Start-up Nation

But entrepreneurship has played only a negligible part in Arab world economies. Even before its economy imploded less than 4 percent of the UAE’s adult population was working in early-stage or small enterprises. So what are the barriers to an Arab “start-up nation”? The answer includes oil, limits on political liberties, the status of women, and the quality of education.

The vast majority of the region’s economic activity is driven by the production and refinement of hydrocarbons. The non-oil GDP exported by the entire Arab world—with a population of approximately 250 million people—is less than that of Finland, with a population of 5 million. Outside of oil, there are some successful multinationals, such as UAE-based Emirates Airlines, Egypt-based Orascom Telecom, and Jordan-based Aramex, a logistics support provider. (Orascom and Aramex were founded and built by savvy entrepreneurs.) Family-owned service businesses are also prominent and—in the case of countries like Egypt—textiles and agriculture, too. But the oil industry is by far the biggest contributor to the region’s GDP. The region produces almost one-third of the world’s oil and 15 percent of the world’s gas.

There is an ever-increasing growth in demand for oil, with China and India the most prominent examples of countries that need more oil. Beginning in 1998, India and China’s combined demand increased by a third in less than a decade. So however much the price of oil fluctuates, the demand is undergoing a global transformation.

But the Arab world’s oil economy has stymied high-growth entrepreneurship. Distributing oil wealth largesse to the masses has insulated governments in the Persian Gulf from pressure to reform politically and economically. Oil wealth has cemented the power of autocratic governments, which do not have to collect taxes from their citizens and therefore do not need to be terribly responsive to their complaints. As historians of the Muslim world have put it, in Arab countries “the converse of a familiar dictum is true: No representation without taxation.”¹²

The badly needed reforms that the elites regard as a threat—the right to free expression, tolerance of experimentation and failure, and access to basic government economic data—are necessary for a culture in which entrepreneurs and inventors can thrive. For precisely all the reasons that entrepreneurship helps economies grow and societies progress—it rewards merit, initiative, and results rather than status—the Persion Gulf governments have stifled it. This is what political scientist Samuel Huntington once called the “king’s dilemma”: all modernizing monarchs ultimately try to balance economic modernization with limits on liberalization, since liberalization challenges the monarch’s power. In the Arab world, British journalist Chris Davidson, author of Dubai: The Vulnerability of Success, calls this the “sheikh’s dilemma.”

With the exception of Lebanon and Iraq, there has never been a genuinely free election in any of the other twenty-two Arab League countries. After one attempt at an election in the UAE in 2006 attracted low voter turnout, a prominent member of the government remarked, “This is particularly disappointing given that all of the candidates and participants were from very good families, and were all personally approved by the UAE’s rulers.”¹³

A number of Persian Gulf Arab governments have sought to work around the “sheikh’s dilemma” by using oil wealth to modernize the hard infrastructure of their economies, while leaving the political structures virtually untouched. Income from the previous oil booms—in the 1970s—was not absorbed by the regional economies but, rather, spent on imports from the West, investments overseas, and military arms. The local economies saw little direct benefit. But since 2002, over $650 billion from this new—demand-driven—oil windfall have been reinvested in the gulf economies alone.

Alongside the cluster strategy adopted by Dubai and a number of other gulf Arab countries, much of the region’s oil revenues have gone into real estate development. The GCC real estate sector has been the fastest growing in the world. Between 2000 and 2010, an estimated 19.55 million square yards of new leasable space—new office buildings, shopping malls, hotels, industrial facilities, and housing developments—will have been added in the region, mostly in Saudi Arabia and the UAE, growing at 20 percent annually during this period. (China’s annual growth in leasable space was 15 percent.)