in nature. GCC states are now aligning their strategies for economic development. They have big plans to support themselves, the smaller states, and to become big as an alliance. Their most ambitious project is the creation of a monetary union, to anchor on the European Union.
The GCC first encountered security threats before and during its formation, but there were other threats, such as economic threats, or the lack of sustainable development for members in the countryside. These threats allowed them to wish for economic integration. Although there many factors to be considered in economic integration, the GCC did not have much difficulty in integrating their respective economies, unlike the integration of political and military areas which really takes time and a lot of efforts. Economic integration was sensed as the economic secret motives of these smaller states who had hoped to emerge victorious in the fight against giants and troublemakers of the Middle East.21
The quest for economic integration stemmed from their desire to secure (and improve) a common product oil and gas. The GCC has the biggest oil and gas reserves. GCC member states are active members of the OPEC.22
There were issues that had to be resolved right away. Economic competition among the states had to be dealt with, and they had to make their efforts work well. For example, there was the issue of pricing arrangements on their oil-related products, including diversified products of chemicals and metals. The skills and educational levels had also to be addressed promptly since they were not delivering quality work. These issues were resolved because of the members common desire to improve and work for the country.23 However, the GCC states had countless problems that had to be resolved as individual states and as a collective nation.
In the 1980s, the GCC shifted focus to becoming a monetary union and to issue a single currency, to imitate the example of the European Union, despite political problems existing in the Middle East and North Africa. Experts backed the move considering that five of the GCC states, i.e. excluding Bahrain, have an abundance of oil and gas for exports, the same structures and similar cultural affinities and peculiarities.24 (The subject on monetary union and a single currency for the GCC is discussed on Section 2.6.3 and in the proceeding sections.)
Public Finance
The big idea behind public finance is that it is financial management for the expenditures of a country. This concept and principle is demonstrated on an example of a family, which is run by the head of the family, with money sourced from the household income in the form of wages or business earned by members of the household. The head of the family has to balance the budget and take all necessary measures that the money is distributed fairly and equally among the members of the household.
In a larger family, we have the government that supervises and administers welfare and justice, and all the other services needed for the general public, including industries and businesses (the family). The government maintains all the other functions like the armed forces, the police, social security, welfare for the elderly, the poor and marginalized, and many other services. Without money, the government cannot function and serve the people. This is the job of public finance.25
Public finance encompasses government services and payments made or to be made for services for the government, including welfare fees, and other functions by which government spending can be covered through ways and methods that the government can acquire funds, like taxation, aids and borrowing from other countries or institutions.
Public finance involves money and how this can be allocated and distributed to the different departments and welfare institutions. The government can find ways, or money to support the many services, through taxation and customs duties of businesses and enterprises. The many services given to citizens families and businesses affect economic activity and revenues can be divided.26
Public finance also involves lending and borrowing, but governments should be banned from acting like banks or private organizations that lend and borrow, and when they borrow, they do it on a large scale. They do this purportedly to build public infrastructure, bridges, schools, hospitals, and for public service and welfare. In the process, they collect taxes and tariffs so high the people cannot pay.27
Public finance is for the good of the public. It has to be used for welfare purposes. Public finance therefore is not for evil intent, and has always been devised to deliver services where they are needed.
Public Economics
This dissertation is concerned with the subject of public economics, with reference to the GCC states and their implementation of public expenditures. Public economics is the link between the state and the market;28 it concerns government or public policies on the economy, emphasizing on taxation. But this is not just about taxation because it encompasses areas pertaining to market failure as influenced by external forces and policies pertaining to social security. The beginning emphasis is on the collection and government spending of revenues collected from various government agencies and programmes with the different aspects of intervention. Public economics also concerns public debt and incidence of taxation as it is related with social decisions. Many authors explained that public economics mostly referred to policy and how it is applied for public consumption.29
The discussion on public economics can be distributed down to different specific subjects, but the most interesting and productive type should focus on how alternative policies affect the general public and the government and what is the optimal policy. In this case, there should be a distinction between positive economics and how it is affected by the introduction of a new policy. The theory should focus on how economic agents plan their activities and how these activities are executed in line with the new policy. Policy makers must weigh down the pros and cons of the optimal policy and how each policy performs and which is on the weighted balance of the equilibrium.30
Public economics has been affected by neoliberalism. Neoliberalism is the radical reconfiguration of the relationship between the state and the market.31 Public economics has become sophisticated because of the recent turn of events in history, such as the U.S.s role as world leader in the Second World War, the need to rebuild the infrastructures damaged by the war, and the need to deal with welfare economics and the welfare state.32 With respect to the GCC, public economics refers to security and the need to focus on development of smaller states that have been lagging behind.
