Oil revenues will not always be enough to support high spending in the Gulf, where the future depends on economic reform, as it does in the wider region
Economic reform is a hot topic in the Arab world, amid wider global changes, not least the move away from fossil fuels creating a need for diversification.
But it is not a new issue. The region has faced similar moments of comparable change before, and a look at the transformations made then can help provide insight into the challenges ahead.
The beginning of privatisation and wider economic reform in the Middle East came in Egypt, which is once more at the forefront of the process. It also touches Syria, Algeria and Kuwait, albeit very differently.
Al Majalla looks at this latest series of reforms – starting at the time and in the place where they began – for insight into what might happen next.
Egypt
The Egyptian roots of reform took hold after Anwar Sadat became president of Egypt in the autumn of 1970, after the death of Gamal Abdel Nasser. Sadat advocated economic openness and attempted to liberate the Egyptian economy from state dominance and the bureaucratic capitalism of the Abdel Nasser years, factors that were ushered in by the National Charter of 1962.
In 1974, legislation was passed to set up free zones to encourage the investment of Arab and foreign capital. Known as Law No. 73, it followed the October War of 1973, in which Egypt achieved a significant breakthrough, reclaiming the Sinai Peninsula, which had been under Israeli occupation since the war of June 1967.
Anwar Sadat advocated for economic openness and attempted to liberate the Egyptian economy from state dominance and bureaucratic capitalism. In 1974, legislation was passed to set up free zones to encourage the investment of Arab and foreign capital.
Law No. 73 was designed to attract investment in various sectors – manufacturing, mining, energy, tourism and transportation – and offered long-term leases to encourage the reclamation and cultivation of desert lands. It also allowed foreign investors to participate in investment companies, banks, and insurance companies.
There were limits on foreign ownership in some sectors, such as 51% of bank capital. It also granted investors the right to transfer profits from investments abroad in foreign currencies.
Egyptian President Anwar Sadat.
These changes represented a change in direction and the potential start of an era of economic openness. But they came with resistance from Nasserist forces. There was also opposition from the traditional left, including socialists, and parts of the country's bureaucracy, which was reluctant to give up its power over the economy.
The resistance was effective. Since the time of Nasser, and despite the changes of the early 1970s, Egypt's economy has been dominated by the military. The influence of institutions remains, controlling various companies in the contracting and manufacturing sectors.
Senior military officers have also continued to oversee the management of factories, farms, hotels, and financial institutions. Major banks are still owned by the state, including Banque Misr, National Bank of Egypt, Agricultural Bank of Egypt, Industrial Development Bank, United Bank, and Egyptian Arab Land Bank.
There are other banks, founded after the 1970s, which are owned by the Egyptian private sector or in partnership with Arab or foreign investors.
And now, questions are being asked again about the wisdom of keeping so many large banks, which finance so much of the economy, under state ownership. Once again, 1970s-style opposition remains. But Egypt is taking clear and bold steps towards privatisation, to free itself from these constraints of the past.
President Abdel Fattah el-Sisi's government has agreed to sell stakes worth $1.9bn in a range of state-owned companies, including hotel firms, telecommunications companies, and contracting firms. There are high hopes that these measures will expand and enhance the role of the private sector in Egypt.
And the current government's need to raise cash could accelerate privatisation. Egypt seems determined to accomplish structural reforms. Its political leadership is aware that the path to development requires the participation of the national private sector and openness to foreign investors.
Syria's signature law was passed in 1991 and is known as Law No. 10. It sets the conditions for private, national, and foreign investment in the country.
There were not many incentives, but several projects were launched in the country, covering banks, hotel companies, and real estate companies. In the oil sector many companies were established through partnerships between foreign and government entities in the oil sector, despite limited production.
Syria has been home to an active private sector since the early 1900s, but it was disrupted by the transformations that occurred since the mid-1950s. They reached various sectors – textiles, agriculture, trade, commodity distribution, traditional crafts, as well as hospitality and food.
