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I. The background[1]

Since the commencement of the production of crude oil in the thirties and forties the oil wealth has transformed the oil countries gradually from low- to middle- and some to high-income countries. In the fifties, with the profit sharing agreements the major Arab oil producers enhanced their annual income further and acquired stable flow of revenues. Stability emanated from the then prevailing structure of the oil industry.  It was mainly dominated by a cartel of integrated corporations.  Prices were fixed and continued so, for the next two decades. Economic development proceeded in many countries through development or planning boards, usually advised by the World Bank. Most Arab countries were following the market system. With the wide ranging nationalisation of private ownerships in Egypt in the beginning of the sixties and the following nationalisations in Iraq, Syria and Algeria after independence, the oil countries divided into two groups: liberals and interventionist or Gulf and non-Gulf countries. By the time of the first steep rise of crude oil prices in the beginning of the seventies the political and economic map was generally delineated. The Gulf countries: Saudi Arabia and the rest of the emirates; the others are such countries as Iraq and Algeria. As much as they are different in their economic policies and institutions the similarities are also revealing.

The oil wealth has put immense power at the disposal of the state. This power has been moderated, in the Gulf societies, by the tribal conventions of consensus; thus the private sector continued to function in a relatively open liberal economy.[2]  This was facilitated by the accumulation of foreign assets.  The exchange system, with stable exchange rate, satisfied demand without restrictions. The public sector has grown in these countries[3] but it was, more or less, kept within two bands, public utilities and oil industries. The private sector continued its activity mainly in trade, finance and consumer industries. It also directed part of its activities into financial and freight services that served the whole region. In the second group, the dominance of the public sector is more visible. Endowed with larger populations, and more diversified resources, Iraq and Algeria followed inward looking policies.  The main national symbol was the development of import substitution industries, protected by import quota systems. On the social side employees, in public administration and public sector, have gradually supplanted the old middle class, which was mainly composed of small traders, industrialist, small landowners and professionals, etc. Thus the imposition of restraints on the private sector has been more recurrent.  What separates them from countries in the Gulf pertains to the kind of controls in existence, mainly:

(1) The controls on the exchange system and the evolution of parallel markets in goods and currency. Foreign trade and banking, in the non-Gulf countries were subjected to the control of the state.  The exchange system was restricted and monetary policy subordinated to the budget. In the Gulf, however, the monetary policy was also dormant, but for different reasons, that will have important ramifications when the oil revenues started to decline, for all Gulf countries followed currency-board-type arrangements[4].

(2) The heavy restrictions on the functioning of the market system. The profit criteria usually applied in the market system gradually gave way, in the public sector, to self-contained criteria that increasingly shifts the ground away from cost and benefit considerations. For instance, profit as a main criterion in the inception and continuation of various productive and service activities gave way to such notions as self-sufficiency or meeting demand at any cost, etc.

In both groups, oil revenues were used to harness ongoing policies; the budget therefore has come to be the dominant tool of economic and social policy. Moreover, to guarantee social consent both expanded employment in their civil service.  In current prices the share of the government services in GDP, in Saudi Arabia, grew from about 9% in 1970/71 to 20% in 1999 (table 5). In Algeria it hovered around 12.5% between 1995 and 1999.  In Iraq it stood at about 18% during the period 1984-1990 (ESCWA 1993 & 1997). Employment in the civil service amounted to about 28.4 of total employment in Algeria between 1994 and 1996.

Both groups were also supporting over-valued rates of exchange during the period of sliding oil prices, the Gulf countries through the use of past savings and the rest through restrictions and regulations. The rate of exchange policy was not considered as a tool to compete in the international market.  Consider for instance the behaviour of a non-Arab oil country, Indonesia.  In 1978 Indonesia was not facing impending balance of payments problem. The reserves were adequate, yet it devalued its currency by 34% against the US$ in order to reduce the adverse effects of overvaluation of the rate of exchange on the agricultural exports, (I. M. D. Little, et al, 1993, P.39) [5].

