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Changing fortunes.

The political economy of the Gulf may still be based on oil, but 25 years on, its business activities, and the way business is conducted, has changed dramatically.

Whether it's the structure of companies, the role of expatriates, the sources of investment, government regulations or technology, things have changed since 1974. However, much remains the same, particularly when it comes to culture and traditions.

In the mid-1970s, it could be argued that the most salient feature of doing business in the Gulf was that its financial heart lay outside the region itself, namely in London.

The rapid escalation of oil revenues in the wake of the 1973 and 1974 price rises led to a rush by US and European banks anxious to recycle "petrodollars", a trend that was encouraged by their governments and which was also fuelled by the loss of Beirut's traditional role as the leading financial intermediary in the Arab world.

While Washington may have been an important mecca for Arab diplomats, academics and students, and Geneva for the vacationing ruling families, the British capital rapidly became the international focal point for Arab investments, including the region's escalating private, as well as public, wealth. Arab-owned banks, which had already begun to play a part in channelling government surpluses to the West, quickly followed in their wake.

By the early 1980s, virtually all the leading Gulf financial institutions, such as the Arab Banking Corporation, the National Bank of Kuwait and the Saudi International Bank - whose shareholders included the powerful Saudi Arabian Monetary Agency (SAMA), had set up shop in the British capital and were using it as a base to expand their international presence.

Today, excessive competition, a lack of management experience and declining government revenues in the Gulf states have forced many of these institutions to retreat from London. But although the financial centres of Gulf business are now closer to home, the region still lacks integrated capital and money markets able to compete globally, except in the small but important area of Islamic financial instruments.

More progress has been made in the structure of companies, albeit here too much remains to be done to keep pace with the modern world. Today, many of the big merchant families have incorporated their holding companies and separated the activities of their constituent companies, whether these be in finance, property, retail, marketing, industry or trade.

The days when single-minded, often brilliant, entrepreneurial patriarchs from the likes of the Bin Ladens, Galadaris, Sayers, Futtaims, Kanoos or Zawawis dominated both their companies and sometimes whole sectors of their respective economies are drawing to a close. Instead, the most successful companies are increasingly run by either highly experienced sons or nephews, many of whom have been trained in the West, or by managers chosen on merit.

As the need to develop export markets and to seek capital through a public listing on local stock exchanges becomes more urgent in the next few years, this trend is likely to accelerate still further.

This rationalisation on the micro level has been accompanied by even more significant changes in the macro economies of the region. First and foremost has been the shift in the past 25 years away from the basic needs of oil and gas production and of infrastructural development to that of consumption and services. While hydrocarbon development still provides the bulk of government revenues, the private sector increasingly relies on retailing, marketing, technology, financial services and light industry to generate profits.

A new market of indigenous middle class consumers, many of whom still enjoy some of the world's highest disposable incomes, has come to maturity since the mid-1970s. They and their families enjoy the same brand-named products, access to travel, education and communications found in the cosmopolitan cities of Europe, the US and Asia.

These demands also lie behind some of the substantive changes which have occurred tn the macro-economic environment. There is a growing realisation that the complexity of society today, coupled with the high expectations of virtually all those under 50, requires new forms of generating revenues and investments. But this awareness is not accompanied by uniform agreement on the solutions. So, while in Saudi Arabia progress on privatisation remains tantalisingly slow, Kuwait has pressed ahead dramatically, selling off everything from banks to shopping centres and insurance companies.

Oman has invited private money to help build new power stations, ports and water supply facilities. Abu Dhabi's huge new power station at Taweelah will also be financed by the private sector, as will Qatar's expansion of its telecommunications services. This is in sharp contrast to the pattern which has prevailed for the past three decades, where governments have used their oil and gas revenues to subsidise most basic utilities and to provide inexpensive housing for their nationals. In line with this, regulations limiting foreign ownership of companies to 49 per cent or less are now being eased throughout the Gulf as both governments and local entrepreneurs seek access to the know-how, marketing skills and finance that international partners can provide.

The next few years are likely to see even more dramatic changes in two other fields important to business: technology and labour.

Just as the Gulf war in the early 1990s broke down the traditional resistance of governments to allow freedom of the airwaves, the Internet has ploughed a gaping hole in their efforts to control people's access to electronic information, education and entertainment. In the future, the privatisation of some of the Gulf's remaining monopolistic telecoms companies should help speed up this process, although official resistance will continue.

What is clear is that the days when governments in the Gulf welcomed an influx of foreigners from around the world is now over Although working and resident permits in the region have always been tightly controlled, the period from the mid-1970s to the early 1990s witnessed a substantial inflow of European, Australian and North American executives, professionals, consultants and technicians and a host of highly trained, English-speaking journalists, academics, professionals and engineers from other parts of the Arab world, as well as huge numbers of contract workers from the Indian subcontinent, the Philippines and other parts of Asia.

Today, although many Gulf nationals continue to form a minority in their own countries, their share n the labour force is growing. Their ability, and willingness, to contribute to their economies and to adapt modern methods of administration, marketing, management transparency and accountability will determine whether the Gulf states continue to prosper in the next 25 years.
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Title Annotation:the emerging business structure in the Middle East; 25th Anniversary Issue
Comment:The coming years are expected to bring in even more dramatic changes in the conduct of business in the Middle East, particularly in the field of technology and labor.
Author:Smith, Pamela Ann
Publication:The Middle East
Geographic Code:70MID
Date:May 1, 1999
Previous Article:West Beirut.
Next Article:A new wave of Gulf women.

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