Syria has been home to an active private sector since the early 1900s, but it was disrupted in the 1950s. Syrian private sector businesses were particularly affected after the Egyptian-Syrian union in 1958, which led to agrarian reform and the nationalisation of manufacturing companies.
Syrian private sector businesses were particularly affected after the Egyptian-Syrian union in 1958, which led to agrarian reform and the nationalisation of manufacturing companies.
More recently, the country's civil war has had a severe impact. The majority of the Syrian people have been affected by the consequences of armed conflict, including internal displacement and flight abroad as refugees.
The economy has also been hard-hit. Private and state-owned companies have suffered from sabotage, destruction and disruption of operations, alongside the displacement of citizens. Rebuilding Syria will require the injection of hundreds of billions of dollars to repair infrastructure and restore facilities and enterprises.
A man walks close to a fire raging at a facility in al-Qahtaniyah in northeastern Syria close to the Turkish border on October 5, 2023.
The role of the private sector will be vital for reconstruction. Syrian companies will need to partner with international firms. It is essential to adopt an economic system based on private initiative to rebuild and to use the skills of Syrians who left the country during the war and were able to set up businesses abroad.
Furthermore, thousands of Syrians raised significant capital that could be invested in their country when suitable opportunities arise, supported by suitable laws, regulations, and governance to protect investors and financiers.
It will be important for the state to support the sale of the many companies and institutions nationalised since the 1960s, from industrial firms to farms and hotels, including real estate and property enterprises.
Algeria
There was a wave of nationalisation and confiscation of private property immediately after Algeria's independence in 1962.
Beforehand, the economy was largely controlled by French colonialists. When they left, the new government took control of a range of properties, including factories and farms, setting up policies known as "self-management."
This concept was based on socialist principles and relied on public ownership of the means of production. Perhaps the new national authorities initially had no alternative to this system. However, leaving it in place did not bring any positive economic benefit.
In 1971, the government nationalised the oil sector, which was previously controlled by French oil interests. Sonatrach, the state-owned oil company, has run all forms of upstream and downstream oil products in the country, including exploration, production, transportation, refining and water desalination.
Sonatrach has had 13 CEOs since 1999, a sign of chronic instability at the oil and gas firm, a major supplier to Europe.https://t.co/cdfYmIsMVP
State control over vital economic activities persisted. The transition to a market economy did not begin until 1988, when the government outlined its "stabilisation and structural adjustment" programme.
It had already been discussed between the government and the International Monetary Fund (IMF) and the World Bank after the country faced serious problems, including a 1.5% annual decline in gross domestic product (GDP) from 1986 to 1991 and layoffs in government institutions.
Algeria was caught in what became known as the Black Decade from December 1991 to February 2002, which amounted to a civil war. The conflict was devastating and catastrophic, causing significant damage to the Algerian economy.
Algeria was caught in what became known as the Black Decade from December 1991 to February 2002, which amounted to a civil war. The conflict was devastating and catastrophic, causing significant damage to the Algerian economy.
But after it was over, the ruling authorities embraced economic reform. Laws were passed and regulations introduced to improve the business environment, freeing investors from obstacles including government hindrance.
Officials also focused on building relationships with European countries and institutions to help integrate the Algerian economy into the international system and enhance trade, particularly in oil and gas.
The World Bank has been following the development of economic reforms in Algeria for over two decades. A report published in January 2023 noted that Algeria was on the path to economic recovery, thanks to increasing oil production.
A representative from the #WorldBank has praised #Algeria efforts to establish the foundations for sustainable economic growth.
The World Bank's want to support in terms of knowledge transfer and capacity building, to support the country in its wide-ranging reforms. pic.twitter.com/XXckJ3l2Kx
The report also praised the development of the service sector and improvements in the agricultural sector. However, it also called for the prudent use of public resources in key economic sectors. Despite the positive developments, the political situation in the country remains unclear and long-term economic development strategies have not yet crystallised.