II. The oil connection

In 1983 oil prices started to slide.  The conservation measures on the demand side and coming online of new oil supplies from outside OPEC area (North Sea, China, Egypt, etc) were exerting their effect. After the crash of 1986 [6], oil prices behaved in something like a cycle (see below). The burden of the sliding revenues, during the downturn, borne by the different Arab oil countries was different.  For such countries as Kuwait and UAE the deficit in the current account was a short incident (table 1). As a matter of fact the cumulative current account surplus amounted to US $ 51 billion between 1983 and 1999 in Kuwait. In UAE it was US$ 72 billion (OPEC 1999). That was only possible due to small population and high investment income from abroad. Yet, in Saudi Arabia the deficit had been pervasive throughout this period, the cumulative deficit amounted to US $ 181 billion (tables 4 and 6). The main source of finance was liquidating official foreign assets[7]; see also Box (1). In the non-Gulf countries the storey is somewhat different. The inactive exchange restrictions during the first period were binding in the second.  The current account balance was maintained as much by exchange restrictions as by budgetary measures. Therefore, Algeria realised a limited cumulative deficit of US $ 2.5 billion between 1983 and 1999 (OPEC 1999), compared to a much larger deficit in the first period [8].

II.1 The growth of consumption

Adjustments in oil economies in response to the fall in oil revenues have displayed the disruptive influence of the oil cycle. Despite sterilisation of part of the oil revenues, during 1970-1982, growth of consumption and investment, in real terms, paralleled that of the oil revenues (tables 1 and 2). Non-oil output also experienced high growth, but in its response to the fast rising expenditures it was restrained by more binding (mainly physical and logistical) constraints.  The gap between demand and domestic supply widened.  In the tradables, the gap was increasingly closed by imports. Imports grew, in real terms in all Arab oil countries, at pace with expenditures. Foreign exchange proceeds were more than enough. For instance, in Saudi Arabia total consumption (private and public) rose, in real terms, by 21% annually during this period, non-oil output by 13.4%, and imports by 25.5% (table 3). The rise in economic activity proceeded within a situation of disequilibrium (mainly in non-tradables) and delays in adjustment.

The rise in oil revenues, during the first period in all Arab oil countries, has thus created a level and structure of consumption (standards of living) that has resisted future decline.  This new level of consumption and incomes, which can only be supported by rising oil revenues, has sown the seeds of future course of crises, financial and political. From this stems many policy and restructuring difficulties facing the oil producing countries. This was amply clear in the second period (1983-1999) when declining oil revenues were facing entrenched levels of consumption and stagnating non-oil output. Although growth of spending (consumption and investment) has converged to that of oil revenues, in nominal and in real terms, in most Arab oil countries, during this period, the gap between demand and non-oil output has already widened a great deal[9]. The Gulf countries continued to close the gap through imports, supported either by adequate oil revenues (Kuwait and UAE) or increasingly drawing on foreign assets (Saudi Arabia). The Saudis continued the liberal exchange system at the time when their budgetary measures were not enough to stall the inadequacy of oil revenues. The result was a heavy run down of their (official) foreign assets.[10] In the non-Gulf oil countries, restrictions on imports (and cuttings on subsidies)[11] have increasingly become the main tool to repress demand and thus effectively reducing consumption (standards of living). Public investment was also constrained through budgetary measures and part of private investment crowded-out.  These were the main causes (and effects) to the growth of parallel markets, separation of international and domestic pricing and emergence of present-day crises.

II.2 The growth of non-oil output

During the last 30 years the non-oil output has grown in value to the extent that its share (in GDP) has risen continuously in all oil countries.  The share of non-oil output has risen from 30% in 1975, measured in current prices, to 65% in 1999 in Saudi Arabia, and from 32% to 74% in UAE, during the same period. In Kuwait it rose from 30% in 1975 to 60% in 1995.  The same trend can be discerned in other oil producing countries[12], table (7).  Does this indicate diversification?  It does, if we take the word to refer to the adoption of different modes of professional or social organisation than the prevailing ones.  For instance, the erection of public offices staffed with civil servants enjoying, until 1985 for some and till now for others, fairly comfortable life and gaining similar consumer tastes emulating those in advanced countries.  The development extended to the mushrooming of the service sector, trade and regional financial intermediation with appearances and practices similar to those in the advanced world.  By other criteria, however, this diversification is more apparent than real, especially when it is taken to refer to sustainable development, i.e. the development of alternative activities that insure adequate foreign exchange earnings for fairly long time. First, the dominant foreign exchange earner is still the oil sector (table 8).  Secondly, oil revenues are still the driving force behind both the growth of expenditures (see above) and growth of non-oil output. Let us touch on this latter connection.

