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NS4053 Spring Term 2017 Economic Development of Oman. Overview I. Oman and Bahrain are Middle Eastern success stories. There are some key similarities. Both have followed pragmatic development strategies built on strengthened governance structures and enhanced economic liberalization
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Overview I • Oman and Bahrain are Middle Eastern success stories. • There are some key similarities. • Both have followed pragmatic development strategies built on strengthened governance structures and enhanced economic liberalization • These improvements occurred in somewhat different settings • Oman developed in a more authoritarian environment • Bahrain enjoyed greater democracy, but somewhat less stability • While both countries have relied on oil revenues to support their development in contrast to their less successful oil producing neighbors • However, each country had just enough oil to do some good, but not enough to do serious damage.
Overview II • Oman has been classified as the only Arab "success story" by the prestigious Commission on Growth and Development • Only one of 13 countries that grew at an average rate of 7% or more for 25 years or longer • The World Economic Forum cites Bahrain as having successfully moved through the first two stages of development in creating a diversified and efficient economy poised for innovation
Oman Patterns of Growth II • With regard to economic growth • Of the GCC countries, Oman had the highest and Bahrain the second highest overall rate of growth for the 1980-2007 period • Oman and Bahrain are the only GCC countries that have not experienced a sub-period of negative growth • Oman and Bahrain alone have maintained high steady rates of growth, with Bahrain's growth rate accelerating over time • Since 2007 however rates have fallen and • Performance for Bahrain below the GCC average • While Oman's is slightly above the average
Oman: Development Strategy I • World Bank profile for resource producers • First, the public sector dominates the development process as a consequence of public ownership of the resource • Second pervasive economic dependence on public spending of resource revenues tends to foster a private economy dominated by rent seeking behavior • Finally, governments are inevitably forced to confront the problem of economic slowdown or decline as the resource becomes exhausted. • From the beginning Oman's carefully planned development strategy ha demonstrated an awareness of these factors and focused on their avoidance.
Oman: Development Strategy II • Initial conditions • In 1970 Sultan Said bin Taimur who reigned from 1932-1970 was deposed by his son Qaboos bin Said • New sultan inherited a very underdeveloped country with • Endemic disease, illiteracy and poverty • An insurgency • Some of the new sultan's first measures were to • Abolish many of his father's harsh restrictions and • Offer amnesty to thousands of Omanis who had fled the country during his father's regime
Oman: Development Strategy III • In the area of economic development he • Established the first structures of a modern government • Initiated a major development program to • Upgrade the nation's educational and health facilities • Build a modern infrastructure and • Develop the country's natural resources • Oman's development strategy under Qaboos has gone through several phases each characterized by a distinct policy focus • Early period 1970-95 -- expanded government involvement and expenditure on the economy • 1995-2000 a period of initial diversification efforts • 2001 - present further diversification and integration into the world economy after Oman accepted into the WTO in November 2000
Oman: Development Strategy IV • Early Development Period 1970-95 • First attempt to define the country's development strategy • Strategy included both • shorter-term objectives and • long-term targets that might take a generation or more to achieve • From the start a recognition that diversification away from oil imperative given Oman's relatively small petroleum reserves
Oman: Development Strategy V • With this in mind the goals of the initial development plan were to • develop new sources of national income to augment and eventually replace oil revenues • increase the ratio of national investments directed to income-generating projects, particularly in manufacturing, mining, agriculture and fisheries; • distribute national investments among geographical regions with a view to spreading prosperity and progress to all regions of the Sultanate, reducing differentials in the standard of living between the regions, and assigning a special priority to the least developed areas;
Oman: Development Strategy VI • (plan goals contd.) • support the maintenance of existing population centers and communities, • to safeguard those communities from potential emigration to densely populated urban centers, and • to protect the environment; • develop natural water resources as a vital prerequisite for continued economic activity and growth; • provide for the creation of a national economy based on private enterprise • free from monopolistic practices • Through various incentives, tax exemptions, concessional loans, • improve the efficiency of the government administration.
