Inclusive Economic Institutions in the Gulf Cooperation Council States: Current Status and Theoretical Implications

Abstract

While the social conflict theory (SCT) suggests that absolute monarchies will not tolerate inclusive economic institutions, the Gulf Cooperation Council (GCC) countries have regularly achieved above global average ratings for property rights protection, entry barriers, disruptive wealth redistribution and corruption. This paper discusses the extent to which GCC states have potential to further improve their institutional quality. We explore whether inclusive economic institutions may emerge in GCC states, such as: (1) regional economic integration and competition which alleviate rulers’ capability to expropriate private property and ease entry barriers to the market, (2) rulers of resource rich economies sustain political power with control of natural resources as opposed to the extraction of private property; and (3) prospect of long-term gain for the ruler incentivizes the adoption of a market-based economy. Strong state involvement in manufacturing and the monopoly of some services, the effect of tribalism in economic affairs and the distribution of resources, as well as a sponsorship system for foreign workers in these states may all impede the development of a truly competitive and free economy.

Economic Diversification Potential in the Rentier States towards a Sustainable Development: A Theoretical Model

“…Since most of the workforce in nontradable sectors is from abroad and especially low-income countries, we assume an average wage, which is equal to 1 chosen as numeraire in A2. Following a similar study, a premium wage should be given in tradable sectors to attract skillful workers both from national and abroad [12]. Therefore, the wage of an employee in the public sector is 1 + u and wage in the tradable sector is 1 + v while it is 1 in nontradable sectors.…”

“…The ruler will allow citizens to pursue business activities in nontradable sectors further as a part of "rentier agreement" as long as his own share exceeds α min . The rulers of GCC states own companies or shares in various nontradable firms in the economy in all these countries [12]. They also support select citizens and merchant families into remaining nontradable sectors by giving them exclusive licenses and various forms of credit support [40,41].…”

“…It is imperative to consider economic activities in a rentier economic system with its political implications as both are interlinked with each other [29]. The current literature about rentier states and development studies tend to ignore political repercussions of economic diversification schemes in rentier states [6,12]. Any economic diversification proposal cannot be separated from its political consequences, which will determine its effectiveness at the end [30].…”

“…This paper aims to fill this gap by simultaneously taking political and economic factors into account in facilitating effective economic diversification of a rentier state. There is currently no theoretical model being proposed to explain economic diversification in a rentier state amid the flurry of reports and papers highlighting the urgency and necessity of such an economic diversification [6,10,12]. The model proposed in this paper aims to identify factors for effective economic diversification in a rentier state in the face of declining rent revenues by considering:…”

“…Many rentier states are reluctant to follow the first option to avoid altering the social contract with some of its citizens [45]. However, there is a significant level of investment into the physical infrastructure, education, opening of free zones, business incubation centers and all other forms of support in a bid to push and attract investment into the tradables sector in rentier states [12,45].…”