With the rise of oil revenues (1970-1982) fast growth has been observed right across the sectors of the economy. The main sources of growth have been:

(1) Investment activities in the infrastructure, social services and manufacturing.  For instance, during these prosperous years value added in construction grew by 18% annually in Saudi Arabia, (table 9).

(2)  The expansion in oil-based industries such as oil products and petrochemicals.

(3)  The expansion in import substitution industries.

The annual rate of growth in non-oil output amounted to 13.4% in Saudi Arabia, 14.7% in Kuwait, 51.1% in UAE and 8.5% in Algeria, during this period, table (10).

In the second period (1983-1999) the fall in oil revenues constrained all these economies. The annual rate of growth in non-oil output amounted to about 1.1% in Saudi Arabia, 2.4% in Kuwait and 5.2% in UAE, during the period, table (10).

Basically, therefore, the growth of the whole economy has been tied to the growth of oil revenues.  The ties are financial rather than organic.  In other words it is the ability to spend (and consequently to import) rather than the inter-industry linkages that generate stimuli to growth. This can be recognised visibly by comparing the growth of real value added in the non-oil sector to the growth of oil revenues.  For the comparison to be meaningful it is necessary to compare growth in the non-oil sector to the growth of real purchasing (importing) power of oil output.[13] It is obvious from table (9), for Saudi Arabia, that the growth of real output of the non-oil sector is closely tied to the growth in the purchasing power of oil output. The association holds for the whole of non-oil output as well as for most of its components. During the first period the real value of oil output grew by an annual rate of 16.1%. Accordingly the non-oil value added grew by 13.4%.  When the value of oil output almost stagnated during the second period (growth of only 1.1% annually), non-oil output followed suit; it grew by 1.1% annually, (table 9).

The interaction between non-oil output and the financial side of oil takes place by proxy, i.e. through the relationship between public expenditures and non-oil output. Our econometric estimation of this relationship, for Saudi Arabia, shows that public expenditures constitute the main variable explaining the growth of non-oil output. Moreover, their influence has increased over time. See Box 2.

This is a fundamental problem facing the oil producing economies. It is obvious that the oil connection has been the major driving force of economic activity for the last five decades. Breaking away has proved unexpectedly difficult.

Looking at the experience of other countries, mostly East Asians, China and Vietnam as well as countries in Latin America we find that major sources of fast growth are external, mainly export-led stimuli. The main vehicle is the export of manufacturing goods. Auxiliary sources such as tourism and financial service also played a supportive role.

It is clear that both groups have not been able to realise sustainable development. No doubt two countries have invested part of their surpluses in portfolios that seem to produce sustainable long-term return (UAE and Kuwait).  As a matter of fact the UAE is anchoring its long-term policies on lengthening the time span during which these investments produce enough return for future generations. Apart from these two, the others, with their existing mode of social and economic organisation and perceived or actual reform programmes have not been, yet, on course to achieving this elusive target.

III. The public enterprises

Composed mainly of inward looking activities, non-oil-based public enterprises in the non-Gulf countries have long been a source of inefficiency, which has been manifested into two outcomes. First, mounted losses, arrears and debt resulted in heavy drain on resources from the budget and foreign exchange. Secondly, the deterioration of quality and quantity of their products, which in turn has been rendered by a system of quantitative protection, without which the enterprises would not have been able to survive. The interplay between the budget, public enterprises, exchange system and financial sector is revealing:

(1)   Apart from insurance companies and pension funds the banking sector has been the main financial intermediary and conduit in the country.  Its major function is to finance the operations of the state, i.e. the budget and the public enterprises.  The central bank ensured the financing of the budget deficit through treasury bills, or other special arrangements. The main task of the other banks is to finance the public enterprises at low (usually negative real) interest rates.  As a result the public debt accumulated on the part of the treasury and non-performing loans and arrears on the public enterprises increased.  The banks’ solvency diminished.