Oman: Development Strategy VII • Oman launched its development effort with the belief that circumstances -- economic, political and social of each underdeveloped country vary • Implication -- the appropriate path of economic and political development cannot be determined a priori but only in the context of specific conditions • This philosophy allowed the government the freedom to pursue pragmatic strategies and policies in its initial economic development programs • Oil was to be invested wisely for the benefit of future generations • Rather than nationalizing the oil sector as done in other Gulf countries, Oman retained its links with the multinational petroleum firms • In turn these firms provided approximately 50% of the capital required for the sector's expansion.
Oman: Development Strategy VIII • While the government's development strategy has undergone modifications over time, its basic objectives have remained unchanged. • However -- Questions of Sustainability • By 1995 Oman had completed its infrastructure and service base • Problem -- a number of difficulties were starting to develop • Most significant was fall in oil revenues that began in the mid-1980s • Major studies conducted by the IMF and World Bank suggested more subtle factors were at play and questioned the sustainability of the country's initial development strategy.
Oman: Development Strategy IX • IMF's analysis found the patterns of non-oil growth were, as expected, strongly correlated with government expenditures • However this linkage had begun to weaken in the mid-1980s, • suggesting diminishing returns were associated with the original development strategy • focused largely on the government's investment and infrastructure programs • World Bank identified a number of problems and also questioned the sustainability of the country's development strategy
Oman: Development Strategy X • In particular the Bank noted that the role of the Omani government went well beyond traditional functions of • Providing public goods, • Developing public institutions • Promoting efficient resource allocation, • Stabilizing the economy and • Promoting an equitable distribution of income • However the government's performance in these areas had been mixed.
Oman: Development Strategy XI • The World Bank found serious deficiencies in a number of key areas • There were serious deficiencies in the quality of basic health and educational services, and • The legal framework governing private investment and business activity was inadequate. • Efficient resource allocation had been promoted by low tariffs and the absence of foreign exchange controls • But hampered by public monopolies, legally sanctioned monopolistic private trading and production arrangements, and distortion-creating subsidies. • The stabilization of the economy was judged only partly effective and this at the expense of a rundown in savings for the future.
Oman: Development Strategy XII • (World Bank criticism contd) • The promotion of a more equitable regional distribution of income had been attempted via an expansion of state investment in regional infrastructure but thwarted by limited productivity growth in agriculture and fishing. • The promotion of a more equitable interpersonal distribution of income had been fostered by the provision of free access to education but counteracted by the emergence of a privileged class of highly paid pubic employees, private entrepreneurs and upper-level private sector employees.
Oman: Development Strategy XIII • The World Bank’s report (at the high-point of the Washington consensus) noted that the Omani government’s extensive involvement in the economy included: • direct provision of a range of commercial goods and services; • guidance and subsidies to aid private sector activity; • controls over the labor market and investment; • targeted and subsidized Omanization; • the provision of medium-term financing to the private sector; • overinvestment (by normal developing-country standards) in urban infrastructure and public buildings; and the supply of expensive municipal services.
Oman: Development Strategy XIV • In the World Bank’s judgment, most of this involvement appeared unnecessary and counterproductive. • The cost of government could be considerably reduced and economic efficiency increased by concentrating the government’s efforts on the effective fulfilment of the traditional public functions. • The Bank concluded that the public sector deficit should be reduced mainly by cutting spending, which at the time was exceptionally high by international standards. • Public consumption accounted for half of total consumption, and • Public investment accounted for over three-fifths of total investment. • The large element of rent in public sector wages, salaries and allowances could not be sustained indefinitely
Oman: Development Strategy XV • In short, the Bank felt it imperative that public sector remuneration be brought into line with remuneration levels in the private sector. • In addition to the concerns raised by the World Bank, it was also becoming apparent that the government would have to scale back its involvement in the economy in the face of declining and uncertain oil revenues.
Oman: Development Strategy XVI • The Omani government took the IMF and World Bank assessments seriously and, in June 1995, convened a development conference: Visions for Oman’s Economy—Oman 2020 • The final conference report included the longstanding goals of • diversification, • regional equity and • improved standards of living,
Oman: Development Strategy XVII • Three new goals stood out. • The first called for opening the economy, with a much greater emphasis on private sector development. • Second, Omanization would now focus on encouraging Omanis away from the public sector and into the manual labor force and • Third the focus of education would be toward technical and vocational skills. • The importance of Vision 2020 lay in its recognition of the inevitable changes that must occur in the role of government in Oman’s economy. • Before the mid-1990s the government had to assume most of the burden for transforming the country’s economy from a traditional to a modern economy.
