Economic freedom in GCC countries

The 2013 version of Economic Freedom of the World report offers GCC states the opportunity to get a better on economic management.

Not surprisingly, the 2013 version of Economic Freedom of the World report issued by the Frazer Institute of Canada provides a mixed ranking for the GCC countries. However, the surprising elements relate to the extraordinary changes in rankings of GCC economies between this and the previous year’s versions, but without offering comprehensive explanations.

For instance, the rankings of Oman and Kuwait sustained drops of 26 and 36 notches over a single year. As such, Kuwait was ranked number 19 worldwide in the 2012 version, but dropped to 55th in the latest. Similarly, Oman saw its position plummeting from 20 to 46. This could be partially attributed to the fact the newest release covers 152 economies versus 144 nations in 2012. However, a major drawback remains the reliance on secondary sources of data rather than carrying out primary research, possibly reflecting the sheer number of variables involved. Amazingly, the freedom index relies on 42 variables, certainly a sizable figure.

In turn, these variables are grouped into five broad areas, namely the size of the government in terms of expenditures, subsidies and investments; the legal system and property rights with regards to impartiality of the judicial system as well as enforcement of contracts; inflationary threats and money supply growth; freedom to trade as well as factors such tariffs and capital control; and regulation of the credit market, labour hiring practices and minimum wage requirements. Still, in a sharp departure from earlier reports, the latest considers the UAE as the fifth freest economy in the world after Hong Kong, Singapore, New Zealand and Switzerland. The 2012 version ranked the UAE as number 11 globally.

The change pushes Bahrain to the second spot among GCC countries and in the wider Mena region. Ever since its inception in 2002, except for 2013, the Frazer report had developed a habit of recognising Bahrain as the freest amongst Mena countries.

Certainly, it makes sense to identify the UAE economy as being the freest. Needless to say, the UAE’s economic strengths entail limited business regulation and freedom from barriers in trade. However, the country’s performance is constrained by possible inflationary threats. The rise in property values and hotel room rates have resurfaced as a worrisome development in Dubai, several years into the recovery following the debt-related problems of 2008 and 2009.

Bahrain receives a high mark for labour market regulations, as an amended law grants migrant workers the right to change sponsors under certain conditions. These include failure of the sponsor to provide salaries for months in a row. Nevertheless, expatriates need to have sponsors to work in the country but possess the right of changing them if and when deemed essential.

Limitations on freedom

Yet, the heavy involvement of the government, with governmental spending compromising one-third of the GDP, places limitations on economic freedom. In fairness, Bahrain’s stronger involvement in business should be partly linked to country’s socio-political troubles since early 2011. This necessitated the need to compensate for the declining interest or fear, rightly or wrongly, among private investors to put funds into projects.

The report continues to regard Saudi Arabia as the least free among GCC countries, possibly by relying on published data rather than carrying out a field study. Despite such limitations, the Economic Freedom of the World report offers GCC states the opportunity to get a better on economic management.

Leave a Reply