(2)   The burden on the budget mounted. This includes servicing its debt to the central bank, subsidising losing enterprises and paying the banks for non-performing loans and arrears on the public enterprises, in the end worsening the deficit further. Algeria went through all these stages especially before, and to a lesser degree after 1994.

(3)   During the eighties the exchange restrictions, motivated by low oil revenues and supporting overvalued exchange rate, constrained supplies of imported goods. Shortages were widespread. With the absence of alternative supplies, surplus purchasing power accumulated in the form of idle balances with the households.  The lending to the budget and public sector on the one hand and shortages of supplies on the other contributed to the crowding-out of private investment.[14] When alternative supplies appeared, outside the official channels, parallel markets developed in currency and goods.  Accumulated balances, with the households, found their way to these markets supporting much lower parallel rate of exchange (and hence higher inflation).

(4)   The industrial public sector has increasingly been dependent for its inputs, spare parts and capital goods on the public import (foreign exchange) budget.  This budget performed dual functions.  First it was the means by which quantitative restrictions (protection) on imports are articulated[15].  Allocations are drawn-up in the budget on the basis of importing those goods, which are not adequately available from domestic sources.  The other task is to control the current account balance. The budget is largely executed at official rate(s) of exchange.

(5)   With the segmentation of the market (official, parallel) the public enterprises could not meet their unsatisfied needs (inputs, spare parts, etc.) from the domestic parallel market, because of inflated prices. The pricing of their own products is regulated by administrative procedures; prices are set on the basis of costing at the official rate of exchange. This has accentuated the already acute problems of capacity under-utilisation, overstaffing, power cuts, etc.

(6)   Losses therefore climbed further, thus increasing arrears and non-performing loans.

Initial oil wealth, and it seems ideology, made such practices tolerable. It cannot be, a priori, explained by vested interests.  The same interests could have been served by export-oriented industries, the case with the chaebols-type[16] arrangement in the Asian experience attests to this. Dutch disease symptoms of overvalued rate of exchange, high labour unit costs and the separation of international from domestic pricing could have also been responsible, on the economic side for this pervasive situation. Furthermore, the preservation of overvalued rates of exchange at the time when the growth of the parallel markets was an indication for the necessity of devaluation is a sign of the higher priority given to social considerations over economic management.

By contrast, the more conservative currency arrangements, which are followed by all Gulf countries, stipulate full foreign exchange (usually the US $) coverage of issued currency. Central Bank (or Monetary Authority) lending to the treasury is usually prohibited by law, and adhered to in practice[17]. These arrangements blocked the way for money creation to meet the deficit of the budget.  Deficit has been met by liquidating foreign assets and borrowing from public financial organisations and commercial banks. The other public enterprises (downstream oil or public utilities) borrow from the private sector in the same way as the private sector does[18].

IV. Reforms in a changing world

The period during which reforms have become a serious choice in major Arab oil countries (1986-) has witnessed major developments in the world, mainly:

(1) Expansion and liberalisation of trade and the advent of the WTO.

(2) Liberalisation of capital movements.

(3) The fall in the costs of transportation and communications. The latter has also been signified by the spread of the use of the Internet (e-commerce, electronic money, etc.).

(4) The increasing influence of the trading blocks and supra-national groupings and trans-national corporations on the economic and political decisions of the small countries.

(5) The collapse of the East European systems.

In their different manifestations, these developments have presented various countries with different challenges. Growth has been accomplished successfully in different parts of the world.  Many countries have adapted well to the changing world, in terms of technology and competition. In addition to fast growth some of them realised more equality in income distribution (World Bank 1993)[19]. Yet, due to different endowments of management and labour skills, technological capabilities and stage of development, available indications point to increasing income disparities between nations (R. Wade 2001).  If not taking the necessary and difficult steps to catch up, the Gulf and non-Gulf countries, once in the middle to high-income scale among nations (WB classification), may find themselves increasingly lagging behind.

