Gulf must devise strategies to lure foreign direct investment

The Gulf needs to devise both long and short term strategies to attract foreign direct investments (FDIs) in a much bigger way, experts said at the second day of the three-day Dubai Strategy Forum.

They, however, stressed that hydrocarbon will continue to be the main attraction for FDIs, which has been in the region since the 1920s and 1930s when oil exploration companies began to invest in oil exploration.

Saeed Al Muntafiq, director general of Dubai Development and Investment Authority, said: "We need to engage the private sector in investment in a much bigger way in order to spur growth, as without FDIs and private sector investments, we will not be able to meet the required economic growth and development in the region.

"For that, we also need to strengthen our hard and soft infrastructure, reform tax structures, create a strong financial market, and establish rule of law in order to establish more investor confidence."

Historically, speakers said, FDIs started to come to the region in the early 20th century when American and British oil exploration companies began to invest in the oil sector in Bahrain, Saudi Arabia and Trans-Jordan.

Hisham Al Razzuqi, chief executive of Gulf Investment Corp, said: "After the discovery of oil in Bahrain in 1929 and in Saudi Arabia in 1938, and in other countries later, most of the Gulf countries concentrated on building the physical infrastructure. Government directly invested in building roads, offices, and telecommunication networks during the 1970s and 1980s.

"Due to our strong focus on direct public sector investment in infrastructure development, we lost out on attracting FDIs to the then emerging Asian Tigers who had built up their economies by attracting a larger amount of FDIs and managed to spur growth."

Al Razzuqi said the average economic growth of the Asian Tigers was 6.9 per cent in the 1980s as against 1.9 per cent in the Gulf countries.

"It has been our experience that a strong co-relation exists between FDIs inflow and economic growth. In the 1990s, the Tigers witnessed an average of 5.9 per cent growth compared with 3.5 per cent in the Gulf. During these two decades (1980-2000), the Asian Tigers attracted a healthy segment of the world's total FDIs.

"In 2001, the total FDIs inflow into the six Gulf countries stood at $38.7 billion, including $26 billion in the Kingdom of Saudi Arabia alone, while the total FDI flow to the Asian Tigers (South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Thailand and Indonesia) during the same period was $774 billion. Hong Kong alone attracted $451 billion, over 11 times higher than the total FDI inflow of the GCC.

"This exposes the Gulf's lack in attracting FDIs. Some of the reasons behind this is the Gulf's sense of complacence, strong public sector spending, self-contentment. However, the region is in the process of awakening and realising the importance of the role of FDI's role in economic growth.

"The region will, in the near future, be required to spend heavily on expanding its infrastructure due to a solid population growth, which is rather young. In ten year's time, it will have a huge population of unemployed youth hungry for employment.

"In the electricity and water sectors alone, the GCC countries will require to invest over $48 billion. The road, telecommunication and IT infrastructure will require more investment to keep the GDP growth rate at 5 per cent.

"It will be difficult for the governments to finance such huge expenditure. So, the private sectors will have to be pulled in to support the development. Besides, it will be almost impossible to execute these huge projects without a solid FDI base."

He also highlighted some of the positive points in attracting FDIs. "We should not forget that the GCC has a strong currency base, a growing population with a high disposable income and with strong purchasing power."

However, Al Razzuqi noted that the regional governments should reform tax, make the law simple and attractive for FDI's and open up all the major sectors for investment, initiate rule of law and bring in transparency in the public sector, establish a strong financial market and a developed capital base.