Is it sunrise or sunset in the perennial quest for Gulf economic reform?

Pretty soon, if not already, the Gulf economy will tip the $1-trillion mark. Of course, it grows apace. Very high energy prices, very low interest rates, and a progressively ambitious mentality have seen to that.

News on the economy has tended to focus on the scale of growth, and attendant inflation.

As Dorothee Gasser, Middle East economist at ING in London has noted, the GCC has faced an arbitrage in this extraordinary context, one of growth or (dis)inflation priority, and growth is winning. That's not least because the tools to fight inflation are "few and inefficient". The risk to this strategy is that expatriates working on the Gulf's overall 'project' become alienated.

But how about growth itself? Is it just, therefore, a 'cyclical' phenomenon, and what has happened to the much-vaunted 'structural' reinvention of the region in terms of diversification away from oil & gas? That was on a drawing-board for years if not decades, but whenever it was promoted, to reduce dependence on hydrocarbons, it tended only to respond intermittently, because the incentive would typically weaken as oil prices moved higher again. Right now the escalation is unparalleled, so where are we?

Among those who might know on this score, and who should carry dispassionate views as credible researchers, opinions seem to be mixed.

Robert Powell, Middle East economist at Economist Intelligence Unit, is somewhat circumspect, reserving judgement. Diversification continues at varying speeds, he says. Thus, "Kuwait - very slow; Dubai - predictably; Bahrain and Qatar - more quickly; Saudi Arabia - somewhere in between."

For example, efforts by the Gulf states to encourage the private sector to hire nationals are being undermined by huge salary hikes in the public sector. That's inflation's bad effect.

Another common theme emerges as a restraint: transparency. Governments in the region have made steps to privatise some areas of provision, such as power generation and utilities generally, but the process has been relatively slow. "In part that reflects the overlapping interests of leading family and government members." Powell gives a telling example. Although Dubai World "stands as a high-profile exception, it's worth remembering that only 23 per cent was divested".

Moreover, moves to liberalise the business environment for foreign investors have been cautious, he argues, citing land ownership rules whose relaxation has been a juddering process. Foreign ownership restrictions on joint ventures tell the same tale, he claims, although the UAE "may be one to watch", with a commercial companies law coming this autumn, wherein might be the pledge to allow 100 per cent foreign ownership.

Inflation's flip side is that it might bring some urgency to supply-side reform efforts, though, as the containment of demand is so acutely problematic. "Across the Gulf tariffs have been lifted on some goods, such as building materials and food." Further acts along the same lines are expected, boosting competition. So, clouds and silver linings, perhaps.

At the World Bank, Mena country director Joe Saba has the same feeling about inflation, that it can spur change, notably in fiscal affairs, where "all the GCC states now recognise the critical need for better budget processes and social protection programmes".

In a forthcoming interview with Gulf News Quarterly Financial Review, he gives a detailed account of how the narrative of reform is being delivered, with an apparently middling outcome so far. He confirms that windfall oil receipts have provided the temptation to inertia, but says it also affords the opportunity to address the labour market/education connection.

That sounds like a pointer to what remains essentially unfulfilled. So where is there real progress? "Over the past decade the GCC states have led the [Mena] region in several key structural reforms," Saba observes - in trade, business climate, and public administration. To take just one item in particular, they have converged to a simple tariff rate of around 5 per cent, and generally the speed of clearing imports and exports has improved.

Making it happen

But the legal and regulatory side are lacking, he argues, and the financial sector "can go much further". The underdeveloped role of women, and the need for amelioration of financial media, also need more emphasis, he argues, to lift markets. The will may be there, but it's all about making it happen, and how that's done.

Within the region, a research report this week from Global Finance House in Bahrain took the very confident stance that "windfall revenue equals diversification of national income, no matter how they are channelled". That intriguing line was based on the idea that triple-digit crude prices are attracting greater global 'value-added' to the Gulf in cross-border acquisitions, besides conventional stimulus from government spending. During 2009-12, major capacity expansion projects will come on-stream across oil and non-oil sectors, the report tells.

Hany Genena, Director of Economic Research at GFH, told Gulf News that structural progress is "gaining significant speed". Apart from it scoring well generally in the International Finance Corporation's Ease of Doing Business 2008 study, liberalisation and competition has been especially present in the telecom and airline industries.

Structural development is tricky to measure, and therefore tough to target. But, since it's the bedrock of growth that can be sustained rather than disappear in an enormous swirl of dust, the Gulf economies have still to be aiming that way, tonnes and tonnes of money notwithstanding.

- The writer is a freelance journalist.