IV.1 The oil cycle

Since the nationalisation of most oil concessions[20] in the beginning of the seventies, crude oil started to flow increasingly outside the channels of the major integrated oil companies.  Towards the end of the seventies oil spot markets emerged in many areas around the world.  Crude oil started to look like other commodities.  After long time of constant (so-called posted) prices, fluctuations became a daily matter.[21] Indeed, in different times since the seventies the price seemed to have come close to its marginal cost in the Middle East[22] then to shoot up above that of the highest existing producing areas (the offshore North Sea or Arctic fields).

As a matter of fact looking at the price data of crude oil from the middle of the seventies to 2000 (chart 1) a kind of a cycle can be figured out. The cycle is more pronounced when monthly data is plotted (chart 2, on page 18).  It is true that the cycle is not regular, the amplitude, duration and phase are all different between one cycle and the other, but visually there are cycles all right.[23] Moreover, it is possible to articulate the different forces that could perpetuate the cycle, which will be touched on shortly. The amplitude of the first cycle (started in 1978/1979 and ended in 1986/1987) was about 22 US $ a barrel. This was followed with a cycle that started in 1989 and ended in 1996 with an amplitude of 8 US $ a barrel. The present cycle that started with a crash in 1998 then sharp rise in 2000, more or less maintained so far in the first half of 2001, has not completed its duration yet.  The amplitude is comparable to that of the first cycle.

Some of the previous cycles were associated with political or economic upheavals.  The sharp rise of 1973, 1979/1980 and even the short-lived rise of 1990 were all associated with crises in the Middle East. The current cycle cannot be explained by upheavals in the Middle East. Rather, it is the confluence of anticipated long run supply shortages (at least on the part of the Americans) and political realisation that low oil prices is destabilising to the Gulf countries. The higher the oil prices the better the chances that areas outside the Middle East can be developed (Caspian or Arctic site in Alaska) and the lower the dependence on the oil of the Middle East.

          Chart 1: Price of Brent Crude (Annual Average, US$/Barrel)

Very recently environmental considerations took a setback with the decision of the new American administration to take measures to increase supplies of crude oil and products[24]. It is obvious that the current rise in oil prices encourage these developments.

Here we have two opposing forces. On the one side the increasing dependence of the USA on imported oil,  security of supply considerations and long lead time between investment and increase in capacity, all exert upward pressures on prices. Therefore, short of a revolutionary backstop technology the price of crude oil is not expected to be driven to its marginal cost permanently, in the foreseeable future. On the other side, new supplies of oil exert downward pressures. Thus there is no way (as OPEC has been discovering time and again) to maintain a price permanently above the marginal cost by a big margin.  Oil price will, thus, continue its cyclical behaviour. With amplitude as high as ten dollars the oil producing countries will find their economies swinging accordingly.  At the downturn restructuring is defended only to be relaxed in the upturn. However, with growing population this state of affairs is obviously unsustainable. The relief of year 2000 (most likely continuing into 2001) will not last. Structural reforms are becoming a pressing need.

IV.2 Reforms and restructuring programmes

IV.2.1 The general trends

For different reasons, reform and restructuring have been pushed to the fore especially during the nineties in the Arab area (Middle East and North Africa). Though the process was overdue since the middle of the eighties it only ripened in the nineties due to the following:

(i) In some Gulf countries, mainly Saudi Arabia, and to a lesser extent in Oman and Bahrain, albeit the balance of resources has started to fall short of demand since the middle of the eighties, by the middle to the end of the nineties the situation became untenable.  More serious measures were needed.

(ii) In the non-Gulf oil states the imbalances have for long been handled through a range of wide restrictions. However, the inefficiency of the public sector and accumulating losses and budget deficit have reached a crisis point (e.g. Algeria) by the beginning of the nineties. The change of ideology that has been associated with the globalisation process bolstered by the fall of the East European systems has lent support to the turnaround from the interventionist policies.

