Panel 4b. Political Economy in the GCC – Sponsored by the Kuwait Programme, LSE

Chair: Steffen Hertog, LSE

Business sector and economic liberalisation policies in Kuwait
Anastasia Nosova, LSE

Having obtained considerable fiscal capacity, the Gulf states developed an elaborate welfare system meant to distribute the oil-generated wealth to their national population in exchange to political obedience. However, the GCC oil-reliant economic systems have long been declared vulnerable to price fluctuations, and unsustainable in a longer term. Various organisations, such as IMF and World Bank, have continuously issued recommendations urging the Gulf states to embark on the course of economic liberalisation and restructuring based around the empowerment of private sector, which is supposed to become the main employer and economy diversifier. Analysing the case of Kuwait, the paper suggests that the country’s private sector in its current state, i.e. in its rent-seeking monopolistic form with reserved preferential treatment from authorities, is not only incapable to contribute to the promotion of any substantial restructuring policies, but in fact constitutes an active force opposing those policies and one of the major stumbling blocks for their implementation. We illustrate the argument with the examples of labour nationalisation and stock market regulation reforms, showing that business actors’ avoidance of compliance to regulations or active political interference to reverse them, defy and deform the initial economy-liberalising idea behind those policies. Thus, the discourse of economic liberalisation, offered by dominant international institutions as a sole way to fuel diversification, fix economic imbalances and ultimately lead to political liberalisation, takes a very different shape in the context of a rentier state, where the interests of established private sector lie in the preservation of economic and political status quo.

Drivers of Price Reaction to Rights Issue Announcements in the Kuwait Stock Exchange
Hessah Al-Ojayan and Bader Alhashel, Kuwait University. Presented by Hessah Al Ojayan.

This study examines the drivers behind stock price reactions to announcements of rights issues by firms listed on the Kuwaiti Stock Exchange for the period 2003-2013. We find higher cumulative abnormal returns for firms that undertake larger issues, with the issue size reflecting the availability of favorable investment opportunities and their potential positive impact on firms’ earnings. We also document a positive price reaction in firms that are affiliated with a family group. We interpret this as evidence that the proceeds of the rights offering would be employed effectively when the firm is controlled by a family firm. No evidence was found for the price pressure and pricing effects.

The relationship between economic and political liberalization: The case of the UAE
Lorraine Charles, University of Exeter

The modernization theory, as put forward by Lipset (1959), suggests that there is a positive correlation between economic and political liberalization. As an extension to this, and in relation to the UAE, Davidson (2009) recognized that the rapid economic development experienced by the state had the potential to serve as a catalyst for more meaningful reform. Thus, at the point when there has been economic development and liberalization, the calls for political participation should become audible amongst the population. This paper will argue that, in fact, in the UAE the opposite has occurred. There has been no political liberalization accompanying the economic liberalization in the UAE. This paper will illustrate that the economic development that has characterized the UAE has only been possible because there is no political participation. The rulers have been able to pursue their ambitions for growth, unhindered by public opinion and the supposed discontent of the populace. There is a general perception amongst some UAE nationals that development is happening too quickly, and the demographic shifts that have occurred as a result of this development do not coincide with the national consensus. However, with economic liberalization there have few calls for political reform; a situation reinforced by the ‘ruling bargain’. The UAE, because it is able to maintain its allocative nature- a characteristic of its rentier structure- due to its economic development, has been able to maintain the strength of the ruling bargain, thereby resisting any calls for reform and political liberalization. Therefore, this paper will examine how the ruling bargain reinforces a situation where significant economic liberalization has not lead to political liberalization, but rather the opposite, it has resulted in a greater autonomy for the rulers. This paper is based on fieldwork conducted in the UAE and forms part of a larger doctoral research project.

Migrant labour in the countries of the Gulf Cooperation Council – A “fix” for Gulf capitalism?
Serhat Yalcin, University of Kassel

Since the early 2000s countries of the Gulf Cooperation Council (GCC) witness major inflows of capital and labour. However, contrary to the positive effects attributed to capital flows the presence of large numbers of migrant workers in the GCC countries is perceived as a security problem. Labour migration which is regulated through the kafala system ties migrant workers to their employers and strongly emphasises the temporality of labour migration. It has been argued that such a configuration constitutes a “fix” for Gulf capitalism: migrant workers are much cheaper to employ and easier to control, they face legal barriers to form collective organisations and initiate collective actions (e.g. strikes) and can be easily deported. The aim of this paper is to elaborate this argument in more detail at the cases of the United Arab Emirates and Qatar. After giving a general overview of migration processes to the GCC region, the paper will, first, develop the argument on the above mentioned “fix”. Second, it will empirically evaluate the current state of labour migration policies and related labour laws regarding entry, stay, work and exit of migrant workers and asses the states’ stand towards migrant workers. Third, the paper will, with the proposed “fix” in mind, elaborate the working and living conditions of migrant workers. Finally the paper will make a short excursus on more recent cases of spontaneous strikes and protests by migrant workers and ask for the effects regarding the “fix” and the still lasting kafala system.

Download the paper

The State of Subsidiary Corporate Governance Practices in the GCC
Maryam Ali Ficociello, Dar AlHekma University

This study aims to understand current practices in subsidiary corporate governance across the major GCC countries: Oman, Bahrain, Qatar, Kuwait, UAE, and KSA. It looks into the state of subsidiary corporate governance and the levels and types of implementation across public and private companies, with an aim at understanding the barriers to better compliance with leading practices. The study further presents an in-depth comparative analysis of current subsidiary corporate governance practices for a single Kuwaiti-owned group, with over a dozen subsidiaries which fall into six diverse sectors and are geographically dispersed across the GCC and beyond. If successful, the benefits of this research will be in better understanding enablers of subsidiary corporate governance in the GCC, and how it may help ensure sustainable economic practice in the region, as well as how it compares to other western economies. The topic of subsidiary governance is an emerging topic of interest given the current unprecedented growth in the GCC with more companies emerging into holding structures. Hence, the topic has been attracting more attention from regulators, board of directors, executive management, shareholders and investors in the region.

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