The theory on public economics states that the government should be able to help in maintaining the prices of commodities and products in industries so that a framework could be built for a democratic society to improve and develop.33 Moreover, the success of the neoliberal project depends on the use of the state as a tool in the marketization policies; examples of these are privatization, financial liberalization, trade liberalization, deregulation, rolling back of the welfare state.34
Public Expenditures of the GCC States
In the 1970s and 1980s, the GCC countries were concerned with building domestic infrastructure and were not thinking of diversifying away from oil. To discourage dissent and political activities, citizens were given social benefits and there was no direct taxation. The welfare system was one of the most comprehensive and generous, and was fully appreciated by its citizens. GCC governments provided free education, looked after the health of its citizens, provided housing assistance and many household necessities including utilities and gasoline. Citizens were also provided jobs in the public sector, whose salaries were very much higher than the salaries in the private sector. After 20 years of service, GCC citizens can retire with 80 percent of their last salary. Governments had surplus money to provide jobs in order to make it appear that there was no unemployment.35
In public economics, authorities study how to make use of meager resources to finance the various functions of government. The resources are in the form of taxes and other duties and income from businesses of the government. The GCC countries have made measures to use these meager resources, although oil was the main source to provide for government expenditures. Bahrain liberalized the telecom sector and invested much on mobile technologies and the telecom industry. Other states, like Saudi Arabia and Kuwait, havent made moves of liberalizing their respective economies. There is much competition in this sector of the telecom market however, with the entrance of foreign firms involved in mobile technologies. Telecom competitors were also penetrating economies of UAE and Qatar in 2006.36
The GCC benefited from high oil prices and economic activity made by investors. In 2008, the GCC produced one of the highest in its history of oil production, soaring up to 16.4 million barrels a day, amounting to an increase of about 7 percent compared to the previous year. This influenced consumption, increasing from 84 million barrels per day during 2005 to 86.9 million daily.37
In 2004 and 2005, economic stability was seen in Jeddah, Riyadh and Qatar, with industries and offices outperforming the residential sector in terms of output across the six countries. The GCC provided more opportunities in terms of business and trading. More expenditure was being poured in the financial sector as corporations grabbed the opportunities of low interest rates in borrowings. Private investors had had increased investments, particularly in Islamic and conventional funds. In 2006, GCC economies were rising amid high oil prices. Governments of these states were reporting surpluses and increased economic growth. Governments were pump priming through infrastructures and more investments, allowing more jobs and requiring more foreign workers.38
For the period from 2005 to 2030, large amounts of investments are expected in the oil industry. In the Middle East, around $500bn is expected for activities in exploration, development, and other oil businesses. Governments of the GCC states are also expecting private sector participation in the energy industry. But experts realize that dependence on oil cannot go on forever. Petrochemical giants are expected to enter the scene as governments start to divest their stakes in the energy sector.39
Diversification efforts in the GCC economies have been focused on the non-oil sector. The authorities took advantage of the export revenues generated by the oil sector and poured it on the non-oil sector. There is now the linkage between the two sectors, the oil and the non-oil sectors. In the United Arab Emirates, there is an imbalance in wealth creation among the member states. But the federal administration has used Abu Dhabis money to help the smaller members. Dubai is prosperous and leading in several businesses, such as real estate, tourism, bank and finance, and is also a commercial hub as big multinational corporations hold their headquarters there. Dubai is leading in diversifying to the non-oil sector.40
Sharjah, one of the emirates, has used small-scale industries in bolstering its economy and in serving Dubai and the rest of the UAE. There are educational institutions now proliferating in Sharjah, attracting students from the Gulf and the rest of the Arab nations. Fujairah, on the other hand, leads in maritime services and its international airport and container port terminal. Abu Dhabi is also diversifying into non-oil but its capital came from oil exports. The private sector is focusing on this capital for the booming economy.41
The GCC states, through shared efforts, have built their own business out of oil. First, they have an oil refinery situated in Oman. This is one of the profit generating ventures that can provide source for the GCC to venture in other products, or for diversification. Refined products can meet other financial requirements for the GCC, for example petrochemical products which can be sold in higher prices. The GCC has other big plans for refineries; some of these have already been set up in Bahrain, Kuwait and in Saudi Arabia. These are necessary steps for the GCCs diversification strategies and shifting to non-fuel products. Another big move was the building of a long oil pipeline, approximately 1,700 kilometers, that would connect Oman to other states, crisscrossing the Strait of Hormuz. The pipeline was connected from a terminal to other points in Oman.42