Thus, the confluence of events made the nineties, during which the globalisation term gained its fame, a period whereby reforms are, or intended to be, applied across the Arab world, with varying speed, of course. The urge to reform has differed among Arab oil countries. Urgency is measured by the need to finance the balance of payments deficit and internal gaps in resources, on the one hand, and the size of foreign assets on the other.  At one end Algeria, short of adequate foreign exchange reserves, was forced to adopt a relatively sever IMF-supported reform programme. At the other end UAE, with ample foreign assets and no impending imbalances, implemented reforms in its trading, banking bureaucratic and judicial systems in order to attract more foreign business.  At the middle Saudi Arabia has been alarmed at the depletion rate of its foreign assets, hence started its own moderate reform programme in 1998,  (Box 3).

IV.2.2 Reforming the public sector

The continuing losses, liquidity problems and mounting debt in many of the public enterprises and their consequences on the banking system (as referred to above) have adversely affected the implementation of social policies, public and private investment programmes and privatisation efforts. Even in better-suited economies of East Asia the relationship between the banking system and public (or publicly favoured private) enterprises has led to sever financial crises (1997-1998) that affected growth negatively (Finance & Development, June 1998 and March 2001)

In these circumstances, reforms in the shape of gradual and balanced programmes of restructuring and privatisation of public enterprises and banks, more liberal practice in pricing, rate of exchange setting, etc would contribute to the unravelling of this vastly inefficient entanglement. However, the extent, domain and sequencing of reforms can be tricky, Algeria is a case at point. Growth improved slightly (but unemployment rose) after 1994’s restructuring of public enterprises and banks. During 1990-1994 annual GDP growth averaged – 0.9%, inflation 27% (CPI) and unemployment rate 22.4%. In 1995-1998 annual GDP growth averaged 3.3% (non-oil output, 2.3%) inflation 9% and unemployment rate 28.3%, (table 10 and IMF, IFS 2000).  The public sector, however, continued its losses and debt and public banks their lack of liquidity. Algeria is poised, therefore, to implement more drastic measures.

In the Gulf countries, apart from public utilities the public sector was mainly composed of hydrocarbon-related industries.  This includes oil products, gas liquefaction and primary petrochemicals[25]. The following factors may have spared the Gulf countries some of the consequences of the vicious cycle of public sector-banking inefficiency that plagued the non-Gulf countries:

(i) The currency arrangements that emulate the currency boards’ rules.

(ii) The open trading system.

(iii) The absence of protected public import substitution industries.

(iv) Private banking with reasonable regulatory framework[26].

More banking reforms are recommended by international institutions (IMF) in these countries, i.e. adopting sound practices and prudential regulations, the deepening of the intermediation process and the creation and opening up of the exchange houses to the outside world.  This can be useful as well as destabilising.

IV.2.3 WTO membership

Apart from Saudi Arabia other Gulf countries are all members in the World Trade organisation. Saudi Arabia and Algeria are negotiating their way for membership; currently they are observers.

The World Trade Organisation has not included crude oil and oil products, explicitly, in its reciprocal treatment negotiations, yet. They are still virtually traded freely across borders. On this score membership would not have much effect in the short to medium terms. The main expected present and future advantage of membership, therefore, is to be party to the changing rules of trade, services and capital flows within in the WTO. For the Gulf countries, this does not entail serious restructuring of the economy or extreme departure from present policies and institutions. It can be carried out through the undertaking of certain changes[27] while continuing with the present dependence on oil and oil-related activities. With their liberal open system, the Gulf countries are able to adapt themselves to such obligations as intellectual property rights, technical barriers to trade, etc.

For Algeria the main objective and, therefore expected advantage is to gain access to a wider market, which is necessary to promote the development of non-oil export-oriented industries. Opening its markets to trade in goods and services as well as capital would expose it, on the other hand, to a challenge that it needs to face in order to build its base for economic sustainability.