Oman: Development Strategy XVIII • Now, however, it was time for the government to shift away from a role of economic dominance in favor of more limited and strategic guidance if it hoped to create an economy based on a dynamic private sector. • With the Fifth Five-Year Plan, the country began a new phase in development planning • one that took a longer-term view of the economy and • envisaged Oman participating much more fully in the international economy. • Previous development could be characterized as resource-based and investment driven, • The new phase placed much more emphasis on raising efficiency through economic reforms and improved governance.
Oman: Recent Performance I • The strategy's success easily seen • From 1980 up to the international financial crisis that started in 2007 • Economy grew at an average annual rate of 5.6% • Comparted to that of 3.8% for the other Gulf oil kingdoms • From 2008-16 however Oman's lead while still positive (4.6% vs 4.3%) showing signs of slowing • Country has fallen into a fiscal crisis. • After budgetary surpluses averaging 9.7% GDP in the 2000s recent years have seen deficits of 1.1% GDP (2014), 15.1% 2015 and 20.6% (2016) • In May 2017 Standard & Poor's downgraded Oman's credit rating to BB+ or junk status • Youth unemployment is well over 20%
Oman: Recent Performance II • In part country's growing unemployment stems from a rapidly growing population • Expanded from a little over a half-million in 1960 to nearly 4.5 million in 2015 • By 2011 unemployment had become a major factor contributing to street protests • Directly related to the country's unemployment problem is the private sector's growing reliance on foreign workers. • Percentage of expatriate workers in Oman's workforce once one of the lowest in the GCC, jumped from 24% in 2003 to about 29% in 2010 and 43% by the middle of 2015
Oman: Recent Performance III • Influx of foreign workers is largely responsible for the recent acceleration in the country's overall population and labor force growth rates • Population increased at an average annual rate of 2.5% before 2011 (1990-2010), increasing to a rate of 8.5% from 2011-16 • Labor force grew at a rate of 4.6% in the first period, increasing to 11.7% in the second. • Patterns stem from a series of governmental miss-steps in confronting the 2011 unrest
Oman: Recent Performance IV • In its efforts to calm the demonstrations, the government responded with a series of ad hoc policies that largely disregarded their long-run financial consequences. • There was a 43% increase in the private sector's minimum wage • 50,000 public sector jobs were created • Government employees received significant increases in their living allowances, pensions and social security • Subsequently to avert future protests, the minimum wage for Omanis was raised a further 60%
Oman: Recent Performance V • The shift to short-run expediency has been a major factor in the government's post 2011 surge in expenditures • Between 2000 and 2010 these had averaged around 31% of GDP, but increased to over 46% from 2011-16 • Over the same period, government revenues fell from 45% of GDP to 43% • The ad hoc nature of the government's post-Arab Spring policymaking is reflected in a sharp fall in the World Bank's government effectiveness score for Oman • Oman experienced an unusually sharp decline from the 66th percentile in 2010 to 56th in 2015 • In 2016 the government's budget balance component of competitiveness ranked dead last (138th out of 138 countries)
Oman: Recent Performance VI • The country's labor hiring and firing practices placed the country 120th out of 138 countries meaning it has become just about impossible to fire an Omani worker once hired. • The country's restrictive labor relations were cited by the private sector as the most problematic factor for doing business in the country. • Rigid labor markets, together with very high wages for Omanis has brought private sector hiring of Omanis to a near standstill. • Recent data show that only 47%of Omani university graduates are currently employed. • Finally there has been little in the way of post 2011 reforms focused on increasing economic freedom.
Assessment I • By radically deviating from its long-term vision of private sector employment for Omanis in its diversification from oil, the government's short term expediency to combat Arab Spring forces has • Reversed the gains made over the years and • Placed the country in an extremely vulnerable position • By trying to spend its way out of the 2011 while increasing the wages of employed Omanis much faster than productivity, the government created great incentives for the importation of foreign workers.
Assessment II • A better approach would have been • Controlled government expenditures and • A comprehensive program of labor reforms creating more incentives for private sector hiring of Omanis • Considering its declining credit rating and the unlikely even of a major increase in oil prices the government will be forced to begin scaling back expenditures