Development of the Labor Force
Skilled manpower has always been a problem of the GCC countries. Migrant workers, who mostly come from Asia, dominate the workforce. With this situation, the private sector is largely dependent on foreign labor but this also put responsibility on the public sector to absorb the workforce. Thus, the thrust of the GCC countries and their future plans is to involve more the national workforce and by 2020, at least 75 percent is expected to be already involved in technical and professional jobs. GCC countries have to invest much on improvement of skills and competitiveness of the national workforce.43 Labor or human capital has to be improved, with emphasis on education. This is another area where the GCC states will focus their expenditures.44
In the early years of the GCC, analysts predicted of the coming in of labor force from various Asian countries and the GCCs continued dependence on foreign labor. The most important reason for this labor influx and GCCs dependence on migrant workers was that the small and young population of the member states did not want to work in the private sector. They were used to special privileges given them by the government, such as higher wages and early retirement.
There was also the need to maintain the existing old infrastructures that had been there since the seventies, and the tendency to secretly hire foreign workers because of the stringent measures imposed by government regulations. All these affected the volume of migrant workers entering the GCC.45
The growth and development of existing national labor force influences the demand for jobs in the GCC. There were changes in the GCCs indigenous labor force, but mostly they were young and had little knowledge about the jobs offered in the oil industry. Thus, the governments had to depend on migrant workers.
Table 1 above shows the percentage of expatriate work force in relation to the total work force of the GCC countries for the period 1975-1990.46
The significance of labor or human capital to economic success of a country has been the subject of several empirical studies. There is the link between human capital and economic development. The theory states that a country can have higher economic growth if it invests in education. Human capital can trigger economies of scale with output exceeding inputs. Another way in which human capital boosts economic growth is when educated workers influence others around them. Economic growth is also obtained through research and development and human capitals introduction of innovation and changes in products.47
The GCC countries have a large population of migrant workers: in Oman, it is 33% while in the UAE, it is 90% of the entire labor force. Migrant workers are recruited by the private sector, working as professionals and as ordinary laborers. There is a discrepancy in the employment of nationals and expatriates; for example between 2000 and 2010, there were only 2 million GCC nationals for 7 million available jobs, which meant that the 5 million were expatriates.48
Privatization in the GCC
After the oil shock in the early seventies, new opportunities loomed in the horizon for the GCC states. Public spending was exacerbated by the private sector, with many of the firms coming from petrochemical and fertilizer sectors building manufacturing plants in Saudi Arabia, Kuwait, and in many other parts in the Gulf region, particularly the GCC. In Bahrain and Dubai, the private sector built cement factories and ship repair yards.49
GCC is moving towards privatization in order to acquire funds to support the governments public expenditures and to ease government load of managing enterprises. There is also the concern of lack of equal chances for the people. For example, there are revenues reserved for the royal families while a great portion of the population goes hungry. Privatization may lessen the present preferences of the royal families, but there is also the negative side on this as separating the private sector and the royal families may result into a political backlash. The unrest in the Middle East was due to lack of economic opportunities although they seemed political in nature, at first glance.50
Privatization across the GCC is gaining ground. This includes privatization of public enterprises, like telecommunications, public necessities like water and energy needs, banking and finance. Bahrain is spearheading privatization through the formulation of a government council known as the Supreme Privatization Council. Abu Dhabi is also making its move of privatizing. Muscats Securities Exchange has provided a different method known as the golden share, making available some shares of state-owned entities for public investing.51
Privatization was conceived by the GCC authorities with the following objectives:
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The general objective is to provide a wider playing field for both public and private entities within the GCC, collect more revenues to support government expenditures in building infrastructures, and motivate competitiveness in the private sector.
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