V. Future configurations

Most countries in the region are now going one way or the other for some reforms and restructuring with mixed intentions and results.  For Kuwait and UAE there is still no immediate economic reason to change the structure of the economy than the one going on now, mainly relatively liberal economic systems in possession of huge reserves, invested in foreign assets, with a highly regulated and segmented labour market. As a matter of fact the UAE is planning for the preservation of its foreign assets in real value as insurance to sustain future generations.  Political uncertainty aside, Kuwait is following the same path. The sustainability of this position can be buttressed by more diversification in services and financial management.  Even some kind of tourism can be developed. Further restructuring in banking, financial institutions (e.g. more prudential regulations), labour market, bureaucratic and judicial systems may also need to be implemented.  In this respect Kuwait and UAE have already been integrated in the global system.

Other Gulf countries are still searching for a sustainable base of development. The oil cycle will only give intermittent stimuli to growth.  With the expanding population and growing needs these stimuli will increasingly become less effective. For countries such as Oman and Bahrain the first is opting for definite lines in industrial development and services the second for financial and regional services.

Saudi Arabia may face a dilemma, or it is already exposed to. The level of national consumption (including defence) has not been subjected to drastic decline (in real terms) similar to that in non-Gulf countries, as required by the fall of resources. In this case Saudi Arabia may find itself increasingly unable to maintain the current level of consumption.  That is why it needs to face important change. For economic activity cannot sustain the financing of continuous current account deficit that was only halted in year 2000 due to high oil price.  In recognition of this, Saudi Arabia started to think about reforms, the main elements of which are spelled in Box 3. However, even if implemented, which is a departure from current policies, they may prove insufficient. Moreover, Saudi Arabia is now relatively less endowed with foreign assets, and the size of its population with respect to oil export is much bigger than in other major producers in the Gulf (table 12).  The country needs to seriously tackle such questions as:

–        What alternative lines of foreign exchange earning should be promoted? Is non-oil manufacturing a possibility?

–        Is the ongoing rate of exchange congruous with sustainable growth, is it not overvalued?

–        Is it possible to support the present size of expatriate labour force (relatively cheap labour compared to domestic labour)?

It is worth noting that the Gulf countries present an interesting outcome of a long adopted policy, which is of relevance to ongoing packages of reform.  For the best part of the second half of the twentieth century they have been following cautious monetary policies.  As referred to above their currency-board-type arrangements have spared them some of the ills that befell interventionist countries. However, with all the real or perceived efficiency gains from monetary austerity, aspired to now by many reforming countries in the Arab world and elsewhere, most these countries are still heavily tied to oil. Apart from portfolio investments (a historical incident not available any more to many oil countries in the region) regional financial and free trade areas, the rentier structure is still dominating.

The main conclusion in this paper is that the success of the restructuring programmes in finding a sustainable alternative to oil depends on the other endowments (resources, technological and managerial skills, knowledge, etc.).  No doubt that these endowments can be enhanced through education and training, but this is a medium- to long-term process.  Regional cooperation can also be beneficial, to serve this purpose, given that it is based on more solid grounds than the ongoing schemes. Countries, like Algeria, are more suited to find a broad based diversification in manufacturing and tourism, given that political stability and social peace can be attained.  The Gulf countries would not be able to find their way through this course.  Efficiency can be achieved through better use of resources, continuing with the development of chemical industry, financial services and a kind of tourism.  But apart from this type of diversification, the Gulf countries will continue their dependence on oil. UAE and Kuwait have their portfolio investments, to smooth out the ups and downs of the oil revenues, so does, to a lesser extent, Saudi Arabia. The latter, however, may increasingly resort to more serious measures and find itself in search for more viable alternatives.

By contrast poor-resource countries such as Egypt and Tunisia are trying to find a way to increase their manufacturing exports through association with Europe, the United States and membership in WTO.  Tunisia is the better of the two. Its manufacturing exports increased by 17% annually between 1985 and 1995.  Egypt may have not done so well with a rate of growth of about 7.5% annually, (both measured in US $ in current prices[28].

Chart 2: Price of Brent Crude (Monthly Average, US$/Barrel)

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