Saturday, June 09, 2007

KUWAIT INC., GULF ARAB INC., AMERICA INC. & China and Other Incs.

KUWAIT INC., GULF ARAB INC., AMERICA INC. & China and Other Incs.

By KEVIN A. STODA


About one to two decades ago, it was popular to bash Japan by calling it one big cartel or megalopolis of cartels. American economists, businessmen, and cheap political hacks named the country: JAPAN INC. There were many “Rising Sun” fear mongering movies and other forms of Western backlash against Japan. Washington, D.C. sent numerous negotiators to get Japan to let American businesses into the somewhat isolated markets and business world of Japan.

In the wake of the recession and deflation in Japan, which lasted approximately from 1989 through 2003, one seldom hears of a good article on the cartelism in that country. Meanwhile, last May I read a special report in the FRIDAY TIMES (May 11, 2007) a brilliant summary about cartels in the Arab states. The piece was by Jamie Etheridge and was entitled: “Gentlemen’s Agreements and Developing Kuwait”. The political economic analysis of the author reminded me both a bit about my experiences in Japan and of my homeland, America.

FROM MONOPOLIES TO CARTELS

Etheridge notes: “In the Arab Gulf, oil-rich governments have long celebrated their natural monopoly over the energy sector, state utilities, infrastructure projects, real estate development and myriad other aspects of the local economy.” However, in recent decades both

(1) globalized economic and political pressures combined with
(2) a growing wariness in placing a nation’s trust too much in the volatile energy sector

have led governments in the Gulf Arab world to call for an end to monopolies and for economic liberalization.

Sadly, in the Gulf this does not necessarily translate into a real free market of forces coming to be developed. This is because competitiveness is often still missing. Rather, these calls for the end of monopolies and liberalization have led to growth in cartels.

One finds that this problem in Kuwait is evidenced quite clearly in the communications, insurance, and hotel sectors. A fairly tiny elite, who support the current regimes at all costs, are the beneficiaries of ownership in these lucrative sectors.

Besides international or globalized pressures, Stratfor researchers have indicated, “Governments, especially the ones in the Gulf Cooperation Countries, will move from a monopoly to a cartel when the private sector tends to expand and [when] there are an increasing number of actors that do not represent the interests of elite. This is where moving to [a] cartel system will help” sustain the current government—and, of course, the particular form of current regime governance, i.e. described as “emir-ship” in many Gulf states.

Etheridge explains that “the Arab Gulf states adopt the lingo and mechanisms of the West—they ‘liberalize’, they ‘privatize’. But they avoid the potential dangerous consequences of greater economic—and by extension political—participation by a greater diversity of society.”


FLASHBACK TO AMERICA INC.

Now, before, I return to Etheridge’s writing, I think it needs to be added that the USA, too, also has large oil cartels who participate with the world’s largest cartel OPEC. Moreover, these cartels of oil have great influence on the U.S. government and the stability of whomever is in power, i.e. whether the White House or congress is Democrat of Republican. This is why many of the most critical analysts of the elite oriented Washington, D.C. leadership have called the USA virtually a one-party state.

For example, even the currently expanding bio-fuels sector in the United States seems to be dominated by a single owner or group of owner. Meanwhile, only one source of this type of alternative fuel has been properly subsidized in the USA over the past 30 years—this is corn. Meanwhile, quite obviously as Brazil is showing the world that sugar cane is a much more efficient bio fuel to be using and investing one’s time in developing.

Only an elite cartel could force a shift away from efficiency like we have been seeing in the biofuels in North America in the supposedly most free business market in the world—my homeland, the USA.

Moreover, lobbyists from the traditional energy sector elite as well as their political cohorts in the USA have until now refused to invest to any great in the alternatives to the petroleum and natural gas or coal sectors. If the finance market in the USA were freer and less-dependent on the political and economic elites who currently run the country, thousands of new local cooperatives across the nation would have been formed already and would have been issuing bonds to create and use energy from alternative fuel sources at local levels—including wind-, geothermal-, solar- and other energy sources that have till-now had to rely on the supposedly free market for investment.


CHINA, INC.

While we are at it, why don’t we look at China and begin to try and count the cartels and monopolies. I don’t see much opening in the finance sector or other economic sectors that the government of China doesn’t ultimately have its finger in. Worse still, the government of China is more defensive of criticism from anyone—not just the west—who may cry foul to any of its labor, financing, or market regulatory practices.

I recall how China Inc. moved in and out of a the small town of Vernon, Texas a few years ago. The Chinese wheelers and dealers bought land and received all kinds of subsidized benefits and a limited tax free-status to build helicopters in the town just west of Wichita Falls where I used to teach at university. They promised the local people jobs for years. Within less than 5-years, the Chinese firm had learned to build helicopters from their American partners.

