Developing countries are usually blamed for weaknesses in their laws that guarantee and protect investments, and which is then touted as the reason for the flight of foreign capital as investors seek markets that protect their interests. This explains why foreign investments tend to move to Europe and the US thanks to their strong regulatory structure, flexible and fair laws and governance systems.
The GCC countries enjoy acceptable levels of regulatory oversight compared to the rest of the region, and yet they still do not fully meet international standards. In addition, the Western investments in Gulf economies are weak, except in the oil and energy sector. Despite what’s been said, the GCC countries have successfully attracted huge Asian investments, given that the Gulf legislations on investor protection are much better than in most of their Asian counterparts.
What sets them apart
Apart from the ability to attract foreign investments, the strength of law and governance in any country effectively contributes to retaining domestic investments and limiting their flight abroad - a development that is no less important than the attempt to attract foreign investments. This holds true for the GCC states preparing for the post-oil phase.
Yet, the process of developing laws guaranteeing investment rights is one of the most complicated issues facing any developmental shift, given the interests of multiple groups. Turkey, for example, faces many difficulties in its attempts to join the EU, but probably one of the most complicated issues facing the country has something to do with its regulatory regime. Particularly after many European as well as Gulf investors lost their investments due to Turkey’s weak investment guarantee structures.
Some of the GCC countries have taken practical decisions to respond to and keep pace with global economic transformation by updating relevant legislation. For example, more than 40 laws were updated in the UAE, some of which entered into force on January 1, 2022. Also, Saudi Arabia approved a new project to improve the legislative environment for commercial transactions. This would certainly have an effective impact on changing the stereotype image of the lack of investment guarantees in the GCC.
Immune to change
This development would conflict with the interests of some investors in the local business sector, who will face greater competition despite the fact that previous laws are clearly no longer what is needed. Some of them are obstructing the development approaches. There should be a strong correlation between the enactment of any legislation and its practical implementation. Foreign investors closely monitor the extent to which the applicable laws can be adhered to, in addition to the flexibility of the arbitration systems keeping its distance from favoritism and the complicated routines.
GCC states have taken the right step with the establishment of special courts for commercial arbitration and financial disputes. We can say that the Gulf countries have embarked on a new chapter of legislative reforms that must be completed to match developed countries, and which will grant them greater ability to attract foreign investments across sectors. This in itself will be a fundamental transformation that will contribute to speeding up economic diversification goals.
Since the GCC states seek to strengthen the foundations of the Gulf common market and unify economic regulations, there cannot be any gaps that may hinder these efforts. Proactive coordination in framing changes to GCC legislation will speed up the Gulf’s search for a common market with shared regulations.
-- The writer is a specialist in energy and Gulf economic affairs.