Algeria needs to adapt to globalisation and strengthen its appeal to European countries so that foreign investors can invest capital in vital sectors that can enhance the country's export capabilities.
Kuwait
Privatisation has also faced opposition in states with established market-orientated principles, not least Kuwait.
Part of the reason is that people have become accustomed to state oil revenues dominating much of the economy. These funds, particularly after the mid-1970s, led the governments of Gulf states to dominate various sectors and provide services to citizens and residents of these countries for free, or at heavily subsidised prices.
Kuwait's largest oil refinery at the Al-Ahmadi complex, about 40 kilometres (25 miles) south of the capital Kuwait City. November 21, 2014.
Since at least the beginning of this century, these countries have recognised the importance of enhancing the role of the private sector and reducing the economic role of the state. However, the dominance of the state has left citizens dependent on its support. Subsidies and large-scale public sector employment are commonplace.
This can make any serious attempt at privatisation or structural reform difficult, impeding or hindering the process.
Kuwait is a notable example of obstinacy in the face of economic change. Its political system prioritises keeping its citizens satisfied, regardless of the cost to the public finances. While the government makes statements in favour of economic reform and fiscal restraint, especially when oil prices are low, the complete set of measures talked about do not materialise and are not mentioned when oil prices are high.
Kuwait is a notable example of obstinacy in the face of economic change. Its political system prioritises keeping its citizens satisfied, regardless of the cost to the public finances.
Nonetheless, Kuwait passed Law No. 37 in 2010, which regulated set up the privatisation of some state-owned assets. It also laid out the same possibility for others in various sectors, including electricity, water, and telecommunications. It ruled out the privatisation of education and health.
A Supreme Privatisation Council was established to oversee the processes. But there has been a lack of significant progress. State-owned assets, including the government printing press, remain unsold. Attempts to sell off the public transportation system are facing challenges, not least the privatisation of Kuwait Airways.
Some members of the National Assembly remain deeply and vocally opposed to any privatisation.
An aerial view taken with a drone shows the Kuwait National Assembly building in Kuwait City, Kuwait, October 7, 2020.
Previous government auctions of shares in banks, investment firms, and real estate or industrial companies through the General Investment Authority have generated significant funds. However, the shares sold were re-acquired by the state over several periods, starting in the 1970s and especially during the Al-Manakh stock market crash in the 1980s.
Real privatisation will come when the government ends the public ownership of – and responsibility for – electricity and water production and distribution, food supply, landline telecommunications, public transport and Kuwait Airways.
That will involve developing partnerships between the public and private sectors to enhance economic performance, improve the business environment and create real employment opportunities for citizens. It will help overcome the hidden unemployment in the government and public sector institutions.
Oil producing countries cannot indefinitely rely on their traditional source of revenue to fund comprehensive state spending and welfare systems, as the world weans itself off fossil fuels. That means there are real economic challenges ahead for that part of the Arab world.
Elsewhere within it, countries, which have long depended on aid, low-interest loans, and borrowing from international institutions and foreign banks, must enhance the private sector capabilities and significantly open up to foreign direct investment.
Privatisation should no longer be a matter of debate: it must be implemented and administrative, cultural and political obstacles must be overcome.
Privatisation should no longer be a matter of debate: it must be implemented, and administrative, cultural and political obstacles must be overcome.
When successful, they open opportunity up for the national labour market and create a properly competitive commercial environment that ensures good value and high quality for consumers.
It should come alongside proper tax laws to support national treasuries via value-added tax and tax on corporate profits.
There are other criteria, relating to partnerships with foreign investors and laws for natural monopolies in some industries. All of these aspects must be clarified through clear programmes and strategies and must not be subject to fluctuating political whims.
These reforms may be complex and challenging, especially in some political circles, but they are vital and will be inevitable as the world changes.