The Chinese firm then picked up the whole helicopter manufacturing plant and shipped everything back to China, the land that free marketers raise up as the future for the world.

Vernon, Texas ended up with nothing. This is what happens when free market without some sort of social commitment locally is not practiced. This is why China will pass the USA in less than 5 to 10 years in green house gas creation. China Inc. is, in some of its manifestation, a greater threat to the world than Japan ever was or the Arab world will ever be to the rest of the planet.

What is amazing is that China is not getting taken to the WTO courts on an hourly basis! Until proper pressure is put on China from investors, governments, and people concerned with the rights of labor or human rights, the problems of cartelism will remain tiny in contrast to the Chinese century we are facing if China is not forced to play by some common rules that are good for all in all of its sectors—from environmental sector, to safety & foods as well as in financing, China could do a lot better than it is.

In any case, China is stealing so many ideas from so many corners of the globe currently that it would take a fool not implement what the so-called Chinese miracle leaders have claimed to do or have been hyped in doing over the past twenty years.


GULF ARAB INC.

“Monopolies are natural phenomena in the Arab Gulf. Most of the region’s economies are dominated by state-owned monopolies in the energy and telecommunications sector. As these economies develop and engage more with the rest of the global economy, they have come under pressure to liberalize.” Etheridge adds, “But economic reform often masks the creation of a cartel.”

For example, in Kuwait the state-owned Mobile Telecommunications Company (MTC) dominated the nation for 24 years. Finally, in the name of liberalization, a new competitor was created about a decade ago. Alas, this single competitor is almost wholly owned by the children and relatives of the ruling family, the Al-Sabahs. Now, a decade after Kuwait entered the WTO, Kuwait has no competitors for these two companies, and Kuwait residents pay for this expensive cartel out-their-ears. Furthermore, this cartel adversely affects the development of the internet and other related sectors across the state.

Similarly, hotel rates, the prices of automobiles and prices in many restaurant chains are fixed high. These are all examples of supposedly informal cartels sealed with a handshake, but this leads then to massive earnings for the elite and far too little trickle down to the others in the land of 3.4 million people. For example, at our local Chile’s Restaurant on Gulf Road—which is the Chile’s that year-after-year is the highest earner of all Chile’s restaurants on the entire planet—the average wage for a 48 or more hour work week is under 600 dollars and sometimes as low as 400 dollars a month.

Etheridge explains, “The cartels begin as patronage from the government. The merchant elite often then hammer out ‘gentlemen’s agreements’ to control the market and maintain prices. The gentlemen’s agreement can take many forms but the basic plan is the same: control prices and access to products and services, limit potential newcomers the ability to enter the market and reap as high as profit as possible.”

In short, this model of development in some ways is more extreme and anti-developmental (in the long term for the region) than the post-WW2 economic model that Japan showed the world.

It is more like the earlier models of cartelism which led to WW1 and ensure that an extremely imbalanced class system is maintained among the Kuwaiti population, i.e. in a way similar to how Bismarck and his successors ran the supposedly modern unified Germany from 1870 through 1918. Moreover, this cartel model has already created a population of about 2.4 million foreigners (67% of the population) in a land where racism in pay and treatment is already rampant, i.e. similar to some of the worst racism found in the USA or Europe at the beginning of the 20th Century.


ARE CARTELS SOUND?

Strangely, in an otherwise impeccable article, Etheridge claims, “Cartels might not be good for the economy but the politics of cartels are sound.” She says this because ruling families in the Gulf, like the al-Sauds in Arabia or the al-Sabahs in Kuwait, are doing a marvelous job of balancing “demands for greater political participation with economic favoritism.” Etheridge explains that this is why there is surprisingly stable support for the regimes in the Gulf Arab states, especially among each state’s nationals.

I am not certain that Etheridge is on the mark here when she claims that there is economic soundness to cartels. The fact that the women’s franchise was delayed in Kuwait over three decades had to do with the fact that Kuwaiti women were not allowed to have a political voice when the first parliament was formed in Kuwait in the 1960s. In other words, males took over as in the word monopoly.

Lack of women’s voices in politics in Kuwait (and in some other Gulf states) and disgust at the isolated elite class had led thousands of Kuwaitis to flee the country to live abroad over the decades. Moreover, health care, health services, and other societal areas have been far-to-long adversely affected because women were not able to push for reform and better care for all.

Let’s take health care as an example. It is traditional in Kuwait for women to run the households in Kuwait. Thus, women are more likely to take care of the sick and elderly—or at least oversee someone else taking over such care at a small fee. Such women would have certainly demanded more quality than has been provided by hthe Kuwait health care system—a system that is regularly ridiculed almost by one-and-all. This mismanagement of health care and treatment of patients is not only true in Kuwait, but neighboring Saudi Arabia with a much larger national population has an even worse reputation for providing health care.

Compare that to the reputation of pre-1990 Iraq where the political-economic system had developed much differently than in neighboring lands. Iraq had the greatest number of doctors, good hospitals, and specialists in the Arab Gulf region for decades. This fact was not just the result of having a larger population, but because Iraq had the best educational system in the region.

Education in all the Gulf states, except Iraq and Iran, has always been well-behind the curve of other Arab lands in the Middle East. This was certainly partially due to the pre-oil era poverty and isolation of these states. However, it was also the result of a political economic system which favored elites over the vast majority of peoples.

This is why the majority of the grandparents of my former students in private university in Kuwait had not learned either to read or write.

Even in the 1960s, after the country of Kuwait had taken control of its destiny—as Saudi Arabia had done decades earlier—, Kuwait chose to use a communist model of development that relied on state largess and jobs over personal initiative. That is why the Kuwait leadership failed to permit real competition in its university system in the 1960s, and then waited for 4 decades to allow a single private university to be founded in the land. The only alternative for decades was for citizens to go abroad and find better education than the government of Kuwait afforded them at Kuwait University, now with a campus of over 30,000.

This 4-decade leg in developing competitive private university alternatives to the state-run higher educational programs will continue to hurt the nation for decades. It also puts a lot of pressure on the newer universities to follow the bribe or favor-for-the-well-connected ridden traditions of the much older private education institutions and public schools in Kuwait. In short, due to decades of having an under-educated citizenry, Kuwait has expected too little in terms of standards of many of its youths and the educational institutions that form working adults in society.


Although more than 5 new private universities have opened in Kuwait in the last seven years—when the new university law went into effect--, none of these universities has been able to develop into an institution which in any ways mirrors western or global standards in higher education. The Kuwait elitist oriented society as it currently functions is fully dependent on family and tribal connections to get good jobs for its youth. Therefore, family and friends do not support good study habits. That is, families and friends don’t support high levels of academic focus from its young people or young friends. Unlike in other developing nations and advanced nations around the globe friends and family demand students focus on family time and on honing tribal or future relationships over undertaking serious university studies.

My own experience in Kuwait leads me to believe that nearly anywhere in Kuwait family, friends, and the building of connections encompasses 50% to 90% of the student’s out-of-class time (including the time that they should be sleeping or resting). How could anyone be a serious university student if he only budgeted 10 % or less of his time each week to coursework?

Further, the foundations of such new private educational institutions and universities have been hindered by the cartel-like system which one might call “the nation of Kuwait”, whereby the same leaders who sit in the ministry of education or work at Kuwait university end up leading the new private universities.

Hence, the system fails to train good leaders who could hope to change if Kuwait needs to change quickly—such as when oil demand drops abruptly as has occurred more than once in the state’s short history. Meanwhile, the need for leadership is obviously there. Kuwaitis of all ages are constantly asking for good leadership and complaining about the lack of leadership. In short, the entire system is unsound in its development of leaders who can take the country out of a cycle of corruption and bad management at any speed that is reasonable and helps the greatest variety of people.

Worse still, besides failing to develop good leadership, Kuwait and other Gulf States often create a nation of workers who feel alienated and misused. This is not sound and surely leads to growing demands and outlets for anger, such as alcohol, drugs, and suicidal tendencies when driving one’s car. (Kuwait is considered the second most dangerous country in the world to drive in. Sadly, Kuwaitis and other ex-pats tell me that driving in Saudi Arabia is even worse.)

In a way, some of what I have observed in Kuwait over the past four years has struck me as similar to what I observed in Japan when I worked there in the 1990s—as well as to the USA I have grown up or lived in over four decades. For example, in Japan inefficiencies were excessively high at Japanese universities and in their educational systems in general, too. Many Japanese were alienated and suicide was high. (In the USA, suicide is also high among all age groups compared to other nations around the globe.) Moreover, many Japanese felt like they were being trained to sit in offices and just look out their windows all their life—rather than being asked to dig-in, show strong drive, and creativity. Similarly, America of the 1980s and 1990s attempted to copy parts of the Japanese Inc. model of running companies. For example, the Japanese emphasis on outsourcing became a major theme of doing business in the USA and in companies it dealt with throughout the world.

All the Gulf Arab oil states offer similar outlooks for youth and young adults entering the working world. In Kuwait, I recently taught a student who said that she had been trained at Kuwait University to be a petroleum engineer. After graduating four years ago from that university, she said that she was soon given a job in the oil ministry where she did basically nothing for three years.

The young Kuwaiti engineer continued. She would go to here office at the ministry in the morning. She had a computer and worked at it—playing games, surfing the internet, and occasionally typing something up that was, indeed, related to work. However, most of the time there was nothing at all to do there--except to sit around talking to here colleagues.

This young mother of two told me, “I was bored to death.” She applied three straight years to be accepted at a government-run oil firm instead. Finally, she was accepted, but instead of placing the woman in a job immediately where she could use her engineering skills, she was initially sent to work in data processing. (I believe she has now been transferred to a more amicable job.)

In short, the inefficiencies of patronage and unsoundness of the economic system which is currently preferred in Kuwait is dangerous to many citizen’s mental and spiritual health in many ways. It is also an inefficient use of trained labor.

This disrespect for even Kuwaiti national laborers and specialists has helped lead to a great brain drain (from one of the wealthiest countries in the world) as the many foreign-trained Kuwaitis—such as health care specialists and doctors--often quickly give-up and take on better job offers & under better working conditions in other lands around the globe.


EX-PATS, ARAB GULF, INC. AND COSTS

Concerning the role of ex-pat or native entrepreneurs working in the Gulf Arab states, an editor for the Middle East Intelligence Bulletin notes, “Economic activity throughout the Arab world is dominated by the state and by businessmen who benefit from government patronage. Successful businessmen in the Arab world are far more concerned about preserving their own preferential individual relationships with government officials than they are about whether their governments gain entry into the World Trade Oranganisation or lift restrictions.”

There are many Arab and non-Arab ex-pats that thrive in the business world of the Gulf. Nonetheless, as Etheridge points out, “The cost of monopolies cum cartels is paid by the whole society.” She lists the problems as follows:

(1) Prices for consumer goods and services tend to be inflated, often
running several times higher than the international average.
(2) Competition is stifled and newcomers to the marketplace find it difficult,
if not nearly impossible to break in.
(3) Customer service is nearly non-existent.
(4) Innovation, research and development are stifled. Product or service quality is inconsistent and typically below the international average.

Whereas, these problems may be less endemic in Dubai than in other Gulf Arab states or regional emirates, I recall that for decades the current leader of Dubai and head of the UAE owned exclusively all rights to taxis in the emirates—making this famed free-marketer very wealthy indeed.

Having previously lived in the neighboring Emirate of Sharjah and having paid cheaper rates for taxi service there than in Dubai City, I know that a lot of poor foreign workers in Dubai were forced to pay more-than-they-should-have in taxi fairs to help make this Emir ever better-off financially.

Moreover, lack of competition in the water-desalinization sector in Kuwait is costing Kuwait residents greatly in terms of inconvenience. It currently costs the government-run plants some 45 dollars a barrel to produce water. I am quite certain that if private water desalinization firms from various corners of the world were invited to open up shop and were finally given proper access to do so by the Kuwait economy, they could cut that cost of production in half within a year or two.

Certainly, petroleum and water are subsidized in Kuwait and in other gulf countries. This leads constantly to inefficiencies in conservation and urban design that will continue to hurt the land for many more decades. (Saudi Arabia is ranked even worse in this area than Kuwait.)

One final example, a metro has been needed in Kuwait since before I arrived here in January 2004. Yet, no construction has started and the usual elitist suspects (or patronage cronies in the government) will eventually get the construction contract. Similarly, in Dubai, although construction of its metro is nearing completion now, it has already taken too long and the roadways are horribly paralyzing to commute on 12 hours or more each day.


STRANGE USA AND IMF RESPONSES

Strangely, the IMF has continued to give the Gulf regions positive forecasts for 2007 and 2008 simply based upon the facts that oil prices will remain high. The IMF peculiarly “lauds the region, noting that government economic policies are ‘on the right track’ with many oil-exporting countries stepping up spending and upgrading infrastructure. It cites, for example, the Gulf Cooperation council (GCC) countries’ plans to invest $700 billion from 2006 through 2010 to cover upgrades and development of the energy sector, infrastructure and real estate.”

Rightly, Etheridge has criticized the IMF on this, “This seems all well and good-until the tenders are issued and the two same construction firms take 80 Percent of the project or until the five major hotel chains get together and agree to raise room rates by 15 percent, regardless of occupancy.”

Similar to the sad lack of criticism from the IMF, the USA’s leadership has been lax in the last few years in seriously castigating Kuwait and other Gulf states in their lack of seriousness in carrying out international promises and trade & tariff treaties.

For example, Kuwait and most of the other Gulf Arab states are already members of the WTO, but they have not been taking seriously the rules on business, financing, transparency, anti-monopoly legislation enforcement, and on treatment of labor. This American silence is certainly to some degree a result of the fact that the USA has its handful already with neighboring Iraq and Iran. Hence, it has apparently decided to kiss-up to the Gulf Arab state governments for the coming years. This means that American and European petroleum users will continue to support these WTO abusers with little criticism or threat of retaliation for many of their closed markets in the foreseeable future.

The only good news in sight has been the renewed willingness of the Kuwaiti Parliament to take on the elite status quo by proposing a series of anti-monopoly and anti-cartel laws. However, that promising legislation has been hung up since December 2006 and there are rumors that the Emir may call for snap elections within the next 12-months. This means that there will be a tendency for the current parliament to put these and other important legislation off until new elections have been held.


IS TRANSPARENCY A SOLUTION?

Etheridge cites local chamber of commerce officials in Kuwait implying that transparency will be sufficient to make the economies in the Gulf Arab world run much better. This will help the local governments to monitor and close down cartels as well, they say. They do not mention that some of the government members have family members who don’t wish to reveal how much money is flowing in and out of their hands—and out of the hands of favored companies and cartels.

I am not sure that transparency is the panacea that it is all made up to be for the Gulf Arab economies. This comes from my observing that the country of Kuwait has had a region-leading free press for many decades. Nevertheless, Kuwait was bypassed in terms of economic efficiency well over a decade ago in economic development by younger Arab states, whom had not experienced such a free press for nearly so long a time. (These more successful upstarts include those 7 emirates that make up the United Arab Emirates in terms of economic efficiency. Meanwhile, both the Emirates and Qatar are making greater strides in developing higher education than is Kuwait or Saudi Arabia.)

More than just transparency, a nation needs leadership and the public demand to improve, i.e. common vision and hope among the populace is needed, too. One needs rigorous legislation that is enforceable and enforced. In other words, one needs enough people who are not tainted by the old-guard elite who can force a change and see it beneficial to carry out these reforms.

On the other hand, there is certainly one aspect of transparency which would really shake up the elite and provide a revolution in Kuwait. This would be to make public the earnings and wages of all the elite companies and wealthiest political elite, via some sort of enforced income tax.

If accounting books, especially at state-run firms, had to be kept more public for tax purposes, the huge black markets and shadow economies would be significantly reduced. Moreover, inefficient businesses would be seen for what they are, market losers than need to be sold off and not subsidized by banks and the economy as a whole. Moreover, international and local competitors could better see how to enter the market if accounting was much more thorough and public.

Further, bribes, abuse of connections and rank, insider deals, and stolen funds could all be reduced in the same fashion as accountability for the books and numbers could help oversight to soar.

Similarly, putting all public expenditures on-line would be helpful.

I recall that the city of Monterrey, Mexico—where I also used to work and teach—put the government’s expenditure on-line in the early part of this decade. It has been beneficial in fighting corruption in that developing nation. It could do the same here in the Gulf. It helped government watchdogs in Monterrey immensely. This sort of transparency would certainly increase government accountability in spending and use of resources. It would also lead to more competitive bidding. Finally, it would lead politicians to think twice before raising certain pork barrel projects targeting a certain tribe or political elite.

In short, the elite in Kuwait have got to learn that at some point, their party will be over. However, with the Gulf Arab governments consisting of family members of many these elite or consisting of political hacks receiving benevolences from these same families, I don’t see much happening from within soon in the Gulf. That is why it might seem that it would be better to focus on the abuses of China Inc., India Inc. or even American Inc. (or Japan Inc. again) in the coming decade

On the other hand, in the absence of many critical and extremely vocal Kuwaitis, non-Kuwaiti voices are needed. The non-elite Kuwaitis are already running up huge financial debts trying to half-way keep up with the monstrous wealth of the tiny elitist in-crowd that has run the land for far too long. Such groups of Kuwaitis are a divided bunch and don’t have any leadership or political-economic savvy to take on the established elites.

With so many ex-pats working hard making Kuwait what it is and trying to make it better, we have got to voice our concerns and get our own WTO member governments to get Kuwait and other Gulf Arab states to play by the fair free market game—or prepare to surrender our futures to this sort of behavior more and more as the 21st century becomes the Asia century & dominated by Asian cartels from the Gulf to China or Japan--with far too little real experience in either fair or free trade.




NOTES

Etheridge, Jamie, “Gentlemen’s Agreements and Developing Kuwait”, FRIDAY TIMES (May 11, 2007), p. 3.

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